Modern Monetary Fantasies 2

The Myth of Big Government Deficits – A TED Talk

This is quite the tale. I’m sure Ms. Kelton studied her economics but here with MMT she takes a few basic truths and spins an elaborate fantasy. Essentially her argument is that debt is no obstacle to economic policy and economic outcomes. You want a Ferrari? No problem, the Fed can write a check and it’s yours, no taxes, no worries. Advocates will hate this simplification but that’s essentially what Ms. Kelton is selling. (You can substitute free healthcare, free college, whatever you want, but I’d go with the Ferrari 365GT.)

MMT is utopian economics. Yes, in theory it can make sense, just don’t go too far down that rabbit hole. Govt debt is not like private debt because it never has to be paid back, only serviced and rolled over. So the debt in $ terms doesn’t matter, but the productivity of that debt matters a lot (the debt to GDP ratio is a good indicator – it looks worse every day).

She lauds the pandemic stimulus because that essentially was an MMT experiment. Look, no recession! But recessions are measured in monetary terms (not value), and if the Fed keeps pumping out money, voila! No recession. But value creation matters and in value terms, we are suffering an extreme recession and stagflation. How many small businesses have closed in the past 2 years? How much price inflation are we experiencing? 5-9%? Have you tried to buy a house lately? 20% price increases. Tried to get a plumber or electrician?

Yes, when the government spends $28 trillion, that money goes somewhere in the private sector. And yes, we’ve seen it skimmed off by the banking industry, the asset-rich who have merely leveraged 3% debt, and the securities markets that have bubbled up even as production has declined. This is what is driving inequality to new heights as the global elites suck up this cheap credit courtesy of the central banks. Check out the number of mega yachts plying the oceans.

Yes, we’ve seen the fantasy of MMT in action and that’s why we’re having a political revolution. Kelton and the handful of economists selling MMT are assuming a utopian political world where everybody always does the right thing. Ultimately, intellectual dishonesty like this is extremely damaging.

Read her book, there’s nothing there that will address these false assumptions. Credit and debt are tools that the market uses to restrain profligacy. Without those restraints, the party will eventually implode.

Modern Monetary Fantasies

I read this comment to an article on cultural conflict and politics (the article was a UK perspective and not that insightful – see link below). I was struck by this reader’s comment because it hits the nail on the head, despite its rudimentary tone and language. I could write an empirical and theoretical analysis that would bore readers to tears but it would all support this view.

It’s US$ monetary policy that is driving the distributional consequences of deficit spending along with globalization and technology into the cul-de-sac we find ourselves in. Think about it: when the government borrows and spends $28 trillion, where do we think it goes? Into private pockets controlled by those at the top. (All those real estate assets we own are merely keeping pace – it’s still the same four walls and roof.)

There’s probably not more than a handful of politicians in Washington DC that could explain this well or understand it, but they’re all setting the policies in ignorance.

Money Printing, the ability to spend more than is taken in has had a vast set of consequences – and almost all the problems can be laid at its feet. Really Nixon in 1971 taking US off the ‘Gold Standard’ to fund Johnson’s ‘Great Society’ and the Vietnam War. Both these make the rich richer. The Military-Industrial Complex goes directly to the wealthy, and the increased Social Spending $ always trickle-up while paying the poor to be poor traps them in poverty.

And so it has progressed till the National debt is 28$ Trillion! About equal to 8 years of all USA’s tax revenues. At the current ZERO percent interest rate it takes 1.5$ Trillion to service the debt! About half of all the Fed Tax revenues! Biden wants to add 4.5$ Trillion on human infrastructure (waste, pork, corruption, and free money to minorities, to trickle to the super-rich (and China, via Amazon and Walmart)). This on top of the monthly 120$ BILLION purchases of Treasuries and mortgage-backed securities the Fed buys – and the 1-3$ Trillion budget deficit! (If, when, interest rises to 5% it will take all the gov tax revenue just to service the national debt – )

Anyway, the printed $ all rise to the super wealthy, they get all of it. The poor just get addicted to the drug of the Welfare Trap, and become multi-generational poor. The working class and middle class have all their savings and pensions harvested by the stealth Tax called Inflation (now officially 5%, but really 9) because interest must be kept at Zero for the debt to be serviced. So all workers’ savings get eaten up by inflation Tax of 5% – (minus the bank and bond interest of 1% = MINUS 4% savings growth). Their pensions and savings melting like snow as the printing inflates the money supply….

But the above just scratches the surface of the harm. USA will eventually lose ‘Reserve Currency Status’ over this. The foreign trade deficit is a Trillion – how can that continue – the hard assets and Equities so inflated – and the wealthy own them. The rich have hard assets which appreciate, they carry HUGE debt at 3% interest while inflation eats the debt basis away – and Dividends, so make money while everyone goes broke.

