Posted by Michael A. Kamperman on March 29, 2011
A debate has erupted between Paul Krugman and James Galbraith over whether or not deficits matter in the long run. The debate centers on the utility of Modern Monetary Theory, which in a nutshell is the usefulness of the federal government printing money to stimulate demand. While I agree with Galbraith, the specifics and nuances of the debate are not important (they can be found on Paul Krugman’s blog). What is important is that the debate is taking place. On the national level no one is talking about the federal governments ability to print money and end the current depression. All of the talk is about the debt and the deficit and the existential threat they make to the United States. Of course such thinking is hogwash since we can pay all of our debt by pushing a button on a computer, and we control the computer printing press. We still think and operate as though we are on the gold standard and bound by the physical laws of nature. We are no different than ancient people who would sacrfice a community member to apease the gods and try to make it rain during a drought. Basically, we are economically sacrificing so many people; students and teachers, construction workers, the disabled, the poor, and so many more. The reason for the sacrifice is because we are afraid our currency and economy will collapse into bankruptcy and hyperinflation when we reach the point where we are unable to pay back the debt caused by large deficits. It matters not whether the number entered into the computer to print is $1, or $10, or $10 million, or $10 trillion all that is required for the U.S. to pay back its debt is to enter any number and hit print. It’s not like gold, we cannot run out of the stuff. Yet we are willing to close nursing homes and school libraries and let college graduates move back home with Mom and Dad with nothing to do all day but play video games because we are afraid to use something that we have an unlimited supply of, which is dollars. If we would use those unlimited dollars, then whole country could go back to work in weeks.
Hopefully this debate will be joined by others giving it a chance to make it up the chain to the policy maker level, because no one at that level is talking about it. They need to start talking about something besides austerity. Imagine you are a young man with 5 minutes to get to your Valentine’s Day date at a fancy restaurant with a girl you’ve been dying to go out with. You realize you forgot your wallet and you ask me for help. I offer you a choice of my wedding ring made up of $500 worth of gold, or a $500 bill. If you want the date you have to grab the paper, because the ring can’t buy you dinner at the restaurant and the paper can. So why in the world are we worshipping the ring and obeying its rules rather than using the paper and following its different set of rules?
This country desperately needs this debate. For starters, we need QE3 and a big new stimulus plan. Home prices are still going down because it is too difficult to get a mortgage. I know of a young couple who applied for an FHA mortgage and were turned down on their own and needed a co-signor. They both graduated from college and had no debt. They both had full-time jobs in their field of study and they both had a good credit score. But because they had no debt they had very little credit history. Under the new rules you cannot get an FHA mortgage without two years history on three different credit lines. Your rent cannot be used as evidience you will pay your mortgage. What you really need are three credit cards. It is unfathomable that the federal government, which already back-stops 90% of the mortgages in America, would have policies keeping qualified borrowers out of the market over a fear of the taxpayer losing one more dime. Even though the federal government can mint the dimes. We need sanity to return and this debate may return it. As an aside Bob Herbert has left his position as a New York Time columnist. He got the problem. His last words were about how we need new leadership and new ideas. Ditto!
Posted by Michael A. Kamperman on December 5, 2010
We are witnessing the last throes of the idolatry of hard money. The era of hard money officially ended when the Federal Reserve correctly decided we needed to print our way back to prosperity. Yet few have noted the end of the era, and fewer still understand its implications, because of the wailing and knashing of teeth from the ardent disciples of hard money. They scream hyperinflation and want to back the currency with gold. They are confused with the concept that the federal government’s dollar resources are not finite, but infinite. Hence, they fear deficit spending and federal debt despite the impossibility of the federal government ever defaulting on debts it owes in dollars. Many mistakenly believe if the federal government prints money it increases rather than decreases the national debt. Hard money religion is our historical heritage, but it is not our future, and is no longer even our present. The sooner we can come to terms with the end of the hard money era, then the sooner we will be able to heal our self-inflicited fiscal wounds with the new tools of the soft money era. The hard money idolatrists are taking us down the austerity path that will break our society apart. Society will come to its senses and exile the idolatrist to the scrap heap of history. Ireland is about to do so because they have been asked to absorb too much pain for someone else’s gain. It is only a matter of when we do the same here. Since our current political leadership is comprised mostly of hard money idolatrists, including multiple priests of the religion, it will take time for change to come.
Hawaii has cut 17 school days to save money. Yet the state has the buildings and the books, the parents want the kids to go, and the teachers want to come and teach. How can we be sitting in the twenty first century and everyone agree we need something we already have the resources for and yet we throw up our hands and say we can’t do it? The reason is the idolatry of hard money and the mistaken belief that dollars are a finite resource for the federal government. All Congress has to do is pass another stimulus bill to send aid to the states, and these problems will be solved. Yet hard money idolatry has us staring at the print button and saying we dare not touch it. Now we are staring at the state of Arizona cutting Medicaid patients out of transplant programs to save money. A 32 year-old father in need of a liver transplant has been removed from the waiting list because he is poor and couldn’t show up at the hospital with $200,000 in cash. The hospital and the doctors are there, yet access is denied. Again, federalising Medicaid would end this nonsensical atrocity.
