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October 15, 2011 – Comments (15)

If you want a good primer on what Government Budget Deficits are, where our money comes from, watch this talk by Stephanie Kelton. If you are under the impression that the US government is 'broke', you should watch this. If you are under the impression that 'There is no alternative' to austerity, you should watch this. It is 45 minutes very well spent.

I offered up some thoughts on economic policy and stability in Section 6 of this post.

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Why You and I Can't Spend More Than We Bring In, but the Government Can - and Probably Should
http://neweconomicperspectives.blogspot.com/2011/10/why-you-and-i-cant-spend-more-than-we.html

Watch Stephanie Kelton explain why TINA falls apart as justification to tolerate unemployment once we understand the relationship between the United States and her currency.  The lecture took place at Luther College in beautiful Decorah, Iowa on September 28, 2011.   Note: if you would like to see the handout featured in the video click here.


15 Comments – Post Your Own

#1) On October 15, 2011 at 7:57 PM, zzlangerhans (99.77) wrote:

I found the lecture rather difficult to follow since the speaker repeats herself frequently, speaks rhetorically to an excessive degree, and journeys into weak and prolonged metaphors. I think her points could have been made much more clearly in ten minutes, but perhaps that wouldn't have satisfied her attendees. 

The gist of this seems to be that the government should be spending more, to a large extent by printing money. This is our special power that will allow us to avoid the fate of Greece and other European countries, who have no sovereign currency and are forced to rely on borrowing. But we have already borrowed heavily and the speaker seems to completely ignore the issue of debt, which seems to me to be the focal point of the crisis. I also found her argument that private sector surplus mirrors public sector deficit very confusing. How does she reconcile her figures indicating a current high point in private surplus with the average person's financial situation?

I find this to be a much more digestible and believable assessment of the world financial situation. It also seems to be a diametrically opposite viewpoint from that of the speaker in the video. I'm currently managing my portfolio with a strategy that incorporates a high probability of major stock market declines following a chain of European sovereign defaults, and possibly further downgrades of the US credit rating. But I'm not an economist and it's very possible that I'm misunderstanding this speaker, so I'd welcome any further analysis.

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#2) On October 15, 2011 at 8:22 PM, binve (< 20) wrote:

zzlangerhans,

The gist of this seems to be that the government should be spending more, to a large extent by printing money.

To be clear, the government *always* spends by printing money. This however is misunderstood, so a clearer way to state this is that the government spends by crediting private sector bank accounts.

This is our special power that will allow us to avoid the fate of Greece and other European countries, who have no sovereign currency and are forced to rely on borrowing.

This is precisely why any comparisons between the US and Greece are invalid

But we have already borrowed heavily and the speaker seems to completely ignore the issue of debt, which seems to me to be the focal point of the crisis.

Actually she doesn't. The main point of the piece is the Government sector debt is the Non-Government sector (the private domestic sector and the foreign sector) net savings. To the penny. The fact that the Non-Government sector has accumulated net financial assets is because it is the 'national debt'. They are same thing.

Regarding debt (Government bonds), whether the government spends by crediting bank accounts directly and issues no bonds, or whether they match the level of crediting with bond issuance makes not difference. Those that want to hold bonds will swap dollars already in existence (from previous government spending). It is a swap between zero-maturity and long-maturity. But the point is it is a swap. The government does not 'borrow' from the private sector. Government bonds don't fund anything. There is not a 'debt crisis' at all.

I agree with the post you linked to that there is a wealth disparity crisis and that financialization is a huge part of the problem.

I discuss the topics (government spending, government debt, and wealth inequality) further in this post: http://caps.fool.com/Blogs/why-deficit-spending-and/621467..

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#3) On October 16, 2011 at 4:07 AM, walt373 (99.80) wrote:

How does she reconcile her figures indicating a current high point in private surplus with the average person's financial situation?

The surplus is actually the consumer deleveraging by paying down debt. Growth of household debt has grown negative in the past few years, the first time it has happened in a long time. The reason they are paying down debt is because they are overleveraged (underwater mortgages, etc.). So yes they are technically "saving" more, but their savings are going into debt reduction, not wealth accumulation.

Haven't watched the video yet but it sounds like it's basically about MMT and balance sheet recession. I would go check out pragcap.com if you want to learn more about it.

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#4) On October 16, 2011 at 4:57 AM, walt373 (99.80) wrote:

But we have already borrowed heavily and the speaker seems to completely ignore the issue of debt, which seems to me to be the focal point of the crisis.

This is where the difference between the US and Greece comes into play. We don't need to borrow to spend because we can just print the money. In fact, according to MMT (Modern Monetary Theory), debt does not actually fund the US government at all. US Government debt is a relic of the days of the gold standard when the government actually was funded by debt. Today, the US govt is a monopoly supplier of the currency so government debt's purpose today is just to control interest rates. Theoretically, if the US govt wanted to, it could print money to buy back all of the outstanding US debt. So the US government has an incredible amount of control of its own currency and interest rates. The only true constraint is inflation, every other constraint is self-imposed.

