Correlations

[moda0306]

Both US government debt and cash are "liabilities" according to their respective issuing institutions.

A government "services" it's fiat debt by continuing to support an expanding economy. As long as there's productive growth in the US, the government's fiat currency will remain valuable. All they need to do is support that growth to "service" their debt.

[Gumby]

Ok, I'll do some reading. It just doesn't seem possible that this is a sustainable system, hopefully it comes together...

Well a debt-based/credit-based monetary system is certainly fragile, that's for sure. But that's the world we live in.

Kriegsspiel and dragoncar, if either of you find the MR literature a bit too complex — as I did when I first tried to learn it — I recommend reading Warren Mosler's short book as an intro to some of these concepts explained in layman's terms:

http://moslereconomics.com/wp-content/p ... s/7DIF.pdf

Mosler is an MMTer, so you can ignore the prescriptions he proposes, if you want to, and you'll still come away with a good understanding of the general mechanics of fiat money.

[Mdraf]

I think that you ran right by the point I was trying to make.

Very much so. I don't see the connection between your fairy tale and the subject at hand which is the fantasy that endless debt can be sustained forever.

[Mdraf]

A government "services" it's fiat debt by continuing to support an expanding economy. As long as there's productive growth in the US, the government's fiat currency will remain valuable. All they need to do is support that growth to "service" their debt.

Of course, but that's not what your colleagues here are saying here.  They are completely discounting the necessity for productive growth to service the debt.

[Pointedstick]

A government "services" it's fiat debt by continuing to support an expanding economy. As long as there's productive growth in the US, the government's fiat currency will remain valuable. All they need to do is support that growth to "service" their debt.

Of course, but that's not what your colleagues here are saying here.  They are completely discounting the necessity for productive growth to service the debt.

I don't think anyone is saying that. Productivity is absolutely the keystone of the whole system. If productivity falls but the money supply doesn't, the result is inflation, plain and simple.

What we're saying is that the government doesn't need to tax that additional productivity to service its debt.

Of course it's all moot as the government always goes ahead and taxes productivity growth anyway. But it also shoots grandmothers in the face and pays farmers not to farm. It does these things because it feels like it, not because it needs do. Cheetah gonna cheat.

[Gumby]

Ditto. There is no solvency constraint. The only constraint is inflation — when government spending exceeds productivity.

The government isn't going to run out of money to pay its bills — that is an undeniable fact. That would be like worrying that a scorekeeper is going to run out of points at a football game. The scorekeeper doesn't need to borrow or collect points to create more points. The only thing we need to worry about is inflation or deflation — which spending or taxing can help control.

The best example of what it means to understanding fiat money is the following analogy (which I didn't write):

"MMT (Modern Monetary Theory) focuses on the way monetary systems such as ours operate and the implications from this knowledge.

Is MMT advocating a free lunch? Is it saying that we can simply spend our way to prosperity? No! It instead identifies the real as opposed to imaginary constraints on economic growth.

Think about our economy as of a car that needs to get from where we're now to its destination – Prosperity! MMT recognizes that the car has a gas pedal and a brake pedal and a steering wheel that if used right can get us to our destination. Think of the gas pedal as injection of money into the economy (also known as "spending"), the brake as removal of money from the economy (also known as "taxation") The driver is the government and it can steer the car in various directions. Other countries have their own economies, so, think of other cars sharing the roads with yours.

The "deficit-hawks" believe that big deficits are always bad. Deficit is the difference between spending and taxation. So, their position is similar to a belief that too much pressing on gas (without counterbalancing by braking) causes crashes. While it is true that if you go too fast you are more likely to crash, pressing on gas and going too fast are two separate things. For example, when the car is going uphill or stalling, you really need to step on the gas to get it moving. So, deficit hawks in their myopia ignore the road conditions. They concentrate on numbers that are meaningless without a context. Additionally, their fear of spending prevents the economy from realizing its potential. Either they'd have you press on the gas very gently (spend less) or brake too often (tax more), without realizing that they might be causing the car to move too slowly and by the time you'd get to the destination Prosperity – if you got there – the rest of the world was there long ago and left to even further destinations.

The deficit hawks don't know how the car really works. They don't even understand that the deficit should be automatically adjusted to road conditions. Imagine if somebody told you you should never press on gas continuously without braking for more than, say, 1 mile. You'd laugh and say: this depends on where you drive and a myriad of other things!

