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Going Off on Rogoff – There is No Hard Debt Constraint for Fiat Currency

The following is a post by Marshall Auerback, who also writes at New Deal 2.0.

We’ve persistently taken the view that there is no economic doctrine, no magic number, which would imply a firm external constraint as far as public spending goes, when dealing with a sovereign government issuing debt in its own floating rate, non-convertible currency. At some point, we may indeed have a resource constraint, or an inflation constraint, but not a national solvency issue. Yet the hysteria surrounding fiscal policy has moved from the realm of rational debate and metamorphosed into a matter of national theology. Hardly a day goes by, it seems, where groups such as the Concord Coalition or the Peter G. Peterson Foundation do not bring us the message that we are all doomed unless we do something drastic to cut back our mounting federal debt.

A new book by former IMF economist Kenneth Rogoff and Professor of Economics (and Research Associate at the National Bureau of Economic Research) Carmen Reinhart — This Time It’s Different; Eight Centuries of Financial Folly — has given greater academic legitimacy to the prevailing deficit hysteria. The authors purport to show that once the gross debt to GDP ratio crosses the threshold of 90%, economic growth slows dramatically. President Obama’s proposed budget will soon cross that line, so the cries of the deficit hawks have intensified.

Although the historical data which Rogoff and Reinhart amass — 8 centuries and all — sound very impressive, it is hard to see what sort of relevance a country operating under, say, an 18th century gold standard, has in regard to a country operating under a 21st century fiat currency system.

A sovereign government is never hostage to the dictates of financial capital because it no longer faces the external constraint that was always present under a gold standard regime. A nation that adopts its own floating rate currency can always afford to put unemployed domestic resources to work. Its government may issue liabilities denominated in its own currency (for interest rate maintenance reasons or to offer its savers an interest-bearing alternative to cash), and will service any debt it issues in its own currency. Whether its debt is held internally or externally, it faces neither insolvency risk, nor “structural” growth shortfalls which Rogoff/Reinhart allege when public debt levels get too high.

Nor does it make sense to lump together private and public debt, as Rogoff and Reinhart do in the book. A failure to distinguish sovereign government debt from the debt of non-sovereign governments, households, and firms calls into question the relevance of the Reinhart and Rogoff study at least as far as it applies to countries, such as the US with non-convertible currencies and flexible exchange rates. Lumping together government and private debt is meaningless and simply heightens the bogus hysteria surrounding government fiscal policy activism. Government debt is a net private asset, while private debts must net to zero. Private saving, however accomplished, increases the future consumption possibilities for the household sector at the expense of current consumption. Saving is foregone consumption which in normal times (barring huge financial crashes) will enhance future consumption.

In this context, because the household sector is revenue-constrained, it has to sacrifice consumption possibilities now to improve them later. It can increase consumption now beyond income via increasing its indebtedness or selling assets (past saving) but the budget constraint has to be obeyed at all times. But, of-course, this sort of reasoning doesn’t apply to the government. A budget surplus does not create a cache of money that can be spent later. Government spends by crediting a reserve account. That balance doesn’t “come from anywhere”, as, for example, gold coins would have had to come from somewhere. By the same token payments to government (such as via taxation) reduce reserve balances. Those payments do not “go anywhere” but are merely accounted for. A budget surplus exists only because private income or wealth is reduced, NOT because the taxes per se fund government spending directly (which would represent a true constraint).

Consequently, it makes no sense to add together the US federal government’s debt and the US private sector’s debt. It is in this regard that the Clinton budget SURPLUSES had such a deleterious impact on the US non-government sector in the late 1990s: Government surpluses squeezed the liquidity of the private sector in the late 1990s, which forced greater reliance on PRIVATE debt, creating the foundations for much of today’s economic fragility. If the US government had run sufficient budget deficits (which it could always have done because the government faced no external funding constraint) to finance the desire to save for the non-government sector overall, then the spending patterns would have been different (more public goods, less private goods) and the non-government sector would not have been forced into as much indebtedness.

Note also that we need to distinguish between debt that is denominated in domestic currency versus that which is denominated in foreign currency-again a distinction that is not always clear in the Reinhart and Rogoff book. It’s like the difference between, for example, Japan and Argentina. In the case of the latter, the currency board arrangement effectively hamstrung monetary and fiscal policy. The central bank could only issue pesos if they were backed by US dollars. So dollars had to be earned through net exports which would then allow the domestic policy to expand. When exports crashed, the funding mechanism became untenable. By contrast, Japan has continued to issue debt denominated in its own currency and cannot therefore be subject to default risk; and as it represents a nongovernment sector’s net financial wealth because of the income transfer to the non-government sector, it cannot be the cause of low growth.

It may well be the case that a government that operates a pegged currency regime, or taps the markets for substantial quantities of foreign debt to finance growth, will encounter precisely the problems articulated by Rogoff and Reinhart. Reaching a limit of 90% debt to GDP might well represent a danger area and consign these countries to subpar growth for many years. But for countries like the US, Japan, Canada or Australia, which have little or on foreign currency public debt, and adopt a free-floating, non-convertible currency regime, the Rogoff/Reinhart analysis has virtually no relevance. It should not be used as a stick with which to beat back the governments that want to deploy fiscal policy to embrace full employment policies.

Marshall Auerback

About 

Marshall Auerback, has 29 years experience in the investment management business, serving as a global portfolio strategist for Madison Street Partners, LLC, a Denver based hedge fund. He also has also worked as an economic consultant to PIMCO, the world’s largest bond fund management group. He is a Fellow at the Economists for Peace and Security, a Research Associate at the Levy Institute, and a non-executive director of Pinetree Capital in Toronto, Ontario, Canada.

2 Comments

  1. barryschaeffer says:

    This is so obvious that it’s Embarrassing that Marshall is forced to say it. Will somebody have a word with Jim Bunning?

  2. LavrentiBeria says:

    Now you know all of this, Marshall, and I now know all of this thanks to you, but do the Tea Party brownshirts and other assorted libertarian religionists? Quite obviously not. Can it be that after he’s ushered in the Second Confederacy and offered membership in the Flat Earth Society to all citizens, President Ron Paul will? Equally doubtful. You’re a voice crying in the wilderness, Marshall. We are moving headlong into the greatest error in economic judgement since 1937 and no one, absolutely no one, seems conscious of that fact. What anti-system political will there exists is now almost exclusively fascist. Our situation bears a reasonable resemblance to that in early 1930s Germany where a swollen right faced down and emasculated a weak and utterly disorganized left. Clearly the Great Depression was not enough to still these reactionaries. Only the dismal prospect of a much deeper malaise would seem to have any hope of achieving that. But what a price to pay!

  3. Thinker says:

    It seems that Marshall is the one who has thought through the natural steps of money printing…

    Who will agree to play this game with government when the value of the dollar has no anchor?

