# Market discipline for fiscal imprudence and the term structure of interest rates

Let’s talk about bond market vigilantes and the term structure of interest rates in a fiat currency system! That’s a mouthful, but I’ll explain what I mean.

Bootstrapping the yield curve

When I was in business school, we learned about bootstrapping the yield curve. Basically, long-term interest rates can be expressed as a series of short-term interest rates, such that if you know long-term rates, you can calculate expected future short-term interest rates. This is important because it tells you what people believe the Federal Reserve is likely to do with interest rates in the future.

For example, say you know the 5-year rate by looking at the current on-the-run 5-year interest rate on Bloomberg. Then, all you need to calculate all the expected future expected 3-month rates are quotes on U.S. zero-coupon bonds known as Treasury STRIPS. They are quoted in the Wall Street Journal daily.

Here’s what the Journal says:

U.S. zero-coupon STRIPS allow investors to hold the interest and principal components of eligible Treasury notes and bonds as separate securities. STRIPS offer no interest payment; investors receive payment only at maturity. Quotes are as of 3 p.m. Eastern time based on transactions of \$1 million or more. Yields calculated on the ask quote.

Bootstrapping the yield curve is simply the math used to translate these three-month zero-coupon prices into a series of expected future 3-month interest rates. Doing this would mean we have a full term structure of interest rates every three-months out to five years.

The Fed controls short-term rates

Here’s the thing though. In our monetary system, the Federal Reserve controls short-term interest rates through open market operations. Bank reserves normally serve this purpose. If the Fed wants a higher Fed Funds rate, it drains reserves by selling financial assets and buying up reserves. If the Fed wants a lower rate, it adds reserves by buying up financial assets – usually Treasury bonds, but more recently it has taken to buying other assets. The quantity of reserves, of course, is irrelevant; the interest rate is what counts for the economy.

Now, if the Federal Reserve has absolute control over short-term rates, why isn’t it reasonable to assume it also has absolute control over long-term rates too? After all, I just showed you how long-term interest rates are really a series of short-term rates smashed together. The real reason that the Federal Reserve would lose control over short-term interest rates is because the economy was operating at full capacity and creating inflation which provoked an increase in rates.

My point is, unless the U.S. economy starts operating at full capacity, consumer price inflation isn’t going to create interest rate pressure for the Fed. A central bank issuing debt in its own currency controls short-term rates. So, absent inflationary pressure when there isn’t significant slack in the economy, rates remain low.

I think this is significant when thinking about bond market vigilantes and the like. But the key takeaway from the Japanese experience is the one I just outlined: sovereign central banks control short-term rates in the currency they issue and through the term structure, they also have some control over longer-term rates. When there is slack in the economy, there is only so far the bond market vigilantes can go. I’m not saying rates can’t rise. I’m saying that that rise is capped if an economy is in a balance sheet recession.

But, of course, people worry that the federal government won’t be able to sell its bonds. The thing is there can never be a problem for the federal government in selling bonds in a currency it creates.

The government’s spending creates the bank’s demand for bonds, because they want a higher return on the money that the government is putting into the economy.

This comment sounds insane in isolation but you have to remember that bonds and currency are really the same thing – claims on the federal government. A quote from a November article of mine might make this a bit more clear:

From the government’s perspective, there is no functional difference between any of its obligations like bank notes, electronic credits, or treasury bills and bonds. As the Ten pound note says, “I promise to pay the bearer on demand the sum of [fill in the blank sum][fill in the blank fiat currency].”

So, the U.S. government could legitimately stop issuing bonds altogether if it wanted to. When people complain about the admittedly enormous government debt, they don’t think of the mechanics of the issue. As I see it, in a fiat money environment, the first function of the Treasury bonds is to serve as a vehicle to add or subtract reserves in the system to help the Federal Reserve hit a target Fed Funds rate. The second is to give holders of government obligations a return on their investment. After all, bank notes or bank reserves don’t pay much if anything.

So, since I expect significant slack in the economy for some time to come, it seems reasonable to me to expect Treasury bond yields to stay low during that period. U.S. citizens can buy gold as currency revulsion takes hold. But, what else are banks going to do with their excess reserves? Speculate and bid up asset prices, creating malinvestment. And of course, pension funds and fund managers will reach for yield by investing in high risk assets, further distorting the allocation of investment capital and creating asset bubbles. But, of course that’s the Austrian in me saying that!

