I’ve often said that collectively we’ve made the decision to borrow from the rich instead of taxing them.
The thing is, when the government borrows, it isn’t actually borrowing. After all, it is the sole issuer of the currency, so why would it have to borrow it’s own currency? From whom? From itself? Where else would the currency come from?
It’s as if you had to “borrow” your paid-off car and drive it into work every day. How can you borrow something you already own?
Who are the “lenders” to government? Why are they loaning their government it’s own money? How can that be? Where does the money that the private sector is “making” come from? After all, they are not literally “making” it, which would technically be counterfeiting. There is no alternate source of dollars “out there” that the government must work to procure (although private loans in banks DO create money, something I’ll discuss in another post).
And so how, then, can the U.S. government be consistently broke as we’re often told?
Anyway, all this questioning was confirmed for me by an appearance by Mark Blyth on the Mixed Mental Arts podcast. Blyth wrote a book about austerity, which he calls a “dangerous idea.” He wanted to go all the way back to discuss the source of this idea, and here’s what he found:
[43:19-46:36] Mark Blyth: “So the basic problem is this. If you go right back—because I wanted to do the intellectual history of what I call this dangerous idea —where do you start? Well, you start with John Locke. You start out with Locke’s chapter on property. He starts with this puzzle: Everything is held in common and we’re all creatures under God. How can we have unlimited wealth and private property?”
Well, let’s do this thing about improvements, so he does this thing, and that’s how he gets it. And then he realizes very quickly that you’re going to end up with an incredibly unequal world, and that might be bad, so then he has to do something he hates because he’s a Liberal. He invents the state. Because if you don’t have a state that’s strong enough to protect your property rights, then why would you ever invest to get your property, right? But if the state’s strong enough to do that, then it can take your property.
So this is the tension. This the American constitution, and everything is written in this sort of classical frame. So the problem is, when you come along and you get to [David] Hume and [Adam] Smith and others a hundred years later—those Scottish Enlightenment figures—what they’re figuring out is that this whole thing called debt is kind of interesting. Because what you can do is you can issue bonds now and somebody will give you real money which you can then spend on a promise that you will pay it back later on.
Well, if you give that to any politician, you know that’s going to be abused. You know that’s the case. But here’s why they like it. You see, because you’ve got this highly unequal world now, and because you’ve got lots of private property, you need a big state to protect that, and police it, and all the rest of it. But you don’t want to pay any taxes. So if you don’t want to pay taxes to protect your property, then you’re going to have to get the income to do it somewhere else. Well, how about bond markets? Because then the state can issue bonds, and it can tax future taxpayers. And I—the guy who’s already got all the private property—I can buy those bonds.
So in a sense, I’m giving the state a loan that I get back all the money with interest, and the state then is able to protect my property rights. That’s awesome!
Hunter Maats: And also it’s sufficiently complicated that probably the people that you’re fucking over won’t understand [what’s going on]…
MB: To recap: I have a problem. I need the state to protect my property rights. I don’t want to pay any taxes and I hate the state. But I need a state otherwise I won’t have any income or any property. So I’ve got to pay for that and I don’t want to pay taxes, so what am I going to do? I’ll invent a bond market. I’ll get the state to issue bits of paper; I’ll lend it the money; I’ll get all the money back with interest, and then future taxpayers—not me—will pay for it.
HM: So you’re setting yourself up for the ultimate human experience: I get to own everything, I get to have my property secure, and I pay for nothing.
MB: Now let’s jump forward to today. There’s a piece in Foreign Affairs by a guy called Sandy Hager that points out that for all the shitting and panic and dire [warnings] that go on about the U.S. national debt, most of it’s owned by the one percent. Why? Because it’s an interest-bearing asset that’s actually incredibly secure because If the United States defaults on its debt, we’re already in Mad Max world. So we have this story about debt as being unproductive and bad and it’s from excessive spending, and blah, blah, blah. You follow the history all the way through, this is basically Liberalism trying to pay for itself on the cheap.
