Pencil in September

As I have been talking about this for months now, nothing is actually being fixed in Europe. Until the less productive countries actually default or Europe creates itself a real fiscal/monetary union then the “debt show” will roll on. The Wall street Journal reports today that the next act for Greece begins in September.

Euro-zone finance ministers signed off on a new slice of bailout money for Greece, avoiding a financial meltdown this month, but left themselves with a heavy task ahead to work out details for a new rescue package for the country. The ministers’ agreement in a teleconference call on Saturday evening leaves only the expected approval of the board of the International Monetary Fund before €12 billion ($17.4 billion) is handed over to Athens. The payment is expected by July 15.

The IMF said it welcomed the “euro group’s commitment to a financing strategy” for Greece. Ministers also decided they would agree by September on arrangements for a new bailout to supplement the €110 billion package they agreed on last year but which fell short mainly because Greece is unable to raise money in financial markets as had been expected.

German Finance Minister Wolfgang Schäuble said after the teleconference that a new aid package for Greece could be approved by autumn, in time for the next expected quarterly tranche of EU/IMF aid. The Greek finance ministry also said a deal was expected by mid-September. The ministers said they will continue to work on ways to encourage holders of maturing Greek government bonds to contribute to the new rescue package.

The ministers said the “precise modalities and scale of private-sector involvement and additional funding from official sources will be determined in the coming weeks.”

This is likely to be achieved through encouraging private investors to reinvest some of the proceeds from maturing Greek bonds into new debt. The ministers reiterated their position that any such plan must avoid Greece being declared in “selective default” by credit-rating agencies. A European official said that even though euro-zone governments may not agree the outlines of the second bailout package by July 11—as they had intended—there would be “full clarity” on private-sector involvement later this month.

As mentioned in the article, all of this talk about bailouts hinges on the idea that credit rating agencies don’t declare the changing of parameters of the existing bailout as a default. If that does occur then we are all back to crisis, only this time it will be much worse as the other failing European economies will also join in. From this morning’s links.

Financial markets are braced for renewed turmoil this week amid growing doubts about the complex rescue plan for the debt-burdened Greek economy.

Analysts are increasingly questioning the French and German governments’ plan for holders of Greek bonds to swap them for new loans as part of a fresh aid package.

The Greek prime minister, George Papandreou, met his side of the rescue bargain last week by winning MPs’ approval for radical new austerity measures, including €50bn of privatisations, public sector wage cuts and widespread civil service job losses. But eurozone ministers have so far failed to agree details of a new rescue, expected to be up to €110bn.

The debt-swap proposal, which French and German banks have agreed to, involves offering new 30-year loans in exchange for expiring bonds, to meet Germany’s demand that investors bear some of the costs of a new Greek bailout.

But analysts say it is likely that ratings agencies could still brand the plan a default. That would trigger chaos in world markets, as investors were forced to slash the value of their Greek debts – and could also lead to Portugal and Ireland, the other bailed-out eurozone states, having their debts downgraded.

I have also been mentioning the European interbank lending market as something to watch for any stress as a precursor to trouble. Last week the Euro Libor peaked at the highest rate since early 2009. This may have simply been an end of FY effect as it has now fallen again, but you can see from the chart that the rate has been trending up in May and June. This however may be connected with the “Strong Vigilance” rhetoric from the ECB and the expectation the ECB rates will rise again shortly.

The financial times has also been reporting about the changing dynamic in the European interbank lending market recently. Non-collateralised lending has all but disappeared, while collateralised lending is booming.

Interbank lending using European government bonds as collateral has reached record levels, in spite of worries over Greek debt default and the future of the eurozone.

By contrast, lending between banks without the backing of collateral has ground to a near standstill for any loans of more than a week’s duration, as fears of bank insolvency rise due to continuing uncertainty over Greece and its emergency loan payments.

Given the recent European debt issues this isn’t too much of a surprise, but the fact that there is now a stalled non-collateralised market and the Euro libor is rising suggest the interbank market is not well place for a shock. Even if the ratings agencies are kind to Europe, September still needs to be penciled into your calendar.