    As long as the government can give a credible assertion that the value of dollars will remain anchored, investors are willing to accept mild forms of seigniorage, especially from an efficient economy. As soon as debt levels rise to too high a level, then investors begin to worry that the seigniorage will be unreasonable and that the downward spiral of increasing seigniorage is beginning.

    Capital flight will begin and the pace of this capital flight destroys all other mechanisms by which the government has attempted to stabilize the economy. Ultimately, the government sector will expand to several multiples of the overall economy destroying fabric of society until a new beginning is started similar to what happened in Russia, and the Eastern bloc in the late 80s early 90s.

    • Gbgasser says:

      What will the capital “flight” to? Gold? Other commodities? Land? I never get a coherent answer form the “deficit terrorists” about where exactly the money will run to. Its going to have to “buy” something which is really kind of the point of our whole exercise I think. We are asking for people to express their preferences by buying something. That way we know where the demand is and can build supply around it. Too many just want to hoard and not demand anything with their money. Without a consistent demand there can be no modern economy. Maybe capital flight is exactly what we should be hoping for because then someone will start stating a preference for what they want. Right now nobody knows. WE’RE WAITING!!!

      Your references to Russia are specious because I believe they were not a free floating currency (just like Argentina) and they had borrowed in other currencies. When the price of oil tanked Russia had no way to accumulate enough “other” currencies so they defaulted.

      America has been stupid in many many ways but one way they have been smart is to not have their economy too dependent on any one resource. When the price of oil is necessary to your economy your economy goes where the price of oil goes.

      • Here’s the deal with Russia: The ruble was convertible into $US at the
        Russian Central Bank at the rate of 6.45 rubles per $US. The Russian
        government, desirous of maintaining this fixed exchange rate policy, was limited in
        its WILLINGNESS to pay by its holdings of $US reserves, since even at very
        high interest rates holders of rubles desired to exchange them for $US at
        the Russian Central Bank. Facing declining $US reserves, and unable to obtain
        additional reserves in international markets, convertibility was suspended
        around mid August, and the Russian Central Bank has no choice but to allow
        the ruble to float.

        All throughout this process, the Russian Government had the ABILITY to pay
        in rubles. However, due to its choice of fixing the exchange rate at level
        above “market levels” it was not, in mid August, WILLING to make payments
        in rubles. In fact, even after floating the ruble, when payment could have
        been made without losing reserves, the Russian Government, which included
        the Treasury and Central Bank, continued to be UNWILLING to make payments in
        rubles when due, both domestically and internationally. It defaulted on
        ruble payment BY CHOICE, as it always possessed the ABILITY to pay simply by
        crediting the appropriate accounts with rubles at the Central Bank.

        Why Russia made this choice is the subject of much debate. However, there
        is no debate over the fact that Russia had the ABILITY to meet its notional
        ruble obligations but was UNWILLING to pay and instead CHOSE to default.

        See also Bill Mitchell’s account to which I’ve already made reference
        (_http://bilbo.economicoutlook.net/blog/?p=8322#more-8322):_
        (http://bilbo.economicoutlook.net/blog/?p=8322#more-8322):)
        Russia is another victim of a pegged currency and the financialisation of
        its economy.
        I took some notes at the time the Russian government defaulted which go
        like this. After the breakdown of the Soviet Union they made their first major
        mistake – conveniently not mentioned by Rogoff – they pegged the ruble
        within tight range to US dollar – and thereby surrendered their currency
        sovereignty.
        Their second mistake was to allow heavy borrowing in foreign currencies.
        There was considerable optimism in Russia at the time and all sorts of
        opportunists were set loose and their foreign currency exposure rose
        dramatically.
        Then in November 1997, the Asian crisis causes a speculative attack on the
        ruble. The speculators knew that (a) it was going to try to maintain the
        peg; and (b) it was borrowed to the hilt in foreign currency. So, sell it
        short to death was a sure way to scoop the pool.
        The problem was that the Russian government played right into their hands
        and instructed the central bank (CBR) to defend the ruble (that is, maintain
        the peg) and they lost around $US6 billion in reserves in doing so.

        • I think this comment proves too much. Add together these two things you have written:

          “Russia had the ABILITY to meet its notional ruble obligations but was UNWILLING to pay and instead CHOSE to default.”

          “At some point, we may indeed have a resource constraint, or an inflation constraint, but not a national solvency issue.’

          If we reach that “point,” why will it matter that we can only “choose” to default? If the alternative is hyperinflation, what strategy does your analysis yield that is any better than the more traditional one?

          Rogoff’s point, I think, is that we can’t know, directly, when we have hit the inflation wall. We can, however, see that when national deficits have reached a certain point, bad things have happened. The sailor doesn’t have to know why a red sky in the morning precedes a storm; he only needs to know that it almost always has.preceded one. If you can show why a particular red sky was created by a particular non-threatening cause, you might be onto something. But if all you can show is that the sailor is wrong to theorize that the red sky results from God’s anger, you have not given him a reason not to take cover,

          So the question becomes, how do we avoid being done in by that “inflation constraint”?

  4. Matt Stiles says:

    It’s your aggregates that are meaningless.

  5. Stevie b. says:

    OK Marshall. I’ll admit it. On first pass, I don’t understand everything you’ve written, but I notice for example that you don’t mention the UK in your examples in the last paragraph of your piece.

    I’m not as long-term bearish as many on the £, primarily because other developed economies are tarred with a similar brush, but for the time being Sterling is in the limelight. Let’s suppose I’m wrong and the Pound keeps falling (e.g. below say $1.40) after a hung parliament as the budget deficit keeps expanding. Is that fine by you?? Is theoretically keeping say a few million in work (work of questionable value perhaps) more important than definitively & permanently screwing many more millions on a fixed income as the £ crashes and costs go through the roof?

    • I think this is what they want. Policy makers want depreciation Ans
      inflation to reduce the value of debt.

      • Stevie b. says:

        Ed – you and I have of course discussed this ad nauseam early-on in this crisis and (of course) this is the logical eventual conclusion to the whole fiasco, but it doesn’t necessarily mean it should be the most desired outcome or the least painful for the majority. I’m just trying to get Marshall to explain in simple english to this ignoramus why he seems to think it’s a good idea that fuller, dubious-value employment for some means that many, many more will probably be permanently shafted as a result.

        I’m not miffed or narked (much…!), but he clearly thinks my questions are less worthy of a response than the comment by StilesBC

        • Okay, Stevie B, here it is in simple English. The answer to your question
          (and I’m sure you’re not an ignoramus), is because I don’t consider a
          government Job Guarantee program to be dubious value employment. Why do you
          make that assumption? Simply because it comes from the government, you think
          it’s dubious value employment? Do you consider financial engineers who
          construct credit default swaps to be engaged in socially useful activity?
          What about a teacher’s assistant in the classroom? Is that “dubious value”
          employment?