[50:47] Mark Blyth: …So debt’s basically a class-specific put option to use the language of finance. I get to have the asset and the asset security and you pick up the insurance if it all goes wrong. And that’s true. But there’s also a productive story here.
So let’s go back to me being able to go to a decent school, going to a public university, and becoming a professor from what are very humble origins. Well, that’s because governments issue debt, and then they build infrastructure and they hire teachers, and they invest in schools, and they do good shit with it. And then you end up with a virtuous circle world—and here’s what I mean by this. Imagine if I stayed in Britain. If there were no welfare state, what are my most likely outs? I’m in the army or I go to prison. Lots of kids that I went to school with went both of those ways. But a lot of us managed to get out.
Now at the level of income I am now in Britain, I would be paying 40-45 percent of my income in taxes straight to the government. So over a five-year period at that bandrate, given what I am now, I have paid back every single cent that was invested in me, and then some. So you can have public debt and public financing which is incredibly productive of human and physical capital assets. We’re in the worst possible world—we generate debt, but we don’t do the investment.
We generate the debt, but we don’t generate the investment. Yep. And therein lies the problem. We’re in hock to the one percent who own all the bonds, but we’re getting nothing in return!
Then, as Blyth points out, the one percent use the deficit “we” are leaving to “our grandchildren” to justify destroying the already threadbare social safety net–the only thing keeping huge amounts of Americans from being even poorer and more destitute than they already are (many Americans have little to no savings).
And expanding the safety net is impossible, we’re told by the powers-that-be, because “where will the money come from???” Watch any interview with Alexandria Ocasio-Cortez, for example, and I guarantee you will hear this question. I’ll address that in a bit.
It’s clear that this whole operation–borrowing from the rich instead of taxing them, and using the resultant debt to claim that government is ‘bankrupt’–is a core strategy under Neoliberalism. I wasn’t able to find the exact article Blyth referenced above, but I did find another very good one by the same author–Sandy Hager, who has written an entire book about the politics behind bonds and who owns them.
In the article, he talks about a concept I first read about in Wolfgang Streeck’s terrific collection of essays, How Will Capitalism End? In that book, Streeck talks about the rise of Neoliberal debt states. From the end of the Second World War through about the 1980’s, governments more-or-less raised taxes on their wealthy citizens to fund their operations without relying too much on borrowing. Then, with the rise of Neoliberalism, states began reducing taxes on the wealthy and corporations, and funding their operations more and more through debt.
The Politics of Public Debt (Public Seminar)
Across the globe, taxes on corporations plummet (Washington Post)
In essence, what the transition from the tax state to a debt state means is that the Federal Government chooses to borrow from the bondholding classes rather than taxing it. And in deciding to furnish wealthy households and large corporations with risk-free assets instead of levying taxes on their incomes, the debt state reinforces the existing pattern of inequality. This raises further questions about the long-term stability of current arrangements. The debt state is likely to persist into the foreseeable future, and the reason has to do in large part with the role played by foreign ownership of the public debt.
The problem I highlight in the book is not a large public debt. As Abba Lerner first demonstrated in the 1940s, the outstanding level of public indebtedness is inconsequential so long as it is being accumulated as part of a macroeconomic strategy to achieve non-inflationary full employment. In fact, for a monetarily sovereign entity like the US Federal Government, which issues debt in a currency it fully controls, bankruptcy is never really an issue because the Federal Reserve can purchase government bonds when the private sector does not want them. The existence of a powerful bondholding class should provide no solace for “deficit hawks” eager to find evidence to support their fear mongering about the supposed unsustainability of the public debt.
