Debt Ceiling Chicken

goman wrote:

Aetuis - The Fed has two mandates. Price Stability and Full Employment.

Both of which boil down to maintaining inflation in their belief system.

Low inflation is consistent with price stability. Deflation is consistent with unemployment.

Well, except for that whole inconvenient period in the late 70's, when we had high inflation and high unemployment. But lets not let reality interfere with nice clean models.

Hence why they try to have low inflation.

Right, which means their mandate is actually to maintain inflation, exactly as I said.

But they have not learned yet that debt bubbles leads to unemployment if the government does not have high enough deficits.

Our government has run unprecedented, multi-trillion dollar deficits over the last several years - more than all other years combined even when adjusted for inflation. How much more should we borrow and spend before we give up? The convenience of this argument is that you can always say we should have spent more, even though it should be obvious that it's not working - there simply isn't an upper limit on what we "should" have spent, theoretically.

Or, we can consider a different theory. Unemployment is caused by the market adjusting to changing demand - buggy makers go out of business, car makers take over. Debt bubbles (booms) lead to unemployment because they cause malinvestment and economic mistakes, which at some point must be corrected in order for the economy to continue working (busts). If you try to prevent or delay the correction, as the Fed and the government are desperately trying to do, you extend and worsen unemployment by preventing correction and recovery.

This theory is much more consistent with reality than "we haven't spent enough", especially in light of the preposterous amounts we've spent with no effect. It also means that you cannot get out of such a situation with yet more government spending, as that simply makes things worse. Instead, it points to vastly reduced government spending as the means of lowering unemployment and getting the economy back on track.

Aetius - Not all inflation is demand side created by government deficits. There was this thing called oil embargo that happened during the 70s. This was a cost push inflation. This was inflationary because our economy was very dependent on oil in the 70s. (It is still dependent now but less so than then.) Asset inflation is also cost push.

Deflation being consistent with unemployment does not mean all unemployment is caused by deflation.

As seen in the 70s unemployment was also caused by cost push inflation and not government demand side deficits.

Another reason our deficits are so high is because of our status as a net importer. Goods and services are imported into the domestic economy and dollars are exported.

Strictly speaking the bulk of the money circulating is created by banks

Yes, but that's just a mathematical multiplier on the original Fed lendings, based on the reserve rate. At a 5% reserve rate, the number of bank dollars to "real" Fed dollars are 20:1. If the Fed doesn't lend out new money, the bank money will not come into existence. (well, there's some argument that the new derivative structures are letting the banks trade the same dollars back and forth multiple times, giving them an infinite dollar multiplier, but that's not how it's actually supposed to work.)

2. Vertical money or government money that what we call the National Debt. - This is where Net Financial Assets come from. Dollar for Dollar the national debt is Savings in the non federal government sector. When government prints Treasuries it creates net financial assets. This is the rest of the money.

The government creates an asset for those who buy its bonds, but it comes with a corresponding liability, which must be serviced out of future tax flows. Bonds are not money. They are not fundamentally different from bonds issued by any other entity in the economy, with the sole difference that the government can extract wealth at gunpoint from its citizens to pay the bonds back. Or it can print money, which is the same thing, just aimed at different citizens. They are, thus, the benchmark for bonds, but they are not money.

Your continued assertion that only government lending creates assets is wrong. Assets happen constantly without any government interference at all. All it takes is a debtor and a creditor. If the government deficit were zero, debt would still be issued and repaid constantly, and the money supply would expand or contract based on what the Fed was doing. This is separate from the creation of financial assets; a flood of cash encourages the creation of other borrowing and lending, but they are not quite the same thing.

It's also worth pointing out that financial assets are ultimately irrelevant. ALL that matters is how much energy, stuff, and knowledge the economy is producing, and how those resources are distributed. Focusing on the tokens instead of the actual wealth is getting the map confused for the territory.

That coin won't change a thing. You are not changing the net financial assets of the system. That only can be done by taxing and spending.

