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Great Leap Forward

BRAD DELONG: WE’RE ALL MINSKIANS NOW!

Earlier this week I noted, tongue-firmly-in-cheek, that we’re all MMTers now, following Paul McCulley’s recommendation that we just declare victory. And be nice about it.

Well here is a strange post from Brad DeLong: http://www.guardian.co.uk/business/economics-blog/2012/jun/29/us-treasury-rates-economic-prophets. He proclaims that essentially anyone who is anyone is a Minskian. And apparently always was. That is why mainstream economists like “Paul Krugman, Paul Romer, Gary Gorton, Carmen Reinhart, Ken Rogoff, Raghuram Rajan, Larry Summers, Barry Eichengreen, Olivier Blanchard, and their peers” ought to be trusted.

They got it right and will get it right again!

I am following Paul McCulley’s advice and so must be nice. And I do like a lot of what Brad DeLong and Paul Krugman write—oh, maybe 90% of it. Alone among this bunch, however, only Rajan (so far as I know) saw the crisis coming. (And he was castigated for throwing cold water all over Ben Bernanke’s Great Moderation.) Indeed it would be very hard to find any single individual more responsible for fueling the hurricane of financial excess that led to the crisis than Mr. Summers. Next to Alan Greenspan, there probably has never been any economist in a position of responsibility who is more culpable for chronic bad decision-making.

And as I’ve said many times, the much celebrated book by Reinhart and Rogoff really should win an award as the worst empirical study ever undertaken. Clueless about Crisis should have been the title.

OK, they’re all Minskians now. Welcome aboard. No need to engage in the Monty Pythonesque “Judean People’s Liberation Front versus the People’s Liberation Front of Judea” bickering that Brad accuses Steve Keen of (http://www.debtdeflation.com/blogs/2012/06/30/what-utter-self-serving-drivel-brad-delong/).

Let’s play nice.

Still, I find Brad’s post strange, as he raises a number of issues that he finds puzzling. I find it puzzling that he finds them puzzling. Anyone who follows Minsky would/should have no trouble explaining these apparent paradoxes. To paraphrase Brad (again, a bit of tongue-in-check; you can go to his post to get the details):

Boy, I cannot figure out how interest rates are so low. I missed the whole 20 years episode in Japan. Why on earth aren’t the US and Japan punished with high rates as if they were Greece? It really is a puzzle. And why can’t central banks just target nominal GDP growth–let us say a China-like 10 or 12 % per year–and thereby get us out of the mess? What, are they stupid or something? Fly the helicopters!

Answer: Japan and the US are not Greece. They are sovereign currency issuers that cannot be forced into involuntary default. There is thus near-zero default risk (a bet against Treasuries is a bet that Congress will collectively go insane and refuse to pay interest on government bonds; it is a fool’s bet because even Republicans are not that foolish).

The interest rate on sovereign debt is a policy variable, not something determined in markets. The BOJ and the FED want near-zero rates, so Japan and the US have near-zero rates. They will have near-zero rates as long as their respective central banks want them.

This ain’t news. Go back to the debates around interest rate determination leading up to the Treasury-Fed Accord of 1951. I’m sure Brad is familiar with these discussions. The interest rate was seen as a policy variable, and the Fed and Treasury were bickering about where to set it. (I’ll post something on this later as I’m working through an excellent paper by a colleague right now.) They finally resolved that more-or-less in the Fed’s favor: it gets to determine the rate target. Until the Fed, Treasury and/or Congress decide to do that differently.

The Treasury can have any rate that the Fed agrees on. And that goes for all maturities so long as the Fed agrees to fix the rates across the yield curve on Treasuries. (Setting rates on other “private” instruments is a different matter—although in principle, the Fed can fix rates there too if it will operate in those private instruments.)

OK final matter. Target nominal GDP growth. Yes we could do that although it is a hard thing to hit. And if we are going to try it, we’ve got to use the right tool.

If we adopted the Chinese version of capitalism, with strong central control and used our banks as a branch of fiscal policy then we could have some chance of hitting GDP targets. Order the banks to finance construction on a scale never seen before in the US, and tell them to do it without regard to profitability—Uncle Sam will absorb all losses.

But as I doubt that Brad and the other “Minskians” are advocating that, nominal GDP targeting is a pipe dream. It will be no more successful than was Chairman Bernanke’s “Great Moderation”. We cannot target nominal GDP growth with monetary policy (interest rate setting). It must be done using fiscal policy. We can disguise that (as the Chinese do) but it is fiscal policy that will ramp up spending. Interest rates are impotent, particularly now.

Helicopter drops are not a part of monetary policy—they are fiscal “transfers”, from Uncle Sam to the lucky souls who find bags of cash in their backyards. Drop enough bags and we’ll get spending up. But there is inevitably a lot of slop between lip and cup.

Personally, I think it would be a bad policy. And so did Minsky. It would generate the Mother of all financial crashes.

It was the Summers-Clinton strategy, run mostly through the “shadow” financial system, to create serial financial bubbles. Minsky called it Money Manager Capitalism, disguised as Bernanke’s Great Moderation.

135 Responses to “BRAD DELONG: WE’RE ALL MINSKIANS NOW!”

Damien MearnsJune 30th, 2012 at 3:37 pm

Moving to some sort of debate as to "who is a truer Minski-ist" is a great trick
to move from Minski's "Theory", that introduces the factors irrationality and uncertainty as the "missing links" in the build up to the current crisis, and converts it into a fashionable "assumed truth" without any sort of proof, a “truth” that no self respecting economist would now deny.
For me "irrationality and uncertainty " are side issues, the crisis is caused by the whole economy being run by the equation :
Profit = Business Fixed Assets + Consumer Debt + Government Debt + Foreigner's Debt. So whatever you do, if you are going to have successful business – making profit year after year – then this Retained Profit needs to be funded by a bubble in some combination of the items on the other side… and then one day it goes pop ! – and it's just because of the maths in the system – it’s nothing to do with “greedy bankers”, or “uncertainty”. The only “irrationality” in it is why do we use a financial system designed during and for medieval times when they did not have computerised production lines – We are using a medieval financial system in a modern world – no wonder we have crisis after crisis : http://www.youtube.com/watch?v=Bf2LLfM0lKE

Elwood AndersonJune 30th, 2012 at 4:06 pm

It's healthy to keep this discussion going. It's time for all the economists mentioned here to get together at a conference and argue their positions. It's necessary to counter the energy the right has proposing stuff that is ounterproductive. Why fight battles that create discord on the side that is 90% right?

Rob RawlingsJune 30th, 2012 at 4:40 pm

You say:

"We cannot target nominal GDP growth with monetary policy (interest rate setting). It must be done using fiscal policy."

The Market Monetarists , while agreeing about interest rates, believe that one can achieve any NGDP target set in a number of monetary ways including asset purchases with newly created money. Can you explain (or point me to an article that explains) why you disagree with them on this point ?

Jayarava AttwoodJune 30th, 2012 at 4:45 pm

As a naive non-economist I find this statement "They got it right and will get it right again!" somewhat at odds with the First World debt crisis going on right now. I understand that some economists, though not this Brad guy, publically predicted the crisis; but that no one listened to them–and that all these more prescient economists are seen as weirdo outsiders by the people at the wheel of the economy.

Here's how it looks from the outside. Economists have repeatedly driven the economy into a ditch. We're in a deep one now and not sure when the AA will come and rescue us. Historically economists have wrecked the economies of Africa in the 70s, South America in the 80s, SE Asia and Japan in the 90s, and now the whole of the First World all at once. Indeed there's every chance that Europe will descend into chaos (again). I tend to agree with David Suzuki who likens conventional economics to a form of brain damage.

I find this guy Brad's article an affront, and I wish the Guardian had enabled comments on it so I could have told them so.

My solution, as a naive non-economist would be this. Anyone who published an analysis of a first world economy or economies a full year or more before the crisis hit, should get a seat at the table of those who decide what to do next. Anyone who didn't should resign their position and go back to school. I think the 12 or so people at the table can probably come up something generally implementable by Western governments fairly quickly since they've all been thinking about it for 6 years now.

I imagine someone like Joseph Stiglitz would chair the committee.

LRWrayJune 30th, 2012 at 5:01 pm

So far as I can tell, Mkt Monetarists use black helicopter magic and handwaves. Central bank can only control the interest rate. On some conditions that will affect economy, altho not necessarily in the desired direction.

Rob RawlingsJune 30th, 2012 at 5:24 pm

Suppose they literally used helicopter drops – and people picked the money up and spent it – would that count as monetary policy? if so , surely if they dropped enough money they could hit any NGDP target they wanted to ?

azizonomicsJune 30th, 2012 at 5:30 pm

Yeah.

The idea that the establishment economists like DeLong, Summers, Rogoff, Romer, Krugman, (etc) are "Minskians" is rubbish. They are — as Keen put it — the left wing of neoclassicism, and both wings of that were proven wrong by the end of the "Great Moderation". Perhaps the left-wing is somewhat more reality-based than Fama, Cochrane, Cowen (etc) but they did not see the Crisis coming.

Ultimately, their solutions to the problem of depressed demand (all variations of throwing more money at the problem) is a hollow solution. It may pump the numbers up for a while, but they are forgetting that depressed demand is just a symptom of a wider malaise, and not the problem itself.

We need to let broken systems (e.g. the current financial system) break instead of continually bailing it out (directly, and via helicopters).

Brad DeLongJune 30th, 2012 at 6:04 pm

I wouldn't say that we are all Minskyites (or Bagehotians, or Kindlebergians) now.

I would say that anybody who is not at least half Minskyite (or Bagehotian, or Kindlebergian) now is out of touch with reality, and that everybody sensible was always at least a quarter Minskyite (or Bagehotian, or Kindlebergian).

