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In a little more than a month, the President will give his State of the Union speech. There's every reason to believe that, in it, he will state that, in all sincerity, he believes that the United States Government has a deficit problem and a national debt problem that must be brought under control.

He will tell us that the Government is running out of money. He will also tell us that we need to raise money by either taxing or borrowing to get more, or that we need to make do with no more money by cutting government spending, and he may also tell us that we cannot borrow too much more without the bond markets raising our interest rates, imposing even more of a deficit/debt burden on us that our grandchildren will have to repay.

Or even worse, if we continue to issue more debt, our main creditors: the Chinese, the Japanese, and our oil suppliers, may cease to buy our debt making it impossible for us to raise money through borrowing which, in turn, would force us into radical austerity, or perhaps even into insolvency, which would then be followed by radical austerity and repudiation of our national obligations.

If we want to avoid all this, then, the President will say, we must decide upon, and implement a middle and long term deficit reduction plan that will stabilize our public debt-to-GDP ratio at a moderate (but unspecified) level that will not breach the confidence of the bond markets. Since we now have two party rule of Congress, we must do this through a bipartisan agreement with the Republicans he will say, and then he will talk about negotiating another deal with them formulating a deficit reduction plan with a schedule for implementing it that will not impede the recovery from the Crash of 2008.

He may also point out that he needs both Republican and Democratic support to get an omnibus spending bill passed, and to extend the debt limit by March 2011, so that he can avoid a Government shutdown, and that his deal with them must therefore include an agreement on extending that debt limit.

President Obama's perceived need for Republican support will then condition his approach to negotiating a bipartisan deal. The Republicans, of course, will be very much opposed to any deficit reduction plan that provides for increased revenue by letting tax cuts for the wealthy expire. They will also be opposed to raising the salary cap on FICA higher than it is now. Instead, they will want to save money through entitlement cuts focused on Social Security and Medicare, and also in "discretionary spending" of all kinds, but will resist cuts in military spending for defense.

Obama will reply by urging everyone in Congress and among the public to be an "adult" in their approach to the universally recognized deficit problem, and to realize that all sides will need to give something they want up and he will urge "sacrifice" and "shared pain," on all, while supporting a compromise that involves little pain for the wealthiest 2% of the population and the banksters and the big multinational corporations, but much pain for the remainder of the population in the coming years through substantial cuts in the social safety net, and in other Government spending on infrastructure, education, new energy foundations for the economy, environmental protections and other spending America sorely needs.

In the end, the President will tell us all that he had no choice but to compromise on an agreement that will shred the social safety net, but he will hail the deal he makes as a great accomplishment assuring the financial solvency of the United States and solving the middle- and long-term deficit problems. Then he will try to run on that compromise, and he will hope that increased Wall Street and business confidence in his fiscal leadership will persuade business to stop sitting on all their cash assets and start investing them in new American jobs that, at least, he perhaps thinks, will lower the unemployment rate below 8% by the time the presidential campaign is in full swing, in the Fall of 2012.

There is only one major problem with this scenario Obama and his supporters seem to be planning. And that is that the deficit/debt problem is a fiction and a fairy tale. Such a problem doesn't exist except in the minds of people, evidently, like the President, who believe that the Government is subject to the same kind of spending constraint, in this case called a Governmental Budget Constraint (GBC), that private economic units such as Households and Corporations are subject to.

There are some Governments that are subject to a GBC. They include Governments of the Eurozone, all of whom have given up their sovereign currency-issuing power to the European Central Bank (ECB). These Governments, from a currency issuing point of view are like American States. In addition, there are other Governments that have established a fixed exchange rate for their currency, very often relative to the dollar, and still others that owe debts in foreign currencies, frequently the dollar. All of these Governments have budgetary constraints because they have either given up their power to create currency, or the value of the currency they create is determined by the value of another currency they do not control.

There are other nations however, including the United States, Australia, Canada, New Zealand, Japan, the UK, Argentina, Brazil, and many others that issue their own currencies, owe no debt in anyone else's currency, do not peg the value of their currency to any commodity such as gold or silver, and allow their currency's value to float freely in the International currency markets. Those nations are sovereign in their own currency, and they have no GBC because they have the constitutional authority to create the currency that is the basis for all financial resources in the non-Government Sectors of their economies.

The US, as one of these nations, has an unlimited constitutional authority to spend, and in the process of spending to create new financial resources. It does not matter if the US owes $13 Trillion in previous debt, or $26 Trillion in such debt. It does not matter if its debt-to-GDP ratio is 60% or 200%. As long as the US retains its currency sovereignty, it has no GBC that is not self-imposed by Congress. It therefore cannot be forced to become insolvent. It cannot run out of money, unless Congress forces it to do so.

The US doesn't have to tax, or borrow to "fund" its spending, as the President seems to think. Unlike Households or corporations that cannot create money, the US always has the constitutional authority to spend by simply marking up the USD in private sector accounts within the banking system. It also has other money making powers. But the main point here is that it raises money through taxing and borrowing not to "fund" spending, but only because Congress has chosen to forbid the Executive from using its constitutional power to spend beyond what it has raised in taxes or from borrowing.

The Congress prevents the Treasury from running a negative balance in its Federal Reserve accounts as a result of its spending. The Congress also mandates that the Treasury issue debt to prevent such negative balances. It also imposes a debt limit on the amount of debt that can be issued at any time.

So, the GBC President Obama will tell us about in February, is a GBC which exists at the option of the Congress. There is no constitutional reason why the US Government should ever become insolvent. Continued solvency is always at the option of Congress, which can remove the mandate for the Treasury to issue debt, remove the requirement that the Treasury not run a negative balance at the Federal Reserve, or remove or increase the debt limit.

However, even though Congress may think that it is the sole authority that ought to determine whether the US continues to gives up its solvency, what Congress can legally do is limited by the 14th Amendment to the constitution, which as Tom Hickey points out, says in part:

"Section 4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. . . . "

So, it is not within the constitutional authority of the Congress to allow or cause the United States Government to become insolvent no matter the level of its deficits, debts, or debt-to-GDP ratio. Congress is mandated by the 14th Amendment to remove the mandate for the Treasury to issue debt, or to remove the requirement that the Treasury not run a negative balance at the Federal Reserve, or to remove or increase the debt limit. But it cannot do nothing and allow the validity of the public debt to be questioned, and  still act constitutionally, just because it wants to force the President to accept its views on what public spending should be.

There is a constitutional way for Congress to impose its spending priorities on the President, of course, consistent with Congress's power of the purse. The Republican House can use the appropriation process to pass the spending and taxing bills it wants to, and then can see whether it can get these through the Senate and through Presidential vetoes. It can go on record, as passing further tax cuts for the rich, and cutting all social safety net expenditures, if it wants to, but it cannot hold the people hostage by allowing the Government to be shut down, because if it does so it will fall afoul of the constitutional prohibition against allowing the validity of the public debt to be questioned.

Currently, there is a news blackout in much of the blogosphere, including its "progressive" wing, in the cable new networks, and in the MSM media on the question of whether or not there is a deficit problem. Most of the progressive blogs won't carry the view that the deficit problem is a fantasy, or the reasoning or argument that makes that conclusion inescapable. In that way, the current situation is like the one we saw at the beginning of the current Iraq War, or the situation during the health care debate where most of the Press blacked out discussion of Medicare for All in favor of the very nebulous public option.

There is consensus now in most of the media, on a false neo-liberal paradigm that gives rise to the view that we have a deficit problem. This paradigm ignores the sovereignty of Government in its own currency, and vests the international bond markets with legitimacy and power these markets do not deserve and only have because the United States refuses to bend them to our currency sovereignty and to the national interest of the United States.

This paradigm causes the United States to pay "welfare" in the form of interest in the hundreds of billions of dollars annually to other nations and mostly wealthy investors, because Congress insists that we borrow US currency from others when our Government has an unlimited constitutional power to make whatever currency it needs to make in the very process of spending for goods and services. This paradigm is like the "flat-earth" consensus. It is preventing us from discovering the real America of hope and a magnificent future for all Americans.