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  1. Don’t forget the US debt ceiling vote in August. The US political climate right now is very partisan, and most political analysts are predicting that the debt ceiling won’t be raised by August 2nd. If the rating agency decide to downgrade US Treasury bond, we’ll experience some SERIOUS, and I mean, SERIOUS, global financial repercussions.

  2. Torchwood1979

    Our lease runs out in September and the Wife is hoping to be in a “home of our own” by then. I need to fend off the nesting instincts for a bit longer…

    • Find her some personal stories of people who are underwater on their mortgage in the US. Everytime I desire my own little piece of this world I read another underwater story and I quickly remember why I’m not buying in at the moment.

    • Me too. Just have to keep the fingernails firmly stuck in the rental market for a liiittle bit longer. I’m starting to beg the bear gods for a massive rout on housing here in Melbourne.

    • Don’t buy before the prices drop by a lot. It would however be wise to get your financing set up, because it may be difficult to get a loan then.

  3. Charles Ponzi

    Renters unite. For the longest time I felt like I was the only one in Adelaide who felt buying a house at bubble prices was foolish. Patience will be rewarded.

  4. housing insanity!

    – I have ridden the credit ponzi housing
    scheme in melbourne since 1993.
    I turned/flipped 90k to 900k
    in 18 years. Go figure, with gross
    rental yields at around
    3.5% who is buying?
    My one and only mortgage was 50k.
    I have been turning friends and family
    off purchasing property
    for about 3-4 years now.
    The macro peak oil contraction/deflation story a few years ago was convincing
    enough let alone the debt burden/deleveraging that is now taking place in the whole economy.

    Your patience will be rewarded, you may
    have to wait 3-4 years – deflation in
    nominal and inflation adjusted terms.
    It should revert to below the mean,
    the ponzi crash will not revert to
    an equilibrium but will under shoot
    to the downside.
    The consensus trance we are now in
    makes it difficult to dissude our other
    halves of a different future reality.

  5. The Euro-Greek story has everyone’s attention, including mine. But what really worries me more is the situation in the US. Whatever happens in America, at the very least there is going to be a significant cut in Federal spending at a time when the industrial cycle is decelerating. The cuts could be precipitous and they could start in just a few weeks.

    Even if there is no default by the US – and that is by no means a certainty – the inevitable demand-side shock will reverberate right through their economy, and, in time, have repercussions in Europe, China, Japan.

    There will be further demand retrenchment in the US. It is a foregone conclusion. And this will impel further subsequent tightening of fiscal conditions…leading to deeper later-round cuts.

    The Republicans think that cutting Federal spending will really help their economy, and Obama has bought into this folly too. In any case, the political imperatives are for cutting and they will get to taste the austerity for which they seem to have such an appetite.

    It scares me….really deeply scares me.

    If this happens to coincide with distress in the Euro financial markets, then the crisis of 2008 will end up looking like a day spent gathering flowers in the garden.

    • Oh come on David, Excess debt/leverage is what has caused these problems more government debt is only at best going to postpone the inevitable crash. Fiat money allows a lot of people to live in La La land for a long time but eventually reality comes a knocking.

      • To my understanding (and I could be wrong), even if the US doesn’t raise its debt ceiling they won’t default. It just means they can’t borrow anymore, and will therefore cut spending in order to by their loans.

        So I don;t think a default is likely at all, however a cut in spending to pay their debts is.

        • US is running a deficit : if they can’t borrow, they’ll have to default. Stopping the payment of all Federal government employees will not be enough, they’ll have to stop Social Security and Medicare payments, and that’ll be really, really ugly.

          • Montgomery Burns

            Incorrect. They do not need to borrow, they do however choose to borrow and make that the basis of the budget.

            Similarly any default is a willful default based on a deliberate choice not to pay rather than an inability to pay.

            Failing to raise the self imposed debt ceiling, which has been raised 30 or 40 times in the last 70-80 years and was raised at least twice under George W Bush, means that it cannot borrow any more not that everything has to be paid back immediately.

