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By Dustin, on January 11th, 2012 I don’t like to do Meta posts, but there’s a debate raging in the MMT world that offers some insight into MMT and it’s Job Guarantee(JG) policy proposal. Modern Monetary Theory is a relatively new school of economic thought and I think it is experiencing it’s first growing pains as more and more people accept it’s fundamental points. So what is the debate? There is a debate raging on whether or not the JG proposal is central, peripheral, or even part of, MMT.
On the one side is the “old guard” who come mostly from academia. This group includes the founders, their students, and their large following on the internet. They argue that the JG is central to MMT. The two were created at the same time. On the other side of the debate is savvy investors who understand MMT. This group is mostly represented by John Carney of CNBC fame and Cullen Roche of Pragmatic Capitalism fame. They argue that there are core tenets of MMT that are undeniable, and that the JG proposal is just an idea that some might advocate and show is possible once you understand MMT.
Cullen has been making several posts questioning the wisdom of the JG proposal. There of course have been counter blog posts firing back. I come down firmly on the side of “I see both sides”. Technically, I think Carney, Roche are right in their assertion that the JG does NOT have to be a part of MMT. In my view is a policy proposal, not an explanation of how a macro economy works. However, the JG flows directly from the MMT understanding of the way the world works. Once one understand MMT, the JG proposal becomes a very obvious and desirable policy.
To suggest that the JG isn’t a part of MMT is like saying that “Aggregate Demand Management isn’t part of Keynesian Economics” or “Gold Standard isn’t part of Austrian Economics” or “Market Promotion isn’t part of Neoliberalism” or that “Socialism isn’t a part of Marxian economics”. In all of these cases, the policy isn’t *technically* part of the economic framework. However, once you understand and accept that economic framework, the policy normally associated becomes obvious and desirable. To reject the policy strongly (but not definitively) suggests that the person either doesn’t understand the framework, or rejects it. After all, I suppose it wouldn’t be unheard of to find an Austrian that doesn’t advocate for a gold standard or a Marxist Economist that rejects Marxist politics. But those exceptions are extremely rare because the policy idea is so strongly suggested by the economic framework.
While I admit that Carney and Roche may be “technically” correct, I am beginning to think that they either don’t fully understand or fully accept the entire MMT framework. I know this to be the case of Carney because in his writings he seems to reject aggregate demand in his analysis. See Letsgetitdone’s third post on this topic for Carney’s assertion and why it’s wrong.
For Roche, he mostly seems to reject it on political terms. Perhaps Cullen will be that one guy for MMT that just reject the JG because he wants to. See Letsgetitdone’s first post on the topic for more on that.
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By Dustin, on January 9th, 2012 Conservative politicians and commentators repeatedly assert that employers need to reduce “labor costs” to stay competitive(Examples here and here). They assert that lower wages will be better for the country by creating more jobs and cheaper products. These assertions do not standup well against 30 seconds of critical thinking. Putting aside the morality of lowering wages, The cost of human labor should be high for very practical reasons. High labor costs is what drives employers and customers to find new ways to automate everyday jobs.
Despite the current depression we are in, the manufacturing capability of U.S. factories is greater than it’s ever been. This may go against conventional wisdom that says manufacturing is dying in the country. That is simply not true, it just quit hiring as many people. Of the people who still work in U.S. factories, their productivity is so great that even with fewer workers, they are able to produce more than their counterparts of 50 years ago. By automating factories, employers can produce more with fewer people and the result is cheaper prices. In a perfect economy, those no longer needed to work in a factory would get different jobs and produce something else and we’d all end up with more overall wealth. Now this is progress that liberals should cheer(Of course, in today’s economy, those employees have no where else to go. The reasons of which are far beyond the scope of this post)
Employers automated all those factory jobs because it was cheaper than continuing to pay workers for the same work. If their cost of labor had been low, as conservatives want it to be, that automation would never have occurred and auto workers would be putting together Ford cars the same way they assembled Model Ts. Conservative policies of lower wages holds society back.
You might think, “Sure, that works in factories, but you can’t automate services or retail jobs– their wages must stay low for my benefit.” This is not true, automation in retail has already occurred and will continue to occur. Think of how much time is saved by bar code scanners. How much time is saved by a clerk no longer needing to manually type in the price of a product. Add to that automatic inventory tracking. Also Security tags that sound alarms when leaving a store reduces the cost of having to hire an army of security guards to prevent shop lifting. If the cost of labor was low to hire these people, employers would never have been interested in investing in these things. And These are just the things that have already been automated. Heaven only knows what else might be automated if the cost of labor was higher. Maybe automatic baggers at the grocery store. Maybe carts that restock the shelves.