          Do you consider the thousands of miles and roads, bridges and airports
          constructed during FDR’s New Deal to have been dubious value? What about the
          art created by Jackson Pollock or Wilhem De Koonig?

          Let’s also be clear here: the choice is not between spending government
          money to create “dubious” employment vs a supposedly productive private
          sector job. The choice is between remaining unemployed (thereby depleting the
          stock of social capital even faster) and the corresponding costs associated
          with that vs putting someone to work. The current system we have relies on
          unemployed labor and excess capacity to try to dampen wage and price
          increases; however, it pays unemployed labor for not working and allows that
          labor to depreciate and develop behaviors that act as a barrier to future
          private sector employment. Social spending on the unemployed prevents
          aggregate demand from collapsing into a depression-like state, but little is done
          to enhance future growth and demand, which can be done via a Job Guarantee
          by providing them with employment, greater education and higher skill
          levels. Why is that dubious value employment?

          The next time that your house is engulfed in flames, or you are robbed,
          tell the public sector employee otherwise known as a fireman or policeman
          that his work is of dubious value. Here’s a real world example in Argentina:
          _http://www.cfeps.org/pubs/wp/wp50.htm_
          (http://www.cfeps.org/pubs/wp/wp50.htm)

          In a message dated 3/4/2010 01:06:17 Mountain Standard Time,
          writes:

          I’m just trying to get Marshall to explain in simple english to this
          ignoramus why he seems to think it’s a good idea that fuller, dubious-value
          employment for some means that many, many more will probably be permanently
          shafted as a result.

        • Stevie b. says:

          in reply to Marshall below (I don’t seem to have the option of replying directly)

          Marshall – thanks a lot for your response. There’s a lot to take in and I really do appreciate the time you’re taking, but to help me (and maybe another poor struggler or 2) understand better, I’d like to push you a wee bit more on just 1 area – you referred to it in another post but I’m still not clear. I’ve tried to read the relevant stuff on the Billy blog but my eyes just glaze-over and I can’t take it all in first time around – but I’ll keep trying and maybe you can provide the key to unlock my mental block.

          You seem to be saying (and I may not be using the precisely correct terminology) that national debt can keep expanding without limit until a certain (more acceptable) level of unemployment is reached, no matter how long it takes to reach that level. Surely many constraints (such as a crashing currency/inflation) could come into play long before your chosen level of unemployment is reached? Why do you think “the markets” will accept an open-ended increase in the deficit without adverse effects that derail the process?

          • Hi Stevie. Yes, wading through some of this stuff is very complicated,
            but it goes back to the argument I made earlier: I don’t think the “markets”
            control rates. The central banks do. I will concede that when you get to
            longer term durations, it is true that the markets might choose not to buy
            longer term debt and this might be reflected in a more positively sloped
            yield structure. For example, the Treasury began to reissue more 30 year
            bonds in 2006 and there doesn’t appear to have been many takers, which suggests
            that Treasury ought to calibrate the maturity of its bond sales to
            something closer to market demand.

            In making this point, I would add that this does not prevent the
            government from spending? It might affect the durations of the instruments it
            chooses to offer to the markets.
            As I have discussed before, deficit spending by Treasury results in
            credits to banking system reserves; if excess reserves are generated, banks offer
            them in the overnight market, which pushes the interest rate down to the “
            support rate”—the rate paid on reserves. See Stephanie Kelton’s blog on
            this:
            _http://neweconomicperspectives.blogspot.com/2009/06/will-run-up-in-government-debt-doom-us_17.html_
            (http://neweconomicperspectives.blogspot.com/2009/06/will-run-up-in-government-debt-doom-us_17.html)
            Randy Wray has argued that if the Fed prefers to maintain a higher fed
            funds rate, it can engage in an open market sale of treasuries to substitute
            them for reserves. This is how it maintains the fed funds market rate at its
            target overnight rate—a spread above the rate it pays on reserves. If the
            Treasury only issues short-term debt, its interest rate will be determined
            by substitution in the overnight lending market—in other words, the rate on
            Treasury debt will be set relative to the Fed’s overnight target rate.
            This result holds no matter how big the deficit or how much government debt is
            issued—so long as its maturity is short enough that it is a close
            substitute for overnight interbank lending. This means that the government doesn’t
            need to allow the markets to determine the interest rate it pays on its
            debt. And even if it chose to issue longer-term bonds, Fed could actually set
            interest rates of different maturities if it were willing to deal in bonds
            of different maturities. Effectively, government would offer the equivalent
            of a range of “certificates of deposit” with different times to maturity
            at different interests—exactly what banks do with their CDs. If it offered,
            say, 4% on “deposits” of 30 years but found no takers, that would be
            perfectly fine. It could either adjust the 30 year rate to try to find buyers,
            or, better, simply let buyers choose shorter maturities at lower rates.
            This leads us back to the concern with foreign holders of debt. Foreign
            sellers of goods, services, or assets to the US receive dollar credits—
            usually to a foreign branch of a US bank or to a correspondent bank. Their bank
            receives a credit to its reserve account (or, to the reserve account of
            their “mother” bank). If this bank prefers domestic currency reserves, the
            dollar reserves can end up in the account of the central bank. In any case,
            the holder of reserves will probably try to find a higher interest rate—
            offering reserves in the overnight market, or buying US treasuries. All of the
            analysis presented in the previous paragraph applies, with one wrinkle. The
            foreign holder could decide to exchange the dollar reserves for other
            currencies. Of course, the exchange cannot occur unless there is someone with
            the desired currency willing to exchange for dollars. It is conceivable that
            as portfolios of currency reserves are adjusted, exchange rates would
            adjust, and, hence, the US current account deficit could place downward
            pressure on the dollar. While the conventional wisdom is that by raising domestic
            interest rates the Fed could keep the dollar from depreciating—although
            there is plenty of empirical evidence to doubt the efficacy of interest rate
            adjustments with regard to impacting exchange rates. As we argued above, the
            decision to sell products to the US is not independent of the decision to
            accumulate foreign currency. We are skeptical that the interest rate paid
            on foreign currency reserves is as important as the decision to export or to
            accumulate foreign currency. Holders will, of course, try to earn the
            maximum return consistent with their appetite for risk—hence, prefer government
            bonds that pay more than reserve deposits at the central bank. But they
            will take what they can get.
            In any case, as I have argued before, it is unclear that you can use an
            interest rate policy to support a currency. The Japan experience suggests
            that the causation is less correlated than conventional wisdom suggests.
            Hope this helps.

            In a message dated 3/5/2010 01:48:18 Mountain Standard Time,
            writes:

            You seem to be saying (and I may not be using the precisely correct
            terminology) that national debt can keep expanding without limit until a certain
            (more acceptable) level of unemployment is reached, no matter how long it
            takes to reach that level. Surely many constraints (such as a crashing
            currency/inflation) could come into play long before your chosen level of
            unemployment is reached? Why do you think “the markets” will accept an
            open-ended increase in the deficit without adverse effects that derail the process?

