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Fiscally Insane

by Tony M.

Now, that title above is not mine. I borrowed it from a self-named "Christian Economist" because I thought the title fit the article perfectly - much better than he knew. Alex Binder wrote on monetary policy, a couple years ago, here.

Let's jump right into the insanity:

The government can simply print more money to pay any debts it has promised to anyone...[snip]...And all of it would be needless because we are not USERs of our own currency, we are ISSUERS.

Almost too ironic for words is this passage:

They are the monopoly issuer of the U.S. dollar and can thus pay any debts denominated in U.S. dollars. In this way we are not like Greece.

No, we are NOT like Greece. If Alex gets his way, we are like the Weimar Republic of 1923. But who's counting? Not other countries, apparently.

And then there's this little counterintuitive nugget:

The only way to reduce the deficit is to grow the economy by increasing the deficit now and letting it decrease later.

I like that nice, vague, nebulous "letting it decrease later." Hopefully, much later, like after the dollar itself becomes worthless and we repudiate all debts in dollars. That's when the deficit can "be decreased".

I would say this in response: a non-hard currency, such as paper, can only obtain in a context of a society that USED TO have rules that sprang from a hard currency, and which still retains something of those rules and the expectations that derived from them. You could never start an economy off from scratch with such a thing. As such, a paper money of necessity borrows off the social capital of the prior currency - which had to work according to rules and built up common expectations. To "play the game" of monetary policy in a way that denies the underlying meaning of those old rules absolutely guarantees that eventually the expectations will cease to apply. Then people will change the game to one that DOES observe rules. One of the classic ones is pulling a gun and shooting the cheater - that new "game" of guns has rules that don't depend on whether you want or like bullets, the bullets fly just fine whatever accounting tricks you have up your sleeve. Selling paper debt to foreign countries on the (later) public policy that you will print empty money for to pay it off is to repudiate the premises and rules that obtained within the underlying context of the loans. People will only stand for it as long as the policy of printing empty paper is restrained by the old expectations and rules. As soon as you publicly and officially repudiate not only the hard standard but also the entirety of the rules that it worked with, you are basically saying "no rules anymore" and you no longer have a currency, you have a bunch of odd paper that people use for lighting cigars.

The rest of the world is already tiring of supporting our higher standard of living with their work. They will eventually see empty dollars as a symptom of American arrogance and greed, and simply stop taking it. The only thing stopping it so far is the very convincing story "no, the emperor really DOES have clothes, they are just invisible. But the economist / tailors who made them have special eye glasses that enable them to see about 20-800 in hindsight."

Comments (16)

I don't have time examine it carefully, but I believe his arguments would be largely confirmed by the addition of the last eighteen months to his graphs. Inflation is still, over half a decade later, a lesser concern than deflation. The deficit is down, in part due to the New Years budget deal, which broadly raised taxes, in part due to the more stable economy, and in part due to the maturation of investments the Treasury made in financial firms.

Binder is right that a want of aggregate demand makes hyperinflation, for the time being, almost impossible. But he may be overlooking the danger of new financial bubbles. Rental rates are in some cities at historic and unsustainable highs: http://www.nytimes.com/2014/04/15/business/more-renters-find-30-affordability-ratio-unattainable.html?hpw&rref=business&_r=0

Binder is also right that, strictly speaking, a sovereign currency issuer cannot go bankrupt on debts issued in that sovereign currency. New units can always been printed to extinguish old debt.

Keep in mind, for purposes of perspective, that there is a real sense in which private or commercial banks "print" money too. A bank takes $10 from five people, generating a $50 capital base; upon which it issues $500 in new loans. Voila! 450 new dollars, out of thin air.

When I purchase a Treasury bond, I am lending to the US government. Likewise, when I deposit savings at a bank, I am lending to the bank.

I am aware of the validity of the data he is using, and I agree that the additional period feeds into the same trend. I have no problem with intentionally printing new money, or, to put it more precisely, intentionally printing money at a a rate that exceeds the rate at which dollars are physically lost, damaged, and otherwise no longer available in the economy. If you are going to have a paper currency that actually works for an economy, you have to plan to print money that stands for the new wealth created by that economy. It may well be that the paper money supply hasn't kept pace with the actual economy, though given the incredibly sluggish growth of the GDP that's kind of hard to do.