            It is all theatre.

      • Well I disagree with the fiat money thing, It is actually credit that lets people live in la la land, and there were credit bubbles before fiat money.

        I do however agree with your sentiment, but I am not sure that was David’s point.

        We all know that the US should have pushed against the house bubble and not allowed private sector debt to grow so large, But it did not.

        We know that by relying on this credit-driven perceived wealth that the US slowly gave away its productive capacity over the last 2 decades, it should not have, but it did.

        We know that in doing so it shipped the production component of its economy to asia, it shouldn’t have, but it did.

        In doing all of these things they allowed China to become a productive based for american companies and created a debt-surplus interdependency, where US debt was recycled to allow the emerging economies to tie their currencies to the US.

        We know that when the credit driven bubble exploded it should have guaranteed its banks deposits, nationalised the banks and told the equity and bond holders “too bad, you were getting paid interest/dividends for that risk, your bet failed so suffer the loses”. It should have, but it didn’t

        In order to re-flate the economy after the banks had died ( which they didn’t let happen ) they should have provide direct stimulus to the private sector via tax and other incentives to keep staff employed so they could afford to keep paying down their debts even as their assets deflated in value. They did not

        At every point along the way the US had a choice to unwind this system, they did not. Even when the economy fell into a debt hole they pulled themselves out with even more debt to keep the “system” going.

        This is how the world economy has functioned for decades. The US is now in a state where isn’t economy has just suffered a Minsky event, and nothing has been done to address the loss of productivity.

        In this state the US private sector is highly reliant on government debt to provide supporting stimulus because it continues to lose money via its trade sector and also by asset value deflation.

        Now I completely agree that the debt needs to be paid down, in fact in my opinion it never should have existed in the first place because a central bank with a clue would have never let private sector debt to rise above 40% of GDP.

        But at this point in time the removal of the government sector’s support of the private sector will have a devastating effect on the US private sector and therefore world demand, because nothing has been done to fill that gap with real economic productivity in the US economy and the US consumer is a major driver of the world economy.

        I think that is what David is stating, and I tend to agree. I am just not too sure it is inevitable, because from what I have observed of US politicians they will say what they want to get into power, and then do the exact opposite once in.

        • Superbly put, DE.

          Which is why, no matter what your political/economic philosophy, milkie-wilkies are essential. My personal view is stimulus should take a different form, nonetheless, potential economic ruin faces not just the US with ending of QEWhatever. (Problem is the underlying derivatives market). Even with it, there may be ruin. The US needs to create jobs in order to kick-start the economy and it’s not going to happen without Koo-Style massive infrastructure spend. It’s over if they don’t. But there’s a chance of resurrection if they do. Otherwise, endgame.

          An interesting debate, FWIW, I’m on the manufacturing side.

        • “Well I disagree with the fiat money thing, It is actually credit that lets people live in la la land, and there were credit bubbles before fiat money.”

          Real money can’t be conjured up out of thin air, I maybe should have said fiat money together with fractional reserve lending is the root cause for the current problems.

          The credit bubbles before fiat money must have been tiny compared to ginormous one we have now !

          • Montgomery Burns

            Real money can’t be conjured up out of thin air

            LOL 🙂

            So you don’t consider fiat money to be real money? I’ll take all of yours off your hands. Would you accept some real shells and beads in return?

          • Montgomery, You can have all my “real” money in exchange for gold or silver, fiat money has less intrinsic value than shells or beads.

        • Great comments DE. While reading it the one thought that kept coming to my mind was Australia is following in the same disastrous foot steps as the US.

          • LBS, we have already gone through the same major steps. Binging on excess credit at the expense of savings has driven capital away from complex production and towards consumption. As a result much of our industry has moved offshore, and indeed even our services sector is offshoring more and more.

            The big structural difference is that we have a reasonably large mining industry that has masked the issued caused by excessive credit and consumption.

            The other difference is that we came from a position of surplus, whereas the US govt has been running large deficits during that time. So we are in a better relative position, though remain on the same path.

