Budgets Are For Users

     Once upon a time, you could pop open the front hood of a car and when looking inside, it was not so intimidating, it was easy to understand how everything about that engine worked. If you were lucky enough to have a ‘muscle car’, you even knew how to adjust the choke, to increase the amount of gasoline going into that gas / air mix, to get that beast started when it got really cold outside…
     The economy works with a similar principle. During an economic cold snap, the federal gov’t needs to add more gasoline, more potency, to that combustible mixture of public sector demand / private sector demand, to get that engine to turn over and started again…
     Our economy has been in a winter freeze for too long. Our fiscal policymakers could offer a hand by simply adjusting the choke to add more federal gov’t spending (more federal gov’t demand) to that mix (total aggregate demand). Instead, we only have our monetary policymakers just giving the car more gas (with an improper mix), trying over and over again to start the engine, and the more they try, the more gas they give it, so rather than starting the engine, they have flooded it. The pistons are not in sync because the policymakers are not in sync.
     Perhaps this is because of ideological differences, but my guess is that our fiscal policymakers are out of sync with our monetary policymakers because when most fiscal policymakers open that federal gov’t hood and look inside, they’re afraid to admit that they really don’t understand how the modern model works.
     First the ideological differences: Some of your policymakers today are ‘Keynesian’ deficit doves and some are ‘Austrian’ deficit hawks. The Keynesian says that we shouldn’t worry about federal gov’t deficit spending because ‘creating money’ will not cause inflation, and the Austrian says that we should worry about federal gov’t deficit spending because ‘printing money’ will cause hyperinflation.
     Both are mistaken. In 1971, President Nixon unilaterally cancelled the direct international convertibility of the US dollar to gold, meaning from that day on, our US dollar was a pure, fiat currency, and the US officially entered the post-gold standard, modern monetary system. Since then, the US economy has had only one deflationary year (a negative print on the historical charts), so the Keynesian is wrong about the ‘printing money doesn’t cause inflation’ thing. In fact, a 1971 dollar today is worth about 18 cents, but that decrease in purchasing power is the secret sauce. Newly-printed dollars are the engine lubricant that keeps the economic moving parts running smoothly, and a big advantage is that since 1971, the federal gov’t uses its own motor oil instead of borrowed motor oil. Since 1971, the federal gov’t is the sole issuer, the monopoly supplier, of the fiat brand of motor oil that the post-gold-standard era engine takes. Just like motor oil for any engine, more newly-issued dollars needs to be routinely added to our economy. Constant additions of newly-issued dollars, like motor oil, keeps our economy from seizing up and going into depressions (which the economy did six times before 1971 and also has never happened since). Furthermore, no monetary sovereign, in all of history, deficit spending with its own, pure, fiat currency, that is not convertible to anything, nor pegged to anything, and freely floats on a global foreign exchange market has never, ever, had hyperinflation, so the Austrian is wrong about the ‘printing money will cause hyperinflation’ thing as well. That said, both the Keynesian and the Austrian don’t need to fight an endless ideological battle between each other, because today, in this modern monetary system, both hawks and doves are needed very much at crucial times by the issuer of dollars and the users of dollars. So instead, the Keynesian (with a fear of deflation) and the Austrian (with a fear of inflation) should compromise, get it sync, and work together with each other.
     Let’s get back to what is really happening under that hood. During the gold standard era, the federal gov’t could not just ‘print’ gold out of thin air. Federal gov’t deficit spending was being financed by borrowing gold-backed dollars. For whatever amount of debt that was incurred, it meant that the federal gov’t was on the hook in gold-backed dollars. Back then, Step 1 was for the federal gov’t to get authorization from Congress to deficit spend. Step 2 was to issue bonds to borrow the gold-backed dollars. Step 3 was to pay the vendors. After officially replacing gold-backed dollars with pure-fiat dollars, federal gov’t deficit spending became a different paradigm. Now, the federal gov’t, the issuer of fiat dollars, can just issue fiat dollars out of thin air. Post-gold standard, Step 1 is still the same, the federal gov’t gets authorization to deficit spend. Step 2 is the federal gov’t prints new fiat dollars by clicking on a computer keyboard. Step 3 is to ‘credit’ the vendor’s bank account with that computer keyboard. Step 4 is to issue bonds in the same exact amount that was newly-printed, however, not to borrow that amount, but only as an accounting entry, a ledger posting, a ‘debit’, of that same amount of fiat dollars, to consolidate the federal gov’t balance sheet. So before, federal gov’t deficit spending added to an actual outstanding debt of gold-backed dollars (similar to a household borrowing more and causing indebtedness); now federal gov’t deficit spending subtracts from the purchasing power of all outstanding fiat dollars (similar to a company issuing more stock and causing dilution). A gold-standard era credit card that ‘monetized debts’ with gold-backed dollars was cut in half and replaced by a post-gold-standard-era debit card that ‘monetizes deficits’ with fiat dollars. What causes the puzzled look on most fiscal policymakers whenever looking under the hood these days is understandable, because the US Treasury and the central bank are still using an outdated, gold-standard-era driver’s manual. Those bygone instructions, that were taught to all of us long ago and still told to us today, stick to the narrative that the federal gov’t, the issuer of fiat dollars, needs to ‘borrow’ fiat dollars, however, what is actually going on under that hood is quite different. In the post-gold standard, modern monetary system, federal gov’t deficit spending has been ‘money’ (debit) financed for decades, yet still to this day, takes place behind what is only an archaic facade of being ‘bond’ (debt) financed. The national debt, what was once an actual debt of gold-backed dollars before 1971, is now nothing more than a national debit of fiat dollars.
     For the non-federal gov’t, nothing much changed in 1971. You, me, all households, all businesses, state & local gov’t, we are not issuers of dollars, we are still just users of dollars. For the non-federal gov’t, the users of dollars, it’s simple: We can deficit spend more if our personal debts are low, and we shouldn’t deficit spend more if our personal debts are high. For the non-federal gov’t, the users of dollars, the dashboard indicator is the same one that we have always used, and is easy to understand:
Scenario #1)

