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Oh, the debt! Oh the humanity! Oh the BULLSHIT. But it has penetrated so deeply into the public narrative that even most thoughtful progressives have fallen into the trap. Diary after diary on this site bemoan the debt in cautious terms, stipulating its presumed dangers, a looming threat but for some future date when the economy is healthy again. That's when we should inflict the next injury, not now! Meanwhile the T-baggers scream hysterically that the debt burden is already crushing us and robbing our children of their future. That the debt we are leaving for our children to pay is the moral outrage of our time.

Really? And the evidence for all of this is what, exactly???? Ipse dixit? Some person with a recognizable name says it's so? This is no longer economics, it's religion.  It is the abandonment of thought and reason to the mentality of the stampeding herd. It is the embrace of lemminghood. It is the modern disaster of Theoeconomics.  

Let's take a little quiz to see how deeply we've fallen into Theoeconomics' rhetorical traps. These are all simple True or False questions:

1. Like households and businesses, the government must finance its spending out of income or through borrowing.

2. The purpose of federal taxation is to finance government spending.

3. The Federal Government borrows money from the private sector to finance budget deficits.

4. The government takes pressure off of interest rates by running surpluses thus leaving more funds available for private sector investment.

5. Persistent budget deficits will produce inflation and higher interest rates for future generations.

6. Current budget surpluses will build the necessary reserves to cope with the future needs of our aging population

All of these statements are FALSE, as "experts" on both sides of the political divide know and admit. So, if you answered any of the questions True, you are operating under real misconceptions about how the economy actually functions. A number of good publications and blogs could help. Great discussions of questions similar to these can be found in Warren Mosler's Seven Deadly Frauds of Economic Policy(link to free pdf). This is a very informative 117 pages, but more abbreviated discussions are also available. New Economic Perspectives is an excellent source, the MMT Primer there should be required reading, and the Money and Public Purpose blog here at DK has many insightful contributions.

Here's an overview of how the macro-economy works. It's not that difficult, just jr. high level math. . . . .

Godley on the US economy: "Without an expansionary fiscal policy, real output cannot grow for long."
For the last several decades we have had persistent trade deficits reflected in the diagram by money flows from the private sector to the foreign sector (right side of triangle). This has been partially offset by a surplus in capital accounts reflecting payment to and from foreign entities (bottom of triangle). Nevertheless, annual net flows to foreign accounts amounts to $500-$600 billion. The largest transfer between sectors is the government's deficit spending, which is an annual net cash flow of $1.1-1.4 trillion into the private sector. But note that, if the government's deficit spending were not greater than the trade deficit, the private sector could not be in surplus. For the economy as a whole, that means money becomes more scarce, savings decline and borrowing increases. Consumption declines, jobs are cut and we're back in the old shitter again. But these days that seems to be everybody's favorite plan. The lusted after "Grand Bargain" is really what William Black calls a "Grand Betrayal." But voices of reason are shouted down because, "OMG, we're bankrupting ourselves, there's no more money!"

OMG is right! Roll your eyes, too, because that is complete bullshit. The government is the issuer of the currency. These hysterics are acting like the last 41 years never happened and we're still chained to the gold standard. Don't they remember that Nixon dumped the gold standard in 1971 because it was robbing us of our sovereignty and our wealth? Until then the US, the most powerful nation on earth, behaved as if it were a pauper. We convinced ourselves of a need to back our promises with gold rather than the sovereign might and integrity of our nation. And we were getting royally screwed for our troubles.

At the time, the value of a dollar was set to 1/35th of an ounce of gold (they described it as gold selling for $35 per ounce  - cart pushing horse). If you were anyone BUT an American, you could take $35 to the gold window and demand your ounce of gold, and you would get it. It's what the United States Government promised, and the 14th amendment mandates that we keep such promises. After leaving the gold window you could take your ounce of gold out on the street and sell it for $42 - a tidy 20% profit. Gold was selling (to foreigners) like hotcakes and fortunes were expanding rapidly. President Nixon saw the hemorrhaging and solved the problem by closing the gold window and abandoning any fixed rate of exchange.