What MMT is saying, is that you should not be shy to press on the gas when needed, to press on the brakes when needed and to steer the wheel as needed. MMT allows you to take the full potential of the car, without imposing arbitrary constraints (such as "pressing on the gas is bad" or "pressing on the brakes is bad"). Is there a fool-proof way to get to the destination? No, there is always an risk and sometimes the driver will make a mistake and sometimes crashes can even occur because of other driver's actions. But have you ever seen a fool-proof system?"

To please Mdraf, we'll get very specific and make it clear that "going too fast" means spending beyond productive capacity. (Of course, we've been saying that all along!).

But, make no mistake, even if a debt-based fiat government spends beyond productive capacity (i.e. "goes too fast"), it can still technically always pay its own bills by issuing new debt-based money (just like a scorekeeper can always give out more points). Banks will always purchase this debt as long as the government does not induce hyperinflation (i.e. "going ridiculously fast") — which would cause the banks to revolt. And as the example above illustrates, the result of "going too fast" is obviously inflation. The more the gas pedal is pressed, the more inflationary pressure there is.

Unlike MMT, MR does not prescribe any set rules for when to push on the gas or brake pedals. MR just teaches you what the brake and gas pedals do.

[Mdraf]

Of course, but that's not what your colleagues here are saying here.  They are completely discounting the necessity for productive growth to service the debt.

I don't think anyone is saying that. Productivity is absolutely the keystone of the whole system. If productivity falls but the money supply doesn't, the result is inflation, plain and simple.

Strictly speaking, I suppose Mdraf is correct about what others have said.  There doesn't have to be growth to service the debt.  But, as you, and I, and moda, and MedTex, and Gumby always point out, the result will be inflation.  Nobody likes this outcome.

Exactly. But when I made that point you guys came back with "It hasn't happened yet" and "look at Japan". And my counter-argument to that is just because it hasn't happened yet does not indicate anything about the future.  As for Japan they had a HUGE amount of personal savings they have/had to work through before inflation raises its head.

[Pointedstick]

If "that point" is the statement that inflation will happen if productivity (and consumption of that production, obviously) does not keep up with increasing money, then we all agree.  The statements that "it hasn't happened yet" and "look at Japan" are not really comebacks, but simply observations of reality to counter the inflationista fantasy.

Yeah, that's basically how I feel about it.

That said, I don't at all like where the government is going. Raising taxes, piling on regulations, trying to control or destroy politically unfavored businesses... they all make me nervous that we're heading closer to that elusive tipping point. That's why 25% of my investments are in gold; infinitely more gold than I had before, and it helps me sleep at night because if the government absolutely wrecks the economy, I believe that the gold will be there for me. That's the point of the PP, to hedge dangers. The nature of hedging your bets means that you'll always do less well than somebody who made a concentrated bet and won. But by the same token, you do far better than them if they lose.

[Gumby]

Exactly. But when I made that point you guys came back with "It hasn't happened yet" and "look at Japan". And my counter-argument to that is just because it hasn't happened yet does not indicate anything about the future.  As for Japan they had a HUGE amount of personal savings they have/had to work through before inflation raises its head.

Well, that's not exactly what you said. On Page 5 of this discussion, in response to MT's point on Japan, you said...

All true MT. Everybody loves the credit system...until the credit goes bad.  What some of us are uneasy about is that the rubber band is getting stretched thinner and thinner and would like it retracted a little, for the sake of prudence.  It appears others feel there is no rubber band  at all.

...So, the reason we've been arguing is that you implied that the government's credit goes "bad" if it spends a bit more than productive capacity can handle — which isn't at all true because we now agree that all that happens is inflation. It would take crazy hyperinflation for a country's credit to go "bad" (banks would likely revolt and stop buying the debt).

So, we've already established that the government's credit cannot go "bad" unless hyperinflation ensues. So, it sounds like you are just saying that you are uneasy about the level of spending that the government is doing right now. Fair enough. That's your opinion. I can respect that. And MR doesn't say we have to spend or not spend — it simply tells us that if we spend too much inflation happens. So, please don't claim that we have been advocating a certain level of spending. We haven't.

A lot of us here don't like government spending, but I think it's a bit too oversimplistic to gauge inflation by looking at the raw level of a nation's debt.

For instance, I know Moda went through these calculations last year, so maybe you guys can correct my math...

