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Connecting the dots- deficit reduction is now only about inflation, not insolvency

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August 11, 2011 – Comments (9)

This concept is starting to become more recognized. The S&P downgrade on the 'ability' of the US Government to service its 'debt' has received so much attention and people are starting to realize that it makes absolutely no sense. The the sovereign issuer of a currency can *always* 'afford' any obligation denominated in that currency, since it issues the currency on demand. This is a big step in the right direction to figuring out what the real constraints are in our monetary system, and which ones are fictional.

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Connecting the dots- deficit reduction is now only about inflation, not insolvency
Posted by WARREN MOSLER on August 11th, 2011

http://moslereconomics.com/2011/08/11/connecting-the-dots-deficit-reduction-is-now-only-about-inflation-not-insolvency/

From comments by Warren Buffet to Alan Greenspan,

And from all the responses to the S&P downgrade by economists and financial professionals from the four corners of the world,

THE WORD IS OUT!

The US government is the issuer of the US dollar.

So no matter how large the federal deficit might be:

The US government can always make any payments in US dollars that it wants to.
There is no such thing as the US govt running out of US dollars.
The US government always has the ‘ability to pay’ any amount of US dollars at any time.

NOW CONNECT THE DOTS TO:

The US is not dependent on tax revenue or foreign borrowing to be able to spend.

And,
whereas Greece is not the issuer of the euro,
much like the US states are not the issuer of the US dollar,

THERE IS NO SUCH THING AS THE US BECOMING THE NEXT GREECE

There is no such thing as the US getting cut off from spending by the financial markets and forced to go begging to the IMF to get US dollars to spend.

Nor is the US government subject to market forces driving up interest rates on US Treasury bills.

EVEN AFTER BEING DOWNGRADED US TREASURY BILL RATES REMAIN NEAR 0%

Why, because, any nation that issues its own currency also sets it’s own interest rates.
So in the US, the Federal Reserve Bank votes on the interest rate

SO, THEN,

WHAT IS THE POINT OF DEFICIT REDUCTION?

Suddenly, it’s NOT solvency.
The US is suddenly NOT going broke.
Social Security is suddenly NOT broken.
There is suddenly NO risk the US will not be able to make all payments as promised.

So now,

the deficit hawks must CHANGE THEIR REASONS FOR DEFICIT REDUCTION
or shut up!

they must FLIP FLOP
or shut up!

Yes, there is a new reason they can flip flop to.

Inflation.

They can start claiming the current path of deficit spending will lead to inflation.

Fine.

Bring it on!

First, they need to do the research, as they haven’t even thought about this yet.

Then they have to convince Congress to cut social security and medicare
Not because we might become the next Greece
Not because the US government checks might bounce someday
Not because the deficit will burden our grand children

But ONLY because some day,
if we don’t do something when the time comes
and even though we don’t have an inflation problem now,
and haven’t had one in a very long time,
SOME DAY far in the future,
inflation might go from x% to y%.

Fine.

Do you think Congress would take draconian steps now,
during this horrendous recession,
to make things worse
by cutting Social Security?
and by cutting funding or public infrastructure?
and by raising taxes?

How about we get the word out and find out, thanks!

Please distribute!

9 Comments – Post Your Own

#1) On August 11, 2011 at 4:45 PM, ChrisGraley (29.71) wrote:

The the sovereign issuer of a currency can *always* 'afford' any obligation denominated in that currency, since it issues the currency on demand.

Only if the country on the receiving end thinks that the currency is worth anything. 

Zimbabwe is the sovereign issuer of it's own currency.

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#2) On August 11, 2011 at 4:56 PM, wolfman225 (64.30) wrote:

^ +1

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#3) On August 11, 2011 at 4:56 PM, PeteysTired (< 20) wrote:

So what is the magic # the US can spend that doesn't ignite a powder keg?

You have to admit the old way of not spending more than was taxed was a neat way everyone could measure.  In the MMT model though dollars can be created on a whim, because nations who issue there own currency can never default.  States are doing cartwheels as they no longer have to constrain their spending until inflation arrives.  As long as their is no inflation, states can pay their consituents whatever and get their money from the treasury/fed.  In fact, the Treasury/Fed could start writing checks to every man woman and child.  It doesn't matter as long as there is no inflation. 

