Government cheques don’t bounce

Check out the chart below. It’s of the breakup of the US GDP with the last bar being the results for the 4th quarter of 2011 released Friday night. I got it out of The Atlantic on Saturday Morning and tweeted it. The reason I was so excited, well not excited really but rather whatever the word for heightened senses is, was the size of the Government drag on growth – the grey bar.

Now regular readers know what’s coming next – GDP = C+I+G+(X-M). These 5 Sectors, consumption, investment, government and net exports make up the 2.8% annualized growth rate for the last quarter. Leaving aside that this recovery is so bad each quarter of it so far has been below the post WWII average it’s the G that I’m interested in here today and particularly the negative contribution (don’t you love economics – negative contribution!) for the 4th quarter of 1%.

Austerity is the new black these days. Whether its Australian households, European governments or the United States Treasury everyone I’d saving and cleansing. But what is true of households is not true of sovereign nations per se. Sure the behavioral similarity in tightening your belt to pay you bills is understandably similar but the reality is the situation is very, very different. While myself and my family have to earn income in order to pay our bills or the cheques I write will bounce the same is not true of the government.

Government cheques don’t bounce – not if they dont want them too and dont put artificila constraints on themselves – it is as simple as that.

Last night I was reading Warren Mosler’s, the father of Modern Monetary Theory, book “Seven Deadly Innocent Frauds of Economic Policy” again because of how this concept of Government cheques not bouncing tied back to austerity.

One of the things you would have heard over the past year is that the problem in Europe and potentially the United States, United Kingdom and maybe even Australia eventually is that debt could become “unsustainable”. In his book Mosler talks about an exchange he had at a conference in Sydney with a David Gruen who was RBA Head of Research at the time.

“David, so tell me, what do you mean by the word unsustainable? Do you mean that if the interest rate is very high, and that in 20 years from now the government debt has grown to a large enough number, the government won’t be able to make its interest payments? And that if it then writes a check (sic) to a pensioner , that the check will bounce?

… No, we’ll clear the check , but it will cause inflation and the currency will go down. That’s what people mean by unsustainable.”
So government cheques don’t bounce – not least for economies like the US, Australia and the UK which have their own currencies.

Mosler again:

The fact is: government deficits can never cause a government to miss any size of payment. There is no solvency issue. There is no such thing as running out of money when spending is just changing numbers upward in bank accounts at its own Federal Reserve.

Yes, households, businesses, and even states need to have dollars in their bank accounts when they write checks, or else those checks will bounce.”

But not sovereign governments with their own currencies.

So in the US the fact that the G in the GDP equation is dragging on growth is to my mind negligent as it is in the UK and Australia. Greece and Portugal don’t have their own currencies but have been living like they do so Europe still has its issues (think of them as states of Europe in the quote above). But for those of us with a choice it’s important to remember Government cheques don’t bounce – its ok to support your economy when it needs it. But if Governments are caught in a political and philosophical straight jacket then rates are going much lower in Australia and are going to stay low around the world for some time yet.

Risk assets will love that!

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Comments

  1. Damn! DFM, I didn’t know you were a red under the bed. Print, grow, full employment for everyone. No worries. All from squeezing the government’s magic pudding.

    Hooray!

    • Deus Forex Machina

      You’re kidding me right???

      How the heck did you get me in bed Big Joe – I would have thought I’d be accused of peddling Keynesian clap trap in this post.

      I’m taking one of Mosler’s tenets here, not all of them and making a point that austerity is damn silly if you have your own currency.

      BUT on the JG I find it difficult to implement and almost unworkable in a modern economy but having sat down with Bill Mitchell and discussed it I buy his argument that there is a social good in keeping every one in work for the families particularly the kids…

      Interestingly i see it as analogous to working for the dole (or a repackaged version) which I think the left would hang me for and the right might applaud.

      So like everything in economics there is no magic pill.

      But my arguement remains – the US and UK and Australia should suppport there economies. If not in our case it will be left to the RBA to cut rates too far and we risk igniting housing again – which I assume you are not in favour of???

      • LOL. Smackdown!

        I see it a bit differently. To me the government has no choice but to show a path to surplus or risk ratings agencies wroth. That’s what they’ve said after all.

        They can play around at the margin on this but that’s all given the same agencies have also declared fiscal support for the banks protects their ratings.