    • Montgomery Burns

      credit issuance = increase in the money supply = inflation = theft

      = wingnut

      home ownership have virtually never have occured. business investment would not occur. we’d be living in the middle ages.

      …but given that wignuts and tin foil hat wearers who advocate this sort of stuff tend to want to live in huts in Montana, fully stocked with ammo and tinned food, I guess reverting to a middle ages lifestyle is probably their nirvana.


      • Rubbish. If you want to take this back to the ‘cavemen’ scenario, money gets created when people decide to do something for someone else as an act of faith that they’ll get something back in return. So if everyone in society decides to have faith, and do something which involves delaying their gratification, then you’ve created stimulus. ‘Printing’ the tokens centrally and then pretending that it’s real money and represents real work, faith and commitment is just theft.

        • Montgomery Burns

          mate you left out the bit about the global conspiracy of bankers led by the people who killed Jesus.

          Seriously you lot all follow a script.

      • For goodness saken Montgomery, money is simply an medium of exchange, instead of using a barter system, which gets complicated real quick with the more goods that are available to exchange.

        Increase the money supply buy whatever amount 10% %50 etc does not mean that magically 10% 50% etc more goods are now available to exchange your money for. All it does is devalue money relative to the goods you wish to exchange your money for, generally call INFLATION !

        • Montgomery Burns

          credit issuance = increase in the money supply = inflation = theft

          so how far would we have come on the road from the middle ages to modern society without credit?

          Increase the money supply buy whatever amount 10% %50 etc does not mean that magically 10% 50% etc more goods are now available to exchange your money for.

          similarly if you increase the amount of goods available by 10% without increasing the money supply you get deflation. Is that your preferred model?

          …and I presume you want us to go back on a gold standard right.

          • Monte, you can have a viable economic and monetary system without inflation.

            As an example, say you have a currency backed by commodities (ie not fiat and interest is not payable.

            Increases in technology and productivity have the effect of reducing prices over time, this is historical fact and not conjecture. This means that price deflation occurs within the economy all else being equal.

            In this environment, if you were a bank and issued a loan whereby only the principal had to be returned in the future, you would profit as the principal amount, when returned, would have a higher purchasing power than when the loan was made.

            This form of economy would encourage savings and discourage excessive spending. This is the polar opposite of what we have now, where consumption is encouraged because your purchasing power is eroded through inflation. Hence inflation is just like another tax, and the higher up the monetary chain you are the more you benefit from it (ie central banks, govts and banks benefit from inflation while the general population suffers from it).

          • The fractional reserve banking system is deeply flawed. Credit is not so much a problem as the interest which is charged on it.

            There is a good video made about it called “Money as Debt”, at the end it presents several alternatives for a sustainable economy with productivity and innovation, without a growing money supply nor an infinitely accelerating requirement for raw resources, which is inherently unsustainable – similar to our current economic models.

          • Montgomery Burns

            The fractional reserve banking system is deeply flawed

            I’ll take your word for it but since we don’t have fractional reserve banking its merits are basically irrelevant.

  6. The US fiscal position has deteriorated for two basic reasons.

    First, the Bush administration cut taxes while also going to war. This was a first in US history.

    Second, when the GFC hit and the economy contracted, revenue fell. It has not recovered, even though US GDP has climbed back to pre-recession levels.

    The revenue is down because employment is down. A minor part of the deficit is attributable to civil spending, but this is insignificant compared with the effects of revenue destruction.

    The Republican proposals will exacerbate this. If public sector demand is significantly reduced, the economy will shrink. That is inevitable at a time when private sector demand is also recessed. If the economy contracts, Federal (and State) revenues will fall further, compounding the deterioration in fiscal conditions.

    The fundamental issue in the US is not “debt” as such. It is and has been the unwillingness of Americans to properly tax themselves. On the issue of tax, the Republican position is not about economic policy. It is about tax resistance, political advantage and ideological mission.

    This is not the time for a tax revolt, but we are seeing one unfold just the same.

