The Japan That Can Say No More

080816 The Japan That Can Say No More (2)

A lot has changed in Tokyo since the year 1989 when the book ‘The Japan That Can Say No‘ came out. In the late eighties, Japan’s economy, still the world’s second largest, was growing between 4% and 7% annually. Japanese corporations were on a buying spree, snapping up U.S. trophy properties like Rockefeller Center and Pebble Beach. In 1989, Akihito, the current Emperor of Japan, acceded the Chrysanthemum Throne, and the property value of the Imperial Palace in central Tokyo, measuring approximately one square mile, was assessed higher than the entire state of California. While stock and property markets soared, Japanese consumers splurged. High-end restaurants were offering sushi wrapped with gold leaf instead of seaweed, or upon request, they routinely served sake and green tea sprinkled with gold dust (I’m not making this up, I was living in Tokyo, a 15-year run, brokering US Treasury bonds). Golf course memberships, a huge status symbol in Japan, were changing hands for millions of dollars. On December 29th, the last trading day of 1989, the Nikkei stock average closed at what still remains to this day, its all-time high of 38,915…

As it turned out, there was as much hot air in that book as there was in those asset prices, and it was Japan’s markets, that instead, said ‘No’. The bubble burst, the country fell into recession, what became a long, slow, economic slog, what we all now know as Japan’s ‘Lost Decade(s)’…

Prior to 1989, there are multiple reasons that explain the past economic ‘miracle’ of Japan, but for this post, I would like to concentrate on the biggest, which was the aggressive fiscal stimulus (increased deficit spending) by the Japanese government. On the other hand, there are also multiple reasons that explain the current economic ‘lost decades’ of Japan, and that biggest, is the over-reliance on ‘monetary stimulus’ (increased ‘quantitative easing’ so-called ‘QE’) by the Japanese central bank, which they pioneered in March 2001 (‘QE’ was coined by Richard Andreas Werner, a German economist working as the chief economist of Jardine Fleming Securities Asia Ltd. in Tokyo at the time, and used this expression during presentations to institutional investors in Tokyo). To counter weak economic growth, the Japanese government has continued with more experimental ‘monetary stimulus’ and less proven fiscal stimulus (because they believed then and still believe today that it problematically adds to Japan’s ‘debt’)…

The Japanese economy, same as the economy of any monetary sovereign, only does exactly what it has been instructed to do by the fiscal policymakers in its government and the monetary policymakers in its central bank. Any economy of a monetary sovereign, using a pure, fiat currency, like Japan, goes in whatever direction the knobs have been turned by these policymakers. If policymakers in Japan want to intentionally slow the economy, then they should raise national consumption sales taxes (drain yen from consumers), introduce negative rates (drain yen from savers), expand central bank asset purchases (further distort markets), and provide an inadequate amount of fiscal spending (add an insignificant amount of public sector demand that doesn’t increase inflation). These measures, if all combined, and continued over time, will also have a powerful and exponentially compounding effect (‘paradox of thrift’), that keeps adding a poisonous uncertainty (decreased consumption), more flight to risk-free assets (stronger yen), which then hurts manufactures (lowers capital expenditures), hurts their employees (lower paychecks), and makes imports more expensive (drains even more yen from consumers). The Japanese economy has done exactly what it was told to do by its policymakers, so no one should be surprised at the country’s economic performance. People should be surprised, however, if in the distant future, economic historians did not compare the prolonged ‘monetary stimulus’ policies deployed in Japan in our lifetimes as the financial equivalent of medieval bloodletting.

It’s easy to see what the problem is. The chief economic surgeons in Japan call monetary stimulus an ‘arrow’. That’s the problem right there, they aren’t familiar with the post-gold standard, modern operating room. They see monetary stimulus as being one of the so-called ‘3 Arrows’ of Abenomics, but monetary stimulus, the lowering of interest rates, is not an ‘arrow’ (is not a scalpel). Only those other two arrows of Abenomics (more fiscal stimulus and more pro-growth reforms), are actual arrows (are actual scalpels). ‘Monetary stimulus’ isn’t a scalpel, it’s only a monetary accommodation, an economic sedative. ‘Monetary stimulus’ is just the anesthesia, that is used by the anesthesiologists (monetary policymakers) while the surgeons (fiscal policymakers) are busy employing more fiscal stimulus (repairing body parts), enacting those reforms (removing tumors), and the anesthesia should only be temporarily administered to the patient (if you know what you’re doing).  Furthermore, fiscal policymakers in Japan, as well as in the U.S., have bought into that ‘federal-gov’t-is-the-same-as-a-household’ delusion. Same as in the U.S. regarding Treasury bonds, fiscal policymakers in Japan are absolutely convinced that more federal deficit spending, which increases Japan’s so-called national ‘debt’ due to more issuance of Japanese government bonds (JGBs), would be a bigger problem than a chronically weak economy. By even thinking that JGBs are ‘debt’, by even believing that Japan itself is in ‘debt’, the real problem is that policymakers in Japan, just as in the U.S., are using outdated, gold-standard mentality, which is still taught to all of us by economists using textbooks referring to that bygone era….