        So, to me, for a little economy like ours the principles of MMT don’t really apply.

        And yes, I agree on the risk in rate cuts, which why I’ve argued we need macroprudential policy tools…

        I agree with you on counter-cyclical Keynesiansm of course. As will the agencies.

        • Is there any likelihood of the government enacting macroprudential tools. Seems at least on the face of it two major hurdles:

          1) No kahunas; and
          2) consensus on what macroprudential tools to implement.

          My guess is they’ll take the path of least resistance.

        • The Sacked Wiggle

          refresh my memory but your case about the ratings agencies is not so much what a downgrade, should it occur, would mean for the federal government but what it would mean for our banks borrowing costs right?

          In other words — if I understood your position — the guvverment must get to surplus in order to support the banks (or some version similar to that)

  2. Risk assets may love it.Let’s say, oil, for instance; pushing up the nominal price of the asset and squeezing the daylights out of what is left of our consumption class. Risk Assets, Higher = Disposable Income, Lower = All Sorts of Social Nastiness.

    • Deus Forex Machina

      Yes, Yes, Yes

      We cant leave rates at zero forever and I would prefer a balance between fiscal and monetary policy not everything being done by monetary policy…

      ZIRP distorts valuations as Barry Ritholtz wrote again over the weekend…what is the NPV of a series of cash flows when the relevant discount factor is a zero interest rate??? Infinite???

      • Bascially yes. At an interest rate of zero money is worthless – so by definition everything else must be worth “infinite” times the amount of it. Central banks have really distorted the cost of capital everywhere as intended to encourage risk taking – despite the fact that it was risk taking that got many of the countries into the mess they are in. We are encouraged into more and more risk just to tread water economically.

  3. Pretty sure I recall Richard Koo arguing similarly last year. A recent PragCap article also argued along the lines of ‘there’s debt and then there’s debt’.

    If you have time could you expand a little on “…Governments are caught in a political and philosophical straight jacket..” re rates going and staying low.

    Cheers.

  4. There is the Soro’s solution for Australia. The refinancing of the government debt at 1%, cut out the bond traders by having the debt that is created/financed non tradeable, and creation of a new goverment owned trading bank that competes , properly prices risk and concentrates on business finance, stays out of housing or insists on 50% LVR’s. Chuck in some major fiscal reform like making Tasmania, a tax haven like the Isle of Man where manufacturers pay nominal tax. A bit ambitious and unlikly however they should look at doing something whilst the dollar is still high.

  5. Research on the iphone DFM? I like it.

    I recall a former Rudd staffer saying once the threat of unemployment or mention of the dreaded ‘R” creeps up the deficit issue will get swept aside. Makes sense in our single meme politico-media mix. Economic safe hands while the rest of world sinks vs. profligate spending….

    Also, wouldn’t it pay to work backwards on this issue a bit more? Look at Japan as the home of long term growing deficits and then ask ‘could Australia do the same’? Who would buy the bonds? Households? Firms? At what rates?

  6. Love that part of the book, for both its point and parochial reasons.

    However to the trolling of red under the bed, saw a good brief blog post on that nonsense today – Keynesian Economics is not Socialism – http://bit.ly/wCKSZP

  7. Good post DFM, another MMTer good to see.
    It took me a few years reading MMT stuff (Bill Mitchell, Mosler, PragCap etc). But once you get it, it is really frustrating to see that people who run the country, RBA etc have very little understanding of the monetary system they live in. Deficits really, really don’t matter, and can be as large or as low as required as long as they don’t cause inflation (aggregate demand does not exceed the economy’s ability to supply goods and services) . No one is saying fed gov should spend money like crazy when the economy is at full capacity. Then it is the perfect time to be austerian and/or to raise taxes if necessary too cool it. But if private sector is unable or unwilling for whatever reason to put the good resources (all those people willing but unable to work,since there are no jobs or enough working hours) to use (i.e to keep them employed), then who else can do it but the government via its deficit spending. And no you won’t get inflation since those people would be otherwise unemployed and have little or no bargaining power. Unemployment has a huge hidden cost to the society (that we all end up paying), through higher crime rates, people being more depressed, abuse alcohol, drugs, dysfunctional families etc. When it becomes entrenched it drags whole suburbs, towns and regions down.