The dollar became a true fiat currency, a far more powerful tool than the earlier gold certificates, but, ultimately, one too subtle for our nation's leaders to grasp, a laser scalpel in ham-handed fists. That's why even though everything changed, nothing changed. That is why we continue to behave as though we were still on the gold standard. That is why we place unwise and unnecessary monetary restraints on fiscal policies for the public good, and why we bend to the false premise that our government could ever be short of cash. WE - THE NATION - CAN NEVER BE SHORT OF CASH. WE CAN CREATE CASH WHENEVER WE NEED IT.

You must wonder, then, if the government just creates money at will, how can the currency have any value at all? Look at our economy; it's no secret that it runs almost entirely on credit. Overall, comparatively few transactions are conducted with actual cash. In the private sector, loans create deposits so real money is not generally required except as the unit of account, a measurement, a score. The one place you have to come up with real money is when you have to pay government for taxes and other liabilities. You have to come up with NET dollars for that. The government does not want your IOU. They have already issued their own IOU's - called dollars - and they want those back so they can physically or virtually tear them up, just as any issuer of an IOU would do.

Then, if we let the government just print money, won't we end up being like the Wiemar Republic or Zimbabwe with runaway hyperinflation? Get real - neither Wiemar nor Zimbabwe were in control of their currency or their economy. Here's a different way to think about it. Did you ever go to a buffet? Sure, some idiot people are stupid enough to gorge themselves and spend the rest of the evening either puking or wishing they could puke. But you don't have to be stupid. You don't have to shove another plateful down your throat just because it's there. And you don't have to deficit spend when the economy is full. Full employment, maximized use of productive capacity. Those are the conditions under which excessive deficit spending would produce inflation. That is controlled by policy choices for spending (the gas pedal) and taxation (the brake pedal). It's not that hard!

To conclude, our money was once constrained by limits imposed by the quantity of our gold reserves. Once the dollar was unshackled from gold, our monetary system was no longer constrained except by the poor judgement of our leaders. In no case is the solvency of the United States or any mandated federal program ever in question. The government can ALWAYS create the dollars necessary to pay its dollar-denominated obligations, subject only to a political will. Sadly, that will is dominated by a Calvinist sentiment and a denial of economic science. It is a religion masquerading as economics, and it is a prescription for misery and failure.  

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Comment Preferences

  •  Outstanding Job. (3+ / 0-)
    Recommended by:
    helpImdrowning, katiec, Old Surgeon

    Thanks for the very good and accurate account of our ongoing mass lunacy.  The point everyone needs to understand is not that the government can create all the money it wants, but even more importantly, that it has actually created all the money out there, and, furthermore, all the net savings in the private sector only exist because the government deficit spent those dollars first.  Private sector savings exist in no other way.  So if we want to reduce the national debt, we better get ready to lose those savings!

  •  Thanks for this great diary. n/t (0+ / 0-)

    "Too often we enjoy the comfort of opinion without the discomfort of thought." - John F. Kennedy -7.8., -6.6

    by helpImdrowning on Wed Nov 14, 2012 at 10:13:33 PM PST

  •  Thanks for the diary. I am still trying to (0+ / 0-)

    understand MMT but I just can't get it. What is confusing to me is that money seems to have different names: C, I, G, S, T, X, M, and sums of various combinations of these different kinds of money have different names as well: Private Sector Deficit, Private Sector Surplus, Public Sector Deficit, Public Sector Surplus, Foreign Sector Deficit, Foreign Sector Surplus.

    What is missing from the diagram, in my view, is the Family Sector and the valves that regulate the various flows of the different kinds of money. In the Family Sector there should be FN for Family iNcome, and FX for Family Expenses, etc.

    My exposure to MMT has been short, maybe less than a year, but I have tried to understand it. I have followed the project by Letsgetitdone on another blog that is aimed at developing a solid narrative of the MMT story. It, too, is very confusing to me though the goal is right.