Acceptance of this paradigm is ruining our country, because it is causing us to voluntarily impose a GBC that does not exist in the Constitution, and that is preventing us from meeting most of the urgent problems we face. We must end this overweaning concern about the non-existent meta-problem of the deficit and the debt. This meta-problem is a distraction from reality we cannot afford.

We must force a great debate over the next couple of months and beyond, about whether this self-imposed GBC is good policy or not. And we must make clear that the very belief that there is a real deficit problem that we need to do something about either by taxing more, or borrowing more, or cutting Government spending, is conditional on the belief that this self-imposed GBC limiting the constitutional powers of the Government is proper policy.

Once we make that clear we can then ask the question:

Is it best for the Congress to continue to impose this GBC, and as a consequence of that also impose austerity, high unemployment, and a shredded social safety net on the citizens of the United States, or is it best for Congress to restore the original state of the Constitution in which there is no GBC, no solvency risk, and therefore no monetary reason for not extending unemployment insurance, creating a Federal Job Guarantee Program to end unemployment, having a revenue-sharing program to stop lay-offs of Government workers in our hard-pressed States, strengthening rather than weakening our social safety net programs, and doing all the other things we need to do to restore prosperity and social and economic justice to the United States?

 
And once we've succeeded in getting people to look at the coming decision about austerity this way, then let Congress and the President legislate austerity if they dare.

I'll end this post with a plea. Over the next months, I ask as many of us as possible who believe that there is no GBC except the one Congress has voluntarily imposed, to blog, comment, and take all legal political action possible, around the point that there is no deficit/debt crisis and therefore there is no need to plan deficit reduction or austerity programs. Instead, we should try to force Congress to remove its constraints on the Government, which create a GBC that isn't in the Constitution.

We need to criticize Congress on the grounds that any upcoming fiscal crisis is its fault and is due to the combination of the three constraints it places upon the Treasury I outlined earlier. It is even relevant to point out that even though the amount of the national debt is of no concern for US solvency, the very existence of that debt is the fault of Congress and must not be used to claim that a false fiscal crisis justifying an austerity program actually exists, since all of the debt can be liquidated just by removing the debt issuance mandate and letting treasury spend without issuing debt.

If we can get enough bloggers, commenters, and activists to unite around this point of view and flood the left blogosphere, we may be able to begin cracking the MSM and left blogosphere consensus that there is a deficit problem, or failing that, at least get people to engage in debate on the point that the problem is a fantasy. We've got to do all we can to get the best of us on cable shows to represent our point of view that there is no deficit/debt problem. We need videos that go viral! And we need our breakthrough to get at least some discussion in the MSM by the time the President gives his State of the Union speech, which I'm sure will be a terrific sales job for austerity. We need to try to inoculate people against this sales job before it happens.

What we should not do is to directly defend specific social safety net programs such as Social Security and Medicare against cuts in these programs. The effect of even a successful defense of these programs without first destroying the idea that deficit reduction is needed will be to cause even heavier cuts and burdens in other areas that we have not chosen to defend.

Whether or not Social Security gets cut, austerity will be a disaster for the economy. It will drive us into another recession and perhaps now a depression if we fall for it. Government austerity means a decline in private net financial assets. Right now the private sector is trying its best to restore its savings and erase the effects of the great loss of wealth in the crash. Government austerity, will not make the Government any more solvent. But it will decrease the solvency of the private sector. And that is the last thing we should be trying to do with a stagnating economy.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

Originally posted to Letsgetitdone on Wed Dec 29, 2010 at 05:41 PM PST.

Also republished by Money and Public Purpose.

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Comment Preferences

  •  I've been reading stuff about (2+ / 0-)
    Recommended by:
    Gooserock, geomoo

    Lerner's theory of functional finance. It fits in well with this. It supposedly was influential on government finance in the 50s and 60s to some degree, but went out of fashion.

  •  This is an emergency. Therefore... (3+ / 0-)
    Recommended by:
    Curt Matlock, william shipley, shrike

    ...standard economic thought must be cast aside.

    We need to vastly increase the money supply and do it by printing and send everyone a large check - say, $100,000 each.

    Could it eventually lead to hyperinflation?

    It's a moot point, because there is no other fix.

    Obsessive deficit fear in these times should be classified in the next DSM IV as a personality disorder.

    When you've truly lost everything, at least you become rich in loss.

    by dov12348 on Wed Dec 29, 2010 at 05:49:57 PM PST

    •  Ahhh! A pro Federal Reserve comment! (1+ / 0-)
      Recommended by:
      dov12348

      Tipped!

      Yes, the Fed has that power but let us bask in the knowledge that they very well COULD do that.

      "The way to see by faith is to shut the eye of reason." - Thomas Paine

      by shrike on Wed Dec 29, 2010 at 06:09:21 PM PST

      [ Parent ]

      •  The Fed (1+ / 0-)
        Recommended by:
        Richard Lyon

        isn't authorized to spend money on goods and services in the private economy. It can't use fiscal policy to re-build aggregate demand in the private economy. Only Treasury can do that. It can create money, but can only exchange the new money for existing private sector assets. This adds no net financial resources to the private sector so it creates no more demand.

        •  I'm not speaking of what the Fed is currently... (0+ / 0-)

          ...authorized to do.

          It is physically possible to print and mail out new money.  The Fed prints it and gives it to the Treasury, in exchange for nothing.  The Treasury mails it out.

          When you've truly lost everything, at least you become rich in loss.

          by dov12348 on Thu Dec 30, 2010 at 03:47:03 AM PST

          [ Parent ]

          •  Why do it that way, then (0+ / 0-)

            If the Treasury is going to provide money to the private sector, just remove the debt issuance requirement. Then when the Fed marks up accounts, it won't incur more debt. Gradually all US debt will be paid and no one will need to get excited about it anymore.

            •  Using that method... (0+ / 0-)

              ...we have to assume that the folks who would invest in US debt would just invest in the money market or such.  In either case there is no boost in the money supply; just a shift.

              When you've truly lost everything, at least you become rich in loss.

              by dov12348 on Thu Dec 30, 2010 at 12:35:29 PM PST

              [ Parent ]

              •  Dov, whether or not (0+ / 0-)

                government deficit spending involves debt issuance in corresponding amounts, that spending results in an increase in private sector net financial resources. We want that increase in private net financial resources because it adds aggregate demand to the private sector. That is to say we are not just looking for a shift in money inside the private sector, we are looking for an increase in demand in the private sector.

                Your method of the Fed marking up the Treasury's accounts and creating new money for the Treasury is functionally the same as the Government just spending itself by marking up those accounts. Again, in both cases an equal amount of financial assets is added to the private economy. Moreover, to give the Fed the power to do this is to give them the power to conduct fiscal policy, which is a political function. The Fed is not supposed to perform political functions, but only to implement technical monetary policy. That is the argument used to justify its independence.

                If we're to change things, as you're suggesting, to have the Fed do fiscal policy, then the rationale for independence is gone, and the Fed should certainly be folded into Treasury, so that it is responsible to the people for its actions.

                Having said this, I should also say, I think, that I really don't accept the idea that the Fed performs only technical operations. That has never been true. Its actions have always been very political and since the 70s have strongly supported neo-liberal ideology. For these reasons, I am all in favor of folding the Fed into the Treasury and ending the present charade.

    •  It isn't about printing money (2+ / 0-)
      Recommended by:
      dov12348, Richard Lyon

      It's about Government spending to create full employment, if necessary through Federal Job Guarantee (FJG). The point is for the spending to result in production of real wealth and increases in productive capacity. If both are expanded, there will be no demand-pull inflation.

      •  Money that would be printed... (0+ / 0-)

        ...can absolutely be used to create full employment. We just shouldn't redistribute it; just print and spend.

        When you've truly lost everything, at least you become rich in loss.

        by dov12348 on Thu Dec 30, 2010 at 12:08:01 AM PST

        [ Parent ]

        •  I agree that it can (0+ / 0-)

          But it's still not about "printing money." The issues here are political/economic, semantic, and technical. On the technical side, of course, the Government doesn't print very much these days. It mostly marks up accounts electronically, so "printing" doesn't quite apply anymore.

          On the semantic end, there's confusion because the origin of the "printing money" expression is that it is an epithet that those who favored commodity-backed money, especially the gold standard used to attack currency issued without the appropriate amount of gold backing.

          In other words, the expression distinguishes two kinds of money. Money that is just "printed" and has no backing, because it is not convertible to gold, and money that is convertible to gold. So, of course, the printed money is inferior like the "Greenbacks" and "Confederate Dollars" of the civil war.

          When people attack the Government these days for "printing money" the previous connotation of money inferior in value to what is already in existence is not there. That is, there is no commodity backing or convertibility for any Federal money. The old money is not different from new "printed money" in this way. In fact, the old money is just as much "printed money," or Government fiat money.

          So, once we realize that, then we see that spending/creating/"printing money" comes down to the politics and economics of it. Will the new spending serve public purposes? Will it bring us closer to full employment? Will it help to create new wealth for people? Will it create inflation? And so on. It's the analysis of impact that is important.

          But to people fixated on the "printing money" aspect. Impact is not the issue. Deficits are the issue. Or inflation is the issue because "printing money" devalues the previously "printed" money already in existence. Why? Because they assume that the value of money is subject to the supply/demand laws of the market as stated in the quantity theory of money. But the quantity theory of money doesn't hold when there's less than full employment. So, that's a problem for them. When they say "printing money", they're really saying printing money = inflation. But that relationship may or may not hold. It's an empirical question. According to the evidence it does not hold until full employment is reached.

          So, the bottom line point I'm getting to here, is that I don't think it's good to use the expression "printing money." It's a very dated expression. It has negative connotations. And it's previous implications under the gold standard don't hold now and so, are misleading. So, even if you're using it ironically, it's probably not a good idea because it may be better to try to keep everyone's eye on the ball, which I think is the likely impact of any contemplated Government spending.

          Btw, you may be interested in Scott Fullwiler's article, here.

          •  Back... (0+ / 0-)

            But it's still not about "printing money." The issues here are political/economic, semantic, and technical. On the technical side, of course, the Government doesn't print very much these days. It mostly marks up accounts electronically, so "printing" doesn't quite apply anymore.

            They can change, as I wrote above.

            On the semantic end, there's confusion because the origin of the "printing money" expression is that it is an epithet that those who favored commodity-backed money, especially the gold standard used to attack currency issued without the appropriate amount of gold backing

            I'm open as long as we don't deliberately fog what we're doing. If you're printing new money what else would you call it?

            In other words, the expression distinguishes two kinds of money. Money that is just "printed" and has no backing, because it is not convertible to gold, and money that is convertible to gold. So, of course, the printed money is inferior like the "Greenbacks" and "Confederate Dollars" of the civil war

            Money with no backing.  The way we've done it for many decades and has shown wide acceptance.

            When people attack the Government these days for "printing money" the previous connotation of money inferior in value to what is already in existence is not there. That is, there is no commodity backing or convertibility for any Federal money. The old money is not different from new "printed money" in this way. In fact, the old money is just as much "printed money," or Government fiat money

            Gold-backed currency is the opposite of what's needed.  We need freedom to print enormous amounts. Seems gold backing would be very constraining.

            So, once we realize that, then we see that spending/creating/"printing money" comes down to the politics and economics of it. Will the new spending serve public purposes? Will it bring us closer to full employment? Will it help to create new wealth for people? Will it create inflation? And so on. It's the analysis of impact that is important

            The hope is that there will be enough to create all of that except for inflation.  Inflation concerns are moot, though, as this is an emergency.  If we don't do it, there soon won't be a country left to experience any inflation, deflation, stagnation or anything else.

            But to people fixated on the "printing money" aspect. Impact is not the issue. Deficits are the issue. Or inflation is the issue because "printing money" devalues the previously "printed" money already in existence. Why? Because they assume that the value of money is subject to the supply/demand laws of the market as stated in the quantity theory of money. But the quantity theory of money doesn't hold when there's less than full employment. So, that's a problem for them. When they say "printing money", they're really saying printing money = inflation. But that relationship may or may not hold. It's an empirical question. According to the evidence it does not hold until full employment is reached

            The deficit-obsessed and the printing-fearful will always be with us.  You can't win 'em all.

            So, the bottom line point I'm getting to here, is that I don't think it's good to use the expression "printing money." It's a very dated expression. It has negative connotations. And it's previous implications under the gold standard don't hold now and so, are misleading. So, even if you're using it ironically, it's probably not a good idea because it may be better to try to keep everyone's eye on the ball, which I think is the likely impact of any contemplated Government spending

            Again, if we're simply running the printing presses, stuffing envelopes and mailing, what would be a good, straightforward alternate term?

            When you've truly lost everything, at least you become rich in loss.

            by dov12348 on Thu Dec 30, 2010 at 12:53:43 PM PST

            [ Parent ]

            •  Just Government deficit spending for (0+ / 0-)

              whatever the public purpose is. No need to talk about "printing" at all. Especially since no actual printed currency is created. The Government will send wires or send checks. In no case will it send currency.

              •  I was using shorthand...of course it would be... (0+ / 0-)

                ...checks or wires.

                I suppose "deficit spending" could be used, generally, although that leaves out which method would be used (new cash v. redistributed cash).  Shouldn't people deserve to know which one it was, without having to do additional digging to find out?

                When you've truly lost everything, at least you become rich in loss.

                by dov12348 on Thu Dec 30, 2010 at 06:54:37 PM PST

                [ Parent ]

  •  Nit: It Will Involve GAIN For the Top % and Pain (5+ / 0-)

    for the rest. As have the past 10 years.

    We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

    by Gooserock on Wed Dec 29, 2010 at 05:53:35 PM PST

    •  If the US spends (1+ / 0-)
      Recommended by:
      Richard Lyon

      on WPA-type projects, State revenue sharing, and payroll tax holidays for employees and employers. The working and middle classes will benefit. If when full employment is reached, and it's necessary to cool down the economy, the Government re-imposes progressive taxation we can begin to reduce create a more equal distribution of wealth again.

      •  The US has almost lost that option (0+ / 0-)

        Buy overspending on wars that return nothing to society.

        I say almost because, first, the US dollar is still the defacto global reserve currency which forces other countries to hold dollar reserves to make trade transations, particularly for commodities priedin Dollars, and so they have to park those dollars somewhere and that is usually done by purchasing Treasury Bonds, so they have an interest in maintaining a stable Dollar. Second, they can and would make FDI in the US so, for example, if the government created programs to build infrastruture, a substantial amount of capital would flow in from the private sector, supported in some cases by S-Funds.

        Ironically, Amerians are pratically phobic about FDI whixh I fund a bit crazy because this provides immediate benifits to people by creating jobs and is long term, produtive investment verses investment in Treasury Bonds wich is indirect, liquid and subjet to mis-appropriation by Congress on non-produtive uses such as war.

        However, I think you are quite mistaken about one thing. Just because the 14th Amendment allows the government to print money, that does not mean it would work, because it is inflationary and if you would like to understand that, study what happened in Germany in the 1930s - the paralevel on many levels is remarkable, and accounts for the very conservative fiscal and monetary policy of present day Germany. In fact, that Germany was largely responsible to bail out the Euro when it was tetering is due to the fact their more consevative policy makes it the strongest country in Europe so they had the funds. It also accounts for German resentment at having to spend their hard earned money to do so.

        Lastly, the days of the Dollar as the global reserve currency are numbered. BRICs are already striking bilateral trade deals based on diret exchange mechanisms enabling them to gradually decouple and hold less Dollar reserves, which lowers their potential liability if the value of the Dollar declines due to inflation and the implication for the US is fewer buyers for Treaury Bonds. China has already reduced it's holdings.

