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Milton Friedman, Functional Finance and the Government Budget Constraint

Randall Wray — Mon, 23 Jan 2012 20:00:00 +0000

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

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Spanish government doubts it can achieve deficit target

Edward Harrison — Fri, 20 Jan 2012 13:14:05 +0000

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

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

Edward Harrison — Sat, 14 Jan 2012 03:10:10 +0000

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

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

Guest Author — Tue, 10 Jan 2012 18:00:30 +0000

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

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

Randall Wray — Wed, 21 Dec 2011 15:00:39 +0000

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

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Government Spending with Self-Imposed Constraints

Randall Wray — Tue, 20 Dec 2011 21:24:52 +0000

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)

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Market Facing Strong Headwinds

Comstock Partners — Fri, 16 Dec 2011 13:15:11 +0000

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.

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Italian minister breaks down in tears over austerity budget

Edward Harrison — Mon, 05 Dec 2011 14:00:00 +0000

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

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Warren Mosler’s Big Fat Greek MMT Exit Strategy

Randall Wray — Thu, 17 Nov 2011 16:26:20 +0000

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

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Franco – German Divergence

Marc Chandler — Wed, 09 Nov 2011 14:00:00 +0000

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

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States and Municipalities: one crisis that has not materialized yet

Marc Chandler — Tue, 04 Oct 2011 14:20:02 +0000

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

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Mosler: Why Greece should not be allowed to default

Guest Author — Wed, 28 Sep 2011 15:46:48 +0000

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

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Mosler: The Speech that President Obama Should Make

Guest Author — Tue, 06 Sep 2011 18:20:01 +0000

Warren Mosler has three proposals specifically designed to get sales up to make sure business has a good paying job for anyone willing and able to work. He arguess that's good for businesses and all the people who work for them and says these proposals are bipartisan. His view is that they are supported by Americans ranging from Tea Party supporters to the Progressive left, and everyone in between

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IOUs Denominated in National Currency

Randall Wray — Mon, 05 Sep 2011 14:00:38 +0000

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)

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Why Made in China Costs More in China

John Lounsbury — Sun, 04 Sep 2011 20:29:45 +0000

Chinese goods cost more in China because of currency, taxes, transportation,logistics and inflation. The Chinese get the jobs, while Americans get the consumer products; The Chinese government gets the dollar, but the U.S government gets to spend the dollar! The Chinese like to say: the Americans get a better deal!

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Workers of the world, good night!

Rick Bookstaber — Tue, 30 Aug 2011 15:00:04 +0000

Rick Bookstaber argues that the rise of the super-elite is not a product of educational differences, but rather a result of the new capitalism which creates bigger winners, and does so much more quickly than in the capital-intensive capitalist era. Less capital is needed, it is applied for a shorter period before the results are realized, and because less capital is required, the entrepreneur captures more of the value of the enterprise. The result is an accentuation in the very wealthy

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France: wealthiest ask government for special tax on the super-rich

Edward Harrison — Wed, 24 Aug 2011 12:27:32 +0000

This is a temporary tax proposal to demonstrate solidarity in tough times. It reminds me of the solidarity tax Germans paid to deal with their reunification

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The Gold Standard and Fiat Currency: Metalism vs. Nominalism, Part One

Randall Wray — Mon, 22 Aug 2011 15:00:00 +0000

“Taxes drive money”—these “money things” are accepted because there are taxes “backing them up”, not because they have embodied gold. As promised, this week I will begin try to dispel the view that coins used to be commodity monies

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On the State and Local Budget Crisis

Michael Hudson — Mon, 22 Aug 2011 14:00:00 +0000

By Michael Hudson The State and Local Budget Crisis The cost of the 2011 cutbacks in federal spending will fall most directly on consumers and retirees by scaling back Social Security, Medicare, Medicaid and social spending programs. The population also will suffer indirectly, by lower federal revenue sharing with U.S. states and cities. The following

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Jon Stewart on Warren Buffett and the Class Warfare meme

Edward Harrison — Sat, 20 Aug 2011 13:30:38 +0000

Jon Stewart has noticed that Fox News is selling viewers on the view that ‘socialists’ like Warren Buffet and Barack Obama are engaged in class warfare. He presents an amusing view; take a look

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Who said this: Obama or Hoover?

Edward Harrison — Fri, 19 Aug 2011 16:00:00 +0000

This is a brief follow-up to my post yesterday proclaiming that this is looking more like Hoover every day. Credit Writedowns reader Greg came across the statement below. Who said it, Herbert Hoover or Barack Obama

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Charlie Rose: An Hour with Warren Buffett

Edward Harrison — Thu, 18 Aug 2011 16:00:00 +0000

On Monday, Warren Buffett wrote a widely-discussed New York Times opinion piece, “Stop Coddling the Super-Rich” about taxes in America. I think his subsequent appearance on the Charlie Rose show was really good at explaining his views and creating a meaningful dialogue on the issues of taxes and inequality. Video below

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Policy Conclusions for Russia (Part 2)

Michael Hudson — Fri, 12 Aug 2011 18:30:00 +0000

Can Russia get the best of both worlds by freeing its economy from technologically unnecessary charges and rentier tolls paid to special interests? Such expenditures prevent the economy from developing. That is the basic cause of poverty – and hence of national decline. Now that neoliberal financial lobbyists have turned Progressive Era economic reforms upside down, it is necessary to “reform the reformers” in order for Russia to rebuild its economy in the way that made the U.S. and Western Europe so successful during their economic takeoffs

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Debt Ceiling Deal: All cuts, no taxes

Edward Harrison — Tue, 02 Aug 2011 19:25:41 +0000

Unfortunately for President Obama, the economy is not doing well. And the cuts envisaged in this deal make that problem worse. From an electoral standpoint this is already becoming a problem in key swing states like Pennsylvania

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Chart of the day: tax burden in the US and globally

Edward Harrison — Mon, 01 Aug 2011 13:17:26 +0000

Despite the widespread view in the US that taxes are high, taxes in the US are relatively low both in the global and historical context. These two charts from the Globe & Mail make that plain

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What About Currency Revulsion?