    USER OF DOLLARS dashboard ‘indicator’:

    No Debt————X————–Too Much Debt


This is the best scenario. The needle is balanced perfectly between ‘No debt’ and ‘Too Much Debt’. Servicing your debt is manageable, and the amount of your deficit spending is not too high, nor not too low:

= FINANCIAL SITUATION IS WELL UNDER CONTROL (No need to be a deficit hawk or a deficit dove, nor take any counter-measures, because the budget is in balance)...



Scenario #2)

    USER OF DOLLARS dashboard ‘indicator’:

    No Debt—X————————Too Much Debt


You have no debt, no deficit spending, so the needle is all the way left. Not a bad problem to have, but not really a preferable scenario either:

= NEED TO TAKE ON MORE RISK…ADD INVESTMENTS USING LEVERAGE (Here is the time to be a deficit dove, because if the budget of any user of dollars is in balance, if not under any threat whatsoever of ‘running out of dollars’, users of dollars should take that opportunity to increase spending on investments to accumulate wealth).

Scenario #3)

    USER OF DOLLARS dashboard ‘indicator’:

    No Debt————————X—Too Much Debt


This is the worse scenario because it is the hardest to resolve. The needle has gone all the way to the right, meaning that the amount of your deficit spending has made servicing your debts unmanageable:

= NEED TO DELEVERAGE AND BALANCE YOUR BUDGET (Here is the time to be a deficit hawk, because if deficits of any user of dollars gets too high, they may ‘run out of dollars’, so any user of dollars must reduce spending in order to get their budget in balance).  
     The issuer of dollars is a completely separate paradigm from the user of dollars. The federal gov’t, the issuer of dollars, should use a different dashboard indicator, but sadly, because too many fiscal policymakers suffer from a federal-gov’t-is-the-same-as-a-household delusion, they don’t use it, despite also being very easy to understand:
Scenario #1)
ISSUER OF DOLLARS dashboard ‘indicator’:
 Inflation: —0%—————X—2%—
This is the best scenario, where the newly-created dollars that finance federal gov’t deficit spending & entering the money supply is closely matched by the newly-created goods & services entering the expanding economy. Those newly-created dollars are neither causing more than 2% inflation (dangerously subtracting too much purchasing power from all dollars) nor any deflation (dangerously adding too much purchasing power to all dollars). In this optimum ‘not-too-hot-not-too-cold-Goldilocks’ economic environment, the decrease of purchasing power of all dollars is contained to a desired level of inflation, just under 2%, the perfect margin of safety away from 0%:
= STRONG GROWTH SUSTAINED, MONETARY POLICYMAKER MANDATE OF PRICE STABILITY ACHIEVED…No need for the deficit hawks nor the deficit doves to prod their fiscal policymakers to take any counter-measures, because the economy is balanced. However, fiscal policymakers could still strive to correct remaining social imbalances, by addressing wealth inequality, and creating opportunities for all those that are not benefiting from the growing economy, like the underemployed, the unemployed, or the non-participating (Collateral damage from that ugly, yet just-as-important, other blade side on the sword of capitalism).
Scenario 2)
ISSUER OF DOLLARS dashboard ‘indicator’:
 Inflation: —0%——————2%—X—
Not a good scenario, but an easy problem for both monetary & fiscal policymakers to solve. In this scenario, newly-created dollars that finance federal gov’t deficit spending & entering the money supply is overpowering the newly-created goods & services entering the economy. Too many dollars chasing too few goods has resulted in inflation over 2%:
= INFLATION WARNING: MONETARY POLICYMAKERS SHOULD REDUCE ACCOMMODATING MEASURES (RAISE INTEREST RATES), WHILE FISCAL POLICYMAKERS SHOULD REDUCE STIMULUS MEASURES (LESS FEDERAL SPENDING AND/OR RAISE FEDERAL TAX RATES) TO GET THE ECONOMY BACK IN BALANCE…(Here is the time for the deficit hawks, taking the cue from their monetary policymakers, to prod their fiscal policymakers to act, but note, it’s a separate paradigm, the issuer of dollars is reducing spending to get the economy that is running too hot in balance, NOT to get ‘the budget’ in balance).
Scenario 3)
ISSUER OF DOLLARS dashboard ‘indicator’:
 Inflation: —0%—X——————2%—
In this scenario, the newly-created dollars that finance federal gov’t deficit spending & entering the money supply is getting overpowered by the newly-created goods & services entering the economy. Too many goods and services chasing too few dollars has resulted in disinflation to levels near zero which is threatening to worsen into a full-blown deflationary spiral. This is the worst scenario, the situation that many countries are stuck in today, and not an easy problem to solve, especially if fiscal policymakers fail to act because they think like users of dollars (they think like households):
= DEFLATION WARNING: MONETARY POLICYMAKERS SHOULD INITIATE ACCOMMODATING MEASURES (LOWER INTEREST RATES), WHILE FISCAL POLICYMAKERS SHOULD INITIATE STIMULUS MEASURES (MORE FEDERAL SPENDING AND/OR LOWER FEDERAL TAX RATES) TO GET THE ECONOMY BACK IN BALANCE…Here is the time for the deficit doves, taking the cue from their monetary policymakers, to prod their fiscal policymakers to act, but again note, it’s a separate paradigm. Unlike a household (the user of dollars), the federal gov’t (the issuer of dollars) is not as concerned with getting a budget in balance; the federal gov’t is increasing spending to get an economy, that is running too slow, back in balance.