As to the substance…

Yes, the Fed and the Treasury can hit pretty much whatever long-term Treasury rate they wish. What surprises me is that they have hit this rate without a much larger ratio of high-powered money to government debt and without a higher current rate of inflation.

Yes, in a liquidity trap it is unlikely that nominal GDP can be successfully targeted without cooperative fiscal policy–deficits and their monetization either now or in the future. But the world is a surprising place, and successfully targeting nominal GDP might not require all that much in the way of cooperative fiscal policy.

The major complaint seems to me to be my list of economists I find worth listening to: "Paul Krugman, Christy Romer, Gary Gorton, Carmen Reinhart, Ken Rogoff, Raghuram Rajan, Larry Summers, Barry Eichengreen, Olivier Blanchard, and their peers." Well, Larry, Barry, and Olivier taught me this stuff, so they are on the list. Larry, Christy, and Olivier have been the senior government policymakers leading the charge for more and better expansionary policies. Raghu, Paul, Barry, and Gary called the dangers of the leveraged housing bubble early. Barry, Ken, and Carmen have been thinking very hard about the dangers of a long-term depression generated by a financial panic for a long time. All are very much worth listening to.

FoppeJune 30th, 2012 at 7:29 pm

I understand your frustration. However, please note how, in order to prevent you from feeling affronted, Brad has — craftily, or you might say weaselly — inserted the word "recent" into the sentence preceding the one you cite. All he is claiming is that you should trust those economists because they got the "recent" history right.

As for your other point, please note that economists didn't drive the West into a ditch all by themselves. Rather, the issue is that lots of politicians decided to act on the advice of economists whose advice appealed to them, as it allowed them to claim that they had 'scientific reasons' for why driving the country into said ditch.

GregJune 30th, 2012 at 8:19 pm

Read the article Rob!

Helicopter drops ARE fiscal policy.

One thing that has become clear about Market Monetarists……. they do not know the difference between monetry and fiscal

LRWrayJune 30th, 2012 at 8:56 pm

Brad: I pretty much agree with the sentiment. Minsky always argued he stood on the shoulders of giants, and his own shoulders were certainly big enough to support those on your list. I'd even note that Tom Sargent was one of Minsky's students and he was always proud of that fact and held out hope Tom would some day come around.

I don't think it is all that important to quibble about how Minskian your list is. I do note that Paul Krugman admitted he never read Minsky before the crisis (I believe he first "tried" to read Minsky in 2009). Not sure if any of the others in your list read Minsky before the crisis, or whether any of them cited him in their pre-crisis predictions that crisis was coming. But again, that is rather beside the point–if they are reading him now that is great.

LRWrayJune 30th, 2012 at 8:57 pm

I would however fairly vehemently object to the assessment of the value of their pre-crisis work (on the dangers of financial crisis). If Larry Summers was prescient, then why on earth did he advocate freeing the banks to blow up the global economy? And the book by Reinhart and Rogoff is just plain awful: throw a bunch of mostly questionable data into a blender, spin it very hard, and pour out garbage.

I'll comment on the substantive points in a minute. For some reason my own blog sharply limits the number of words I'm allowed to post!

LRWrayJune 30th, 2012 at 9:03 pm

Brad: on the interest rate issue, I don't quite get your surprise. Can you explain why we would need a high HPM/Bond ratio to allow Fed to hit rate target? Since the Fed began to announce rate target, it does not even need to take any action (OMS or OMP) to hit the target. Think of HPM as a checking deposit at the Fed that pays very low rate, and Bonds as saving deposit paying higher rate. Fed can announce lower (or higher) rate target on either one and move actual rate there simply by standing ready to accommodate. Think of the late 1940s when Fed pegged both short term and long term treasuries as well as the discount rate. It hit all three–and with deficits that had run at 25% of GDP.

Rob RawlingsJune 30th, 2012 at 9:11 pm

Greg, thanks, the article does indeed define helicopter drops as fiscal policy. Sorry of this is a basic question but how would you define the difference between "fiscal" and "monetary" policy ? I think I would not be alone in viewing helicopter drops of new money as monetary on the basis that it directly affects the money supply.

BTW: I am not a market monetarist and agree with the article that such a policy (however it is categorized) would generate more financial bubbles.

uioooooooooJune 30th, 2012 at 10:17 pm

Monetary policy manipulates interest rates by altering the composition of pre-existing financial assets. Fiscal policy adds new net financial assets.

uioooooooooJune 30th, 2012 at 10:20 pm

What surprises me is that they have hit this rate…. without a higher current rate of inflation."

Could you also explain this part?

Thanks.

George HartzmanJune 30th, 2012 at 11:28 pm

If former Bank of America CEO Ken Lewis knew about secret Federal Reserve loans in 2008 and 2009, how did he not recieve BAC without knowing inside information?
http://hartzman.blogspot.com/2012/06/if-former-ba…

If former New York Fed Chairman and Goldman Sach’s alumni Stephen Friedman knew about secret loans to Goldman in 2008 and 2009, how did he not buy GS with unknown information?
http://hartzman.blogspot.com/2012/06/if-former-ne…

Thoughts?

Is Delong aware of this?

If Delong was aware, what would he say?

Have many coddled the status quo,
by ignoring what they should be screaming about?

LRWrayJuly 1st, 2012 at 2:23 am

Someone pointed to this essay by Jamie Galbraith, a version of which I saw him present. It is as good a take-down of mainstream economics as we’ve had since his dad did it, and before that what Veblen did a century earlier.
http://www.nea.org/assets/docs/HE/TA09EconomistGa…

To put it simply, both freshwater and saltwater economists are out of the water when it comes to trying to understand the crisis–much less actually predict one.

Brad DeLongJuly 1st, 2012 at 3:01 am

A 30-year Treasury bond at a 2.76%/year yield is an awfully risky asset to hold, as is a 10-year Treasury bond at 1.67%, and a 5-year bond at 0.72%/year. When the alternative asset–reserve deposits–is paying almost as high an expected return with a lot less risk, a very large chunk of people's portfolios should be in cash–and people should be trying to dump their Treasuries to buy real goods and services as well.

That the Fed can drive the 30-Year Treasury rate to 2.76%/year is not surprising. That doing so does not require a larger high-powered money stock and lead to higher aggregate demand is surprising.

Dan KervickJuly 1st, 2012 at 3:51 am

What I don't get about this NGDP level targeting business – apart from the fact that its defenders implausibly believe the Fed can administer the targeting regime all by itself – is why we should think there is any particular level or growth rate of either real or nominal spening that is "just right".

Huh?July 1st, 2012 at 5:15 am

"That the Fed can drive the 30-Year Treasury rate to 2.76%/year is not surprising. That doing so does not require a larger high-powered money stock and lead to higher aggregate demand is surprising."

Even after Japan you're still surprised ?

Winslow R.July 1st, 2012 at 5:42 am

"When the alternative asset–reserve deposits–is paying almost as high an expected return with a lot less risk, a very large chunk of people's portfolios should be in cash–and people should be trying to dump their Treasuries to buy real goods and services as well. "

As you know, many treasuries are owned by China, Japan, and other countries that like to alter exchange rates.

The irrational becomes rational when you look beyond the obvious. But you already knew that.

GarethJuly 1st, 2012 at 5:43 am

You've' recently" discovered Minsky, have you read and understood Irving Fisher's debt deflation essay? It's all in there.

The Fed is a factor in the long yields this low, but the market is a more than willing participant. It's called "capital preservation". Only mainstream economists don't seem to understand that the world is crippled with too much.

Neil WilsonJuly 1st, 2012 at 6:21 am

"We cannot target nominal GDP growth with monetary policy (interest rate setting)."

R,

Does the effect of monetary policy that we've seen over the twenty odd years before the crash depend upon the perpetual rise in the Private Debt to GDP ratio?

ISTM that the only reason it has any effect at all was due to the debt roll up generating excess demand for 'long term asset investments' that are sensitive to interest rates (aka houses).

Neil WilsonJuly 1st, 2012 at 6:26 am

'should' is not 'will'.

And the reason for that is that people hold long term bonds for other reasons than just the interest rate.

Try 'Fundamental Uncertainty' – which people and businesses are feeling a great deal of at the moment.

There is a reason that the Black Scholes mathematical model didn't predict the behaviour of traders during the LCTM collapse as well.

And that's because real people aren't mathematical models, they aren't 'rational' and they don't listen to what economists say they ought to do.

Nick RicciardiJuly 1st, 2012 at 9:07 am

What Brad and Randall continue to miss is that Japan, and now most of the developed world outside EU, is in a public debt trap. By this I mean that the private sector keeps reducing demand because the private sector keeps adding to it. The inter-dependence between the private and public sector continues to elude both of these brilliant economists, yet it is obvious to many practical business executives with no economic background.

In such a trap very little high powered money stock is needed to hold rates near zero and crimp long rates to all-time lows. Inflation cannot get going as this trap is debt- deflationary in nature. E.g., the Nikkei stock average is down 80% over the past 22 years, mostly because of it. It kills confidence. The game can go one for generations.

Low rates in fiat nations with monopoly power over their currencies are a sign of private sector sickness. They are telegraphing to those that can read the tape that tax revenues will be inadequate to cover governmental expeditures as far as the eye can see. They are telltale signs of deep imbalances within and among nations. Randall, the way out of this trap is to find a way to rejuvenate the private sector, not to allow the state to grow ever larger. That is why we need to become post-MMT.

Nick Ricciardi
Kyoto, Japan

Nick RicciardiJuly 1st, 2012 at 9:10 am

Correction in first paragraph:

What Brad and Randall continue to miss is that Japan, and now most of the developed world outside EU, is in a public debt trap. By this I mean that the private sector keeps reducing demand because the public sector keeps adding to it. The inter-dependence between the private and public sector continues to elude both of these brilliant economists, yet it is obvious to many practical business executives with no economic background.