With higher labor costs even services that seem impossible to automate might be ripe for an enterprising entrepreneur. It is not unheard of for services to be automated. The number of household with maids went down considerably with the invention of things like the washing machine and dishwasher. If the cost of hiring a maid was low, these inventions would not have caught on because it was still cheaper to just hire someone to do it. Just like in retail, there are still several services that could be automated. For instance, there are already robotic lawn mowers. How long will it be before owners of golf courses or other owners of other large tracts replace yard workers with automatic mowers and leaf baggers. The answer, of course, is as soon as the machine costs less than labor. If the cost of labor was higher, this automation would happen sooner. If we continue to follow conservative policies of low wages, progress like that will never occur.
I don’t mean to belittle or down play the suffering caused by people who have their jobs replaced by a machine. However, I think that calls for a much stronger social safety net, and does not justify holding back progress. Technology and putting it to use by investing in new automation is what helps increase overall wealth in the economy. Conservative policies of low wages are not only heartless, but hold back the economy and our country from greatness.
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By Dustin, on January 3rd, 2012 You probably all know about the story of Copernicus. In the 1500s he spread the idea that the Sun – and not the Earth – was at the center of our solar system. Despite fierce resistance from the Church, the idea caught on and changed the way scientists think about our place in the Universe. One part of the story you may not know is that there was such a thing as a pre-copernican astronomy. It involved complex theories to explain the movement of planets that involved things like “epicycles” and “coils”. Believe it or not, they did a fairly decent job of predicting the movement of planets and forecasting eclipses. However, as accurate as those models may have been, Copernicus’s model was much simpler to understand and ended up being even more accurate. When Copernicus changed the frame of reference from the Earth to the Sun, suddenly everything else fell into place and was much easier to understand. To understand modern economics, we need a similar change of perspective from the old.
Most of us have a 19th century view of money. That is, the view that money and dollars are nothing more than a unit of exchange that is representative of something concrete like gold or silver. Granted, most people know that the gold standard has been over for over 40 years now. However, when talking about money, we still carry the thinking and language of money as gold. We think of dollars in terms of being physically limited, like gold. Also like gold, we think of in terms of supply and demand – if there is more of it, it is automatically less valuable and vice verse. We think of the government “saving” dollars like it saves gold in a vault. We think of the government needing to hoard dollars today so that they can be used tomorrow. This view of money comes with a (unsubstantiated) story of money that goes like this: A long time ago humans used barter to exchange goods. This was inconvenient so they decided to find a common unit of exchange. Gold and Silver were settled on because they were rare and one piece of gold(or silver) was just as good as another.
An increasing number of economists are taking a different approach to understanding money and that is called Modern Monetary Theory or MMT that I’ve been writing about for almost a year. Rather than thinking of money as purely a unit of exchange created spontaneously, MMT economists take a different approach. The approach was proposed, most famously, by Knapp. He viewed Money as “a creature of the state”. MMT economists view is that money is how the government of a capitalist country brings resources to the government. Here’s how the story goes:
Say you are the head of your own country. You want to build a new highway for your people. To do so, you must convince people to work for you and sell you the concrete and tools you’ll need to build your road. You therefore decide to create a new currency and give it a name… say iCoin. You offer your iCoins to people to work for you or to sell you construction equipment, but nobody accepts your offer because nobody wants an iCoin. Therefore, as head of the government, you impose a tax on all your people of 10 iCoins that must be paid by next April 15th or be faced with jail time. Suddenly, people need iCoins and are willing to work or sell the government equipment in exchange for iCoins that they will eventually give back to the government. (A by product of this is that people start exchanging it with each other.)
The take away from the story is that taxes are what gives a currency value and the purpose of the currency is to make private resource public. These concepts give us a new approach to understanding money in a modern economy. Just like when Copernicus put the Sun at the center of the solar system, this new approach simplifies our understanding and reveals once obscure truths that now seem obvious. I’ll briefly go over a few of them, although each deserves their own blog post.
What gives Fiat money value.
