How should the US handle its debt?

[Leftwinger]

Maybe Wile E doesn't know what he means either.

After the initial figures which had everyone jumping for joy, the US bureau of labour statistics has released a much more sobering report:

Nonfarm payroll employment was essentially unchanged in June (+18,000), and the
unemployment rate was little changed at 9.2 percent, the U.S. Bureau of Labor
Statistics reported today. Employment in most major private-sector industries
changed little over the month. Government employment continued to trend down.

http://www.bls.gov/news.release/empsit.nr0.htm

I suppose Wile E will be happy to see the US government pass a stupid, voluntary rule preventing it from fulfilling it's responsability of protecting the welfare of it's own people.

[Leftwinger]

Marshall Auerback - someone who understands how modern economies function - comments on the continuing shit-awful news.

Today’s unemployment data suggests that we are experiencing something far worse than a mere “bump in the road”, as our President described it last month. In fact, if last month was the time to panic, as Stephanie Kelton argued here, then today’s data should create real palpitations in the White House. This isn’t just a “bump,” but a fully-fledged New York City style pot hole.


First the headline number everyone looks at: non-farm payrolls. Up 18,000 in June, the increase was 100,000 less than expectations. In addition the prior two month payroll increases were revised down by -44,000 overall. That’s weak – but not terrible.


Dig a bit deeper into the data and it looks absolutely awful: The household measure of employment fell by -445,000. Okay, it’s a noisy number. But, as Frank Veneroso has pointed out to me in an email correspondence, this measure of employment which is never revised now shows no employment growth over the last five months and very negative employment growth over the last three.


But it gets worse: The work week was down one tenth. Overtime was down one tenth. The labor participation rate at 64.1% was the lowest since 1984. The broad U6 unemployment rate rose from 15.8% to 16.2%. In other words, as Frank suggested to me this morning, “many other employment indicators in this report confirm the deep disappointment in the payroll series and the much more negative message of the household series.”

Many of us who contribute to this blog have been concerned about these trends for months. We expressed concern that the prevailing deficit hysteria and corresponding cutbacks in government spending (based on a wholly misconceived notion of “national solvency” or “fiscal sustainability” – whatever that means), would engender precisely the kinds of economic conditions that we’re seeing today. Unfortunately, the President, his ineffectual Treasury Secretary and Congress all remain in thrall of Wall Street Pollyannas and mainstream economists, who have continued to predict significantly above trend economic growth quarter after quarter after quarter.


Yet quarter after quarter after quarter growth has come in less than they expected. Why? Because of this persistent tendency to diminish the importance of fiscal policy and an irrational belief in the efficacy of gimmicks such as QE2. The reality is much more grim: Growth has come in at less than a 2% rate in the first and second quarters of this year, and instead of responding to the real crisis of unemployment, our policy makers remain fixated on deficit reduction, and cutbacks in “unsustainable” entitlement programs, in effect withdrawing even more income out of an economy steadily heading back toward the precipice of recession.


And with a deal on the debt ceiling likely to include yet more cuts in government spending, and a major squeeze on real consumer incomes from commodity prices buoyed by speculation to the point of manipulation, the Administration inexplicably continues to forecast, yet again, a resumption of significant growth, because its fundraising buddies on Wall Street continue to reassure them that this will be the case.

Not if we keep proceeding along the path we’re going down. Further declines a la Europe (where fiscal austerity remains fully in swing), gives some clue of where we are heading. Spanish retail sales have been a disaster. They were down 6.6% versus a year ago. That is much worse than the already horrible 4.4% decline during the prior five months. Spain's unemployment rate is 21%. Greece, which has just implemented yet another round of cuts in government spending, has an unemployment rate above 16% and trending higher. And Italy is finally coming up in the headlines; per-capita income in that country has grown 0% over the last decade. Today the Bank of France put out their monthly business survey:

http://neweconomicperspectives.blogspot ... ic-ii.html

[Rainbow Moonlight]

Thankyou for that link. Very interesting reading.

I am not sure I understand MMT. However it seems to me that the first role of a government should be to its people's welfare. this is why it exists. If governments can create projects that involve work for people and the project scan be useful in helping stimulate industry growth or support industry then that seems to me to eb what governments should be doing in these circumstances.

This is an issue of ethics, not economics- it only becomes an issue of economics once people want to say - governments can't spend the money to do this and other people say yes they can.