The real problem, then, is a large unequally distributed public debt. This distinction is absolutely crucial. From an emancipatory point of view, the point is not to try to eliminate or even reduce the public debt, but to find ways to tackle the inequality that underpins the public finances. As mentioned earlier, the emergence and consolidation of the debt state was driven primarily by tax stagnation and declining tax progressivity. The debt state, in other words, has come into being because the Federal Government has come to rely on borrowing from the bondholding class instead of taxing it. Restoring progressivity to the federal tax system, by increasing tax rates on wealthy households and large corporations, would therefore go a long way in addressing the growing inequalities in ownership of the public debt and in the ownership of wealth and income more generally.
Of course, this problem could easily be solved. The one percent has accumulated more than enough wealth and assets—including incalculable shadow wealth hidden in offshore accounts—to deal with the global debt. And besides, they own the debt, remember? A lot of their wealth is due to the fact that they are the creditors of this debt. Remember, the state’s liabilities are someone else’s assets, and assets and liabilities always sum to zero, as Blyth points out.
[47:00] Mark Blyth: The United States has never been richer. It’s got a 17 trillion dollar debt in an 18 trillion dollar economy. The net figure is probably about 12 trillion, right? Here’s the thing—that’s an interest-bearing asset. When the treasury says, “Who wants to buy our debt?,” it never fails; everybody wants to buy it. Why? Would you like to buy a Euro bond? The Euro might not be there in five years. That’s toilet paper. You want to buy a Chinese bond? Oh, you can’t.
So if you want a safe, secure asset where you give somebody 10,000 dollars and ten years later you get it back and they pay you interest in the meantime, it’s us, and it’s always been us. The majority of that debt is owned by big financial institutions and the one percenters in the income distribution. Over 70 percent of that debt is held domestically in the United States. We talk a lot of crap about debt—it’s stuff we owe to ourselves. It’s rich people lending the government money so the government can give them back money so they can hand them back their own money.
Why does nobody talk about this? How come a blogger like me can figure this out, but the entire mass media is silent? (this is a rhetorical question, of course; I know the answer).
A good insight into how government “borrowing” works (and my overused quotation marks really are appropriate here) is provided by this episode of the Odd Lots podcast. A side note—this was posted on Naked Capitalism. Although the podcast is still available as of this writing, when I went to the official podcast page of the Odd Lots Podcast (produced by Bloomberg), this episode was mysteriously not there. Not to get all conspiratorial here, but maybe this is information they don’t want the general public to hear? Anyway, here’s some of the conversation with bond trader Brian Romanchuk. Listening to the interview should hopefully make it clear that government “borrowing” is not really borrowing at all. Here’s their introduction:
Joe Weisenthal: There is a sort of naïve view about how people talk about government debt. Particularly with US government debt, there’s often this view that sees the government as a typical borrower like a household or a person trying to borrow money to buy a car. And as we know, it doesn’t really work that way and that can really lead people to a lot of false assumptions about what interest rates are going to do and what the Market is going to do.
Tracy Alloway: Deep down in my gut I have always been uncomfortable that the US can borrow extraordinary amounts of money and not have major, major impacts…
And the interview:
Joe Weisenthal: Now, one of the things we talked about in the intro is we have to dispel the myth that the U.S. is just like any other private sector borrower. So we’ve established that the bonds on paper look the same. It looks like any other corporate bond or a loan that might get turned into a bond-like instrument. But its fundamentally different and the key difference is the source of funds. So explain to us structurally why the U.S. is a different type of borrower.
Brian Romanchuk: Well, the key difference is the U.S. controls its central bank. The horrible counterexample is a place like the Euro area where the countries don’t control their central bank. Ultimately, all the bonds say, ‘We’re paying you U.S. dollars.’ The U.S. dollar is a liability of the US Federal Reserve, and the US Federal Reserve—the Fed—is owned by the Treasury. So that gives you the one big picture difference than any other borrower.
The other issue is, for the government, they’re more concerned about the macro consequences of spending and not so much the financial. A smaller borrower—an individual bank, no matter how big they might be—aren’t really worried about the effect of their spending on the overall economy. And that is a key difference.