    • Well as the great philosopher George Carlin pointed out, there are 3 classes in the USA:

      the middle class, which does all the work and pays all the taxes
      the poor, who are taxed at the margin (through inflation)
      the rich, who pay no taxes and make sure the middle and poor classes are either frightened or envious of the other….

      Sad but possibly true. The tax paid by corporations and HNWI in the US is miniscule whilst transfer payments now make up close to 100% of tax receipts. Who pays for all this? The middle class, who are only 80% employed at best.

      Not sure why the Republicans (except Ron Paul) can understand that this is not a good economic model.

      • If they continue on the current path, destruction of the middle class will eventually result in the realisation that it is not a good economic model.

        The rich may have to pay tax!!!

        • Montgomery Burns

          the social conditioning there gives them a greater opportunity to perpetuate this disparity. Riots and protests as per e.g. Spain seem miles off.

          • True – too busy watching Kendra, Kardashians, WWF, Gerry Springer and Real Housewives.

            Perhaps years of decline in the public school system was deliberate!

      • Prince, thats not really true, the rich in the US have always, and still do, pay lots of tax.

        Looking at states, for Ca, NY and NJ 40% of state income tax is paid by the top 1% of income earners.

        Federally, the top 20% of income earners in the US have paid more than 80% of the taxes for decades now. The bottom 40% receive payments in net, so as a collective pay no tax. You then have the 40% ‘middle class’ as you could call them paying around 20% of income taxes.

    • Alex Heyworth

      “This is not the time for a tax revolt, but we are seeing one unfold just the same.”

      Exactly. Tea Party adherents are taking the view that the government has no right to tax “us” (ie them) to pay for benefits to “them” (ie health care, education, social security). While there is a case to be made that federal spending could be far better directed, the argument that taxes should be reduced seems pretty weak to me. The US is already one of the lowest taxed developed nations.

      • The argument from libertarians in the US is that spending needs to be cut first to enable low taxation and small govt. Not that tax cuts come first.

        The argument is also that laws need to be enforced; at the moment govt agencies and large corporations are able to ignore various laws without prosecution.

        That totality of this is an erosion of freedom in the US.

        PS: the US isnt as low tax as people assume once you take into account state income taxes, property taxes and sales taxes (of course this varies by state). Usually only the federal tax picture is considered. When you have to pay 3% of your property value as tax each year it is a pretty big proportion of your income.

        Texas is one of the least taxed and smaller govt states and it has done reasonably well during the last few years, something like a quarter of all private jobs created in the US have been in Texas. Contrast that to the big spending, big govt state of California which is in the toilet.

        • Montgomery Burns

          Pete, others would point out that some of that logic belongs to the gold standard, e.g. under the current system taxation doesn’t fund government spending so therefore debates about spending and taxation are conflating two separate issues. I’d imagine that those same people would assert that taxes need to be cut, and/or the deficit increased, in order to boost aggregate demand but you can read their thoughts and work out their positions yourself e.g:

          …plus Billy Blog on the blog roll on your right, and Warren Mosler, and Cullen Roche would be the most commonly cited advocates of these views.

          • Under the current system taxation + debt issuance finances govt spending. You cant separate taxation and spending, they go hand in hand.

            Cutting tax on its own doesnt stimulate aggregate demand when your debt to GDP ratio is too high (thats generally accepted to be >90% according to those who have done the research), as the drag on debt financing of the economy is too great.

            Similarly at those levels increasing the deficit has an overall negative effect (ie growth in GDP is less than the growth in spending). This is simple to see right now in the US.

            The theories around using tax cuts and increased spending to boost aggregate demand only really apply to economies that are not already stressed by debt levels that are too high. if your debt levels are too high due to high deficit spending then at some point you will need to cut your spending. You cannot keep issuing debt to kick the can down the road.

            from your link:

            ‘This key point, which is persistently obscured in these discussions, is that if a government issues a currency that is not backed by any metal or pegged to another currency, then there is no reason why it should be constrained in its ability to “finance” its spending by issuing currency. ‘

            That is patently not true, a sovereign cannot keep borrowing indefinitely without eventually either defaulting due to unsustainable debt requirements (people stop buying your debt, as you are too leveraged, and you cant finance current spending + coupons), or destroying its currency.