    In my view, the problem with all of the essays I have read and the videos I have watched is that the discussion is always in the context of the current economic system and relies on the current jargon. It seems to me that the discussion is about economists talking to economists and the jargon and concepts flow freely. This is a mistake, in my view. People like me, ordinary citizens, don't have the time or the inclination to learn the ins and outs of the current economic system so that they can then learn how MMT differs in detail, especially because we all agree that the current system doesn’t work. So why should I spend time trying to learn the details of a system that doesn’t work so that I can pass through the gateway to learning about a system that does, or might, work?

    Wipe the slate clean, and draw a new schematic that relates to the Family. Use terms that families use: Income, Savings, Expenses, etc. Families are not the same as businesses and therefore should not be lumped together in the same sector. The only reason that they are lumped with businesses is because somebody did it for the sake of convenience for those who didn't really care about families as a separate entity from businesses and that is ample proof that the current economic system is wrongheaded.

    There is much work to be done, and time is wasting.

     

    Might and Right are always fighting, in our youth it seems exciting. Right is always nearly winning, Might can hardly keep from grinning. -- Clarence Day

    by hestal on Thu Nov 15, 2012 at 03:24:43 AM PST

    •  Dividing up the private sector (1+ / 0-)
      Recommended by:
      katiec

      into all sorts of sub-sectors is possible and it may be what micro-economists are about. But flows into and out of one of those sub-sectors don't tell you about the economy as a whole. Even in the worst economy some do well, and in the strongest economy some are left behind. I think the intent of economics is to accurately describe the aggregate movements of money, goods and services. I never studied econ in college, my first exposure to any formalized study was MMT, which I approached with an a priori admission that I knew nothing, nothing! And so I was able to suspend judgement until, with a feeling of near elation, I began to see it. It is a bit like an Usher painting. Once you get, you can't not see it.

      •  I agree when you say: (0+ / 0-)

        "the intent of economics is to accurately describe the aggregate movements of money, goods and services." But that is the wrong intent. The goal of any economic system is to build an engine that serves human beings. Most economists engage in a fruitless game that is entertaining and absorbing for them, but does nothing to serve ordinary human beings. The implication of your remarks is that we are all on our own. That is not a system, that is chaos, and we see the results all around us.

        So your reply to my comment, please forgive me, is nothing more than an admonition to wait for divine revelation.

        But let me ask you, now that you have gained the blissful insights of MMT, how will it change my life and the lives of other ordinary citizens, when will it start, and how do we get there from here? I'll bet that neither you nor the other MMT gurus have an answer to these questions, and because you don't then you are just spinning your wheels, contributing nothing but gaining the fun of a puzzle that you share with those of like mind.

        So in light of that revelation, let me respectfully suggest that you MMTers stop claiming that you will be able to solve our economic problems. Stop giving people like me false hope.

         

        Might and Right are always fighting, in our youth it seems exciting. Right is always nearly winning, Might can hardly keep from grinning. -- Clarence Day

        by hestal on Thu Nov 15, 2012 at 05:24:07 AM PST

        [ Parent ]

        •  I don't understand this (0+ / 0-)
          The implication of your remarks is that we are all on our own. That is not a system, that is chaos, and we see the results all around us.
          How does pursuit of knowledge imply that? I did vascular surgery. If I didn't have an accurate model of the circulatory system and all of its intricacies and dynamics, I would have done an awful lot of damage along the way. I think it is necessary to compartmentalize. The intent of the study is to do the study and learn what it has to offer. What to do with those results is a contingent objective. If it weren't, how could the study be unbiased?
          •  Research? (0+ / 0-)

            Well golly gee, now I understand that the MMT project is merely pure research in hope of discovering new laws of economics, if there are any. So, let me make sure I understand what you and all the other MMT gurus are saying. There are laws of physics that are fundamental and immutable. Once these laws were discovered, humans devised technologies that enabled them to use these laws for the benefit of humankind. The internal combustion engine is an example of using technology to apply the fundamental laws of physics so as to produce a system (the engine) that serves human beings.

