Why Modern Monetary Theory is Wrong About Government Debt

I’ve taken some criticism — particularly from advocates of modern monetary theory and sectoral balances and all that — for using total debt rather than just private debt in my work.

The modern monetary theory line (in one sentence, and also in video form) is that government debt levels are nothing to worry about, because governments are the issuer of the currency, and can always print more.

This evokes the words of Alan Greenspan:

The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.

Of course, the point I am trying to make in worrying about total debt levels is not the danger of mass default (although certainly default cascades a la Lehman are a concern in any interconnective financial system), but that large debt loads can lead to painful spells of deleveraging and economic depression as has occurred in Japan for most of the last twenty years:


Of course, before the crisis in America (as was the case in Japan at the beginning of their crisis) government debt was not really a great contributor to the total debt level, meaning that the total debt graph looks far more similar to the private debt line than the public debt line, which means that when I talk about the dangers of growing total debt I am talking much more about private debt than public debt:


But what Japan empirically illustrates is the fact that all debt matters. Japan’s private debt levels have reset to below the pre-crisis norm, yet the economy remains depressed while public debt continues to climb (both in absolute terms, and as a percentage of GDP). If excessive private debt was the sole factor in Japan’s depression, Japan would have recovered long ago. What we have seen in Japan has been the transfer of the debt load from the private sector to the public, with only a relative small level of net deleveraging.

And high and growing public sector deficits often lead to contractionary tax hikes and spending cuts. This happened time and again during Japan’s lost decades. Peter Tasker of the Financial Times writes:

When Japan’s bubble economy imploded in the early 1990s, public finances were in surplus and government debt was a mere 20 per cent of gross domestic product. Twenty years on, the government is running a yawning deficit and gross public debt has swollen to a sumo-sized 200 per cent of GDP.

How did it get from there to here? Not by lavish public spending, as is sometimes assumed. Japan’s experiment with Keynesian-style public works programmes ended in 1997. True, they had failed to trigger durable economic recovery. But the alternative hypothesis – that fiscal and monetary virtue would be enough – proved woefully mistaken. Economic growth had been positive in the first half of the “lost decade”, but after the government raised consumption tax in 1998 any momentum vanished. Today Japan’s nominal GDP is lower than in 1992.

The real cause of fiscal deterioration was the damage done to tax revenues by this protracted slump. Central government outlays as a percentage of GDP are no higher now than in the early 1980s, but the tax take has fallen by 5 per cent of GDP since 1989, the year that consumption taxes were introduced.

A rise in debt relative to income has historically tended to lead to contractionary deleveraging irrespective of whether the debt is public or private.

The notion at the heart of modern monetary theory that governments that control their own currency do not have to engage in contractionary deleveraging remains largely ignored. Just because nations can (in a worst case scenario) always print money to pay their debt, doesn’t mean that they will always print money to pay their debt. They will often choose to adopt an austerity program (as is often mandated by the IMF), or default outright instead (as happened in Russia in the 1990s).

And what governments cannot guarantee is that the money they print will have value. This is determined by market participants. In the real economy people in general and creditors (and Germans) in particular are very afraid of inflation and increases in the money supply. History is littered with currency collapses, where citizens have lost confidence in the currency (although in truth most hyperinflations have occurred after some great shock to the real economy like a war or famine, and not solely as a result of excessive money printing).

And there has always been a significant danger of currency, trade and political retaliations by creditors and creditor nations, as a result of the perception of “money printing”. Many, many wars have been fought over national debts, and over currencies and their devaluation. One only has to look at China’s frustrated rhetoric regarding America’s various monetary expansions, the fact that many Eurasian creditor nations are moving away from the dollar as a reserve currency, as well as the growth of American-Chinese trade measures and retaliations, to see how policy of a far lesser order than the sort of thing advocated in modern monetary theory can exacerbate frictions in the global currency system (although nothing bad has come to pass yet).