This is what Lefty/Liberal MMT is doing – the death of America. The Left economics is always same – all the money to the elites, and the rest go broke.

Why Does America Hate Itself?

What is Money?

This looks to be an excellent series of articles concerning the most important policy issue of the past 50 years. The global monetary regime that uses the US$ as the reserve currency and gives the world’s central banks discretion and control over the supply of fiat currency drives current global events, for better and worse. The effects range from economic crises and financial meltdowns to inequality, political conflict, and environmental degradation. Given the importance of money, I print the following article from the NY Sun in full…

God and Money: ‘A Perfect and Just Measure Shalt Thou Have’

nysun.com/national/god-and-money-a-perfect-and-just-measure-shalt/91597/

By JUDY SHELTON

Following begins a new series of columns marking the 50th anniversary of the collapse of the Bretton Woods gold exchange standard established in the closing months of World War II. A related editorial appears nearby.

* * *

The 50th anniversary of the collapse, on August 15, 1971, of the Bretton Woods monetary system is a momentous moment in the history of money. It should provide an occasion for thoughtful discussion focused on the road to reform, our priceless constitutional foundation, and the restoration of honest money.

Let us avoid an academic food fight among economists over prior international monetary systems. We should not be arguing about the classical gold standard versus the Bretton Woods pegged exchange-rate system, as these are just variations on the more significant theme of gold convertibility and the role of government in regulating money.

We can’t even usefully revert to debating the old fixed-versus-flexible arguments that were part of Milton Friedman’s justification for freely floating rates in the 1960s; the theoretical models for both positions have been mugged by reality.

Instead, we should be talking about money itself — what is its basic purpose, its relationship with productive economic growth — and whether today’s dysfunctional international monetary regime deserves to be designated any kind of system at all.

As the former chief of the International Monetary Fund, Jacques de Larosiere, noted at a conference in February 2014 at Vienna, today’s central bank-dominated monetary arrangements foster “volatility, persistent imbalances, disorderly capital movements, currency misalignments.”

These, he warned, were all major factors in the explosion of credit and leverage that precipitated the 2008 global financial crisis. Such an unanchored approach, he said, does not amount to a “non-system” but something considerably worse: an “anti-system.”

It is time to think creatively about money. We need to remind ourselves what it means as a measure, how it facilitates voluntary commerce and opportunity — how it can lead to greater shared prosperity while remaining compatible with liberty, individualism, and free enterprise. We’re at a moment when everything is on the table. For the wisdom of central bank mechanisms for conducting monetary policy is being called into question just as private alternative monies are making ever more credible bids for legitimacy.

Looking back and looking ahead, we can see that the most relevant and stimulating views emphasize the importance of productive economic activity and an open global marketplace. Money’s crucial role is to provide clear price signals to optimize the rewards of entrepreneurial endeavor and increased human knowledge.

Adam Smith wrote his treatise “The Wealth of Nations” during an age when nations forged a global monetary system by defining their currencies in terms of precise weights of gold and silver. A level monetary playing field arising from a system inherently disciplined by forces outside the control of government — wherein the economic decisions of private individuals are not held hostage to the ambitions of politicians—served profoundly liberal goals such as rule of law, private property, and the equal protection of human rights.

Modern-day visionaries likewise focus on the integrity of market signals conveyed through money. When Elon Musk says, “I think about money as an information system,” he goes to the heart of money’s unit-of-account function and underscores the importance of price signal clarity. When he tweets that “goods and services are the real economy, any form of money is simply the accounting thereof,” he illuminates the same reasoning that caused our constitutional Framers to include the power to coin money and regulate the value of American money, and of foreign coin, in the same sentence of our Constitution that grants Congress the power to fix our standard of weights and measures.

Money is meant to be a reliable measure, a meaningful unit of account, and a dependable store of value. When those qualities are undermined — especially by government — for purposes of redirecting economic outcomes at the risk of global financial instability, the dynamism and productive potential of free-market forces is diminished.

Political arguments in favor of maintaining government control over the issuance of money tend to invoke short-term objectives couched in words such as “stimulus” and the need for central bank “support” for an economy. Such calls are met with somber warnings about long-term “unsustainability” from the monetary authorities who nevertheless indulge them.

“But thou shalt have a perfect and just weight, a perfect and just measure shalt thou have,” goes the passage from the Book of Deuteronomy (25:15), “that thy days may be lengthened in the land which the LORD thy God giveth thee.” The biblical injunction against dishonest measures can be interpreted as alluding to sustainability not only in economic terms but also in the moral realm.

As noted by Robert Bartley, editor of the editorial page of The Wall Street Journal for more than 30 years, economist Robert Mundell was correct in his assessment that the only closed economy is the world economy. It’s time to start building an ethical international monetary system.