It's not the remoteness of the risk of hyperinflation _right now_ that constitutes the fundamental problem, though. It is the moral problem of a government (and a whole people) who thinks printing explicitly empty new money to lend to foreigners is an actual solution rather than a temporary band-aid that necessarily carries a bill to pay later. Nobody who imagines that there is no long-term consequence to printing extra money to fund government can achieve the moral virtue of prudence to deal with the due trade-off of goods and evils that constitutes right behavior.

Keep in mind, for purposes of perspective, that there is a real sense in which private or commercial banks "print" money too.

I am aware of it. And, like with the government's money, it too cannot be borne except on the back of a prior social capital. It is sustainable as long as that prior social capital is carrying the day. When bankers and financial institutions directly turn against that social capital, it is hard to see that as a sustainable situation.

All good points, Tony.

It is the moral problem of a government (and a whole people) who thinks printing explicitly empty new money to lend to foreigners is an actual solution rather than a temporary band-aid that necessarily carries a bill to pay later.

I agree that it is a moral problem. I agree that expansive deficit spending cannot go on indefinitely. I most emphatically agree that financial assets, whether currency, securities, swaps, options, whatever, all rest on this social capital you speak of.

But it is important to keep an eye on the ball and note that deficits are no longer expanding, they are contracting. The country's fiscal position is improving -- faster, in all likelihood, than the position of most American households.

It is this latter that concerns me. Deficits as such have never really worried me. Neither has the Fed's ZIRP and QE.

In a sense all these are mere indicators or symptoms of that underlying fragility of American households.

Which is really just another way of repeating old conservatives truths: The economy is people. People are families. All of us, universally, are born into them. Liberty and prosperity arise out of families. Disorders, strife, exploitation, prodigality, greed -- these, too, very commonly find their ground in families.

http://www.prospectmagazine.co.uk/derbyshire/i-started-off-as-a-libertarian-economist-but-ive-come-full-circle-greg-clark-on-social-mobility/#.U0ve5fldW6V

Back to the point of what may be our disagreement on political economy: if some sort of deficit spending could be shown to encourage or abet the restoration of financial health to American households, I would favor it; and I would not give much of a rip about short-term deficit spending to get it done.

Taxes are way too onerous in many parts of this country. Some states are positively predatory: http://www.city-journal.org/2014/24_1_state-tax-grab.html

This austerity needs to stop. That government fiscal positions would be weakened by reduced taxes does not fill me with alarm. It galls me that tax cuts are regularly treated as "expenditures"; as if permitting people to have more of what they earn were a grand public act of fiscal generosity. Bebother and confusticate that.

Anyway, I doubt that we disagree much, my friend; perhaps just some details of monetary policy.

Paul,

You just mentioned one of my hobby horses: "This austerity needs to stop." Well, it all depends on just what you mean by austerity!!! If you mean, like the liberals, that government balance sheets must be in the black -- then I agree. But if we instead agree that tax rates are too high as well as spending, then we are talking about a different kind of austerity -- one that gleefully looks at what government does and says 'this is too much', takes out the scissors and starts cutting -- in a sustained, serious way. At the federal level whole departments; at the state level government reforms in the Walker and Daniels model. That is a whole different kind of austerity -- one that liberals fear and conservatives should embrace.

Yes, I think Jeff is right to mention the ambiguity on the term "austerity." It is the liberals who want to act as though they just _have_ to spend what they are spending and the only way to cut taxes is to go further in the red. They act like cutting spending to match tax cuts is literally impossible, is beyond the realm of thought. I know it's a slightly far-out comparison, but the way a liberal talks with contemplating tax cuts is much like the way a pro-abortionist talks when contemplating a woman's not having an abortion: Adoption? You'd think it was a word in an unknown tongue. Treated as off the table altogether. No, the woman would have to give up her whole life, raise the baby, starve, whatever. Similarly, when it comes to tax cuts, this would *have* to mean more deficit spending. That is not true. Conservatives are always talking about cutting government spending. We should keep talking about it rather than embracing increased deficits as a way to cut taxes.

Jeff, I fear the ambiguities of the term tend to aid liberals most of all. That said, I do decidedly insist that tax hikes be classified as austerity policy; precisely because their very design is to extract more revenue out of the private sector -- a more austere climate for business by definition.

As you know, it is not uncommon for Republicans to compromise on taxes (thus allowing Democrats to raise them) in exchange for budget cuts -- distant promised cuts concentrated in the "out years," which (conveniently for the Dems) never really materialize. The sequester -- a pitiful simulacrum of real budgetary restraint but nevertheless the first successful piece of legislation to cut the federal budget in decades -- lasted less than a year, and mostly affected the military.