If we use 2013 as an example. The government spends ~$4 trillion into the economy each year and removes ~$3 trillion each year via taxes — which equals a total net spending effect of ~$1 Trillion each year into the private and foreign sector. Let's say 30% of that freshly printed money goes to the foreign sector. The foreign sector is fairly limited as to what it can spend (China can't "buy" Exxon or Chevron, for instance). So, in a sense we've exported that ~$300 billion in inflation to China (thanks China!).

So I'm just curious as to how is ~$700 billion in freshly printed money too much when we compare it to the size of the private credit market, which equals ~$57 trillion dollars and more than 7% of the population is unemployed? If we agree that 7% unemployment is nowhere near full productive capacity, then it would seem that the government is not spending enough money to reach full capacity. What's your take on that? (There is no "right" answer, since the answer depends on what you are trying to achieve).

Note that the government tax breaks and "spending" are the same thing on macro level. So, if you don't like government spending, you could just as well have less "spending" and more tax breaks to have the same net effect.

[Pointedstick]

For instance, I know Moda went through these calculations last year, so maybe you guys can correct my math...

If we use 2013 as an example. The government spends ~$4 trillion into the economy each year and removes ~$3 trillion each year via taxes — which equals a total net spending effect of ~$1 Trillion each year into the private and foreign sector.

This is a great point. It means that, for example, you could be in favor of preserving the monetary status quo by cutting spending to $1 trillion and eliminating all taxes. That would of course indicate many political changes, but monetarily, the government's part of the money supply would still be expanding by exactly the same rate.

[Mdraf]

Clarifications:

1) Agreement on "that point". That's what I meant.
2) By gone "bad" I meant collapse in the faith of debt service which yes, translates into ever increasing debt issuance and hyperinflation. Hyperinflation OR a change in currency (1 new Dollar = 1000 Old Dollars)

So what remains now is a discussion about whether the Fed facilitates this trend (by buying every credit instrument in sight and keeping rates at zero). Correct me if I'm wrong but your opinion is that it doesn't matter, while I say that it does.

The rubber band analogy is that the tipping point of hyperinflation is so sudden that it is very difficult to reverse.

[Gumby]

So what remains now is a discussion about whether the Fed facilitates this trend (by buying every credit instrument in sight and keeping rates at zero). Correct me if I'm wrong but your opinion is that it doesn't matter, while I say that it does.

Well, you are clearly exaggerating to make some kind of point. The Fed doesn't buy "every credit instrument in sight". The Fed's balance sheet is only ~$3 trillion (a lot of it T-Bills) and it pales in comparison to the size of the private credit market, which is ~$57 trillion. So, I don't completely understand what you are trying to suggest. The Fed has a Congressional mandate to set the Federal Funds Rate and to fulfill that mandate, it buys a small portion of the private sector's assets to set that Federal Funds Rate (among other things). It's really not a big deal in the grand scheme of things.

So, if you say that it "does matter" then you'll need to explain how it matters. Because buying a small portion of the private sector's assets to set the Federal Funds Rate is something the Fed has been doing for a very long time.

The rubber band analogy is that the tipping point of hyperinflation is so sudden that it is very difficult to reverse.

Says who? Peter Schiff? When does this "tipping point" happen in relation to productive capacity? If we agree that significant inflation (not even hyperinflation) doesn't really happen very much until a country reaches full capacity — after everyone's wages begin to experience a sustained rise — then how are we even close to that point when unemployment is at 7% and ~30% of our fiat money just goes into foreign accounts that can't easily be spent?

I don't fully understand how you think we are even close to that point. Would you mind clarifying?

[Mdraf]

I say it is a huge deal in the grand scheme of things because if the interest rate was anywhere close to what the market would set then the government would not have "free money" to spend as it does, thereby limiting inflationary pressure.

Based on your belief why should the Fed even think about tapering?

Hyperinflation: you should study this a little further since you enjoy research.

[Pointedstick]

I say it is a huge deal in the grand scheme of things because if the interest rate was anywhere close to what the market would set

I think this may be the root of our disagreement. You think that the Fed is severely depressing interest rates and that absent QE, they would be much higher.

If so, how do you explain that when QE2 ended, rates fell?

[Gumby]

I say it is a huge deal in the grand scheme of things because if the interest rate was anywhere close to what the market would set then the government would not have "free money" to spend as it does, thereby limiting inflationary pressure.

