I'm curious about your political science perspective on this.
Is our president a neo-Hooverite or a masochist? I just don't get it. On the one hand he's a decent arbitrator but on the other he seems like such a weakling. It seems like everything is a losing battle for this administration. Like a nightmare of multiple catch-22s that are all self-imposed.
I remember John Stewart a year ago saying something to the effect of: "I can't decide if he is the Zen master or just out of touch"...
Wednesday, February 16, 2011
Friday, February 11, 2011
TELL THE DEFICIT TERRORISTS TO SHOVE IT
With the pandemonium set to be amplified soon with the coming political question of raising the debt limit in the U.S., I thought it would be good to quell some myths surrounding how our monetary system works.
First of all, contrary to the retarded narrative we hear constantly spouted off by media figures and old white men in both political parties: there is no risk of default for the U.S. federal government. A sovereign nation who is the monopoly issuer of a fiat non-convertible currency with a floating exchange rate can NEVER BE INSOLVENT with respect to obligations denominated in that currency. The government can always meet obligations, interest or transfer payments for social security, etc. The reason why there is a connection between the deficit and debt issuance is that there is a SELF-IMPOSED POLITICAL CONSTRAINT that makes conservatives (neoliberals across the political spectrum) feel better. It is a relic left over from the gold standard Bretton Woods days that spending needs to be ‘financed’. There is no underlying economic reason why the U.S. federal government needs to ‘borrow’ to finance any spending. Let me repeat, the federal government of the U.S. can never go bankrupt or default because of the way the monetary system is set up.
But what about hyperinflation? Yes, inflation could be a constraint. However, there is no empirical connection between deficits and inflation. Japan is case in point on this! Furthermore, in the U.S. we have plenty of excess capacity and underutilized resources (high unemployment) which can soak up nominal spending. I think the inflation risk is really low for the U.S. I’ll believe it when I fucking see it and if we do see some it will be due to rising input costs not government deficits.
But what about ‘devaluing’ or ‘debasing’ the currency? There is no empirical link between deficits and depreciation of a fiat currency. Japan again is case in point.
But what about rising interest rates? The Central Bank controls interest rates. How could they explode out of control? That’s right, they won’t.
But what about rising future taxes? Spending by a government who issues a fiat non-convertible currency under floating exchange rates does not need to be ‘financed’ either by borrowing or by taxes. There is no external constraint. If you examine the balance sheets of the consolidated government sector (in our country the Fed and Treasury) you can see that this is true. The government spends first and taxes later. Furthermore, Ricardian equivalence is patently false.
There is absolutely no need to balance the budget like a household. The government which issues a fiat non-convertible currency under floating exchange rates is NOT like a household or firm. The analogy with a household is a fallacy. I think people propagate this fallacy in order to play political games, cause citizens to fear things that don’t exist and generally to further their neoliberal ideology of decreasing the role for government. It is a self-defeating and self-destructive position to take. Deregulation and desupervision of the financial institutions has led to fraud and a credit bubble and now cutting government spending will kill any chance of private sector recovery from the credit binge. I.e. the private sector cannot deleverage without a government sector deficit because in the U.S. there is a current account deficit (imports are greater than exports so there is a leakage there).
But what about all the money we owe China? GOVERNMENT DEBT IS A PRIVATE ASSET. Our children don’t have to ‘pay back’ shit for the above reasons. Note how recently private sector saving has risen while the public sector (consolidated government) has gone into deficit. The government deficit is facilitating private sector deleveraging (paying down debts). The neoliberal period has seen an explosion in private debt and that is a major cause of the global financial crisis.
In conclusion, EVERYONE NEEDS TO SHUT THE FUCK UP ABOUT THE U.S. GOVERNMENT DEFICIT and start working on more important problems such as massive unemployment and persistent ecological destruction. Unemployment imposes huge social and cultural costs, not to mention economic costs.
Cutting government spending will not create jobs! It will make shit much worse and multiply social ills.
The government is the monopoly issuer of a fiat currency and the private sector are the users of the currency. This is a subtle power they have over us but also it creates opportunity for the government through fiscal policy to achieve many goals without worrying about any bullshit ‘financing’ constraint. Politically, we can figure out what those goals are that we want the public sector to take on.
Note that the monetary system is different in the Euro zone where they have relinquished their monetary sovereignty and gone to the Euro (effectively fixed exchange rates) plus agreed to idiotic and arbitrary deficit limits as a percentage of GDP. Those constraints are what necessitated bailouts in Ireland and Greece. Zimbabwe had hyperinflation, but they had major supply-side issues…
Often deficit terrorists citing hyperinflation use Zimbabwe and Weimar Germany as examples of what would happen to the U.S., U.K., Japan, etc. if the government sectors don't cut their deficits/debt.
In Zimbabwe and Weimar there were extraordinary problems on the supply side. Let's start with Zimbabwe. A large part of the story is a hangover from colonialism, but after the ensuing land reforms, agricultural capacity was destroyed. This required shifting to imports which used up foreign exchange which could have been used acquired raw materials for manufacturing. Manufacturing capacity was hardly being utilized (20%). Production collapsed and unemployment rose above 80%. Income growth fell, aggregate demand fell further. GDP growth contracted 7-8% per year causing investment to dry up and potential capacity to plummet. If that wasn’t enough, the government spent money on political favors instead of adding to productive capacity.