Governments controlling their own currencies are likely to continue to defy the prescriptions of the modern monetary theorists for years to come. And that means that expansionary increases in government debt relative to the underlying economy will continue to be a prelude to contractionary deleveraging, just as is the case with the private sector. All debt matters.

135 thoughts on “Why Modern Monetary Theory is Wrong About Government Debt

  1. The creation of money needs to be equal to the amount of goods and services created, otherwise, it is simply counterfeiting.

    There is an enormous parasitic class who believe that counterfeiting is perfectly OK, among them being bankers, government, and educators, all freeloader-extraordinaires.

      • I am not comfortable with the accuracy of your debt to gdp graph. The 20’s saw the advent of margin loans which made the 29 crash worse. I see total private debt increasing after the crash which seems illogical. Surely there would have been deleveraging which you see in 2008. Was the 29 to 33 upswing in private debt the 1 percenters borrowing from the fed to buy up from the fretful selling public? Printed money buying real assets i.e. Factories that ultimately saw the benefit of Government debt paying for the war effort.

        • 29-33 “upswing” was the GDP level collapsing while the nominal debt level remained very high. Mellon talked a lot about liquidation, but there wasn’t much.

        • I was under the impression that margin loans were only secured by the underlying stock, hence the nominal debt would have been wiped out when the stock was worthless. Both the broker and investor wearing losses.

      • I assume you’re referring to the 6 deep depressions that occurred during the 19th century. Yeah, that worked out really well – if you don’t care about waste and human suffering.

    • What the MMT theorists seem not to understand is that the money supply in a normal economy expands from interest earned on real investments and that money growth is directly related to real growth. Creating new money outside of real investment lowers the interest rate and produces price inflation as well as under-investment.

      Today it is so fashionable to pooh-pooh the quantity theory of money but QTOM is a tautology after all and is ignored at one’s own risk.

      Of course, no one is ever arrested for violated Say’s Law even though they should be.

    • sadly, you are far off from realistic economics which will work! What we are seeing are man made fictitious problems all thanks to fictitious economics.

      The problem in the current system (where fiat money is created “unlimited”), is one of, when this fiat money is created, who does it benefit the most? Where is the created money allocated?
      Most of the money in most economies, are created as debt in the form of commercial bank loans. By letting these private banks to create money, we basically let them decide where to allocate this money in the economy!!!!!!!!
      One has to understand this is the whole problem. They being private, obviously do not allocate it for long term public purpose. Instead into already existing assets, with least risk to make maximum profit. Let me repeat that again – the money created by private banks are mostly allocated into already existing assets with least risk to make maximum profit.
      And That being housing!! This is why house prices go up and up and up and up and up. This is made even worse, by having tax rules which are modified and shifted away from land onto labour and industry.

      Most of our planet is run by this junk neo classical economics!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

      Also, We will end up with a hell lot of poverty by having a system such as
      “The creation of money needs to be equal to the amount of goods and services created…”
      This is pretty much equal to going back to the gold standard, which limits economic activity in a nation.

      At a nation level, one has to have a set of goals which are over and above anything else. And obviously it has got to be in achieving,
      1. Max employment
      2. Min poverty levels

      Both of these go hand in hand, you achieve one and you have achieved the other. This can be achieved by increasing economic activity. Which in turn is achieved by either,
      1. Expansion of government created money
      2. Expansion of credit.

      But expansion of credit by private commercial banks has the problem of, private vested interests deciding where the money is to be allocated.
      Which leaves us with, governments printing money. When governments create money they create for long term public purpose in the form of funding public infrastructure so public can use them at subsidized rates..

      Most of The inflation we see around us is not created by money creation, but mostly because of Private banks credit expansion and allocation of that money into housing. When house / land prices go up…every darn think becomes expensive. All of a sudden business find it is lot more expensive to set up a business. So even if an entrepreneur has an idea, he is held ransom, by an economic system which makes it impossible to get that initial investment. So he ends up making a deal with the devil (deal with ones with enormous capital). Well, this is a different story altogether.