        If you think stimulus spending would not produce inflation you are dreaming. Look at China today. China was the first major economy to exit the recession and it was largely due to the huge stimulus package - far larger than the US in terms of GDP ratio - which was mainly spent on infrastructure including clean energy (China invested twice what the US did in 2009). This stimulus spending had exactly the desired effect you are looking for; it created jobs, primed the economic pump and also helped to start restructuring the economy toward domestic spending, and that is a damn good arguement for the stimulus spending you advoate.

        But it also produced something else - inflation, which the Chinese government is now struggling to tame by cooling the economy. Read the news.

        Of course, there are some sigifiant differences between the US and Chinese eonomies too - Chinese tend to save more than spend and China has progressive taxation, as well as relatively high VAT on commerce (less then the EU but much higer than the US).

        And without taxation, printing money would be a disaster. How's that Wall Street bailout working?

        T+R

        What about my Daughter's future?

        by koNko on Wed Dec 29, 2010 at 08:54:58 PM PST

        [ Parent ]

        •  (China invested twice what the US did in 2009) (1+ / 0-)
          Recommended by:
          koNko

          Only twice on clean energy? I would have "guessed" it was way more than that....

          FDR 9-23-33, "If we cannot do this one way, we will do it another way. But do it we will.

          by Roger Fox on Wed Dec 29, 2010 at 09:14:29 PM PST

          [ Parent ]

        •  I've answered the inflation (0+ / 0-)

          question in many other comments here and your comment doesn't address my reasons why there will not be inflation until we get to full capacity utilization. As for China, I've been noticing that they're interested in containing "inflation" and believe it's a problem. However, there are a number of differences from the US. First, China's currency is not free-floating. It is pegged to the dollar by the Chinese themselves. That may be a cause of domestic price rises as they increase economic activity.

          Second, Chinese statistics are not very reliable, and neither the Chinese nor we really know if they are experiencing "inflation," or whether if they are, it is demand-pull inflation as your theory suggests.

          Inflation is an accelerating rate of price increases, not just price increases themselves which are often just one-time adjustments to markets.

          As far as comparisons to Zimbabwe or Weimar Germany are concerned, both the US and China are in vastly different places from those nations. Take a look at Rob Parenteau's piece here, and also at Marshall Auerback's presentation here.

  •  I am awed (4+ / 0-)
    Recommended by:
    Alice in Florida, Hlinko, shrike, SoCalSal

    at how quickly many activists have stopped talking about how the Democrats have been the ones who've always cut the deficit while the Republicans were the profligate ones. Why the sudden change in tune?

    •  Non-sequitur and potentially (0+ / 0-)

      ad hom attack.

    •  There's no consistent position: when (2+ / 0-)
      Recommended by:
      missliberties, SoCalSal

      people thought there was some sort of jiu jitsu move against tax cuts for the rich, deficits were awful.  When worried that deficts would be a reason to cut benefits, deficits are no problem.

      In fact, the cost and benefit of deficit spending depends on economic cycles.  At the moment, our deficit spending is funded by cheap money and is needed economically.

      But this diary is basically an argument validating Cheney's remarks on deficits, which were part of Bushonomics.

      Denounce someone else's lack of courage from safe distance and anonymously!

      by Inland on Wed Dec 29, 2010 at 06:20:07 PM PST

      [ Parent ]

      •  This economic analysis (2+ / 0-)
        Recommended by:
        Richard Lyon, geomoo

        (a) has nothing to do with neo-liberal/neocon thoughts on economic issues. It comes out of responses to the flaws in capitalism as practiced by Western countries that arose as a response to free market economic thought. before you respond, you should also note it has nothing to do with Marxism either.   So , I have no idea how anyone can conclude that it s validates what it is actually critiquing.

        •  It's an economically useful analysis. (1+ / 0-)
          Recommended by:
          missliberties

          I suggest that it be applied consistently.

          Denounce someone else's lack of courage from safe distance and anonymously!

          by Inland on Wed Dec 29, 2010 at 06:32:06 PM PST

          [ Parent ]

          •  In order to determine its usefulness (2+ / 0-)
            Recommended by:
            Richard Lyon, geomoo

            you would have to understand what it is. I am just starting to understand this subject, but I know enough to know that your prior comment had nothing to do with the subject matter.  This theory as I understand it arises out of Heterodox theories of free market economics as opposed to neoclassical and later neoliberal economic theory. It has nothing to do with Chenney because Chenney was not arguing Heterodox theories of economies. It looks at the economy in an entirely different way that Marxist/Neoliberal/Neocon/Free Market see the economy. In other words, its a competing model.

            •  I don't understand your point. (1+ / 0-)
              Recommended by:
              missliberties

              In other words, its a competing model.

              I don't think Cheney's thoughts rise to a "model", but it certainly isn't consistent with standard economics.  That's why it's bad.

              Denounce someone else's lack of courage from safe distance and anonymously!

              by Inland on Wed Dec 29, 2010 at 06:43:37 PM PST

              [ Parent ]

              •  "Standard" economics (0+ / 0-)

                led us directly into this present crisis. The neoclassical model peddles the emperor's new clothes for the neoliberal establishment. It is past time to begin to seriously examine alternative models.

                •  That's okay. (0+ / 0-)

                  I'm talking about the version without quotes, which tends to be pretty serious already.

                  Denounce someone else's lack of courage from safe distance and anonymously!

                  by Inland on Wed Dec 29, 2010 at 06:51:01 PM PST

                  [ Parent ]

                  •  Oh my (0+ / 0-)

                    now that was a really strikingly insightful response.

                  •  I am not trying to embarrass (1+ / 0-)
                    Recommended by:
                    geomoo

                    you, but you really are out of your depths here.

                    This is some really complicated shit,a nd you are acting like it is a sound bite.

                    The truth is there are a lot of competing, although minority, ideas of how the economy should run. Many of them outside of marxism and neoliberal/neoclasical thoughtthey , which means are often ignored or  not well understood.

                    I am only now starting to grasp some of this.

                    You grasp the discussion you would have to stop acting like this is about a pol.

                    •  Shrug. (0+ / 0-)

                      There's lots of ideas.  But saying "there's lots of ideas out there" isn't the same as actually having one.

                      Denounce someone else's lack of courage from safe distance and anonymously!

                      by Inland on Thu Dec 30, 2010 at 04:16:11 AM PST

                      [ Parent ]

                      •  Well you should know about not having any ideas (0+ / 0-)

                        I mean your entire response was to fall back on a soundbite.

                        At least I am trying to understand something new rather than being so fearful of life that I keep falling back on what I know.

                        Don't worry the vast bulk of Americans, including most Republicans, agree with your approach to life. That's part of the reason why where we are now. But that's okay. You got a lot of support.

                        Again, if you ever tire of the approach- look up some of the links mentioned above by the diarist.

                        •  Heh. (0+ / 0-)

                          Maybe I didn't take 1500 words to say nothing, like the diarist, and you, cumulatively, but that doesn't make it a bad comment.

                          Denounce someone else's lack of courage from safe distance and anonymously!

                          by Inland on Thu Dec 30, 2010 at 05:34:29 AM PST

                          [ Parent ]

                          •  I would have settle for you understanding (0+ / 0-)

                            the disucssion rather than falling back on things you know that have nothing to do with the discussion. Its not your word choice that's the problem. Its your lack of interest in anything beyond being a partisan. I got to do something more productive now than debating you. Good luck.

              •  Huh? (1+ / 0-)
                Recommended by:
                geomoo

                You mean it's bad because it disagrees with the models that failed to predict the recession of 2000-2001, the Crash of 2008, and that has consistently failed to predict the course of our supposed recovery? What's bad about that?

            •  Yes (2+ / 0-)
              Recommended by:
              bruh1, geomoo

              It's a different paradigm. It's not even Keynesian. For example, Keynes believed that the Government should run deficits when times were bad and aggregate demand was lagging, but that it should run surpluses when the business cycle is at the other end and times are good. So, generally he believed that it would be necessary to run surpluses a fair amount of the time.

              MMT, however, holds that in a particular economy it may never be necessary to run a surplus. It depends on the specific conditions of the economy. For example if an economy has high savings propensities, and a continual current account deficit, than the demand leakages can be so great that the Government will have to run continuous deficits even in good times. If you look at the history of the US you'll notice that there are very few times when we have not had deficits and that every time we tried to eliminate it led to recessions or depressions. Randy Wray reviews the history cursorily here.