JGBs are no longer ‘debt’. The Japanese national government, the issuer of yen, yen that is now a pure, fiat currency, does not have ‘debt’ because all those Japanese federal gov’t bonds, those JGBs, are denominated in yen. If those JGBs, that are issued by Japan, were denominated in U.S. dollars, or fixed to U.S. dollars at a certain foreign exchange rate, or pegged to any other foreign currency that Japan did not issue, THEN YES, THAT WOULD BE DEBT, but the Japanese yen isn’t any of these. Since 1971, when President Nixon dismantled the Bretton Woods system (fixed-exchange rate), the Japanese yen, just like the US dollar, is a pure, fiat currency meaning that it freely floats and it is not convertible to gold or anything. To be clear, JGBs are ‘obligations’ (JGBs are legal tender obligations of Japan to any holders of those securities), and JGBs are ‘liabilities’ (the outstanding JGBs and the interest payable are liabilities of Japan on a national consolidated balance sheet), but ask any accountant, not all obligations and liabilities are debts. Japan, like any other monetary sovereign that issues it’s own pure, fiat currency (not convertible to anything and freely floats), is never in ‘debt’ of anything denominated in that same currency.

The government of Japan, the issuer of yen, is not the same as a household, a user of yen. When the Japanese gov’t (issuer of yen) deficit spends, it is a different paradigm from when a Japanese citizen (user of yen) deficit spends. A user of yen must borrow yen to finance deficit spending, and when they do, that means that user of yen incurs an actual debt, whether it is in the form of a monthly credit card balance (same as a bond), an outstanding student loan (same as a bond), or a mortgage amount (same as a bond). Conversely, every single Japanese gov’t bond (JGB) in existence is issued by the gov’t of Japan, sold by its banking agent, the Bank of Japan (BOJ), and it is denominated in Japanese yen, a currency that the Japanese gov’t has sole monopoly power to issue. Rather than being ‘debt’, those JGBs are just a time deposit, a safekeeping service, for anyone with a desire to save yen. Just like a certificate of deposit (CD) at any bank, JGBs are a place to park yen, risk-free. It’s just like buying a CD at any other bank, except a CD from the BOJ is called a JGB…

Unlike a user of yen, the Japanese goverment, the issuer of yen, doesn’t need to ‘borrow’ yen. The Japanese gov’t, the issuer of yen, doesn’t need to sell JGBs to ‘finance’ deficit spending in yen. The Japanese gov’t, the monopoly ‘supplier’ of yen, is simply adding newly-created yen, to the economy, and the Japanese people, the Japanese financial institutions, or anyone else, when buying JGBs, are putting some of it back. A 250% JGB to GDP just means that the Japanese are incredibly good savers, that’s all. That is not Japan going into ‘debt’. That is yin and yang, ebb and flow, tidal gravity, like fallen rain and natural evaporation, and it’s all happening inside Japan’s very own economic ecology of yen, Japan’s post-gold standard, modern monetary masterpiece. The gov’t of Japan, their policymakers, have as much to worry about having to ‘pay back’ that ‘debt’, those JGBs, as much as they have to worry about ‘putting back’ all the rain that has ever fallen, or ‘paying back’ all the oxygen ever breathed. Japanese JGBs are as much a ‘debt’ to the country of Japan as are shares of Nissan stock ever issued and sold by Nissan being a ‘debt’ to the corporation of Nissan.

Thankfully though, Japanese government policymakers seem to have recently begun to rethink ‘monetary stimulus’. The latest fiscal stimulus announced by Japanese gov’t policymakers last month did NOT increase the asset purchase sizes of QE, nor did the BOJ push negative rates even deeper. Earlier this year, the Japanese gov’t also decided NOT to raise across-the-board sales taxes (Japan National Consumption Tax) any higher, again, to 10%, like they did, to 8%, in April 2014. All these are very good signs that regarding ‘monetary stimulus’, maybe, just maybe, Japanese gov’t policymakers are possibly thinking ‘No More’.