Tracy Alloway So, why can’t the US government just borrow as much as it wants—enormous amounts of money? What are the negative effects that are going to happen if it does that?
BR: It’s not the borrowing per se that’s the problem. If there’s a problem, it would be on the spending. Because what is the government buying? Maybe they’re buying good things, maybe it’s bad things. One can always debate what to spend money on. But from a macro perspective, what the worry is, is that if the government starts buying too much stuff, it will drive up the price of everything, i.e. there’s inflation. But the borrowing is the flip-side of the spending because if they’re spending…it’s a mistake to worry about what they’re borrowing; what are they spending on?
JW: …Why is it not a risk that on day lenders just won’t show up?
BR: The reason why governments can get away with this is—their spending creates the money that then is sucked back in by the bond auction. It’s a circular flow. And this is why, yes, there’s a demand for borrowing by the government, but at the same time they’re supplying money that then is recirculated back into the bond market.
JW: So let’s say the government want to spend ten billion dollars more on some new aircraft program for the military. That ten billion dollars that they spend winds up in the bank account of some private defense contractor. And then that money in the bank–perhaps via a circuitous route–ends up being back invested in government bonds. Do I have that right?
BR: Yeah, that’s basically it…what happens is, if the government sends a defense contractor ten billion, they’ll have a ten billion deposit on the bank, the bank in return will get 10 billion transferred to them from the Fed, and they have 10 billion as a deposit at the Fed. These are reserves; because the Federal Reserve is a bank. The customer might want that 10 billion in the bank account because they have expenses.
But the bank itself, what’s it going to do with the 10 billion? It has an asset on the balance sheet which is a deposit at the Fed which is a low risk asset which used to pay nothing but now very little. And they want to do something else with that asset on their balance sheet and so they then go out and say, ‘We want something that gives a higher return.’ Essentially, how the loop gets closed is, they say, ‘Look, there’s Treasury Bonds. We buy them.’ They should have an expected return higher than leaving the money on deposit at the Fed. And so the bank will go out and buy the Treasury Bonds in the auction, because otherwise they’re stuck with a deposit at the Fed that’s paying them very little.
…For every buyer there’s a seller, and scare stories often revolve around forgetting that basic principle. Someone with a dollar has to buy. Pricing can change, of course. If you’re worried about pricing, Treasury prices would go down relative to other things, but the flows will still cancel out.
We’ve talked about this before—the basic difference between holding money in a bank account and in bonds is just that one has a higher return. All you do is shift funds between one account and the other via keystrokes, much like you might transfer your money from a checking account to savings account (checking being more liquid since checks can be written against it). It’s just that one account is considered ‘money’ and the other as ‘debt’. But, basically, the debt is just a place to store cash, and hence a higher-yielding but less liquid form of money (money is debt, remember?). Bonds are also an alternative to stocks, which are also lending money, just lending ti to private-sector entities rather than public-sector ones. From a different episode of this podcast:
In long-term rates [bonds] are an alternative to stocks. The difference between stocks and bonds is if you buy a bond and hold it to maturity you’ll earn the coupon, and depending on whether inflation is or isn’t a problem you’ll give some of it back in purchasing power. Stocks on the other hand, give you a yield based on their dividends, but they also have a lot more upside if things work out pretty well, and then of course they have a downside if they don’t.
Back to the interview:
JW: So we’ve established that for the US, credit risk isn’t really a thing because the dollars that come to buy treasuries come from [government] spending. We’ve also established that you don’t even need to be a reserve currency for this phenomenon to exist because it’s [also] in Japan which also has lots of debt, and Canada and Australia and New Zealand [which are not anyone’s reserve currency]. Then the question is, why can’t all countries do this? Think of a country like Venezuela and the debt they have. Why can’t they just spend and keep a stable currency and a stable market?