        • Stevie b. says:

          whoops – somehow Marshall is correctly above, not below. Guess I don’t understand the way the system works.

        • Stevie b. says:

          well he’s either above or below!

        • Gbgasser says:

          I think your question to Marshall can be answered like this;

          ALL constraints on the deficit are real not monetary, at least for the US. It CAN make any interest payment it chooses to, always. There is no way shape or form it does NOT have the money to pay. Okay

          Once you accept that you simply have to ask what is your spending trying to achieve, what are you buying? Now if you are buying unused labor to increase productivity I dont think anyone would argue that THAT is a bad thing. Are you buying unused labor at too high a price that makes people leave the private sector? Thats a bad thing so a balance needs to be reached.

          What the “market” thinks of your spending should be irrelevant. The govt is not losing money in the markets nor do they need funds FROM the markets, unless they ignorantly tie themselves to them with stupid rules.

          You are correct that the govts aim should be on providing for its citizens, ALL its citizens, and therefore employment should be higher on the list of worries than bond markets or currency traders.

          • THAT is the real issue. As I’ve said before, this is a problem of
            political economy, not finance or “national solvency”. The former, unfortunately,
            is much harder to solve.

            In a message dated 3/5/2010 08:57:46 Mountain Standard Time,
            writes:

            You are correct that the govts aim should be on providing for its
            citizens, ALL its citizens, and therefore employment should be higher on the list
            of worries than bond markets or currency traders.

        • Stevie b. says:

          @gbgasser & marshall – many thanks for your efforts – you’ve given me a lot to try and digest!

  6. Samuel Morales Jr. says:

    Debt is not a problem, and should be used in full force to create jobs? Can government really create jobs? Public works? Surely Obama can come up with funds to build pyramids in the middle of Kansas. Build solar panels across death valley. Maybe build a road a to Santa Clause’s house in the North Pole or how about assembling a paranormal task force to find Bigfoot, steal UFO technology from space aliens visiting earth? We not just throw our PCs out the window, and Obama can use tax credits for people to buy a new PC. Why not order men to step up consumption and buy lingerie? That will surely create economic activity. Green jobs? Surely Obama can pay green soldiers to protect every tree in the country from destructive humans, and nurture them. Surely if debt isn’t a problem, and government can create jobs, these things can be done.

    • Anonymous says:

      Maybe we can resurrect old shipyards, and build battleships again.

    • When you read this post, you have to focus on TWO separate issues. The debt constraint and government stimulus spending because they are distinct.

      The main takeaway here – and the reason this post is important – is that there is no hard debt constraint in a fiat currency system for a sovereign nation which issues debt in its own currency. A lot of people don’t understand this and make spurious arguments about involuntary national bankruptcy. Greece might be bankrupted involuntarily because of debt which is NOT issued in its own currency, but Japan, the UK and the U.S. are different.

      The main question on this issue is what do you DO about this lack of an operational constraint – one that DID exist in the gold standard, under Bretton Woods? There are two main approaches: one – take advantage of the lack of constraint to use fiscal policy to drive full employment through government action and two – impose an artificial but non-operational constraint.

      That gets us to the second point: government stimulus. Given the lack of a debt constraint, the government is free to pursue stimulus of any magnitude it wishes – the EFFECTIVE but NOT OPERATIONAL constraints being currency depreciation and/or inflation. This means a government can stimulate the economy in a depression via deficit spending in a fiat system mindful only that it could induce inflation (so-called default by price level) or currency depreciation (so-called default by beggar thy neighbor).

      The reason I mention the de facto default meme is because this is where the problem lies. This is what informed observers object to. Moreover, the concept that government should CONTROL the business cycle through its inefficient spending and resource allocation is (rightfully) seen as questionable.

      So again, the question is twofold: what does a fiat currency mean. it means national bankruptcy can only occur voluntarily for a sovereign indebted in its own currency and the true defaults are de facto through currency depreciation for foreign holders of the debt and inflation for domestic holders.

      Question 2 is how should the government respond to this lack of constraint. THIS is where the real disagreement lies. I fully understand the desire to use government stimulus in a depression in order to promote employment. But I also understand – AND FOCUS ON – the very real issue of poor resource allocation aka malinvestment.

      So agree with Marshall on point one because it’s true, but disagree with him on point 2 because that’s the debate here. I hope that makes sense.

      • The nature of the government stimulus spending is important, but that’s a
        separate political issue, which I have conceded before. This can be dealt
        with to some extent by introducing massive tax cuts, if you don’t like the
        idea of a corrupt government spending the money. That’s a legitimate
        argument. MMT advocates do need to confront James Galbraith’s predator state
        insights, and the tax reduction angle may be one way to thread the needle
        even if it is not entirely satisfactory (since spending priorities need to be
        decorporatized) but this is a much deeper issue of rebuilding democracy
        with political participation, accountability and decentralization.

        In a message dated 3/3/2010 06:36:56 Mountain Standard Time,
        writes:

        ======

        Edward Harrison wrote, in response to
        Samuel Morales Jr. (unregistered):

        When you read this post, you have to focus on TWO separate issues. The
        debt constraint and government stimulus spending because they are distinct.

        The main takeaway here – and the reason this post is important – is that
        there is no hard debt constraint in a fiat currency system for a sovereign
        nation which issues debt in its own currency. A lot of people don’t
        understand this and make spurious arguments about involuntary national bankruptcy.
        Greece might be bankrupted involuntarily because of debt which is NOT
        issued in its own currency, but Japan, the UK and the U.S. are different.

        The main question on this issue is what do you DO about this lack of an
        operational constraint – one that DID exist in the gold standard, under
        Bretton Woods? There are two main approaches: one – take advantage of the lack
        of constraint to use fiscal policy to drive full employment through
        government action and two – impose an artificial but non-operational constraint.

        That gets us to the second point: government stimulus. Given the lack of
        a debt constraint, the government is free to pursue stimulus of any
        magnitude it wishes – the EFFECTIVE but NOT OPERATIONAL constraints being currency
        depreciation and/or inflation. This means a government can stimulate the
        economy in a depression via deficit spending in a fiat system mindful only
        that it could induce inflation (so-called default by price level) or
        currency depreciation (so-called default by beggar thy neighbor).

        The reason I mention the de facto default meme is because this is where
        the problem lies. This is what informed observers object to. Moreover, the
        concept that government should CONTROL the business cycle through its
        inefficient spending and resource allocation is (rightfully) seen as
        questionable.

        So again, the question is twofold: what does a fiat currency mean. it
        means national bankruptcy can only occur voluntarily for a sovereign indebted
        in its own currency and the true defaults are de facto through currency
        depreciation for foreign holders of the debt and inflation for domestic holders.