     In conclusion, unlike the users of dollars, the dashboard indicator for the issuer of dollars is the current rate of inflation, not the current amount of debt. The perfect inflation rate, one that provides a margin of safety, is just under 2% per year. This 2% annual decrease in the purchasing power of all outstanding dollars, this slight level of inflation, is much more preferable to the alternative, which would be dangerously low inflation, or worse, outright destructive deflation. What determines how much the federal gov’t, the issuer of dollars, should deficit spend, is ALWAYS to keep inflation balanced, to keep the economy in balance, and NEVER to keep a budget balanced.
     The questions that fiscal policymakers need to ask themselves while looking under the hood: Is that newly-created demand entering the economy from that federal govt deficit spending increasing aggregate demand (?) Are the newly-created dollars entering the economy from that federal govt deficit spending stoking inflation (?)
     OR, is the stimulative effect of that newly-created demand and the inflationary bias of those newly-created dollars vaporizing on impact (?)
     If so, then please give your monetary policymakers a hand, and adjust that choke.
Happy driving,
Eddie D
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P.S. REVISION (08/07/18):
Amendment to this post:
Using this ‘Inflation Indicator’ should be the US federal gov’t policymaker’s guide; but ONLY in the event of an economic crisis should it be THE guide. For example, similar to a badly-injured patient losing blood, the federal gov’t should perform an immediate transfusion of increased spending (s/b priority one in that triage situation).
However, when the economy has recovered, for the issuer of dollars, other ‘indicators’ should also be the guide when deciding on spending policies. Indicators such as productivity gains (are you seeing increased wage gains along with increased federal spending?); wealth inequality (are you only seeing stock & bond price gains?); price gains (are you only seeing currency-induced stagflation?); etc., must be considered by federal policymakers (taking cues from monetary policymakers) when making spending plans.
“MMT needs a more detailed explanation as to the limits of federal government spending and understanding of how we prioritize spending besides the catch-all inflation. Inflation is not as useful guide as it is more difficult to create in more developed countries than in the past. Inflation is not as relevant nowadays, because world-wide productive capacity has increased, and the ‘Savings Bubble’ liquidity trap takes money out of the consumer [functional] economy and puts it on ice.”—CHARLES ‘Kondy’ KONDAK, co-contributor to the Pure MMT for the 100% page.
Kondy next dives deeper into why the ‘inflation indicator’ (even though it is way better than using the ‘budget indicator’), still isn’t the only indicator to look at when making federal spending plans (even in a weak economy):
“Introducing money into the economy without increasing the percentage of people that can save, without improving productivity, or without producing a tangible asset for the public purpose, now or in the future, runs a much greater risk of just being ‘inflationary’. Yes, increased production wherever it occurs is beneficial; but increasing the ‘Savings Bubble’ [nonfunctional economy] without a healthy flow back into the productive [functional economy], NO! Further, even if none of these things are accomplished with deficit spending money creation [even if the spending plans were ‘paid for’ by taxes], it would still be a waste of money as it creates nothing of real value. We may run into having to make political decisions to prioritize spending, as we cannot do it all. This said there is a time and place during recessions for solely propping up aggregate demand.”—Charles Kondak
In the meantime, instead of using the ‘inflation indicator’, the gold-standard ‘federal-gov’t-is-the-same-as-a-household’ mentality of using the ‘budget indicator’ with federal spending decisions, continues (today in 2018).
You have the Republicans, cutting taxes while increasing spending.
Then, while we wait for those tax cuts ‘to pay for themselves’ (through increased economic growth), that’s when the Republicans next get busy and demagogue budget deficits and drumbeat the need to cut spending on other functions of government (except the military of course).
The Democrats, not so much, but similar to the Republicans (some things never change), the exception to their spending plans is that they almost always come with ‘the pay for’ (with increased taxes upfront).
H/T Kondy
H/T Nick Hionas
Also special thanks to @netbacker for his suggestions that inspired this post (Follow @netbacker on Twitter for more about the economy).