________

Judy Shelton, an economist, is a senior fellow at the Independent Institute and author of “Money Meltdown.” Image: The conference room at the Mount Washington Hotel, Bretton Woods, New Hampshire, where, in 1944, the Bretton Woods Treaty was crafted. Via Wikipedia Commons.SupportAboutTerms

Debt Follies

The New Monetary Regime: An Expert Panel Discusses Debt and Inflation

Written remarks from our three panelists follow below:

U.S. Fiscal Profligacy and the Impending Crisis

by David P. Goldman

The Rise and Rise of Deficit Government

by Christopher DeMuth

The Costs of Our Debt

by Veronique de Rugy

These remarks from the symposium offer a revealing analysis of US financial and fiscal policy. I include in this post the essay by David Goldman, as I believe it offers a foundation for understanding the predicament we have created with poorly conceived financial policies that are now being accelerated and amplified. I have highlighted sections in RED.

May 5, 2021

Massive demand-side stimulus combined with constraints on the supply-side in the form of higher taxes is a sure recipe for inflation and eventual recession. The Fiscal Year 2021 US budget deficit will amount to 15% of US GDP after the passage of an additional $1.9 trillion in demand stimulus, according to the Committee for a Responsible Federal Budget, a proportion that the United States has not seen since World War II.

It is hard to avoid the conclusion that the Biden Administration’s fiscal irresponsibility arises from a cynical political calculation. It evidently proposes to employ the federal budget as a slush fund to distribute benefits to various political constituencies, gambling that the avalanche of new debt will not cause a financial crisis before the 2022 Congressional elections. The additional $2.3 trillion in so-called infrastructure spending that the Administration has proposed consists mainly of handouts to Democratic constituencies.

Where is Foreign Money Going?

During the 12 months ending in March, the deficit stood at 19% of GDP. Even worse, the Federal Reserve absorbed virtually all the increase in outstanding debt on its balance sheet. In the aftermath of the 2009 recession, when the deficit briefly rose to 10% of GDP, foreigners bought about half the total new issuance of Treasury debt. During the past 12 months, foreigners have been net sellers of US government debt. (See Figure 1.) The US dollar’s role as the world’s principal reserve currency is eroding fast, and fiscal irresponsibility of this order threatens to accelerate the dollar’s decline.

The Federal Reserve has kept short-term interest rates low by monetizing debt, but long-term Treasury yields have risen by more than a percentage point since July. Markets know that what can’t go on forever, won’t. At some point, private holders of Treasury debt will liquidate their holdings—as foreigners have begun to do—and rates will rise sharply. (See Figure 2.) For every percentage point increase in the cost of financing federal debt, the US Treasury will have to pay an additional quarter-trillion dollars in interest. The United States well may find itself in the position of Italy in 2018, but without the rich members of the European Union to bail it out.

The flood of federal spending has had a number of dangerous effects already:

  1. The US trade deficit in goods as of February 2021 reached an annualized rate of more than $1 trillion a year, an all-time record. China’s exports to the US over the 12 months ending in February also reached an all-time record. Federal stimulus created demand that US productive facilities could not meet, and produced a massive import boom.
  2. Input prices to US manufacturers in February rose at the fastest rate since 1973, according to the Philadelphia Federal Reserve’s survey. And the gap between input prices and finished goods prices rose at the fastest rate since 2009. (See Figure 3.)
  3. The Producer Price Index for final demand rose at an annualized 11% rate during the first quarter. The Consumer Price Index shows year-on-year growth of only 1.7%, but that reflects dodgy measurements (for example, the price shelter, which comprises a third of the index, supposedly rose just 1.5% over the year, although home prices rose by 10%).

If foreigners are net sellers of US Treasury securities, how is the United States financing an external deficit in the range of $1 trillion a year? The US has two deficits to finance, the internal budget deficit, and the balance of payments deficit, and here we refer to the second. The answer is: By selling stocks to foreigners, according to Treasury data. (See Figure 4.) Foreign investors have been dumping low-yielding US Treasuries and corporate bonds during the past year, according to the Treasury International Capital (TIC) system. Foreign investors bought $400 billion of US equities and nearly $500 billion of US agency securities (backed by home mortgages) during the 12 months through January, but sold $600 billion of Treasuries and $100 billion of corporate bonds.

This is a bubble on top of a bubble. [Double Bubble = Trouble.] The Federal Reserve buys $4 trillion of Treasury securities and pushes the after-inflation yield below zero. That pushes investors into stocks. Foreigners don’t want US Treasuries at negative real yields, but they buy into the stock market which keeps rising, because the Fed is pushing down bond yields, and so forth.

At some point, foreigners will have a bellyful of overpriced US stocks and will stop buying them. When this happens, the Treasury will have to sell more bonds to foreigners, but that means allowing interest rates to rise, because foreigners won’t buy US bonds at extremely low yields. Rising bond yields will push stock prices down further, which means that foreigners will sell more stocks, and the Treasury will have to sell more bonds to foreigners, and so forth.