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#5) On October 16, 2011 at 5:13 AM, walt373 (99.80) wrote:

I think she gets most of the points right, but not the cause of the huge loss in demand. The unemployment contributes to it, but the majority of it comes from the actual deleveraging. Any money that consumers use to pay down debt is not being used to buy stuff, not going into the economy. Even if the jobs come back, until consumers are done deleveraging, we won't return to a healthy economy. I recommend watching this 10-minute video.

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#6) On October 16, 2011 at 10:03 AM, dbjella (< 20) wrote:

Would MMTers be happier if the gov't just printed real dollars for the excess between spending and tax receipts?  It seems more honest.

And while they are at it print some more real dollars and payoff the debt? 

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#7) On October 16, 2011 at 10:31 AM, Frankydontfailme (27.38) wrote:

Yes dbjella, and they expect China to be cool with that. What's 3 Trillion in reserves your people have slaved over gathering?

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#8) On October 16, 2011 at 1:02 PM, cbwang888 (26.02) wrote:

China, Japan, Taiwan, Hong Kong, Korea and many others who hold big chunk of T-bonds are the fools being slaved for decades.

The world moved faster because of that, but 1% got the most benefits out of it ...

Big corporations squeeze every dime of its workers and don't bother hiring any new grads who need to be trained ...

 

 

 

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#9) On October 16, 2011 at 3:15 PM, walt373 (99.80) wrote:

Yes dbjella, and they expect China to be cool with that. What's 3 Trillion in reserves your people have slaved over gathering?

Not sure what China would feel about it, probably not very happy. But the point is that the US government can do it if they wanted to. We are not "at the mercy of the Chinese" or whatever, it's more like the other way around. They are using our currency, where we make the rules.

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#10) On October 17, 2011 at 11:16 AM, Frankydontfailme (27.38) wrote:

Yes that is the status quo Walt. It won't last. That is why they are diversifying their holdings into gold, yen, heh even euros. They will float the yuan. They'd rather us be responsible and keep the dollar as the reserve currency. If were not responsible, they'll dump treasuries and the value of the dollar will immediately drop to zero.

Who's really in control?

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#11) On October 21, 2011 at 6:16 AM, walt373 (99.80) wrote:

Franky... do you realize China only owns like 8% of the US outstanding debt?

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#12) On October 21, 2011 at 7:01 AM, dbjella (< 20) wrote:

walt373 

Do you think the US is walking a precarious position with debt/printing of money to fund their "projects" while trying to stop deflation?  Do you think people can lose faith in their currency?  If wages have been stagnant then how do we have any inflation at all?    Thanks. 

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#13) On October 21, 2011 at 8:54 AM, Frankydontfailme (27.38) wrote:

26% of foreign held debt. Only as low as 8% if you count the trillions that we owe ourselves (that we will never pay back, an admittance that will similarly end the dollar as we know it) and federal reserve holdings (ditto).

In total, they have over 3 Trillion in US dollar reserves.

http://articles.businessinsider.com/2011-04-16/markets/30054657_1_foreign-exchange-reserves-fdi

So they either own us, or are our currency is worthless, take your pick. 

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#14) On October 21, 2011 at 8:36 PM, walt373 (99.80) wrote:

dbjella, please see this article for an alternate view. I don't claim to be an expert on any of this, but I think that post does highlight some interesting arguments. In particular, the graph comparing our money supply growth vs. China's is eye-opening.

I believe people will lose faith in our currency if the economy collapses, which is how hyperinflation has come about historically. I don't think there have been any cases where a stable economy experiences currency collapse purely from too much money printing. It's very possible that the government will print too much money and cause normal inflation. But hyperinflation is not simply a greater form of normal inflation - it's a completely different phenomenon.

You can think about it as a ratio of money vs. size of the economy. If the economy is in a downward spiral, that can definitely cause the ratio to grow at an exponential rate. If the economy is stable, your money supply needs to grow at a ludicrous rate to cause hyperinflation (orders of magnitude greater than what is happening today). Also, the government has much more control over the amount of money it's creating compared to how fast its economy collapses.

Franky, the 3 trillion figure includes all of China's reserves, not just US Treasuries. Of that 3 trillion, some 60% or so is in US-dollar backed assets, including corporate bonds and stocks. US treasuries only make up a little over $1 trillion of their reserves.

I think all of this fretting about the US debt and hyperinflation, etc. is overblown. Even if it is a problem, at worst it is a long-term problem. I'm not against being an alarmist when the time calls for it, and right now I think the danger from the European currency crisis and China's massive infrastructure bubble are much more serious. I mean we might see a little inflation between now and when the SHTF... but it's such a small problem compared to other problems and people like you guys (no offense) waste a disproportionate amount time worrying about it.

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#15) On October 21, 2011 at 11:18 PM, walt373 (99.80) wrote:

About hyperinflation... I am just speculating. I'll admit I don't really understand it that well.

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