              •  Yes, I have been reading that lately as well (0+ / 0-)

                its interesting  economic thought. A lot of it is very heady and complicated. But people like their sound bites. Not sure what I can say to other than keep writing. I like it and others appreciate the thought.

      •  When Dick Cheney said (3+ / 0-)
        Recommended by:
        bruh1, Inland, koNko

        "deficits don't matter", he was referring to electoral politics, not economic theory.

        "A lie is not the other side of a story; it's just a lie."

        by happy camper on Wed Dec 29, 2010 at 07:09:00 PM PST

        [ Parent ]

        •  He probably was (1+ / 0-)
          Recommended by:
          Calamity Jean

          Harry Hopkins used to say of the Roosevelt Democratic Party" "We will Tax and Tax, and Spend and Spend, and Elect and Elect!

          The Dems let the Republicans scare them away from that starting with Jimmy Carter. That's why Reagan got in, in the first place. I was around during the Carter stagflation. He never stimulated the economy, because he was trying to balance the budget so he could contain the supply-push inflation. he was chicken to get the economy moving and then use price and wage controls to manage the oil-push. So he turns to Volcker, who ratchets up interest rates to squeeze the inflation out of the economy. This blunt instrument deepens the recession, brings Reagan in, takes three years to finally wring out the inflation, and eases off just in time for Reagan to benefit in the '84 election. Great job, Jimmy and Paul. Together they gave us a generation of neo-liberalism and it still hasn't ended.

      •  Nope (3+ / 0-)
        Recommended by:
        bruh1, Richard Lyon, geomoo

        I'm afraid "people thought there was some sort of jiu jitsu move against tax cuts for the rich, deficits were awful"  doesn't apply to me.

        I've always been opposed to Democrats acting like Republicans and supporting surpluses and balanced budgets. I hated it when Carter did it. I was upset when Bradley, Gephardt, Paul Simon, and Russ Feingold got holier than thou about deficits. And I thought the Democrats would pay for it big time when they fought Reagan on deficits, but not on neo-liberalism and mal-distribution of wealth.

        And I got real, real angry at Clinton and Obama when they got in bed with the corporates and started talking fiscal responsibility as US industry and the Unions have been dying. In short, I never worry about deficits until full employment is reached, and even when that happens I don't worry about deficits per se, but only about cutting Federal spending that's having negative impact.

        This post has nothing to do with Cheney's nonsensical supply-side theories. It doesn't say that deficits don't matter under all conditions. Just that targeting on deficits, debts, and debt-to-GDP ratios is bad policy. When deficits do matter is outlined by Randy Wray here. I agree entirely with his formulation.

    •  Bill Clinton's (0+ / 0-)

      Budget Reconciliation Act of 1993 set up the prosperity and balanced budget of 1995-99 and it passed with ZERO GOP votes.

      "The way to see by faith is to shut the eye of reason." - Thomas Paine

      by shrike on Wed Dec 29, 2010 at 06:20:23 PM PST

      [ Parent ]

      •  Clinton had a "Peace Benifit" (0+ / 0-)

        Obama has the opposite.

        What about my Daughter's future?

        by koNko on Wed Dec 29, 2010 at 08:58:02 PM PST

        [ Parent ]

        •  It won't be much of a future (2+ / 0-)
          Recommended by:
          bruh1, Richard Lyon

          if we can't get Obama to resign. We need a real Democrat in there. Maybe Joe can do it. He's old enough to know about the New Deal, and maybe he'll turn into a D version of Pope John XXIII. I doubt he'd be less of a Democrat than Mr. O.

          •  I don't think the problem is just Obama (1+ / 0-)
            Recommended by:
            bruh1

            But Congress, and the situation just got worse.

            I agree Obama failled to act fast enough and drank a bit too much Wall Street Kool Aid, but he actually proposed some very sound measures.

            But sitting on his hands waiting for Congress to absorb his ideas by osmosis and put a bill on his desk ... um .../NFC.

            What about my Daughter's future?

            by koNko on Wed Dec 29, 2010 at 09:22:31 PM PST

            [ Parent ]

      •  According to CBO (1+ / 0-)
        Recommended by:
        Richard Lyon

        There were four surplus years due to Clinton: 1998, 1999, 2000, and 2001. They were accompanied by the beginning of a recession in from 2000-2002. The occurrence of the recession was no accident. When you run a surplus you destroy private sector financial assets. That's what Clinton did and he left Bush 43 a recession because of it. Not only that, but the Clinton economic expansion occurred because of private debt bubbles created by the Fed and Greenspan. Clinton kept cutting down on Government deficits, which is to say he quit Government contributions to savings in the private sector. So, to keep the expansion going, Greenspan just kept loosening credit and increasing aggregate demand by blowing debt bubbles.

        Long-term, the Clinton economy was a disaster and prepared the way for the Bush bubble-based expansion and the crash of 2008. We would have been much better off if the Clinton Administration had never existed.

    •  Read a little history (1+ / 0-)
      Recommended by:
      bruh1

      The adoption of the traditional and classical Republican concern about balanced budgets, the religion of Coolidge, Hoover, and Taft, by the Democrats started in the Carter Administration and represents the march of the Democrats away from the New Deal philosophy of Governing.

      The movement away from a concern with balanced budgets represents a return to the more traditional democratic tradition, the tradition that says it's about jobs and people and underdogs, not about deficits, debts, and debt-to-GDP ratios.

  •  Its difficult to overcome decades (5+ / 0-)

    of indoctrination.

    Even the cabbie on the street will tell you that the US economy should run like his household runs.

    Its not economics. Its emotions.

  •  After extending tax cuts to the wealthy again (2+ / 0-)
    Recommended by:
    Calamity Jean, geomoo

    it will be interesting to see how they rationalize austerity and sacrifice for the masses.  But they have already been talking about it and they will enact austerity.  Not because of the deficit, mind you, but because they want the final safety nets to be taken away.  Hypocrites the lot of 'em.

    •  It will be interesting to see how they (2+ / 0-)
      Recommended by:
      Calamity Jean, Blizzard

      rationalize continuing to increase the deficit and debt, which you know they will...

      "All governments lie, but disaster lies in wait for countries whose officials smoke the same hashish they give out." --I.F. Stone

      by Alice in Florida on Wed Dec 29, 2010 at 07:04:11 PM PST

      [ Parent ]

      •  I told you (1+ / 0-)
        Recommended by:
        Blizzard

        how they'll do it above. They'll just say: do you agree there's a problem? If so, let's look forward not backward, here's a solution. Then you'll say well, I don't like that or that or that, and they'll say well, we don't like that and that and that, but everyone's got to have a little pain except for Lloyd Blankfein cause he's too big to fail, and so, you'll lose something which you can't afford to lose so long as you agree that's a problem.

        But if you say, I know there's no problem and don't you dare try to cut anything I care about or even try to cut the deficit at all until we've reached full employment, and if you do I'm voting against you and you're going down cause you're after my bread and butter, then we might win now or in the next election.

    •  They are hypocrites (1+ / 0-)
      Recommended by:
      Blizzard

      and that might be comforting to know, but unless we give them the lie on austerity and let them know that we know it's a lie and that whoever tells kit is going down in the next election, we will get austerity.

      Tell your Congressman and Senators not to BS you about the deficit/debt problem because you know there is one and if they don't, they ought to take a look at this piece. And if they still say they're going to vote for austerity, then tell them that they're going down because you and all your family and friends are going to vote against them.

  •  Yes and no. (1+ / 0-)
    Recommended by:
    geomoo

    I haven't gotten an advance copy of the SOTU, so I can't be as certain as you are, but even if we posit everything you said in the early parts of the diary, and merely address the part about 'not being able to go broke', we have to note that sure, they can just continue to print more money, whether physically or electronically.  