        Question 2 is how should the government respond to this lack of
        constraint. THIS is where the real disagreement lies. I fully understand the desire
        to use government stimulus in a depression in order to promote employment.
        But I also understand – AND FOCUS ON – the very real issue of poor resource
        allocation aka malinvestment.

        So agree with Marshall on point one because it’s true, but disagree with
        him on point 2 because that’s the debate here. I hope that makes sense.

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        • Anonymous says:

          I just don’t believe massive tax cuts will do anything. George Bush cut taxes, and Bill Clinton cut taxes on capital gains in housing sales. The problem is credit markets, and I believe that foreign creditors can replace domestic insolvent financial institutions. They were detrimental to the economy, and shouldn’t be bailed out, because they mis-allocated scarce resources. Government stimulus doesn’t fix the underlying micro problems such as housing stimulus, which is futile, because the value of these houses vanished, and home buyers can’t afford them. I have no idea the point of trying to inflate housing. Prices have to come down, because the high prices were not a result of underlying micro activity, but cheap credit, and incentives where risk wasn’t taken seriously. I also don’t agree with your macro view of private debt, and government debt. The reason why the financial markets were deregulated was because of lack of growth didn’t satisfy politicians, or Bill Clinton. In order to grow the economy, they decided to give banks free reign on the dole of the Federal Reserve, and FDIC. The result is the financial markets ballooned in size, and scope. Of course in a global economy where jobs in the US are being outsourced. Diversification needs to happen, savings must be encouraged, not spending, and increased production in goods. Minimum wage increases does nothing to help employment during a recession, and Obama aims to increase minimum wage to over 9 dollars by 2011. Also regulations on business which prohibit free growth in other sectors of the economy outside of the financial markets. Obama recognized the economic imbalanced, but did nothing meaningful, other than talk to the Chinese. Real wages have to increase, otherwise, government stimulus is meaningless unless you want the government purchases cars, houses, etc, and give them away for free, and call that economic prosperity, or recovery.

      • Sam says:

        Well if there is no debt constraint, because fiat currency is infinite, there cannot be any mal-investment, so what is the point of only stimulating during a depression? Just hand out jobs as part of government program. Give health care to everybody, as the US has the worst health care in the world. Give everybody some kind of job as a government program. How does any of this constitute a mal-investment? That’s like saying cops, and firemen are a mal-investment. There is no mal-investment in demands, and there is plenty of demand, just the money lagging behind. A poor person definitely wants a mansion, yacht, nice clothes, go to Disney World. Another words, why is there a lot of greed with such a strict supply of money. That’s even more evil.

  7. Anonymous says:

    For Cripes sake: GDP means d*ck. Baked like Enron and meaningless.

    Three things matter: 1.) How much they take in (2.2 trillion) 2.) How much they spend (4.4 trillion (*8 trillion if you use John William’s (Shadow Statistics GAAP))) 3.) Rogoff’s work points out only that there were more sovereign defaults than most people believe.

    Insolvent is insolvent. It is what we are. QE is nothing more than Moron Bernanke in the basement of the Fed counterfeiting. The only way they can stop that and prolong the pain is to 1.) have an equity crash where stupid people fly to perceived safety, or 2.) steal 401K’s and IRA’s and buy bonds with your money.

    The gig is up. Why everyone has to make it physics or trig is beyond me. Broke is broke. That is all there is to it.

    • Gbgasser says:

      How are we BROKE!?? Are you saying we have nothing of value??

      Yours is a nonsensical argument. We are not broke. We may have somethings mispriced but we certainly possess many valuable things.

      Money is simply a pricing mechanism, a policy tool and NOT an investment. It is how OTHER investments get assigned some value. We can never run out of money, its a nonsensical idea.

      We must decide what we spend our money on. We must use our money to incentivize worthwhile things (like healthcare and not ass hole bleaching) but that is a completely different argument than saying we dont have enough or we are BROKE as a country.

      • Absolutely right. And Government spending is always just crediting a
        member bank reserve account. The distinction between printing and any other
        manner of spending is inapplicable today. And the Rogoff/Reinhart emphasis
        about low growth with high deficits is backwards causation. Deficits go up
        as growth slows due to the automatic countercyclical stabilizers.They don’t
        cause the slow down, etc. It’s very poor scholarship.

        In a message dated 3/4/2010 08:23:54 Mountain Standard Time,
        writes:

        Money is simply a pricing mechanism, a policy tool and NOT an investment.
        It is how OTHER investments get assigned some value. We can never run out
        of money, its a nonsensical idea.

  8. haris07 says:

    After spending a fair amount of time with the accounting identity (as explained very well by MMT – Bill Mitchell’s blog, Marshall, Mosler et al, but also the likes of Richard Koo), I now understand it to be an elegant and accurate view of deficit spending and/or monetization. However, I think the policy suggestions that come out of it are useless because the deficit spending and/or printing will be usurped by special interests, inefficient bureaucrats and instead of being used for productive growth, it will be channeled to asset bubbles. Even if govt is not involved and the money is placed in the hands of the public, there is no way to channel it towards efficient growth and not asset bubbles. Eventually, all this will result in is inflation (notwithstanding the substantial output gap as emphasized by MMT proponents).

    I haven’t even begun addressing the “social causes” of such a program – it will encourage sloth among citizens, comfortable in the knowledge that they can blow bubbles and when it pops, government will just ride to the rescue, so why bother “working”!

    Lastly, this isn’t specific to Marshall, but Richard Koo instead. While his explanation is accurate (it is essentially MMT), why does everyone assume either that it is so successful that we should emulate it or that it is indeed the very best that can be done (which is what Koo argues). IMHO, there is hardly any positive success with their experiment to make a strong case for such a policy.

    Bottom line, good elegant theory, sounds great on paper and indeed explains deficts and money in a fiat currency well, but is practically useless and won’t work.

    You CANNOT create wealth w/o working and producing value, no matter how much money you can print and how much deficits you can run.

    My 2 cents, allow some Austrian economics destruction and debt elimination, spend a modest amount in fiscal deficits and printed money in targeted and efficient means (work for pay overseen by an efficient organization or entity for e.g.). Dems and Obama won’t do it because it involves some pain, and markets will crash because the easy money scheme will disappear, but it will lead to a much more sustainable foundation for growth after some of the purging has been done.

    Rogoff’s lessons are perhaps technically inaccurate, but the end result will be accurate, mounting deficits (even in a fiat currency world) will lead to default from inflation and currency debasement and NOT productive growth. There seem to be too many born again MMT proponents arguing vehemently to deficit spend and print away to prosperity…it won’t work.

    • Jolt says:

      trying to avoid “pain” is hardly an obama & dem goal. it applies equally to republicans (unless of course you choose buy their rhetoric of being tough on spending – while gladly accepting stimulus funds).

      no doubt there is need for “debt destruction”. start with forcing the big banks to mark their debt to what it is truly worth, not what they want it to be.

    • pebird says:

      First of all, there has been significant pain – unfortunately inflicted on those who had little to cause the crisis and have little power to change things.

      Secondly, it is not just a theory (although Theory is the last word in MMT) but has also been a practice that has demonstrably been successful, even though it has not been able to be anywhere near fully realized.

      I agree that the government is corrupt (always has, always will, probably more now than ever) but that so it the private sector and markets don’t care about corruption. At any rate, there is still some degree of transparency in government spending that does not exist in private spending and if the public sees the problems and does not do anything – well, we deserve what then occurs.

      Despite MMT, I don’t believe we have enough data as to what percentage of spending has to be “legitimate” to be effective. I would support a government commission to look into the issue, if for no other reason than to name it.

      What percentage of your private spending is wasted? Have you ever bought something that you did not use, or found out it did not work as advertised and were too lazy or unable to return it? How efficient do you live your personal economic life? Perhaps very – but in which case you are an exception. Life is messy and that is very visible when people come together in organizations to make decisions.

      Instead of being a criticism, this should be seen as an incredible compliment to our real economic efficiency. We can produce enormous amounts of goods and services – with huge leakages and still get up every morning. It is this quality of our economic system that allows corruption in the financial sector and government to exist yet not destroy us (for now, at least). I don’t think we truly appreciate the productive capacity of the global economy – despite all its shortcomings.

      I used to be in the “let the crisis occur – the harder the better – and god will sort it out” crowd. I realized this came from intense anger at the naked corruption and utter disregard for human decency. It is truly obscene. But we have to get our hands dirty, as much as we would like to walk away – and in the US it is easier to believe one can walk away. But we wouldn’t just be walking away from government spending, we would be turning our back on what remains of US democracy.

      • Excellent comments. I agree with this wholeheartedly.

      • Stevie b. says:

        pebird – surely the West has to face 1 fact – in a world of “free” trade (yes, yuan manipulation is a problem here), all the cushioning/deficit spending whatever cannot change the inevitable long-term outcome of a gradual global levelling-out to some sort of (i’m not a mathematician and i may be using the wrong precise terms) median common denominator for wages worldwide. We need to face this reality and not burden ourselves with unbearable amounts of debt that will only make the inevitable worse. The world is changing & there is no increased-debt-based economic nirvanha to be had in the world that is to come.

        • Stevie b. says:

          I’m posting Marshall’s response here (with his ok – he’s travelling), so that I’ve got everything in one place for me to come back to & re-read & get my thick head around it all! I had made a further email comment that “We cannot live in the past – wages have already stagnated for what, 10 -15 – 20 years? Why should we think any mild or even stronger recovery will lead to more domestic investment as opposed to just greater profit margins and profit-hoarding? Things that have been made abroad will continue to be made there. I just can’t get my head round how meaningfully more debt is the way out of this scenario.”

          He replied:

          You make a lot of good points here. In classic MMT, there is an argument that “exports are a cost and imports are a benefit”. I always qualify that remark by indicating that this is only a POTENTIAL benefit, when you have an economy characterised by full employment, which is why I (and others) stress a Government Job Guarantee program. See here:

          http://www.ritholtz.com/blog/2010/02/navigating-the-jobs-crisis-time-to-try-government-as-employer-of-last-resort/

          We need expansionary fiscal policy for that policy objective to be achieved and then we don’t have to worry as much about China’s currency manipulation which, in my opinion, hurts them in the longer term.

          Exports are clearly a cost by any measure when you take a macroeconomics position. They involve a nation giving another nation the benefits of their real resources which might otherwise be consumed locally. The only reason you would want to do this is to: (a) get some real goods and services from other nations (that is, imports which are beneficial in a material sense); and/or (b) build up stores of financial assets denominated in the currency of the nation you are exporting to.
          Either way, there is a cost involved and that cost is represented by the resources you are shipping away. How costly the exports are is another matter especially if you have lots of minerals such as my nation and who could imagine us using it all. But it still remains that there is a cost of some dimension in all exports.
          What Caterpillar thinks is a separate matter as they are only indulging in private cost-benefit calculus and do not take a macroeconomic position.
          China is still largely an assembly nation rather than the manufacturing hub – a point which is often misunderstood. They are clearly moving into the next phase of industrial development to become full-blown manufacturers but are facing a relative shortage of low-price labour given they have exhausted the coastal region which gave them transport economies. Moving into the hinterland to maintain cheap labour will come at a cost.

          But they could have had this economic growth without exporting very much at all. They have a huge domestic market which they could have developed. And we clearly need to do something here in the US, although I don’t think the manufacturing jobs that have been lost to China can ever be brought back. What I would like to see ideally, then, is more fiscal deficit spending designed to encourage businesses to reinvest in more efficient technology or in new product innovation, both of which could help improve US export competitiveness. Alternatively, public/private cooperation in R&D projects like Sematech could be explored with various emerging energy technologies, for example, in order to reduce US energy dependence. Such moves would speed the transition away from deep fiscal deficit spending which began riling investors in longer dated Treasury debt back in March. Nevertheless, such a shift in the fiscal deficit was required for the domestic private sector to return to a net saving position and begin reducing its debt load without setting off a full blown debt deflation.

          Hope this helps.

        • pebird says:

          Stevie b.

          There is a lot to comment on here. Although I consider myself an amateur critic for a long time, and maybe it’s old age, I’ve continually surprised myself by how little I know – so I’ve taken the philosophy of “everything I know I false”. It keeps me honest (I hope).

          I also believe in cycles – but I don’t believe in any specific outcome inevitability – cycles bring tendencies but are not mechanisms that must destroy us. There are those that want us to believe that – so that we submit to the “inevitable”. This doesn’t mean that we have no constraints, but that constraints shift over time and that context is critical. This is the crux of the government vs. private debt debate.

          Anyway, I somewhat disagree that there is a long-term inevitable decline in wages or leveling out as you stated. I agree that the world is changing, but I disagree in any preordained outcome. I agree that we need to reduce our burden of PRIVATE debt – there is no good reason to be obligated to the Mob. But we should not unnecessarily constraint the public by thinking that public debt operates in any way the same as private debt. This “normal” thinking is what is actually accelerating when what you call the “inevitable” will occur and will make it much worse.

          During the Great Depression, FDR restrained the spending in response to deficit critics. The economy was “heating up” – there was substantial gains made from the first New Deal. After the spending was reduced, the economy plunged back into Depression. What intensified this 2nd “double-dip” was that the economy was weakened – much of the private reserves that people had built up in the 20s were spent, so the 2nd downturn created a downward spiral that was not turned around until WWII. For all those that worry about wasteful government spending, can you think of anything more wasteful than war?

          When you mention wage equalization across the globe and loss of manufacturing, etc., think about this – how much manufacturing do we really need? We have more stuff than we want and the ability to crank it out is incredible. What people need are services – specialization in what they provide to and receive from others. This is harder to outsource or create equivalencies across countries/cultures. An increase in services does not create the same demand pressures on real resources that manufacturing does – so it is less inflationary.

          Why shouldn’t the people who are getting unemployment benefits be required to work (say at a public school) in return for a higher payment/decent wage? This is a service that has very low inflationary impacts (people still eat, need to live someplace, buy the occasional drink – not much upward push on real resource). So what if the government has to spend more? The only people who would complain are the banks – because they will get their deliberately-designed toxic debt repaid and the obligation discharged. Just like the mob that wants you in virtual debtors prison for life.

        • Stevie b. says:

          (I hope I’ve got this in the right order)

          Pebird. Thanks for this and yes, I am starting to see through the fog of my own incompetence & I realise now that when I managed money, any success I had was likely due more to luck than to good judgement, cos I further realise now that I probably don’t know a lot more than you claim not to know, but I find it hard to wipe the slate clean and look at things afresh and comprehend at the same time.

          In that vein, I seem to vaguely remember in the dim and distant UK past of my early days that (make-)work projects, which started with the absolute best of intentions, didn’t get very far and withered because of project misdirection allied to a distinct lack of enthusiasm on the part of many of the supposed beneficiaries. I’m not saying it’s wrong to try and I’m sympathetic to the idea. I’d guess it’s matching properly-directed, effective spending with the right incentives for the (hopefully well-)chosen participants that might be the hard part.

        • Stevie b. says:

          Pebird – well I’m clearly a dunce and apologies cos my post is in the wrong place – but I was not given an option to “reply” to your comment, so whatever the logical thing to do was, I didn’t/still-can’t find it.

        • Stevie b. says:

          well it wasn’t in the right order yesterday!

  9. Stevie b. says:

    well I see my question was too stupid/irrelevant to merit a response,but just to prove I’m used to it, here’s another potentially stupid question
    (or3):

    Why is gold now going up against all currencies (assuming it’s not cos of the Sprott Physical Gold Trust) and what are the potential ramifications of this if it keeps going (to say a new high)? Could it be because of developed-economy-governments’ crap “resource allocation” perhaps – and if so why is the apparent answer to have more of it?

  10. pebird says:

    There is lot here to consider.

    Yes, the level of political corruption is extreme, this is the democracy we currently have, with whatever degree of transparency exists. Do we advocate increased spending with some oversight, knowing that there are inefficiencies and corruption, with the presumption that the outcome is better than the severe contraction expected with reduced spending?

    There also this moralist thread something along the line of “we’ve made mistakes and now we have to pay the price”. The implications seem to be we haven’t paid enough of a price yet and/or some kind of cleansing apocalyptic event is needed. I don’t know if that is just a way to vent anger, some religious/philosophical sensibility or general laziness (if the world is going to end, why bother).

    I take the view that the public sphere has been badly damaged over the past few decades and that it needs rebuilding (our public:private balance is out of whack) and that this rebuilding is not going to come from the private sector. So, despite the poor visibility and obvious corruption, public spending is better than contraction. To the extent that federal spending can be distributed down to local levels for spending at least the individual has more relative power over spending decisions than if the federal government directly spends.

    The idea that public spending cannot produce anything of value is simply contradicted by the evidence. We can debate the relative value of NASA, the internet, libraries, public safety, food regulations, public transit, clean water, etc., but the idea that only when people are organized under private interest can value/wealth be generated is absurd.

    I also don’t see a moral hazard problem if people who can work have to in order to receive public benefits. We should not advocate handouts, but require work, I don’t think that is a hard sell among the unemployed.

    The idea that public spending generates asset bubbles is also unsupported by the evidence. Asset bubbles have been generated using bank money and financial products deliberately designed (by the private sector) to generate bubbles. We can argue if the Fed is public or private – its hazy status is clearly meant to obscure its intentions.

    By increasing incomes (e.g., increasing the ability to pay back debt), these financial instruments of mass destruction are greatly weakened. I would like nothing else than to see the banks repaid with “lower value” dollars. They would be seen as lower value to the banks, but much higher value to me. Advocating what will clearly create a contraction is playing into the hands of the banks.

    • Stevie b. says:

      Q. I would like nothing else than to see the banks repaid with “lower value” dollars. UNQ

      so as far as you’re concerned let’s screw the multi-million people on a fixed income just so we can screw a few banks? This is the best way to go about things? Ya think?

      • pebird says:

        Stevie – my point was it’s lower value to the banks – they don’t want the dollars they want the properties. The dollar still buys the same goods and services – it’s asset values that are out of whack. Doesn’t affect fixed income people (except speculators).

        • Stevie b. says:

          Pebird – fair enough – i think yesterday i felt a tad grumpy about things in general (and Marshall in particular!)

          • I’m sorry to add to your heartburn and grief Stevie B. That’s not my
            intent. On the other hand, as they say on TV, if you don’t like what you’re
            watching, you can always change the channel!

            Best,

            Marshall

            In a message dated 3/4/2010 08:07:16 Mountain Standard Time,
            writes:

            Pebird – fair enough – i think yesterday i felt a tad grumpy about things
            in general (and Marshall in particular!)

        • Stevie b. says:

          responding to Marshall “if you don’t like what you’re
          watching, you can always change the channel!”

          I’m just trying to understand the program I’m watching – difficult when the aerial’s inadequate, the picture’s fuzzy, and all that when the presenter’s hard enough for me to understand in the first place!

          • Well, I’ve got to give you credit for that one! At least you’re sense of
            humour is intact! Bravo!

            I’ll try to do better in the future!

            In a message dated 3/4/2010 15:05:27 Mountain Standard Time,
            writes:

            I’m just trying to understand the program I’m watching – difficult when
            the aerial’s inadequate, the picture’s fuzzy, and all that when the
            presenter’s hard enough for me to understand in the first place!

  11. Kirk Kinder says:

    Marshall,

    This is a well thought out piece, and your comparison between Argentina and Japan is solid. A currency backed to another currency or hard asset will face d-day quicker, but Japan has seen their GDP consistently fall in real terms since 1990. It looks as if there is no turn around in the near future. Many countries that are forced to alter their behavior due to a tied currency come out much quicker. Certainly, the initial pain is more, but the recovery is much quicker, just look at Russia and the Asian countries from the 90s. They took it on the chin, but they are looking pretty solid now.

    Japan also benefited from an internal funding source from its high saving citizens. What are they going do as their older generation goes from net savers to spenders (in retirement)?

    • Thanks for the thoughts. Actually, I think the idea that Japan has just
      stagnated for 2 decades even though it allegedly engaged in massive fiscal
      stimulus is a mischaracterisation. I was there for a lot of that time. They
      raised the consumption tax in the heart of a major recession in 1996.
      Then we had the external shock of the Asian Financial Crisis in 1997/98.
      Until 2003, in fact, the Koizumi Administration was obsessed with “fiscal
      consolidation” and it was only after Sept. 2003 (two years after initiating
      quantitative easing, which achieved nothing) that the MOF finally relented and
      the government began to deploy fiscal policy proactively. And, surprise,
      surprise, it worked. Japan’s economy grew very strongly from 2003-2006
      until the most recent financial crisis created another huge external shock.
      And during those years, the deficit began to come down very dramatically.

      More recently, the high deficits, in other words, reflect the cumulative
      effect of years of erratic policy making, not an endless attempt to “kick the
      can down the road” as you suggest here.

      Argentina might well have “taken its medicine”, but the cure was found when
      they stopped with their ruinous currency peg regime and the corresponding
      build-up of US dollar denominated debt. To deal with the looming crisis
      and skyrocketing unemployment and poverty rates, the Argentinean government
      implemented a limited job guarantee program called Plan Jefes y Jefas de
      Hogar Desocupados (Program for the Unemployed Male and Female Heads of
      Households, or simply Jefes). Participation in the program grew quickly, to 2
      million workers at its peak or about 5% of the population, and about 13% of the
      labor force. In other words, they implemented a government Job Guarantee
      program, although it was limited in scope to the most disadvantaged, whereas
      I would like to see this kind of program become a permanent feature. The
      the guaranteed public service job would be a counter- cyclical influence,
      automatically increasing government employment and spending as jobs were
      lost in the private sector, and decreasing government jobs and spending as
      the private sector expanded. It would therefore remain a permanent feature of
      our economy, in effect acting as a buffer stock to put a floor under
      unemployment, whilst maintaining price stability whereby government offers a
      fixed wage which does not “outbid” the private sector, but simply creates a
      stabilizing floor and thereby prevents deflation.

      In a message dated 3/3/2010 19:36:51 Mountain Standard Time,
      writes:

      ======

    • Not correct. The population doesn’t “fund” anything. See this analysis to
      help you understand this:

      _http://bilbo.economicoutlook.net/blog/?p=8117#more-8117_
      (http://bilbo.economicoutlook.net/blog/?p=8117#more-8117)

      Bonds are simply something akin to CD offered by the central bank to the
      saver as an alternative to keep the funds in cash. They are also interest
      rate maintenance tools. But the causation is the reverse of what you imply.
      The spending comes first and then the government effectively “borrows”
      from itself. The government does not sell bonds to fund its activities, so
      the domicile of the person who owns the bonds has no significance from that
      perspective. It is only important in regard to the “fiscal channel”
      effect, in that if the bonds are largely held domestically, there is no leakage
      as the income flows to them. Whereas in the case of the US, clearly a
      chunk of that income flow from debt issuance is going overseas.

      In a message dated 3/3/2010 19:36:51 Mountain Standard Time,
      writes:

      Japan also benefited from an internal funding source from its high saving
      citizens. What are they going do as their older generation goes from net
      savers to spenders (in retirement)?

      • pebird says:

        Marshall:

        To what extent do you think Japan’s real economic issues (as opposed to fiscal balances) may have due to a shift in Asian production of capital goods to Korea, Taiwan, other tigers and the emergence of China for low cost consumer goods?

        In the mid 90′s a significant percentage of Chinese manufacturing came on line. There was a great shift in capital at that time , resulting in the debt crisis/Asian contagion. It seemed that a result of this shifting of productive capacity, Japan was left out as the high cost legacy provider – they also have the highest switching costs out there (cultural, demographics, geographic isolation – kind of like the Eastern UK). Their stumbling around is not due to their public debt, but a long-term debate about their role in the global economy.

        • I think this is important, but Japan could have offset the loss of its
          export markets by encouraging a more domestically oriented consumption policy.
          It could have done this via significant tax cuts. Japan’s mandarins have
          historically responded to slackening economic conditions by trying to
          weaken the currency and encourage more export growth. I think we’re now at the
          limits of these policies.

          In a message dated 3/10/2010 8:47:15 A.M. Mountain Standard Time,
          writes:

          ======

          pebird wrote, in response to Marshall Auerback:

          Marshall:

          To what extent do you think Japan’s real economic issues (as opposed to
          fiscal balances) may have due to a shift in Asian production of capital goods
          to Korea, Taiwan, other tigers and the emergence of China for low cost
          consumer goods?

          In the mid 90′s a significant percentage of Chinese manufacturing came on
          line. There was a great shift in capital at that time , resulting in the
          debt crisis/Asian contagion. It seemed that a result of this shifting of
          productive capacity, Japan was left out as the high cost legacy provider –
          they also have the highest switching costs out there (cultural, demographics,
          geographic isolation – kind of like the Eastern UK). Their stumbling
          around is not due to their public debt, but a long-term debate about their role
          in the global economy.

          IP address: 67.121.144.164
          Link to comment:
          http://www.creditwritedowns.com/2010/03/going-off-on-rogoff-there-is-no-hard-debt-constraint-for-fiat-currency.html#comment-38864563

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  12. Anonymous says:

    “nonsensical’? You are clueless.

    http://www.usdebtclock.org. Emerging countries have better balance sheets than we do. By any metric: Citizen’s states or federal.

    When you take in 2 trillion and spend 4 trillion and you can’t borrow the difference – YOU ARE BROKE!

  13. I think this comment proves too much. Add together these two things you have written:

    “Russia had the ABILITY to meet its notional ruble obligations but was UNWILLING to pay and instead CHOSE to default.”

    “At some point, we may indeed have a resource constraint, or an inflation constraint, but not a national solvency issue.’

    If we reach that “point,” why will it matter that we can only “choose” to default? If the alternative is hyperinflation, what strategy does your analysis yield that is any better than the more traditional one?

    Rogoff’s point, I think, is that we can’t know, directly, when we have hit the inflation wall. We can, however, see that when national deficits have reached a certain point, bad things have happened. The sailor doesn’t have to know why a red sky in the morning precedes a storm; he only needs to know that it almost always has.preceded one. If you can show why a particular red sky was created by a particular non-threatening cause, you might be onto something. But if all you can show is that the sailor is wrong to theorize that the red sky results from God’s anger, you have not given him a reason not to take cover,

    So the question becomes, how do we avoid being done in by that “inflation constraint”?

  14. Sam says:

    Well if there is no debt constraint, because fiat currency is infinite, there cannot be any mal-investment, so what is the point of only stimulating during a depression? Just hand out jobs as part of government program. Give health care to everybody, as the US has the worst health care in the world. Give everybody some kind of job as a government program. How does any of this constitute a mal-investment? That’s like saying cops, and firemen are a mal-investment. There is no mal-investment in demands, and there is plenty of demand, just the money lagging behind. A poor person definitely wants a mansion, yacht, nice clothes, go to Disney World. Another words, why is there a lot of greed with such a strict supply of money. That’s even more evil.