In such a trap very little high powered money stock is needed to hold rates near zero and crimp long rates to all-time lows. Inflation cannot get going as this trap is debt- deflationary in nature. E.g., the Nikkei stock average is down 80% over the past 22 years, mostly because of it. It kills confidence. The game can go one for generations.

Low rates in fiat nations with monopoly power over their currencies are a sign of private sector sickness. They are telegraphing to those that can read the tape that tax revenues will be inadequate to cover governmental expeditures as far as the eye can see. They are telltale signs of deep imbalances within and among nations. Randall, the way out of this trap is to find a way to rejuvenate the private sector, not to allow the state to grow ever larger. That is why we need to become post-MMT.

Nick Ricciardi
Kyoto, Japan

spiderJuly 1st, 2012 at 11:07 am

Who says economics is a profession?? It's a scam to keep intellectuals from having to dirty their hands by actually working. Like so many other professions.

phiJuly 1st, 2012 at 12:36 pm

Scott Fullwiler also points out that the yield on bonds will only vary within a limited spread determined by the short term base rate.

LRWrayJuly 1st, 2012 at 12:59 pm

Brad: I follow your point about the capital risk and that is why it was helpful for the Fed to talk about holding rates near zero for an extended time. Even if ZIRP became a permanent policy, you are right that there is a lower limit to rates on longer maturities. We agree on all that. With respect to why low rates don't stimulate demand: firms need to see more sales before they increase spending and hiring; consumers need to see more jobs and more security and rising income before they spend more. And what I think is key this time around is that we have to reverse the downward spiral in housing. Stopping foreclosures is very important (and not hard to resolve except for the politics and fingers in the pie). But even that might not be enough. House prices were so far out of whack that it is hard to see a reversal of the depreciation.

LRWrayJuly 1st, 2012 at 1:03 pm

Brad2: However I still don't get your point about relative volumes of HPM and Treasuries. So HPM rises initially with the budget deficit–say we add $1T per year. Whatever banks don't want to hold gets substituted into Treasuries. These earn slightly higher rates so are preferred (taking capital risk into acct). But in addition, Treasuries are the main collateral used throughout the financial system (this is why you can even get negative nominal rates on govt bonds); and with the collapse of MBSs, they are not good collateral. However we also have to factor in QE, with Fed taking Treasuries and giving banks HPM. So I'd say HPM is actually HIGHER than it would be all things equal (that is, w/o QE).

phiJuly 1st, 2012 at 1:38 pm

"So HPM rises initially with the budget deficit–say we add $1T per year."

I thought it was the other way around – the treasury has to borrow HPM by issuing a bond before the deficit spending can take place. It sounds like you're saying the treasury spends and then issues bonds?

Nick RicciardiJuly 1st, 2012 at 2:56 pm

Randall, You have a lot of questions for Brad. Good! But if you want to know why low rates don't stimulate more demand, the answer is obvious. Most firms (unlike the majority of their short-term oriented shareholders) do not simply want to "see more demand" before they increase capex. They need to see more sustainable demand. Trust me: I know a bit about this. (Or don't trust me, as I fully suspect that you don't care all that much about "pro-Corporate types". Ask a relative.)

"Sustainable demand" means demand which is balanced without excessive government expenditures. It means only legitimate demand; demand without excessive public spending. This spending may goose next quarter's income, but we all know that it can be reversed at a moment's notice, or suddenly paid for via large corporate tax hikes. So why take it seriously? Do you really think companies are wrong to think this way? If so, why? Or do you just not care? "Confidence fairy" and all?

And consumers will not see rising incomes when the State takes on ever greater debt levels. Almost all of us accept this. In fact most households have internalized this view. I ask: Do you deny it? You were the one who used the word "secure". Is consumer security, in fact, not important? Why, pray tell?

Many consumers I know contend that the way to make their fellow shoppers feel "secure" (in your words) is to make them confident that the future macro-economic imbalances — especially the governmental ones — will be swiftly corrected, with minimal hardship to themselves. Yet you seem to propose the opposite course of events.

Let's look again at Japan:

If Japan maintains its general policy of public debt increases — thepolicy it has maintained for over two decades — do you really expect a good eventual outcome? If so, Why? And if not, what are the implications for the West? For MMT? Inquiring minds would sure like to know.

Once again, the above is a further reason why you should consider becoming MMT. Debt Traps matter!

Dan KervickJuly 1st, 2012 at 3:19 pm

"That doing so does not require a larger high-powered money stock and lead to higher aggregate demand is surprising."

Why should it significantly increase aggregate demand, Professor DeLong? Aren't the purchasers and sellers of these assets almost all financial institutions? How does the composition of maturities among their assets directly effect demand in the real economy? Banks already have massive quantities of excess reserves.

And how much more high-powered money are you looking for? Hasn't MB climbed from just over 800 billion to about 2.7 trillion since 2007?

How risky are the securities when the Fed has shown a willingness to convert then into reserves readily. Isn't that willingness the reason *why* Treasury/Fed have been able to maintain such low yields?

I think the intellectual problem here is the persistent among macroeconomists that there is some direct channel from bank reserves to consumption spending and investment spending on real capital assets. A lot of macro seems to take an impossibly general and useless view of the economy as a collection of aggregates, and is blind to institutional structures. They are like surgeons going into the operating room convinced that all they need to know about the human body is some theory about a few high-level parameters like core body temperature, blood pressure, respiration rate, etc., and about some alleged and tenuous law-like connections between these parameters, and in possession of almost know information about the anatomy of the human body. We would have no trouble identifying such people as quacks.

EdmundJuly 1st, 2012 at 3:21 pm

"What surprises me is that they have hit this rate without a much larger ratio of high-powered money to government debt and without a higher current rate of inflation."

You've *got* to re-evaluate the assumptions that went into your wetware and your models, then, or we really are all doomed. Perhaps reserves really don't matter as they're usually assumed to.

Dan KervickJuly 1st, 2012 at 3:50 pm

Nick Ricciardi, I agree that firms will be much more cautious about capex expenditures in response to increased demand that they believe is a result of merely temporary and politically insecure "stimulus". That's one reason I support the MMT employer of last resort proposal and similar measures that rely on automatic stabilizers left permanently in place. These types of systems will give firms confidence that shortfalls in demand resulting from drops in private sector employment and disruptions of private sector income flows will automatically be offset by injections of public sector demand that will only diminish as the private sector recovers and draws that demand back into private enterprise.

Our current approach relying on intensely debated and contested policy initiatives – whether or not to do more fiscal expansion; whether or not to employ more "extraordinary" monetary policy – does nothing to build business confidence in long-term investment commitments.

I'm very skeptical that most households have internalized the sort of Ricardian offset you describe. I think when households get extra cash from Uncle Same they mostly spend it, and that most people don't spend time fretting about the public balance sheet in ordinary time.

Nevertheless, I believe it is extremely stupid and irresponsible for the President, members of Congress, and other prominent opinion leaders to go around promoting public debt hysteria and saying we are "out of money". Apart from the fact that it is a lie, such talk has a dispiriting and paralyzing effect on consumer and investor confidence.

EdmundJuly 1st, 2012 at 3:50 pm

" By this I mean that the private sector keeps reducing demand because the private sector keeps adding to it. The inter-dependence between the private and public sector continues to elude both of these brilliant economists, yet it is obvious to many practical business executives with no economic background. "

That's the crowding out view that preceded Keynes and the subsequent IS-LM paradigm. Doesn't work.

FoppeJuly 1st, 2012 at 4:04 pm

They need to see more sustainable demand. Trust me: I know a bit about this.
"Sustainable demand" means demand which is balanced without excessive government expenditures. It means only legitimate demand; demand without excessive public spending. This spending may goose next quarter's income, but we all know that it can be reversed at a moment's notice, or suddenly paid for via large corporate tax hikes.

So are Lockheed Martin, Blackwater, Halliburton, and all those other companies that live off (largely no-bid) govt contracts not corporations? Or are they all idiots, for not realizing this 'truth'? Do help me out..

If Japan maintains its general policy of public debt increases — thepolicy it has maintained for over two decades — do you really expect a good eventual outcome? If so, Why? And if not, what are the implications for the West?

Ooh, I love questions of this type. Is the fact that they've been a stable country for 20 years now, even though their GDP has not "grown", and that they have actually to some extent been decreasing income inequality rather than increasing it, not worth something in and of itself? Is the only thing that matters, in your eyes, really whether it "eventually" fails?

ollyJuly 1st, 2012 at 5:02 pm

Randall Wray's work demonstrates that high levels of public spending don't need to entail future tax hikes to "pay for them". Tax rises, or cuts in spending, are tools whose logical purpose is to regulate aggregate demand, and thereby control inflation. Taxes are too high at present.

People do have quite incorrect ideas about the way the economy works. Lots of people thought QE would lead to hyperinflation, because their ideas were based on an ignorance of how things actually work.

For example, why would people be uncomfortable with a rise in public debt, but not as uncomfortable about a rise in private debt? We've seen what happens when an economy becomes too dependent on private debt.

For the economy to grow given the current account deficit and private sector desire to save, either overall private debt will have to increase or public debt will have to increase.

The corporate money hoards will only start to be spent when they begin to see demand. They will gain confidence from government policy based on reality and reason, not superstition and ignorance as it seems to be at present.

ollyJuly 1st, 2012 at 5:03 pm

No wonder people are worried when their own government spouts fear inducing nonsense about running out of money, bond yields spiking, "bond vigilantes", China having us by the balls and government deficits "killing" jobs.

When government lies to the population or makes up nonsense based on irrational fears, bad things tend to happen. Think Hitler.

People can run out of money. Governments that issue their own money can't. So public debt actually isn't like private debt at all. It makes you wonder whether it should even be called debt, really. That doesn't mean the government can spend infinite amounts of money, just that its limitations are different.