Goddamn, think your way through it. It's changing the supply of money. If the goverment mints a trillion dollar coin, it then starts sending out checks on its deposit. All the people getting those checks now have new dollars that didn't exist before. They take their dollars and go buy things with them. This reduces the supply of whatever they're buying, driving up prices. This means that the goods they want will inevitably be priced out of the reach of the poorest people in the world economy.

The prices will then likewise rise on the sub-goods that are assembled into the finished products, and the sub-sub goods, and so on, all the way back to the original sources. Ultimately this will stimulate new production of whatever goods are being demanded by the government. But because the government is spending money on things that aren't wealth-producing, that means the economy grows to service consumption instead of wealth production. It grows wrong.

Over time, as the government continues printing money, prices all over the economy rise and rise, as more and more dollars are chasing goods. Goods production also rises, but the energy, stuff, and knowledge produced is diverted into serving the government instead of serving the people producing wealth. And gradually, living standards for everyone start to erode, and the economy becomes completely dependent on the flow of wealth tokens from nothing. The more dependent it gets, the sicker it gets. Living standards drop and drop, except for the lucky few nearest the printing presses. And, despite how bad things keep getting, the pain of stopping gets worse in direct proportion.

The economy fundamentally needs to service the people creating the real wealth, not the people creating wealth tokens. Fiat money in general, and particularly printing money for government consumption, hijacks that process, and very slowly destroys even the strongest economies.

This is why average incomes have steadily declined since the 1970s, while Wall Street has gotten unbelievably wealthy. They have a myriad of ways of issuing new wealth tokens, and of manipulating the ones that already exist, where the ordinary Joe just has to trade his labor for tokens. And in that setup, Joe loses.

Malor - I consistently have said net financial assets. Do you not get that idea? That ultimately fiat money spent and not taxed into the system is the same as net financial assets? Just because the money is then stored as Treasuries by the nongovernmental sector does not mean it was not spent into existence in the first place.

It is also this framework that treats unemployed people as a resource that is not being used.. So stop telling me something I already know. It is with the framework I describe that says the only thing that matters is

energy, stuff, and knowledge the economy is producing

including the unemployed.

The coin would cancel the 1T Treasuries. It will not create more financial assets than would ultimately be made by the fiscal policy already allotted by Congress in the first place.

So instead of net financial assets = Government Debt as Treasuries.
It is Net Financial Assets = Government Debt as Treasuries + 1T of reserves.

This process doesn’t change actual govt spending, so doing it this way doesn’t add to inflation, nor does it change the fact that govt deficit spending adds income and net financial assets to the other, non govt sectors. It’s just that the new financial assets will simply be new reserve balances at the Fed, rather than new Treasury securities (which are also simply accounts at the Fed).

- Warren Mosler

goman wrote:

Aetius - Not all inflation is demand side created by government deficits.

Prices going up != inflation. Prices change all the time for a virtually infinite variety of reasons. When considering our modern currency, the dollar, all inflation - the expansion of the money supply - is caused by the Federal Reserve creating money. True, it can be amplified or dampened by levels of bank lending and defaults, and very unpredictably so, but it's all based on how much the Fed creates.

But, even by my definition of inflation, it's true that government deficits don't necessarily cause inflation. For example, if the government borrows from private lenders to cover a deficit, that's not inflation - that 's just borrowing, because those debts will in theory be repaid (with interest, usually).

However, that's not what we're doing. The Fed largely takes on Treasury debt, which means that the government is simply writing IOUs to itself and then spending the money. That is the very definition of inflation - expansion of the money supply (which can cause prices to go up, but doesn't have to). The Fed has also recently implemented direct inflation through various purchases of private assets (toxic mortgage securities) at prices far above the market price.

So our deficits, because they are largely financed by the Fed, are VERY inflationary, and incidentally create a lot of wealth transfer from people with only cash (which gets devalued) to people with assets (which don't get devalued).