    But doing so would likely lead directly to ever increasing inflation as the value of the dollar drops.  When you have very little money, and retailers know it, they charge less, taking smaller profit margins to 'make the sale' and 'move inventory'.  When you're flush, they raise prices, because they know they can get more money for the same product.

    Simply increasing the money supply is not a perpetual 'get out of jail free' card.  So debt and deficits do matter, and do need to be handled.  But simply not necessarily now.  

    When you're in a bad spot financially, you've got several options.  

    1. Scrimp and save, cut spending, buy the cheapest and poorest quality items you can, traveling to the cheapest places to buy when you have to buy.  This 'austerity', however, reduces demand in the system as a whole, and leaves you more susceptible to food poisoning, muggings, and being judged poorly by those around you.
    1. Go nihilistic, spend up large and go out in a blaze of glory.  Not really a good option for a country.
    1. Invest in physical plant, new training, experimentation, and hope it leads to something better.  On a personal level, that's a decent interview suit, good grooming, and retraining or other skill acquisition, or buying something you can maybe rent out to others.

    Austerity will hurt countries on which it is imposed.  Now is the time to invest, instead, spending more on putting more people to work, so they can make new discoveries, create new resources, and pay more in taxes.

    It's all about return on investment, and the ROI on austerity is dismal.

    •  The theory of functional finance (0+ / 0-)

      holds that inflation would not become a problem until you hit full employment. We have a long way to go to get to that point.

    •  Housing lost 30%, thats deflationary (0+ / 0-)

      Some think its not a bad idea at all to print a ton of money, basically to counter this massive deflationary force.

      FDR 9-23-33, "If we cannot do this one way, we will do it another way. But do it we will.

      by Roger Fox on Wed Dec 29, 2010 at 09:04:54 PM PST

      [ Parent ]

      •  It won't counter that deflationary force (1+ / 0-)
        Recommended by:
        Roger Fox

        The Fed can't just give money. It can extend credit. It can swap reserves for assets of equal financial value, but it can't create net financial assets. That's against the law.

        To counter the deflationary force, of the Housing collapse real demand for housing has to be restored. For that to happen we need creditworthy buyers. That is to say, people with good jobs, good wages, and good prospects who can conclude non-liar loans. The only way that can happen is two get everyone to work again  and have enough demand that the two trillion in private sector cash comes off the sidelines. The only possible source of that demand at this point is the Government. Only it is empowered to spend/create money in the process of buying goods and services that create real wealth.

    •  You're reflecting (0+ / 0-)

      the quantity theory of money. Keynes disproved that theory in the 1930s. Increasing the money supply doesn't necessarily cause inflation, except in full employment economies. Our economy is operating at 70% capacity and additionally we have another 12% GDP demand leakage to private sector savings and the current account deficit in trading. We are very far from inflation based on the money supply alone. I've talked about the quantity theory of money in this post on the recent Krugman/Galbraith debate.

      Further more, I'm not talking about printing money. I'm talking about buying goods and services to utilize our full productive capacity that will create real wealth to back our increasingly electronic currency and give it the only real value that exists in the modern world of non-convertible free-floating currencies.

  •  So simple... (4+ / 0-)
    Recommended by:
    Hlinko, seanwright, SoCalSal, zqxj

    So why tax us at all?

    Just print as much as the government wants to spend.

    All these years, and we could have just made it appear out of nowhere.

    Wow!

  •  If there is no deficit problem (2+ / 0-)
    Recommended by:
    seanwright, SoCalSal

    why tax anyone?

    We can all enjoy the current level of government services, or indeed increase government services, without the burden of taxation.

  •  Yes (2+ / 0-)
    Recommended by:
    Calamity Jean, Faroutman

    he will state that, in all sincerity, he believes that the United States Government has a deficit problem and a national debt problem that must be brought under control

    And finish with:
    So of course we must borrow billions more to give the wealthiest people in America more tax breaks.

    Good night and God Bless America,

    When will our consciences grow so tender that we will act to prevent human misery rather than avenge it? Eleanor Roosevelt

    by IndyRobin on Wed Dec 29, 2010 at 06:14:03 PM PST

  •  I'm ambivalent about the necessity of cutting (1+ / 0-)
    Recommended by:
    Calamity Jean

    spending but until I hear any of the congress critters who are screaming about it stand up and say we have to have substantial cuts in military spending, I won't take them seriously

    When one reads Bibles, one is less surprised at what the Deity knows than at what He doesn't know. -- Mark Twain

    by voroki on Wed Dec 29, 2010 at 06:15:37 PM PST

    •  Any of the congress critters? (0+ / 0-)

      Some of those congress critters have been calling for cuts in military spending. Rep. Barney Frank and other congress critters formed the Sustainable Defense Task Force, recommending nearly $1 trillion in defense spending cuts over ten years.

      Senator Coburn proposed defense spending cuts, as has Rep. Jan Schakowsky.

      Of the seven or so deficit reduction proposals issued in the past month or so, all of them propose cuts to defense spending (even Pete Peterson's proposal).

      Slavery is the legal fiction that a person is property. Corporate personhood is the legal fiction that property is a person. -Jan Edwards

      by SoCalSal on Wed Dec 29, 2010 at 07:21:48 PM PST

      [ Parent ]

    •  Why take them seriously even then (0+ / 0-)

      There are very good reasons to cut military spending. Specifically, it's having negative effects. But there are no good reasons for cutting Social Security and many good reasons for spending more on it. In short, it's not about spending or cutting for the sake of either. It's about spending for public purposes. Rather than spending corruptly to make those who give political contributions even more wealthy.

  •  So how about Zimbabwe? (0+ / 0-)

    How about the Weimar Republic? Why weren't they able to just print their way out of trouble?

    You do understand that we are an oil importing nation, right?

    •  what were the specific conditions of those (0+ / 0-)

      situations that differs from what is being decribed here?

      •  Don't know. It just seems wrong (2+ / 0-)
        Recommended by:
        Hlinko, koNko

        to be saying "don't worry we'll just print more".

        That didn't seem to work for those countries. Or a host of other countries in history.

      •  The Weimar Republic (0+ / 0-)

        Is such a close match to the US in so many ways it is scarey. See my comment up-tread, I mention this as well.

        Legally, the US might be able to print money, but this has been tried and failed so often it almost seems redculous to have to explain it.

        There is a small window to print money to a certian extent but beyond a point rampant inflation occurs which creates the need to print more and so on until the system crashes. Germany today has one of the world's most conservative fiscal and monetary policies and the strongst economy in Europe as a result.

        Been there, done that, learned their lesson.

        What about my Daughter's future?

        by koNko on Wed Dec 29, 2010 at 09:08:59 PM PST

        [ Parent ]

        •  Weimar looks nothing like the US (0+ / 0-)

          as far as I remember of the economic history. The comparison is often superficial.

        •  Read my various comments (1+ / 0-)
          Recommended by:
          bruh1

          about why this won't be inflationary. Then if you disagree please address the arguments. Do you have a theory that hasn't been disproved that says there will be demand-pull inflation before we reach full productive capacity utilization?

          If so, I'd like to see it.

          If not, why do you believe what you do? Why is your belief rational? Why should you act on it?

    •  US housing lost 30% of its value (0+ / 0-)

      thats a massive deflationary force.

      FDR 9-23-33, "If we cannot do this one way, we will do it another way. But do it we will.

      by Roger Fox on Wed Dec 29, 2010 at 09:07:36 PM PST

      [ Parent ]

      •  'Deflation' is misleading (0+ / 0-)

        Right now we have housing price deflation. However we do not have a general deflation. In fact, both food and energy prices have gone up. Gold prices have gone way up. The foreign currencies have all gone up relative to the US dollar.

        •  Your comments are inaccurate (0+ / 0-)

          (a) Unemployment is also high which leads to deflation

          (b) energy costs have gone up due to other countries growing in the third world (due to neoliberalism) and not because of domestic policy.  And yes it matters why energy pricses are going up. i.e. those countries need more oil so energy prices are going up.