Fortunately for us many of the priests of hard money who are railing against debts and deficits and runaway spending, such as our President and most of our Republican and Democrat Senators and Congressman, are actually false prophets and charlatans. As politicians, they are willing to tell us anything to maintain their own base of power and the perks that come with it. Otherwise, we would not be looking at an all-but-certain extension of all the tax cuts enacted by both President Bush and President Obama along with an extension of unpaid for unemployment benefits in the midst of trillion dollar deficits. Most of these so-called deficit hawks are not true believers. They simply manipulate the beliefs of others to gain votes. When the polls change, they will change with the polls. This is actually our saving grace. All it will take to bring about true change is to change public opinion. And as President Obama has found out, the public can change opinion fast.
Posted by Michael A. Kamperman on May 12, 2010
As predicted the ECB caved and has started to print money to buy up European Government bonds (Greek, etc.). They never really had a choice and should have acted much sooner to the avert the crisis. However, quantitative easing should be pared with a long term glide path to fiscal sanity. Instead, the Europeans in their clear lack of wisdom have embraced a combination of buying just enough government debt to keep the “Wolves” at bay. Meanwhile, they are trying to combine this strategy with demands for fiscal discipline requiring significant short term cuts in budget deficits. On the surface it sounds great to require people to retire later in life and to cut wages and to cut jobs. In reality this will only deepen the debt-induced depression and delay the inevitable. The Fed, the ECB, the Bank of Japan, and the Bank of England need to coordinate an all out monetization of government debts. This will hit the reset button and buy time for nations and economies to adjust holding societies together. By both cutting jobs and requiring people to work longer we are killing job opportunities for people in their 20′s. Is this what we really want? Younger workers without seniority will take the brunt of the axe to be swung. And, they will be out of luck a long time as retirements are delayed keeping existing jobs closed to newcomers for a long time. The austerity religion sweeping the globe is utter madness. The riots in Greece could be a harbinger of all of our futures. Today Spain announced it will cut another 6 billion euro form its current budget to show solidarity with the austerity mania. This in a country with official unemployment rates already over 20%.
The U.S. shares in the austerity mania as exemplified by the Tea Party. These well intentioned but misguided people believe they are saving society. In fact, they are most likely causing the fabric of our society to disintegrate. In my state of Texas the legislature is facing a projected $11 billion budget shortfall. One solution gaining popularity is to raise the student teacher ration in elementary schools. The current cap is 22 pupils per teacher. They want to save money by cutting teachers and forcing more kids into the classroom. They also are considering shortening the school week from 5 days to 4. Young teachers will be cut loose and elementary education graduates will find no room at the inn. Texas is in the best shape of all the large states in the U.S.
What the peddlers of austerity fail to grasp is many innocent hard working individuals will find themselves out in the cold through no fault of their own. Why? So those who were irresponsible will be punished? So those who are afraid of hyper-inflation will be pacified? Inflation occurs when too much money is chasing too few goods. There is no shortage of almost anything in the world. Furthermore, with global unemployment well above 10% it is doubtful demand will overtake supply even if all federal debt is monetized globally. Yes gold will go up in the short term. Probably a few other commodities too. But it will not lead to shortages. It will however push capital further out on the risk curve which could perhaps lead to global unemployment falling back below 10%. What most people miss is a large portion of global government debt is held by banks and hedge funds. The real money, capital, backing these bonds is not nearly as high as the outstanding amount of the bonds. Most banks and hedge funds are allowed to mark government debt at par and are allowed to leverage this debt with little capital. When they move out on the risk curve the leverage will greatly diminish. In the meantime young teachers could teach and young children could learn.
Posted by Michael A. Kamperman on October 16, 2009
In today’s New York Times David Brooks advocated the same policies in the middle of an economic depression that the Liquidationist’s advocated in the early 1930′s. We know how that turned out. They worshipped at the mystical alter of gold. They believed money was finite and a zero sum game. They preached balancing the budget and creative destruction. To stop the deflationary economic decline FDR ditched the gold standard. Even then the country remained in a depression until the U.S. went on a wild spending spree to fight World War II. It was wild government spending that launched a 62 year economic boom. Surely we have advanced enough to know we can enact the same massive spending programs to end this depression without actually going to war. Today money is not finite since we have a fiat currency. Yet you would have us live in a finite world. Why do you obsess over the debt and the deficit when the federal government has the power to print what it owes? You are trapped in 19th century thinking in a 21st century world. This obsession leads you to worry about the growth in entitlement programs such as Social Security and Medicare.
The federal government should not worry about the deficit or the debt right now. Only after the economy recovers should it return to fiscal responsibility. The most effective stimulus plan we could have would be to give everyone on Social Security a 20% raise and lower the eligibility age for Social Security and Medicare to 60. This would simultaneously restore consumer confidence and spending, open up jobs for younger workers, and lower health insurance premiums for employers. When more money starts moving around the economy, then federal tax revenues will go up. Sometimes you have to spend money to make money.
Most people place far too much faith in econometric forecasting models that project huge future deficits 50 years out. Did these models forecast the current economic crisis? Why should we believe they will be accurate so far out into the future when they can’t even accurately predict a few months out? Your concern about our entitlement programs is they have unfunded liabilities because the revenue sources to pay for them have yet to be identified. Well, when I was in my early 20′s if I was going to live for the next 50 years I would have to eat for the next 50 years. But I didn’t even have the money in the bank to pay for 2 years worth of groceries, no less 50. Somehow I have managed to eat for the last 25 years even though my food budget was an unfunded liability. Right now we should focusing on creating jobs and not focus on the federal budget deficit or the federal debt.