BR: There’s policy differences between Venezuela and the U.S. coming down to the strength of the tax system. The IRS, as everyone knows, is a powerful organization. Income tax has the effect of damping economic activity, and so it controls inflation better than in a country with a weaker tax system. My pet theory is that the difference comes down to the effectiveness of the tax regime for inflation control. That’s a major difference.
There is also a question of what is produced. If you’re dependent on foreign imports for a lot of goods, then your domestic inflation is driven by your exchange rate. Whereas the US is relatively a closed economy when compared to other countries. Changes in the exchange rate don’t have much of an effect on prices. If the US dollar falls 10 percent, it’s not really noticeable in domestic prices.
And their conclusion:
So the big picture is that, it’s not the borrowing per se; it’s not the gap between government’s expenditure and its revenues; it’s really about the capacity of the economy to absorb all that spending. That’s what theoretically would drive inflation. And then the link between inflation and what the Fed does, that would be what ultimately determines what long-term rates are going to do. Once you answer that, then you can decide whether it makes sense to buy a bond.
And then also just this idea that there’s different growth or inflationary impacts of different kind of fiscal policies. If you were to give Bill Gates a one billion dollar tax cut or whatever it is, it’s probably not going to do much because Bill Gates has more money than he knows what to do with. Whereas if you were to put it towards consumption, and typically something that we don’t have much capacity in like housing or something like that, then you might see a real inflationary impact.
One other point I think is key is that there has this question of the tax cuts are blowing out the deficit and who is going to buy all that debt? And the simple answer is: a bunch of people just got tax cuts, and so they’re going to have a lot more money. So we already know who’s going to buy it—it’s those people that have more money in their bank account. If you think of this closed loop phenomenon, it allows you to anticipate who is the new entity that’s going to be doing the buying.
Which brings us back around to the core point. Cutting taxes on the already wealthy won’t stimulate the economy. What it will do is allow them to buy the government’s debt and get paid back with interest, rather than paying taxes. It also allows them to fund political campaigns.
As advocates of Modern Monetary Theory point out, it’s not a theory—it’s descriptive of how the monetary system actually works. One of its originators, Warren Mosler, was a bond trader who saw how all this operated and put the pieces together.
Are We Really Broke?
So if debt is actually money, are we truly ‘broke’ as we keep hearing from certain politicians? Is the U.S. really on the verge of bankruptcy as some would have it?
The MMT Podcast episode 5 has a lot of good stuff in it. Although it’s mainly about the Job Guarantee (again, a topic for another post), it has this exchange which is relevant to our discussion. If the government goes into “debt” by enhancing the productive economy, say, by providing people with jobs, it need not be inflationary—no more than hiring any other Federal Employee or crediting government contractors:
[1:16:39] Rohan Grey: To go to the question of, What if we set up a public policy regime where governments felt able to create money? The first thing about that is, government debt is a form of money! If you’re a sophisticated pension fund manager with 100 billion dollars of assets, you’re not storing your cash in twenty-pound bills; you’re storing it in Treasury securities.
So if you’re holding Treasury securities of, say, three month duration, you’re holding that to satisfy your cash holding needs in your portfolio allocation. So when a government runs a deficit of 100 billion dollars and it finances that by issuing 100 billion dollars of treasury securities, that’s a form of “printing money” not dissimilar from issuing 100 billion dollars of cash or 100 billion dollars of reserves.
Christian Reilly: The thing that makes the dollar bill good is the same thing that makes the dollar bond good.
Rohan Grey: That’s right, that’s what Thomas Edison said a while back in a great article for the New York Times. So that exact point is understood by sophisticated financial players and not necessarily something that gets articulated to the average person, particularly by the Right wing who love to talk about how we’re ‘burdening our grandchildren’ and ‘spending beyond our means’ and this type of stuff.