Of course government spending always has the potential to be wasteful or inefficient. If a higher deficit is required for growth, the choice is basically between spending increases or tax reductions. Take your pick.

Would people feel more confident and willing to spend and invest if the government just stopped taking so much money out of their pockets?

ollyJuly 1st, 2012 at 5:03 pm

A nice quote from Sam Brittan, Veteran FT writer:

"A permanent secretary under an earlier Labour administration once asked me what I thought were the limits to permissible Budget deficits. My answer was: “Up to the point where the gains to output and employment are offset by the inflationary effects of a fall in the exchange rate.”

ollyJuly 1st, 2012 at 5:09 pm

"Low rates in fiat nations… are telltale signs of deep imbalances within and among nations."

If you want to reduce the current account deficit you have to find a way to do that that doesn't crush demand. Cutting wages across the board and thereby making consumers poorer isn't going to help demand.

b'emetJuly 1st, 2012 at 5:23 pm

it seems to me that all of this discussion assumes the continuing monopoly of bank-created interest bearing money. Instead, Kucinich' NEED act, and MMT, propose sovereign governments issue debt-free money as needed to be spent directly on infrastructure projects. Existing debt can be paid off with newly issued money whenever those debts become due. Revenue from taxes are not required to pay expenses – taxes can more wisely be imposed to control inflation. (I'm taking this straight from M Wray's published writing, or so I imagine.) Lenders's monopoly on creation of money can be broken by taking away their fractional reserve lending privilege.

Nothing but bubbles can expand in a world constrained entirely by universal debt payable only by more borrowing. "Get Out Of Debt!" the Billboards declaim, "Borrow More!," the only accepted method.

Damien MearnsJuly 1st, 2012 at 6:00 pm

Hi b'emet If we have “sovereign governments issue debt-free money as needed to be spent directly on infrastructure projects” – "Needed" for what ? "Needed" because we need another motorway or needed because the financial system needs the extra money in the economy – if we do it that way round we'll have “Government Almighty”.
If we do it the other way round and have directly democratically elected banks then they can hand this new money over to people so they can spend it or save it and the power and the Freedom of the individual compared to the government will move into the right direction.

phiJuly 1st, 2012 at 6:20 pm

actually I'm not sure I do. Could you explain? And why should people be dumping treasuries to buy goods and services? Don't people buy treasuries to save/invest? What's suddenly going to make them want to spend their savings on goods and services?

ollyJuly 1st, 2012 at 6:27 pm

"Lenders's monopoly on creation of money can be broken by taking away their fractional reserve lending privilege. "

Wray doesn't advocate "taking away bank's fractional reserve lending privilege".

"democratically elected banks then they can hand this new money over to people so they can spend it or save it"

Um, what? Reform the banking sector, maybe have smaller banks and more community banks, and perhaps some state banks, but not what you just said.

NickJuly 2nd, 2012 at 1:19 am

Oh it works, but in a different way. Instead of leading to inflation, when public debt levels rise too high in fiat nations the inter-dependence between IS and LM creates a debt trap. It leads to structurally low rates and a deeply depressed private sector.

Extricating the private sector from a debt trap is especially tricky and painful. Better not to get into one in the first place. Too late.

NickJuly 2nd, 2012 at 1:40 am

Dan,

I fully agree with your last point that it is irresponsible for Congress — and the rating agencies — to promote debt hysteria. You are correct, the US will not "run out of money" until it rejects fiat money, and that is a long way away.

But I see the Ricardian effects of the private sector increasing by the day. Businesses are severely cutting back on capex for growth, and are, instead, hoarding cash, paying down debt, and repurchasing their shares. Banks at the margin are hoarding bonds instead of growing their loan books. And households are postponing large ticket items. This is happening throughout the developed world.

No banker will tell you that he didn't make a loan because he was worried about the debt to GDP ratio, but someone has to hold the mountain of debt issued by governments, and, ironically, the more debt which is issued, the greater the demand for it. Regional and city banks in Japan own more bonds as a percent of their capital than any banks have ever held throughout recorded history. People may not be scared but they are pessimistic; and they prize safety. This insatiable hunger for super-safe bonds is a symptom of the withering away of the private sector and of a debt trap.

Put differently, if the safe debt and/or high powered money were not available, banks would have to lend. The economy would quickly regain vigor. This is why hard money nations have rebounded faster from crises throughout history. I don't advocate a gold standard, but I think MMTers profoundly miss the severe problems associated with the ability of nations to issue endless amounts of public debt before inflation takes root. Inflation may Never take root! The effects on the confidence of the nation are huge, even if we will never run out of money.

We need to go beyond MMT.

steve from virginiaJuly 2nd, 2012 at 1:44 am

Jeezus, economists are a pack of fools.

They were right with 20/20 hindsight about 2008 but cannot see now what is taking place under their noses. A pox on all economists who have no ability to understand but are able to endure hours of 'indoctrination' (degree study). Good grief!

What is happening now, Mr Wray? Do you have a clue?

Let me help you and your friends out: we are having an energy crisis in credit drag. The world is in the process of becoming car-free: the sunk capital that is the auto habitat is an extraordinary mis-allocation of funds, an unaffordable luxury. The world's greatest single enterprise is a dead loss and comes now the repo man to strip away everything including your children..

The problem is not at the bank or even in Larry Summers' office but at the end(s) of your driveways. What is happening is 'conservation by other means', there is nothing being discussed (outside of Charles Hall and maybe James Hamilton) international fog of denial and propaganda.

What a disaster for the profession and blot on the reputation of all economists, you should every single one be ashamed of yourselves.

May you all lose your gas-ration cards.

nickJuly 2nd, 2012 at 1:48 am

"The corporate money hoards will only start to be spent when they begin to see demand."

I respectfully disagree. Corporate money must see demand which can be sustained without recourse to government debt. Only then can they be counted upon to loosen their purse strings.

This distinction between governmentally created demand and "real" sustainable demand may sound arbitrary to an academic, but is is of huge importance in the business community.

I do agree with you that QE leading to hyperinflation is a very remote possibility. I fear that QE is helping prevent deflation and is hindering structural reform. QE is no panacea.

NickJuly 2nd, 2012 at 1:51 am

Nice quote! MMT has been tried before. England had to go hat in hand to the IMF in the late 70s. This humbling experience paved the way for the Thatcherite reforms which the British would never have otherwise acceded to.

Neil WilsonJuly 2nd, 2012 at 9:29 am

MMT has not been tried before. Nobody has targeted the excess savings of the non-government sector using tools that inject at the level of the unskilled worker via enhanced automatic stabilisers. In other words a 'bubble up' economy.

England didn't have to go cap in hand to the IMF. They chose to as a matter of policy (primarily to use the IMF as a way of controlling the Unions).

It's clear from the documents around the crisis that the 1976 Labour government did not understand how the new floating rate system worked and were still using policy ideas designed for a Bretton woods fixed exchange system.

PostkeyJuly 2nd, 2012 at 9:32 am

For consideration?

"His theory is very seductive in the light of the experience since 2007.
But the theory does not explain why, over the past 80 years, we have only had two major financial crises, the early 1930s and the recent one from 2007. It is the dog which has not barked which causes fundamental problems for the hypothesis as it stands.
For example, in the United States, private sector debt relative to the size of the economy reached a peak of 2.1 in 1932. From a low point of only 0.4 in 1945, it rose almost without interruption to a new peak of nearly 2.2 in 2001. But there was no crisis. It reached 2.6 in 2006, much higher than its peak in the 1930s Great Depression. But again, no crisis.
The Minsky story is good at telling us after the event what happened in a crisis. It does not tell us why crises do not happen, even when the objective facts suggest they should." http://www.angrybearblog.com/2011/12/its-private-…

Neil WilsonJuly 2nd, 2012 at 9:36 am

It all happens at the same time in a dynamic flow.

There is spare HPM in the system that would otherwise just sit on account at the central bank. Treasury then swaps that for Bonds paying a higher interest rate and reinjects the HPM into the economic flow.

Austerity has shown that when a government cuts its spending the non-government sector does not increase its spending. Therefore it is proven that the government cannot possibly be 'pulling' money away from the private sector.

Instead it is the non-government sector that is 'pushing' money onto the government sector in a desperate search for a secure and risk free investment.

The government isn't borrowing. The non-government sector is saving in excess of current required investment – and the system allows that.

ollyJuly 2nd, 2012 at 9:50 am

The current UK government seems to be equally clueless. Tory MPs making impassioned speeches about how the nation has to pay off its credit card and you can't pay off a credit card by taking out more debt on your credit card. Oh and bond yields are at historic lows despite the fact that the UK is supposedly in a "debt crisis" (according to moron Tories) because the bond markets trust dumb Tory policy. Not because the Bank of England has bought hundreds of billions of pounds worth of bonds. Don't mention that, David Imbecile Cameron.

Philip PilkingtonJuly 2nd, 2012 at 10:13 am

This guy hasn't read Minsky. Minsky is quite clear in his book that 'Big Government' is able to prevent smaller financial crises from becoming system threatening. However, this leads to underlying instability increasing — and so paves the way for a larger crisis.

ollyJuly 2nd, 2012 at 10:14 am

"Businesses are severely cutting back on capex for growth, and are, instead, hoarding cash, paying down debt, and repurchasing their shares. Banks at the margin are hoarding bonds instead of growing their loan books. And households are postponing large ticket items."

That's deleveraging. It's happening because we just had a massive bust following a massive private sector debt boom.

