ECB credit easing by buying debt from Greece and Spain analogous to Fed buying California and Illinois munis

Interesting! That would be a good move (buying local bonds), in my opinion, and therefore would be opposed by Republicans…

“Deficit hawks should concentrate on how government policy changes the allocation of real resources in the economy rather than specific deficit targets as Rogoff and Reinhart do because that’s what drives productivity and GDP growth. …//… I have long come to the conclusion that the only thing which will cause government to change course is an even more severe depression and economic collapse. If we don’t have leaders who get it after so much hardship, what will it take?” – Money the government owes us – by Edward Harrison on 17 June 2010

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Hi Ed, been pondering this a little.

In advance I’m not a deficit ‘hawk’. I think spending is always going to be modulated by circumstances and perceptions and political sentiments, thus having a ‘view’ about spending pro or con is irrelevant. But I object when people propound spending be on or off, like some sort of ideology light-switch.

You’re wording above “how government policy changes the allocation of real resources”, is the same language I hear Bill Mitchell use and Marshall repeat – it’s the MMT line.

When you say Govt policy that means Govt spending allocations.

But I wonder what you (or the MMT’s) mean by the allocation of ‘real resources’.

As far as I can see, Govt spending does not allocate real resources, the Govt of the day just makes the money and signs-off on public cheques. Even in the case of Defence the military advises Govt what it requires to meet the Constitutional national defence needs, within the observed and projected environment. The Govt caucus itself does not select the specific aircraft and the ships, the professional military does that, or the politics would very rapidly make defence capabilities dysfunctional.

The military instead assesses threats and briefs Govt on the ‘threat’ (i.e. of real abilities to do physical damage and achieve unchallengable positions within own territory) and recommends options for effective defence against this on the basis of money quantity ear-marked to overturn such an attack.

Money is just a proxy for national resources access. Money does not come out of ‘thin-air’; for if a country did not have the territory and the resources to ‘back it’ you’d have a fiat currency no one trusted (unless you made stuff people wanted, via purchasing someone else’s resources as does Japan).

i.e. you do not need a vault full of gold to ‘back’ a currency (despite what Casey Research may think) because a countries real-resources are generally worth far more than all the fiat dollars that have ever existed.

For instance, US soils are the deepest and most fertile in the world, making NET surplus food supplies every year in vast quantity that can be exported. There’s no dollar value for possessing that capacity, hence the USD can not go to zero value, as the national real-resources are far too abundant for that and the supply too well developed to totally suddenly collapse and cease to operate.

Thus the US won’t get hyperinflation develop because a prerequisite of hyperinflation requires the protracted development of gross insufficiency of daily staples to meet of life’s basic needs. This also is a valuable thing to know, as it lends itself to longer-term organized Govts and relative stability. (if another JFK egomaniac doesn’t blow the world to pieces with nukes)

Other than arguments for hyperinflation in the USA, I’m yet to read anything that suggests the USD is going to become worthless or undesirable, for some reason. Yes, it will be drastically devalued via armageddon levels of printing but it will not lose all its value entirely or cease to be accepted in trades (not entirely anyway, much like the Pound Sterling). As the value falls people will simply seek to hold and use a currency that is not being devalued so viciously. Once the Fed is finished debasing it people will start to use dollars again, and that will only be when US banks have been cleaned out, closed and debts extinguished.

The only question is which fiat currencies will be used in the interim as that occurs? It won’t be the Euro, and it won’t be the Yen, and there’s low confidence in a Chinese currency that can’t even be floated-off a USD pegging (i.e. because it’s too lacking in credibility to stand on its own merits yet as a proxy swap to access to the state’s real-resources).

So it seems to me the democratic OECD countries and some developing-world world countries whose currencies need to be devalued less, and have less debt, will necessarily be used more and more. And when people work this out the USD will go into a rapid devaluation. Bad if you hold USD but in my view it’s a pre-requisite for USA recovery as deflation actually finally plays out.

The ‘money’ for a defence (the proxy for state’s real-resource access) is allocated years in advance but actual real resources are not allocated by Govt. But it’s quasi-civilian capability planners in conjunction with private defence options providers on behalf of a military who examine the issues and determine what type and what allocations of ‘real-resources’ must occur to generate a credible and competitive defence capability.