    Deflation, then inflation, mass unemployment, brought you know who to power in Germany in 30s.
    Did you notice that once WWII started, all countries involved reached full employment very quickly. But do you really think that war is a better policy tool then building another bridge to nowhere, if you run out of good bridges to build.

    Anyway go and read MMT it really makes sense.

    • Did you notice that once WWII started, all countries involved reached full employment very quickly. But do you really think that war is a better policy tool then building another bridge to nowhere, if you run out of good bridges to build.

      It was a major element in the period of ‘all boats rise’ in the post WWII keynesian era.

      Soldiers went off to war, they were paid, they received a pay cheque. Elsewhere there was full employment.

      Now at the peak, 50% of Australian males between 18-40 were in the military, up to the point of forming the 10th division.

      However the economic impact of this was disasterous, and once the US 6th Army took form, the Ausralian government started disbanding the 10th division to mobilise back into the workforce.

      The rule fo thumb is that 6% of the population can be in the armed services without impacting on aggregate supply.

      The soldiers came back, and real them receiving a pay cheque is an MMT principal, realising they don’t have to be killing enemies and obliterating real wealth in brass bullets, iron bombs, etc, etc.

      6% is close to what NAIRU has us at at the moment, really, those 6% can be part of doing stuff, doing ANYTHING.

      If all forms of existing welfare were abolished and replaced with structured institute along the lines of Mitchell’s idea of a job guarantee, I think we’d see a major positive.

  8. “I would have thought I’d be accused of peddling Keynesian clap trap in this post.”

    You are peddling Keynesian clap trap in this post.

    BTW, David Gruen said (according to Mosler) “No, we’ll clear the check, but it will cause inflation and the currency will go down. That’s what people mean by unsustainable.”

    Is Gruen wrong?

    • Deus Forex Machina

      Yes but thats the point…why is a policy that buttresses the economy and takes the heat out of a currency like the AUD at 1.05/6 or higher bad…

      equally not all inflation is bad in my opinion…i think what the BOE is doing letting inflation run a little stronger is actually quite smart as a nominal v real play…

      hyperinflation – thats another thing but we’re not advocating that are we…just a bit of stimulus where required…

      • On the inflation question, at what point do we consider inflation high. Under RBA guidelines it is anything over 3% but I find that low to mid-range. With no evidence just a personal position perhaps once we climb over 5 or 6%. Perhaps even higher depending on real growth and employment.

        And I speak of stable inflation not accelerating inflation or disinflation.

  9. Those who advocate that the government should step in and borrow and spend more when everybody tries to spend less should not forget that at a later stage we will elect a Howard-Costello type of government determined to pay-off the debt. Then that new government will tax us to oblivion until that debt is repaid. I surely don’t want to be overtaxed to pay off debt accumulated for various make-work programs with questionable efficiency.

    We live in a world with scarce resources. We better allocate them in the most efficient manner. Governments are usually efficient in certain limited areas – defence, policing and building large infrastructure, but projects outside these areas are usually disastrous in terms of efficiency.

    How about an alternative view. The few years up to 2008 were not really normal. We were spending money we did not have to buy stuff we did not need to impress people we did not care about. This was clearly unsustainable. It is over. Gone. Now is time to adjust to the new normal when everyone is more frugal and shall I add – a bit more sustainable. Any “step in” by the government stands in the way of this “return to normal” process and thus does more harm than good.

    • Deus Forex Machina

      We must adjust to the new normal – with that i have no dispute but we can choose the path to this normal to ease the overall pain in the economy.

      for example I’d argue that in many states in the US the path is easier than ANY state in Australia because you can walk away from your debt with little long term consequence. This is one of the reasons the McKinsey report shows the US is doing well cutting debt http://www.macrobusiness.com.au/2012/01/chart-of-the-week-deleveraging/

      In Australia that is not the case so the path to debt reduction is longer and harder and bourne by householders and thus retailers and other ancillary businesses that service the consumption side – so it may be necessary for G to be a bit more positive for a while.

      Even if its just to balance out to a still lower growth future than the recent past.

  10. Hi thought provoking post as usual. You lump the US, UK and us together, I’m wondering if the US having the global reserve currency makes them different from us and the UK?