Almost All Swiss Gov’t Bonds Have Negative Yield

Almost all Swiss federal bonds issued by the Swiss federal gov’t have a negative yield, so do the Swiss people still think of those bonds as the federal gov’t ‘borrowing’ (?)

061716 From 1 Month to 33 Years, Almost the Entire Yield Curve for Swiss Bonds is Negative

Do Swiss ‘deficit hawks’ think that further Swiss gov’t bond issuance that increases federal debt (that *literally* makes money for the Swiss gov’t)…is…’unsustainable’ (?)

Take a look at a bill from inside your wallet. You are staring at a zero-coupon perpetual bond issued by your federal gov’t. Do you consider that as your federal gov’t being in ‘debt’ (?)

Take a close look at this WSJ graph above…

Which one of the four countries is NOT like the other?

If you said ‘Germany’, no need to read any further, see you at the luau buffet at sunset.

For the rest, may I explain, of the 4 countries above, Germany is NOT a monetary sovereign…

Germany is a sovereign, yes, but not a monetary sovereign like Japan, the United States, or Switzerland…

Germany is like a U.S. state, sharing a currency with other sovereigns, within one federal monetary sovereign…

So for a non-monetary sovereign like Germany (a currency user),

to be included in the same graph with Japan, the US, or Switzerland (a currency issuer),

…is like comparing apples to oranges at best; or at worst it doesn’t give the credit that a Eurozone ‘member state’ actually being in the same ballpark as a monetary sovereign, is due. In fact, in the article, the WSJ narrative is that Germany was “outdone” by Switzerland. Here’s a reality check on that WSJ narrative: In 2015, Germany, a member state of the Eurozone, had the US dollar equivalent of $1T in government revenues, which worldwide, was ranked third, only behind China ($2T), and the United States ($3T), while Switzerland was way down that list at $175 billion.

The German federal government, a member state of the Eurozone, just like any US ‘member’ state or US state gov’t, just like any user of currency, needs to ‘get’ currency from someone else to finance deficit spending in that currency. Switzerland, however, an issuer of currency, unlike Germany, doesn’t need to ‘get’ that currency to finance deficit spending. The Japanese federal gov’t, the issuer of currency, unlike Germany, doesn’t have to ‘borrow’ currency to deficit spend in that same currency. The United States federal gov’t, the issuer of currency, unlike a US state gov’t, unlike Germany, unlike any users of currency, doesn’t have to ‘borrow’ that currency, from anyone, not anymore, not since become a monetary sovereign issuing a pure fiat currency.

Those German gov’t bonds are actual ‘debt’ (because they are denominated in a currency that, as a non-monetary sovereign, Germany cannot issue). Those Japan, US, and Switzerland federal gov’t bonds are not actual ‘debts’ (because they are denominated in a currency that, as monetary sovereigns, they can issue). Those Japan, US, and Switzerland federal gov’t bonds are nothing more than accounting entries, ledger postings, ‘debits’, that consolidate a balance sheet to simply keep record of the newly-created fiat currency that was added, that was ‘credited’, to the non federal gov’t. To help remove the specter of ‘debt’, so that policymakers can enact productive, desperately-needed, counter-cyclical fiscal measures that would stimulate their economies, perhaps Japan, the US, and Switzerland’s ‘debts’ should be called ‘debits’ (?)

Those German gov’t bonds are actually part of what is called the ‘credit markets’ because like the bonds of any other non-monetary sovereign, business, or household, those bonds could default, there is credit risk. As users of currency, any non-monetary sovereign, business, or household could become insolvent, it could ‘run out of currency’. However, the federal gov’t bonds of Japan, the US, and Switzerland will not default, unless intentionally by nihilistic politicians, so there is practically no credit risk. Any monetary sovereign, as issuers of a currency that is not convertible and free-floating, could never become insolvent, they will never ‘run out of currency’. So that the people could stop seeing their federal gov’t less as ‘borrowing’ currency, and more as offering a service of ‘safekeeping’ currency, as a seller of term deposits, more like fully-insured central bank CDs, perhaps the marketplace for Japanese federal gov’t bonds, US federal gov’t Treasury bonds, and Switzerland federal gov’t bonds should just be called the ‘debit’ markets (?)

(So that people like central bankers, politicians, and WSJ reporters don’t confuse them.)



Thanks for reading,

Eddie D


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Source: http://blogs.wsj.com/moneybeat/2016/06/16/from-1-month-to-33-years-almost-the-entire-yield-curve-for-swiss-bonds-is-negative/


A Suggestion For MMT

Today we say ‘Gov’t v. Non Gov’t’…

We say that ‘Gov’t Deficits = Non Gov’t Surpluses’, which makes it clear, and that is good…

