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Stephanie Kelton, Ph.D.Augustana College
April 12, 2014
Turn that Frown Upside Down:
Copyright 2014 by Stephanie Kelton
A Heartwarming Tale of Debt and Deficits in the Modern Economy
What Do Most of You Want?
Graduate into a healthy economy
Become part of a strong middle-class
Inherit a sustainable planet
Enjoy a secure retirement
In short, you want to live in a Good Society
We Want a Balanced Economythat Works for All of Us
Not too hot
Not too cold
Where Jobs Are Plentiful
And Income is Maximized
Heres Our Problem
Republicans say, "We have a spending problem!"
Democrats say, "We have a revenue problem!
The both decry deficits And both equate
balanced budgets with fiscal responsibility
And It Seems to Make Sense
We know we can only spend what we earn or can borrow
We know too much debt can force a person or a businesses into bankruptcy
We know it's important to save for the future
Today, most of us are up to our eyeballs in unnecessary debt and we
cant see an end to it. And our spending habits are getting worse. It
is a simple fact that if you spend money that you dont have today,
your financial picture will look even grimmer in the future.
Stop Spending Money You Dont Have!
Great Advice... Unless..
Everyone in the economy tries to follow it
Paradox of Thrift Paradox of De-
leveraging
Capitalism Runs on Sales
Spending creates income
Income creates sales
Sales create jobs
Spending Cannot be the Enemy
Its About Calibrating Flows
Leakages Injections
Saving Investment
Taxes Government Spending
Imports Exports
I + G + X
S + T + M
Text FaucetDrain
To Get to Full Employment Businesses must have
more customers
Spending can come from:
1. Domestic private sector
2. Foreign sector (i.e. rest of the world)
3. Our government
But Were Obsessed with Balancing the Budget
We Hold These Truths to Be Self Evident
And WRONG!
Government is like a household or private business
It can spend more than it takes in but only if it can borrow other people's money on affordable terms
There is a limited amount of money available to be loaned out
Continued... There is a fine line between
solvency and insolvency
Once the debt gets too high, creditors will grow weary
They may downgrade your credit rating, and your borrowing costs may spike
You could end up like Greece (i.e. unable to pay your bills)
We Think This Can Literally Happen
Weve Been Fooled
Its Hard to UnFool People
Most people dont understand where money comes from or how it works in the economy
The see government deficits as a negative
They see our national debt as a major problem
What Do You See?
Flat Earth Economics
In economics, we still see the earth as flat
We talk and write textbooks as if the dollar was still tied to gold
Its a mistake thats costing us trillions(CBO)
http://www.stlouisfed.org/publications/re/articles/?id=2157
"As the sole manufacturer of dollars,whose debt is denominated in dollars, the U.S. government can never
become insolvent, i.e. unable to pay its bills. In this sense, the government is not dependent on credit markets to remain
operational. Moreover, there will always be a market for U.S. government debt at home because the U.S. government has
the only means of creating risk-free dollar-denominated assets.
~STL Federal Reserve
What Are We Missing?
The Issuer of the Currency Can Always Pay
[A] government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit
~Alan Greenspan, 1997
We've Been Fooled The gold standard world causes us to see
threats and obstacles where none exist
1. We've run out of money
2. We're at the mercy of the Chinese, the ratings agencies and the bond vigilantes
3. We could end up like Greece
4. We could get hyperinflation like Zimbabwe
The Truth is Hiding in Plain Sight
The world changed in 1971
The US$ works differently now
Shows why the debt crisis was never real
We can't end up like Greece
We actually need the government to run deficits most of the time
What Does the Owl Say? Enter the post-gold-standard
world of Modern Money Theory
FT says it's like an autostereogram
Flipping a switch
Changes the way you perceive things
What I will NOT Say What I WILL Say
Deficits don't matter
The government should keep spending until we reach full employment
We can print our way to prosperity
There are no limits to government spending
Deficits matter, but not the way most people think
Unemployment is evidence of a deficit that is too small
We can have a much more prosperous economy
The government is not revenue constrained; it is inflation constrained
Please Listen Closely
Let's Start with The Goal of Reducing the Deficit
The president wanted to "Go big!"