Randall Wray — Mon, 01 Aug 2011 01:47:44 +0000

The normal case—let us say, in the US or the UK or Japan—is that anything for sale is for sale in the domestic currency. These sovereign governments never find that they cannot buy something by issuing their own currency. However, the situation can be different in developing nations in which foreign currencies might be preferred for “private” transactions (payments that do not involve the sovereign)

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On Voodoo Economics, the Debt Ceiling Debate, and Hyperinflation

Edward Harrison — Wed, 27 Jul 2011 20:00:25 +0000

If you recall, it was George W. Bush’s father, GWH Bush, who, when campaigning against Reagan, called supply side economics’ claims that tax cuts pay for themselves Voodoo Economics. And Bush was proved right when deficits spiralled out of control and both Reagan and Bush were forced to raise taxes. Yet, the Republicans of today are acting like none of this is true

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Taxes Drive Money

Randall Wray — Mon, 25 Jul 2011 14:00:29 +0000

The government is then able to issue a currency that is also denominated in the same money of account, so long as it accepts that currency in tax payment. It is not necessary to “back” the currency with precious metal, nor is it necessary to enforce legal tender laws that require acceptance of the national currency. For example, rather than engraving the statement “This note is legal tender for all debts, public and private”, all the sovereign government needs to do is to promise “This note will be accepted in tax payment” in order to ensure general acceptability domestically and even abroad

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USA Debt Crisis: Is There Any Truth?

John Lounsbury — Sun, 24 Jul 2011 03:17:26 +0000

Last week the NY Times covered the division within the economic community over the way out of the USA's overspending / balance budgeting. “Reasonable people can sit down and, apart from any political or policy motivations, come up with different answers,” said Robert S. Chirinko, a finance professor at the University of Illinois at Chicago who studies corporate taxation. No doubt this is true. The economic community's solutions range from more deficit spending stimulus (on the theory that boosting the economy will boost tax revenues to balance the budget) to out-and-out cutting spending (on the theory that re-balancing, while causing short-term pain, will spur long-term growth). Both extremes have some basis in main stream economic studies

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How does fiscal consolidation affect the economy?

Guest Author — Fri, 15 Jul 2011 17:48:36 +0000

The research presented below from the IMF from October 2010 "finds that fiscal consolidation typically reduces output and raises unemployment in the short term. At the same time, interest rate cuts, a fall in the value of the currency, and a rise in net exports usually soften the contractionary impact."

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Tax Holiday: Homeland Investment Charade

Marc Chandler — Fri, 08 Jul 2011 15:30:00 +0000

It is not clear that there is a political consensus for a stand-alone tax holiday. There may be support for the stand-alone tax holiday as part of a larger corporate tax reform effort. If it is enacted, job growth and capital investment is unlikely to be aided, if for no other reason than the lack of capital is not the reason for the jobless recovery and sluggish investment

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The Harrison Plan for Greece

Edward Harrison — Thu, 30 Jun 2011 20:30:02 +0000

Evangelos Venizelos is dispatched to consider how to prevent the government from sacking tens of thousands of workers in order to prevent the Greek from defaulting on its debt. He suggests that California’s previous IOU issuance is a model for Greece. But he goes one step further in emphasising that the IOUs can be used to expunge a tax liability to the Greek government and by adding a redemption in 5 years at a 40% premium to the present spot price for gold, which represents a 7% annual return

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The Mosler Plan for Greece

Guest Author — Thu, 30 Jun 2011 01:00:05 +0000

The following is an outline for a proposed new Greek government bond issue to provide all required medium term euro funding for Greece on very attractive terms. The new bond issue includes an addition to the default provisions that eliminates the risk of loss to investors. The language added to the default provisions states that while in default, and only in the case of default, these transferable securities can be used directly, by the bearer on demand, at face value plus accrued interest, for payment of any debts, including taxes, owed to the Greek government

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The Continuing Eurozone Extend and Pretend

Marshall Auerback — Wed, 29 Jun 2011 20:30:21 +0000

Short of a fiscal union, there are other measures which the Greeks could adopt to make their bonds more attractive to external investors, thereby preventing the markets shutting the country down and refusing to extend further credit to a insolvent country. Warren Mosler and I have suggested Greece could place new debt by inserting a provision stating that, in the event of default, the bearer on demand can use those defaulted securities to pay Greek government taxes. This makes it immediately obvious to investors that those new securities are ‘money good’ and will ultimately redeem for face value for as long as the Greek government levies and enforces taxes. This would not only allow Greece to fund itself at low interest rates, but it would also serve as an example for the rest of the euro zone, and thereby ease the funding pressures on the entire region

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Money and Trading 101

John Lounsbury — Sun, 26 Jun 2011 02:09:04 +0000

When we tighten our belts, it means that we are trying to build up our savings. We do this by spending less. But spending drives our economy. Sales create jobs. So unless Obama has a secret plan to reverse three decades of current account deficits, the Government needs to loosen its belt when we tighten ours. If it doesn’t, then millions of us will lose our shirts

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