The 2009 crisis came from the demand side. When the housing bubble collapsed, trillions of dollars of derivative securities backed by home loans collapsed with it, wiping out the equity of homeowners and the capital base of the banking system. The 2021 stagflation—the unhappy combination of rising prices and falling output—is a supply-side phenomenon. [Back to the Future of That 70s Show] That’s what happens when governments throw trillions of dollars of money out of a helicopter, while infrastructure and plant capacity deteriorate.

The present situation is unprecedented in another way: Not in the past century has the United States faced a competitor with an economy as big as ours, growing much faster than ours, with ambitions to displace us as the world’s leading power.

The source of the 2008 crisis was overextension of leverage to homeowners and corporations. I was one of a small minority of economists who predicted that crisis.

Federal debt in 2008 was 60% of GDP, not counting the unfunded liabilities of Medicare and the Social Security System. As of the end of 2020, Federal debt had more than doubled as a percentage of GDP, to 130%. The Federal Reserve in 2008 owned only $1 trillion of securities. US government debt remained a safe harbor asset; after the Lehman Brothers bankruptcy in September 2008, the 30-year US Treasury yield fell from 4.7% to 2.64%, as private investors bought Treasuries as a refuge.

The Treasury: Not a Refuge from, but a Cause of Crisis

Today the US Treasury market is the weak link in the financial system, supported only by the central bank’s monetization of debt. If the extreme fiscal profligacy of the Biden Administration prompts private investors to exit the Treasury market, there will be no safe assets left in dollar financial markets. The knock-on effects would be extremely hard to control

The overwhelming majority of over-the-counter (privately traded) derivatives contracts serve as interest-rate hedges. Market participants typically pledge Treasury securities as collateral for these contracts. The notional value of such contracts now exceeds $600 trillion, according to the Bank for International Settlements. Derivatives contracts entail a certain amount of market risk, and banks will enter into them with customers who want to hedge interest-rate positions only if the customers put up collateral (like the cash margin on a stock bought on credit) (See Figure 5) The market value (after netting for matching contracts that cancel each other out) is about $15 trillion. If the prices of Treasury securities fall sharply, the result will be a global margin call in the derivatives market, forcing the liquidation of vast amounts of positions.

Something like this occurred between March 6 and March 18, 2020, when the yield on inflation-protected US Treasury securities (TIPS) jumped from about negative 0.6% to positive 0.6% in two weeks. The COVID-19 crash prompted a run on cash at American banks, as US corporate borrowers drew down their credit lines. US banks in turn cut credit lines to European and Japanese banks, who were forced to withdraw funding to their customers for currency hedges on holdings of US Treasury securities. The customers in turn liquidated US Treasury securities, and the Treasury market crashed. That was the first time that a Treasury market crash coincided with a stock market crash: Instead of acting as a crisis refuge, the US Treasury market became the epicenter of the crisis.

The Federal Reserve quickly stabilized the market through massive purchases of Treasury securities, and through the extension of dollar swap lines to European central banks, which in return restored dollar liquidity to their customers. These emergency actions were justified by the extraordinary circumstances of March 2020: An external shock, namely the COVID-19 pandemic, upended financial markets, and the central bank acted responsibility in extending liquidity to the market. But the Federal Reserve and the Biden Administration now propose to extend these emergency measures into a continuing flood of demand. The consequences will be dire.

The present situation is unprecedented in another way: Not in the past century has the United States faced a competitor with an economy as big as ours, growing much faster than ours, with ambitions to displace us as the world’s leading power. China believes that America’s fiscal irresponsibility will undermine the dollar’s status as world reserve currency.

Here is what Fudan University Professor Bai Gang told the Observer, a news site close to China’s State Council:

Simply put, this year the United States has issued a massive amount of currency, which has given the US economy, which has been severely or partially shut down due to the COVID-19 epidemic, a certain kind of survival power. On the one hand, it must be recognized that this method . . . is highly effective. . . . The US stock market once again hit a record high.

But what I want to emphasize is that this approach comes at the cost of the future effectiveness of the dollar lending system. You do not get the benefit without having to bear its necessary costs.

A hegemonic country can maintain its currency hegemony for a period of time even after the national hegemony has been lost. After Britain lost its global hegemony, at least in the 1920s and 1930s, the pound sterling still maintained the function of the world’s most important currency payment method. To a certain extent, the hegemony of the US dollar is stronger than any currency before it. . . .

We see that the US dollar, as the most important national currency in the international payment system, may still persist for a long time even after US hegemony ends. Since this year, the US has continued to issue more currency to ease the internal situation. The pressure will eventually seriously damage the status of the US dollar as the core currency in the international payment system.