          (c) GOld prices are irrelevant. I would argue that market is highly irrational. I have friends who know nothing of the market issues, and in fact one who has never heard of deflation buying gold because this person believes the gold bugs and keepts irrationally discussioning inflation. This person is not unique.

          (d) All foreign currencies have not gone up. In fact, many are down. And some of the currency issues are about manipulation of the currencies on the international front.

          So, what pressures as far as monetary policy do you suggest are causing what you are seeing because that would be the question to me.

    •  Wondered when these were going to come up (0+ / 0-)

      You can't compare the US to Zimbabwe or Weimar. Why not is explained in detail here and here.

      •  What I glean from those articles is that (0+ / 0-)
        1. There won't be hyperinflation because the feedback mechanism is not there.
        1. The US won't default on its debt because its debt obligation is all in US currency.

        But having said that there is no guarantee at all that there won't be serious inflation. Say, for example 100% increase in the price of oil & steel & copper. In other words, not hyperinflation territory, but serious, growth crippling inflation nonetheless.

        •  If the above is your basis for that (0+ / 0-)

          argument I don't see how its valid. and you need to be able to show in the economic data how your argument is valid.  Oil and copper alone are increasing not due to domestic issues but because other economiies that are growing right now in the third world are in need of those materials or energy sources. Its not domestic demand that is producing this result.

          •  Currency devaluation can also lead to oil price (0+ / 0-)

            increase and other raw material price increase.

            The whole theory of 'deficits don't matter' works only if we were in a closed system with little or no trade with other countries. When you need to import oil and a host of other natural resources, then you need to convince other countries that your colored papers are worth something.

            •  Well, (0+ / 0-)

              Right now, they're persuaded. If we reach full employment again quickly and get our economy roaring, they won't be going anywhere. We probably have to deficit spend another $1.5 Trillion at most to make that happen. I'm sure we won't have any trouble getting their oil while we're doing that. But if we do have trouble we can always ration oil and shift to other forms of power.

              That transition is overdue anyway.

            •  Actually the theory is more complicated (0+ / 0-)

              at least the versions of it I have seen. The point is to continually adjust to what the economic conditions are rather than a one size fit all theory that says the economy will always tend toward inflation- which your argument relies on regardless of the conditions. Notice how you try to fit the facts, despite their differences, into your thesis?

              •  I understand what this theory is saying, sort of (0+ / 0-)

                And I can agree that it probably does work in isolation. ie. if the US was a mostly  closed economy with excess capacity as you pointed out.

                But 1) that is not the case. We have a host of raw materials that we need to import from the outside. We continually run a trade deficit. We are a net importing nation. and 2) what is going to happen when all the other countries also do the same money printing? If one country does this, another country will be pressured to do the same. It will be like an arms race.

                In the end, I question whether this is the only way out. If we are going to do something drastic, I prefer forced consumption myself. But that's a different story.

                •  Well, to put it bluntly (0+ / 0-)

                  we are going to have to chose some other economic theory than neoliberalism because its not sustainable as an approach.  That's what i was referring to as a one size fit all theory. One that has previously failed. Many of the things you are describing are a byproduct of neoliberal ideology. By the way, China needs us more than we need them. They nor would any of hte other export dependent country ever allow us to go under. We are their source of demand. Both for China and countries like Germany.

                •  We do have a perpetual current account deficit (0+ / 0-)

                  But that means more room for Government deficit spending not less. the Macroeconomy can be divided into three segments. By accounting identity the flows in the three segments must sum to zero over any period of flow.

                  In any year, if there is a trade deficit draining assets from the US domestic private sector, and the private sector is running a surplus from savings activity (the situation at present), the Government deficit is determined by these two facts and will be equal to the amount of the private sector surplus minus the current account balance. Since the current account balance is a negative, the Government deficit becomes the sum of the absolute values of the private sector surplus and the current account deficit.

                  So, you can see that the bigger the trade deficit is the bigger will be its contribution to a Government deficit. A common sense piece on the sectoral balance model is here. A more formal treatment is here.

    •  All kidding aside (0+ / 0-)

      The most prominent sign that we are NOT in serious debt mode - yet - is the printing presses are not running.

      Why can't we all just get a blog? :)

      by cskendrick on Fri Dec 31, 2010 at 06:18:27 AM PST

      [ Parent ]

  •  As far as our lot in America goes, there are (1+ / 0-)
    Recommended by:
    Richard Lyon

    probably good gains to be made as a country by feeding our economy from the bottom. Even using printed money...we likely have a ways to go before inflation becomes a problem.

    But as far as the multinational corps go, they'll make more money selling to peasants in low level countries. That's the rapid-increase part of the profit curve.

    This def/dbt argument is all to justify letting America go.

    -- We are just regular people informed on issues

    by mike101 on Wed Dec 29, 2010 at 06:51:50 PM PST

  •  I have to wonder about the diarist's (4+ / 0-)
    Recommended by:
    Hlinko, koNko, Balto, zqxj

    qualifications/bona fide expertise on the topics of money supply, federal budget and deficits. I'm highly skeptical, to state it politely.

    A constitutional authority doesn't equate to sound fiscal policy.

    Slavery is the legal fiction that a person is property. Corporate personhood is the legal fiction that property is a person. -Jan Edwards

    by SoCalSal on Wed Dec 29, 2010 at 06:54:36 PM PST

    •  Here's a referernce that supports the approach. (2+ / 0-)
      Recommended by:
      bruh1, geomoo
      •  "An antidote to conventional principles" (3+ / 0-)
        Recommended by:
        Hlinko, Roger Fox, geomoo

        The paper you linked to begins thus:

        The approach presented here is properly called a "functional finance" approach to government finance—an antidote to conventional principles of "sound finance".

        Not buying it. I'll follow the advice of those such as Paul Krugman, who counters Jamie Galbraith's claim (deficits don't matter) with the statement that yes, deficits do matter in the long term.

        In other words, government spending to improve the economy is not a worry, but eventually the long term deficit must be addressed. The diarist's argument is a losing one, unsupported by "conventional principles of sound finance". And Professor Wray says of his "functional finance" approach:

        I am not arguing that the current situation will go on forever, although I do believe it will persist much longer than most commentators presume. But changes are complex and there are strong incentives against the sort of simple, abrupt, and dramatic shifts often posited as likely scenarios. I expect that the complexity as well as the linkages among balance sheets ensure that transitions will be moderate and slow-there will be no sudden dumping of US treasuries.

        Some of the deficit reduction proposals issued in the past month propose measures that would not go into effect until employment numbers recover, and focus on long term measures that protect the social safety net, reduce corporate and farm subsidies, reduce Pentagon spending, support infrastructure spending, and reform the tax code. Those proposals present great opportunity to reform the budget, and those are proposals that progressives should be taking up as a cause.

        Slavery is the legal fiction that a person is property. Corporate personhood is the legal fiction that property is a person. -Jan Edwards

        by SoCalSal on Wed Dec 29, 2010 at 08:43:20 PM PST

        [ Parent ]

      •  Thanks (0+ / 0-)

        I gave a whole raft of references above

    •  You're making an argument from authority (0+ / 0-)

      My reply is that argument from authority is a well-known logical fallacy. If you have criticisms of my arguments, I'd be happy to consider them. Otherwise, I'll just dismiss what you say as a logical fallacy.

  •  You don't have to be (1+ / 0-)
    Recommended by:
    Hlinko

    an econometrician to realize that if we have an aging population, with declining birthrates and limited immigration, that eventually transfer payments and the interest on the debt will become problematically large. They are not too large yet. But they will be if we do absolutely nothing. It's pretty simple math. Which is part of the reason we're going to transition from a country of anti-immigration xenophobes to actually making an effort to market ourselves to immigrants (in 30-50 years or so).

    I'm in the I-fucking-love-this-guy wing of the Democratic Party!

    by doc2 on Wed Dec 29, 2010 at 07:02:39 PM PST

    •  Have you been reading? (0+ / 0-)

      We don't have to issue debt. Guess what? If we don't we won't have to worry about the interest rates going up. See here.

      Also, even if we were to continue issuing debt we can control the interest rates. For example, Japan manages to force the bond markets into paying 0.25% interest rates on there debt even though they have nearly a 200% debt-to-GDP ratio. See here.