If you look at the sectoral balances you'll see that for growth and lower unemployment either, 1. those with savings will have to start spending their savings/ investing them in real job-creating business, or 2. the private sector will have to start increasing its indebtedness again, or 3. the government will have to increase its spending, either by increasing its deficit or by taxing savings and redistributing them, or 4. the current account deficit will have to substantially decrease. Ideally you'd want a balanced mix of the above, I'd say.

ollyJuly 2nd, 2012 at 10:15 am

The issue is one of causation. If the government cuts spending now, will this encourage those with savings to start using them? Will it encourage the private sector to take on more debt and start investing in productive business? Will it increase exports and foreign inward investment? Sounds a bit like voodoo economics.

"This insatiable hunger for super-safe bonds is a symptom of the withering away of the private sector and of a debt trap.
Put differently, if the safe debt and/or high powered money were not available, banks would have to lend."

Your not describing a world that follows MMT. You're describing a world which was overly dependent on private debt and financialization, a world which thought it wasn't a problem if the productive economy withered and wages stagnated so long as the financial sector got larger, people got more into debt, and house prices kept on rising. We've come to the end of that model now. We need more balanced trade and appropriate government budget deficits. A focus on the real economy and less of this financial ponzi scheme economy. A reformed banking sector, wages increasing in line with productivity gains and less hoarding of all the wealth at the top.

ollyJuly 2nd, 2012 at 10:18 am

And less spending on pointless stuff, like keeping bankers in their jobs and bombing the crap out of middle eastern countries.

phiJuly 2nd, 2012 at 10:36 am

I thought the banks only kept a small quantity of reserves to meet their reserve requirements and settlement needs. Where do they get the additional reserves from to buy extra goverment bonds?

Also when someone buys Treasuries, I suppose their bank doesn't transfer the full bond amount in reserves to the Treasury, do they? Instead they just settle as they normally do by paying the difference. So for example if the Treasury owes a bank's depositors $100 million and the bank buys $90 million in government bonds, the Treasury will just transfer $10 million in reserves to the bank, which will credit its customer's accounts with $100 million, whist also receiving the $90 million bond?

Sorry , I don't know how it all works. Do you have any links to papers or sites that explain the whole thing clearly in non-economist language?

NickJuly 2nd, 2012 at 10:50 am

I hear you olly, but I don't find it realistic to expect us to move to your ideal reformed world. Moreover, if we, in fact, cannot get there, then it is especially pernicious to attempt to force such a world to exist by punishing the financial sector. This will only excerbate our debt trap and cause interest rates to fall further.

Growth, innovation, entrepreneuralism, and dynamism will suffer in such a world, along with asset valuations. Not good for the real economy.

NickJuly 2nd, 2012 at 10:56 am

"The issue is one of causation. If the government cuts spending now, will this encourage those with savings to start using them? Will it encourage the private sector to take on more debt and start investing in productive business? Will it increase exports and foreign inward investment? Sounds a bit like voodoo economics."

Again, I hear you. It will be very tough for the economy to endure cold turkey for a while. But the alternative is far worse. Austerity is a really bad option, but it is the least bad one. See Reinhart and Rogoff's latest piece "Debt Overhangs" for a good discussion of the consequence of allowing debt to grow to high levels.

Brad DeLongJuly 2nd, 2012 at 1:51 pm

RE: "Brad: I follow your point about the capital risk and that is why it was helpful for the Fed to talk about holding rates near zero for an extended time. Even if ZIRP became a permanent policy, you are right that there is a lower limit to rates on longer maturities. We agree on all that. With respect to why low rates don't stimulate demand: firms need to see more sales before they increase spending and hiring; consumers need to see more jobs and more security and rising income before they spend more. And what I think is key this time around is that we have to reverse the downward spiral in housing. Stopping foreclosures is very important (and not hard to resolve except for the politics and fingers in the pie). But even that might not be enough. House prices were so far out of whack that it is hard to see a reversal of the depreciation."

That seems right to me. That's why I tend to be very skeptical of claims by Scott Sumner and even Christy Romer down the hall that the Fed could do it all by itself if only they would announce a nominal GDP target. It is true that expectations of higher inflation over the next five years would boost spending now by making holding cash appear less attractive, but I don't see how those expectations of higher inflation emerge unless somebody boosts demand right now by buying more stuff–and that somebody pretty much has to be the government…

ollyJuly 2nd, 2012 at 2:30 pm

I've read an extract. I might pay to downlod the paper a bit later. Seems interesting, worth thinking about. However they don't appear to differentiate between different monetary systems, i.e. gold standard and now, which makes me think that their thinking might be a bit limited by some false notions. However I'll have more of a look into it.

ollyJuly 2nd, 2012 at 2:31 pm

Quote:
"The reason for this subpar economic performance is not always the force of market discipline pushing up real interest rates. Rather, high government debt induces some other form of crowding out of the private sector. This might include a reliance on distorting taxes to pay the interest service on the debt or more direct restrictions on finance that creates a captive market for government debt. The former concerns the dead-weight loss from taxation, and the latter is sometimes known as “financial repression”. Financial repression includes directed lending by captive domestic audiences, explicit or implicit caps on interest rates, regulation of cross-border capital movements, high reserve and capital requirements, and moral suasion applied to regulated entities."

From an MMT perspective tax rises wouldn't be necessary unless you wanted to control inflation, or do more redistribution of wealth.

ollyJuly 2nd, 2012 at 2:32 pm

The "financial oppression" is a bit more complicated.

"Directed lending by captive domestic audiences" isn't necessary for the government to sustain a large deficit.

"Explicit or implicit caps on interest rates": rates don't need to be kept super low, but high rates don't encourage investment in the real economy either, do they?

"Regulation of cross-border capital movements" might be needed temporarily in the possible case of an extreme and rapid depreciation of the currency, but not otherwise. You'd have to show that this was a real possibility.

There's no need for high reserve requirements at all.

Higher capital requirements are agreed by most to be desirable in order to make the banking sector less fragile. That has nothing to do with government debt or MMT.

"Moral suasion applied to regulated entities" also has nothing to do with government debt. If it happens at all it will be because the financial sector is guilty of gross fraud and of dynamiting the economy with that fraud.

ollyJuly 2nd, 2012 at 2:34 pm

From your business perspective, if the government cuts spending a lot now to pay down the debt (or raises taxes?), and the economy goes into recession, where will the source of growth eventually come from?
I'm talking specifics.

Philip PilkingtonJuly 2nd, 2012 at 3:29 pm

Isn't the argument — not just from Sumner, but also from Krugman — essentially that the Fed should try to "scare" people into spending. That, to me, not only appears uncredible but also ignores the serious "debt deflation" component of this downturn — that is, it goes beyond simple Keynesian hoarding and has much to do with paying down accumulated private sector debt.

In fact, I saw a post by Sumner the other day where he claimed that the Israeli central bank was engaged in NGDP targeting "in secret". This appears to me to make no sense at all. If much of the effects of NGDP targeting are realised through "expectations" then how do you run such a program "in secret"? That would be like trying to run a successful election or advertising campaign "in secret".

Frankly, I think that NGDP targeting will be the new fad to replace the failed QE programs. The Markets need such a fad to trade off — nothing is easier than making a few bucks by shorting the USD when Bernanke announces new monetary measures. Many in the markets, disillusioned with QE have started talking NGDP targeting. But its difficult not to catch a whiff of self-interest every time they bring it up.

MarkJuly 2nd, 2012 at 7:01 pm

Ridiculous. Wray has been a bear and calling for depression since the early 90s. And now he's claiming he was right all along. Stopped clock.

ollyJuly 2nd, 2012 at 7:26 pm

Are you actually familiar with MMT writings on the nature of money?

The supply siders of the eighties claimed their policies of cutting taxes and regulation, and raising interest rates are what saved the economy from excessive government deficits and debt and brought the economy back into equilibrium. What they always fail to mention is that government deficits and debt INCREASED during the so-called supply side revolution.

If you don't believe in government spending, we can still have a appropriately sized deficit by cutting taxes. Lower taxes means people have more of their own money to spend and invest. So the market can work.

NickJuly 2nd, 2012 at 8:58 pm

Confidence will slowly return. After a downturn (perhaps a sharp one, involving lower asset prices) banks will lend, businesses will invest domestically, and consumers will buy homes again.

There is far too much cash on the sidelines right now, because markets have yet to clear. And this is taking a terrible toll on the real economy. Gov't cannot fix this by cutting taxes.

Letting the markets clear is how we escaped from the sharp downturn in 1921, or 1907, 1901, etc. not that of 1929.

As for R&R piece, the debt overhang duration is obviously extended, not shortened, when nations have their own fiat money. That is the Debt Trap problem with MMT. Generations of sub-par growth costing 10s of trillions of dollars.

Supply-siders were somewhat similar to MMT. Dick Cheney's: "Reagan proved deficits don't matter" could have come straight from Randall here.

Deficits DO matter. But the conventional thinking about the way they matter is completely wrong. They do not drive up interest rates (Niall Ferguson or John Paulson or WSJ editorial page or S&P etc.) They drive rates Down.

See my piece on Japan last year. Everyone I knew was predicting higher rates for Japan. I was equally bearish, but felt rates would drop.
http://www.zerohedge.com/article/guest-post-japan…

ollyJuly 3rd, 2012 at 11:51 am

In that article you seem to see government bond yields as ultimately controlled by the market. That's incorrect. Bond yields won't rise beyond the level which the central bank wants them to.

As I said Rogoff and Reinhart don't seem to acknowledge any difference between gold standard, fixed exchange rate or floating fiat currency. So their analysis appears to be lacking and based on some simple errors.

The effectiveness of the policies MMTers advocate shouldn't be judged by poor government decisions made in the past. The two are different.

Supply side is all over the place. They claim to want less government and trumpet the success of their policies despite the fact that the 'supply side revolution' was accompanied by larger government deficits and debt. At least MMT is coherent.

I'll post another reply at the bottom of this page as this box is too small.

ollyJuly 3rd, 2012 at 12:37 pm

Nick,

(continued from above)

As I mentioned before, the problems associated by Rogoff and Reinhart with large government deficits and debt don’t actually apply. See my comments above.