America has enormous power, but the Biden Administration and the Federal Reserve are abusing it. And China is waiting for the next crisis to assert its primacy in the world economy.

Everything is Broken

A couple of excellent articles that give the long-tailed, big picture of how the global economy has gotten itself between a rock and a hard place. Mostly due to political and financial mismanagement. The consequences were not inevitable, but Mauldin explains how we’re beyond the point of no return.

We have arrived. Any choice the government and central banks of the US and the rest of the world make will ultimately lead to a crisis. Just as the choices that Greenspan and Bernanke made about monetary policy created the Great Recession, Yellen and Powell’s choices will eventually lead us to the next crisis and ultimately to what I call The Great Reset.

I believe we have passed the point of no return. Changing policy now would create a recession as big as Paul Volcker’s in the early ‘80s. There is simply no appetite for that. Further, the national debt and continued yearly deficits force monetary policy to stay accommodative.

John Mauldin, Inflation is Broken.

Everything is Broken.

Inflation is Broken.

Broken Credit
Broken Retirement
Broken Stocks
Broken Data
Broken Unemployment System
Puerto Rico, Vaccines, and Some Good News

Broken lines, broken strings,
Broken threads, broken springs,
Broken idols, broken heads,
People sleeping in broken beds

—Bob Dylan, “Everything is Broken” from the album Oh Mercy, 1989

The Global Debt Bubble

I reprint this Bloomberg article in full because it lays out all the ways global policymakers have increased the risks of a global debt-driven correction, sometimes called a depression.

These policymakers have decided that since there is no shortage of global labor, there is little chance of cost-push inflation. But this ignores the very real effect of excess credit, which is the relative price changes reflected in real assets, such as land, real estate, and the control of Big Data. These assets are being more and more concentrated in fewer hands – it’s like a return to feudalism where a few lords owned all the productive assets and the laboring peasants were forced to work for subsistence living.

So, the real question is which comes first: a global financial collapse or a political revolution? Neither are smart risks for public policy and democratic governance.

My comments in bold red.

The Way Out for a World Economy Hooked On Debt? More Debt

By Enda Curran

December 1, 2019, 4:00 AM PST Updated on December 2, 2019, 12:12 AM PST

    • Cheap borrowing costs have sent global debt to another record
    • Options to revive economic growth require even more borrowing
    • Zombie companies in China. Crippling student bills in America. Sky-high mortgages in Australia. Another default scare in Argentina.

A decade of easy money has left the world with a record $250 trillion of government, corporate and household debt. That’s almost three times global economic output and equates to about $32,500 for every man, woman, and child on earth.

Global Debt

Much of that legacy stems from policymakers’ deliberate efforts to use borrowing to keep the global economy afloat in the wake of the financial crisis. Rock bottom interest rates in the years since has kept the burden manageable for most, allowing the debt mountain to keep growing.

Now, as policymakers grapple with the slowest growth since that era, a suite of options on how to revive their economies share a common denominator: yet more debt. From Green New Deals to Modern Monetary Theory, proponents of deficit spending argue central banks are exhausted and that massive fiscal spending is needed to yank companies and households out of their funk. [But we can’t ignore the fact that central banks are largely funding this deficit spending by buying bonds. If they can no longer expand their balance sheets, the private sector would have to buy this excess debt at much higher yields.]

Fiscal hawks argue such proposals will merely sow the seeds for more trouble. But the needle seems to be shifting on how much debt an economy can safely carry.

More than a decade after the financial crisis, the amount of combined global government, corporate and household debt has reached $250 trillion.

One solution proposed by policymakers? More debt pic.twitter.com/KVrv3CdlW1

[Debt growth is an exponential function – thus as we increase debt, we have to increase it at an ever greater rate just to keep the game going.]

Central bankers and policymakers from European Central Bank President Christine Lagarde to the International Monetary Fund have been urging governments to do more, arguing it’s a good time to borrow for projects that will reap economic dividends.

“Previous conventional wisdom about advanced economy speed limits regarding debt to GDP ratios may be changing,” said Mark Sobel, a former U.S. Treasury and International Monetary Fund official. “Given lower interest bills and markets’ pent-up demand for safe assets, major advanced economies may well be able to sustain higher debt loads.”

Rising expectations of fiscal stimulus measures across the globe have contributed to a pick-up in bond yields, spurred by signs of a bottoming in the world’s economic slowdown. Ten-year Treasury yields climbed back above 1.80% Monday, while their Japanese counterparts edged up closer to zero.

A constraint for policymakers, though, is the legacy of past spending as pockets of credit stress litter the globe.

At the sovereign level, Argentina’s newly elected government has promised to renegotiate a record $56 billion credit line with the IMF, stoking memories of the nation’s economic collapse and debt default in 2001. Turkey, South Africa, and others have also had scares.