At some point I am going to get back to Austrian school posts. I have been thinking a lot about the actual ability of government to withdraw demand from the economy by increasing taxes – a key assumption in Modern Monetary Theory (MMT) with which that I have an issue and critical to containing eventual inflation. But for now, I am on an MMT kick and their analyses demonstrate that sustained consumer price inflation is a long way off.

Update 18 May 2010 1120 ET:

I received the following corrections about my post from Scott Fullwiler, a Professor of Economics at Wartburg College and one of the leading scholars on Modern Monetary Theory

Two minor corrections:

1. The Fed and other central banks actually don’t change the qty of rbs when they want to change the interest rate target. Under pre-Lehmann operating procedures (that set the target rate above the rate paid on rbs) the demand for rbs is VERY interest inelastic at the qty banks desire to hold to settle payments and meet rr. The Fed essentially just announces a new target, and stands ready to "defend" the target via repos/reverse repos if the mkt doesn’t move to the new rate. Under current operating procedures, with a large qty of excess rbs and the target rate set at the remuneration rate, the Fed just changes the remuneration rate (or could). Finally, in other countries that set the target rate in a narrow corridor b/n the remuneration rate and the cbs lending rate, all the cb really needs to do is announce a new target and new levels for remuneration and lending rates–that is, just set new bid/ask rates, and the overnight rate will necessarily trade in that range.
2. MMT’ers don’t necessarily argue for a fiscal policy rule that alters tax rates to manage the macroeconomy. In fact, I’ve never seen such a rule proposed. The statement that "govt can alter taxes to stabilize aggregate demand at full employment" should be understood as a metaphor for adjusting the deficit. The preferred prescription is to have very strong automatic stabilizers, like a job guarantee that countercyclically provides employment at at minimum wage. I would also index most govt spending and taxes currently indexed to inflation instead to an inflation target. When these and similar measures are insufficient (like now), then we might consider proactive adjustment of, say, taxes or tax rates, but the goal would be to have automatic stabilizers strong enough that this would rarely be necessary. Of course, that’s theory, and fashioning effective stabilizers is easier said than done, particularly once you add the complexities of political economy. We fully recognize that. But I would just conclude by saying that aside from the job guarantee, there’s not much published theory by MMT’ers on specific fiscal policy rules–my point again being that "adjustment of taxes" is more of a metaphor than an actual policy suggestion.

I hope that helps explain some of the nuances I could not.

1. Phil says

Modern monetary theory (MMT) is very interesting. As I’ve been trying to wrap my mind around it, and get through some of the not-as-well stated facts about it, it is changing my whole understanding of how the economy works (and how profound the removal of the gold-standard was in 1971).

I was first drawn to MMT because it explains some aspects of Reagan’s presidency that I had not been able to understand to this point. Reagan was excoriated for running deficits — and yet caused a big economic boom. Even with Reagan’s tax cuts, it didn’t quite make sense until I started to learn about MMT.

Also, I have some understanding of how to read stock & flow diagrams, so I could grasp the MMT model of the economy. However, it’s a different way of thinking and is often not explained well.

For example, MMT apologists will often say that a government is “not revenue-constrained,” operationally speaking; instead the constraints are political in nature. This concept may be true, but it is very confusing to someone who is accustomed to thinking about money as a commodity, as with a gold standard. To gold-standard thinkers, any increase in the amount of currency equates to inflation and a devaluing of the currency that old people and widows have worked so hard all of their lives to save. (That’s the image that would come to mind — which is why gold-standard thinkers can be emotionally charged about this issue.) It would be better stated that the federal government can issue currency without the threat of inflation as long as 1) the economy has unused productive capacity to absorb the currency issued (which could be just the desire to save), 2) taxes are modified to absorb any excess currency, or 3) some combination of the two. (At least, that’s how I understand it today. Please correct me if I’m wrong.)

So, I personally have come to think MMT is correct. However, it’s one thing to say that the federal government should increase spending. It’s another thing to discuss how they go about it — because the “how” matters as well. For example, the idea of welfare (paying people who are not working as though they are), while well intended, is actually psychologically harmful to individuals if it goes on for very long. There is a big, big difference between paying people before they do anything and paying people after they do something. (An interesting book on the subject is the Sin of Wages by Abernathy.) The importance on the “how” is where the concept of malinvestment still has relevance.