I don’t get your use of the term ‘legitimate’. What exactly do you mean? The government is not an add-on to the ‘free market economy’ which would work just fine without it. The government is an integral part of the economy. As the issuer of the currency it plays a crucial role.

New money can come from four sources: government spending (I include spending by the central bank), domestic private debt, foreign private debt, or foreign government spending. You seem to think that only private debt is ‘legitimate’ for some reason. You seem to think that banks creating money when they make loans is legitimate whilst government spending money into being is not. This view misunderstands the nature of money and fails to take into account the logic of sectoral balances. The government plays an important part in maintaining full employment and growth, market clearing doesn’t achieve this on its own, due to excess saving desires.

ollyJuly 3rd, 2012 at 12:41 pm

Nick,

From your zero hedge article:

"18 years of Keynesian spending to prop up its post-bubble economy has imparted a mild deflationary bias to its economy. Heterodox monetary measures (such as “helicopter money”) could swiftly reverse this"

Large tax cuts are effectively 'helicopter money'.

John CardilloJuly 3rd, 2012 at 3:11 pm

I have learned much from your articles and am interested in hearing your thoughts on the role of capital gains taxes as an economic control variable. As an engineer, I tend to rationalize what I see happening in economics in terms of control system theory. From that perspective I see capital gains taxes as the most overlooked control variable that directly impacts the unstable positive feedback loop or the euphoria that drives the masses into one financial bubble after another.
Capital gains tax rates from 1917 – 2012 http://www.ctj.org/pdf/regcg.pdf had two periods of time with rates at or below 15%. In both cases, there was a 7 year run up to major economic crisis.
1917 – 1921: 67 – 73%
1922 – 1934 12% — Great Depression 1929
1934 – 2002 20-30%
2003 – today 15% — Great Recession 2010

SandhammerJuly 3rd, 2012 at 6:56 pm

When the definition Savings = Deferred Consumption became Savings = Hoarding the corruption of a moral system was assured. All this dialogue I am reading here is merely an attempt to rationalize a system of fraud and legalized theft. Rave on! Rave on and tell me your hand is not in a pocket that is not yours. Tell me that Debt is Money. Expect me to believe it? You are arguing Disney Land. Sooner or later the visit ends and all children must go home. I hope it is still there.

NostradamusJuly 3rd, 2012 at 6:57 pm

Hey, let's predict the future it's fun!

I predict that the world is at verge or nuclear power energy revolution, led by thorium-based molten salt liquid reactors. They will provide virtually inexhaustible energy source, cheap electricity as well as clean, cheaper than oil liquid fuel, hydrogen. That is because heat generated from these things can be used to slit water into oxygen and hydrogen.

As these reactors do not use water as coolant there is no risk of nuclear meltdown as coolant flow is obstructed. Whats more they don't need large contaiment vessels around them so they would be relatively cheap to build. They would burn almost all nuclear fuel leaving very little nuclear waste.
http://www.youtube.com/watch?v=VgKfS74hVvQ

NickJuly 3rd, 2012 at 8:59 pm

"Legitimate debt" in the sense that that is how the private sector agents see it. Of course, as Minsky has shown, all debt becomes Ponzi at some point. (Minsky maintained that the US government debt could become illegitimate and the US could go bankrupt to Randall's deep dismay.) In particular, there is an especially close connection between ponzi bank sector debt leading to excessive public debt (e.g. Spain: 2012).

But the private sector has never worried about the blurring of these lines. Private sector agents tend to believe that excessive private sector debt will be corrected by the market place. So these debt buidups do not lead to Ricardian behavior. Public debt, however, is a different story. And public debt which can remain Ponzi for ever (due to the nature of the monetary system) worries the private sector most. This is what the Abba Lerner, functional finance, & MMT proponents continue to miss. Lerner, brilliant as he was, was never in the private sector. He never grasped these real world responses.

As for my article on Japan. R&R are, of course, wrong to conflate default rates of nations with vastly different monetary systems and then draw lessons from it. I do not make this mistake. But, in fairness to them, monetary systems are more fluid, over long periods of time, then MMT supporters recognize. Ray Dalio has writtern excellent (and non-academic) thoughts about this.

I do not see Japan moving off its fiat money system anytime in the foreseeable future. Hence I do not see its bond market being able to be clear on its own. The BOJ has been monetizing Japan's debts for 20 years (via ever larger so-called Rimban operations). This has enabled the government to run endless deficits, and has caused the private sector to become the most depressed of any private sectors in history. This is no exaggeration.

The government needs to stop "playing an important part in maintaining full employment and growth" (in your well-chosen words) and allow markets to function properly, or the excess saving desires will only continue to grow.

Post-bubble Japan is the perfect lab to see why — and how — MMT simply does not work.

ollyJuly 4th, 2012 at 12:21 am

The difference between treasury debt and central bank money is basically an illusion in a fiat money system. Smoke and mirrors. If you wanted to you could effect that tax cut by distributing that amount directly from the central bank, with no debt involved. Only difference is interest rates, which are basically a policy choice.

NickJuly 4th, 2012 at 1:29 am

Money financed tax cuts by the central bank are less Ricardian than conventional tax cuts as they do not increase external public debt.

As Bernanke put it back in 2002, "If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets."

He is completely right in theory. But this is unrealistic. The Fed and Treasury are constrained by real world politics, as BB has now realized. Again, this is where MMTs simplistic and idealistic sense of what the world "should be" breaks down. If one ignores real world factors and thereby pursues suboptimal policy, one destroys economic value. Japan's policymakers keeps doing this. The West is joining in too.

Olly, the smoke and the mirrors matter in the real world. That's why you should be post-MMT, and recognize the essential nature of a debt trap.

ollyJuly 5th, 2012 at 11:45 am

"If one ignores real world factors and thereby pursues suboptimal policy". Actually MMT focuses on reality and proposes policies which have the potential to deliver optimal outcomes. It is the mainstream fixation on imaginary problems which leads to suboptimal outcomes. Your argument is that MMTers should stop focusing on real problems and start focusing on imaginary ones. If the mainstream didn't continually scare the population with lies about "running out of money" and "bond vigilantes" then perhaps people would be able to base their future expectations on actual facts rather than fictions.

According to your own argument the "essential nature of a debt trap" is that people don't understand the situation they are in because they have been fed a load of nonsense and lies by economists and the media.

"psot-MMT" seems to mean "remain ignorant".

ollyJuly 5th, 2012 at 12:01 pm

"public debt which can remain Ponzi for ever"

If it can remain 'ponzi' for ever then it's not ponzi.

"I do not see its bond market being able to be clear on its own"

It makes no sense to apply loanable funds thinking to the current fiat money system.

ollyJuly 5th, 2012 at 12:11 pm

"The government needs to stop "playing an important part in maintaining full employment and growth" (in your well-chosen words) and allow markets to function properly"

The government is a part of the market economy. The currency that the market uses comes from the government, not from an underground cave.

GoHomeRothbardCloneJuly 5th, 2012 at 12:53 pm

Taxation is not theft. Money creation by government is not fraud. Your argument is based on two simple errors.

PZJuly 5th, 2012 at 12:59 pm

My views…

First of all, US treasuries are risk-free asset, so we should not expect risk premia on them compared to reserve deposits. After all, U.S. constitution says that validity of U.S. government debts should not be even questioned.

Money invested in treasuries is just savings. It provides an alternative to normally non-interest bearing reserves, that's all. It is essentially interest-bearing form of money. Both reserves and trasury bonds exist in two accounts at the central bank.

And the thing about savings is that it is purchasing power that is put aside, for the purpose that it will be utilized later, maybe decades later as in pension savings. It does not matter whether the wealth is in money-form or bond-form. QE is essentially just an asset swap that changes financial wealth from bond-form to money-form. But it is still savings. It is not meant to be consumed now, so hence it will not be consumed now.

If QE strips interest income from savers it will cause them to save more, not less, to achieve their desired savings position, for example pot of money they want to put aside for retirement. I don't really get what is the channel additional demand for goods and services is supposed to come. Yes, interest rates for all sorts of loans maybe little bit lower, but against that private sector is engaged in massive deleveraging as collateral values of houses and commercial real estates have collapsed and private sector has realized it has overextended itself. So "demand for money" is negative? You cannot get them to loan more by simply reducing interest rates.

And in the investment front, investment decisions depend upon the expected profitability of investments. Value of companies fluctuate but is still tied to their expected profits. Real world investments get go-ahead if they are deemend sufficiently profitable. So it was before QE and so it is after QE. QE can change funding costs (interest rates) a little, and that's it. Portfolio allocations are not going to provide significant boost to the economy. Even before QE treasuries yielded very little compared to other forms of investments, but institutional investors still bought them as an, essentially, just an interest-bearing form of money. Well, nothing has changed in that front. They still want to hold just money, or interest bearing from of money.

Joe FirestoneJuly 5th, 2012 at 6:13 pm

First, how can you say Japan is following MMT-based policies when Japan has no Job Guarantee program and also still continues to issue debt. Obviously,japan does suggest that MMT is right in saying that the level of public debt is not associated with inflation or hyperinflation, but no way is it following MMT-based policies. Also, I'm very suspicious about words like "ponzi." That notion has a specific meaning. Please define it and then show how the Government continuing to issue debt puts it into "ponzi." When you do that please explain how it can fall into "ponzi" while it retains the authority to mint coins having arbitrary face value, along with the Fed's power to create reserves "ouy of thin air."

