I happened to be pointed to this article recently:
China’s economic slowdown is deepening, with overcapacity in almost all industries, and won’t bottom out until after the first quarter of next year, two senior officials said today.
And I have been thinking about these words from Randall Wray in the TPMcafe discussion of Paul Krugmans "Return of Depression Economics":
What is clear is that policy-makers oppose provision of a sufficient supply of jobs to satisfy the demand for them, on the belief that if everyone is working, inflation will result. Let that sink in for a moment: if everyone is gainfully employed producing the stuff we Americans want to consume, that will be more inflationary than an economy in which we maintain, say, 10% of the employable population in enforced idleness, subsisting on handouts and producing nothing of use. Only an economist could come up with such an outrageous proposition.
So we have two related problems:
- How do we have overcapacity if people still want stuff and lots of our infrastructure is clearly run down?
- Why does our government make people sit around instead of putting them to work?
#1 does not have a reasonable answer, and number 2 is unconscionable.
If we have the capacity to build mass-market production goods, but nobody can afford them, then there is a problem with out system of distribution and allocation, not with our production capabilities.
We need to better understand how money works to match production capability and our ability to afford that production.
I am going to make what appears to be a series crazy claim, but these claims are based on an accounting identity. Money is created by U.S. government spending. If we desire savings, the U.S. government must deficit spend. If we have overcapacity, the U.S. government has not deficit spent enough to support the demand necessary to absorb all of our capacity.
From Warren Mosler
The essence of the political process is coming to terms with the inherent trade-offs we face in a world of limited resources and unlimited wants. The idea that people can improve their lives by depriving themselves of surplus goods and services contradicts both common sense and any respectable economic theory. When there are widespread unemployed resources as there are today in the United States, the trade-off costs are often minimal, yet mistakenly deemed unaffordable.
Money comes from the U.S. government, and if there is not enough money in circulation, they need to issue more. Now, most money market people think that the fed controls the money supply. But in reality, it is not the Fed that controls the amount of money, but the U.S. government through the treasury. When the U.S. government deficit spends, there is more money in the system. When the U.S. government runs a surplus, it removes money from the system.
This is why we are facing deflation at this point, where money is worth more today than it was yesterday. In the 90's, we ran large and persistent government surpluses. Surpluses causes deflation, and deflation causes "overcapacity" as the money spent to build something will be more than the money collected when it is sold.
Nothing could be worse for our economy than running a surplus, as it results in deflation without fail. If you average our deficits over the last 15 years, you will see that we have not spent nearly enough money to account for the total demand for savings.
I am claiming is a very different mechanism for money creation than is commonly accepted by most economists. However, it comes down to a simple accounting identity, and a simple example will make it extremely clear.
Thought Experiment
Imagine there was no U.S. currency in the world. Now the govt wants to buy some goods, so it spends U.S. currency to purchases these goods. It then taxes people to collect the same amount of U.S currency as it just spent. Clearly, after this process is complete, there can be no U.S. Currency in the world. The govt has collect all it has spent, and there is nothing left over.
Note in the method given by traditional economics, treasury bills, notes, and bonds are assumed into existence. Read this post by a great economist, James D. Hamilton. The linked post is being hailed as a fantastic explanation of how money is created:
These deposits are something the Fed has the power to create out of thin air. This indeed is its primary power-- the ability to create money. That's a power that could be easily abused, so our system is set up to prevent the Fed from creating deposits willy-nilly. Specifically, the traditional operation of the Federal Reserve was to purchase assets such as Treasury securities from a private dealer, paying for them by simply crediting the dealer's account with the Fed with new deposits. The Fed hasn't created any wealth with this transaction, it has simply introduced a new asset (ultimately, money) and retired an old (the Treasuries that were formerly held by a member of the public are now held by the Fed).
He just assumes treasuries are there for a purchase at any time, but they do not have to be there. Now I think that Prof. Hamilton is one of the good guys, and if you get the chance, his blog is excellent. Sometimes people forget their assumptions. But in this crisis, it is imperative to understand how money is created. His explanation has an assumption that it should not have and does not need.
The breakdown isn't that hard to fix. We simply need more money. The world needs much more money to be able to afford what it already can produce. How does the world get more money? As the U.S. dollar is the world's reserve currency, the U.S. government must deficit spend.