It still makes me somewhat uneasy that the current crop of incompetent (at best) politicians have that much impact on the economy. I think that’s been my biggest stumbling block to embracing MMT. With the current US administration, I am more concerned that they will enact policies that artificially constrain productive capacity than that they will reduce the deficit. Mr. Obama claims to want to be “fiscally responsible” but I have a hard time believing much of what he says.

1. Edward Harrison says

Phil, great comments all around. I come at this from a gold standard mentality so I sympathise with people who have a hard time understanding what MMT is all about. I am explaining it largely from a more gold-standard mentality so perhaps it comes across better.

I’ll run your comments by some of the MMT’ers and ask them what they think, but it seems to me you grasp the essentials of how inflation is transmitted in a fiat currency system. The key is the ability to tax in my opinion because eventually we ARE going to get more capacity utilization. Eventually we will be operating closer to full employment. And if government cannot absorb this excess demand at that juncture, we’re going to have an inflation problem.

As for Obama, I agree that he is likely to restrain productive capacity because he and his advisors don’t understand modern money. They are very concerned with the supply side and pay almost no attention to the demand side. And in this deflationary environment, this is a critical error.

1. zanon says

MMT does not say Govt should spend, it says (when unemployment high) Govt should run higher deficit to fund savings desire in private sector.

Given that taxes come out to about 30-35% GDP, this is easiest fiscal drag to remove first. It can be done “fairly” via payroll tax holiday, as warren mosler and others have suggested.

Mostly, fiscal has come through automatic stabalizers, but there are the automatic DESTABALIZERS as well. Personally, I am dissappointed with MMT thinking on optimal tax policy at Federal Level. It is not that they are wrongs, it is that they have not thought about it much.

When you tax to drain AD, it is different animal than when you tax to fund spending! Your micro requirements/assumptions are opposites!

1. Scott Fullwiler says

Zanon,
You’re right . . . optimal tax policy at the federal level isn’t something we’ve done much of. We’ve done the job guarantee, and we have some stuff on a preference for a property tax (“cubic ft of living space,” actually) over income and consumption taxes, but that’s it.

1. Marshall Auerback says

The optimal tax level is really more of a political question than an economic one. The size of the budget deficit per se (and, by extension, the level of taxation) is less important than whether it achieves the goal of accommodating the private sector’s savings desires. If it doesn’t, you get sub-optimal growth. You can mitigate that through more government spending or less taxes, but that’s fundamentally a political choice. Even within the “MMT camp” you’d get different opinions about that. The question to be posed is: for the ‘right’ amount of government spending which we presume is necessary to run the nation the way we would like to see it run, how high should taxes be? The ‘right amount of government spending’ is an economic and political decision that, properly understood, has nothing to do with government finances. The real ‘costs’ of running the government are the real goods and services it consumes- all the labor hours, fuel, electricity, steel, carbon fiber, hard drives, etc. etc. etc. The real cost of the government using all these real goods and services is that those resources would other wise be available for the private sector. So when they government takes those real resources for its own purposes, there are that many fewer real resources left for private sector activity. Therefore, the way I see it, we first set the size of government at the ‘right’ level, based on real benefits and real costs, and not the ‘financial’ considerations.

2. Gbgasser says

It seems to me, given all the information we are capable of assimilating in this day and age, that targeting a tax policy to suppress demand in an inflationary time would be rather simple.

Now simple to determine and easy to get a populace to understand are two different things, I know. So the efforts need to first be applied to getting people to understand that taxation IN FACT is not a form of “paying for stuff the govt does”. Thats going to be a big effort but it can be done and once that tie is broken we will be on our way to no longer hearing the phrase ” I dont want them taking MY MONEY and giving it to……. ”

3. Scott Fullwiler says

I don’t disagree with Marshall or gbgasser. In fact, I agree in whole. My point in agreeing with Zanon was to recognize that the points both Marshall and gbgasser are making have not been fully developed in published form in the same way that the job guarantee has. In fact, there’s virtually nothing on it, aside from a few passing blogposts and comments made here and there (again, like those of Marshall and gbgasser).