But all this is required via constitutional stipulations, as voted for via public Referendum.

So I don’t see what a specific Govt’s policies have to do with that spending process except with regard to foreign policy, diplomacy and defence postures. And even if the Govt makes a mess of foreign policy and upsets the neighbors, creating a much bigger threat, the military is still bound by the constitution to provide a national defence (i.e. sort of automatic stabilizer). So Defence still goes through this same processes anyway, to meet and defeat a larger threat with available dollars. And as we saw in WWII the available dollars can be whatever amount of proxy (debt/bonds) a Sovereign Govt wishes to allocate, provided it can *SUPPLY* matching resources streams in market saleable values.

The particular Govt’s spending policy is almost irrelevant then, because it’s ultimately the people who set up this system, and who also man this military system, and who muster all the ‘real-resources’ it needs.

This is because it was the citizens referendum that demanded it be organized this way so that vital functions that sustain society would continue to function efficiently with minimal disruption.

I’m splitting-hairs but for a reason.

Its because far too much emphasis is being placed upon Govt as THE agent of spending and policy formulation. Govt only administers a system set in place by the people’s choices. It’s the public service who does real policy formulation, and the so-called ‘policy makers’ simply cherry-pick the ones that suit them, and hopefully suit the people.

Well, that’s how it’s supposed to work.

A democratic Govt is just the people’s representative that writes legislation (which is usually done for them by public officials) then debate it ad-nauseum then vote to pass or reject it, on the people’s behalf and in there best interest (theoretically). Thus creating masses of red-tape and the need for ‘micro-economic reform’ to clean up the chronic inefficiencies and unintended consequences they have just created.

But ultimately it’s what the electorate’s lagged demand which will determine the spending level.

And this is what has been fundamentally derailed in the US case (and is perhaps in the early stages of being clarified) as to who is the boss of state resources and therefore its proxy access to those resources (the fiat money supply). The US is an odd-ball as it spends like crazy but not on those who need it, but on those who definitely don’t deserve it. And I think the USA is headed for intensifying civil conflict as a result of this.

Fiat dollars only have meaning and value in relation to the ability to SUPPLY real resources on demand, and that only occurs if the CITIZENS allow these or enable these resources to be accessed.

Which is the whole point.

The people can prevent even the Govt from accessing state resources and from trading, via strikes, if Govt acts willfully against the majority interests to serve elite minority interests. The people can demand control of spending peacefully with the vote, or as we are increasingly seeing in Europe they can demand it much more pointedly and persistently (as we will soon see in the UK) in the ultimate form of democracy – the majority getting physical about it.

Conservative Govts, beholden to elite interests and bankers, but who impose austerity and misery on the lower rungs of the citizenry, in order to relatively protect elite interests, are likely to get smashed as the collective comes to their senses about what is happening to their family, life and society.

And who are the relative winners from all this? … hint: not the poor.

Desperation will be what brings about the ‘total collapse’ you mention Ed, and a social crisis can drive that collapse just as much a liquidity crisis can and that’s what we have not yet seen in the OECD.

But Greece is getting there. Why are Greeks CDO’s still rising? It’s because Greeks are still striking and starving the Govt of real-resources and function, until the Govt is replaced with one that will do what the people want it to do, with regard to spending and taxation, and therefore the debt must go. G-Pap can claim it’s just a minority doing this, and that most Greeks understand and support the Govt policy direction, but that just isn’t going to work.

The process of Govt’s favoring elite-interests via spending stimulus policy and loans to protect banks is what is going to demolish these Govts, and the elite wealth behind these Govts.

A voluntary military is made up of general society and are not going to support (for long) a Govt that supports elite interests, at the majority’s expense, in the name of ‘austerity’. Especially if a Govt has access to the printing presses and real resources to relieve the suffering at will. But what if elite interests take control of a military, and that military elite decides democratic processes and Law are not such a good idea right now as the elite-interests would like to not be answerable to either? Which is what occurred in the 1930s.

