Tuesday, November 16, 2010

"Simplified"

From this page at Perotcharts --


What I think?? I think the "Debt Issues" discussion of the past 30 years was already simplistic and over-simplified.

14 comments:

Tschäff said...

I think the Government Deficit = Private sector surplus. Operational fact. Try buck this fact only invites trouble (recession/depression).

Lessons from business (microeconomics) don't all apply to the macroeconomy. Businesses would love to pay their workers as little as possible, but if all workers were paid small salaries, who would buy what companies are selling? We think of savings as good. However if everyone saved, there'd be no spending, and no jobs. Government spending adds income to whoever government spends on, and profits to those businesses who benefit from more customers. Cutting back on government spending now would mean reducing demand in an already demand constrained economy unless something were to replace it. What will it be?

C+I+G+NX=GDP

C= consumption. Will consumers suddenly spend more? Not if they are in paying down debt mode, and a large share of the population unemployed.

I= investment. Can you expect companies to invest in expanded production if they don't expect an increase in consumers? I can't.

G= government. Apparently the population wants government spending to shrink. They'll cut medicare and social security most likely. They won't give aids to cash strapped states to prevent more layoffs and tax hikes.. More likely we'll just see gridlock.

NX= net exports. Will other countries suddenly come to the rescue and buy what Americans are selling? So far this isn't happening, and europe is in worse financial shape than the US. China doesn't want to allow their currency to float for fear that will kill their export jobs and cause a giant bubble pop in their economy.

So there we have it. Micro lessons don't all apply to macroeconomies.

Here is Mosler's good ideas to fix the economy in less than 500 words. http://www.mecpoc.org/2010/02/how-to-fix-the-us-economy-in-less-than-500-words/

The Arthurian said...

Hey, Big T. I'm not sure if I did something that counts as applying Micro lessons to Macro. Maybe you're concerned because I quoted Perot? I'm not sure what to "do" with this.

Thanks for the Mosler link. That kind of writing sounds like economics to me, rather than politics. But this whole MMThing is so different from what I understand...

...if everyone saved, there'd be no spending, and no jobs.

Yeah. I showed you that there is too much savings. We definitely agree on some things...

Art

Tschäff said...

Hey Mr. Art,

It was your link that was quite upsetting. The general public is nearly entirely maco illiterate.

I can't agree with you there is too much savings. It's a complex issue that is still open in my mind. Saving is a non-event. What we can say is there aren't enough events to bring down unemployment! But even this is a political macro goal. We can say that given the savings desires of the world for dollars, there aren't enough dollars to satisfy that desire without causing people to cut back on their spending so much that there is insufficient aggregate demand to generate full employment.

Your plan to print money and pay off the debt has got a few "issues". First what's wrong with the national debt? Second the Fed can buy all the national debt, it already is the largest owner. The fed doesn't just print money and drop it onto the economy. The fed buys an asset, and creates a liability, reserves. Check out their balance sheet
http://www.frbsf.org/education/activities/drecon/2010/0310b.png

So the Fed can't create liabilities without a corresponding asset purchase. Usually the fed purchases treasuries, but it can purchase any financial asset it wants. Corporate bonds, mortgage backed securities... There are fairness/distributional/political issues with this, such as what if the Fed takes a loss (and whoever sold the MBS wins), why should General Electric have their bonds purchased but not the restaurant down the street gets nothing. Who is this unelected and unaccountable group to pick winners and losers? If there were no more treasury debt to buy it would force the central bank to confront those issues when it wants to expand reserves.

MMTers tend not to like the interest aspect of the national debt. They see it as government welfare for bond holders. Most would like to see the government be able to run an overdraft at the fed.. that is let their account at the fed go negative, and not require it to issue any treasury bonds. If that leads to excess reserves in the banking system, and the Fed Funds rate goes below the Fed's target, rather than drain reserves by selling bonds, the Fed will just raise the interest rate it pays on reserves. That way banks will have no incentive to lend out reserves at below the interest rate they get from the Fed. However most MMTers also would like to keep interest rates at zero, just because they don't like what Keynes called "the functionless rentier class."

The Arthurian said...

...if everyone saved, there'd be no spending, and no jobs.
but
I can't agree with you there is too much savings.

The MMT solution (increase money-in-circulation in the private sector via federal spending) is a way to reduce money-in-savings relative to money-in-circulation (by increasing the money supply). But you have to hope that the new money doesn't move into savings too quickly, or the imbalance will not be corrected. //my solution perhaps has the same flaw.

Your plan to print money and pay off the debt has got a few "issues". First what's wrong with the national debt?

