Mitchell’s laws: Reduced money growth never stimulates economic growth. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. Austerity breeds austerity and leads to civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
Here is yet another example of pitiful, self-styled “experts” who have no idea what they are talking about, so they use intuition and popular belief to support what should be science. If anyone reads Robert J. Samuelson’s columns, you might try to clue him in (though I suspect you will fail in the attempt).
By Robert J. Samuelson, Published: December 18, Washington Post
“Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.” — John Maynard Keynes, 1936
This quote from Keynes is hilarious in context. Samuelson printed the quote and as you will see, he doesn’t realize it refers to him!
When Keynes wrote “The General Theory of Employment, Interest and Money” in the mid-1930s, governments in most wealthy nations were relatively small and their debts modest. Deficit spending and pump priming were plausible responses to economic slumps.
They also were on a gold standard, and so were monetarily non-sovereign. The U.S. is Monetarily Sovereign. Samuelson doesn’t understand the difference.
Standard Keynesian remedies for downturns — spend more and tax less — presume the willingness of bond markets to finance the resulting deficits at reasonable interest rates. If markets refuse, Keynesian policies won’t work.
True for monetarily non-sovereign nations; not true for Monetarily Sovereign nations.
Countries then lose control over their economies. They default on maturing debts or must be rescued with loans from friendly countries, the International Monetary Fund (IMF), government central banks (the Federal Reserve, the European Central Bank) or someone. There are other reasons why Keynesian policies might fail or be weakened. But they pale by comparison with the potential veto now posed by bond markets. Ironically, the past overuse of deficits compromises their present utility to fight high unemployment.
Not only does Samuelson not understand the differences between the Monetarily Sovereign U.S. and the monetarily non-sovereign PIIGS, but he thinks the Federal Reserve has to rescue the U.S. by lending it money! Yikes!
Excuse me, Mr. Samuelson, but how do you think the Federal Reserve gets dollars? Total ignorance of federal finances, yet he writes a weekly economics column in a major newspaper.
And by the way, how does one “fight high unemployment” by reducing deficit spending? Can’t be done.
There is no automatic tipping point beyond which a country’s debt — the sum of past annual deficits — causes bond markets to shut down. But Greece, Portugal and Ireland have already reached that point, with gross debt in 2011 equal to 166 percent, 106 percent and 109 percent of their national incomes (gross domestic product), according to IMF figures. Heavily indebted Italy and Spain could lose access to bond markets.
Thankfully, the United States is not now in this position. Interest rates on 10-year Treasury bonds hover around 2 percent; investors seem willing to lend against massive U.S. deficits. Just why is unclear. It’s not that U.S. budget discipline is noticeably superior.
Mr. Samuelson, it’s “unclear” to you because you have no understanding of economics. Lenders buy Treasury bonds because the U.S. has the unlimited ability to service them. The PIIGS do not.
. . . some economists urge more “stimulus.” In a paper, Christina Romer — former head of President Obama’s Council of Economic Advisers — argued that scholarly studies support the administration’s view that its $787 billion stimulus in 2009 cushioned the recession. Another big stimulus “would be very helpful . . . to really create a lot of jobs.”
I am less sure. For the record, I supported Obama’s stimulus — though disliking some details — and, under similar circumstances, would again. The economy was in a tailspin; the stimulus provided a psychological and spending boost. But how much is less clear. As Romer notes, estimating the effect is “incredibly hard.” For example, the Congressional Budget Office’s estimate of added jobs from the stimulus ranged from 700,000 to 3.3 million for 2010.
Suppose a new stimulus — beyond renewal of the payroll tax cut — did succeed at significant job creation. By piling up more debt, it would still risk aggravating a larger crisis later. There is no long-term plan to curb deficits. Americans seem to think they’re invulnerable to a bond market backlash.
The U.S. has no need to issue bonds, so is invulnerable to any sort of bond market “backlash.” If no one wanted U.S. bonds, this would not affect by even one penny, the federal government’s ability to spend.
Economist Barry Eichengreen, a leading scholar of the Great Depression, is dubious:
“Given low interest rates and the still-weak U.S. economy, it will be tempting for the U.S. government to continue running deficits and issuing additional debt. At some point, however, investors will recognize this behavior for the Ponzi scheme it is. … If history is any guide, this scenario will develop not gradually but abruptly. Previously gullible investors will wake up one morning and conclude that the situation is beyond salvation. They will scramble to get out. Interest rates in the United States will shoot up. The dollar will fall. The United States will suffer the kind of crisis that Europe experienced in 2010, but magnified.”
Total, unmitigated bullsh*t. Messrs. Samuelson and Eichengreen, you acknowledge stimulus does create jobs but you think it’s a Ponzi scheme?? Do you even know what a Ponzi scheme is? (It’s a system by which later investors pay earlier investors, collapsing when there are not enough later investors.) By contrast, federal debt is paid by federal money creation, which a Monetarily Sovereign nation can do, endlessly. No later investors are asked to pay earlier investors.
Governments have ceded power to bond markets by decades of shortsighted behavior. The political bias is to favor short-term stimulus (by lowering taxes and raising spending), which is popular, and to ignore long-term deficits (by cutting spending and raising taxes), which is unpopular.
Of course it’s “unpopular.” It destroys an economy.
Debt has risen to hazardous levels, undermining Keynesian economics as taught in standard texts. Were Keynes alive now, he would almost certainly acknowledge the limits of Keynesian policies. High debt complicates the analysis and subverts the solutions. What might have worked in the 1930s offers no panacea today.
Right, and what couldn’t work in the 1930’s is exactly what would work today. What most certainly cannot, does not, and will not work is deficit reduction and austerity.
You can add the names Robert J. Samuelson and Barry Eichengreen to the flat-earth society membership roll.
Rodger Malcolm Mitchell
No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports