Chart of the Day: Government Deficits as Far as the Eye Can See

The chart below from the blog Pragmatic Capitalism shows the U.S. Federal government deficit for each quarter since 1952. As you can see, almost the entire period is marked by deficits

Functional Finance and Exchange Rate Regimes: The Twin Deficits Debate

In conclusion, while there are links between the “twin deficits”, they are not the links usually imagined. US trade and budget deficits are linked, but they do not put the US in an unsustainable position vis a vis the Chinese. If the Chinese and other net exporters (such as Japan) decide they prefer fewer dollar assets, this will be linked to a desire to sell fewer products to America. This is a particularly likely scenario for the Chinese, who are rapidly developing their economy and creating a nation of consumers. But the transition will not be abrupt

[PREMIUM] The Ultimate QE is the Fed’s Coming Purchase of Real Assets

I would bet on near-systemic collapse before the Fed starts either asset purchases or Congress resorts to fiscal activism. But eventually, the Fed is going to purchase more than just treasuries. They will purchase a lot of financial assets and probably some real assets as well

Edward Harrison’s Ten Surprises for 2012

Welcome to Credit Writedowns Pro. This is the first post in a series here. Let me start this Byron Wien-style and make a predictions list. Wien defines his surprises as events to which investors assign 1-in-3 odds of happening but which he believes have a more than 50 percent likelihood of occurring in 2012. That’s how I am playing it too

Krugman, Tabarrok, Cowen and the bond vigilante fallacy

I don’t expect any response from Paul Krugman, Alex Tabarrok or Tyler Cowen on this but they know who I am and read my articles from time to time. I am going to add my voice to a debate they have been having in the blogosphere on debt, deficits and bond vigilantes. It goes like this

What is Modern Money Theory?

OK, you might be wondering: Isn’t this a strange point at which to raise the question, “what is modern money theory?” Yes, in some important ways, it is. However in the past week there have been some really pretty extraordinary pieces in the popular media trumpeting

Bond vigilantes and the currency relief valve

The last post by Randall Wray below is an interesting one because it points out how the world has changed since the end of the gold standard and why the sovereign debt crisis is centered in the euro zone.

While I have an Austrian bias overall, for me, MMT is the best way to think about nonconvertible floating exchange rate systems as distinct from fixed exchange rate, currency board, pegged and convertible systems. The difference is policy space and what I would call the bond vigilante relief valve

The money scoreboard

This post is intended to be a hopefully brief synopsis of how the monetary system works using an Austrian framing with MMT terminology. If you don’t know what that means, you’ll see what I mean as I proceed. MMTers like to say that money is like points and the government is just a scorekeeper. I

What They Are Doing?

The quantity of debt grows as the quality recedes. The problem of bad loans is no longer just the pre-2008 mortgages, CDOs, and LBOs. Debt issued after the bust is defaulting, such as Greek sovereign bonds, issued in June 2010. Some securities are born to part investors from their money, but it’s remarkable the extent and variety of such instruments issued in 2011. The world choked on similar bonds and derivatives only three years ago, many of which are still held at false prices on financial institutions’ books

Mosler: Why Greece should not be allowed to default

Warren Mosler argues that it is the realization that the ECB is the issuer of the currency, and is therefore not revenue constrained, that leads to the conclusion that not allowing Greece to default best serves public purpose

The prospects for inflation have not been smaller since 1930

Just where are all those borrowers who are willing and able to borrow the $2 trillion or $20 trillion that hyperventilators believe banks want to lend? The US private sector (firms and households) have instead ramped up their net savings—they are not borrowing, they are not even spending their diminished income. They are scared. They are (rationally) tightening belts, paying down debt, and accumulating claims on government and banks. In short, the prospects for inflation have not been smaller since

IOUs Denominated in National Currency

On a floating exchange rate, the government’s own IOUs—currency—are nonconvertible in the sense that the government makes no promise to convert them to precious metal, to foreign currency, or to anything else. Instead, it promises only to accept its own IOUs in payments made to itself (mostly, tax payments, but also payments of fees and fines). This is the necessary and fundamental promise made: the issuer of an IOU must accept that IOU in payment. So long as government agrees to accept its own IOUs in tax payments, the government’s IOUs will be in demand (at least for tax payments, and probably for other uses as well)