I don't care about government debt. It is private-sector debt that holds our economy down. The large increase in federal debt since the 1970s failed to restore vigor to our economy specifically because private-sector debt continued to increase faster than government debt. This could EASILY be restated in your "sectoral balances" terms. But I think the problem is the excessive accumulation of private-sector debt, and MMT seems to ignore that problem. You champion the "the savings desires of the world." I think the excessive accumulation of savings is just another result of long-term application of bad economic policy. The high level of savings (like the high level of debt) is not "natural" but rather a consequence of bad policy.

The "sectoral imbalance of debt" problem can be resolved via an "inflationary" increase of government debt, or by some kind of technical sleight-of-hand at the Federal Reserve that reduces the amount of accumulated private-sector debt. I opt for the latter. We've had inflation for the past 40 years because of all the CREDIT use. There is no reason we should have to have more inflation while un-winding that credit-use.

... The fed doesn't just print money and drop it onto the economy. The fed buys an asset, and creates a liability...

Yeah, okay, I could definitely use some help thinking my ideas through. Thanks, Tschäff.

Tschäff said...

The MMT solution (increase money-in-circulation in the private sector via federal spending) is a way to reduce money-in-savings relative to money-in-circulation (by increasing the money supply). But you have to hope that the new money doesn't move into savings too quickly, or the imbalance will not be corrected. //my solution perhaps has the same flaw.

Historically the savings rate is something in the neighborhood of 7% of income.. It was far lower during the tech and housing bubbles.

I don't care about government debt. It is private-sector debt that holds our economy down. The large increase in federal debt since the 1970s failed to restore vigor to our economy specifically because private-sector debt continued to increase faster than government debt.

Or there was not enough private debt didn't expand quickly enough given how fast government debt was expanding. Steve Keen has figured out total demand = GDP + change in total debt. I'm not sure it's right yet, but at first glance it is. The reason the growth in the national debt didn't stimulate the economy is also because the trade deficit really started to drain income away from America at the same time.

This could EASILY be restated in your "sectoral balances" terms. But I think the problem is the excessive accumulation of private-sector debt, and MMT seems to ignore that problem.
It's a problem only if there is a finite amount of savings that can be created, like during the gold standard. MMT aims for full employment and price stability. If Americans want to save more/pay down private debt, the ONLY way to do so is via larger government deficits or a current account surplus. So by reducing taxes or increasing spending, MMTers accommodate people's desire to pay down private debt and save. There isn't much the government can do to reduce the current account deficit, nor do they care to since doing so would mean receiving fewer imports for each export.

You champion the "the savings desires of the world." I think the excessive accumulation of savings is just another result of long-term application of bad economic policy. The high level of savings (like the high level of debt) is not "natural" but rather a consequence of bad policy.

In the US for the most part culturally determined. In other countries, they hedge against inflation by saving US dollars, to that extent I would agree it is a result of bad economic policy.

Tschäff said...

The "sectoral imbalance of debt" problem can be resolved via an "inflationary" increase of government debt, or by some kind of technical sleight-of-hand at the Federal Reserve that reduces the amount of accumulated private-sector debt. I opt for the latter. We've had inflation for the past 40 years because of all the CREDIT use. There is no reason we should have to have more inflation while un-winding that credit-use.
Few points on this one. For every debt there is a credit. They are two sides of the same contract depending of you are owed or owe respectively. All money is debt/credit. As for the inflation vs deflation concepts, I find it helpful to to think in term's of Marx's capitalist groups. There are capitalists, entrepreneurs and labor all competing for power. The capitalists make money via rents, lending out money. Inflation would indeed transfer power away from the capitalists and to the two other groups by lowering he real value of loans. Deflation does the reverse. The fed can do very very little to create inflation. Congress could, but won't by trying to demand more physical output from the economy than what it can produce, thus producers raise prices rather than expand production and sell their goods to the highest bidders. We've not had this type of inflation since the end of WWII. There has always been a large pool of unemployed that compete with each other for who can take the job for the lowest wage.

My political goal is to have government lower taxes and increase spending until people are able to save/pay down private debt as much as they desire.. This is fiscal policy, not monetary. We depend on congress, not the fed, to ensure the national debt is large enough for this to occur. Unfortunately the whole nation depends on this power center to do what is necessary and they don't do it. A single currency (like any monoculture) is very efficient when it works, but very lousy when it doesn't.

The Arthurian said...

ME: The large increase in federal debt since the 1970s failed to restore vigor to our economy specifically because private-sector debt continued to increase faster than government debt.

YOU: Or there was not enough private debt didn't expand quickly enough given how fast government debt was expanding.

What is the problem with debt? The problem is cost. The greater the debt, the greater the cost. All that expansion of debt, public and private, fails to reinvigorate the economy because of the excessive cost burden created by accumulated debt. (We could solve this problem by using "accelerated repayment of debt" as an anti-inflation policy, but we don't.)