4. Marshall Auerback says

Yes, we spend a lot of time on the operational aspects of MMT and don’t tend to get into the political dimensions as much. That’s something that ought to be rectified. But if we get to a stage where we have the operational realities accepted and begin to develop the political arguments, then I’d say we’ve won the debate. But a long way to go, I’m afraid.

2. Bill says

Check out moslereconomics.com if you are interested in learning more about MMT, he is one of the leading voices trying to explain how the monetary system actually works to anyone who will listen. Plenty of literature on his site that explains it and he is always willing to reply to comments.

3. Scott Fullwiler says

Good post, yet again, Ed!

Two minor corrections:

1. The Fed and other central banks actually don’t change the qty of rbs when they want to change the interest rate target. Under pre-Lehmann operating procedures (that set the target rate above the rate paid on rbs) the demand for rbs is VERY interest inelastic at the qty banks desire to hold to settle payments and meet rr. The Fed essentially just announces a new target, and stands ready to “defend” the target via repos/reverse repos if the mkt doesn’t move to the new rate. Under current operating procedures, with a large qty of excess rbs and the target rate set at the remuneration rate, the Fed just changes the remuneration rate (or could). Finally, in other countries that set the target rate in a narrow corridor b/n the remuneration rate and the cbs lending rate, all the cb really needs to do is announce a new target and new levels for remuneration and lending rates–that is, just set new bid/ask rates, and the overnight rate will necessarily trade in that range.

2. MMT’ers don’t necessarily argue for a fiscal policy rule that alters tax rates to manage the macroeconomy. In fact, I’ve never seen such a rule proposed. The statement that “govt can alter taxes to stabilize aggregate demand at full employment” should be understood as a metaphor for adjusting the deficit. The preferred prescription is to have very strong automatic stabilizers, like a job guarantee that countercyclically provides employment at at minimum wage. I would also index most govt spending and taxes currently indexed to inflation instead to an inflation target. When these and similar measures are insufficient (like now), then we might consider proactive adjustment of, say, taxes or tax rates, but the goal would be to have automatic stabilizers strong enough that this would rarely be necessary. Of course, that’s theory, and fashioning effective stabilizers is easier said than done, particularly once you add the complexities of political economy. We fully recognize that. But I would just conclude by saying that aside from the job guarantee, there’s not much published theory by MMT’ers on specific fiscal policy rules–my point again being that “adjustment of taxes” is more of a metaphor than an actual policy suggestion.

1. Edward Harrison says

Thanks for the corrections, Scott. I may incorporate them into an addendum at the end. The issue about ‘automatic’ stabilizers is key because the adjustment is geared to the actual slack in employment and capacity.

Cheers.

4. Nick E says

Hi Ed, Another very thought provoking post. Thank you.

So, if I understand you correctly, it sounds like under a fiat currency regime which is not experiencing “currency revulsion”, the central bank can peg all interest rates wherever they want provided that (a) the economy is running well below capacity, and (b) it is expected to remain that way.

Moreover, the CB will desire to push rates near zero. AND the process of putting nominal rates to near zero in a weak economy — ironically, here’s the MMT — locks in the demand for those bonds from the banking sector. In effect, the financial repression deployed by policymakers is self reinforcing.

If this is correct, then we have designed a system which will ultimately collapse, and collapse spectacularly. The system will perpetuate itself (in a non-market way) far beyond the optimal point. Only when currency revulsion takes root will investors throw in the towel and abandon the bonds. Or is there another catalyst?

So what could bring this ultimate collapse about? What is the catalyst? I suspect it will be contagion. An endogenous collapse is surely possible, but I believe it is more likely to be contagion from a smaller country (one with lower credibililty) which spreads to larger firms. Greece to PIGS or UK to Japan to US.

I also suspect exchange rate dynamics to be an important element. Japanese investors essentially require the long term dollar rates to be 2%-3% higher than yen rates or they will repatriate. When you run a current account deficit it may be difficult or impossible to bring long rates near zero.

Thinking through the implications of your comment, the first world needs to learn a very expensive lesson. Fiat currencies are dangerous and reckless not because they collapse, but because they delay, and thereby compound, the inevitable reckoning.

One question: Could policy makers simply bypass the banking system and hand out money to the private sector, and create inflation in excess of bond yields? Wouldn’t negative real rates wash away much of the debt?

