Milton Friedman, Functional Finance and the Government Budget Constraint

Last week we examined Milton Friedman’s version of Functional Finance, which we found to be remarkably similar to Abba Lerner’s. The only problem with Friedman’s analysis is that he did not account for the external sector: he wanted a balanced budget at full employment, but if a country tends to run a trade deficit at full employment, then it must have a government budget deficit to allow the private sector to run a balanced budget—which is the minimum we should normally expect. Somehow all this understanding was lost over the course of the postwar period, replaced by “sound finance” which is anything but sound. It was based on an inappropriate extension of the household “budget constraint” to government

Spanish government doubts it can achieve deficit target

I have been saying for a few months now that all of the periphery would miss their targets as depression took hold. Belgian newspaper De Standaard reports that the new Spanish government is fearful. My translation from Dutch below

Willem Buiter: “We will certainly have a panic stage before the debt crisis is resolved” (part 2)

Continuing from part 1 of the Willem Buiter interview with het Financieele Dagblad

Mosler: I advocate tax relief and jobs, but forecast muddle through at best

Warren Mosler proposes a full FICA suspension, a $150 billion one time distribution to the states and an $8/hr federally funded transition job for anyone willing and able to work. However he believes these proposals will likely not be followed and predicts muddle through at best as a result

It is Krugman who has shined the headlights on the difference between a currency issuer and a currency user

It seems to have been none other than Paul Krugman who made it safe for others to adopt MMT. He shined his headlights on the obvious: the reason why interest rates on government debt are not exploding in countries like Japan, the US, and the UK is because they issue their own currencies. So, Krugman shined the headlights on the difference between a currency issuer and a currency user. It is now time for everyone to follow Dean Baker—to look for the car keys under those MMT headlights

Government Spending with Self-Imposed Constraints

Let’s see how it is really done in the US—where the Treasury really does hold accounts in both private banks and the Fed, but can write checks only on its account at the Fed. Further, the Fed is prohibited from buying Treasuries directly from the Treasury (and is not supposed to allow overdrafts on the Treasury’s account)

Market Facing Strong Headwinds

All in all, the negative fallout from the EU sovereign debt crisis and the outlook for the U.S. economy are likely to have a strong downward pull on the stock market. Rather than reflecting fear, the market seems unusually complacent as investors are overconfident that the world financial authorities can pull a rabbit out of the hat at the last minute.

Italian minister breaks down in tears over austerity budget

Italy’s government has come forward with an aggressive 30 billion euro austerity package to prevent the country’s bankrupcty and pave the way for the fiscal integration that Angela Merkel is pushing as the key to solving the European debt crisis. In the video below, Elsa Fornero, the Italian welfare minister, broke down in explaining the provisions. The package also increases taxes on housing, luxury items and via a 23 percent VAT, a measure Ireland is also taking. Approval is expected before Christmas

Warren Mosler’s Big Fat Greek MMT Exit Strategy

It is beginning to look like a Greek exit is ever more likely, which means that the end of the EMU could be near.

Even if exits and a break-up are not inevitable, countries should have a plan on the shelf. It is clear that Germany is going to insist on the maximum austerity it can squeeze from nations facing a run on their debt. Hence, if nothing else, an exit strategy is required for negotiations. The best strategy would be for all the so-called PIIGS to band together with a believable threat to exit together. That could finally break the logjam.

I’m not optimistic about that. In any event, it is time to examine proposals for dissolution. Warren Mosler has formulated what looks like a nice, clean exit strategy that EMU members can adopt. I am reprinting here with his permission

Franco – German Divergence

The European debt crisis is straining the Paris-Berlin axis, the pillar of EMU. French banks are heavily exposed to Italian debt, with some estimates putting public and private sector exposure at more than $400 bln at the end of H1 (without taking into account insurance, hedges, etc). The French government is not in nearly as good a fiscal position as Germany. The French 10-year premium over Germany stands at a record 145 bp today. It finished last year near 40 bp

States and Municipalities: one crisis that has not materialized yet

A little more than a year ago, many investors were worried about the US state and local government finances. There were genuine concerns that what was happening in Greece could very well be the future of numerous US local governments. Yet the much forecast debt crisis of US city and state governments failed to materialize

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