    • Deus Forex Machina

      Reserve status affords them some luxury in terms of debt levels and deficits except they put artifical constraints on themselves with the debt ceiling and so on…they are as captured by the rhetoric as anyone, probably more so, save Europe

      but the USD is reacting as the Fed wants it to and has weakened over the course of the GFC so they are getting their cake and eating it too

      interestingly without reserve status the UK is getting away with relatively high inflation and austerity – there is a theory that as long as you have your own central bank and your own currency you are safer – UK is potentially proof of that theory although even 4 years into the GFC its still too early to tell longer term

      • DFM this “theory” always works – until it doesnt.

        Thats why chartalism has been able to be revived.

        the govt cheque is only as good as the faith in its perceived value. While the US reserve status means they can get away with inflating longer, at some point that game stops and countries start to transact in other currencies. I wouldnt say they are eating their cake too; their economy isnt exactly booming and fuel prices remain high. The Fed looking at QE3 tells you as much. It just papers over the cracks of a brittle economy.

        Similarly here we could inflate “a little” to ease our woes, but how do international investors react to that? If it is perceived that our currency will weaken over time then there is a not insignificant probability that those with AUD will flee before they are forced to.

        Thats the end game with all these shenanigans: looking at a GDP equation and assuming that it is the same as “the economy” does not mean that it will hold true in reality. Time has shown that to be the case.

        • Each time we print or create a dollar credit, whether public or private, we make a decision to increase our international indebtedness.
          Why is everyone in denial about this?

          A little inflation is put forward as though we are thus getting something for nothing. We aren’t. We are just stealing from the prudent to give to the profligate. That works for a little while, barring likely accidents, until we have no more prudent and only profligate. Who are we going to steal from then to fund our over-indulgent lifestyles?
          How the hell does anyone think we got into this mess other than by profligacy and penalising prudence and production.?
          Now we are paying more and more Public servants and lawyers to think up more and more regulations in order to justify their employment while strangulating every productive enterprise in the country. We call it progress and add the wages of the PS to GDP and call it ‘growth’.
          Is everyone totally insane…rant off!It’s just frustration!

  11. Isn’t it curious how a slowdown in the rate of increase, of the rate of increase in government spending is called “austerity” ??

    Western governments have gone on the mother of all spending sprees over the last few decades, racking up huge debts in the process, and now they are starting to hit a wall.

    That wall should be called reality, not austerity.

    • Maybe Bono and Bob Geldof can hold another aid concert to ask for debt forgiveness for these third world European countries.

      Worked for Africa…..

    • Jack
      How does 1% interest help the necessary total restructuring of these economies?
      Zero to negative RAT rates caused the distortions that resulted in the crisis. How can RAT rates even more negative fix the problems. It will just make it worse. The attitudes currently entrenched will be further entrenched. More Govt employees, more service sector. Production doesn’t pay so all the money will go to those sectors that were the recipients of past largesse.

      • Flawse I agree if the refinancing results in the capital being used for the service sector its a total waste of time and will make the situation worse.

        I believe if the money was used to retire government debt that is at a higher rate and it could buy time to restructure their economies.

        It is a bit of moot point however with the amount of currency manipulation and tricks being carried on by every developed country such as China , Singapore the Swiss etc to maintain their CAS.

    • “Mr Soros proposed that Spain and Italy should be allowed to finance their deficits by issuing treasury bills with a 1 per cent interest rate”

      And who would buy them?

      • The ECB you idiot…who else? 🙂

        Beautiful isn’t it…then you have a bond market that is solely the ECB!

        There just might be a bit of self-interest in the Soros proposal somewhere!

        • IF all of the debt was being monetised by the ECB would holders of existing debt at higher yields be rewarded by an increase in the capital value of that bond as it is more valuable, no more being issued ?
          This is more a rhetorical question ,I am just following on the thread that Soros then makes a killing by holding existing debt

  12. Frankly this is all just more modern monetary tripe. I work as well as watch this site so I’m too late getting here to be an active part of the debate.

    Mosler sits in the richest country in the world with massive natural resources that also has the Reserve currency. Yet does anyone think that the US is getting off scot free for all this printing….maybe so far mostly free. The day of reckoning on that is coming when the USD will no longer be accepted as payment for some resources and products in some places. (evidence on that is readily available if you talk to Chinese investors)
    Why was Gruen portrayed as the fool here? He was exactly right. What you get is either inflation, an increase in your CAD and Foreign debt, and a bath for your currency resulting in more inflation and round and round and round.