Some ideas on what kind of proiects governments should be investing in to help business would be worth discussing. Monk has mentioned road building. I think something needs to be done about housing- I don't know exactly what- some scheme of evaluation and then buying up of a public housing stock from private houses on the market would involve employing people and soaking up some of the market and providing some money into it. If some evaluations led to demolitions that would also provide work. Public investment in schemes which made houses already in existence cheaper to run would help people an provide employment(I know reminds me of the ill-fated insulation scheme, but it wasn't all bad), and perhaps in building infrastructure for cheaper long term energy delivery. Building manufacturing capacity or trasnsport infrastructure for goods is another area.

[Jovial Monk]

I am sure that in the US they have public schools that have not had any new buildings for yonks, their roads are in parlous state and so on. Their broadband is in shocking state, money spent on backhaul and running out fibre would pay quick as well as deferred dividends. Using wireless for the main form of broadband is hopeless. As well, as I would like to see happen here, suitable properties bought up and turned into low cost public housing—that would help stop real estate prices from collapsing, allowing them to retreat in orderly fashion.

[The Artist formerly known as Sappho]

Marshall Auerback - someone who understands how modern economies function - comments on the continuing shit-awful news.

So that is how we are going to play is it? Just snide remarks that question my understanding. That's ok. I don't need to speak for myself, like you, I can do quotes and snide remarks. So excuse me whilst I go off and do just that. But do remember... what we are engaging in now is not debate, rather, it is a dysfunctional form of communication that promotes skim reading of snippets only.

[The Artist formerly known as Sappho]

Not sure what you mean here. Government never spends by "printing money", it spends by crediting bank accounts.

Just dealing with little nonsense statements such as that above whilst collecting appropriate quotes together that will form my response.

The Fed (as an arm of the government) can expand its account instantaneously, what we refer to as 'money printing' (although all of us are way that this is an electronic transaction and not a physical one. They are not actually running the printing presses when they do this. But the metaphor is apt).

http://caps.fool.com/blogs/the-matter-o ... its/435457

Well, not all of us were aware of that Mr Money Pants. Leftwinger hadn't a clue!

But now you are aware, Leftwinger, that 'to print money', 'printing money', 'money printing' etc. are common metaphors used in finance and not to be taken literally where you see it used in a discussion on money.

[The Artist formerly known as Sappho]

MMT is simply a description of how modern monetary systems actually function Wile E.

More specifically:

Modern Monetary Theory (MMT) is based on the following principles:

1. The Federal government is the monopoly supplier of currency.
2. The modern floating exchange rate system helps to maintain equilibrium and flexibility in the global economy.
3. The currency unit created by the state via deficit spending can only be extinguished by payment of taxes. Therefore, a modern monetary system can best be thought of as a system of debits and credits where government deficit spending credits the private sector and payment of taxes debits the private sector.

http://pragcap.com/resources/understand ... ary-system

But there is more to it than that.

Therefore, the key to understanding Modern Monetary Theory is this vertical-horizontal relationship. When one understands this, then Abba Lerner’s principles of functional finance become obvious.

http://caps.fool.com/blogs/the-matter-o ... its/435457

So what are the principles of Functional Finance?

Functional Finance is an economic theory based on the following principles:

1. The government is an entity created by the people and for the people. It exists to further the prosperity of the private sector – NOT to benefit at its expense. If this entity is allowed to exist for its own benefit or becomes corrupted by a concentration of power, it will become susceptible to dissolution via the populace’s rejection of that government.
2. Governments should be actively involved in regulating and helping build the infrastructure within which the private sector can generate economic growth. The economy is a complex dynamical system with irrational participants. It cannot be expected to regulate itself or behave rationally at all times. Therefore, some level of government intervention and involvement is not only beneficial, but necessary. But ultimately, it must be the private sector that is the driver of economic growth. While government can aid in this process it cannot be expected to be the primary driver of innovation, productivity and growth.
3. Money is always created by the state and must therefore be regulated by the state, however, ultimately the private sector must accept this money as the currency unit. Therefore, the private and public sectors should best be thought of as being in partnership with one another and not opposing forces. Government by the people and for the people is not the antagonist in this story, but rather an entity that should be best utilized to maximize private sector prosperity.
4. Government deficit spending and tax collection should be maintained at a rate that does not impose financial hardship on the private sector. Because the Federal government is not a state or household it should not manage its balance sheet for its own benefit. Rather, taxes and government spending should be managed in a way that most benefits the private sector and encourages private sector prosperity, productivity, innovation and growth.

http://pragcap.com/resources/understand ... ary-system

Are you with me so far Leftwinger?

[Jovial Monk]

Billbo blog, on MMT, the final BER report etc:

http://bilbo.economicoutlook.net/blog/?p=15211

[The Artist formerly known as Sappho]

I think Leftwinger and Monk would agree that the quotes above give a very fair and reasonable assessment of MMT. The above also highlights my first problem with MMT, and that is the purpose and function of tax. What is it? It seems to have no place within the system, yet is included as assumed or as a 'should' with no altruistic reasoning to justify it.