But on a given day, if the federal government deficit spent and added dollars to the banking system (aka net financial assets or high-powered dollars) which ONLY went to state & local gov’t, this isn’t captured with just Gov’t v. Non Gov’t. For example, if the federal gov’t deficit spent only to state & local gov’t, for grants, infrastructure, workforce development, or medicare/medicaid reimbursement, the Gov’t v. Non Gov’t model shows net nothing happened. Meaning with this present two-sector model, we are missing that improvement of those state & local government’s financial standings due to that significant state & local surplus, which also decreases their municipal bond ‘leverage vulnerability’…

Conversely, in a misguided effort by policymakers to attain federal gov’t surplus, if they were to cut federal funding to the state & local gov’t, again, this model doesn’t reflect state & local gov’t savings deficits that will have negative economic effects to their financial standing. In addition, that may spill over to decrease private sector savings, threatening the private sector’s financial standing, which may not only increase the state & local ‘leverage vulnerability’, but the private sector’s as well…

Perhaps we could improve on the Gov’t v. Non Gov’t model and make it even better? Not to say that there is anything *wrong* with it, just offering an idea that may improve it. We’d still be crank-starting cars if we stopped tweaking them, right? So here’s a suggestion: How about we slide state & local gov’t over with the private sector, and instead say Federal gov’t v. Non federal gov’t…

I believe this modification would go a long way, not just in a slightly better illumination of financial flows, but also in helping the uninitiated better understand and more easily accept the concepts of Modern Monetary Theory (MMT). The ‘issuer’ of dollars v. the ‘users’ of dollars will start to make more sense to more people. This may also have a far-reaching cauterization effect that may heal the political divisiveness that has been so detrimental to solving America’s problems. If we no longer commingle federal gov’t with state & local gov’t, more folks with hard-wired ideology and confirmation bias may begin to understand what ‘the-federal-gov’t-is-not-the-same-as-a-household’ and by extension ‘the-federal-gov’t-is-not-the-same-as-a-state-&-local-govt’ really means. This is a compromise to all the ‘Fiscal conservatives’ and ‘Deficit hawks’ who can continue to fight their good fight for state & local gov’t to get their fiscal houses in order, while at the same time becoming less suspicious of MMT proponents if they, as we, see the federal gov’t as a separate paradigm…

Take these three entities:

A) Federal gov’t  B) State & Local gov’t  C) Private sector households & businesses

Of the entities above, which one, or two, and/or maybe all three all together, match these following scenarios:

1) This entity has the AUTHORITY TO TAX…2) The taxation by this entity MUST be done to finance its spending…3) Once all revenue inflow (no matter what source) is exhausted, this entity MUST then borrow dollars to spend…4) In order to borrow, dollars must be LENT to this entity (this entity must ‘get’ dollars from someone else)…5) When borrowing dollars, this entity goes into actual DEBT…6) All of this entity’s debt must be ‘PAID BACK’…7)  This entity is the ‘ISSUER’ of dollars…8) This entity is a ‘USER’ of dollars…9) In the game of Monopoly, this entity is more like ‘BANKER’…10) In the game of Monopoly, this entity is more like ‘PLAYER’…11) This entity IS NOT revenue constrained (it always has unlimited dollars)…12) This entity IS revenue constrained (it only has limited dollars)…13)  This entity needs to BALANCE THE ECONOMY because it will never run out of dollars…14) This entity needs to BALANCE THEIR BUDGET or else they will run out of dollars…15) This entity acts for the greater good and a common cause for ALL people…16) This entity acts as either a ‘non-profit’ or a ‘for-profit’ only for CERTAIN people…17) This entity IS the ‘Lender-of-last-resort’…18) This entity IS NOT the ‘Lender-of-last-resort’ 19) This entity has NEVER experienced a missed interest payment, a debt restructuring, or actual default of their debt (this entity has very little leverage vulnerability)…20) This entity MAY have in the past experienced a missed interest payment, a debt restructuring, or actual default of their debt (this entity has some leverage vulnerability)…

How many times did you choose A) Federal gov’t AND B) State & Local gov’t together at the same time…once or twice (?)

How many times did you choose B) State & Local govt AND C) Private sector together at the same time…more than that (?)

If B & C together walk like a duck….and B & C together sound like a duck…perhaps start calling them a ‘Non federal government’ duck (?)

Thanks for reading,  

eddie d


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