If the accumulation of debt was smaller it would be less costly. Living costs would be lower and business profits would be higher. Economic growth would be enabled.

"Private debt didn't expand quickly enough" to give us vigorous growth, because the cost of debt was already too great. Because the cost of debt was excessive, lethargic growth was all we could muster. The ineffective and obviously excessive increase in public and private debt only made the cost problem worse.

The Arthurian said...

And oh yeah, thinking in Marxist terms will get people responding to you about the same way you responded to me when I quoted Perot!

Tschäff said...

What is the problem with debt? The problem is cost. The greater the debt, the greater the cost. All that expansion of debt, public and private, fails to reinvigorate the economy because of the excessive cost burden created by accumulated debt. (We could solve this problem by using "accelerated repayment of debt" as an anti-inflation policy, but we don't.)
Be careful not to make the mistake of fallacy of composition. For every "cost" of borrowing, there is someone "benefiting" from that income. It is a redistribution of wealth from borrowers to lenders. That's why I brought up Marx. I wouldn't bring up Marx to just anyone, but I took you for a man who can appreciate a good idea regardless of the source.

If the accumulation of debt was smaller it would be less costly. Living costs would be lower and business profits would be higher. Economic growth would be enabled.
I don't know if living costs would be lower if there was less debt. I suspect you are right when it comes to housing and college tuition, but the competitive nature of markets limit how much profit any firm can make ergo how much they can raise prices. Overall a 3% inflation rate is perhaps a little annoying but not very significant to overall economic production/real physical wealth. Besides, who keeps their savings in cash?

"Private debt didn't expand quickly enough" to give us vigorous growth, because the cost of debt was already too great. Because the cost of debt was excessive, lethargic growth was all we could muster. The ineffective and obviously excessive increase in public and private debt only made the cost problem worse.

Government debt is arguably a far more stable form of debt than private. There is no way for our government to involuntarily default, it's debt need not be paid down... Going back to our first discussion the interest payments on the debt need not come from higher taxes, it is a government expense just like medicare.. Government cuts a check. If debt service payments gives so much income to recipients that they go out and spend so much that the economy overheats and inflation results , then yes taxes need to increase, or the Fed needs to lower interest rates. Taxes destroy the currency, spending creates it. Lowering interest rates reduces the spending government does on servicing the debt.

Have a good turkey day!

Greg said...

Great to and fro guys

Youve given me hours of entertainment.

I just want to add MY thoughts on part of your discussion.... if I may.

Seems to me the issue regarding private debt (I'm going to assume that none of us see govt debt as a "problem") is not so much the level but what you purchase with it. Keen talked about this a little while ago on his Debtwatch site and had some very interesting suggestions going forward. And the reason we, and most of the worlds workers got in trouble was because income growths lagged behind economic growth (except for the top 5% of wage earners) and we began using private debt to replace lost daily spending out of income. Debt for college, homes and other large purchases is understandable but not for ipods and weekend trips to Atlanta. In addition much borrowing was taking place to actually buy other high risk financial instruments with, of course by the end of 2006 a house BECAME a high risk financial instrument.

Your printing money to pay down private debt idea Arthur (which I like) might work like this;

Calculate the average Americans private debt. Lets say its $100,000 . Announce that everyone will get 50,000 towards debt reduction. If you have no debt you get 50,000 cash. If you have a mortgage you get it reduced by 50,000 and the mortgage gets restructured relative to the new principle.

Carry on you two. ;-)

Tschäff said...

Great to see another join the conversation! The three of us would probably be perceived as the most dull people at a party, but that's just fine with me!

I agree with all that you said Greg. What Keen talks about is also consistent with your explanation of private debt crises- private debt growth is sustainable, as long as it's channeled into loans that will get repaid. We see in Arthur's graphs is that private debt expands, life is good as that increases income for so many..until it doesn't. Irving Fisher and Minsky still have the best work on this cycle. Then we see in Arthur's graphs government debt suddenly spikes as automatic stabilizers kick in. The downturns are getting more severe because of lower borrowing standards and greater income inequality.

This pattern is very clear to anyone who understands monetary operations and takes the time as Arthur has to look at the data.

Greg said...

Keen was my favorite place before I found the MMT guys. He gets a lot of stuff right I think.

Arthur has an incredible ability/desire to dig around for data doesnt he?

I admire his diligence the last few months and the volume of work he's done on this subject. He is learning this stuff his own way, which is quite good, and he is coming closer and closer and closer to the MMT views. All on his own.

I on the other hand didnt do the work he's done but simply compared the arguments I was reading. That was one very valuable insight I got form Bill Mitchell and guys like WInterspeak. They actually explained what it was that monetarists were arguing and what it was that Austrians were arguing so you could actually see which best lined up with what you see. I remember seeing Winterspeak comment at Nick Rowes site and Scott Sumners site and was always like 'Huh? Thats an interesting perspective I need to hear more of what this guy is saying"

A comment Mosler has made, which I'm sure is somewhat of a throwaway for him but just gave me an AHA moment, is regarding control of the money supply as monetarists see it and as MMT sees it.;

Its quantity not price that matters.

