Steve's Politics Blog

From Warren Mosler’s free book Seven Deadly Innocent Frauds of Economic Policy.

Deadly Innocent Fraud #3:
Federal Government budget deficits take away savings.

Fact:
Federal Government budget deficits ADD to savings.
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So what is the role of deficits in regard to policy? It’s very simple. Whenever spending falls short of sustaining our output and employment, when we don’t have enough spending power to buy what’s for sale in that big department store we call the economy, government can act to make sure that our own output is sold by either cutting taxes or increasing government spending.

Taxes function to regulate our spending power and the economy in general. If the “right” level of taxation needed to support output and employment happens to be a lot less than government spending, that resulting budget deficit is nothing to be afraid of regarding solvency, sustainability, or doing bad by our children.

If people want to work and earn money but don’t want to spend it, fine! Government can either keep cutting taxes until we decide to spend and buy our own output, and/or buy the output (award contracts for infrastructure repairs, national security, medical research, and the like). The choices are political. The right-sized deficit is the one that gets us to where we want to be with regards to output and employment, as well as the size of government we want, no matter how large or how small a deficit that might be.

What matters is the real life – output and employment – size of the deficit, which is an accounting statistic. In the 1940’s, an economist named Abba Lerner called this, “Functional Finance,” and wrote a book by that name (which is still very relevant today).

It was interesting to read how many economics experts of the highest caliber did not understand this until Warren Mosler explained this to them. It is obvious that the academic discipline of economics is different from the academic discipline of accounting. However, if economists don’t know how to do the accounting of the money on which they opine, should they stop offering opinions on that for which they cannot account?

Seven Deadly Innocent Frauds of Economic Policy is a book written by Warren Mosler.

For those who are tempted to think, “Oh no, another deadly dreary economics book that I won’t be able to understand”, here are some words from the beginning of the book.

In the next few moments of reading, it will all be revealed to you with no theory and no philosophy- just a few hard cold facts.

Before you get to the book, you may want to know what an innocent fraud is. Here is the book’s explanation.

The term “innocent fraud” was introduced by Professor John Kenneth Galbraith in his last book, The Economics of Innocent Fraud, which he wrote at the age of ninety-four in 2004, just two years before he died. Professor Galbraith coined the term to describe a variety of incorrect assumptions embraced by mainstream economists, the media, and most of all, politicians.

From the overview of the book, I give you the list of the seven frauds that Mosler discusses.

1. The government must raise funds through taxation or borrowing in order to spend. In other words, government spending is limited by its ability to tax or borrow.
2. With government deficits, we are leaving our debt burden to our children.
3. Government budget deficits take away savings.
4. Social Security is broken.
5. The trade deficit is an unsustainable imbalance that takes away jobs and output.
6. We need savings to provide the funds for investment.
7. It’s a bad thing that higher deficits today mean higher taxes tomorrow.

Once you understand these things for the frauds that they are, you can free yourself from the tyranny of the oligarchs who control both of our political parties. Then we can get on to the business of saving this country from disaster for the non-oligarchs. There are more of us than there are of them, so it is for the good of the country as a whole to make life livable for the non-oligarchs. The oligarchs will lose some of their power, but I think they will still do alright for themselves.

The only thing that can really hurt the oligarchs is for them to get carried away to the point where the rest of society revolts. This revolution will really do the oligarchs in like what happened in the French Revolution and the Russian Revolution. We would be doing the oligarchs a favor by regaining control peacefully so that they can continue to live the good life with just a little less of the goods.

Steven D Grumbine has the Facebook post The hive mentality of the vote blue apologists is bordering on pathological. Here is part of what he said.

The hive mentality of the vote blue apologists is bordering on pathological. It is literally impossible to have a discussion about facts ranging from economics to geopolitical strategy or civil liberties because they are steeped in a religion… deifying “vote blue”… they have forsaken the ability to think beyond just falling back into the hive.

I find it useless to try to explain The Modern Money Model to neo-liberals who still think that federal government deficits are inherently bad and Clinton’s surplus was good. They brag about Obama’s cutting the deficits without realizing that these cuts helped prevent full economic recovery for anybody but the wealthy.

Naked Capitalism has the article Don’t Side With Neoliberalism in Opposing Trump.