            With the foregoing in mind, where are we with respect to MMT? You said that you are looking for laws, but the items you listed in your diary are not laws, or are they? For example:

            1. Like households and businesses, the government must finance its spending out of income or through borrowing. (this is a description of part of the current economic system)
            2. The purpose of federal taxation is to finance government spending. (again a description, in the form of a goal)
            3. The Federal Government borrows money from the private sector to finance budget deficits. (description of the current economic system)
            4. The government takes pressure off of interest rates by running surpluses thus leaving more funds available for private sector investment. (This could be a law, but is it general? Does it apply to all economic systems including our current system and MMT?)
            5. Persistent budget deficits will produce inflation and higher interest rates for future generations. (Is this a law? Is it universal?)
            6. Current budget surpluses will build the necessary reserves to cope with the future needs of our aging population. (????)
            So then you say that these statements are all false. You are talking about our current economic system. Well, that is truly a waste of time.

            What about MMT? What are the fundamental laws of MMT that you and other gurus have discovered so far? Do you have a model that shows how you would apply those laws to develop an engine, a system, for managing our economy? We don’t need to be told that the current system does not work. We, your audience, will stipulate to that. Has your pure research come up with anything that will work?

            Might and Right are always fighting, in our youth it seems exciting. Right is always nearly winning, Might can hardly keep from grinning. -- Clarence Day

            by hestal on Thu Nov 15, 2012 at 06:33:32 AM PST

            [ Parent ]

            •  Wow, how quickly you have managed to make (0+ / 0-)

              this degenerate into a squabble. I don't think I ever mentioned the term "law" - that's entirely your glop. I'm not here to argue with you. Yes, there are answers to the questions you pose, yes there are policy proposals from the MMT community, the links are in the diary. You seem to be more interest in the fight than the information. I am not.  

              •  I am not interested in arguing either, but (0+ / 0-)

                you are the one who mentioned the pursuit of knowledge and in the context of economics that means discovering the fundamental laws that can then be applied to human activities. But obviously you don't see it that way, but I can't imagine just what kind of "knowledge" you are pursuing.

                The reason that I took the time to write lengthy comments is because I wanted to know if you should be taken seriously. And now I know that you are not. Your dismissive attitude and your inability to explain just what your process is and what your goals are means that you are just screwing around. Nothing wrong with that, but you should add a tag to this diary to indicate that it is just a vent.

                Have a nice day.

                Might and Right are always fighting, in our youth it seems exciting. Right is always nearly winning, Might can hardly keep from grinning. -- Clarence Day

                by hestal on Thu Nov 15, 2012 at 08:12:30 AM PST

                [ Parent ]

                •  As I understand it, though I could be wrong, MMT (2+ / 0-)
                  Recommended by:
                  hestal, Old Surgeon

                  isn't trying to discover fundamental laws so much as describe how our monetary and national accounting system actually works today.

                  I guess one "law" would be: we have a fiat currency.  Fiat currencies are an abstraction rather than a thing.  As such you can never run out of them.  Just as we never run out of inches, or score keepers run out of points.

                  But I don't think this is a fundamental law of economics, just the internal logic of fiat currencies and other abstract units of account.

                  The process MMT uses is empirical research into national accounting practices in regard to how our fiat currency flows through the economic system.

                  The primary goal is to have an accurate description of the above so that we can understand policy options.

                  A secondary goal is to make policy recommendations based upon how our monetary and national accounting system actually works.

                  The most famous recommendation is a guaranteed jobs program.  How do we know we can afford this recommendation?  Cuz we have a fiat currency, which is nothing more than a unit of account, not an object that may or may not be in short supply.

                  •  Thanks, Katiec. No need to spend any (0+ / 0-)

                    more time here.

                    Might and Right are always fighting, in our youth it seems exciting. Right is always nearly winning, Might can hardly keep from grinning. -- Clarence Day

                    by hestal on Thu Nov 15, 2012 at 08:54:31 AM PST

                    [ Parent ]

            •  One policy recommendation that a lot of MMT (1+ / 0-)
              Recommended by:
              hestal

              folks make is a job guarantee program.

              Randal WRay, at least, also thinks that the Fed Reserve should target unemployment and let the deficit and interest rate float.  

              And MMT has good reasons to make such proposals based in their description of our current monetary reality.