    •  THe only way to hold serve with the Asian powers (0+ / 0-)

      is good education, good infrastructure and good approaches to immigration to attract, develop and retain the best taken from around the world - starting with the talent available right here at home.

      In 30-50 years, you could probably take any country on the planet and turn it into the nucleus of a rising world power if you did all of the above properly.

      Why can't we all just get a blog? :)

      by cskendrick on Fri Dec 31, 2010 at 06:25:43 AM PST

      [ Parent ]

  •  Money is worthless (1+ / 0-)
    Recommended by:
    Hlinko

    except insofar as it is exchangable for goods.  It is only exchangable for goods on the basis of how many goods are available. Doubling the money supply does not make more bread available, it just makes each loaf of bread cost twice as much.

    Yes, we can print all the money we want, but why would anyone give us goods in exchange?

    •  When 30% (0+ / 0-)

      of the economy is idle and there are no jobs people will give us there labor in return for money created by the Government. That labor can create new goods and services -- real wealth, which others will pay for, or trade for.

      Your notion about printing money applies when there's a full employment economy. Unfortunately we haven't had one of those in the United States since the Kennedy-Johnson Administration. Clinton's economy came pretty close; but it never quite got there.

      •  Your suggestion we print money in anticipation (0+ / 0-)

        of the goods that will become available as a result of full employment would only work if the goods became instantly available.  Unfortunately two things would actually happen.  

        First the money would appear well before the people could be hired and make the goods.  This would generate the inflationary push as the increased money supply would be used to compete for the existing supply of goods prior to any increased productivity.  This would cause prices to spike -- absorbing the money.  It would have to be used to increase current worker's salary so that they could still afford 'bread'.

        Second these assets created by fiat rather than through productivity may well be applied in ways that do not efficiently produce goods, thereby increasing the competition for the existing supply of goods by more people, causing the prices to rise once again and consuming the additional money.

        Money is not magic, unless it is kept in reasonable parity with the available goods, then the value of money with respect to goods will vary.  

        •  Nor is sticking the word productivity in (0+ / 0-)

          a post helpful. Define what that means here?

        •  I don't see that (0+ / 0-)

          I see enormous inventories sitting on shelves and boats and in stores, unsold for a long time. I see people putting off purchases for some time now where supplies are readily available. And I see an economy that can produce the new goods and services in a very short time.

          And I also see the new spending going out over a period of time in the form of payments for work performed in Federal Job Guarantee Programs, and saved State Government Jobs. So I don't see any inflation at all. And I think, further, that you have absolutely no empirical evidence for your view that Government spending programs of this kind would result in any inflation worth talking about.

          In short, I don't see new money appearing in anticipation of new goods and services, but new money being spent for available goods and services. Currently we have neither a full employment economy nor one which has even come close to handling its accumulated inventory.

  •  Thanks for posting it here. I read it on (1+ / 0-)
    Recommended by:
    Richard Lyon

    Corrente couple of days back. While I don't understand few things in the post, I agree with the overall content. The debt/deficit hysteria is another item in the neo-liberal agenda used as a Trojan horse to attack public spending. But it gets repeated again & again and people start believing it.

    No Virginia, the federal budget is not like a household's :
    http://www.newdeal20.org/...

  •  Another crap detector test for debt/deficit (2+ / 0-)
    Recommended by:
    Calamity Jean, geomoo

    fear mongers is whether or not they talk about our trade policies. The amount of trade deficit in our books ends up as a surplus in China's , for example. So those who overlook this are dishonest.

  •  Thanks for a good debate (0+ / 0-)

    I see that the dialog on this post is now nearing its end. Thank you to all the people who participated in raising questions about what I've proposed.

    My contention, again, is that there's no deficit/debt or constraint on Government spending when viewed from the standpoint of the constitutional authority of the US Government to engage in deficit spending. Put another way this means that from the viewpoint of its constitutional authority and the workings of its present fiat currency system, the United States has no solvency risk and can never run out of money, as the deficit hawks and doves have claimed. It has no Governmental Budget Constraint (GBC) restricting its authority to spend.

    When looked at from a political point of view however, there is a solvency risk due to three constraints the US Congress has placed on the processes of Executive Branch spending on legitimate Congressional appropriations. The Congress prevents the Treasury from running a negative balance in its Federal Reserve accounts as a result of its spending. The Congress also mandates that the Treasury issue debt to prevent such negative balances. It also imposes a debt limit on the amount of debt that can be issued at any time. These three limits imposed voluntarily by Congress mean that Congress have created the potential for default on US obligations, provided Congress refuses to act to remove these limits. If this happens make no mistake, it will be a voluntary default forced by the Congress, but not by any economic conditions either domestic or international.

    This post also made clear my opinion that any refusal by Congress to remove these limits when the ability of the Government to pay its obligations is threatened is a violation of section 4 of the 14th Amendment prohibiting anyone from questioning the validity of US debts. I also called for an end to issuance and for gradual repayment and liquidation of the national debt; not because that debt carries with it any solvency risk, but for the political reason that the national debt is deeply unpopular among the people and creates a distraction from real economic issues.

    The discussion on this post is very interesting in that no one questioned my argument about solvency and the Government's constitutional authority to spend what has been appropriated by Congress. I think we all agree then, that there is no argument here about solvency, and no argument that claims we have a constitutional GBC to contend with. Everyone agrees that the constraints that exist are due to the limits imposed by Congress, which it can easily lift at any time.

    So, where the discussion is mainly focused has not been on the question of existence of a GBC or any solvency risk. Instead, it has been on the possibility that the effects of Government spending, and especially spending not backed by debt issuance, is serious inflation whose effects would be much more damaging to the economy than the present gap between available productive capacity and what we're using.

    In discussing this question, I've taken the position that demand-pull inflation will not occur until we close this gap and reach full employment, and that while supply-push inflation may occur at any time that 1) has nothing to with Government deficit spending, and 2) must be controlled by wage and price restraints and rationing anyway.

    In any event, I think the key to this discussion is that the real economic issue here is not a deficit/national debt problem, but, instead, the question of whether specific Government policies designed to strengthen the social safety net or create full employment by putting the 26.5 million who now want full-time employment back to work, would ignite dangerous demand-pull inflation whose costs would be greater than the benefits of creating full employment.

    I think this is the debate that we as a nation should be having instead of just accepting that we have a deficit/debt problem, and debating whether we ought to cut military, safety net, education, or sorely needed economic re-invention spending that we desperately need for the future. In short, I think the deficit/debt problem is another distraction being created by the "haves" in our economy, to make others sacrifice while they go right on looting the economy with the help of the Government and its plutocratic  bank bailout policies, which allow huge bonuses to be paid based on fraudulent profit calculations that don't recognize toxic real estate assets.

    We must recognize that this deficit/national issue is just a distraction, reject it, and any moves to solve this non-existent problem, while we begin to focus on the real problem of re-creating a stagnant economy, creating full employment, and avoiding demand-pull inflation, while preparing to restrain supply-push inflation if it should occur. In other words, we have to evaluate fiscal policy based on whether or not it's likely to accomplish the public purpose, including economic and social justice, and not whether or not it's likely to raise the deficit, the national debt, or the debt-to-GDP ratio.

    No real people care about these statistical abstractions. They care about whether there are jobs available, whether they have futures, about their families, about whether prices are rising uncontrollably, and about other real conditions in their lives. Managing Government fiscal policy on the basis of movement in abstract statistical constructs having no direct connection to real things that people feel everyday is madness and the road to ruin. I'm afraid that the United States may be firmly on that road, and that we must dislodge and place it on the path of reality before it is too late.

    •  Question (0+ / 0-)

      I am involved in a discussion of your diary on Facebook. There is some confusion over this statement.

      the US always has the constitutional authority to spend by simply marking up the USD in private sector accounts within the banking system

      Could you tell me what you meant by the term marking up in this context. I follow the notion that money is being created in the banking system, but I am unable to explain how you meant the specific wording.

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