During the Bernie Sanders campaign I heard a high-level official give a powerful speech blasting the Trans-Pacific Partnership Act for the harm it would bring to workers, environmentalists and to all who cared about protecting democracy.

Donald Trump now has signed an executive order pulling out of the TPP negotiations.

Is this a victory or a defeat for the tens of thousands of progressives who campaigned to kill the TPP?

I agree with the gist of the article and the caveat that Naked Capitalism added. However, I feel the need to add a caveat of my own.

This is not quite right “Trade deals are bad deals unless they enforce the highest health, safety, environmental and labor standards.”

Labor in the developing countries consider some of this to be the developed countries’ trick of preventing the people in the developing countries from getting jobs. There is some truth to this idea. When we negotiate trade deals, we must remember that in a fair negotiation neither side gets everything it wants, but each side must get enough of what it wants to agree to the terms of the negotiation.

The trouble with past trade pacts is that only the corporations on both sides of the deal were represented. In the future, labor and environment on both sides must be represented in the negotiations.

Thanks to Raj V. for awakening me to the issue many years ago. My take on how to respond to the issue is mine, though. I am not sure if Raj V. would agree.

Counter Currents has the article Trump Orders Military To Prepare For War.

The order further instructs Mattis, in the words of the Washington Post, which obtained a copy of the order prior to its formal release, “to examine how to carry out operations against unnamed ‘near-peer’ competitors, a group which US officials typically identify as China and Russia.” And it commands the Pentagon and the Office of Management and Budget to develop a “military readiness emergency budget amendment” that would increase military spending in the current year and increase the budget for 2018 and thereafter—increases to be offset by cuts to social spending.

if this is accurate (and I have no reason to believe the Washington Post), now might be the time to start worrying. In case you think Hillary (or Bernie or Jill Stein ) would have been better, look into the following book:

The American Deep State: Wall Street, Big Oil, and the Attack on U.S. Democracy (War and Peace Library) by Peter Dale Scott

Steven Grumbine of Real Progressives has some ideas about restoring sanity to the Progressive Movement. The YouTube video is 2017-02-02 And the insanity hits its stride false pride and fake revolutionaries be true to the ….

And, by the way, the problem is not George Soros nor the Rothschilds.

New Economic Perspectives has a post MMT and Debunking AMI: Positive Money . (Modern Money Theory, American Monetary Institute)

Steve Grumbine talks with NEP’s L. Randall Wray for Real Progressives LIVE. Topics include MMT and Debunking AMI: Positive Money and other important and relevant economic issues that affect the progressive agenda.

Here is the YouTube video of the conversation.

This is a wonderful interview that will introduce so many people about what Modern Money Theory is all about, and why it is so important for us all to understand it. That being said, let me go on to one suggestion for improvement that I have.

The one thing I think needed to be discussed and analyzed was the inflationary period from the end of LBJ’s term through Nixon, Ford, and Carter, and into the Reagan administration. To state that the last time we faced resource constraints was WW II might turn people off who remember the LBJ to Reagan period. I know MMT and Wray can explain it, so I think that omission needs to be fixed quickly.

I read a lot of speculation on what makes people vote or not vote, but I have not found the study where people were asked “What Would It Take To Get You To Want To Vote?” If you know of such a study or poll, can you let me know?

For people trying to increase voter turnout, wouldn’t you think there would be some people out there asking this question?

Until just now, I never thought to ask that question.

The Roosevelt Forward blog has the post Interview with Randall Wray: Truths and Myths of the Federal Reserve. It is a short article, and I will print a significant portion of it as an excerpt from it with my own emphasis added.

Bernanke had long argued that what Japan needed was “quantitative easing” to supplement the zero rate policy. He was always vague about what that means, but he had this idea that the Fed can “push on a string“-encourage banks to lend and borrowers to borrow by “pumping liquidity” into the economy. This would take the form of increasing bank excess reserves-providing them with far more reserves than they wanted to hold-on the belief they would then lend.
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Banks will not lend and borrowers will not borrow because they know we are in a deep and long recession.
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So to provide a more direct answer: the Fed can neither create nor cure recessions and crises. It can determine the overnight interest rate, and it can provide reserves on demand. It can also buy anything for sale simply by crediting reserves (a point Bernanke made in testimony before Congress). We used to think the Fed would never buy bad private assets-but Bernanke changed all that. However, only appropriate fiscal policy could have led to a quicker recovery. We did not get that.