            This is shown by historical episodes of default, regardless of the economic theory you subscribe to. Anyone who believes that a sovereign can issue infinite debt because they control their own printing press is deeply misguided. if that was the case then you would not have sovereign defaults occurring with regularity throughout history.

          • Montgomery Burns

            No, taxes and debt issuance do not fund spending. (it is a little bit like the statement that bank reserves fund lending, also incorrect)

            I didn’t mean to imply that cutting taxes would/could be the only policy measure to stimulate demand.

            In your somewhat exasperated discussion about debt and kicking cans shouldn’t you distinguish between private and sovereign debt and also the denomination of the debt?

            You need to re-read that stuff again because your conclusions are a big fail. You reproduce this quote:

            This key point, which is persistently obscured in these discussions, is that if a government issues a currency that is not backed by any metal or pegged to another currency, then there is no reason why it should be constrained in its ability to “finance” its spending by issuing currency.

            and then you talk about something completely different, namely borrowing. Leaving aside the issue of whether you agree with the quote, it should be patently clear that the speaker is not making any statement whatsoever about borrowing. Therefore launching into a criticism of borrowing as a critique of the quote is a straw man argument.

            Regarding your final paragraph there are lots of mixed themes in there but you fail to mention anything about the monetary system under which the defaults occurred, and you fail to mention whether the defaulted debts owed where in the sovereign currency or some other currency.

          • So if govt spending is not funded through tax revenue and debt issuance, how is it funded? I presume you believe it is solely funded through the issuance of currency?

            Fair point about my mis-reading of that quote, I read it quickly and misread the meaning. However, it is an incorrect statement. No sovereign can indefinitely spend by issuing currency without reaching a point where confidence in that currency is lost. A currency only works as a medium of exchange for so long as there is trust in said currency.

            Whether it is fiat or backed by a metal is irrelevant here, being backed by a metal just makes the devaluations a little more obvious. The kings of old devalued their gold coin currency on a regular basis to finance spending. Just as now, it doesnt work.

            Whether the debt is issued to the public or external to the sovereign, regardless of whether the currency is pegged or not and regardless of whether the debt is denominated in the sovereign currency or a foreign currency, sovereigns will and do default. Currency pegs, foreign denominated debt etc are factors in making a default more likely.

          • Let me just clarify so we are not posting past each other. ‘funding’ can mean different things to different people, ie if you speak to a banker they will talk about funding their loan book through deposit growth and issuing debt. Whereas if i say ‘funding’ to you in the banking context, you will look-through and your interpretation will revolve around underlying currency flows.

            When i talk about ‘funding’ the government spending in this context I am talking about reasonable sustainable spending.

            You need to separate the underlying mechanics of currency creation with policy prescription and assumptions (ie the assumption that indefinite currency creation can finance any govt spending is very much separate from the underlying mechanism of currency).

            Taxation and debt are ‘funding’ in the banking sense for govt; the collection of tax revenue and issuance of debt is a control on the money supply that allows a govt to sustainably spend without out-of-control currency creation (leading to high inflation, loss of confidence in the currency and a collapse of the economy). In this sense, currency creation may be the underlying mechanism, but the ‘funding’ of the spending itself relies on the tax revenue and debt in the real world.

            hence why, once again, you cannot separate spending, tax and debt issuance in the real world, regardless of whether currency is the underlying layer of all of these.

          • Montgomery Burns

            You need to separate the underlying mechanics of currency creation with policy prescription and assumptions (ie the assumption that indefinite currency creation can finance any govt spending is very much separate from the underlying mechanism of currency).

            First let me say that you are creating these assumptions yourself. I haven’t said there can be indefinite currency creation and I have not read anyone who has said that. Correction, I have read Austrians who have falsely attributed that to MMT as a straw man debunking of MMT.