Start printing baby, because according to MMT is doesn't matter unless there is inflation.

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#4) On August 11, 2011 at 5:23 PM, cbwang888 (25.58) wrote:

To the point the creditor countries would all feel like fools and Fed will own 50% of the Treasury bonds/bills/notes with endlessly printed Federal Reserve Note, aka, USD.

Then what is going to happen?

 

 

 

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#5) On August 11, 2011 at 5:45 PM, smartmuffin (< 20) wrote:

Hyperinflation will piss off literally everyone, from the debtors to the bankers to the average citizen on the street.  

 Default only pisses off the debtors. 

The idea that China would be incredibly enraged at a failure to pay the interest on the coupons, but completely and totally keen on receiving debts in dollars that have lost 500% of their value (or whatever it would take) is absurd.

 

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#6) On August 11, 2011 at 6:02 PM, binve (< 20) wrote:

ChrisGraley and smartmuffin,

Do you really think that hyperinflation is simply just a matter of printing money? Do you really think comparing Zimbabwe to the US is even remotely applicable? If so, then read this: http://pragcap.com/hyperinflation-its-more-than-just-a-monetary-phenomenon

PeteysTired,

Are you kidding me with this comment? If we could avoid a depression by having the government step in and spend (print money) to put a floor under demand and we didn't have to worry about inflation because the economy and resource utilization is so bad right now ... then why the hell wouldn't we?

Regarding simply writing checks to the citizens directly (which is a stupid idea and no MMTer is suggesting such an idiotic policy), read this comment: http://caps.fool.com/Blogs/regarding-the-myth-that/623119#comment624654 ..

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#7) On August 11, 2011 at 6:31 PM, ChrisGraley (29.71) wrote:

The the sovereign issuer of a currency can *always*

You are speaking in absolutes. It's not remotely applicable, it's absolutely applicable. Given the level of corruption in our government, I'd say it's probable. 

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#8) On August 12, 2011 at 1:42 AM, mtf00l (50.20) wrote:

I disagree.  The Federal Reserve is a privately held bank consortium.  If they think they're not going to get paid, they have the choice not to lend.  That the relationship is "good" today does not mean it will be "good" tomorrow.

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."

Thomas Jefferson, (Attributed)
3rd president of US (1743 - 1826)

Is this not what's happening today with the Federal Reserve monetizing the debt and taking ownership of more and more?  Even after Ben Bernanke testified before congress that the fed would not monetize the debt?  If the Fed sells, who will they sell to?   

 

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#9) On August 12, 2011 at 2:46 PM, davejh23 (< 20) wrote:

I agree with mtf00l...only had to read two lines in to find a flaw with the argument:

"The US government is the issuer of the US dollar."

This is not true. 

You've noted before that QE is not "money printing", "debt monetization", etc..., but these quotes basically argue that we can monetize debt without consequences...or at least that we shouldn't think about the consequences at this point. 

"THERE IS NO SUCH THING AS THE US BECOMING THE NEXT GREECE

There is no such thing as the US getting cut off from spending by the financial markets and forced to go begging to the IMF to get US dollars to spend."

Not so sure about this one either.  Lets say foreign investors quit buying treasuries...or even cut their buying by a significant percentage.  As the buyer of last resort, should the Fed buy any and all debt issuance that others don't want?  You've argued before that the gov't should fill the holes in our economy with deficit spending...should the Fed automatically help fill those holes if investors don't want our debt?  Is this significantly different than Greece needing IMF bailouts?

"Why, because, any nation that issues its own currency also sets it’s own interest rates."

Only when you're talking about debt monetization.

I think everyone agrees that the downgrade has as much to do with inflation risk as it does with default risk.  We CAN default, simply because we have a dysfunctional Congress.  If the Treasury ran out of cash, do you think the Fed would have immediately started shoveling money to the Treasury without any debt issuance?  I don't think so...default.  If they did, it's flat out money printing...no different than illegal counterfeiting...same as default.

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