    You can print you own currency till it reaches the moon and back. No problem so far. Your problem comes as say, in Australia’s case, the marginal leak rate in payment for foreign goods is about 35%. Immediately your currency is worth less. Your previous solution to this was to import even m ore cheaper goods from China. This is no longer available to you as the evidence is that the USD FOB price of your goods ex China is rising rapidly and your own currency is deflating rapidly.
    At this point you either sell your country off (which we have already done) or you whack on teh brakes with extremely high interest rates or you watch your society fall to pieces under the influence of inflation.

    Mosler talks absolute tripe and Bill Mitchell is probably worse.

    • A bit of inflation is like a bit of cancer. At what point do you do radical surgery and cut out the growing cancer or do you let it grow to destroy the whole body.
      Negative RAT rates that you are advocating result in more spending and more debt. You must, mathematically in an economy structured as Australia’s is, get higher inflation and/or a higher CAD

      • Isn’t it amazing. Irresponsible borrowing and spending caused the GFC. Yet some (actually most) economists believe the solution is…irresponsible borrowing and spending. Amazing. Absolutely freaking amazing.

        • Deus Forex Machina

          How is it irresponsible to run a deficit to support the sectors of the economy that need it now??? no one is advocating irresponsible borrowing indeed Id argue in australia if the burden is shared between fiscal AND monetary policy more evenly rates wont need to go as low as they will otherwise go and thus there is reduced risk of anothe misallocation into housing…

          by saying no borrowing you maintain the current status quo – mining boom till china busts and the rest of the economy gets hollowed out by this and a high aud…

          there is no quick fix but supporting your economy now is so far from irresponsible I cant believe I have to write this

          • Deus Forex Machina

            BTW – here is what Skidelsky wrote in Project Syndicate recently on this specific topic…I agree with him

            “the national debt is not a net burden on future generations. Even if it gives rise to future tax liabilities (and some of it will), these will be transfers from taxpayers to bond holders. This may have disagreeable distributional consequences. But trying to reduce it now will be a net burden on future generations: income will be lowered immediately, profits will fall, pension funds will be diminished, investment projects will be canceled or postponed, and houses, hospitals, and schools will not be built. Future generations will be worse off, having been deprived of assets that they might otherwise have had.”

          • “How is it irresponsible to run a deficit to support the sectors of the economy that need it now?”

            It is irresponsible if these sectors cannot stand on their own feet in the long run. Eg in Australia the car industry is a dead duck, long term. The only reason for government support is political, not economic.

          • Deus Forex Machina

            what if the sector is just a working family with two kids over burdened with debt because everyone (except us here at MB) said it was a never ending gravy train and the government reinforces this with policy all the time…is it there fault, is it their kids fault or is it the economies institutional framework at fault???

          • I think you’re stretching the meaning of “sector”, Greg. But to answer your question, it is partly their fault, partly the government’s fault, and partly the institutional framework’s fault. How you apportion the blame depends more on your political stance than anything else. I think we can leave the kids out of it.

            However, apportioning blame is only useful if it serves to change future behaviour. The change I would like to see (which is happening to some extent) is to an Australia which relies less on borrowing from overseas and more on domestic saving. This doesn’t need to mean an obsession with government surpluses, but does mean keeping a reasonably tight rein on government spending, particularly with an economy with close to full employment and good growth. In short, cyclical deficits OK, structural deficits not so good.

          • Deus Forex Machina

            I accept what you are saying there alex but my focus in this instance is about families – i think they have been terribly let down by the economic and intellectual infrastructure over the debt boom and having been so they are now faced with bearing the brunt of the restructure…not to say they werent complicit somehow…

            agree that the big positive has been the reduced reliance on offshore and also agree with your thoughts on the surplus deficit equation…

            cheers greg

          • It’s irresponsible because it only delays the inevitable, it doesn’t solve anything. Indeed, deficit spending makes things worse because of the higher debt burden which has to be serviced with higher taxes in the future.