Debt:GDP

[The trend of total debt/GDP tells us whether are deficit spending is paying off. When it gets too high, most of our GDP will need to service existing debt loads. The more likely scenario is widespread defaults that ricochet through the global economy.]

As for corporate debt, American companies alone account for around 70% of this year’s total corporate defaults even amid a record economic expansion. And in China, companies defaulting in the onshore market are likely to hit a record next year, according to S&P Global Ratings.

So-called zombie companies — firms that are unable to cover debt servicing costs from operating profits over an extended period and have muted growth prospects — have risen to around 6% of non-financial listed shares in advanced economies, a multi-decade high, according to the Bank for International Settlements. That hurts both healthier competitors and productivity.

As for households, Australia and South Korea rank among the most indebted.

The debt drag is hanging over the next generation of workers too. In the U.S., students now owe $1.5 trillion and are struggling to pay it off.

Even if debt is cheap, it can be tough to escape once the load gets too heavy. While solid economic growth is the easiest way out, that isn’t always forthcoming. Instead, policymakers have to navigate balances and tradeoffs between austerity, financial repression where savers subsidize borrowers, or default and debt forgiveness.

“The best is to grow out of it gradually and consistently, and it is the solution to many but not all episodes of current indebtedness,” said Mohamed El-Erian, chief economic adviser to Allianz SE.

Gunning for Growth

Policymakers are plowing on in the hope of such an outcome. [Hope for the best? In the meantime, elites’ ability to manage a crisis of their own making is more secure.]

To shore up the U.S. recovery, the Federal Reserve lowered interest rates three times this year even as a tax cut funded fiscal stimulus sends the nation’s deficit toward 5% of GDP. Japan is mulling fresh spending while monetary policy remains ultra easy. And in what’s described as Britain’s most consequential election in decades, both major parties have promised a return to public spending levels last seen in the 1970s.

China is holding the line for now as it tries to keep a lid on debt, with a drip-feed of liquidity injections rather than all-out monetary easing. On the fiscal front, it has cut taxes and brought forward bond sale quotas, rather than resort to the spending binges seen in past cycles.

What Bloomberg’s Economists Say…

“When a slump does come, as surely it will, monetary policy won’t have all the answers — fiscal policy will contribute, but with limitations.”

— Bloomberg Economics Chief Economist Tom Orlik

As global investors get accustomed to a world deep in the red, they have repriced risk — which some argue is only inflating a bubble. Around $12 trillion of bonds have negative yields.

Anne Richards, CEO of Fidelity International, says negative bond yields are now of systemic concern.

“With central bank rates at their lowest levels and U.S. Treasuries at their richest valuations in 100 years, we appear to be close to bubble territory, but we don’t know how or when this bubble will burst.”

The IMF in October said lower yields are spurring investors such as insurance companies and pension funds “to invest in riskier and less liquid securities,” as they seek higher returns.

“Debt is not a problem as long as it is sustainable,” said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA in Hong Kong, who previously worked for the European Central Bank and Bank of Spain. “The issue is whether the massive generation of debt since the global financial crisis is going to turn out to be profitable.”


 

Okay, so we know that public debt never gets paid back, just rolled over with new debt. The question, as Ms. Herrero says, is whether this debt leverage is productive or not; does it make our lives better in material and non-material terms; will it help us tackle non-monetary challenges like climate change?

Credit constraints are those that penalize unproductive investments in favor of productive ones before we know which is which. The elimination of credit constraints means we are just throwing money at the wall to see what sticks, and whoever gets those credits is largely arbitrary. The whole strategy is driving global inequality, so the question again is which comes first: financial collapse or political revolution?

Oh yeah, Merry Christmas!

Health Care Fantasies

A couple of articles today outlining how far apart from reality are the pro and con arguments for different possible reforms. This is going to matter at some point soon, if not now.

Socialized Medicine Has Won the Health Care Debate

The first article, by Sarah Jaffe published in The New Republic, suggests that “socialized” healthcare has won the policy debate. Citing opinion polls (for which all questions display a certain bias), the author claims that the American public favors government-run socialized medicine. (Here’s a good example of survey bias: “Do you favor free healthcare for all?” – How many No’s do you think that question elicits?)

Ms. Jaffe explains away Obamacare’s unpopularity with this, “What people don’t like are the inequities that still prevail in our health care system, not the fact that “government is too involved. …The law didn’t go too far for Americans to get behind. It didn’t go far enough. And while single-payer opponents continue to evoke rationed care, long lines and wait times, and other problems that supposedly plague England or Canada, the public seems well aware that the reality for many Americans is far worse.”

Really?

What’s more, what makes her think that government control removes inequalities rather than make them worse according to different selection criteria?

Finally, she proclaims, “This is now an American consensus. And if socialism is the medicine our system needs, the country is ready to embrace it—even by name.”