A Job Guarantee vs a Universal Basic Income (MMT Podcast)
I looked up that Thomas Edison quote above. I found this page about it, and what Edison was essentially arguing was that going into debt to financiers to build a new power station at Muscle Shoals (which Henry Ford was proposing) was pointless when the government could just issue the money! That’s why he said that the same thing which makes a bond valuable (the ability to tax) also makes a dollar valuable:
…any time we wish to add to the national wealth we are compelled to add to the national debt…If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good. The difference between the bond and the bill is that the bond lets the money brokers collect twice the amount of the bond and an additional 20 per cent, whereas the currency pays nobody but those who directly contribute to Muscle Shoals in some useful way.
” … if the Government issues currency, it provides itself with enough money to increase the national wealth at Muscles Shoals without disturbing the business of the rest of the country. And in doing this it increases its income without adding a penny to its debt.
“It is absurd to say that our country can issue $30,000,000 in bonds and not $30,000,000 in currency. Both are promises to pay; but one promise fattens the usurer, and the other helps the people. If the currency issued by the Government were no good, then the bonds issued would be no good either. It is a terrible situation when the Government, to increase the national wealth, must go into debt and submit to ruinous interest charges at the hands of men who control the fictitious values of gold.
Of course, this money was going to productive investment: a new power plant. As Blyth says above, this productive spending would not be inflationary. It’s what you actually want the government to do (infrastructure development).
What excessive bond debt does do, however, is give the moneyed elite control over the state.
Countries that do “too much spending” on their own citizens, for example, housing, schooling, infrastructure and health care, find themselves punished by what are called “bond vigilantes” who object to governments operating what they call “loose” monetary polices.
This Odd Lots podcast (which IS still available on their site) talks with the initiator of the term “bond vigilantes.” Here we see how foreign bondholders exert control over internal political decision-making:
Tracy Alloway: Over in Turkey we’ve also seen some financial drama where president Erdogan is basically exerting influence over the central bank and trying to prevent them from hiking interest rates at a time when there is a lot of inflation and they should be hiking interest rates. So if you were to ask Erdogan about bond vigilantes I’m sure he would probably shake away any of their concerns and say that the bond market isn’t the right entity to be exerting fiscal influence over political decisions. Do you think the bond market should be influencing political or fiscal decisions?
Ed Yardeni: I’m not a preacher; I don’t do good or bad; I do bullish or bearish. I deal with fact on the ground. The facts on the ground are that Turkey is dependent on capital inflows from abroad, and that partly because their yields have been higher because they are deemed to be a credit risk. But they weren’t terribly higher. Turkey was getting some pretty good rates until Ergogan decided that he didn’t like an independent central bank.
Now, look, the bond vigilantes always have an issue with the central banks, but it gets to be much, much worse in terms of their reaction if the central banks is believed to not be independent, or to be blatantly politically driven. So what we’re seeing here is global bond vigilantes. It’s certainly not locals in Turkey who’ve pushed their interest rates up and their currency into the abyss, it’s been foreigners who have been looking for good opportunities, and thought that Turkey was relatively stable and that their fiscal and monetary policies were relatively acceptable. And when they turned unacceptable, they left. This is an example of the posse saddling up and leaving the country which is what happened in Turkey and as a result rates spiked up dramatically and the currency took a dive.
The bond market first and foremost wants to make sure that inflation remains down. Maybe I shouldn’t say first and foremost, because much more important is making sure that you get your money back. It’s both the inflation rate and the credit risk. Very often what happens is the bond market gets its way, the policy makers hear the message being sent by the bond vigilantes, they put up their hands and say, ‘All right well give you what you want!’
What he’s saying about the central bank being “politically driven” is code-speak. If the Central Banks bail out bankers and bondholders, that’s not political, but if the government spends money on its own people, the vigilantes will draw their weapons and punish that government. Yet it’s funny that they never do that if taxes are cut on the very rich (would would also theoretically undermine the currency). That sort of policy is “acceptable.” And that’s how turning from tax collection to funding state operations via debt gives the moneyed interests control over the state, as Streeck points out. Austerity is really the result of a coup d’etat by big finance.