A simple example of a modern monetary system

The following example should help clarify some of the concepts mentioned above. Please excuse the simplicity, but this can be a mind bending concept if you are textbook taught (trust me, I know the feeling) so I will keep it simple:

On a journey around the world with members of the US Navy we become shipwrecked and find ourselves on a beautiful island. There is a wonderfully productive citizenry there and they are accepting and generous of us. They are impressed by our combat training, weaponry, etc and hold us in high regard. We form a pact and what will later be known as a “government” whereby my men offer protection and safety in exchange for acceptance into their society. We agree to a government by the people and for the people and I am elected as their President. Economic activity is the heart of this country and the people are innovative, enjoy hard work and reap the benefits of their labor.

The people of this island once transacted with sea shells, but luckily, these innovative folks were wise enough to create a computer system just recently. I propose that we modernize our economy and begin transacting in a fiat currency so as to make trade more convenient and efficient. Lugging around sea shells grew tiresome. I issue “Reserve” notes and initiate an electronic system that tracks each citizen’s transactions. These notes, on their own, are not worth more than the paper they’re printed on. However, they serve as a convenient medium of exchange.

Like gold, sea shell currency is a finite source or currency reserve. Paper currency, or rather computer credits are an infinite source of currency reserve. In either case, currency serves as a convenient medium of exchange and has no intrinsic value of its own. However, because sea shells are finite, there is a need for the administration to tax those shells so that infrastructure which benefits all is paid for. Sea shell tax is a community pool of funds to pay for community needs. In an infinite computer credit currency, the Govt. simple needs to issue more computer credits at the tap of a key board. It does not require tax.

Within the sea shell economy, there is a need for almost zero inflation, because the currency is finite. This poses a problem if their island is threatened. The only way they can resolve that is by going to another island and requesting to borrow some of their sea shells in order to create the mechanisms of war and so defend themselves. This loan comes at a cost and that cost is interest. Interest increases the tax rate needed to repay the loan, reduces the finite reserve of sea shells so as to cover the interest which is in effect inflation; getting less for your sea shells. The islanders would restore their near zero inflation rate through scouring the shore line for new sea shells just as those of the Gold Exchange increased their finite reserves through finding more and more gold. But what if they couldn't do that? Well they could debase the currency by breaking the shells into chars of shells, just as Rome debased their denarius by adding base metals. Either way, inflationary pressures affect the sea shell currency, so that, although they need an almost zero based economy with a finite currency, reality shows that inflationary pressures will act on that currency. We know these inflationary and deflationary pressures, for that matter, as the boom and bust cycle.

In an infinite computer credit currency, this is not a concern. If the island is threatened and needs more credits to purchase weaponry from the people, more credits are added to the computer accounting system. Tax is irrelevant. Tax is a function of finite currency systems and not infinite currency systems. Obviously there is still inflationary pressures, but they have minimal impact. The infinite currency can be pegged to the labour costs, so that when there is an increase in the supply of credits, it is offset by an increase in the cost of labour. No tax required.

It’s not free to live on the island, however, with all of these new resources and organized services. So, we create a tax. This acts as the glue that binds our monetary system together. This makes the citizens beholden to government via the “Reserve” notes. They MUST have them in their account on April 15th of every year. I’ve created demand while also fulfilling their desire to transact conveniently and reliably. Why would they agree to this? Because I am offering them protection among various other services in exchange for this small tax burden. Because this island has a long standing feud with a neighboring island they are happy to pay this tax and sleep well at night.

And here is the crux of the matter. In MMT, tax does not serve as a community pool of currency for the purchase of community goods as is the case in finite currency systems. Rather it's purpose is to enslave you to your government. Note too that we are no longer talking about a government for the people by the people, we are talking about autocracy. "Because 'I' am offering them protection..." In a democratic society we the people offer we the people protection.

http://pragcap.com/resources/understand ... ary-system

My concerns are in pink.

I've broken the rule. I should have quoted another expressing my concerns rather than addressing them in my own words. So;

Federal Taxes: If the USG is not revenue constrained, then taxes serve no true economic purpose. The tax code is complicated, antiquated, and wastes so much time and energy. So if the Federal government does not need tax revenues to operate, which by my observations above then it doesn't, then it is simply an unnecessary and costly (in terms of wasted productivity) hold-over from our earlier monetary system.

http://caps.fool.com/blogs/the-matter-o ... its/435457

[Jovial Monk]

“In MMT tax does not serve. . .”

Why blame MMT? It is the nature of the financial/monetary system.

As to tax, it provides some of the automatic stabilisers in the Budget.