  13. How many times does it have to be shown in here that MMT is a totally false flawed teaching based on false precepts?
    Yet we get Mosler quoted as if his words are the command of God and David Gruen’s words are totally misrepresented

    MB is better than that surely!

    • Deus Forex Machina

      Give me a bereak Flawse – the point is that policy makers and economists have put them selves into a theoretical straight jacket that is making them prescribe a remedy that is as bad if not worse than the disease…why else is the IMF under Lagarde changing tack, almost 180 degrees??

      The point of the blog was not to make Mosler a God but rather to highlight that there are other ways…

      In all my time in financial markets I have found that there is always a kernal of something I can learn from theories or ideas even if I dont agree with them completely or at all…thus i appreciate your thougths even if I think them a little alarmist

      cheers – Greg

      • DFM printing in the long run is no different to a default if you have high levels of debt. Thats the choice, default now and let the credit markets punish you or inflate away your currency to cover the debt and eventually destroy any confidence in it. If your debt isnt high, and has been taken to create productive industry, then the debt is taken care of through additional growth.

        There isnt “another way” to have your cake and eat it. Austerity + higher taxes is no solution, obviously. Austerity + default IS a long term solution, as govt spending is way out of control. The debt needs to be flushed from the system one way or another. A govt funds itself not from printing money (i still cant believe this is even discussed), but from the labours of its people, and any govt over the long run needs to live within the means of that country’s productivity.

        This rubbish about having a sovereign currency making it any different is just that, rubbish. Govt cheques DO bounce when someone refuses to cash it!

        • Thanks poid.

          “There isnt “another way” to have your cake and eat it. Austerity + higher taxes is no solution,”

          That’s why I’ve always said ‘The (easy)answer lies back in time’

          “Austerity + default IS a long term solution”

          Yes this is the point. Those sectors of the economy (FIRE)that have grown way out of control in the 50 year easy credit phase have to decline…i.e. many default and disappear.
          Does it hurt? Sure as hell!
          Does it involve a reasonably severe cut in living standards? Sure but it would not be too bad if EVERYONE took some pain

          The problem with the living standards thing is that those with the power always refuse to have their standards cut. Politicians, Public Servants, powerful unions (including lawyers), banks, powerful sectors of the retail RE industry, etc all refuse to take their cut.
          Then the pain falls on the few and it hurts like hell

          • Deus Forex Machina

            you know I dont disagree at all…my problem, in australia unlike the US, is its hard to default without really really hurting ever one. families, businesses and the economy – bankruptchy is not really something we like here and it has a stigma attached so you have financial and social costs long term and behaviourally i’m concerned how that would play out…also i think the government would end up having to step in and support anyway but from a lower social base, for the families,

            so my sense is there has to be a way to get the realignment back to a more sustainable economic break up perhaps more slowly granted but with less acute pain and the social upheavel that might come with a short sharp contraction…

            equally i think (and i’m going to sound like Big Joe here HnH) it is the average joe who is going to get hit hardest and I just think that is so unfair because they have just followed what the MSM and their advisers, friends and family have said was the way to go…

            there has been a massive policy failure over the past 15 years and the little guys are the ones going to get squashed…

          • there has been a massive policy failure over the past 15 years and the little guys are the ones going to get squashed

            Greg…50 years…that’s why it’s all so damned impossible and intractable.

            We’re all aiming for the same thing…unfortunately there is no easy way in a corrupted democracy.

      • Greg

        I just want to hear one MMT proponent say…

        Yes!!! Our choice is now we print money. We know we can’t control where it goes in the economy once it goes past the first layer. So, in the Australian economy which is 70% service sector we know that more than 50% of the money we print is going to end up being spent on imports. Yes we know we already have a massive CAD and we know this will make the CAD significantly worse. Yes we know that the CAD does increase our Foreign debt and require that we sell more of our resource assets to foreigners. We know this is living off the future of our children.
        We know we are doing this so as to maintain the economic structure basically as it is. We know this is a bad structure but we don’t care.

        Just one person from MMT please think through this and say ‘OK WE see that is so. We know printing is not a costless process’ It always disadvantages someone.

        Can we please just do away with this stupid notion that by printing we get something for nothing.

        • flawse, if we print money we will get inflation and more than likely some currency devaluation. With the currency devalued, importing will be more costly, so we may see a shift toward decreasing imports and increased domestic production in some sectors.