As far as I’m concerned, there has never been a really good explanation of why fiat money(money with no gold backing) has value. The traditional approaches have been less than satisfactory. The one traditional explanation is that all fiat money grew out of gold or silver certificates and that even when the exchange was closed, people keep accepting the certificates out of habit. The second traditional explanation – the one still taught at places like Harvard – is even less concrete. It goes something like this “As a hair stylist, I accept dollars from my customers because I know that I can use them to buy a hamburger at my favorite restaurant which accepts my dollars because they can use it to pay their waiters who also accept dollars because they know they can use them to get a hair cut at my salon.” Both of the traditional explanation requires a leap of faith by currency users every time they accept dollars. In the MMT approach, it is real simple why people accept dollars as a payment: “I need dollars to pay my taxes.”
Extended Recessions
There are several possible causes for temporary, short-lived recessions that no economic understanding can always prevent. However, the MMT approach provides a simple understanding of extended recessions like the one we’re in now, or the ones in the early 80s and 90s. A long term recession is caused by the government not providing enough dollars for everyone to meet their tax requirements and dollar savings desire. Where-as the traditional approach requires understanding everything from sticky prices and wages, IS-LM charts, and Phillips curves.
Currency Value and Inflation
The traditional approach to understanding how a government can control the value of a currency is based on interest rates – The idea being that if you raise interest rates the currency becomes more valuable-, “quantity theory” if the amount of money in the system goes up then the value of the currency must (eventually) go down, and reserve levels(the amount of money banks must keep in their vaults). The MMT approach views it differently. MMT views that the only way a government can control the value of their currency is by the level of taxation and spending level(i.e. fiscal policy).
New Insights
In the previous 3 examples comparing the different approaches one can see that neither approach is definitively wrong or right. Just like the ancient astronomers vs. Copernicus, MMT just offers a different approach that makes things easier to understand. MMT also makes a few things obvious that aren’t obvious in more traditional approaches.
The first is the limits on federal spending. Those trapped in the traditional approach believe that a government can only spend what money it gets (or will get) from taxes. The MMT approach suggests that tax level isn’t the limitation – the ability of the economy to create the resources the government wants to buy is the only limitation. If the government deficit spends too much it’ll hit resource limitations which manifests itself as inflation. Therefore, inflation is the only limitation on government spending – not tax revenue or even borrowing.
Recessions and Inflation
Another thing MMT shows is an explanation of why governments can spend more during a recession without raising taxes. In the traditional approach, a large budget deficit is thought to automatically cause inflation based on the “quantity theory of money”. Therefore, even during a recession when tax revenue drops and unemployment rises, it is recommended to cut spending so as not to cause inflation.
However, the MMT approach shows why that is wrong. During a recession, people are out of work. If the whole point of money is to bring resources to the government… then people being out-of-work means that the government has MORE room to spend because there are more resources available. In fact, the government should not only spend more, but even tax less. As long as the unemployed resources are available, the government has no reason to cut back during a recession. That’s why we can have 3 years of trillion dollar plus deficits and still have very low inflation.
Final Remarks
There are of course numerous other things that your understanding of is changed once money ise viewed as how the government of a capitalist country brings resources to the government. There are too many to cover in a single post. Not the least of which is the relationship (or lack there of) between inflation and unemployment, trade deficits, interest rates, and many more. All these topics need their own posting to due them any justice. I won’t get into it now, but the point of this is to acknowledge that MMT completely reframes the role of money and that the reframing makes it easier to understand the real world mechanics of modern economies.
You don’t have to accept MMTs reframing of money to understand all these concepts mentioned above, but just like with reframing the Earth moving around the Sun helps to understand astronomy, so does MMTs reframing of money. Otherwise, to explain everything that we’ve seen just in the last 3 years we have to accept things like sticky prices, an ever-changing Phillips curve, and maybe even Ricardian equivalence.
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By Dustin, on December 20th, 2011 This isn’t fun to report:
Ireland’s economy contracted faster in the third quarter than at any time over the past two years, calling into question its ability to recover while implementing harsh austerity measures.
Gross domestic product fell by 1.9 per cent from July to September compared with the previous quarter due mainly to falling personal consumption and a steep decline in investment as the eurozone crisis deepened.