Imagine the monetary policymakers at the Bank of Japan, following Emperor Akihito’s lead, speaking directly to the Japanese people, leveling with them, admitting to them, that it is not your ‘deflationary mindset’ that is holding the country back, but the government’s own policies. Federal policymakers should announce that they will start acting like the issuer of yen…not like users of yen…so…unlike users of yen that need to get their budgets in balance…that instead…that they…the issuer of yen…with a wobbly economy caused by a lack of aggregate demand…by a lack of consumer purchasing power…will increase that demand, by increasing spending, that keeps increasing ‘deficits’ coming FROM the issuer (meaning larger injections of ‘surpluses’ going TO the users), and will not let up that fiscal stimulus until the issuer gets their economy in balance. So that a fair and proper worldwide economic expansion could finally begin, perhaps the rest of the world’s policymakers would also decide to step down from their ‘monetary stimulus’ throne.

Yonde kurete arigato,

eddie-san

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Budgets Are For Users

     Once upon a time, you could pop open the front hood of a car, and looking inside was not so intimidating. 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, 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 ‘printing 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 never had a year on record without inflation, 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 it’s 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 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—————————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—————————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 widen prosperity).

Scenario #3)

    USER OF DOLLARS dashboard ‘indicator’:

    No Debt—————————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…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).  
062316 Budgets Are For Users
     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’:
——————0%——————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 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’:
——————0%——————2%——————
                                                                     ^
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’:
——————0%——————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:
= 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, the issuer of dollars is increasing spending to get the economy that is running too slow 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. SPECIAL THANX 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 newly-created, high-powered dollars into the money supply 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 municipal gov’t  C) Private sector households & businesses

Of the entities above, which one, or two, and/or maybe all three, match these 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 Federal gov’t AND State & local govt together at the same time…once or twice (?)

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

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

Thanks for reading,  

eddie d

 

 

President Jackson Demoted

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Here’s what they *should* say why President Andrew Jackson, the seventh President of the United States, was bumped to the backside of the $20 bill:

He was moved to the back of the Twenty because he paid off the national debt…(Yes, you read that right).

As counter-intuitive as it sounds, paying off the national debt, running federal gov’t budget surpluses, a spending sequester, are all glaring examples of why that federal-gov’t-is-the-same-as-a-household groupthink has it all backwards. To pay off the national debt, President Jackson’s administration ran sustained budget surpluses for 7 straight years (meaning sustained public sector deficits was replaced with sustained private sector deficits)…

Two years later, the Panic of 1837, the U.S. economy went into a depression, banks became insolvent, business failures rose, cotton prices dropped, and unemployment dramatically increased…

That depression lasted for four years until 1841 when, the national debt went back to increasing again (meaning private sector deficits switched back to private sector surpluses), and the economy began to rebound…

Not convinced? Take a look at these dates:

1817-1821

1829-1836

1852-1857

1867-1873

1880-1893

1920-1930

These dates above were the 6 periods in American history when the US federal gov’t had substantial yearly budget surpluses meaning, at the very same time, and by accounting identity, the non-federal-gov’t (everybody else) was being subjected to ‘savings deficits’. Next look at these dates:

1819

1837

1857

1873

1893

1929

These dates above were the starting years of all six economic depressions in U.S. history. Now let’s put all the dates together:

1817-1821 federal gov’t surpluses and the 1819 Depression

1829-1836 federal gov’t surpluses and then the 1837 Depression

1852-1857 federal gov’t surpluses and then the 1857 Depression

1867-1873 federal gov’t surpluses and then the 1873 Depression

1880-1893 federal gov’t surpluses and then the 1893 Depression

1920-1930 federal gov’t surpluses and then the 1929 Great Depression

Coincidence?

Here’s another example of federal gov’t surpluses having its fingerprints on economic downturns: The 2001 recession was also preceded by federal gov’t budget surpluses. The ‘Bush recession’ was triggered by the ‘Clinton surpluses’. In my opinion however, the economy was very strong during Clinton’s second term, not to mention that dot com internet stock hysteria was reaching full ‘silly-crazy’ stage, so in that particular case, those short-lived surpluses were justified, because they were analogous to tapping the brakes. Masterfully, that 2001 recession was a mild one because Clinton’s successor, incoming President George W. Bush, with both the Congress and the Fed Chair Alan Greenspan’s blessings, quickly resumed federal budget deficits with tax cuts passed on June 7, 2001 (a rare example of both monetary and fiscal policymakers being in sync and turning their launch keys at the same time)…

Alexander Hamilton, the first United States Secretary of the Treasury, who, it was also announced today, will remain on the front of the $10 bill, said in 1790, “A national debt, if it is not excessive, will be to us a national blessing.” (No mention of paying it off, in fact, he argued for the usefulness of safe, easily traded federal debt, that would provide a store of value, as collateral for deals, as a lubricant for business activity, making the economy more productive, which he predicted would help our new nation someday surpass England as a world power)…

Unless you truly need to slam the brakes on growth, and you actually want to slow down the velocity of those twenty dollar bills, sustained and prolonged federal gov’t surpluses throughout American history are a fiscal policymaking case study of What Not To Do.