Nick R
Kyoto, Japan

5. Namazu says

Thanks for giving MMT a fair hearing, minus the repetitiveness and “deficit terrorist” rhetoric of some of your guest posters. The basic mechanism of the theory seems perfectly self-evident (which may simply mean I don’t understand it well enough), but a number of practical issues suggest this experiment belongs in the intellectual laboratory. As far as I can tell, containing inflation is treated as an exercise left to the reader–in particular, the behavior of energy markets under such a regime would be difficult to predict. The idea of crediting individual accounts rather than borrowing seems attractive given the futility and injustice of the current arrangement with the banking system. In practice, given such direct access to the money supply, the fiscal authorities would grow the size and scope of government until it reaches some hard and painful limit: history trumps theory here.

6. Anonymous says

How exactly is the supply of actual currency (physical dollar bills) managed?

Who decides how many to put into circulation, and by what process is that decision made?

Then, how is the decision carried out? To whom are additional dollars distributed, and is anything demanded in exchange? If the number is to be reduced, from whom are dollars taken, and is anything given in return?

7. haris07 says

Excellent post Ed. I got started with MMT a few months back and with your posts and others, I have a good grasp of it now. But, as I have thought more about MMT, I find a critical flaw in that it assumes that if you throw money at the problem (in a fiat currency system with debt issued in its own currency), it can be solved (esepcially in an economy with a lot of slack). My questions have been the things that you have already touched upon (and questions that I have posted on Bill Blog and TPC blog beginning a couple of months back) – what if the money is just taken and put into completely (or mostly) unproductive use? Malinvestment, asset bubbles result. Furthermore, similar to Phil’s comment above, once you make the citizens of a country used to the idea that they will be bailed out by free money each time a credit contraction results from asset bubbles, what is to prevent them from just sitting back, not working, living off asset bubbles with the secure knowledge that they will be bailed out every time? Sloth and decay will set in and the country will fail.

Separate and distinct from the above, PPI shows some big price pressures building up – core crude prices, core intermediate prices are beginning to show some pretty big increases? In an economy with much slack, how does one account for these? I am not so sure that inflation cannot result as the MMT’ers say….while it is far from clear that inflation broadly is rising, these seem to be early signs that it is and when capacity utilization and unemployment are so high, how is this happening?

1. Phil says

“it assumes that if you throw money at the problem (in a fiat currency system with debt issued in its own currency), it can be solved (esepcially in an economy with a lot of slack).”

Not quite, from what I understand. MMT is saying that if you have a functioning economy, which is like an engine, and you apply more currency, which is like the fuel to the engine, then you get more performance up to the point where the engine is running at its maximum (ie: full employment). More fuel after that point and the engine overheats (inflation).

If you have a dis-functional economy, then applying more currency would be like pouring fuel on the floor — you would just get a big mess at best; but nothing more in the way of productive value. (If anyone has a better analogy, I would appreciate it.) In the US and most developed countries, this situation is not the problem, generally. However, there are “pockets” of the economy where the analogy could apply (hence, my welfare example above). It does matter how the currency is issued.

Another possibility is having an engine (a functional economy) and adding fuel to it (more currency), but then you restrict its capacity for performance (through nonsensical regulations, supply shocks, government takeover of your farms, etc.). Then your engine gets flooded with fuel (currency). That’s analogous to what happened with both Weimar Germany and Zimbabwe. It is also analogous to what’s happening with oil. The big players in the oil supply are OPEC and Russia — both of which have been known to restrict supply to get the prices they want.

Mike Norman mentions on his blog that one of the keys to understanding MMT is to get away from thinking of the money and focus on the capital, especially the human capital. After all, it was Adam Smith who is famous for pointing out that the real wealth of nations was not in the money, but in the goods and services it produces. I think some MMT apologists are saying that the current fiat currency paradigm actually offers governments policy choices that could be used to maximize the real wealth of the nation, but not if we limit ourselves by thinking about money as if it were still a commodity. (Of course, these are policy choices — governments could just as easily choose to be destructive too.)

One other point: MMT is descriptive. Meaning, if you live in the US, Australia, New Zealand, or any other country that is the sole issuer of its own currency and enforces taxation in that currency, then MMT describes how your economy operates right now. It is important to separate the descriptive theory from the policy opinions of some MMT apologists.