Austerity is an auspicious sounding term for paying down government debt by cutting spending and/or raising tax rates. Considering that Ireland has been doing nothing but austerity plan after austerity plan for the last 3 years, some neoliberal economists would eventually take a look at the results and realize that they aren’t working(even I’m able to do that).
The only way Ireland and other European Zone countries are going to recover is by increasing demand until people are put back to work and people and businesses are more confident about making future investments.
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By Dustin, on December 16th, 2011 Back in October, Senator Bernie Sanders put together a panel of economists and other public policy experts to come up with a plan to “reform” the Federal Reserve structure. As his news release makes clear, there is a lot of room for improvement.
Sanders announced formation of his expert advisory panel in the wake of a damning report that faulted apparent conflicts of interest by bank-picked board members at the 12 regional Fed banks.
Top executives from Goldman Sachs, J.P. Morgan Chase, General Electric and other firms sat on the boards of regional Federal Reserve banks while their firms benefited from the central bank’s policies during the financial crisis, the Government Accountability Office investigation found. The dual roles created an appearance of a conflict of interest, according to the GAO.
The surprising part was that the panel had a significant number of MMT economists. People like L. Randall Wray, William Black, James Galbraith, and Stephanie Kelton. With all that MMT on the council and the strong showing from the UMKC economics department, I’m optimistic about the reforms they’ll come up with. Wray has been writing about the Fed since being on the panel. I think it gives a little hint of the kind of things he and other MMT economists are recommending. Here’s links to his articles:
Time to abolish the Fed? Maybe Andrew Jackson was Right.
MORE SECRETS OF THE TEMPLE: Time to Demand Transparency and Accountability of Our Public Stewards
BERNANKE’S OBFUSCATION CONTINUES: The Fed’s $29 Trillion Bail-out of Wall Street
BERNANKE’S OBFUSCATION ON THE 29 TRILLION DOLLAR BAILOUT: RESPONSE TO CRITICS
The $29 Trillion Bail-Out: A Resolution and Conclusion
The title’s alone are encouraging and give you an idea of what he’s writing about. I highly encourage reading all of them. It (hopefully) is a preview of the final recommendations the panel will deliver to the good Senator.
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By Dustin, on December 15th, 2011 I know this blog is mostly about budgets and economics, but this is so terrible and receiving such little press, I’m going to make an exception. Today, is “Bill of Rights Day”.
In 1941, President Franklin D. Roosevelt declared December 15 to be Bill of Rights Day, commemorating the 150th anniversary of the ratification of the Bill of Rights.
It is ironic that, Bill of Rights day is celebrated the day after the Fourth, Fifth, and Sixth amendments were “lawfully” rescinded. In case you need a little refresher of which ones those were:
Fourth Amendment – Protection from unreasonable search and seizure.
The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.
Fifth Amendment – due process, double jeopardy, self-incrimination, eminent domain.
No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offence to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.
Sixth Amendment – Trial by jury and rights of the accused; Confrontation Clause, speedy trial, public trial, right to counsel
In all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial, by an impartial jury of the State and district wherein the crime shall have been committed, which district shall have been previously ascertained by law, and to be informed of the nature and cause of the accusation; to be confronted with the witnesses against him; to have compulsory process for obtaining witnesses in his favor, and to have the Assistance of Counsel for his defence.
Yesterday, the President announced that he’s going to sign a bill that codifies that the those amendments don’t count if the government says so. What does this bill do?
(1) mandates that all accused Terrorists be indefinitely imprisoned by the military rather than in the civilian court system; it also unquestionably permits (but does not mandate) that even U.S. citizens on U.S. soil accused of Terrorism be held by the military rather than charged in the civilian court system (Sec. 1032);
(2) renews the 2001 Authorization to Use Military Force (AUMF) with more expansive language: to allow force (and military detention) against not only those who perpetrated the 9/11 attacks and countries which harbored them, but also anyone who “substantially supports” Al Qaeda, the Taliban or “associated forces” (Sec. 1031); and,
(3) imposes new restrictions on the U.S. Government’s ability to transfer detainees out of Guantanamo (Secs. 1033-35).
Look out if you’re accused of terrorism. You can be whisked away without a trial to Guantanamo, and then, by law, can never leave. That thunder you hear is Jefferson, Madison, Adams, and Franklin rolling in their graves. I’ll get off my soap box and go back to talking about economics now… as long as the First Amendment hasn’t also died…
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By Dustin, on November 30th, 2011 In 2009, there was a crazy, wild-eyed passion spreading among conservatives and the Teabagger. Here are some choice quotes from prominent conservatives and teabagger favorites.