Yes, I know that governments suck and everything but though hyperinflation was almost inevitable in this case it provides no intrinsic case against a government that is sovereign in its own currency and who runs permanent deficits to pursue policies of higher employment.
First of all, contrary to the retarded narrative we hear constantly spouted off by media figures and old white men in both political parties: there is no risk of default for the U.S. federal government. A sovereign nation who is the monopoly issuer of a fiat non-convertible currency with a floating exchange rate can NEVER BE INSOLVENT with respect to obligations denominated in that currency. The government can always meet obligations, interest or transfer payments for social security, etc. The reason why there is a connection between the deficit and debt issuance is that there is a SELF-IMPOSED POLITICAL CONSTRAINT that makes conservatives (neoliberals across the political spectrum) feel better. It is a relic left over from the gold standard Bretton Woods days that spending needs to be ‘financed’. There is no underlying economic reason why the U.S. federal government needs to ‘borrow’ to finance any spending. Let me repeat, the federal government of the U.S. can never go bankrupt or default because of the way the monetary system is set up.
But what about hyperinflation? Yes, inflation could be a constraint. However, there is no empirical connection between deficits and inflation. Japan is case in point on this! Furthermore, in the U.S. we have plenty of excess capacity and underutilized resources (high unemployment) which can soak up nominal spending. I think the inflation risk is really low for the U.S. I’ll believe it when I fucking see it and if we do see some it will be due to rising input costs not government deficits.
But what about ‘devaluing’ or ‘debasing’ the currency? There is no empirical link between deficits and depreciation of a fiat currency. Japan again is case in point.
But what about rising interest rates? The Central Bank controls interest rates. How could they explode out of control? That’s right, they won’t.
But what about rising future taxes? Spending by a government who issues a fiat non-convertible currency under floating exchange rates does not need to be ‘financed’ either by borrowing or by taxes. There is no external constraint. If you examine the balance sheets of the consolidated government sector (in our country the Fed and Treasury) you can see that this is true. The government spends first and taxes later. Furthermore, Ricardian equivalence is patently false.
There is absolutely no need to balance the budget like a household. The government which issues a fiat non-convertible currency under floating exchange rates is NOT like a household or firm. The analogy with a household is a fallacy. I think people propagate this fallacy in order to play political games, cause citizens to fear things that don’t exist and generally to further their neoliberal ideology of decreasing the role for government. It is a self-defeating and self-destructive position to take. Deregulation and desupervision of the financial institutions has led to fraud and a credit bubble and now cutting government spending will kill any chance of private sector recovery from the credit binge. I.e. the private sector cannot deleverage without a government sector deficit because in the U.S. there is a current account deficit (imports are greater than exports so there is a leakage there).
But what about all the money we owe China? GOVERNMENT DEBT IS A PRIVATE ASSET. Our children don’t have to ‘pay back’ shit for the above reasons. Note how recently private sector saving has risen while the public sector (consolidated government) has gone into deficit. The government deficit is facilitating private sector deleveraging (paying down debts). The neoliberal period has seen an explosion in private debt and that is a major cause of the global financial crisis.
In conclusion, EVERYONE NEEDS TO SHUT THE FUCK UP ABOUT THE U.S. GOVERNMENT DEFICIT and start working on more important problems such as massive unemployment and persistent ecological destruction. Unemployment imposes huge social and cultural costs, not to mention economic costs.
Cutting government spending will not create jobs! It will make shit much worse and multiply social ills.
The government is the monopoly issuer of a fiat currency and the private sector are the users of the currency. This is a subtle power they have over us but also it creates opportunity for the government through fiscal policy to achieve many goals without worrying about any bullshit ‘financing’ constraint. Politically, we can figure out what those goals are that we want the public sector to take on.
Note that the monetary system is different in the Euro zone where they have relinquished their monetary sovereignty and gone to the Euro (effectively fixed exchange rates) plus agreed to idiotic and arbitrary deficit limits as a percentage of GDP. Those constraints are what necessitated bailouts in Ireland and Greece. Zimbabwe had hyperinflation, but they had major supply-side issues…
Often deficit terrorists citing hyperinflation use Zimbabwe and Weimar Germany as examples of what would happen to the U.S., U.K., Japan, etc. if the government sectors don't cut their deficits/debt.
In Zimbabwe and Weimar there were extraordinary problems on the supply side. Let's start with Zimbabwe. A large part of the story is a hangover from colonialism, but after the ensuing land reforms, agricultural capacity was destroyed. This required shifting to imports which used up foreign exchange which could have been used acquired raw materials for manufacturing. Manufacturing capacity was hardly being utilized (20%). Production collapsed and unemployment rose above 80%. Income growth fell, aggregate demand fell further. GDP growth contracted 7-8% per year causing investment to dry up and potential capacity to plummet. If that wasn’t enough, the government spent money on political favors instead of adding to productive capacity.
Yes, I know that governments suck and everything but though hyperinflation was almost inevitable in this case it provides no intrinsic case against a government that is sovereign in its own currency and who runs permanent deficits to pursue policies of higher employment.
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