Simpson-Bowles "and more"
At least $4 trillion in deficit reduction over 10 years
"I'll wash Mitch McConnell's car. I'll walk John Boehner's dog."
~President Obama
Government Balance (%GDP)Actual Projected
CB&PP
Simpson-Bowles/Obama
Which path would you choose?
Think Like an Owl
Let's Put the Deficit in Context
Government Balance (%GDP)
Actual Projected
Government Balance (%GDP)
Non-Government Balance (%GDP)
Actual Projected
Their Deficit is Our Surplus!
Government Non-Government
$$$
A Simple and Indisputable Accounting Fact
G > T
orTheir red ink is Our black ink!
Fiscally Responsible?
FY2013 deficit is down to $680bn
4.1% of GDP
38% drop from 2012
48% drop from 2009
How Big Does the Deficit Need to Be?
What Almost Everyone is Missing
When government goes "down"
We go "up"
Private Surplus
Government Deficit
Where Does the Money Come From?
The Government is the Scorekeeper for the dollar
As Chairman Bernanke explained on 60 Minutes in 2009:
(PELLEY): Is that tax money that the Fed is spending?
(BERNANKE): Its not tax money. We simply use the computer to mark up the size of the account.
It's Time We Realized The government is not like
a household
The US$ comes from the US Government
Not revenue constrained (Greenspan and Bernanke)
If the real resources are available, the financial resources can be there
CONGRESS
A Common Reaction
Understandable!
Pervasive distrust of government
Afraid of what might happen if they discover they have this power
Our Fears Are Costing Us Dearly
Fear of Hyperinflation Fear of China Fear of Bond
Vigilantes Fear of becoming
Greece Fear of Debt and
Deficits
Hyperinflation
By looking down the list you can see what isnt there and, strikingly, what you dont see are any instances of central banks gone mad in otherwise-productive economies.hyperinflation is caused by many things, such as losing a war, or regime collapse, or a massive drop in domestic production. But one thing is clear: its not caused by technocrats going mad or bad. ~Felix Salmon, Reuters
http://blogs.reuters.com/felix-salmon/2012/09/03/why-you-wont-find-hyperinflation-in-democracies/
What Drives Inflation?
Especially Oil
Printing Money Doesnt Do It
And, of course, private banks
have a license to printand they do
most of the printing
China What if China wont buy our
bonds?
Net exporters to US
Results in checking account at Fed
Treasuries are savings accounts at the Fed
We benefit in real terms
The treasury can always raise money by issuing securities. The bond vigilantes really have it backwards. There is always more demand for treasuries than can be allocated from a limited supply of new issues in each auction; the winners in the auctions get to
place their funds in the safest most liquid form of instrument there is for US dollars; the losers are stuck keeping some of their funds in banks, with bank risk.
~Frank N. Newman, 2013
The Bond Vigilantes
Greece
They Are Currency Users
Same debt levels were sustainable when they had sovereign currency
Were Not Like Them
Greece
Spain
Italy
What Should We Be Doing?
Stop waiting for the economy to fix itself
Recognize -- before its too late -- that the deficit is falling too fast and for the wrong reasons
Do the fiscally responsible thing: Cut taxes and/or increase spending now
Our focus should be on macro outcomes not budget outcomes
Nowhere Near Full Employment
Useful Projects
Plenty of Spare Capacity
And No Long-Run Inflation Problem
"Companies are awash with cash. And what they've been missing are enough
customers out there to prompt demand and justify them investing in more plant and
equipment."
~President Obama
Were out of money.
~President Obama
End the Obsession with Balancing the Budget
7 periods since 1776 where government ran surpluses and
paid down debt.
Coincided with 6 Depressions and eventually The Great Recession of
2007-2009
The Budget is a Tool The budget is a means to an end,
not an end in itself
Focusing our energy on balancing the budget leads to bad economic outcomes and human suffering
The budget is a tool that should be used to achieve policy goals, like full employment and modest inflation
Balance the Economy
Not the Budget
Thank You!
To Get to a Balanced Economy, We Need A Better Understanding of How Money,
Deficits and Debt Really Work
@StephanieKelton