Deflation being consistent with unemployment does not mean all unemployment is caused by deflation.

True, because deflation and high unemployment are caused by the same thing - collapsing bubbles of unsustainable inflation-fueled economic activity. When the money supply is expanded, it makes money cheap to obtain and increases risk-taking and malinvestment. When these bubbles collapse, the money supply contracts (deflation) and people obviously lose their jobs.

As seen in the 70s unemployment was also caused by cost push inflation and not government demand side deficits.

I would disagree. Price shocks are usually temporary, and the oil price shock in the 70's certainly was temporary. Rather, the unemployment was caused by the dedicated Fed policy of monetary inflation during the 60's and 70's, much of which was indeed dedicated to government deficit spending for the Vietnam War and the Great Society. It's not an accident that versus stable commodities, the dollar was dramatically devalued between 1960 and 1980. Such expansion kept money cheap, maintained malinvestment, and along with wage and price controls slowed the economy from adjusting to changing demand and higher commodity prices. When you do that, you get sluggish growth and chronically high unemployment - just like today. The only difference between then and now is that the bubble blown by the Fed's policies was so big that it dwarfed their attempts to re-inflate - the best they've been able to do is barely keep up. Of course, those who support them argue for more and more inflation - just like in the 70's. If they succeed, we'll go back into stagflation. They don't seem likely to this time, because the amounts are simply so preposterous - but we've made up for that with the bailouts and government takeover of the mortgage industry keeping the economy from recovering, and thus we're stuck with slow growth and high unemployment again.

DSGamer wrote:

Good job we didn't raise taxes as part of the debt ceiling deal. This is going to turn out great. I can feel it.

IMAGE(http://apps.cnbc.com/cgi-bin/upload.dll/file.gif?z04b0100az4ae1ccfd011e4c91a3c858bcd794d709)

If we did, market would have crashed yesterday instead of today.

Good job we didn't raise taxes as part of the debt ceiling deal. This is going to turn out great. I can feel it.

I like the way my local paper (The Stranger) put it.

Good thing the Republicans forced through their all-cuts, government-slashing, economy-contracting debt ceiling deal, because without it, today's 513-point drop in the Dow Jones Industrial Average would have been even worse, right? Sure, since they provoked this artificial crisis in the name of ideological purity and political gamesmanship, the markets have given back all of this year's gains, but without the uncertainty the Republicans created, things would certainly have been much, much worse! Maybe a 1,000 point drop... maybe 1,500. Maybe capitalism would have collapsed in on itself, the markets disappearing entirely! So God bless the GOP for saving our economy!

I found a link to an article that actually mentions a few things in the bill that might turn out to be bad things for the Republicans: Link.

As an example, it mentions how the deal prevents further cuts to Social Security and Medicaid, allows the Bush Tax Cuts to finally expire for the wealthy, and forces half of funding cuts to come from defense, not including the wars in Iraq and Afghanistan.

Not having followed this whole ordeal horribly closely, and not really being much of an economist, are the things mentioned in this link accurate at all? Or is Congress just going to use some kind of funky accounting gimmicks to get out of it all over again?

Keldar wrote:

I found a link to an article that actually mentions a few things in the bill that might turn out to be bad things for the Republicans: Link.

As an example, it mentions how the deal prevents further cuts to Social Security and Medicaid, allows the Bush Tax Cuts to finally expire for the wealthy, and forces half of funding cuts to come from defense, not including the wars in Iraq and Afghanistan.

Not having followed this whole ordeal horribly closely, and not really being much of an economist, are the things mentioned in this link accurate at all? Or is Congress just going to use some kind of funky accounting gimmicks to get out of it all over again?

From what I understood unless the Super Congress Committee agrees on the cuts and they make their way through the House and Senate, there's a dead man's hand clause in the law that would trigger mandatory cuts. Those cuts don't have to be taken equally from defense and non-defense discretionary spending.