            The underlying mechanics, or operations, are that in our type of monetary system taxes and debt issuance do not fund government spending. But once you mention currency creation some of you want to take the leap and extrapolate this to mean that loss of confidence in the currency is inevitable. A loss of confidence or change in sentiment in relation to anything changes people perceptions of value. We see this every day in the share market, or house prices etc., but it doesn’t follow that there MUST be a negative change of sentiment. People would still have to hold the currency by the way, in order to pay taxes. In the event of a civil war or revolt maybe they may choose on mass not to pay taxes. If you extrapolate most arguments to a doomsday scenario you will be able to find your doomsday.

            As far as policy goes it seems that if your money creation exceeds your productive capacity then you will get inflation. That is why when people explain how the current system works they add the qualifier that it doesn’t mean you can create money ad infinitum.

            And in your second last paragraph you are describing two separate functions. In this system taxes and debt are controlling (to some extent) demand, not allowing spending. Government spending, aggregate demand and so on may not be separated in a discussion about the economy but they are separate parts to the economy and the former does not depend on the latter under our system (although I concede that every member of parliament would not know this which is why we have calls for the budget to get back into surplus).

            Here is another explanation:


          • Monte, you state: ” I haven’t said there can be indefinite currency creation and I have not read anyone who has said that. ”

            My response re infinite currency creation stems from the quote i pulled from one of your links, which states:

            “This key point, which is persistently obscured in these discussions, is that if a government issues a currency that is not backed by any metal or pegged to another currency, then there is no reason why it should be constrained in its ability to “finance” its spending by issuing currency.”

            This directly says that there are no constraints on financing spending through issuing currency. So how is it a strawman to state that this represents indefinite currency creation, when that is exactly what it states?

          • also just on this point:

            “And in your second last paragraph you are describing two separate functions. In this system taxes and debt are controlling (to some extent) demand, not allowing spending.”

            Thats the MMT way of looking at it, yes. But its simply one way, and not the only way.

            Another way you can look at it is that aggregate demand of the public for govt debt is a control on govt spending that is not inflationary. if the govt wants to spend above that it must issue more currency resulting in some inflation. There is nothing in MMT that shows aggregate demand is controlled by taxes and debt, rather than the vice-versa case.

            This is one of the problems i have with various interpretations of MMT as it stands: just because the accounting relationships hold (which they do according to the definitions) doesnt establish the cause-effect relationships seen in the wider economy.

            Mosler in fact has stated the following:

            “govt can only deficit spend (in real terms) to the extent the economy wants to net save financial assets denominated in its currency.
            Trying to spend more than the tax liability and ‘savings desires’ as defined will only drive up prices, and not get the govt any more real goods and services. That’s an mmt fundamental”

            That supports what i have stated, that taxes + debt issuance is a constraint on govt spending.

          • Montgomery Burns

            Pete your quotes are proving my point about no one claiming indefinite issuance of currency. It was you who introduced the term whereas as you point out all writers make it very clear that there are clear limits within which currency should be issued and they outline what those limits are.

            So rejecting the idea that no country can indefinitely create currency — as you did in your comment — is a straw man argument. No one is claiming that you should do that.

          • Montgomery, you have put me in the tin foil hat brigade with some of the comments I have made, now you may be right. I do genuinely want to understand at least the basics of economics and I thought I did, but I have been wrong at times (99.9% of the time if you ask my wife !).

            Now I think you should start with understanding the basics, then use that as a foundation for greater understanding (so far I hope I haven’t earned a rebuke from you). So starting with the basics what is your (not a link to a web site) understanding of the function/purpose of money ?

      • There are other dimensions to this. The first is that real disposable incomes for mid-low income households in the US have been stagnating for many years – maybe since the mid 1980’s. This has been associated with a complete re-organization of the occupational structure in the US labour market. Millions of skilled blue-collar and middle-management jobs have just vanished. Workers have had to become vastly more flexible in relation to the kind of work they will accept, the hours they work, the places they will live, the commuting they will do and the income they will live on.

        Long-term jobs in manufacturing or manufacturing-related occupations have become the exception where they used to be the norm, and a very much greater proportion of the population work casually or are self-employed contractors.