1. Marshall Auerback says

That is correct, although I don’t think we would describe ourselves as “apologists”, so much as “operationalists”. I don’t think those of us who explain this framework have anything for which we have to apologise as such. In a message dated 5/18/2010 12:33:01 Mountain Daylight Time, writes:One other point: MMT is descriptive. Meaning, if you live in the US, Australia, New Zealand, or any other country that is the sole issuer of its own currency and enforces taxation in that currency, then MMT describes how your economy operates right now. It is important to separate the descriptive theory from the policy opinions of some MMT apologists.

1. Phil says

I was using the term “apologist” according to its literal dictionary definition, not in the sense of “to apologize.” I meant it as a more respectful way of saying the “MMT-ers”. :)

a·pol·o·gist (ə-pŏl’ə-jĭst)
n. A person who argues in defense or justification of something, such as a doctrine, policy, or institution.

1. Marshall Auerback says

I know. I was saying it very much tongue-in-cheek!

2. haris07 says

Phil, I agree with your points…while I wasn’t very accurate, the gist of my comments remains the same i.e. while a country with a fiat currency can print money (credit accounts) w/o limit (and technically not even bother with issuing “debt”), the limitations come from the way it is disbursed through the economy. In my opinion, most of it will be usurped along the way into unproductive uses such as asset bubbles. So, apply fuel to the engine so long as you can control that the engine will function well enough to benefit all/most of the occupants of that vehicle, and not just have some passengers benefit by creating a big roar and massive exhaust that eventually hurts everyone (can’t think of anything better…its just a bad analogy that I am coming up with!).

1. Phil says

“In my opinion, most of it will be usurped along the way into unproductive uses such as asset bubbles.”

Understood – I lean towards your opinion as well, but it need not be that way. Most people want to produce and achieve; and as long as the currency is applied in such a way as to reward that inclination and consistently dis-incentivize cheating, fraud, and malice; then we could have very healthy growth in all senses of the term.

A big part of the problem now is that the known fraud in the financial system is not being addressed, which is dis-incentivizing production and has contributed heavily in forming the asset bubbles of housing and the stock market.

2. Marshall Auerback says

Haris07, You are right. The problem of the Predator State is a big one and if the fiscal resources are not deployed effectively that creates a political problem. And this can eventually become an economic one if the legitimacy of the state degenerates to such a degree that you no longer have a functioning polity which enforces the ability to impose taxation. That happens, and you are on the way to Zimbabwe. I don’t think MMTers would dispute that. We readily acknowledge sock puppet politicians do have this proclivity and we recognize their proclivity toward wasteful spending and given goodies to their campaign contributors, and we argue IF YOU WANT TO TAKE THIS POWER BACK AWAY FROM THEM you must support a Job Guarantee like mechanism that automatically adjusts to insure the private sector can actually realize its desired net nominal savings position…in other words, our proposal frees the system from political parasites while increasing the freedom of the private sector to achieve its goals.

1. Phil says

I appreciate this answer, though I think it needs to be developed more. Perhaps you could write an article on how the job guarantee proposal contributes to keeping politicians in check?

To someone thinking along a gold-standard paradigm, MMT does sound like we are giving the government too much control and authority. I’m coming to see that such is not really the case. (Though, I still favor the right to bear arms for the populace as a last resort means to keep politicians in check.)

2. haris07 says

Marshall,

I enjoy reading your posts and have learnt quite a bit from them. I agree with your thesis and MMT as a whole (and point to Japanese 10 Year JGB as the prime example of that in action). Your point above is exactly what is needed, some efficient, non-bureaucratic way to channel those currencies to productive use by creating jobs. If this can be done, then, as you and others have said, there is no reason why a person who is willing and able to work productively should not and printing money should be used to enable that ALL THE TIME. My issue is that politicians and bureaucrats and other vested interests will usurp this function (indeed they already control this function) and use it to benefit a few and blow other bubbles.

A job guarantee program or tax credits for genuine work etc. seem to be the way to go. Since I don’t trust govt can really dole out the money efficiently (no govt ever does!), some way of incenting pvt sector to do that job (while still maintaining the means to channel it efficiently) seems to be the best way forward.