I don't see a committee of six Republicans and six Democrats ending in anything but deadlock, which means the additional trillion plus dollars in cuts will come from non-defense discretionary spending: from education to transportation and everything in between.

Didn't the earlier bipartisan committee come up with recommendations which included entitlement cuts and revenue increases?

Malor - I consistently have said net financial assets. Do you not get that idea? That ultimately fiat money spent and not taxed into the system is the same as net financial assets? Just because the money is then stored as Treasuries by the nongovernmental sector does not mean it was not spent into existence in the first place.

That's not true, because net financial assets can happen between private parties without government involvement. In fact, almost all of them are created this way. Do you not get this?

You may argue that someone has a credit to offset the debit, but that's also true of government bonds. For every credit is a debit. If I hold $50,000 in Treasuries, the government has a liability for $50,000. If I hold $50,000 in your debt, then you have a liability for $50,000 in exactly the same way. It's not different when the government does it.

You are confusing money and debt issued denominated in that money. They are similar in many ways, but they are not the same thing. I can't spend a government bond, I have to sell it first. I can't spend your debt either, I have to sell it to someone for money, which I can spend.

Well, I suppose I could barter either instrument, but I'm not aware that this actually happens in practice.

edit: fixed some horrible grammar.

Revenue increases? What are you? A goddamned Communist?

Robear wrote:

Didn't the earlier bipartisan committee come up with recommendations which included entitlement cuts and revenue increases?

Bowles-Simpson called for cuts to spending and tax reform, based on the idea that if you "broaden the tax base" you would see higher revenues. It sounded to me like they wanted a tax increase on the poor and middle class. Rates on top earners would have fallen, I think. TPM had this summary:

* The co-chairs suggest capping both government expenditures and revenue at 21% of GDP eventually.
* In their first plan, called "The Zero Plan," they suggest reducing the tax brackets to three personal brackets and one corporate rate while eliminated all credits and deductions. Without any credits or deductions (including the EITC and mortgage interest deductions), the 3 tax rates would be 8, 14 and 23 percent.
* In their second plan, they would increase the personal deduction to $15,000, create 3 tax brackets (15, 25 and 35%); repeal or significantly curtail a number of popular tax deductions (including the state and local deduction and the mortgage interest deduction); and eliminate other tax expenditures.
* The third plan would force Congress to undertake comprehensive tax reform by 2012 by raising taxes for each year Congress fails to act.
* All their proposals limit Congress to collecting taxes on income made within the United States, reducing or eliminating taxes on American expats and revenues companies earn abroad.
* They also suggest raising the federal gas tax by 15 cents per gallon.

Goman, can you go through how the trillion dollar coin would change hands, pay off our debt, and still not "enter the financial system" to increase the money supply and add inflation?

I agree that there are some cases where a trillion dollar coin wouldn't add inflation, such as if they minted it without telling anyone and Obama just slept with it under his pillow every night (idea for movie, Ocean and 13 other miscreants break into the White House, steal the trillion dollar coin under Obama's pillow, and replace it with one of his baby teeth, possibly recovered (inexplicably) from Kenya) but once you start using it (even indirectly, as collateral) to start paying people, that's kind of the definition of entering the money supply.

Or is your argument that the current money supply is so large (ten seconds of googling didn't give me a number, I'm guessing since Banks create most of our money these days it would be pretty hard to estimate our current money supply) that a trillion dollars or two in coins wouldn't add appreciable inflation?

From what guys like Krugman say, you won't get a lot of inflation without wage increases someplace in the pipeline. The poor employment picture in the U.S. and the existence of cheap labor markets abroad will prevent wage increases. We could end up seeing wage decreases, in fact. So the trillion dollars of created money just goes into ledgers someplace until banks and corporations physically put it into local economies, and they won't do that until demand requires capacity increases. You can hand money directly to people via tax cuts, but if they just use it to pay down debt (a smart move), you won't see enough increased demand to justify hiring more people.