      Have a look at this documentary to understand problems of the phony tax policy shifted away from land.

      • The historical record shows quite clearly that allocation of capital by the private sector tends to be less misallocatory than allocation of capital by the state. Why? Very simply — in a centrally planned system, there are not adequate price feedback mechanisms for the efficient allocation of capital. This is why the Soviet system was worse than the (imperfect) American system.

        The reason why the private sector today is failing to allocate capital efficiently is much more likely that a lot of junk and zombie establishments are being supported by government largesse and liquidity insurance. If these zombie establishments and financials were liquidated and the system that created it ended, the market would have no choice but to lend to productive ventures (by trial and error) if they want to make a profit.

        • Aziz [Nov 29 @19:23]: Adequacy of feedback mechanisms is only a (small?) part of the reason centrally planned — centrally CONTROLLED — economies fail. Motivation — cronyism, ideology, greed, etc. — is the larger problem.

        • Yes, those are problems with centrally controlled economies too (but to some degree they can also occur in market economies), so the biggest technical difference is the price feedback mechanism in my honest opinion. Also the opinion of Hayek, Mises, etc.

        • Wen I said banks need to be curtailed i didnt mean government should run and decide what to produce from toothbrushes to ipads to hair gel to sports cars.
          What the government should do is create money and push it into economy through public infrastructure spending.
          This will flow down to private hands eventually. This money can then be used by people to invest in what they deem fit.
          Basically when government sector is spending, someone else is earning (private sector). The money flows from government sector to private sector. This goes on for a while, and reaches a point when money increases in private sector by a large margin in comparison to government sector (money is decreasing since government is spending). Now, at some point this process can be reversed again by taxation. When private sector earns money they start spending, when they start spending and when taxed, money flows back to government sector.
          On top of that new money is injected by government to increase economic activity.

          This ensures a circular flow of money, which does not happen in this American system since most of money is created by private sector. Quantity of money that flows back to government is small in comparison to what stays in private sector.

          Lets assume there is a flaw or two or more in this theory.
          Lets go back to the banks need to create money system. A simple question, what banks do, lend money, manage / evaluate risk (if at all they actually do), ect, by us humans, cant the same banking sector run by government by same humans? it is not nuclear physics or rocket science to create and lend money.
          So why not just tweak the current system with the same motives being – profit but with long term public interest and true growth on priority?

        • Lets assume there is a flaw or two or more in the theory mentioned above.

          Lets go back to the – banks need to create money system.
          A simple question arises.

          What do banks actually do?
          Lend money, decide whom to lend to and what for (profit driven), manage / evaluate risk (if at all they actually do this), ect, and this is done by us humans who are educated and work in banks.
          Cant the same banking sector be run by government by same humans with education and training?

          it is not nuclear physics or rocket science to create and lend money!

          So why not just tweak the current system with the same motives being – profit but with long term public interest and true growth on priority, and let governments be the ones that run banks and not a few private individuals?

          Eventually, it boils down to what policies are being followed irrespective of who is creating the money!!! This is affected by who is in control of running these policies.
          And that is, “They who create money”!

          Even this system can fail if government officials are corrupted. So we tweak that too!!
          There is incentive to make money and with low risk as a government official. Lets modify that to, there is incentive to work in public office, *but with high risk* (Period!) !!!
          Meaning, “Capital punishment”, for top officials, ect for betraying a nation for pure self interests.
          Tweak it a little more and introduce some minor punishment for immediate family for giving “moral support” to a traitor, and seizing all assets and money from the entire family. (arguable)

          Now we have a system where, we can minimize the
          “Tom, Dick or Harry(s)” who come and stand for public office. Only ones who,
          1. are really crazy, or
          2. Ones who are actually ethically grounded!!
          will have the ball$ to stand for representing as the highest officials in a state/country, and can be called true leaders!!!