            •  Once I get on a real key board, rather that the (0+ / 0-)

              iPad, I'll try, as a medium bright new student, to go through your list.

              MMT really is cool.

              Even if, as I believe, we also need to be thinking about devising the fundamentals of a steady state economy.

              But MMT is about our current reality.  They just describe it far more accurately than either talking heads or politicians.

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

                Don't worry about it.

                I am naturally driven to find solutions to system problems. The MMT experts assert that our current system is seriously flawed, and they seem to be spending a lot of energy to try to convince their audience (whoever the hell that is) that things ought to be changed. And, from what I have been reading, they are frustrated that no real progress is being made toward the adoption of their ideas. And they seem to recognize that they need a better narrative, and some of them are working on it. All to the good.

                All I am trying to point out is that attacking the current system has limited value. Yes, they must point out the holes in the current economic system, but then they must propose corrections. The only proposals I have heard so far are the ones you mentioned above involving employment, the deficit, and interest rates. The offerings I have seen about these issues, here and elsewhere, are not convincing and will never result in change.

                Because there is no laboratory experiment to prove that MMT is correct, then convincing models must be provided. Contrasting MMT with the current economic system is not such a model.

                The best model is to talk in terms of human beings and their economic lives. If I were king and I said to you and the other MMT gurus, "go ahead implement your system," what would you do? How would you implement it, and how would it affect ordinary citizens?

                So, I look for MMT experts who are thinking along these lines. So far, I have found none.

                So, it is now up to me.

                Thank you for taking my questions seriously.

                Might and Right are always fighting, in our youth it seems exciting. Right is always nearly winning, Might can hardly keep from grinning. -- Clarence Day

                by hestal on Thu Nov 15, 2012 at 08:49:52 AM PST

                [ Parent ]

                •  hestal, we are not so much pointing out the flaws (1+ / 0-)
                  Recommended by:
                  katiec

                  as we are pointing to the inherent strengths in the system that are not being utilized. MMT is not a new paradigm. Fiat money has been around for at least 4000 years. We don't need a laboratory to experiment with MMT - it is an observational science, a description. If you want a humanistic approach to MMT and the policy potentials that flow from it, you might try Bill Mitchell and Michael Hudson.  

                  •  Well, I am glad to learn that earlier (0+ / 0-)

                    nations used fiat money to maintain full employment and that they also did not worry about deficits, only inflation. Which nation(s) can I go read about?

                    Observational science has serious drawbacks. I refer to Alexander Stephens' cornerstone speech in which he said that it was obvious that blacks are inferior to whites and that their natural state is to be slaves for whites.

                    A example from the early 20th century is instructive. Connie Hagar and her husband owned and operated what was known then as a "tourist court" in Rockport, Texas. Connie had always had an interest in birds but she had grown up far inland. When the couple moved to the coast town she was delighted to observe many new birds. She fell quickly into the habit of walking a long course each day, no matter the weather, and recording her sightings along the way. She wrote friends in other places to tell them what she had seen. Soon university authorities began to hear of her claims and they dismissed them, and her. But she persisted in her innocent way. Some of these authorities, who had national reputations as birding experts, and who had observed birds all over the world and particularly in America, finally came to see her. They could not believe that her reports were true, because they disagreed with the observations these authorities had been making for years. But when they came, they were amazed, not only was Connie right about the birds she had identified, she clearly was superior to these authorities when it came to knowing how to identify a wide range of species in the field. Connie Hagar transformed ornithology. So the moral of this little story is that there were two types of observations going on at the same time. One set of observers had a great reputation and closed minds. The other lone observer had no reputation, but an open mind. She was right and they were wrong.

                    So, I come to this discussion late, but I spent a lifetime observing human behavior in complex situations and in large enterprises. I always kept an open mind, and was able to develop systems that assisted those humans in coping with their professions. What I am getting here, not from you, is that minds are closed.