Joe FirestoneJuly 5th, 2012 at 6:26 pm

Also, laissez-faire isn't enough to create a sustainable market economy, because the truth is that market economies are unsustainable, eventually capitalists subvert them, control markets, and create plutocracy where the largest companies and wealthiest individuals control the economy, politics, and government. We're seeing that happen now, just because the government was penetrated by free market ideology in the mid-1970s, and has yet to break free. A free market economy isn't sustainable for most people in the medium term. We need a mixed economy with government deficit spending compensating for trade deficits and private savings through automatic stabilizers, and we need very, very strong regulation in the finance and consumer sectors to prevent and punish business fraud where it occurs. No more Mr. nice guy. People who commit fraud go to jail, and companies that commit systematic fraud pay with forfeit of their corporate charters.

barfJuly 6th, 2012 at 1:01 am

treasuries are risky? why? "because the can't rally any more from here"? where is the inflation? there is not default risk. all that oil money will go directly to the Treasury Department. Same with all the rest of the energy moullah. Sucks to be a State of course…

NickJuly 6th, 2012 at 3:02 am

When the economy becomes dependent upon the government to continually fill in the gap via deficit spending to prevent collapse, the government becomes part of the problem — not the solution. Under fiat money this can go on for ever, but, in reality, citizens have never (and will never) tolerate deficits until infinity.

Shockingly bad economic regimes can maintain themselves far longer than most people realize. Look at the former Socialist Republics of Eastern Europe or Communist North Korea the past 50 years. But, at some point, perhaps far into the future, the rubber meets the road. It is only when people begin to question the framework and institutions of government that the debt becomes understood as Ponzi. Before then if governments ignore debt, we don't have inflation, we have a long debt trap.

This is why no nation has ever managed to sustain fiat money more than 200 years. Look up Tang dynasty "flying paper money" for the earliest known example of the failure of fiat money. The point is that fiat money always fails, but it takes much longer to fail than "gold bugs" understand.

Human nature will not tolerate public deficits forever. And that is what happens in a debt trap. Once the trap becomes intolerable, a new monetary regime will be adapted. If evil just did not exist, there would be no need for a military. You got to take human psychology into consideration.

NickJuly 6th, 2012 at 3:10 am

Joe, An MMT econony isn't sustainable in the long term. I don't know your concept of medium term, but I hope you get the Big Government fiat monetary system you deserve. It may look a lot like post-bubble Japan.

NickJuly 6th, 2012 at 3:16 am

My longer response was blocked. To recap: (1) A large public sector that doesn't fund itself creates structural problems for the private sector and the economy. (2) Ponzi money will only collapse when people see it as such. This could take over a century. A debt trap is the intermediate 100 year or so stage between a healthy economy and hyperinflation or debt repudiation. It takes a very long time as post-bubble Japan evidences.

Joe FirestoneJuly 6th, 2012 at 3:44 am

Nick, you're saying it doesn't make it so. An economy based on MMT-inspired policies will be quite sustainable, thank you. And it won't look like any present-day economy.

My concept of the medium term is 10 years, btw. The time it would take for "free market" economy to go through a business cycle.

ollyJuly 6th, 2012 at 12:14 pm

"A large public sector that doesn't fund itself creates structural problems for the private sector and the economy. "

Warren Mosler has said he'd prefer a smaller government that sends out larger checks. He also argues his proposals for banking reform would greatly reduce the amount of regulation needed. See his site for details.

What are the 'structural problems' you're referring to? Can you give me more info?

Here's some articles on Japan by Bill Mitchell:
http://bilbo.economicoutlook.net/blog/?p=19528
http://bilbo.economicoutlook.net/blog/?p=18970

And this by Wray:
http://www.levyinstitute.org/pubs/wp_603.pdf

NickJuly 7th, 2012 at 6:15 am

Billy Blog's timeframe for Japan seems to be measured in years, not decades. He fails to understand that a debt trap can lead to a generation, or three, of sluggish growth whilst the private sector becomes zombified. Nor does he care about the corporate of banking elements of the private sector. He is a pure academic. Best to disregard him.

Mosler is, by far, my favorite MMT thinker. He truly understands and has learned from the markets (incuding his brutal summer of '98) and he has extensive business and political experience. I hope to someday persuade him that MMT can lead to a debt trap. We'll see!

NickJuly 7th, 2012 at 6:23 am

As for the Wray piece, I find it to be yet another tired restatement of Abba Lerner's functional finance. The article concludes that the government should keep spending as long as there is unemployment until inflation gets going. Wrong.

What if inflation never gets going because the private sector's fear of reckless spending is greater than the government's propensity to spend? If, on the margin, the private sector hoardes $1.01 for every dollar the government spends, we'll have no inflation for a very long time, and ultra-low bond yields. I call that a debt trap, my friend. And that's the fatal flaw with MMT.

peace

NickJuly 7th, 2012 at 6:50 am

David Pilling's FT article today on Japan is well worth reading in full. You can detect the real nature of Japan's trapped condition. Or, you can just nod along with Billy.
http://www.ft.com/cms/s/2/0d158be8-c633-11e1-a3d5…

"I tell him about Furuichi’s theory, that what youngsters have lost in income security they have gained in freedom. Imai is not convinced. “Living has become too hard. Younger people only have part-time jobs or contract jobs. The sense of community has become weaker.” He fears for Japan’s economy, worrying that the public debt of 230 per cent of GDP will one day explode. “I don’t know when this bankruptcy will happen. Maybe we’ll be OK for three years or five years. But 10 years?

"Some social critics say such preoccupations are taking their toll. When the bubble burst in the early 1990s, the suicide rate shot up, jumping 35 per cent to 32,863 in 1998 alone, a year of big layoffs. It has remained above 30,000 ever since, about 90 a day, though it has fallen marginally in recent years. That puts Japan below Russia …."

Joe FirestoneJuly 7th, 2012 at 3:25 pm

Where do you get this stuff from? Billy's been watching Japan for decades and often uses data going back decades to describe the case. Also, Billy doesn't fail to understand your debt trap conjecture, he just has a better theory which is that Governments sovereign in their own currency don't have a public debt problem, and that it's the private debt problem they need to worry about.

As far as banking elements are concerned he'd nationalize them in a New York second because they're already creatures of the Government and , as such, are just examples of "lemon socialism."

Furthermore Warren and Bill are very, very close friends and Warren has provided financial support in the past for Bill's research and both of them have fed off each other for close to 20 years now.

As for what Warren thinks about banks, he has the following tag line at the end of his e-mails: "The financial sector is a lot more trouble than it's worth." Also, since Warren is utterly militant when it comes to the idea that the level of public debt has absolutely no implications for the capacity of fiat sovereign governments to spend, you will never persuade him that your public debt trap theory is anything but pure nonsense.

Joe FirestoneJuly 7th, 2012 at 6:08 pm

I'm with Billy. japan can pay off its public debt anytime it decides to stop being fiat illiterate! They can do this with any demand-pull inflation consequences.

Joe FirestoneJuly 7th, 2012 at 6:26 pm

Billy's timeframe is in decades See: http://bilbo.economicoutlook.net/blog/?p=18970 You fail to understand what Billy does, namely that a nation sovereign in its own fiat currency can always eliminate its debt if it chooses to do so without running "surpluses."

On Warren, he and Billy are very close, and Warren has financially supported Billy's research. Also, Warren will never accept your view about "debt traps" because he is absolutely militant about the idea of fiat sovereign governments never having solvency problems. See: his book and also his presentation to the 2010 Fiscal Sustainability Conference. I'd link it but I'm afraid of having too many links in my reply.

NickJuly 8th, 2012 at 8:33 am

I read your link. Kobayashi is clearly pre-MMT. He thinks debt issuance leads to inflation immediately. Billy is MMT.Way to unrealistic. Here's the biggest blunder in his commentary.

"Moreover, if it wanted to the Japanese government could authorise the Bank of Japan (which might require some changes in rules and conventions) to retire all the outstanding national government debt as it matures."

Those changes ain't about to happen. Does he understand anything about the BOJ? How can some academics be so deliberately ignorant of political realities? You cannot make this stuff up.

Go beyond MMT Joe. You can do it.

Joe FirestoneJuly 8th, 2012 at 2:36 pm

First, You're shifting your ground Nick. The point you made was that Billy looks at a few years not decades. My link shows that you're wrong about that. lease have the grace and honesty to admit it.

Second, Bill's point is that it is within the power and authority of the Japanese Government to have the central Bank pay its debt. Therefore the debt is not a financial and economic constraint, but rather a voluntary political constraint that the idiot politicians in Japan are applying that is creating the debt. His other important point is that however much the Japanese public debt grows, it is always within the power of the Government to make every debt payment, so that there is no risk of insolvency due to economic factors. But, of course, political stupidity can always produce voluntary insolvency.

Your latest argument isn't economic or financial. When you say "Those changes ain't about to happen. Does he understand anything about the BOJ? How can some academics be so deliberately ignorant of political realities?" You're simply taking past Bill's argument. Also, your perception of "political reality," is, in my view, just ingrained subjective conservatism. When, and if Japan hits a financial crisis which it doesn't have right now, its government may develop an entirely different view of political reality, especially if when that happens other fiat sovereign nations have shown it the way.

It is always a mistake to project political reality based on the immediate past. In the 970s. No one would have thought the New Deal possible in 1931. FDR ran in 1932 on a balanced budget platform. But by 1933 he had to abandon ideology and try all sorts of things to end the depression and give people hope. In the 1970s no one would have predicted a political reality in which regulation of the financial sector was virtually abandoned. Even in early 1990 that would have been a stretch. But there's Clinton repealing Glass-Steagall at the end of the decade. And how about ending "welfare as we know it." Clinton didn't run on that in 1992, and if he had he never would have gotten elected.

Political reality changes under extreme pressure of events. If Japan couldn't get its debt bought anymore and it had to avoid its economic collapse it would have the BOJ either monetize it or pay it off, because, as any fool can plainly see, those alternatives are better than default.