        • My opinion of Politicians is that they have psychological deficiencies due to bad parenting. They have hubris. They seek fame and popularity to confirm their unfounded belief that they are great and can make a difference. To achieve this confirmation they learn quickly that they have to lie. That is why Politicians are good at speaking and convincing. See how a heroin addicted person will make a convincing argument.

          That is why rules made by founding well educated and benevolent Founders must be adhered to to keep these Psychopaths in check.

          But I agree, seizing the wealth from the immediate family will ensure that the family comes forward and exposes the lies.

        • There is some truth to this, but to some extent it also exaggerates the problem. I think the zombie establishments are only a small part of the economy. The government is relatively successful in weeding these out. It’s like the laws being passed requiring government ID’s for voting, as if they are needed to stop voter fraud. There is very, very little voter fraud. When it occurs it has proportionately almost no effect.

      • I agree, that Governments can raise money at a lower cost of capital and if they plan right (And not held captive by vested political interests or corruption) can efficiently allocate that into productive nation building projects. As the Convener of the Australian Nationalist Party, this is a key policy platform.

        • I think problem is quite simple, see my above post.

          All We need to do is increase risk to government officials for standing in public office (but with good incentive). Higher the position, more the responsibilities, higher the risk they should have!! Unlike now.

        • POLITICIANS (see Buddy Rojek far, far above @ Jan 25 21:27:57): Buddy calls ’em “psychopaths”, which I think is a valid warning. When he contrasts them as opposites of the Founders, I almost wish he held high office here in the US (apparently he’s working on it in Australia). But —

          Many times I have been wisely cautioned by family and friends to back off from politics. Why? I will not compromise on principles — like Buddy, I was taught right from wrong. And, like Buddy’s characterization, I believe and often say, “Anyone who WANTS to be president should be automatically disqualified from holding that office!”

          Since WW2, my evaluation is:

          + Truman — a “common man” who became senator by default,
          and had no presidential ambitions.
          ++ Ike — like G. Washington, did not “need” or seek the presidency.
          Kennedy — tenure too short to be rated.
          – – LBJ — ambitious, unscrupulous politician throughout lifetime.
          – Nixon — career politician, lawyer.
          Ford — short tenure.
          – – Carter — Naval Academy, farmer, satisfactory governor, but
          lacking in character, big-picture wisdom, and vision.
          ++ Reagan — actor and governor, but patriotically principled. Strong mother.
          G.H.W. Bush — overprivileged youth, in RR’s shadow, not tough*.
          – – Bill Clinton** — wretched childhood, charismatic, utterly unprincipled.
          – – Hillary Clinton** — pushy mother, unattractive girlhood, combative,
          arrogant, consumed by ambition.
          + G.W. Bush — very successful governor of Texas, but too naive and
          dependent on father’s generation for cut-throat Washington.
          – – Obama — born and raised anti-colonial (anti-white) and Muslim ( anti-JudeoChristian
          culture), tutored in Marxism, and groomed in “The Chicago Way”;
          shrewd, charismatic, unscrupulous, narcissistic master of the political arts.

          * PM Thatcher re firmness with Gorbachov: “Now is not the time to go wobbly, George!”

          ** “Co-presidents”.

        • Don Guier is immediately disqualified from judging anything more important than the quality of rice pudding. He says Reagan was ” patriotically principled.”

          Let’s review, shall we: Reagan was the guy whose administration agreed to give Iran spare parts for all those weapons the U.S. sold the Shah when Carter refused. Using the likes of Ollie North, Reagan sold weapons to Iran’s Ayatollahs then used the proceeds to fund an illegal war that Congress had de-funded in Nicaragua. You may say Reagan was ignorant, or insulated, or afflicted with Altzheimer’s, but “patriotically principled” he was not.