At no point does Ms. Jaffe discuss the associated costs, who is going to pay them, and what kind of trade-offs this will impose on citizens and taxpayers. This is an argument motivated by political ideology, not reality.

***

This brings us to the second article, by Sally Pipes in Investor’s Business Daily (this should give us a clue that Pipes actually plans to address money issues).

Sanders’ Single-Payer Fairy Tale

Ms. Pipes first gives us an indication of polling bias: “The idea is … enchanting ordinary Americans. Fifty-three percent support single payer, according to a June 2017 poll from the Kaiser Family Foundation. But this supposed support is a mirage. According to the same Kaiser poll, 62% would oppose single-payer if it gave the government too much power over health care. Sixty percent would reject it if it increased taxes.”

Sen. Sanders estimates that “Medicare for all” would cost an extra $14 trillion over 10 years, while the Urban Institute’s analysis of the plan puts the figure at $32 trillion. Our current annual health spending is $3.2 trillion, so Medicare at minimum would double that spending level, with no viable way to pay for it, with taxes or otherwise.

Medicare for the 65+ crowd is already a deficit buster, so the nation will not be affording such care for the entire population and promises to do so are a dangerous fantasy. We do know what will happen – the “free” care we expect will never be delivered and the politicians who sell such snake oil will be long gone.

The real problem with our health care debates is that they focus solely on distribution and not on the real problem, which is adequate supply. If no one is producing health care goods, what is there to distribute?

It’s the Fed, Stupid!

A Messaging Tip For The Donald: It’s The Fed, Stupid!

The Fed’s core policies of 2% inflation and 0% interest rates are kicking the economic stuffings out of Flyover AmericaThey are based on the specious academic theory that financial gambling fuels economic growth and that all economic classes prosper from inflation and march in lockstep together as prices and wages ascend on the Fed’s appointed path.

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Book Review: Makers and Takers

Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

Crown Business; 1st edition (May 17, 2016)

Ms. Foroohar does a fine job of journalistic reporting here. She identifies many of the failures of the current economic policy regime that has led to the dominance of the financial industry. She follows the logical progression of central bank credit policy to inflate the banking system, that in turn captures democratic politics and policymaking in a vicious cycle of anti-democratic cronyism.

However, her ability to follow the money and power is not matched by an ability to analyze the true cause and effect and thus misguides her proposed solutions. Typical of a journalistic narrative, she identifies certain “culprits” in this story: the bankers and policymakers who favor them. But the true cause of this failed paradigm of easy credit and debt is found in the central bank and monetary policy.

Since 1971 the Western democracies have operated under a global fiat currency regime, where the value of the currencies are based solely on the full faith and credit of the various governments. In the case of the US$, that represents the taxing power of our Federal government in D.C.

The unfortunate reality, based on polling the American people (and Europeans) on trust in government, is that trust in our governmental institutions has plunged from almost 80% in 1964 to less than 20% today. Our 2016 POTUS campaign reflects this deep mistrust in the status quo and the political direction of the country. For good reason. So, what is the value of a dollar if nobody trusts the government to defend it? How does one invest under that uncertainty? You don’t.

One would hope Ms. Foroohar would ask, how did we get here? The essential cause is cheap excess credit, as has been experienced in financial crises all through history. The collapse of Bretton Woods in 1971, when the US repudiated the dollar gold conversion, called the gold peg, has allowed central banks to fund excessive government spending on cheap credit – exploding our debt obligations to the tune of $19 trillion. There seems to be no end in sight as the Federal Reserve promises to write checks without end.

Why has this caused the complete financialization of the economy? Because real economic growth depends on technology and demographics and cannot keep up with 4-6% per year. So the excess credit goes into asset speculation, mostly currency, commodity, and securities trading. This explosion of trading has amped incentives to develop new financial technologies and instruments to trade. Thus, we have the explosion of derivatives trading, which essentially is trading on trading, ad infinitum. Thus, Wall Street finance has come to be dominated by trading and socialized risk-taking rather than investing and private risk management.

After 2001 the central bank decided housing as an asset class was ripe for a boom, and that’s what we got: a debt-fueled bubble that we’ve merely re-inflated since 2008. There is a fundamental value to a house, and in most regions we have far departed from it.

So much money floating through so few hands naturally ends up in the political arena to influence policy going forward. Thus, not only is democratic politics corrupted, but so are any legal regulatory restraints on banking and finance. The simplistic cure of “More regulation!” is belied by the ease with which the bureaucratic regulatory system is captured by powerful interests.

The true problem is the policy paradigm pushed by the consortium of central banks in Europe, Japan, China, and the US. (The Swiss have resisted, but not out of altruism for the poor savers of the world.) Until monetary/credit policy in the free world becomes tethered and disciplined by something more than the promises of politicians and central bankers, we will continue full-speed off the eventual cliff. But our financial masters see this eventuality as a great buying opportunity.