        And now, this same workforce has seen a new cycle of job destruction at the same time as they have seen their retirement accounts stagnate, and the equity in their houses evaporate along with their general sense of economic security. In a society where access to employment is the difference between some economic security and abject poverty, the health and character of the employment market is absolutely central to people’s lives.

        In the US, where it is always popular to bash the Government, there is visceral appeal to demands that taxes be cut and the size of Government be cut back to match Americans’ sense of their own reduced fortunes.

        It is easy to see all this and understand it. The trouble is that tearing down the infrastructure of Government will only make things worse. It will be totally self-destructive.

  7. with regards to modern
    fractional reserve banking
    – cui bono?

    capitalism requires capital

    it is fraudulent, insolvent,
    exploitative, creates speculative bubbles
    and busts, beholdens governments to socialise the losses

    the kleptocrats are in charge

  8. with regards to modern
    fractional reserve banking
    – cui bono?

    capitalism requires capital

    it is fraudulent, insolvent,
    exploitative, creates speculative bubbles
    and busts, beholdens governments to socialise the losses

    the kleptocrats are in charge

    • Montgomery Burns

      the government is the root of all evil

      fiat money is theft

      we MUST return to a gold standard

      hyperinflation is just around the corner

      there is a worldwide banking conspiracy to steal our wealth (led by the people who killed Jesus)

      yada yada yada

      let’s abandon fake money and store gold, store ammo, store tinned food (and store tin foil hats), and set man traps around our compounds.

      actual economists who subscribe to Austrian views are probably quite coherent but their acolytes are absolute tools and show signs of mental impairment (I cannot use the words spastic or retard because our oppressive government won’t let me)

      • You mix truths (ie. the well known worldwide banking cartel, hardly any conspiracy nor a theory) with exaggerations (did they really kill jesus?) and false implications (ie. the only alternative to the current system of fiat money is gold standard).

      • Montgomery, I’m at work now, tonight I will take up the challenge of replying to your comments.

    • Alex Heyworth

      Arne, I think you are mistaking the abuses of capitalism for the beast itself.

      What alternative are you proposing?

      • MB
        its either a gold standard or a fraudulent fractional reserve system? – the ‘argument’ is a little shallow. Anyone of us can conjure an
        argument via some blog somewhere to support
        whats in our best interests. – intellectual or fiscal.
        I have made a lot of funny money from
        the ponzi financing (excessive credit issuance) of real estate. Having said that its still
        flawed, what is the true value of an asset?
        What is the true value of money/debt?
        What is the vaue of fiat if it is backed by debt at a ratio of 10:1. –

        Fiat is an accident waiting to happen.

        Alex, perhaps check out the work by economist Herman Daly.
        BTW, our beloved Steve Keen acknowledges
        the deflationary/contractional nature of
        peak oil on the wider economy.

        • Alex Heyworth

          Arne, I think perhaps you have misread my comment. I agree that all the things you mention are happening. I just think they are caused by the current implementation of capitalism, not capitalism per se.

          As for Herman Daly, he may be right, but not yet. He is a man ahead of his time.

        • Montgomery Burns

          denying borrowers the right to credit and lenders the right to debt hardly sounds like a free market philosophy. Why shouldn’t the market decide who gets credit?

          until you read the debunking of Rothbard this can’t really progress. Fiat is not backed by a debt ratio of 10:1 yada yada yada everything else that gets said in ignorance of how the monetary system actually works.

          Find out how the monetary system works and then lets hear the objections if you still have any.

      • arne, if you have read Steve Keen, you would realise there is no such thing as a fractional reserve banking system.

        We don’t have one, neither does the US or any major banking center.

        You don’t need reserves to create loans, you create them first and then find the reserves later.

        This has been empirically proven (for decades), therefore FRB is not in operation at all.

        Let’s keep the rhetoric down a bit too folks……

        • Montgomery Burns


          frustrating/irritating to continually read these objections to a monetary system that doesn’t exist.

          Let’s keep the rhetoric down a bit too folks……

          sorry my characterization of tin foil hat blogs was probably needless digression.