Yonder wrote:

Goman, can you go through how the trillion dollar coin would change hands, pay off our debt, and still not "enter the financial system" to increase the money supply and add inflation?

I agree that there are some cases where a trillion dollar coin wouldn't add inflation, such as if they minted it without telling anyone and Obama just slept with it under his pillow every night (idea for movie, Ocean and 13 other miscreants break into the White House, steal the trillion dollar coin under Obama's pillow, and replace it with one of his baby teeth, possibly recovered (inexplicably) from Kenya) but once you start using it (even indirectly, as collateral) to start paying people, that's kind of the definition of entering the money supply.

Or is your argument that the current money supply is so large (ten seconds of googling didn't give me a number, I'm guessing since Banks create most of our money these days it would be pretty hard to estimate our current money supply) that a trillion dollars or two in coins wouldn't add appreciable inflation?

Okay - you got it kind of right. Obama is not sleeping on it but Ben Bernanke would be the one sleeping on it. Obama tells Geithner to give it to Bernanke. Bernanke credits the Treasury 1T in the Treasury account and the Coin is stored under Bernanke's pillow.

See how this has nothing to do with spending or taxes.. That is how it is not inflationary.

Funkenpants wrote:

From what guys like Krugman say, you won't get a lot of inflation without wage increases someplace in the pipeline. The poor employment picture in the U.S. and the existence of cheap labor markets abroad will prevent wage increases. We could end up seeing wage decreases, in fact. So the trillion dollars of created money just goes into ledgers someplace until banks and corporations physically put it into local economies, and they won't do that until demand requires capacity increases. You can hand money directly to people via tax cuts, but if they just use it to pay down debt (a smart move), you won't see enough increased demand to justify hiring more people.

You got it!

IMAGE(http://upload.wikimedia.org/wikipedia/en/0/06/The_Simpsons_5F14.png)

Top 5 most ridiculous ideas in the history of finance. The fact that this is being discussed at all boggles the mind.

MyBrainHz wrote:

Top 5 most ridiculous ideas in the history of finance. The fact that this is being discussed at all boggles the mind.

As is the debt ceiling idea in the first place. Nice of you to try to debunk it.

goman wrote:
MyBrainHz wrote:

Top 5 most ridiculous ideas in the history of finance. The fact that this is being discussed at all boggles the mind.

As is the debt ceiling idea in the first place. Nice of you to try to debunk it.

I have an idea. $1 Trillion is small potatoes. We need to think bigger. I propose the minting of a $1 quintillion coin!

MyBrainHz wrote:
goman wrote:
MyBrainHz wrote:

Top 5 most ridiculous ideas in the history of finance. The fact that this is being discussed at all boggles the mind.

As is the debt ceiling idea in the first place. Nice of you to try to debunk it.

I have an idea. $1 Trillion is small potatoes. We need to think bigger. I propose the minting of a $1 quintillion coin!

Yeah we could do that too. And guess what. All it would do would kill the Treasuries market. If the money is not spent into the economy it does nothing to the economy.

Keldar wrote:

Not having followed this whole ordeal horribly closely, and not really being much of an economist, are the things mentioned in this link accurate at all? Or is Congress just going to use some kind of funky accounting gimmicks to get out of it all over again?

The latter. The important thing to know about this is that the "cuts" aren't actual cuts in spending - they are reductions in the planned additional spending for future years. In other words, they are a (tiny) reduction in the rate of increase. For example, lets say you budget $50,000 for this year. For next year, you plan your budget for $60,000, even though you didn't get a raise or a second job. If you actually spend that money next year, you're going to have to borrow $10,000. This agreement is an agreement to maybe adjust next year's budget to $59,950, and that's called a cut - while asking the credit card company for a higher limit on your card so you can borrow the $9,950.

That's what makes this whole thing such an obvious charade - it doesn't actually do anything about our government's structural spending problems, raising revenue OR cutting spending, whatever you prefer. It's just smoke and mirrors.