 

 

Eddie D  <eddiedelz@gmail.com>

April 15th Tax Day is the “Big blind”

Today, in the post-gold-standard era, and especially on tax day April 15 (April 18 this year because of the Emancipation Day holiday in Washington, D.C.), the present narrative that the US federal government must collect federal taxes in order to finance it, is analogous to the federal government saying that it must hitch horses to its brand-new 2016 Ford Pickup in order to pull it.
Here’s another analogy regarding those federal taxes for Texas hold ’em poker fans:
Imagine a casino, not your ordinary casino, but one with the most action in the history of mankind, with many poker tables inside, and each of the separate poker tables are just like a separate local and state gov’t inside that casino, the federal gov’t. Then picture local and state taxes being like the “Rake”; and federal taxes being like the “Ante”, or more precisely, the federal taxes are like the “Small blind” and the “Big blind”. The players pay all rakes and blinds (federal, state & local taxes) with casino-issued chips (federal, state & local tax credits)…
The blinds are different from the rake. The blinds (the federal taxes) paid before dealing each new hand do not finance that poker table; instead, the rake (local & state tax) confiscated from the winning pot finances that poker table. This is because the casino (the federal gov’t) is the issuer of chips, while each of the poker tables throughout the casino (the state & local gov’t) are not the issuers of chips. The poker tables and the poker players are the users of chips…
The casino never worries about getting chips. Only the tables and the players worry about getting chips, while the casino has other, much more important things to worry about. The casino doesn’t get their chips from players from China, from Japan, not from anyone. Unlike the tables or the players, the casino issues the chips by fiat. The casino is who first enters the chips into existence. The tables get their chips from the casino. The players get their chips from the tables…
Rather than funding the poker table or the casino, those blinds prevent all poker players in the casino from just waiting to be dealt pocket aces, or never risking their chips unless they get a royal flush on the river card. The blinds are just making sure that all players, especially those few players with a lot of chips can’t just sit there, hoarding their chips, never calling a bet, and never slide anything into the middle of the table…
The rake ‘funds’ the tables, while the blinds ‘facilitate’ the tables. Local and state gov’t finances itself by raking some of your chips, but unlike that rake, the purpose of the blinds is not to finance anyone. That Big blind (that federal tax) players must pay once every round (every April 15th) is an imposed redistribution of chips. In addition, both those small and big blinds speed up the game, they increase chip velocity, by creating an urgency to play because those blinds remind the players that they will bleed their chips away if they stop trying to win more chips…
Most important, the rake and the blinds must be paid for, can only be paid for, with just those casino-issued chips (those federal, state & local tax credits). Throughout the casino, no matter which table you play on, you can only spend those casino-issued chips, which gives full monopoly control of the flow of those chips, full power over the entire chip dominion, to the casino, the sovereign issuer…
The users of chips, the local & state gov’t, as well as all the players, stay focused on either breaking even or winning. Meanwhile the issuer of chips, the federal gov’t, stays focused on growing the action, improving the casino, adding gaming diversity to the floor, or upgrading the facilities, which gins up enthusiasm for more people to play. The federal gov’t is also that ‘eye in the sky’ that watches for cheats or other criminal activity to make players feel secure…
In the post-gold-standard, modern monetary system, it’s important to understand the dynamics between the rake (collected by the non-sovereigns) and the blinds (imposed by the monetary sovereign). The purpose of the rake is to fund that table (local & state gov’t); and the purpose of the blinds is for the casino (federal gov’t) to create your need to keep trying to get more of those chips, which leads to more consumption using those chips, in a perpetual pursuit of profit and/or happiness…
It’s not those chips that the federal government needs from you today, it’s your work at the tables, your interactions with the players, and your spending of those chips that it always only needs.
Many happy (federal) returns,
eddie d  <eddiedelz@gmail.com>

All About That Base

Going back to the start of the Large Scale Asset Purchase (LSAP) program right after the Lehman bankruptcy on September 15, 2008…

 

The reason why those bond ‘kings’ and hedge fund ‘stars’ predicted that ‘quantitative easing’ (QE), QEII, III, etc., would cause massive hyperinflation and sky-high interest rates were so wrong, was because as we (hopefully) now know, there’s a difference between the newly ‘printed’ dollars that finance deficit spending that add net financial assets into the banking system; and the newly ‘printed’ dollars that financed LSAP that do not add any net financial assets to the banking system. The reason why LSAP was not an increase of dollars in the banking system, why it had nothing to do with the money supply at all, and why it had no inflationary bias whatsoever, was simple: The Fed was only swapping newly ‘printed’ dollars (a.k.a. reserves) going into the monetary base (not part of the money supply), for the exact same amount of bonds (also not part of the money supply), that were ‘unprinted’ out from the secondary bond market. If you just understood that, then consider yourself ahead of 98% of the population, ahead of Nobel-laureate economists, ahead of all policymakers, and especially ahead of the Very Smart People in the mainstream media that constantly bark fake narratives relying on outdated, gold-standard-era mentality over the airwaves today.