Thus they take direct control of the proxy access to resources (fiat money), and also direct control of the actual real-resources and property.

Then what do/can you get?

That’s what an austerity policy to protect the rich can turn into, and that’s how conflicts can commence with little fore warning.

Hence modulated spending, that doesn’t prejudice or undermine the poorest members of society, especially the unemployed, and the maintenance of Democratic processes, and Law enforcement that is fair and even-handed, plus keeping the military and security apparatus clean of elitist interest-serving will become more important than ever.

i.e.

“…If we don’t have leaders who get it after so much hardship, what will it take?” – Money the government owes us – by Edward Harrison, 17 June 2010

That’s because the US Govt under both parties, are serving minority elite-interests who have also gained considerable control over the State security apparatus. However, in the US case they are still ready to use the printing presses … except … not to ease suffering … just to prop-up the banks that hold the money of elites.

(Well done Hank Paulson! … the ultimate Wall Street plant)

So I hope you aren’t ‘over’ the politics of austerity, as you recently wrote Ed, because it’s about to get very interesting. Even the so-called center-ist ‘moderates’ in the UK are being beaten into ideological submission to sign-up for austerity measures and double-dip, … and triple-dip. Though I wonder how much of this is also intended to devalue the UK currency. Well, it’s certainly doing that.

I’m with you Ed, spending has to be modulated to relieve suffering, not to favor elite malpractice or else the dormant social volcano does its imitation of Krakatoa.

I don’t care if someone wants to call that conclusion an ideological label (what label applies to Hank Paulson?) because we are entering a period where physical practicality and outcomes will really matter and these must trump devious politicizing and demonizing of what is non-optional essential ‘welfare’ support.

Welfare exists because o human rights, and because it’s vastly cheaper to do it than to pay the consequences of not doing it.

Frankly, the USA is in for very deep and bitter social conflict (if not quasi class-warfare) over this topic if conservative clown are not put in their box. The truth is the Conservatives have been by far the biggest deficit spenders of US tax dollars since WWII, but when it comes to supporting actual US people that’s considered pure evil. That US Republicans on Friday show a continuing strong desire to eliminate welfare for millions of US unemployed, when the US has massive real-resources, and a fiat dollar, and a Fed willing to print them, is an utterly devious behavior that deserves to be severely punished.

I strongly agree however with the general German view that balanced budgets and surpluses are the ideal if you can manage them. And *if* you are not a sovereign issuer of a fiat currency – like a US state.

Hence US States and cities should be balancing their budgets and creating surpluses and cutting wages and conditions, and the Federal Govt should be printing to support those affected rather than just propping up bank accounts of those that NEVER suffer material deprivation.

I do not agree with austerity policy being used as an excuse to protect elite-interests via needlessly sacrificing the conditions of the poorest in a country that actually has abundant real physical resources.

There is no excuse for that, but that’s what Brussels and London and increasingly Washington want to do to the working and non-working poor.

Frankly, I think debt is only significant as a big issue until such time as it’s finally defaulted on – which it eventually will be. It will then cease to be a problem, but a solution.

But this will impoverish Hank Paulson, hence Hank made it the problem for the poorest and weakest and hoped they would not get too put-out by this. So now the poor must use force to dump full responsibility back on Hank Paulson and chums.

And that’s what the whole process that’s coming will be about and austerity propaganda and a Bank-levy is the wedge being used to stop it.

Just watch how the austerity policy propaganda is spun out as ‘necessary’ and ‘essential’, as a ‘crisis’ must be avoided (thus guaranteeing one). And how they will attempt to make austerity appear ‘fair’, via a grandiose and sensible, but smallish Bank levy on financial transactions. And take note that it will be minimal if it is implemented at all, and most probably it won’t be.

It’s all political theatre with one aim, to prop-up banks at any cost so all the Hank Paulson’s won’t have there bank accounts killed.

Strikes and rioting that attack elite interests and Govt function and revenue will be what eventually shuts this down, with a blunt public demand for the elimination of public debt held by banks, rather than the current drive to eliminate public spending. Hence the UK are getting ready for a new wave of industrial relations and anti-strike laws to avoid the Sovereign default risk ramping in the bond market.

But the UK conservatives are going to discover that this will not work, it will just make people more angry, resistant and militant, no matter what propaganda they concoct to sell-it to everyone and make them feel obliged to toe the party line.

According to the MMT logic, described within you post, “Money the government owes us”, tax can be virtually eliminated via a fiat-issuing Govt for as long as they wish. The UK is also a country where insufficiency of life’s staples is extremely unlikely to emerge, so hyperinflation is not a danger there either. So they can certainly print and devalue a lot more yet.

All that will then happen is countries will not want to trade in Pounds, they will require payment in a currency more likely to maintain its buying-power to obtain real resources.

Big deal!

And in the EU taxation case the State’s tax is eliminated and Govt spending is then funded entirely via ECB fiat that is not repaid.

Don’t discount it Greece is almost there.

The alternative is a disorderly and hostile abandonment of the Euro in a couple of years.

Looks to me like all the elements are in place for a big global print-a-thon, to fight off deflation.

I just wonder how you undo this once it’s done?

I suspect you don’t. I suspect the Fed already can’t. It’s an irreversible change in dynamics. And Ben Bernanke has no idea what this will lead to. And the Gold bugs don’t have any clue either.

That’s facing facts.

What I think we are going to discover is that fiat currencies are far more flexible and far less fragile than fiat money skeptics think.

I’ve never once seen anyone from the gold camp adequately (or in any way) explain exactly and simply why gold would add ‘backing’ to the USD in this situation, or any other major OECD fiat currency. Or why gold would be one iota more credible or workable as money, in a strongly deflating world?

(not to mention the US already has a stack of gold … so what’s the ‘effing drama?)

People only want access to useful real-resources (not gold) and fiat money already gives them this, and I can’t see any mechanism that would cause that to suddenly cease. Certainly inflation won’t do it, within the OECD.

Plus I’m convinced that defaults rather than chronic 10 to 15% inflation will be the primary debt delivering mechanism, so I’m not even sure gold will be needed to buffer moderate long-term inflation (which gold investment logic also requires gold to maintain an historic high and rising price trend).

Rationing is an ideal structure for managing rapid growth of inflation, via equalizing supply (food stamps even make price irrelevant as then only production and supply matters). Austerity leads to rationing, economic collapse leads to even more intense rationing, war leads to severe mass-rationing (plus malnutrition). i.e. austerity policy can transform into intensified rationing, as everyone is encouraged by Govt propaganda to look upon it as a patriotic duty, for the war effort, etc.

And note that austerity is the opposite of Obama’s “spreading-the-wealth”, and “is that fair”, pre-election debate BS.

Austerity is the transfer of pain from the wealthy to the poor – that’s all it will do.

So I would say that being talked into austerity, as is now occurring in Europe, merely to protect banks and elite-interests must be resisted and argued vigorously against, and also acted against if imposed. History shows rationing can last for decades, and that’s totally unacceptable in real-resource rich OECD states, with fiat currencies and bankruptcy law.

This all comes down to cleaning out banks and supporting the poor as it’s done.

So, enjoy Obama’s deficit spending, to predominantly prop-up elite interests, a bit longer (as is currently planned through to Oct 2012), because once these deficits start shrinking fast you will finally see that austerity is very different to current State and Municipal belt-tightening. One makes you angry at City Hall while the other gives you malnutrition, frostbite, secondhand underwear, and potentially an early grave.

Given this US slowdown is likely to re-enter a negative growth phase and both US Parties have remorselessly supported elite-interests with incredible, undeniable and impossible to hide extravagance, if the Tea-Party offers an electoral option to voters I think they will smash the power-base of both US Parties.

And then the Obama’s budgets will be forced to flip into severe cuts, to get passed, and the fuse of austerity will be lit in the USA, as well.

In other words;

The people who need to understand your post “Money the government owes us”, Ed, are in the Tea party movement.

Thus the MMT types had better get over their prejudices against the Tea Party movement, and get involved with them real fast if they want to make a difference to the policy and social and political detritus to come.