Helicopter Money

Central bank “Helicopter Money” is to the economy what helicopter parents are to their unfortunate children. This from Bloomberg View:

`Helicopter Money’ Is Coming to the U.S.

Aug 5, 2016 5:41 AM EDT

Several years of rock-bottom interest rates around the world haven’t been all bad. They’ve helped reduce government borrowing costs, for sure. Central banks also send back to their governments most of the interest received on assets purchased through quantitative-easing programs. Governments essentially are paying interest to themselves.

What is Helicopter Money? 

Since the beginning of their quantitative-easing activities, the Federal Reserve has returned $596 billion to the U.S. Treasury and the Bank of England has given back $47 billion. This cozy relationship between central banks and their governments resembles “helicopter money,” the unconventional form of stimulus that some central banks may be considering as a way to spur economic growth.

I’m looking for more such helicopter money — fiscal stimulus applied directly to the U.S. economy and financed by the Fed –no matter who wins the Presidential election in November.

It’s called helicopter money because of the illusion of dumping currency from the sky to people who will rapidly spend it, thereby creating demand, jobs and economic growth. Central banks can raise and lower interest rates and buy and sell securities, but that’s it. They can thereby make credit cheap and readily available, yet they can’t force banks to lend and consumers and businesses to borrow, spend and invest. That undermines the effectiveness of QE; as the proverb says, you can lead a horse to water, but you can’t make it drink.

Furthermore, developed-country central banks purchase government securities on open markets, not from governments directly. You might ask: “What’s the difference between the Treasury issuing debt in the market and the Fed buying it, versus the Fed buying securities directly from the Treasury?” The difference is that the open market determines the prices of Treasuries, not the government or the central bank. The market intervenes between the two, which keeps the government from shoving huge quantities of debt directly onto the central bank without a market-intervening test. This enforces central bank discipline and maintains credibility.

In contrast, direct sales to central banks have been the normal course of government finance in places like Zimbabwe and Argentina. It often leads to hyperinflation and financial disaster. (I keep a 100-trillion Zimbabwe dollar bank note, issued in 2008, which was worth only a few U.S. cents as inflation rates there accelerated to the hundreds-of-million-percent level. Now it sells for several U.S. dollars as a collector’s item, after the long-entrenched and corrupt Zimbabwean government switched to U.S. dollars and stopped issuing its own currency.)

Argentina was excluded from borrowing abroad after defaulting in 2001. Little domestic funding was available and the Argentine government was unwilling to reduce spending to cut the deficit. So it turned to the central bank, which printed 4 billion pesos in 2007 (then worth about $1.3 billion). That increased to 159 billion pesos in 2015, equal to 3 percent of gross domestic product. Not surprisingly, inflation skyrocketed to about 25 percent last year, up from 6 percent in 2009.

To be sure, the independence of most central banks from their governments is rarely clear cut. It’s become the norm in peacetime, but not during times of war, when government spending shoots up and the resulting debt requires considerable central-bank assistance. That was certainly true during World War II, when the U.S. money supply increased by 25 percent a year. The Federal Reserve was the handmaiden of the U.S. government in financing spending that far exceeded revenue.

Today, developed countries are engaged not in shooting wars but wars against chronically slow economic growth. So the belief in close coordination between governments and central banks in spurring economic activity is back in vogue — thus helicopter money.

All of the QE activity over the past several years by the Fed, the Bank of England, the European Central Bank, the Bank of Japan and others has failed to significantly revive economic growth. U.S. economic growth in this recovery has been the weakest of any post-war recovery. Growth in Japan has been minimal, and economies in the U.K. and the euro area remain under pressure.

The U.K.’s exit from the European Union may well lead to a recession in Britain and the EU as slow growth turns negative. A downturn could spread globally if financial disruptions are severe. This would no doubt ensure a drop in crude oil prices to the $10 to $20 a barrel level that I forecast in February 2015. This, too, would generate considerable financial distress, given the highly leveraged condition of the energy sector.

Both U.S. political parties seem to agree that funding for infrastructure projects is needed, given the poor state of American highways, ports, bridges and the like. And a boost in defense spending may also be in the works, especially if Republicans retain control of Congress and win the White House.

Given the “mad as hell” attitude of many voters in Europe and the U.S., on the left and the right, don’t be surprised to see a new round of fiscal stimulus financed by helicopter money, whether Donald Trump or Hillary Clinton is the next president.

Major central bank helicopter money is a fact of life in war time — and that includes the current global war on slower growth. Conventional monetary policy is impotent and voters in Europe and North America are screaming for government stimulus. I just hope it doesn’t set a precedent and continue after rapid growth resumes — otherwise, the fragile independence of major central banks could go the way of those in banana republics.