 

There are three scenarios where the present balance of reserves that were newly created by the Fed to be paid to the banks to buy Treasury bonds and mortgage backed securities (MBS) from banks during LSAP could be reduced. In the first scenario, banks in aggregate can reduce their reserves only to the extent that they initiate new lending and the public demands more physical currency (cash) that flow into the economy as new banknotes.

 

In the second scenario, a bank, not on its own volition (like during any Open Market Operations done pre-LSAP), purchases (is ‘assigned’) bonds presently impounded at the Fed that were bought during LSAP. This would be the exact opposite of what the Fed did during LSAP (the Fed would “unwind” the initial trade by ‘unprinting’ reserves and ‘printing’ those bonds held on their balance sheet back into the secondary market). Those bonds would be paid for by that bank’s reserves held at the Fed (meaning the Fed’s balance of reserves are reduced). This has not happened, nor will it ever, unless the Fed decides to more aggressively reduce reserves (if there is a sudden, unexpected US economic boom that is so strong that the Fed needs to slam on the brakes and quickly ‘unprint’ reserves to drive interest rates higher).

 

In the third scenario, the Fed reduces the amount of reserves (Fed liabilities on its balance sheet) by reducing the amount of bonds held (Fed assets on its balance sheet). As per the 09/20/17 FOMC statement, the Fed will start a reduction to “perhaps $1T in the coming years”. This Fed “normalization” will be done slowly (only $10B every month at first) by reducing the amount of maturing securities held on its balance sheet that the Fed reinvests (NOT by selling bonds from the Fed’s balance sheet directly to banks as in the second scenario). Going forward, the amounts that the Fed receives from maturing securities will cancel out the same amount of Fed’s liabilities.

 

As of today (the end of Q3 of FY2017), right before the start of Fed ‘normalization’, most of the Fed’s assets are those $4.2T in Treasury bonds and MBS securities bought during LSAP. The other side of the Fed’s balance sheet, most of the Fed’s liabilities include $2.178T of formal bank reserves (deposits held by depository institutions) presently earning 1.25% (the FFR ‘ceiling’); $0.455T of non formal bank reserves (reverse repurchase agreements) earning 1.00% (the FFR ‘floor’); and $1.533T cash dollars in circulation (Federal Reserve notes outstanding).

 

Here are the running balances since the credit crisis started:

 

Total Liabilities of the Federal Reserve Bank Balance Sheet  
DATE FORMAL BANK RESERVES NON FORMAL BANK RESERVES DOLLARS
now earning 1.25% (the FFR ‘ceiling’) now earning 1.00% (the FFR ‘floor’) (cash in circulation)
9/28/2017 2.178T 0.455T 1.533T
6/30/2017 2.118T 0.504T 1.512T
3/30/2017 2.270T 0.511T 1.490T
12/31/2016 1.943T 0.574T 1.463T
9/30/2016 2.085T 0.515T 1.424T
6/30/2016 2.199T 0.404T 1.417T
3/30/2016 2.336T 0.370T 1.398T
12/30/2015 2.209T 0.499T 1.381T
9/23/2015 2.602T 0.304T 1.340T
6/24/2015 2.494T 0.289T 1.320T
3/25/2015 2.738T 0.279T 1.313T
12/24/2014 2.610T 0.299T 1.294T
9/24/2014 2.707T 0.262T 1.245T
6/25/2014 2.628T 0.223T 1.236T
3/27/2014 2.611T 0.198T 1.225T
12/25/2013 2.451T 0.151T 1.195T
9/25/2013 2.307T 0.103T 1.163T
6/26/2013 2.018T 0.089T 1.150T
3/27/2013 1.830T 0.093T 1.135T
12/26/2012 1.533T 0.100T 1.125T
9/26/2012 1.471T 0.090T 1.086T
6/28/2012 1.492T 0.084T 1.258T
3/29/2012 1.565T 0.083T 1.234T
12/28/2011 1.569T 0.089T 1.035T
9/28/2011 1.609T 0.083T 0.996T
6/30/2011 1.622T 0.067T 0.986T
3/31/2011 1.458T 0.066T 1.118T
12/30/2010 1.021T 0.059T 1.123T
9/30/2010 .984T 0.067T 0.914T
6/24/2010 1.062T 0.060T 1.094T
3/25/2010 1.148T 0.055T 0.893T
12/31/2009 1.025T 0.070T 0.890T
9/24/2009 0.903T 0.071T 0.872T
6/25/2009 0.745T 0.072T 0.867T
3/26/2009 0.822T 0.066T 1.044T
12/29/2008 0.819T 0.088T 1.025T
9/25/2008 0.095T 0.091T 0.990T
6/26/2008 0.013T 0.042T 0.989T

