I give this book one star because the drone landed on my cat

December 3, 2013 § Leave a comment


If the government is in surplus, it means that the government is taking in more cash than it’s spending, which is the opposite of stimulus.

It’s also well known that the US trade deficit exploded during the late 90s, which means that ‘X-M’ was also a huge drag on GDP during his years.

So the trade deficit was subtracting from GDP, and the government was sucking up more money from the private sector than it was pushing out.

There was only one “sector” of the economy left to compensate: Private consumption. And private consumption compensated for the drags from government and trade in two ways.

First, the household savings rate collapsed during the Clinton years.

And even more ominously, household debt began to surge.

So already you can see how the crisis started to germinate under Clinton.

As his trade and budget policies became a drag on the economy, households spent and went into debt like never before.

Economist Stephanie Kelton expounded further…

“Now, you might ask, “What’s the matter with a negative private sector balance?”. We had that during the Clinton boom, and we had low inflation, decent growth and very low unemployment. The Goldilocks economy, as it was known. The great moderation. Again, few economists saw what was happening with any degree of clarity. My colleagues at the Levy Institute were not fooled. Wynne Godley wrote brilliant stuff during this period. While the CBO was predicting surpluses “as far as the eye can see” (15+ years in their forecasts), Wynne said it would never happen. He knew it couldn’t because the government could only run surpluses for 15+ years if the domestic private sector ran deficits for 15+ years. The CBO had it all wrong, and they had it wrong because they did not understand the implications of their forecast for the rest of the economy. The private sector cannot survive in negative territory. It cannot go on, year after year, spending more than its income. It is not like the US government…”  read more

PHOTOGRAPH: Achille Volpe

The cessation was glibly attributed to the Great Fire: but in every other city in England the Plague ceased at about the same time

November 21, 2013 § Leave a comment


While virtually all mainstream economists believe in a long-term Say’s Law (supply creates demand, so the ultimate constraint on long term growth comes from the supply side), the real constraint on long-term growth in a developed capitalist economy is always on the demand side. (Note that there’s nothing new in the Summers/Krugman recognition of secular stagnation; David Levy called it a “contained depression” in 1991; Wallace Peterson announced a “silent depression” in 1994; and I demonstrated in 1999 that the problem is chronically constrained demand. At a recent Levy Institute conference in Rio, Paul McCulley laid out what he called a fundamental economic principle: Microeconomics and Macroeconomics are inherently different disciplines. Macro is demand-side; micro is supply-side. For any practical time horizon, demand always drives supply.)

I know what I’m saying is heretical, even though it is fully backed by all the data. And this stagnation is not due to a liquidity trap, or to a negative “natural” rate of interest. It is in the nature of the productivity of capitalist investment in plant and equipment. To put it in simple terms, the problem is that investment is just too damned productive.  read more

PHOTOGRAPH: Antonio Olmos

A subject and a verb walk into a bar. They have a disagreement. They walks out

November 8, 2013 § Leave a comment


To put things crudely, there are two ways to get the increase in total spending that we call “economic growth.” One way is for government to spend. The other is for banks to lend. Leaving aside short-term adjustments like increased net exports or financial innovation, that’s basically all there is. Governments and banks are the two entities with the power to create something from nothing. If total spending power is to grow, one or the other of these two great financial motors–public deficits or private loans–has to be in action.

For ordinary people, public budget deficits, despite their bad reputation, are much better than private loans. Deficits put money in private pockets. Private households get more cash. They own that cash free and clear, and they can spend it as they like. If they wish, they can also convert it into interest-earning government bonds or they can repay their debts. This is called an increase in “net financial wealth.” Ordinary people benefit, but there is nothing in it for banks.

And this, in the simplest terms, explains the deficit phobia of Wall Street, the corporate media and the right-wing economists. Bankers don’t like budget deficits because they compete with bank loans as a source of growth. When a bank makes a loan, cash balances in private hands also go up. But now the cash is not owned free and clear. There is a contractual obligation to pay interest and to repay principal. If the enterprise defaults, there may be an asset left over–a house or factory or company–that will then become the property of the bank. It’s easy to see why bankers love private credit but hate public deficits.

All of this should be painfully obvious, but it is deeply obscure. It is obscure because legions of Wall Streeters–led notably in our time by Peter Peterson and his front man, former comptroller general David Walker, and including the Robert Rubin wing of the Democratic Party and numerous “bipartisan” enterprises like the Concord Coalition and the Committee for a Responsible Federal Budget–have labored mightily to confuse the issues. These spirits never uttered a single word of warning about the financial crisis, which originated on Wall Street under the noses of their bag men. But they constantly warn, quite falsely, that the government is a “super subprime” “Ponzi scheme,” which it is not.

We also hear, from the same people, about the impending “bankruptcy” of Social Security, Medicare–even the United States itself. Or of the burden that public debts will “impose on our grandchildren.” Or about “unfunded liabilities” supposedly facing us all. All of this forms part of one of the great misinformation campaigns of all time.

The misinformation is rooted in what many consider to be plain common sense. It may seem like homely wisdom, especially, to say that “just like the family, the government can’t live beyond its means.” But it’s not. In these matters the public and private sectors differ on a very basic point. Your family needs income in order to pay its debts. Your government does not.

Private borrowers can and do default. They go bankrupt (a protection civilized societies afford them instead of debtors’ prisons). Or if they have a mortgage, in most states they can simply walk away from their house if they can no longer continue to make payments on it.

With government, the risk of nonpayment does not exist. Government spends money (and pays interest) simply by typing numbers into a computer. Unlike private debtors, government does not need to have cash on hand. As the inspired amateur economist Warren Mosler likes to say, the person who writes Social Security checks at the Treasury does not have the phone number of the tax collector at the IRS. If you choose to pay taxes in cash, the government will give you a receipt–and shred the bills. Since it is the source of money, government can’t run out.

It’s true that government can spend imprudently. Too much spending, net of taxes, may lead to inflation, often via currency depreciation–though with the world in recession, that’s not an immediate risk. Wasteful spending–on unnecessary military adventures, say–burns real resources. But no government can ever be forced to default on debts in a currency it controls. Public defaults happen only when governments don’t control the currency in which they owe debts–as Argentina owed dollars or as Greece now (it hasn’t defaulted yet) owes euros. But for true sovereigns, bankruptcy is an irrelevant concept. When Obama says, even offhand, that the United States is “out of money,” he’s talking nonsense–dangerous nonsense. One wonders if he believes it.

Nor is public debt a burden on future generations. It does not have to be repaid, and in practice it will never be repaid. Personal debts are generally settled during the lifetime of the debtor or at death, because one person cannot easily encumber another. But public debt does not ever have to be repaid. Governments do not die–except in war or revolution, and when that happens, their debts are generally moot anyway.

So the public debt simply increases from one year to the next. In the entire history of the United States it has done so, with budget deficits and increased public debt on all but about six very short occasions–with each surplus followed by a recession.  read more

PHOTOGRAPH: Michael Wolf

Sand integument. Grains blown into navel. Stone-studded between toes

June 10, 2013 § Leave a comment


This design maintains the mutual elements of the UK banking system – our common cash machine system and payments infrastructure as well as the ‘free banking’ transaction system, it frees the lenders from a crippling cost obligation and it ensures that everybody can rely on ‘cash in the bank’ being there – regardless of the turmoil in the lending institutions.

The one casualty is interest on deposits. To have interest on deposits in a private system there has to be income from somewhere else to pay that interest. Therefore in this system it becomes a line item of government spending – likely via interest bearing accounts for individuals at National Savings. Paying interest on deposits in this way is then really just the same as paying coupons on Gilts. Gilts, of course, would cease to be issued under any rational government.  read more

PHOTOGRAPH: [unattributed]

I must say, Amy, pretending to have intercourse with you has given me a great deal of satisfaction

December 12, 2012 § Leave a comment


I’ll let you in on a secret: before this crisis, when I thought about the budget deficit I was like everyone else in that I paid no attention to how the government budget interacted with the private and trade sector balances. This is a big error. If you do that, you treat the government budget deficit in isolation, when the reality is that the government is an integral part of an open economy with households and businesses that trade domestically and abroad. When the government balance changes, the balances for those businesses and households change too. If you are talking about deficits then, you need to know how changes in the government balance affect the rest of the economy.

Here’s the thing: when we exchange goods and services with each other, from an accounting perspective, it’s a wash; if you buy my goods, I get money and you get goods of equivalent value. If you pay for those goods with an I.O.U., with a debt, your liability, your deficit in the year we made the transaction, is exactly equal to the asset on my balance sheet and my surplus for the year. I mean this is basic accounting, folks. There’s no hocus pocus. Any person’s, any household’s, any business’s, any group’s, any government’s debt is someone else’s asset. Any person’s, any household’s, any business’s, any group’s, any government’s deficit is someone else’s surplus. Again, it’s basic accounting.

Think of it like exchange traded options and the profit and losses on the exchange. People buy and sell oil futures or soybean futures. At the end of the option period, they either have a loss or a profit and that period’s deficit or surplus is exactly offset by the deficit or surplus of the counterparties. When you sum up these deficits and surpluses they net to zero. Again, no hocus pocus. That’s how accounting works.

The same is true for national accounts. At the end of any accounting period, then, the sum of the sectoral financial balances must net to zero. The government balance – the private balance – capital account balance = 0. The government balance = the private balance + the capital account balance. See my post Economics 101 on government budget deficits for the full write-up. I credit British economist Wynne Godley for making this identity relevant to macro economics.

What does all this mean then? Put simply, the financial sector balances framework means that when the government sector runs a deficit, the non-government sector runs a surplus of equivalent size. So, to move any sector balance in an open economy, you need to move the other two balances exactly opposite in equivalent measure. To reduce the government deficit in any period, the private balance and the capital balance must increase by the exact same amount in that period.