All that said, I certainly agree that government is way too big and intrusive. Start with Obamacare and begin paring back from there (but not if the paring is again illusory while the tax hikes all too real).

Lydia, what's really hilarious is to watch their reaction to any proposal that would bring spending back into line with what it was in, say, 2007. "Draconian," "cut to the bone," etc., are the words that you'll hear.

I actually have some sympathy for fiscal conservatism, but I think you are living in a dream world if you think that we are going to make sustained and permanent spending cuts. People like Medicare, Social Security, and having a strong military. Those three areas of spending are the primary drivers of federal debt, and substantially cutting them is politically impossible. So you are going to have to choose between higher taxes or larger deficits. You might think it would be better to cut spending and taxes, but we have to live in a place called "reality." So you can pick your poison, you either get tax and spend or borrow and spend.

>Conservatives are always talking about cutting government spendin

Serial adulterers often talk about the value of monogamy. What's your point? Paul Ryan ran *against* Obama's medicare cuts in 2012, and Romney refused to specify the details of his own plan. Ryan's Path to Prosperity budget is also a transparent sham that makes absurd predictions about economic growth while fudging all sorts of other numbers to achieve "balance" in ten years. Americans like the idea of fiscal conservatism in the abstract because it sounds responsible, but when you explain what it means all they can see is that you are cutting the programs they don't want to be eliminated.

But it is important to keep an eye on the ball and note that deficits are no longer expanding, they are contracting. The country's fiscal position is improving -- faster, in all likelihood, than the position of most American households.

Deficits are contracting means, in reality, that we are no longer going into debt at the same rate that we used to be going into debt. But the amount of debt keeps increasing. Much of that debt is to foreign nations. Somewhere, that has to stop. Not: "it should stop". It has to, as in law of nature.

Back to the point of what may be our disagreement on political economy: if some sort of deficit spending could be shown to encourage or abet the restoration of financial health to American households, I would favor it; and I would not give much of a rip about short-term deficit spending to get it done.

Me too. I am a firm believer in borrowing for sound investment purposes that you are confident will pay off, (and pay off the debt), and for emergency purposes to get you over the hump of a crisis. I have no problem with increasing debt if it will re-mold the economic factors to align with a winning, successful economy. What I have a problem with is borrowing money this year to put in place a new permanent consumer spending that didn't used to exist and cannot be understood as a necessity, with no prospect of EVER capping that program or EVER having the revenue to pay for it out of current taxes. Comparable to a poor person establishing a habit of just plain going out to dinner at a fancy restaurant with a credit card, knowing full well he has no expectation of ever being able to afford it. Permanent consumer spending for ordinary daily goods on credit cannot be sustained, and shouldn't be started.

I do decidedly insist that tax hikes be classified as austerity policy; precisely because their very design is to extract more revenue out of the private sector -- a more austere climate for business by definition.

I am OK with some "tax hikes" - namely, some use fees. Actually, I don't really consider those to be taxes properly speaking, so I suppose that I would say that such fees cannot impose a tax hike. Although I would be cautious about that for so-called "fees" on things that everyone uses and has to use, such as gasoline. Costs of government should be shared equitably, which means some costs should be shared very broadly, some more narrowly, and some in between.

Given that I am not a Democrat or Republican, I could ask this question without having to assume any ideological position myself and being liable to partisan criticism.

Would anyone here be willing to significantly reduce military spending in order to maintain (or even reduce) the deficit for more tax cuts? If not, then this demonstrates that military spending is an ideological commitment of most American conservatives, leaving aside that the military-industrial complex is a major part of the economy in some constituencies and a source of campaign funding.

===

"The rest of the world is already tiring of supporting our higher standard of living with their work. They will eventually see empty dollars as a symptom of American arrogance and greed, and simply stop taking it. The only thing stopping it so far is the very convincing story "no, the emperor really DOES have clothes, they are just invisible. But the economist / tailors who made them have special eye glasses that enable them to see about 20-800 in hindsight."