Thanks for reading,

 

Eddie D

Follow us on Facebook: https://www.facebook.com/PureMMT/

 

* (Note: This is an updated version of the original post from April 2016)

‘Helicopter Money’ Won’t Offer Much Lift: Narayana Kocherlakota

 

http://www.bloombergview.com/articles/2016-03-24/-helicopter-money-won-t-provide-much-extra-lift

This article (link above) entitled “‘Helicopter Money’ Won’t Offer Much Lift” from Bloomberg/Newsrooom appeared today. It was written by Narayana Kocherlakota, now a Bloomberg View columnist, who also is the Lionel W. McKenzie professor of economics at the University of Rochester, and who also was the 12th president of the Federal Reserve Bank of Minneapolis from 2009 through 2015. In this article, Narayana Kocherlakota mentions “global central bankers’ quest for unconventional ways to stimulate weak economies”, with the old idea of dropping “helicopter money” directly to the people, or the gov’t, to spend. Knowing that this idea is more sensation than sensible, Narayana Kocherlakota then makes his most powerful point:The government has all the borrowing and spending power it needs to boost the economy and get inflation up to the desired level, if only it had the will.”

Bingo…In a nutshell, he says exactly what is presently ailing most of the world economies.

Inspired by this, I emailed him. In lieu of a lack of will by fiscal policymakers, I offered my own unconventional idea for monetary policymakers that I personally believe would immediately work to remove the ‘specter’ of federal government debt, and restore confidence to consumers. This idea, in my opinion, would unleash that pent-up aggregate demand here in the US, and even more so if implemented in Japan, but this idea would not work in the Eurozone. Forget the EZ, with their incomplete setup, without a federal government bond (like the US and Japan), and also without a centralized, fiscal policymaking branch with strong authority (like the US and Japan), the troubles in the EZ will last a very long time…The only hope for any member state is to ‘exit’ the EZ, my guess Italy will be the first (?), get back their ability to issue sovereign currency, and reacquire that needed ‘adjustment mechanism’ that they had lost. I also thanked Narayana Kocherlakota for his public service and he was kind enough to reply back (and polite enough to gently put that he was skeptical of my idea). Here is my message and his reply:

From: <eddie_751@hotmail.com> To: NARAYANA: Agreed that if fiscal and monetary policymakers were in sync, they could work together to generate inflation, but if not, instead of talking about helicopter drops (which would be politically untenable), I have another suggestion: ‘Quantitative Redemption’. The Fed has $2T in Treasury bonds on its balance sheet. Announce that starting today, $167 billion per month, will be, effective immediately, ‘redeemed’. Paid off. Ripped up. One arm of the federal gov’t (Treasury) issued those IOUs and another arm of the federal gov’t (Fed) bought them back. Instead of continuing to ‘impound’ these bonds on the Fed’s balance sheet (Peter paying Paul), by the end of one year, all $2T won’t exist anymore. Anybody that knows Treasury bond markets can guess what would happen next: This outright decrease in supply would bid up prices of Treasury bonds and pressure rates lower (Thus ‘QR’ done sooner would mean ‘QE2’, ‘QE3’, ‘The Twist’, and endless Fed jawboning would not have been necessary). Anybody that knows what Treasury bonds are also knows what this ‘redeeming’ of Treasury bonds means: Decreased ‘National Debt’ which decreases Groupthink’s perceived imminent ‘danger’ to the financial security of the country, and also decreases the need for any more Kabuki theater in Congress over raising the ‘debt ceiling’. Furthermore, anybody that knows what this telegraphed, intentional money creation means, can also guess what would happen next: Consumers and businesses would front run the approaching dilution, or reduction, in the purchasing power of their cash, and start making those purchases +/or investments that they had been postponing since the financial crisis of 2008. Instead of another helping of obstructionism, fiscal policymakers in Congress *could* get in sync with monetary policymakers, assist them by concentrating on boosting the economy, enacting productive, counter-cyclical fiscal policy measures, and generating inflation to the desired level…“If it had the will”.

His reply:

Thanks for the comment.

I should think more about this –

but my first reaction is skepticism.

Suppose the Fed forgives all of this debt.

Would this make the Fed less willing to raise rates, more willing to tolerate inflation?

Maybe – but, as I say, I’m skeptical.

Thanks again.