Thinking about government deficits this way opens a whole new understanding of what cutting deficits means for the economy. What it should mean to you is that deficits are the effect and not the cause. Budget deficits are the result of the ex-post accounting identity between the sectoral balances and should not be a primary goal of public policy.  read more

PHOTOGRAPH: Francesca Woodman

‘Well, what’s your name?’ you ask him. ‘Odradek,’ he says. ‘And where do you live?’ ‘No fixed abode,’ he says and laughs; but it is only the kind of laughter that has no lungs behind it. It sounds rather like the rustling of fallen leaves. And that is usually the end of the conversation

November 26, 2012 § Leave a comment

So where does this obsession with returning the budget to surplus coming from? It appears to be a consequence of the puppet show that passes for political leadership not just in Canberra but globally, where mainstream parties of both progressive and conservative persuasion vie with each other over who would be best at balancing the country’s fiscal books.

The question of whether and when the books should be balanced doesn’t get a look in when this contest is afoot. Both mainstream contenders — Liberal or Labor in Australia, Democrat or Republican in the US — concur that the best budget is a balanced one (and the best of all is one in surplus). This shows that there is no real contest of ideas in modern politics: parties instead compete over who would do a better job of managing the economy according to the neoliberal rulebook.

That rulebook has two overriding principles: that government should be as small as possible, and that asset price bubbles are a good thing — though heaven forbid actually calling them that. The first principle is why a surplus is seen as being better than a balanced budget, since then government can be downsized. The second, which is described as increasing private sector wealth, makes it easier to justify downsized governments since a wealthier private sector has less need of public largesse.

That rulebook appeared to work right from the early 1980s until the crisis of 2007, and when something appears to work, few politicians question why. Instead they strive to take the credit for it. This made governments of notionally Left and Right persuasion complicit in the debt bubbles that actually finance asset bubbles.

This is why there is no Left/Right pattern to political economics in the last three decades: a notional progressive in Bill Clinton signed in the abolition of Glass Steagall; a notional progressive in Tony Blair extended the City-favouring policies of his notionally conservative predecessors Thatcher and Major; and a card-carrying conservative in John Howard simply built on the finance-friendly policies of his notionally progressive predecessor Paul Keating.

In fact, the neoliberal rulebook worked because both rules encouraged the growth of the FIRE economy (FInance and REalestate), where the engine of growth was exploding private sector debt. When that engine burst past maximum revs and seized up in 2007, the crisis we are now in erupted.

An optimist might hope that politicians would learn from their mistakes, and abandon the rulebook that caused the crisis. But that would involve admitting that mistakes were made in the past, and it seems that politicians — and the public too — would rather return to the past than to examine it more closely.  read more

ART: Jeroen Allart

Writing a novel about a man who leaves his wife and three children and goes to live alone on the other side of London to write a novel about a man who leaves his wife and three children

November 14, 2012 § Leave a comment

When the Fed buys assets, it purchases them by crediting banks with reserves. So the result of QE is that the Fed’s balance sheet grows rapidly—to, literally, trillions of dollars. At the same time, banks exchange the assets they are selling (the Treasuries and MBSs that the Fed is buying) for credits to their reserves held at the Fed. Normally, banks try to minimize reserve holdings—to what they need to cover payments clearing (banks clear accounts with one another using reserves) as well as Fed-imposed required reserve ratios. With QE, the banks have ended up with humongous quantities of excess reserves.

As we said, normally banks would not hold excess reserves voluntarily—reserves used to earn zero, so banks would try to lend them out in the fed funds market (to other banks). But in the ZIRP environment, they can’t get any return on lending reserves. Further, the Fed switched policy in the aftermath of the crisis so that it now pays a small, positive return on reserves. So the banks are holding the excess reserves and the Fed credits them with a bit of interest. They aren’t thrilled with that but there’s nothing they can do: the Fed offers them a price they cannot refuse on the Treasuries and MBSs it wants to buy, and they get stuck with the reserves.

A lot of people—including policy makers—exhort the banks to “lend out the reserves” on the notion that this would “get the economy going”. There are two problems with that. First, banks can lend reserves only to other banks—and all the other banks have exactly the same problem: too many reserves. A bank cannot lend reserves to your household or firm. You do not have an account at the Fed, so there is no operational maneuver that would allow you to borrow the reserves (when a bank lends reserves to another bank, the Fed debits the lending bank’s reserves and credits the borrowing bank’s reserves). Unless you are a bank, you cannot borrow them.

The second problem is that banks don’t need reserves in order to lend. What they need is good, willing, and credit-worthy borrowers. That is what is sadly lacking. Those who are credit-worthy are not willing; those who are willing are mostly not credit-worthy.

And we should be glad that banks are not currently lending to the uncredit-worthy. Here’s why: that’s what got us into this mess in the first place.  read more


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