Glenn Beck and Ron Paul
Ron Paul: [snip] So the bailout is a disease, it’s contagious, it’s ongoing, and the result of this will be the destruction of the dollar, which to me means runaway inflation, and political chaos. It’s very, very dangerous.
Glenn Beck: OK, hang on, because you are saying “runaway inflation”. You’re meaning Weimar Republic, wheelbarrow full of money type of stuff to buy a loaf of bread. Is that the kind of inflation you are talking about?
Eric Cantor
Finally, we must ensure that vast government spending doesn’t lead to rampant inflation in the future. At $825 billion, this Democrat stimulus proposal causes us great concern. While the Fed remains rightfully concentrated on fighting deflation, uncontrolled spending and borrowing will most ultimately lead to inflation if the spigot is not turned off in time. That could trigger a flight of foreign capital and a steep drop in the purchasing power of the dollar for the American consumer. As interests rates rise to keep foreigners financing our debt, the pain dealt to businesses and families alike promises to be sharp.
Michele Bachman
Make no mistake. This stimulus bill has very little to do with stimulating the economy and helping the average American . This is a bailout for big government. And let’s get ready. We are looking at massive tax increases and we are looking at massive inflation or both. In fact, we could be looking at hyperinflation.
Arthur Laffer (The “Father of supply-side economics” or Reaganomics)
With the crisis, the ill-conceived government reactions, and the ensuing economic downturn, the unfunded liabilities of federal programs — such as Social Security, civil-service and military pensions, the Pension Benefit Guarantee Corporation, Medicare and Medicaid — are over the $100 trillion mark. With U.S. GDP and federal tax receipts at about $14 trillion and $2.4 trillion respectively, such a debt all but guarantees higher interest rates, massive tax increases, and partial default on government promises.
But as bad as the fiscal picture is, panic-driven monetary policies portend to have even more dire consequences. We can expect rapidly rising prices and much, much higher interest rates over the next four or five years, and a concomitant deleterious impact on output and employment not unlike the late 1970s.
We are a couple of months away from the close of the third year of the Obama Administration. Before that we will mark the 4 year anniversary of the start of the Great Recession(Dec 2007). And, most importantly we’ve just finished our third fiscal year in a row of having more than a trillion-dollar budget deficit.
So based on all the hyperbole of conservatives, and the fact we’ve had such huge budget deficits, one might think we were facing huge bouts of inflation. So let’s take a look at the inflation rate for the last three years.
As you can see, since the stimulus and other government spending brought us out of a recession, month to month changes bounced around between .4 and negative .2 and only briefly went higher than .5 percent. However, is that a lot? Let’s compare it to the previous years. Let’s take at the data since January 2001.
As you can see, after officially exiting the recession, inflation has actually been consistently lower than in the earlier, non-recession ,years. The only spike you see was from earlier this year and was almost entirely driven by energy costs. How do I know? Let’s lay over the cost of energy in general and gasoline into the graphs.
Remember these are month-to-month changes. As you can see, the energy costs went up so much higher and faster that I had to adjust the scale of the graph to show the increase. General Prices(blue line) barely looks like a bump while Gas Prices(Red) and general energy costs(Green) went up about 10 times as fast. So those price increases weren’t driven by general inflation, they were driven by an increase in energy costs.
So in spite of these billion and trillion-dollar budget deficits, how has there been such low inflation? Didn’t Weimer Germany prove that always happens? The assumption that a large budget deficits will automatically lead to high inflation is deeply ingrained in our politics. Based on the last 3 years, you would think that this belief would be re-examined. And yet, republicans and conservative allies are still warning that the sky is falling inflation is coming. The whole theory of oncoming inflation is based on the flawed quantity theory of money. A theory rendered even less relevant since it was developed when we were still on a gold standard.
So what is an alternative explanation? Does this mean that government can spend and spend without consequence? MMT (which evolved from keynesian economics) provides an alternative economic framework for understanding why a government can have a trillion dollar deficit 3 years running and still have inflation that is lower than it was when deficits were less than 400 billion. First of all, inflation comes from spending money, not creating it.