NK

 

A Leading Indicator’s Leading Indicator

US private sector dollar adds and drains from1992 to 2015

The US stock market is one of those ten US economic ‘leading indicators’ that usually changes before the economy as a whole changes. The enclosed link above is a very illuminating ‘info-graph’. It’s kinda like a ‘Chutes and Ladders’ game board. The object of this game is to become the first player (Read: fiscal policymaker) to break away from the ‘federal-gov’t-is-the-same-as-a-household’ groupthink…

Just start at the left, follow along up and down with actual amounts of dollars sloshing in to and out of the private sector year over year (what economists call ‘vertical’ or high-powered ‘exogenous money’ and what MMT calls ‘dollar adds’ / ‘dollar drains’). As it all veers upwards, that means dollars getting consistently added to the private sector, as it all veers downwards, that means dollars getting consistently drained from the private sector, and then watch what happens next in the stock market (Spoiler Alert: It did exactly what it was told to do)…

Note that other than just those four ‘Clinton Surplus’ years, all the rest of the years on this graph are, at the same time, running both US budget deficits (the first two bars in each year) and US trade deficits (the second two bars in each year). Can you remember when we were all told that these so-called ‘Twin Deficits’ were so terrible, yet as you can clearly see, the economy and by extension the stock market weren’t always doing so terribly, in fact, there isn’t much of a correlation at all. There is a correlation however, to the economy and the stock market with the other deficit on this graph, the private sector ‘deficit’ (not to be confused with private sector debts like student loans, a home mortgage, or credit card balances due). Federal budget deficits and federal trade deficits are what everyone focuses on, and needlessly worries about, but the private sector deficit is the one and only deficit that we should instead be focused on, and actually be worried about. In the year 2001, the total private sector dollar drain, or their sustained ‘deficit’, since the 1990 recession, reached $1.787 trillion right before the economy fell into recession. This ‘indicates’ that going forward, fiscal policymakers should take action if private sector deficits reach that level again, but look what happened next. After proper dollar adds, or private sector surpluses, the economy recovers, but only a few years later, dollar drains, or sustained private sector deficits pass that $1.787 in the year 2007 again, and by much more. The result was the Great Recession. Only sustained private sector deficits that are allowed to build up are the actual danger to the economy, and only fiscal policymakers, working cooperatively, taking their cue from monetary policymakers, can prevent dollar drains from reaching critical levels. Furthermore, only people watching these private sector deficits as ‘leading indicators’, will have a good idea what that real leading indicator, the US stock market, will do next.

Not convinced? Take a look at these dates:

1817-1821

1823-1836

1852-1857

1867-1873

1880-1893

1920-1930

These dates above were the 6 periods in American history when the US federal gov’t had substantial yearly budget surpluses (decreasing total US federal gov’t debt) meaning, at the very same time, and by accounting identity, the US private sector was, to the penny, being subjected to the exact same amounts of yearly ‘savings deficits’ (increasing total US private sector debt). Next look at these dates:

1819

1837

1857

1873

1893

1929

These dates above were the starting years of all six economic depressions in U.S. history. Now let’s put all the dates together:

1817-1821 federal gov’t surpluses and the 1819 Depression

1823-1836 federal gov’t surpluses and then the 1837 Depression

1852-1857 federal gov’t surpluses and then the 1857 Depression

1867-1873 federal gov’t surpluses and then the 1873 Depression

1880-1893 federal gov’t surpluses and then the 1893 Depression

1920-1930 federal gov’t surpluses and then the 1929 Great Depression

Coincidence?

Hardly…Now let’s connect the dots:

The Great Depression was the worst economic downturn in the history of the Western industrialized world, and why?  It was not just because of a stock market collapse, but instead, it was because of a “money supply collapse” (quoting former Fed Chair Ben Bernanke in ‘Courage to Act’). When the federal gov’t is running a surplus, like it did in all the examples above, the federal gov’t is draining dollars from the money supply, out from the private sector. When dollars are being drained from the private sector for a prolonged period, then the private sector must start borrowing, or ‘deficit spend’ to maintain their same level of consumption in order to keep up their same desired level of savings. As you can see, all 6 economic depressions in US history were preceded by prolonged federal gov’t budget surpluses, or put another way, they were preceded by prolonged private sector savings deficits, resulting in prolonged private sector ‘deficit spending’. It is not continuous deficit spending by the federal gov’t that is unsustainable, it is continuous private sector ‘deficit spending’ that is unsustainable…

From the perspective of the private sector, there is no difference between the gold-standard era and the post-gold-standard era, because the private sector is not the issuer of dollars (no matter whether they are backed by gold or they are not). The private sector, because they are not the issuer of dollars, always goes into actual debt when deficit spending. However, from the perspective of the federal gov’t, the issuer of dollars, there is a stark difference between the bygone monetary system that had gold-backed dollars, and the modern monetary system that doesn’t have gold-backed dollars. US dollars today are not convertible to anything. US dollars today are not pegged to anything, they are free-floating, and they are issued by fiat. During the gold standard era, the federal gov’t could not just ‘issue’ gold out of thin air, but now the federal gov’t could just issue fiat out of thin air. Instead of the federal gov’t borrowing gold-backed dollars and ‘monetizing debt’ (financing debt by swapping IOUs for gold-backed dollars), the federal gov’t today issues newly-created fiat dollars and ‘monetizes deficits’ (reconciles deficits with ledger entries of non-convertible dollars). Before, federal gov’t deficit spending added to an actual outstanding debt of gold-backed dollars; now federal gov’t deficit spending instead just subtracts from the purchasing power of outstanding fiat dollars.