I don't understand why you say the government's money would not be "free" if all fiat government is free to begin with. The government has no problem paying high interest rates. That would be like saying that a stadium cannot afford to give out points at a high-scoring football game. One could even argue that high interest rates can fuel inflation (by flooding the private sector with more interest payments than it needs).

Based on your belief why should the Fed even think about tapering?

Not sure if I'm reading your question correctly, but the Fed would stop buying bonds if it simply wants interest rates to float with the market. That's how it sets the Federal Funds Rate (its Congressional mandate). It's not like the Fed needs to fund the government or anything. And it's not like holding $3 trillion of the private sector assets "funds" anything. We already agree that the government can fund itself by issuing debt that is purchased by banks (and therefore "savers") around the country.

Hyperinflation: you should study this a little further since you enjoy research.

Already have. Modern hyperinflations are caused by exogenous circumstances, not just "printing money". For instance...

[align=center][/align]
[align=center]Source: http://pragcap.com/hyperinflation-its-m ... henomenon/[/align]

If people lose faith in a government, through war or regime change, the money becomes worthless and massive printing ensues as the regime begins to die. If a country owes foreign-denominated debt, the government runs the risk of having to print massive amounts of money to pay that debt. Exogenous circumstances always precede these printing schemes. The "printing" comes at the end, as the regime dies.

[Mdraf]

Here's some reading for you. Japan is where we are headed.

http://blogs.wsj.com/moneybeat/2013/07/ ... heartbeat/

http://blogs.wsj.com/moneybeat/2013/07/ ... e-critics/

[Gumby]

Here's some reading for you. Japan is where we are headed.

http://blogs.wsj.com/moneybeat/2013/07/ ... heartbeat/

http://blogs.wsj.com/moneybeat/2013/07/ ... e-critics/

I'm seeing lots of Peter Schiff-style fear-mongering.

The potential catalyst, Japan bears say, lies in the country’s suffocating debt levels. Gross government liabilities are currently worth more than 220% of GDP and projected by the International Monetary Fund to exceed 240% by year-end, an unprecedented level for advanced economies. If Mr. Abe’s aggressive measures ultimately fail, these people argue, Japan must reduce its debt if it is to avoid a massive reduction in living standards required to pay its bills.

Source: http://blogs.wsj.com/moneybeat/2013/07/ ... heartbeat/

I don't understand how you can believe that crap when we know that Japan will never have any problem "paying its bills". We've just been over that! If wages start rising, Japan can always cut spending and/or raise taxes to suck money out of the private sector.

Furthermore, unlike our own Federal Reserve, the government-owned Bank of Japan is allowed to (and does) buy government bonds directly from Japan's Treasury (known as the Ministry of Finance). And, of course, any interest payments on the bonds is refunded back to the Treasury. The BOJ often holds Japanese government debt in excess of 100% of the nation’s GDP. And since the government owns the bank, the loan is always interest-free and can be rolled over indefinitely. An interest-free loan rolled over indefinitely is the equivalent of printing fiat money.

There is no issue of solvency with Japan's debt servicing. That is an undeniable fact. The only constraint is inflation — which may happen. But, you'll need to do a better job explaining how that will happen.

After nine pages of discussion I've never heard you explain how it will happen. Get on with it already.

[MediumTex]

There is no issue of solvency with Japan's debt servicing. That is an undeniable fact. The only constraint is inflation — which may happen. But, you'll need to do a better job explaining how that will happen.

After nine pages of discussion I've never heard you explain how it will happen. Get on with it already.

The fact that you have a whole world full of people who cost less to employ than people in the U.S. is a strong headwind to ANY scenario involving strong and sustained inflation in the U.S.

The fact that U.S. labor unions have mostly been gutted in recent decades is also an inflation retardant because you have far fewer organized interests in the labor markets that can successfully demand higher wages in response to price increases (as we saw in the 1970s).  Instead of what we had in the 1970s, today we see offshoring of jobs in response to increases in U.S. labor costs in a more or less frictionless fashion.

[Gumby]

The flaw in his second article, if I understand his argument correctly, is that he describes an aging nation that lacks enough "savers" to buy future debt as everyone starts drawing down their savings.