As long as all spending is matched by an equal increase in the amount of goods and services produced by an economy, that spending won’t be inflationary. Here’s the macro economic implications: During a recession dollar savings tends to increase – i.e. people tend not to spend their money. People are afraid of losing their job, and businesses are afraid to expand, leading to reinforcing recessionary effects. One thing that doesn’t change right away is the capacity in the economy. Therefore, when people save dollars, they open up room for the federal government to deficit spend money that won’t be inflationary. In fact, if the government doesn’t spend it’ll cause deflation which is really bad for an economy.
To better understand the macro economics, let’s take a look at a micro economic example: Presumably, even during a recession, a factory that produced 100 cars yesterday, can still produce 100 today. If all the people in the economy bought 100 cars yesterday, but only bought 99 today, then that means that the government can come in and buy an extra car and it won’t be inflationary because the factory can produce it. Now, of course I’m not suggesting that the government start asking factories how much it can produce and directly buy what it doesn’t sell. Instead, I’m just trying to give a micro example of what is happening across an entire economy. The economy has excess capacity that the people producing the items aren’t buying because they are saving their dollars.
The take away is that the federal government has the ability to have deficits until the economy can no longer increase the amount of goods the economy is capable of producing, then inflation happens. The size the budget deficit can be depends on many things. One of the things as explained above is the rate of private savings which tends to be higher during recessions. That is why the federal government can run a trillion dollar plus deficit 3 years running and the economy can still have a lower inflation rate than when it was running sub 400 billion dollar deficit.
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By Dustin, on November 29th, 2011 No two countries are exactly the same. One would think this would be obvious, but to many politicians and economists it is not. Economists “assume” that they are to simplify certain models where the differences are irrelevant to what they are studying, but then forget to “unassume” for others. No where was this more obvious than in the design of the Eurozone.
I explained before one of the reasons that the Euro failed was because it failed to take into account recessions. Sometimes a country needs to run a currency deficit, and there is nothing wrong with that when done for the right reasons and at the needed level. This is the primary reason the entire region is failing.
A secondary reason that the Euro is failing is because it provides no ability to account for trade deficits between regions. Trade deficits occur, and there must be a mechanism to correct them when they start occurring. Think of it as some kind of regulator gauge. Let’s look at 3 popular ways of balancing out a trade deficit.
- The first way is my preferred method. To have a floating currency between the two regions so that as goods and services flow to one region(which means currency flows to the other) the value of the currency in that region goes down. At that point it is now cheaper to produce in that region and they will start producing and selling more to the other region until the currency is brought back to even. Rinse & repeat.
- Another way of dealing with a trade imbalance is for the countries to implement protectionist trade policies to encourage exports and encourage imports until the trade deficit disappears. This runs the risk of a so-called “trade war” erupting.
- The third method is the most popular method by market fundamentalists: Wreck the economy through draconian cuts to government and have across-the-board tax increases.
Number 3 is the favored option by members of Europe. Especially when it’s not their own country that must go through with it.
Let us take a look at a hypothetical eurozone country running a trade deficit. If it is running a trade deficit, then that means Euros are leaving the country. If the government makes no attempt to accommodate the loss of currency within the country, it can cause local deflation. As we all know, deflation is bad for an economy and unemployment rises until the economy is so bad, people quit buying items and the trade deficit disappears, but only after rampant unemployment and other recessionary ills.
In a Eurozone country, a country’s government might try to accommodate a trade deficit by running a government deficit. That way the local economy won’t deflate by keeping the same amount of currency in the local economy. This creates an “unfair” condition, because it means the country can continue to import more goods and services than it exports. The whole reason that Eurozone countries aren’t allowed to run perpetually high trade deficits.
Notice though, that the only alternative for a Eurozone country to fix a trade imbalance is through wrecking the economy. This is what happened in so many of the Eurozone countries. Greece, Italy, etc… The other countries made them practice austerity which caused recession and unemployment. That recession and unemployment causes a spiral because of reasons discussed before.
This is among the reasons why so many MMT economists predicted that the Euro would fail. Besides having no mechanism to deal with recessions, it has no mechanism for dealing with trade imbalances that doesn’t wreck a local economy.
