Bernanke ‘Irresponsible’ to Compare US to Greece

That’s the headline from my latest talk on RT’s Alyona Show. Before I send you to the clip, let me explain my thinking because I don’t think I was really clear in the video.

Here’s what I was saying about the differences between Greece and the US: Greece is in a currency union that has the euro operating much as the gold standard did in the 20th century, restricting government spending in a way that produces deflationary policy responses to avoid default. Without the convertibility, government has more policy space. Here’s how I put it in December:

While I have an Austrian bias overall, for me, MMT is the best way to think about nonconvertible floating exchange rate systems as distinct from fixed exchange rate, currency board, pegged and convertible systems. The difference is policy space and what I would call the bond vigilante relief valve.


Today the release valve is always the currency because there is no gold tether. So the currency gives way, not interest rates. And to the degree that interest rates would increase, the central bank can print. The currency revulsion question then is always currency depreciation, inflation and even hyperinflation (when and under what preconditions) not interest rate spikes.

Sovereigns with significant foreign currency liabilities face the same issues as sovereigns under the gold standard – as we saw in Iceland in 2008. In the Russia and Argentina defaults last decade, those countries had foreign currency liabilities and a currency peg. This was the problem. It’s different for nonconvertible floating exchange rate currencies issued by a sovereign with no foreign currency obligations.

Where the bond vigilante story is usually flawed is in thinking that the bond vigilantes have power. Shorting government bonds when the central bank is politically aligned with the Treasury is a sure-fire way to lose lots of money. The consolidated government’s balance sheet consists of IOU liabilities that it can manufacture in infinite quantities. Why would anyone think they can win that game? It’s like my writing Yves IOUs for blog points. Maybe I write more than I can ever cover her for. But I create the points. I can always create more. if I write too many, their value depreciates.

Bond vigilantes and the currency relief valve

Bottom line: The US is not Greece. It doesn’t face the same constraints as Greece and can’t be rendered insolvent involuntarily like Greece because its only liability, unlike Greece, is an IOU which it can manufacture in infinite quantities. That’s why Japan has 200 percent debt to GDP and the lowest interest rates in the world.

I am not making a judgment here as to whether being able to print is a good thing. I would argue it is not a good thing because the policy space will be used to promote corporatism aka crony capitalism rather than full employment. But that’s a different argument. Here I am just making clear that the US faces very different constraints than Greece and that Bernanke knows so or at least should know so.

As for government deficits as far as the eye can see, this is related to why Bernanke is making the false claims he has made. I addressed this one week ago:

  • Cyclical deficits are just that, cyclical. Raising taxes or reducing spending before you reach full employment is likely to increase these cyclical deficits.
  • Deficit sustainability is an artificial construct. The concept is usually based on a flawed view that taxes fund government expenditures when every dollar, euro, or pound in your pocket is an IOU created by government out of thin air aka fiat currency. Debt-to-GDP constraints are better at framing sustainability. But these too are artificial and are implicit indications of fears of cronyism and government waste.
  • Deficits matter only to the degree they steal real resources from productive use. This can be surmised from a rapidly rising debt-to-GDP ratio.

Budget deficits are the result of an ex-post accounting identity. In plain English that means the policy prescriptions are the economic input and the deficit is the output. Focus on the policy and policy goals, not deficits. Focusing on the deficits leads to what’s happening in Greece and Spain.

Video below

P.S. – Yes, I think the official US unemployment rate has been systematically massaged to produce a lower headline number, just as the official consumer price inflation numbers have been massaged to produce lower numbers. But these are systemic changes that are ‘system’-based as opposed to ‘politically’-based. The President simply does not have the micro level control necessary to manipulate employment data the way some are saying he does. Moreover, the best time to manipulate would be closer to the election. This whole meme is politically-motivated conspiracy theory nonsense. The facts are that the U-6 number of 15.1% is still near depression levels but it is down from nearly 18%. That means the employment situation is poor but somewhat improved. This is the no-spin analysis of the current US jobs data.

  1. Sam McLaughlin on Facebook says

    Go Ed!

  2. Sam McLaughlin on Facebook says

    I suspect people confuse the unemployment rate (keyword: rate) with percentage of population employed.