LS: Of course, the inevitable next question has to be: who owns the Federal Reserve which issues the reserve currency of the world?

RW: The Fed is a creature of Congress, created in the 1913 Act, with subsequent legislation dictating functions and policies. In other words, it really is a branch of government, albeit an unusual one since there are private shareholders. Does the Fed cater to financial institutions? Yes, but so does the Treasury-and as we know, Goldman Sachs has been running the Treasury for the past three Presidencies-Clinton, Bush and Obama. I think that is of greater import than is Wall Street’s control of the Fed. Capture of regulators is nothing new. But it’s become more obvious and complete since Clinton, who essentially delivered Washington to Wall Street. Washington then deregulated finance, which responded by “Hoovering” up 40% of all US corporate profits. The triumvirate of Rubin, Greenspan and Summers led the charge, and then added Paulson, Geithner and Bernanke. Remarkably, only Greenspan’s reputation has suffered in the collapse-and of this team he was the only one who actually raised some doubts during the speculative bubbles that followed.

My thanks to Real Progressives for their valiant efforts to publicize this information in their Facebook post.

Wray knows that the “private shareholders” are more like paying passengers in a taxi. For the time that they are paying, they get to tell the taxi where to go, but they don’t own the taxi.

the Fed has expanded its balance sheet to $2 trillion.

For the sake of ease of calculation, let’s say that the $2 trillion is sitting as excess reserves of the private banks from which the Fed bought these “assets”. Let’s assume that the Fed pays 25 basis points (0.25%) in interest for letting private banks leave their excess reserves with the Fed. The private banks are earning $5 billion a year on their $2 trillion of excess reserves that they cannot find any productive use for. I think I could comfortably just retire on $5 billion a year. I wouldn’t even have to touch the $2 trillion nest egg, unless I got bored in retirement with nothing to do. Consider this Social Security for the banks.

By the way, if you read the short article and have trouble understanding most of what Wray says, then you cannot have an informed opinion about the economy, the national debt, banking regulation, or a whole host of other important topics. Now that you know what it is that you don’t know, get yourself educated before you make any statements that can be believed as informed opinion.

Tulsi Gabbard has the news release Rep. Tulsi Gabbard, Lawmakers Call For Reinstatement of Glass-Steagall.

Background: In 1933, the Banking Act—also known as the Glass-Steagall Act—passed amid an atmosphere of chaos and uncertainty to address banking failures of the Great Depression. The goal of its lead cosponsors, Rep. Henry Steagall and Sen. Carter Glass, was to separate commercial and investment banking and restore confidence in the American banking system. In 1999, Congress repealed the Glass-Steagall Act and removed the barriers between investment banking and traditional depository banks. This action gave financial institutions and investment firms access to the deposits of the American consumer, which then were used to gamble on the Wall Street casino.

While I do favor a restoration of a modern adaptation of the Glass-Steagall act, and I was opposed to its repeal in 1989, I do realize that there are differences between 1933 and now. One difference is the recognition that the loanable funds model of banks is in low repute among some modern economists. See the article Banks are not intermediaries of loanable funds – and why this matters.

Problems in the banking sector played a seriously damaging role in the Great Recession. In fact, they continue to. This column argues that macroeconomic models were unable to explain the interaction between banks and the macro economy. The problem lies with thinking that banks create loans out of existing resources. Instead, they create new money in the form of loans. Macroeconomists need to reflect this in their models.

No doubt bank savings deposits do play some role in bank lending, and these deposits need to be protected. However, any policy aimed at protecting those deposits needs to be aware of how banks operate today. The ability of the Federal Reserve Bank to create US high-powered money without any constraint of the gold standard which we left in the early 1970s may play a significant role in commercial banks’ ability to lend with little regard for the amounbt of deposits they have. The paper on loanable funds model breezes over one issue in their description of how the banks make a loan transaction and a countervailing deposit transaction at the same time. That issue is that the loan is not callable for an agreed term of the loan, but the countervailing deposit can be and probably will be withdrawn almost immediately. I would guess the backup of the Federal Reserve is what makes this all possible. I still think my idea of banks borrowing at wholesale and lending at retail is what explains a lot.