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By Dustin, on November 14th, 2011 I ran across this “old” testimony from a spokesperson for the “American Securitization Forum”(ASF) to congress in 2003(pdf). The ASF is made up of mostly large financial firms involved in the securities market including the now infamous mortgage backed securities(MBS). Much of the testimony included is a matter-of-fact history of the development of the secondary market for mortgages. What made me laugh was reading their conclusion and message for congress. Their message was basically, we are awesome. We’ve ‘innovated’ this awesome new market to provide credit to everybody. Anything you do to regulate predatory lending will ruin this awesome thing we created.
Securitization reflects innovation in the financial markets at its best. Pooling assets and using the cash flows to back securities allows originators to unlock the value of illiquid assets and provide consumers lower borrowing costs at the same time. MBS and ABS securities offer investors with an array of high quality fixed-income products with attractive yields. The popularity of this market among issuers and investors has grown dramatically since its inception 30 years ago to $6.6 trillion in outstanding MBS/ABS today.
The success of the securitization industry has helped many individuals with subprime credit histories obtain credit. Securitization allows more subprime loans to be made because it provides lenders an efficient way to manage credit risk. Efforts to curb “predatory” lending that inhibit the legitimate use of securitization by assigning liability to the purchaser of a loan or some other means, threaten the success of the beneficial subprime market. Secondary market purchasers of loans, traders of securitized bonds and investors are not in a position to control origination practices loan-by-loan. Regulation that seeks to place disproportionate responsibilities on the secondary market will only succeed in driving away the capital loan purchasers provide in the subprime market.
I urge Congress to move with great care as it addresses the problem of predatory lending. The secondary markets are a tremendous success story that has helped democratize credit in this country. Well intended, but overly restrictive, regulation in this area could easily do more harm than good. This is particularly the case when state and local governments craft disparate anti-predatory lending statutes that place different compliance burdens on the secondary market. For this reason, the ASF urges this committee to consider legislation to pre-empt the authority of state and local governments in the area of predatory lending and to construct a safe harbor from assignee liability for secondary market participants.
These guys were so high on their own awesomeness that not only did they want congress to leave them alone, they wanted congress to MAKE the states leave them alone too. The lobbying firm had some success with this.
Then, of course, 2008 rolls around and those financial wizards found out they were full of crap. The punchline to all of this is that the ASF then lobbied for TARP to bail them out(pdf).
SIFMA and ASF support the use of a Guarantee Program to cover assets with high illiquidity premiums relative to their expected losses. In such instances, the assets are unable to be sold at prices that are reasonable based on the quality of the asset. SIFMA and ASF believe that the Guarantee Program should be considered for use with a full spectrum of financial assets, including both securities and whole loans. Treasury may consider whether identifying frequently referenced assets (such as RMBS referenced in multiple CDO transactions) may present an opportunity to magnify the benefits of any purchase or guarantee program
So the same group that 5 years earlier was telling everyone to leave them alone because if we try to make them stop selling deceptive loans, we’d ruin all their awesomeness, then they get congress to bail them out when their “innovations” blow up in their face. Then they wonder why everyone is so upset with them.
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By Dustin, on November 8th, 2011 The European Union was set up in a manner that guaranteed that eventually, one of its members was going to have a debt crisis. What makes the Euro so unique is that it was setup almost like a gold standard. Each nation does in the Eurozone does not issue it’s own money. It must be borrowed. That borrowing must come from someone who has Euros. This is very different from most other modern countries like the U.K., United States, Canada, or Japan. The reason this becomes important is not during economic booms, but during the busts.
During an economic bust – or recession – people are out of work and pay less taxes. Therefore the nation brings in less tax money. Additionally, the increasing unemployed add to the costs of the social safety net. Therefore as the recession goes on, countries bring in less tax dollars, but are obliged to pay out more benefits. This becomes a problem when you cannot have a budget deficit. The U.S. states are having that problem right now. Greece and other Euro zone nations aren’t supposed to have budget deficits greater than 3% of GDP. That is impossible during a deep enough recession.
During a deep recession, a Sovereign nation like Japan or the United States could run a large budget deficit to counter-act the recession. Eurozone nations cannot do that. They must cut back along with the rest of their private sector. Well, when a recession is caused by people cutting back, and then the government cuts back… it’s only going to make the recession worse!
Even if Greece perfectly managed their finances and economy, this would’ve just happened to another euro zone country. Greece just happened to be first. MMT economists predicted this would happen several times over the years(See here, here, and here and again here).
Governments must be able to counter act recessions. The Euro was designed without thinking about recessions.
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