Perhaps the rest of the world has already seen "American arrogance and greed" instead it coming in a future moment of satori, and this would not portend anything. I remember Henry CK Liu advancing the notion of "dollar hegemony", a financial institution that has persisted since the Second World War after the British Empire lost most of its geopolitical influence. Due to the US' military hegemony after the advent of the Cold War and various forms of financial assistance to subsidize and reconstruct "First World" nations after World War II, the US has an entrenched position of military, monetary, and financial dominance. For instance, during the Cold War, before and after Bretton Woods, many countries try to amass dollars in their foreign exchange reserves in order to participate in international commerce or to repay dollar-denominated loans. New York became the preeminent financial center of the world, and most financial transactions were dominated in dollars. Due to the geopolitical history of the world of the last seven decades, the global economic is structurally centered around dollars, and it would therefore be very difficult to jettison the dollar without a sense of urgency. Now, many countries want to facilitate economic growth, and a common means of accomplish this is to stimulate an export industry by making it internationally competitive. A nation can increase its competitiveness by reducing the cost of the inputs of its exports, particularly labor by suppressing wages or lowing the value of its currency relative to other competitor nations. Regarding the latter, a nation can either: (1) increase its money supply relative to its foreign currency reserves but this would cause domestic inflation, or (2) sterilize the excess reserves through purchases of foreign financial assets with its reserves. Now, there are few markets liquid and capacious enough to handle an influx of incoming dollars from foreign central banks aside from the Treasury market. Moreover, keeping with the spirit of competitive devaluation, other countries do not want the value of their currency to increase.

Interestingly, Henry CK Liu argues that dollar hegemony is counter-productive, since suppressing the wages of domestic workers in order to have competitive exports and to make foreign direct investment more attractive undercuts the development of strong domestic demand. Moreover, a country is starving its domestic capital by using it to ship goods for export in change for paper dollars.

But this is the geopolitical arrangement that many (Christian) Americans assented to in the name of anti-communism and continued dominance in a post-Soviet, neoliberal, capitalistic, globalistic, unipolar world. The denouement of the Cold War has liberated capital so it can freely seek low-cost labor, and capital has access to more of the world's natural resources since regimes hostile to capital had been removed and are no longer in control of those resources. In contrast, labor has fewer freedoms, apart from being able to purchase cheaper consumer goods in wealthier countries, and a severely weakened bargaining position in the global market while their governments are essentially deprived of national sovereignty in order to render their country economically competitive and business friendly unless it wants to deter foreign investment and prevented from undertaking protectionist policies for development of their domestic industries in order to avoid having economic sanctions and embargoes from the WTO . These are merely the affairs of the City of Man.

I would say this in response: a non-hard currency, such as paper, can only obtain in a context of a society that USED TO have rules that sprang from a hard currency, and which still retains something of those rules and the expectations that derived from them. You could never start an economy off from scratch with such a thing. As such, a paper money of necessity borrows off the social capital of the prior currency - which had to work according to rules and built up common expectations. To "play the game" of monetary policy in a way that denies the underlying meaning of those old rules absolutely guarantees that eventually the expectations will cease to apply. Then people will change the game to one that DOES observe rules. ... People will only stand for it as long as the policy of printing empty paper is restrained by the old expectations and rules.
It is no secret that the "old expectations" (of the "hard money" gold standard) no longer apply: the US left Bretton Woods in 1971 and Keynesianism has been the de jure dominant economic paradigm for almost a century.

Moreover, under the chartalist monetary theory. Government-issued fiat money acquires its domestic value simply because it is the means of payment for one's financial government obligations to government (taxes). The acceptance of its own fiat currency would be enough to stimulate economic activity so an individual would be able to pay taxes and other financial obligations denominated in dollars. This would create a demand for dollars and allow it to retain it value, at least in the context of the domestic economy.

---
Also, I never really regarded the Federal Reserve's purchase of long-term Treasuries and mortgage-backed securities as a means of a "financing the deficit", but as a means of providing stability to the financial markets and stimulating economic activity through downward pressure on interest rates.

I am willing to consider any contrary opinions and be challenged, especially since I have not analyzed this topic in-depth in about four years and perhaps I want an intellectual stimulating opportunity to revitalize my interest in this, but please attempt the sources ideological neutral.

Would anyone here be willing to significantly reduce military spending in order to maintain (or even reduce) the deficit for more tax cuts? If not, then this demonstrates that military spending is an ideological commitment of most American conservatives,

I don't know what caricature of conservatives you hang around with, but I know plenty of conservatives who would decrease spending on military in a heartbeat if you could convince them that this would not jeopardize national security. Especially conservatives who are growing ever more disgusted with a feminized, limp-wristed military. The trade-off of jeopardizing national security in order to reduce the deficit or reduce taxes has never been a winning argument: you can just decrease defense spending to 0 on that notion, let other countries have their way militarily, and not even have an economy (or budget) to bother protecting.