The Most Important Lesson In (Macro)Economics
Finally, circular flows are important in another way. Whistling in the Wind had a good article about the most important lesson in economics, which is: Your Spending is my income.
Economics is a broad and vast field comprising intricate areas that would take years to master. This makes it very hard to summarise or reduce it to a simple point. However, if there was one simple lesson that I wished everyone knew about economics, one easy sentence or sound bite that could explain the essential core to people who know nothing else about economics, it would be: “My spending is your income”. This simple point, properly understood, explains everything you need to know about the important policy issues of the economy. It doesn’t explain everything, but it explains the important parts.
The Most Important Lesson of Economics (Whistling in the Wind)
However, I would call this the most lesson in Macroeconomics. Macroeconomics considers the operating behavior entire economies. Your household is one element in an economy. The Macroeconomy is the sum total of everybody—all businesses and housholds—which we divide into three sectors: public, private and foreign. These sectoral balances must all sum to zero, due to accounting identities. This is necessary to understand how economics works at the nation-state level.
Here’s Mark Blyth making the exact same point on MMA.He also points out what heppens when most of income goes to one tiny segment of the population–demand is suppressed and you wind up in a slump:
MB: Here’s a very simple way about how I think about the world. Is it good to save? Yes. Is it good if everybody saves all at once. Well, then what would happen? Then nobody would be in the shops spending. It’s a very simple thing, right?
So the more we save, the less domestic demand we’re going to have. Now, if you’re the Germans you can create artificial demand by selling the rest of the world BMWs. But we don’t all have that trick. And the United States is a very large domestically-focused economy.
So if the income and wealth in the country is very skewed into very few hands—a great line that a friend of mine who owns a pillow factory said, ‘I only need one pillow. I’m not going to buy a thousand a day; I own the factory.’ How many fridges is Mitt Romney going to buy? I bet he’s got a SubZero; he doesn’t need two. So where do you expect the demand to come from if everybody else has basically got $500.00 in checking and is terrified that if they get a medical bill they’ll be in bankruptcy court?
So then we have to say to ourselves—if that’s just a series of factual statements, then why is it so hard to realize that if the investments that are supposed to be done in society to create jobs and growth and all the rest of it aren’t creating jobs, aren’t creating growth, why do we allow these people to have the right to do this
This is the basic understanding of Keynesianism. If the price” of money is already free–the so-called “zero lower bound–then government spending, not austerity, is the only thing that will re-employ the masses, whether on jobs or just welfare (e.g. a UBI). This is hardly non-mainstream; Paul Krugman, for example, has repeatedly made this argument from his perch at the New York Times:
For the essence of what’s happening now — the key to understanding the mess we’re in — is that sometimes the economy is not like a household, that our individual choices sometimes lead to outcomes that are in nobody’s interest.
In particular, when you have economy-wide deleveraging — when everyone is trying to spend less than his or her income, so as to pay down debt — you have a fundamental adding-up problem. My spending is your income, and your spending is my income, so if both of us try to spend less at the same time, what we end up achieving is mutual impoverishment.
Ah, you say, but the price mechanism will take care of that. Indeed: in normal times interest rates rise or fall to match desired spending to the economy’s productive capacity. But what if the interest rate needed to achieve this outcome is negative? Well, that can’t happen — so when the deleveraging shock is big enough, the economy goes into a depression.
And that’s the world we’re in!
The Economy is not like a Household (New York Times)
Because debt is money we owe to ourselves, it does not directly make the economy poorer (and paying it off doesn’t make us richer). True, debt can pose a threat to financial stability — but the situation is not improved if efforts to reduce debt end up pushing the economy into deflation and depression.
Nobody Understands Debt (New York Times)
Accounting Identities (New York Times)
Why are own politicians–theoretically public servants and “our employees” lying to our faces about how U.S.A., Inc. operates? This should be the biggest scandal of our time. Instead, we’re distracted by hot-button social controversies while the One Percent truly put our entire society in a state of bong-age.