The problem in that logic is that as those aging savers start drawing down their savings and giving it to corporations and workers, those corporations and workers will have no choice but to put that earned money into a bank account which will automatically be used to purchase the same debt. And any additional spending by the government will simply be used by banks to buy more debt. Of course, at that point, the government would be crazy to spend at previous levels and therefore it could simply reduce spending or increase taxes as needed to suck money out of the private sector.

I think we can all agree that Japan might crash its car if it is careless with its gas pedal (i.e. spending). But, there is no set fate where Japan has to have hyperinflation just because its aging population decides to buy some goods with its own savings. That's just fear-mongering. They can always buy goods from foreigners if there is too much demand and not enough productivity. And they may have to! In that case, they will simply export their inflation.

The fact that you have a whole world full of people who cost less to employ than people in the U.S. is a strong headwind to ANY scenario involving strong and sustained inflation in the U.S.

Precisely.

[MediumTex]

There is no issue of solvency with Japan's debt servicing. That is an undeniable fact. The only constraint is inflation — which may happen. But, you'll need to do a better job explaining how that will happen.

After nine pages of discussion I've never heard you explain how it will happen. Get on with it already.

The fact that you have a whole world full of people who cost less to employ than people in the U.S. is a strong headwind to ANY scenario involving strong and sustained inflation in the U.S.

The fact that U.S. labor unions have mostly been gutted in recent decades is also an inflation retardant because you have far fewer organized interests in the labor markets that can successfully demand higher wages in response to price increases (as we saw in the 1970s).  Instead of what we had in the 1970s, today we see offshoring of jobs in response to increases in U.S. labor costs in a more or less frictionless fashion.

Yup.  Inflation in the 70's was kicked off due to the price of oil increasing tremendously, along with the fact that lots of peoples' wages were tied directly to the CPI.  This is what fed the unstable feedback loop.  The fact that wages are no longer directly linked to the CPI eliminates the feedback mechanism.

I work with a lot of pensions that have discretionary COLA provisions that are left over from a long time ago.  Just for fun, sometimes I ask if there are any planned COLAs.  That always seems to be good for a laugh.

[Mdraf]

So let me get this straight. After two weeks you all finally agree that money printing can't go on forever without a corresponding growth in GDP (which I referred to as "value" or "productivity"),  otherwise you get inflation.

But now the new argument is that "inflation doesn't matter"? Or is the argument "inflation matters, but it won't happen"

[Pointedstick]

So let me get this straight. After two weeks you all finally agree that money printing can't go on forever without a corresponding growth in GDP (which I referred to as "value" or "productivity"),  otherwise you get inflation.

Actually I'm pretty sure that's the premise we started with as well. If we've been in agreement this whole time, then great!

But now the new argument is that "inflation doesn't matter"?

No, it most assuredly does.

Or is the argument "inflation matters, but it won't happen"

It does matter, and it may very well happen. What we're arguing over is what would cause it. A rise in the money supply without GDP growth would cause it. Swapping one asset for another won't.

[Mdraf]

Swapping one asset for another won't.

So basically it boils down to the fact that you consider T-Bonds and currency as the same thing, freely interchangeable, and I don't.  Is that a correct way to phrase the debate?

[Mdraf]

I say it is a huge deal in the grand scheme of things because if the interest rate was anywhere close to what the market would set

I think this may be the root of our disagreement. You think that the Fed is severely depressing interest rates and that absent QE, they would be much higher.

If so, how do you explain that when QE2 ended, rates fell?

I like the Hoisington report explanation posted a few days ago:


When the Fed buys, it appears that the existing owners of
Treasuries (now amounting to $9.5 trillion) decide
that the Fed’s actions are inflationary and sell their
holdings, raising interest rates. When the Fed stops
this program, inflation expectations fall creating a
demand for Treasuries, bringing rates back down.

[MediumTex]

I say it is a huge deal in the grand scheme of things because if the interest rate was anywhere close to what the market would set

I think this may be the root of our disagreement. You think that the Fed is severely depressing interest rates and that absent QE, they would be much higher.

If so, how do you explain that when QE2 ended, rates fell?

I like the Hoisington report explanation posted a few days ago:


When the Fed buys, it appears that the existing owners of
Treasuries (now amounting to $9.5 trillion) decide
that the Fed’s actions are inflationary and sell their
holdings, raising interest rates. When the Fed stops
this program, inflation expectations fall creating a
demand for Treasuries, bringing rates back down.

But this explanation seems out of synch with your belief that absent Fed buying, treasury rates would be much higher.