This totally made sense to me. Trying to influence money supply by stimulating bank lending with interest rate moves is a backasswards way of increasing money supply(not to mention simply leads to more private debt). As monopoly supplier of something you either control quantity and let prices fluctuate or you control price and let quantity fluctuate. MMT says control quantity. Makes compete sense especially since its something you CAN control real well.

What I think the vast majority of the difference comes down to is how is money described, what is this stuff we call money. Your earlier recommendations of Inghams (sp) book, Innes' essay and Wrays book (much easier to read than Inghams) did a lot to sway me to the MMT paradigm.
Austrians just hate the notion of a state controlled monopoly, and I think most Monetarists are Austrians who dont want gold backed money but want to treat fiat money with gold rules, keeping those precious hoarders in control of all purse strings.

What is really amazing now is how I can be in a room of people who know as much about economics as I did 18 months ago, maybe even more, and I can ask a simple question like "Well, what is their debt denominated in ?" Or "Well is that country running a trade deficit?" And most of the time they are just ................................................ Its sad and funny how little we learn about econ and money,the two things which are probably in EVERYONES top five important things, from our basic education and television. Whats more is how vehemently that ignorance can be defended.

The ability to ask new questions and really digest some previously undigestible information has been my biggest asset form the last 2 yrs or so.

I honestly feel I could walk into most Masters level econ courses and have a discussion with the students and teachers and hold my own and probably teach them a thing or two.

The Arthurian said...

Greg, you write: "Seems to me the issue regarding private debt ... is not so much the level but what you purchase with it. Keen talked about this a little while ago..."

I caught one Keen post where he says it is the speculative use of credit that is the problem. I think speculation remains minimal until the cost-of-debt drives profit down the productive sector, and the other side of that cost increases profit in the financial sector. At that point, financial business must increase; and since productive activity is unprofitable, it is speculative activity that sees increase. I think "what we purchase with it" is a function of the level of debt.

Also this: "And the reason we, and most of the worlds workers got in trouble was because income growths lagged behind economic growth (except for the top 5% of wage earners) and we began using private debt to replace lost daily spending out of income."

Yeah, sure... But don't forget that lagging income growth was the result of a policy change. I cannot blame the concentration-of-income. I must blame policy.

Your way of implementing print-money-and-pay-off-debt sounds good to me!

Tschäff... DULL??? :)

You write: "private debt growth is sustainable, as long as it's channeled into loans that will get repaid."

I recognize that from Mosler: "Well, what makes a loan go bad? Only one thing- people who can’t make their payments. If people make their payments, the loans are AAA." (From the Dallas address.) Agreed. But ...Hold on... Okay. (I just re-sequenced my upcoming posts.) RE the sustainability of private debt, see my Nov 20th post.

"The downturns are getting more severe because of lower borrowing standards and greater income inequality."

Yeah, and because debt has grown faster and faster. As has the cost of it, in the sector that was shortchanged income besides.

"This pattern is very clear to anyone who understands monetary operations and takes the time as Arthur has to look at the data."

ABsoLUTEly. Which accounts for my ideas being quite similar to yours. Despite my sum total of three credits in the dismal science.


Greg! Careful, bud. You're mighty close to lighting the fuse on my ego!

Tschäff said...

I was in the kitchen scrubbing the floor when I had to stop because something I said needs to be elaborated on. The last thing I want to do is say something that adds confusion to an already confusing topic! From my earlier post:
So the Fed can't create liabilities without a corresponding asset purchase. Usually the fed purchases treasuries, but it can purchase any financial asset it wants. Corporate bonds, mortgage backed securities... There are fairness/distributional/political issues with this, such as what if the Fed takes a loss (and whoever sold the MBS wins), why should General Electric have their bonds purchased but not the restaurant down the street gets nothing.

When the Fed purchases a MBS or anything else from the non-government sector, it has swapped one financial asset for another. Unless the Fed takes capital losses on this purchase, the net financial assets of the non-government sector doesn't change. This is why the Fed needs government debt to purchase. To quote from a recent paper from my friend Pavlina "...the fed cannot exogenously expand the oney supply without governemnt spending. What this means is that, even if the Fed lent against a wide variety of assets, it may be able to prevent a sell-off or to put a floor on these asset prices, but it will not be able to boost aggregate demand. The only way to do this, according to Bernanke, is via a "gift" from government spending, namely through an injection of net financial assets (net wealth) from fiscal operations." Tcherneva- Bernanke's Paradox 2010