From what guys like Krugman say, you won't get a lot of inflation without wage increases someplace in the pipeline.

That's the common theory, but it's wrong. The 70s proved it.

What we'll get is terrible employment here, while Chinese workers are still being hired in droves. The DVD players they're sending us will climb and climb, while our wages go nowhere.

Malor wrote:
From what guys like Krugman say, you won't get a lot of inflation without wage increases someplace in the pipeline.

That's the common theory, but it's wrong. The 70s proved it.

What we'll get is terrible employment here, while Chinese workers are still being hired in droves. The DVD players they're sending us will climb and climb, while our wages go nowhere.

And the pain will felt almost exclusively by the middle class and poor.

I do think your prediction will be tempered somewhat by the fact that the US still has a monopoly on what's "cool," (asians modify their eyelids to look more like non asians, for example) so American fashion exports will grow substantially as a Chinese and Indian middle class can afford our crap.

So we trade cheap DVD players for tuxedos designed by the guy from Jersey Shore.

Malor wrote:

What we'll get is terrible employment here, while Chinese workers are still being hired in droves. The DVD players they're sending us will climb and climb, while our wages go nowhere.

The pipeline includes Chinese wages. As Chinese wages go up, then the price of goods rises here. But as Chinese wages rise, then they take less production and there are more jobs here, which is good for us. Of course, that assumes that production can't then move on to Indonesia or India or Africa. Which maybe it can't.

The pipeline includes Chinese wages. As Chinese wages go up, then the price of goods rises here. But as Chinese wages rise, then they take less production and there are more jobs here, which is good for us. Of course, that assumes that production can't then move on to Indonesia or India or Africa. Which maybe it can't.

Well, sort of... yes, Chinese labor will get more expensive, but there's a LOT of untapped labor there before that's going to be much of a problem. And they make maybe a tenth what a US worker makes, so wages would have to come up a LOT before we got much more competitive. And, as you say, many of the jobs will go sideways, into Africa and Indonesia.

There are definitely companies that prosper hiring US workers. We ARE better than Chinese workers, for the most part. But we're rarely ten times better.

Malor wrote:

Well, sort of... yes, Chinese labor will get more expensive, but there's a LOT of untapped labor there before that's going to be much of a problem.

So why are you saying that Krugman is wrong? Where is the inflation going to come from in the U.S. when the real cost of labor is either stable or declining, and the cost of Chinese labor is too low to increase wholesale prices?

From our imports. We run a gigantic trade imbalance, and goods we import are going to get a lot more expensive, while we simultaneously continue to bleed jobs to cheaper countries. Gradually, we'll buy less and less stuff, and they'll start trading amongst themselves instead.

And yes, I am saying that Krugman is wrong. The idea that inflation requires full employment is a sacred cow among economists, and it was thoroughly butchered in the 1970s. "Stagflation" is very real, and it is here.

The only reason we're not seeing more of it is because other countries are buying up dollars like crazy, and printing their own currencies. This is causing huge inflation problems over the globe. China is suffering particularly badly because they have such a profound trade imbalance with us. Eventually, they will be forced to stop buying so many dollars to contain their own inflationary problems, and that's when it's REALLY going to take off here in the center.

Malor wrote:

We run a gigantic trade imbalance, and goods we import are going to get a lot more expensive, while we simultaneously continue to bleed jobs to cheaper countries.

Why would we need to import goods that can be built cheaper here? The whole reason jobs get exported is that labor is overseas is cheaper than the costs of transportation, which is not insignificant at a time of rising energy prices. The reason other nations buy dollars is to prevent the cost of exports from rising, because they know that if their exports get too expensive, substitution from other sources takes place.

And while you might not need full employment to get inflation, you aren't going to see a lot of wage growth when workers have no pricing power. When the labor participation rate has fallen sharply, and employers are refusing to even consider hiring unemployed workers, it's a buyers market for labor.