Perhaps the rest of the world has already seen "American arrogance and greed" instead it coming in a future moment of satori, and this would not portend anything.

But they are still taking paper dollars as if that were worth something. Eventually, they won't. Such a change would "portend something". Something rather significant - like the collapse of our standard of living.

Moreover, under the chartalist monetary theory. Government-issued fiat money acquires its domestic value simply because it is the means of payment for one's financial government obligations to government (taxes).

I never could see such a theory accounting for the entirety of the economy, the entirety of the monetary exchanges. To me the concept is very hokey, kind of an intense "just so" story.

Interestingly, Henry CK Liu argues that dollar hegemony is counter-productive, since suppressing the wages of domestic workers in order to have competitive exports and to make foreign direct investment more attractive undercuts the development of strong domestic demand. Moreover, a country is starving its domestic capital by using it to ship goods for export in change for paper dollars.

But this is the geopolitical arrangement that many (Christian) Americans assented to in the name of anti-communism and continued dominance in a post-Soviet, neoliberal, capitalistic, globalistic, unipolar world.

It's funny how you can have many elements of the truth in an elaborate theory but still not get major ideas right. Neither China nor India, two of the most important examples in economic development since 1970, brought about their development by "suppressing the wages of domestic workers". And for neither of them can it easily be said that they are "starving its domestic capital by using it to ship goods for export in exchange for paper dollars." It would be rather humorous to even say things like "severely weakened bargaining" and "deprived of national sovereignty" in the same paragraph as China, and India is not far behind.

Latias, I am sometimes OK with theories that talk about extraordinary American influence on the world's economies, but "dollar hegemony" is a HELL OF A LOT different from the kind of hegemony produced by the Macedonian phalanx and the Roman legion. So much so that using the term "hegemony" for it is a bit of a red herring. And the causes that ultimately brought it on were complex enough to consider as not being deliberate and planned, at least not in the normal sense. But I will get rather snippy with an attempt to hijack this thread to talk about geopolitics and world-theory-of-everything as if that is all needed in order to discuss whether the US flatly declaring as public policy that "we will just print dollars to settle foreign debt" can be sound policy.

>'s funny how you can have many elements of the truth in an elaborate theory but still not get major ideas right. Neither China nor India, two of the most important examples in economic development since 1970, brought about their development by "suppressing the wages of domestic workers".

Well, that's not quite true. China artificially devalues its currency in order to lower manufacturing costs and keep its exports more competitive. That has the effect of artificially reducing the wages of average workers.

But they are still taking paper dollars as if that were worth something. Eventually, they won't. Such a change would "portend something". Something rather significant - like the collapse of our standard of living.

This is the key in my opinion, foreign central banks choosing to settle trade by storing dollar surpluses in US Treasuries. And according to the TIC data the net Treasury position of foreign official holders has decreased year-over-year for the first time in decades. Has foreign official support for the dollar ended? It seems unmistakeable.

http://4.bp.blogspot.com/-lK7rzPaEwM8/U1Bo5xKttOI/AAAAAAAAF1g/YdmXBqxwo78/s1600/Foreign_official.png

I don't know if there is any meaning behind those numbers... Japan, China, and Belgium (the EU?) have increased Treasury holdings, and logically since there is a net 1% loss in overall Treasury positions, other countries lost Treasuries. The "all others" account for 30 billion of the 40 billion in the decrease in the net position, thus the listed countries below Japan, China, and Belgium have decreased their Treasury positions. Russia, Switzerland, Singapore, Thailand and diminished their position by 38 billion, 20 billion, 22 billion, 18 billion respectively.

Perhaps, some Treasuries had matured (or their holders sold them) and those countries used that cash in order to import stuff. Is there any other activity in other bond markets that would account for the the loss in Treasuries?

I still do not see how a 1% net loss in overall Treasury positions can unequivocally mean that official foreign support for the dollar has ended.

Latias,

Compare 2013 to previous three years:

2010: +$456B (over 12 months)
2011: +$426B (over 12 months)
2012: +$386B (over 12 months)

Last 12 months (mostly 2013): -$31.2B

http://fofoa.blogspot.com/2014/04/yoy-structural-support-now-negative.html

Surely you don't think this absurd system where the rest of the world settles trade with US Treasuries is going to continue indefinitely. Russia and China are in the news daily working on various fronts to shepherd in a new economic/geopolitical order.

I don't know if there is any meaning behind those numbers

It doesn't matter whether the predicted event is starting even now, or is off in the future. The problem is that the event is unavoidable without a major change in behavior.

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