NickJuly 9th, 2012 at 4:41 am

"But, of course, political stupidity can always produce voluntary insolvency. "

Therefore sovereign debt carries default risk after all, and should be priced accordingly. Why do MMTers fail to grasp this elemental point? To ignore default risk when it is, in fact, there is reckless. Label them stupid all you like, but institutions matter.

"Political reality changes under extreme pressure of events."

Agreed. And as long as Japan keeps relying on the BOJ to endlessly paper over its debts, political change will not happen. Japan will remain trapped. MMT leads to debt traps.

Billy's timeframe was short in the link you sent me. He sarcasticaly mocked a conventional economist for expecting Japan to crash immediately. Billy implied that Japan's 10 years of sluggish conditions, without a crash, exonerated his theory of endless debt until inflation.

Maybe you are somehow unaware of this, but Japan has not thrived these past 10 years. Give Japanese another 50 years or so and its people may abandoned the endless debt build-up without inflation. But don't expect Nirvana while we wait for Japan's quasi-MMT regime to end.

Joe FirestoneJuly 9th, 2012 at 5:28 am

J: "But, of course, political stupidity can always produce voluntary insolvency "

Nick: Therefore sovereign debt carries default risk after all, and should be priced accordingly. Why do MMTers fail to grasp this elemental point? To ignore default risk when it is, in fact, there is reckless. Label them stupid all you like, but institutions matter."

J: Don't kid a kidder, Nick. All MMTers grant political and psychological default risk for fiat sovereign governments. If you really read MMT posts you'd know this. That kind of risk doesn't invalidate the MMT claim that fiat sovereigns have no involuntary sovereign risk. In fact, it supports it, because it points to the voluntary and controllable nature of the risk.

In pointing this out, MMT is saying that default risk isn't economic or financial in nature but only a matter of ignorance, venality, and/or stupidity. And it suggests that we remove that risk by pointing out that no one is forcing any fiat sovereign to default, and that the way to fight default risk is to make sure that everyone knows this fact, so that fiat sovereign governments won't claim that they're running out of money or are forced by solvency concerns to default.

Since you apparently agree with me on the point that default risk is purely political why aren't you joining with us in telling everyone about that rather than claiming that debt is a trap, a financial or economic problem that politicians and governments cannot solve if they are willing to grasp the obvious solution; which is just to pay the debt in question off with newly-created fiat money?

Joe FirestoneJuly 9th, 2012 at 5:48 am

On your Japan and Billy comments above. First, MMT doesn't recommend that Japan keep rolling over debts. In fact, MMT recommends that Japan use vigorous fiscal policy to get out of its economic stagnation. MMT economists also prefer that Japan pay off its debts as they fall due with newly created money, and not incur new debts.

On Billy, the link I gave you above tracks more than 30 years of the expansion of Japan's public debt and deficits. It's not restricted to the short term. Other readers can easily check who is right about this by going to: http://bilbo.economicoutlook.net/blog/?p=18970 and looking for themselves. I'm happy to let them be the judge of who is giving them the true story here. As for what Bill implied, why don't you quote precisely what he says and then readers of our debate can see for themselves what he says, and what his statements "imply."

The rest of your post doesn't need a reply in light of what I've just said. MMT bloggers don't imply that Japan has dome well or that it reflects MMT policies, only that it's long-term growth of debt without high inflation refutes the predictions of hyperinflation made bu neo-classical and austrian school economists.

NickJuly 9th, 2012 at 7:45 am

I agree with the second half of this comment. Austrians and conventional right wingers have an imperfect understanding of debt, and MMT is more advanced. You have much to teach, but some more to learn as well.

Where MMT goes astray is in its insistence that because governments do not have to ever voluntarily default, increases in public indebtedness need not be a problem.

Large public debts carry Ricardian consequences. Growth slows under any monetary regime plagued by high debts.

The lines between public debt and private debt are blurrier than MMTers grasp as are the lines between fiat monetary standard regimes and hard money ones.

There are no absolutes here Joe, so absolute-ish solutions predicated on fallacies create more problems than they solve.

I undertand MMT and I reject it. When debt levels become high enough, the state sector becomes too large, the private sector too inefficient, and a very long period of low growth sets in.

Why would you deny this? Notice that Billy is indifferent between the state sector and the private sector. Market socialism or market capitalism, it's all the same to him.

I'll leave you the last word, as we are not going to convince each other.

NickJuly 9th, 2012 at 7:52 am

My reply was too long. Your insistence that Ricardian effects are due to stupidity makes no sense. Nations have never stuck with one monetary system for ever, so debt levels will always matter, and they will matter more as debt levels rise.

MMT leads to market socialism. Abba Lerner was a proponent of such an idea (at least until he grew confused by the stagflation of the 70s), and Billy is indifferent between market socialism and capitalism. I chose the latter, do you really think you can rule this option out? Debt matters.

NickJuly 9th, 2012 at 7:54 am

Debt matters Joe. It always has, it always will. Ricardian effects cannot be explained away as stupidity or venality. Nice try. Get real.

NickJuly 9th, 2012 at 7:58 am

Billy is indifferent between market socialism and capitalism, therefore he advocates fiscal spending as a cure for Japan. More Obuchi-like spending would kill whatever animal spirits are left in Japan.

NickJuly 9th, 2012 at 7:59 am

More fiscal spending in Japan would crush private sector animal spirits. Everyone understands this much here.

Joe FirestoneJuly 9th, 2012 at 3:31 pm

I received two comments from "intense debate" in my inbox which for some reason have not appeared above. Here's the first:

"Debt matters Joe. It always has, it always will. Ricardian effects cannot be explained away as stupidity or venality. Nice try. Get real."

I've never said debt doesn't matter. Private debt matters a lot. I think public debt matters a lot too. First, it creates a confusing political issue that cripples progressives, and second, it results in $250 B+ in what are essentially unnecessary welfare payments to foreign nations and mostly rich investors that create a disincentive to investment. Those are two very good reasons for getting rid of the public debt. As I've said earlier, this can easily be done while continuing to spend more than the government collects in taxes. So, let's do it! Let's get rid of the debt subject to the limit entirely.

On Ricardian equivalence, that theory is bankrupt. See Billy's critiques here: http://bilbo.economicoutlook.net/blog/?p=6399 and here: http://bilbo.economicoutlook.net/blog/?p=7988

In short, both logic and existing empirical evidence refutes the Ricardian equivalence fairy.

Here's the second comment by Nick:

"More fiscal spending in Japan would crush private sector animal spirits. Everyone understands this much here."

When economists have to resort to the "animal spirits" fairy, then you know they're run out of real aguments. Look, along with most economists have no qualifications in either psychology or cognitive science. You know nothing about these things and your just trying to substitute BS for real world you don't understand and have no scientific basis for. Japan has had substandard economic results for a long time now. the reason is that every time they do some stimulus to get out of their doldrums they deficit spend too little and then when they start making a little progress they get scared and go back to contractionary fiscal policy only further increases their debt/deficits due to the reactions of their automatic stabilizers. So, what "everyone understands" over there is the very reason why Japan has these stagnations cycles. Stop believing it, start practicing MMT-based economics and solve the problem.

NickJuly 9th, 2012 at 11:01 pm

I think I got it. There is no such thing as business confidence, that's just the "Krugman's confidence fairy" at play. There is no such thing as Ricardian equivalence, that's just the "Ricardian equivalance fairy", there is no such thing as animal spirits, that's just Keynes' "animal spirits fairy", there is no such thing as an enlightened decision to voluntarily default on public debt, that's just venality and stupidity.

NickJuly 9th, 2012 at 11:03 pm

Now I am finally understanding. All this time I was just substiuting my BS for how the real world actually exists. I didn't understand. All Japan has to do is deficit spend a lot more than they currently have been, and all will be ok. And Japanese people, like people all over!, once they understand this simple idea, will be thrilled to see their economy rebound.
Thank you for explaining the real world to me.

NickJuly 9th, 2012 at 11:11 pm

Since you obviously have a great deal of private sector experience, you obviously know much better than a mere academic in an ivory tower, why all these seemingly obvious psychological concepts are actually just mere fairies. I guess I must have come across thousands of misguided souls who, can you believe this?, were venal enough and stupid enough to believe in these fairies! (silly them.) Nice theory you subscribe to Joe. What else can you ignore? A generation or two of stagnation perchance?

ollyJuly 10th, 2012 at 7:35 pm

Warren Mosler's argument is that given Japan's savings desires, taxes could be lower than they are at present. So he advocates cutting taxes and instituting a transitional job guarantee program.

From an MMT perspective, if the government's institutional arrangements are causing the population to be afraid due to the phantom threat of voluntary debt default by the government, then it might make sense to change those institutional arrangements. If the population knew that government bonds are basically just an interest rate control mechanism then they might not worry about them so much.

MMTers stress that it is precisely poor government policy and defunct thinking which is standing in the way of solutions to current problems. People need to understand how the monetary system works in order to formulate better policies.

You can't blame MMT for non-MMT policies enacted by "non-MMT governments".

Warren Mosler worked out MMT on the basis of his real world experience of the economy and his trading in government securities and derivative contracts.

promotor_rentNovember 4th, 2012 at 9:53 pm

In such a trap very little high powered money stock is needed to hold rates near zero and crimp long rates to all-time lows. Inflation cannot get going as this trap is debt- deflationary in nature. E.g., the Nikkei stock average is down 80% over the past 22 years, mostly because of it. It kills confidence. The game can go one for generations.

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Emre Deliveli is a freelance consultant, part-time lecturer in economics and columnist. Previously, Emre worked as economist for Citi Istanbul, covering Turkey and the Balkans. He was previously Director of Economic Studies at the Economic Policy Research Foundation of Turkey in Ankara and has has also worked at the World Bank, OECD, McKinsey and the Central Bank of Turkey. Emre holds a B.A., summa cum laude, from Yale University and undertook his PhD studies at Harvard University, in Economics.

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