                    In a more modern example, I can describe for you what I saw on Channel 5, Texas News out of Fort Worth, Texas a few years ago. As I sleepily watched the 10 pm telecast while waiting for the weather forecast I was surprised to see the face of an old family acquaintance. He was one of the county commissioners in Wise County, and he was being interviewed about the county's lack of compliance with the requirement to make it possible for handicapped persons to access the courthouse building. I had known this man for many years and I was interested in what he would say. He told the reporter that it was unnecessary to build the access ramps and to do so would be a big waste of money, because he said: "In all my years at the courthouse I have never seen a person in a wheelchair there." So much for his observations.

                    I do not necessarily want a "humanistic" approach, I want a narrative or a model that will show how MMT should be applied to our national economy and what it would do for ordinary citizens. That is not much to ask for in my opinion.

                    Thank you for telling me about Mitchell and Hudson, I will read them right away.

                    Might and Right are always fighting, in our youth it seems exciting. Right is always nearly winning, Might can hardly keep from grinning. -- Clarence Day

                    by hestal on Thu Nov 15, 2012 at 09:50:51 AM PST

                    [ Parent ]

                    •  Actually, I think the whole point of the diary (1+ / 0-)
                      Recommended by:
                      katiec

                      goes to this:

                      I want a narrative or a model that will show how MMT should be applied to our national economy and what it would do for ordinary citizens. That is not much to ask for in my opinion.
                      For all your lengthy writing, I really don't understand your complaint. I'm not trying to be argumentative, but this was a diary about a false narrative being pushed in the public discourse, and an explanation of why it is false. In the context of the discussion, the "how MMT should be applied to our national economy" is obvious. Policy decisions can be made independent of debt considerations. That's all this diary was about. It was never intended to be a treatise on MMT or public policy.

                      As for ancient fiat money, there are tally sticks in British museums from Henry I (circa 1100) but here's Michael Hudson with a good discussion of ancient money and monetary / debt systems

                    •  Read up on the history of Tally Sticks (0+ / 0-)

                      Which were started in England by King Henry, and continued to be in use for 700 years.

                      You might want to look at JJ Dewey's To Fiat or Not Fiat and subsequent posts on the history of Fiat Money.

                      The fact is that we have been off the gold standard since 1933 in the US domestically, and since 1971 internationally. We have been off the silver standard since 1964 ( that is when the US stopped issuing silver coins. That is a fact of life. However, we try to live our life as if we were still on a metallic standard money. Most of the times, that make believe works, when that make believe is restricted to the domestic private sector. However, it fails spectacularly when we try to impose that same make believe on the Government sector ( and that was the major reason to get off the metal standards in the first place)

                  •  One last observation, and then I must go (0+ / 0-)

                    have lunch. Your remark about "not pointing out the flaws" just doesn't square with the title of this diary. You were clearly talking about the current economic system when you said, "Theoeconomics, they are selling us out and we are buying it." Not only is the current system flawed, but you liken to a religion, a faith-based (believing something for which there is no evidence) system.

                    Might and Right are always fighting, in our youth it seems exciting. Right is always nearly winning, Might can hardly keep from grinning. -- Clarence Day

                    by hestal on Thu Nov 15, 2012 at 10:17:42 AM PST

                    [ Parent ]

                •  It's not attacking tge current system, it's (2+ / 0-)
                  Recommended by:
                  hestal, Old Surgeon

                  describing it.

                  MMT is often attacked for being status quo rather than revolutionary.

                  Personally, as I said, we better have a better understanding both of what we have and what we need for the longer future.

                  In my opinion, MMT points in tge direction of thinking about a steady state system in so far as money is clearly no longer wealth itself.  The political challenge is getting people to understanding that money, being abstract, is not a thing that can be hoarded without a system of laws which work with the same logic as power being used to distribute the alphabet.  Mr. Dimon gets a trillion letters, you get ten?

                  Absurd.

                  •  The political challenge is getting people (0+ / 0-)

                    to understand what MMT, applied wisely, would do for them.

                    Might and Right are always fighting, in our youth it seems exciting. Right is always nearly winning, Might can hardly keep from grinning. -- Clarence Day

                    by hestal on Thu Nov 15, 2012 at 09:52:49 AM PST

                    [ Parent ]

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