          However, the big question is whether markets will react by dumping the dollar. If the expectation is built that we will continue to print as necessary, then markets probably will react.

          I don’t see this as having a tangible impact on the CAD, given that we are seeing a record CAD with just the opposite policy (as in, money aggregates goring slowly, credit growth extremely subdued etc).

          Remember, most of the CAD is earning from foreign investment in Australia (and lending) being sent abroad.

          I will write something about this in more detail soon.

          • Rumples
            most of the CAD is earning from foreign investment in Australia (and lending) being sent abroad.

            You must be using some sort of residual measure of CAD here. I’ve not got the latest numbers on this but I thought this was about 6% of the total outgoings?…perhaps I’m confused!

            Repeating an earlier question I had. Most of the earnings of foreign companies here have been re-invested in the country. Certainly this is true of resource companies. I wouldn’t have a clue about Schweppes or Cambpbell Soups.

            Given that interest and dividend repatriation adds (significantly)to the CAD, the major retention in Australia of profits from foreign companies may mean our REAL CAD is much higher than we tell ourselves?

            Look forward to your post.

      • thus i appreciate your thougths even if I think them a little alarmist

        I don’t think I’m alarmist. Perhaps my sense of frustration over the continual return of MMT makes my tone sound more strident. I DO just regard it as tripe essentially based on the Pitchford thesis which has been clearly demonstrated to be so wrong.

        Greg you yourself are worried that the ordinary people have been asked to make financial decisions in an environment that wasn’t giving them the facts they need.

        My problem is that people are now voting based on their own selfish interests. This has resulted from the notion, encouraged by every political party, that there is an unlimited amount of funds for the Govt to give out. There isn’t. So I’m saying let’s cut all the BS.

        Like you, I think it’s time that the economic profession, MSM, RBA. Treasury etc really gave people the facts even if they are hard. Then let the people make the choices. That is democracy and I can’t think of a better system except to elect me dictator!
        Unfortunately it isn’t going to happen because of all the entrenched self-interest.

        In that case the end result is not going to be pretty. People will one day let into power some psychopath who promises to fix all their problems. Dictatorships, war you name it. Timeline…hell I don’t know..who does? But as sure as hell if you follow through logically that is where we are headed.

        So it is REALLY important that economics does not garb itself in this new cloak of MMT. Let’s have some common sense and deal with reality.

        • Deus Forex Machina

          cant disagree with any of that…in the long run…please excuse my tone from 525 this morning btw …it was a little rude – hadnt had the coffee yet

          which is why i’m advocating small amounts of help now to avoid a bigger debacle later…we can debate whether this is doable and I accept the implied premise through this thread that the big flaw in my argument is that I have to effectively trust the people who got us into this mess with fixing it…

          and i hear what you are saying about dont replace one doctrine with another…if anything i’m a trying not to be too prescriptive or doctronaire and seeking to cherry pick from a bunch of different theories which could then tie back to the “right (what ever that is) outcome for our economy specifically and the global economy more broadly…

          perhaps with the benefit of hindsight i should have introduced the piece a little better as to what i was setting out to do…but as ever I am enlightened and informed by the debate with you and other commentors

          cheers greg

          • I agree with Flawse on this one.

            There isn’t an unlimited amount of funds for the government to give out.

            Like households and businesses, a sovereign (even with a fiat currency) does have a long-run budget constraint.

            What Gruen is saying is right. It makes no difference that the RBA can technically honour any government cheque.

            If a government has lost access to the bond market and is forced to finance spending with base money, and the nominal rate is greater than 0% (velocity is fairly normal)any permanent increase in base money (which is what money financed spending is) will quickly lead to hyperinflationary expectations.

            At that point the government is in default; because it can’t exchange its paper (either cash or bonds) for goods and services.

  14. For all the MMT critics, this is how you do it fairly. http://www.interfluidity.com/v2/1357.html

    Please note TC’s responses on the terms insolvency and default. There are many other good posts in the comments section too.

    The import is the stock-flow consistency of sectoral identities, that’s all DFM has highlighted here. Other things related to MMT are extraneous to this article.

    On the CAD argument I continually see Flawse bring up I think I’m beginning to get my head around it. Is it the view that the CAD should be balanced?