So, as much as I like the elegance of MMT, in the end, I think its unworkable practically. Some amount of debt destruction must occur to prevent a boom bust cycle of asset bubbles and decay.

1. Marshall Auerback says

Agreed. And it needn’t be a big bureaucratic affair. It can be administered at the local and state level, although it has to be funded federally. Getting this as devolved as possible also seems to minimise the scope for political mischief. On the debt destruction, do you mean private debt destruction or public? Tax cuts by definition facilitate private sector deleveraging.

1. haris07 says

Pvt debt….people need to be shown that borrowing stupidly for unproductive asset bubbles won’t work, otherwise, again, everyone just decides not to work any more and just build bubbles.

What I am saying is that true “wealth” is created by a productive economy, not by increasing an asset’s value in \$. Unfortunate, I believe that the increased \$ will find its way (mostly) into unproductive bubbles (a la the home ATM).

3. Nathan Tankus says

i’m an MMT’er but i think the mainstream MMT’ers are describing it badly to the so called “gold standard” minded. a job guarantee is a standard of sorts. let’s say today obama annnounced a 10 dollar an hour job guarantee. it is effectively pegging the value of 1 dollar to the value of 6 minutes of unskilled labor time in may 2010. once you realize that a gold standard effectively fully employs the gold of a country you realize that the most useful commodity to have fully employed is labor power.

1. Marshall Auerback says

Nathan,

A lot of people, such as Bill Mitchell, have used the analogy of a buffer
stock. Instead of fully deploying a buffer stock of wool or gold, you do
it with people. It’s a very good analogy I think.

3. Gbgasser says

“once you make the citizens of a country used to the idea that they will be bailed out by free money each time a credit contraction results from asset bubbles, what is to prevent them from just sitting back, not working, living off asset bubbles with the secure knowledge that they will be bailed out every time? Sloth and decay will set in and the country will fail”

Ya know, Ive seen this criticism trotted out more than once and I really dont think you are thinking this through quite enough. If there is no govt debt being issued then there will be no low risk bonds to just collect from and sip scotch. So asset values will require that real work be done to maintain real value. A society that sits back and collects checks off asset bubbles seems impossible. Collecting checks and having nothing that has been produced to buy?? In fact I think you will see a tighter connection between work and compensation. I dont know maybe I’m totally off but I dont see your scenario as much of a potential problem.

1. haris07 says

What I am trying to say is that if the money is doled out (let’s skip the issuing of govt debt, as has been pointed out, there is no reason to do this other than to establish a rate of return, you can just credit bank accounts) and it is not used in a productive capacity i.e. to give a job to a person who is willing and able to work, then the free money is misallocated and misspent on blowing bubbles. As citizens become used to this, they just live off asset bubbles (a la the home ATM from 2003-2007).

In 1 sentence, you can’t create “wealth” by issuing more \$. Wealth comes from a productive economy.

1. Marshall Auerback says

I disagree. I would argue that the reluctance to deploy fiscal policy
effectively in a true job creation mode (as opposed to doling out trillions in
financial subsidies for bankers) places the onus on monetary policy. And
since we essentially operate in a society which doesn’t believe in full
employment policy, it means a constant serialisation of bubbles, which creates
ephemeral wealth gains and perpetuates great inequalities. So the asset
bubbles are a symptom of the problem we’re trying to eliminate.

The use of the home as a quasi-ATM machine is a classic illustration of
this dynamic. You had a government which was running persistent budget
surpluses, thereby draining private demand and income growth from the system, in
turn forcing a greater reliance on private debt to sustain income and
living standards. The “home as ATM” is a symptom of that problem, not the cause.

In a message dated 5/18/2010 14:34:49 Mountain Daylight Time,
writes:

haris07 wrote, in response to gbgasser:

What I am trying to say is that if the money is doled out (let’s skip the
issuing of govt debt, as has been pointed out, there is no reason to do
this other than to establish a rate of return, you can just credit bank
accounts) and it is not used in a productive capacity i.e. to give a job to a
person who is willing and able to work, then the free money is misallocated
and misspent on blowing bubbles. As citizens become used to this, they just
live off asset bubbles (a la the home ATM from 2003-2007).

In 1 sentence, you can’t create “wealth” by issuing more \$. Wealth comes
from a productive economy.

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