Unlike a household, that needs to balance a budget, the federal gov’t needs to balance the economy. Rather than worrying about ‘running out’ of fiat dollars, federal gov’t fiscal policymakers should be concerned about either strengthening a too-weak economy, or weakening a too-strong economy, whichever is needed at the time, to promote balanced growth. An economy with balanced growth creates as many jobs as possible, which then helps the most people as possible to earn dollars to pay for goods and services. In addition, fiscal policymakers must do what is needed to have the resources to be able to provide those goods & services in the future because THAT IS WHAT WE CAN ACTUALLY RUN OUT OF

Today, in the post-gold-standard, modern monetary system, federal gov’t deficit spending ‘finances’ our savings (not the other way around anymore). If the federal gov’t isn’t deficit spending enough, then the private sector must keep ‘deficit spending’ more, meaning keep borrowing more dollars, and since unlike the federal gov’t, the private sector cannot issue dollars, THAT IS WHAT IS ACTUALLY UNSUSTAINABLE

Monetary policy is just the anesthesia, and those monetary anesthesiologists, our central bankers, just keep the patient sedated. However, if those fiscal surgeons, our fiscal policymakers, do not then get to work, do not take productive, counter-cyclical measures, and just dither or bicker at each other while dollars keep draining from that patient, our private sector, then just like ZIRP & Consumption Taxes did in Japan, like austerity measures are doing in the EZ, and what sequestration is now threatening to do here in the US, as history shows, the US stock market will sooner or later follow accordingly.

NOTE: The above info-graph is a modified version of the original created by Chris Brown. Here is his latest updated version:  US asset decline 1992-2015 Revision 7 on FEB 17 2016

Follow Chris Brown at the “Intro to MMT – Modern Monetary Theory” page on Facebook: https://www.facebook.com/groups/introductiontommt/

 

Make Congress Great Again

On January 29, 2016, Bank of Japan Governor Haruhiko Kuroda announced a negative interest rate, to take effect on Feb. 16, “to spur banks to lend in the face of a weakening economy”…

(Read: To punish banks for not lending.)

Next year, the Japanese gov’t plans to once again increase the Consumption Tax, or national sales tax to 10%, “to balance the federal budget”…

(Read: To punish everyone else with a ‘deflationary mindset’ for not spending.)

The BOJ’s move, “is similar to the ECB’s first foray into negative rates in June 2014 and the tiered measures put in place by the Swiss National Bank”…

(Read: The BOJ’s move is similar to the reeking smell of desperation as in the Eurozone and as in the US, also suffering from weak growth, due to a lack of productive, counter-cyclical fiscal policymaking that has resulted in non-productive, pro-cyclical ‘austerity’ & ‘sequestration’ policymaking.)

P.S. It’s like completely incompetent people are running gov’t…Hmmm, why does that sound familiar (?)

(Read: Why Trump might become president.)

Encl. Here is what all central bankers would sound like (if their fiscal policymakers were also on the same page as them):

1 FEB 2016 BANGKOK POST – Thailand’s central bank, the Bank of Thailand, will forgo further interest rate cuts to “concentrate on stabilizing the nation’s currency, because in the current market, government spending has far more potential to drive economic growth than monetary policy does. In a situation like this, fiscal policy is much more effective than monetary policy for stimulating the economy overall“, Thai central bank Governor Veerathai Santiprabhob said. Thailand Finance Minister Apisak Tantivorawong added, “I believe we are heading in the right direction. If we want to improve the domestic purchasing power we have to focus on ways to boost the purchasing power of the vast majority of people. Moreover, since low-income earners are the most vulnerable sector of society, they are the most deserving of government aid,” he said. Recent measures reflect the Thai government’s concern over the impact of the slowdown of the Chinese economy. Mr Apisak said China’s cooling economy had heavily hit the export sector and affected other sectors along the economic chain, so the Thai government has sought to ease the impact by injecting liquidity mainly to low-income earners and accelerating investment in megaprojects.

http://www.bangkokpost.com/business/news/846636/stimulus-to-focus-on-grass-roots

 

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