  3. ChrisBern says

    Doesn’t the no-spin analysis of the current U.S. jobs data also require mention that the labor participation rate is at almost 30-year lows?

    Also, I completely agree with this: “…the policy prescriptions are the economic input and the deficit is the output. Focus on the policy and policy goals, not deficits.”

    However, if deficits aren’t used at least as a gauge or a measuring stick…how will politicians’ propensity to spend (in order to appease their constituents and get re-elected) ever be reigned in? Does anyone really trust a politician to spend responsibly if there are not deficit budgets to be held accountable to?

    1. Edward Harrison says

      I feel like I covered that aspect Chris, so it’s not in this post:

      Your question is the right one: “Does anyone really trust a politician to spend responsibly if there are not deficit budgets to be held accountable to?”

      I think the answer is probably no and that’s why this artificial constraint was built in. But it’s based on a lie. It’s a lie to say that the US is going to go bankrupt or similar types of propaganda used to scare people into restraint. And where has it gotten us? Nowhere. The flip side of the deficits are private sector surpluses. When we did follow the deficit mentality to its logical ends under Clinton we got huge private dissavings and a massive bubble.

      I like Debt to GDP or change in debt to GDP as a measuring stick. The question still will be what to do if it is rising to quickly. So it doesn’t tell us enough on its own.

      1. Dave Holden says

        Are you talking about overall debt to GDP or government debt to GDP. Because to me it seems that for most countries the latter wasn’t, at least in the short term, a problem.

        The reason it has become a problem I think can be summarised thus:-

        1) a crony based economics profession dominated by neoclassicals who didn’t (don’t?) think private sector debt matters enabling a one way only interest rates policy.

        2) A private sector banking system incentivised to create debt without regard for the productive ROI of that debt and a monetary system that facilitated this into essentially becoming a Ponzi scheme.

        3) The unwillingness of government to let that Ponzi debt be destroyed in the private sector.

        i.e. because 3) is inevitable the key (which I agree is policy prescription) needs to take into account how money is created by the private sector.

        I know I’ve banged on this before but to me its the private sector “monetary system” where the problem is.

        1. Edward Harrison says

          Dave, I was talking about government debt to GDP here. But I like debt-to-GDP and debt to income statistics as a yardstick generally.

          I agree with you that it was private debt that was most problematic in the bubble economies. But public debt fetishism will continue and cause us to propose the wrong solutions to the problem.

          1. Dave Holden says

            Ah, ok. I get you. On the issue of government debt I’m still in the process of distilling my thoughts. Part of that I think is for me to get a better understanding of the relationship between the realms of money and real resources.

  4. Sam McLaughlin on Facebook says

    Why not be held accountable to the unemployment rate and participation rate rather than a debt ceiling? The participation numbers look grim, more participation from ages 55+ and less from 25-44. Not encouraging for birth rates either.

    1. Edward Harrison says

      Hi Sam,

      The participation rate may be in secular decline because of an aging population just as it was increasing as women entered the workforce in the 1970s and 1980s. But I think your thought of targeting a higher participation rate from the 25-44 cohort makes a lot of sense to me.

  5. Sam says

    Why not be held accountable to the unemployment rate and participation rate rather than a debt ceiling? The participation numbers look grim, more participation from ages 55+ and less from 25-44. Not encouraging for birth rates either.

  6. David Lazarus says

    I prefer the U6 measure as it includes those that are dropped from the official figure because they have exhausted benefits. The fact that the U6 figure is going down is excellent. Though my definition of full employment is when unemployment is below 2%.

  7. Iluvatar says

    Hello Edward:

    Have just been a reader. Love your site and your stuff. Also an ex-Austrian (grin).

    Mostly post over a PragCap (Cullen Roche’s site).

    Congratulations on a good interview. I think it went better than you felt.

    Continue to spread the word. We need Wynnes’s sectoral balances understood by Congress so desperately.

    Could you just imagine if Ron Paul got this. Totally deadly.

    BTW, your comment about the deficit sounded like an Abba Lerner read (really big grin) – to wit, you don’t target things like the deficit, you target policy and the deficit is what it is. Sounds like functional finance/economics to me.

Comments are closed.

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More