Seems to me core of the problem has nothing to do with what people claim. Seems to me that the core problem is that inflows to support our Treasury and Agency market was our own consumption coming back to us, via CB buying. When global trade and US consumption collapsed, it was then prudent to look for significant diminishing of that dynamic. Now that this has happened, the FED is functionally monetizing the shortfall. The shortfall first arose on a discretionary basis in Agencies, and now it’s moved on to Treasuries. But the shortfall is no longer discretionary. One can read Setser who does a good job of tracking this stuff, for example, or just go right to the data.

Savings rate data shows that US savers cannot cover the annual budget shortfall. Inflow data shows USD reserve accumulation is down, and therefore foreign CB buying of Treasuries cannot make up the shortfall. So, The FED is making up the shortfall. If one listens to Mosler’s views, I will take it to mean this is not really a problem. That may be true.

However, I would argue that a nation that needs to monetize its own government bond issuance in order to fund itself–can do so as long as consensus reality is willing to put up with such an operation. However, in the world of economics, behavior–not mechanisms–is what determines outcomes. When the epiphany arrives unfolds, then 60 years of certain paradigmatic relationships will fall, because structurally they are already falling.

Are you arguing that the fact we operate in a global economy with significant currency pegs is immaterial?

What exactly has been the effect of the yuan peg in your view?

Is a global economy of flexible exchange rates identical to an global economy where one of the major export platforms has a peg? If not, how do they differ?

It seems to me you are arguing against the notion of a distortionary effect of a global savings glut (funded by the Asian surpluses, in large part). But you assume flexible exchange rates, where actually that flexibility is impaired, in practice, by pegs.

Disclaimer: I am not an economist, but an interested layperson looking to gain a better appreciation of what’s happening in this murky world

I understand what you’re saying when it comes to non-securitized HELOCs, or credit cards. In those cases I believe the bank does just loan out some money to the consumer, who then spends that money.

No, the causation is from loans to deposits as a matter of accounting I guess that’s all part of how fractional reserve banking works. fractional reserve banking is a fixed exchange rate/gold standard concept

But in the securitized world, which was the majority of mortgage financing (and REfinancing, importantly), we had a lot of mortgages being funded by foreign purchasers with lots of dollars left over from their trade surplus with the US.

Fact: they are no different anyone or any company that sells products and gets paid for them via a deposit that goes to their bank account.

It was their willingness to loan those surplus dollars back to us that enabled us to buy more of their crap, thereby sending the money back to them again.

Again, no, it was domestic credit that funded foreign ’savings’ of $US financial assets. Once they got paid in $ balances in their bank account, they decided to exchange those financial assets for tsy secs which are nothing more than different accounts at the Fed. And in order to buy more, american consumers do more of same. get a car loan from a bank that creates a new deposit. ‘old deposits’

Marshall is in London and asked me to take a stab at responding to your question. So here’s my take.

What I think Marshall is getting at is that all of the increase in credit which created those external imbalances was done in the U.S. That means that because of deleveraging, this credit has now disappeared, and so the external imbalance is also going away.

The problem is that the loss of credit means a shrinking economy and recession – a recession that I have labelled a depression with a small d but that risks becoming a Depression with a capital D.

What if the U.S. government stepped into the breach then by stimulating demand while the private sector saved? That would mean a huge deficit, which is what’s happening and that means those deficits need to be financed by debt that needs willing buyers.

This is where the problem lies that you are asking about. Doesn’t all that debt risk stoking inflation or a buyer’s strike? It does. But, this is ostensibly a problem that is more manageable than a deflationary spiral. (Remember that debt can be bought up by the Fed — which is inflationary but not fatally so)

The fact of the matter is you need to stop the deflationary spiral and its associated dead weight economic loss. The deflationary spiral is the Great Depression Armageddon scenario. But, stopping the spiral through deficit spending creates other problems which you have correctly identified. I see those problems as more manageable than the spiral and that makes it clear to me that we need fiscal stimulus.

Without it, you get Depression with a capital D.

Disclaimer: I am not an economist, but an interested layperson looking to gain a better appreciation of what’s happening in this murky world

I understand what you’re saying when it comes to non-securitized HELOCs, or credit cards. In those cases I believe the bank does just loan out some money to the consumer, who then spends that money. I guess that’s all part of how fractional reserve banking works.

But in the securitized world, which was the majority of mortgage financing (and REfinancing, importantly), we had a lot of mortgages being funded by foreign purchasers with lots of dollars left over from their trade surplus with the US. It was their willingness to loan those surplus dollars back to us that enabled us to buy more of their crap, thereby sending the money back to them again.

So if the foreign nations were spending this money instead of saving it, surely they wouldn’t have had all these surplus dollars to loan back to us in the first place?

(be gentle, I’m relatively new to all this)