          It’s also true that Reagan’s depredations into the Nicaraguan war (designed to overthrow a democratically-elected government, in the tradition of Eisenhower installing the Shah, or Diem, or Nixon’s CIA overthrowing Allende on the other 9/11) got the U.S. prosecuted in the Hague for state-sponsored terrorism. This was for (again, illegally) mining Nicaraguan harbors.

          Reagan’s rise to political prominence began after he reversed his pro-union, new-deal Democratic principles and sold out the Screen Actor’s Guild when he rose to its presidency. His career had stalled until then, and he immediately began to get jobs as a producer, then got funded to become CA governor.

          Reagan was a despicable opportunist, whose public service has brought out the very worst of the Republican party. For example, the “two Santa Clause” strategy which says Republicans should run up the biggest possible government “debt” when in power, (Reagan’s exceeded all previous administrations’ “debt” combined), then squeal like stuck pigs about the debt when out of power.

          Republicans follow this strategy to the letter today. Heck, this blog’s point is to defuse any MMT criticism that, in pointing out the obvious, might reveal the man behind the curtain.

          How can you tell the current “debt” concern is illegitimate? There would be no debt if we only spent three times more than our nearest rival (China) on the military. Not only that, according to its recent audit, the Fed created $16 – $29 trillion to cure the same financial sector whose frauds crashed the economy. Economist Michael Hudson estimates the total subsidy to the financial sector comes to $13 trillion, at present. Furthermore, the U.S. embarked on wars whose cost is $3 – $7 trillion. Where was the “debt” panic then?

          The decades-away shortfall in Social Security is orders-of-magnitude less, but apparently we must pre-pay for that with cuts now, because the “debt” is a big deal. The financial sector will require more and bigger bailouts under current circumstances. Where’s the call to have them pre-pay?

          I call bullshit.

        • I agree that the TBTF banks should prepay “Bailout insurance” to cover unforseen “stuff ups” due to their massive administrative size.

          As to Ronald Reagan, I was too young to understand the Politics of the time, but I agree, he should have asked tougher questions to avoid this Iran Contra affair. He is the President and the buck stops with him.

    • A trillion dollar economy mean a trillion dollars spent. It doesn’t necessarily mean there is a trillion dollars in total circulation. Any more spending can lead to growth or it can lead to too high inflation. Too little spending leads to deflation which can bring about recession or even a depression. Its the amount of money spent rather than amount of money in existence, which matters
      Most governments, despite what they may say publicly, adjust their spending, and taxation to aim for an inflation rate of a few %. That seems to be the best option overall.

  2. It is the ability of debtors to service their debts out of income that is important. Debt, per se, is neither here nor there

        • Stephen
          Jan 02, 2013 @ 20:31:20

          All types of finance have a cost, whether equity or debt.

          My Wag says:
          Sure, most types of finance do have a cost. Except for Monetarily Sovereign Nations..like the US. We can either borrow money thru the Fed (the usual route) or we can release the money ourselves….saving the US the financing costs.

          Money is not debt. It is just an exchange medium of obligation.

  3. Aziz,

    I thought you are heteredox but you are using arguments which are orthodox!

    Ok let me not get personal there but some amount will be required for arguments, so don’t take it wrongly.

    I think you use an exogenous/Monetarist argument about printing presses etc. The model you seem to have is the government injecting excess cash notes into the economy – something like helicopter drops – and the excess eliminated by purely by a price rise.

    But that is not a right description. A fiscal expansion leads to a rise in real output and it is true that some of the expansion contributes to a price rise coming from the demand-side.

    However, in general prices are explained by firms’ costs rather than by demand. So you may have heard of cost-push and demand-pull etc. There is no reason that a fiscal expansion is impotent as the undercurrent in your piece suggests.

    In Japan a huge deleveraging (i.e., a reduction in expenditure to pay down debts and increase credit quality) led to a rapid rise in the public debt. This is because when there is a higher propensity to save, output reduces leading to a fall in total taxes. Japan was a case of a huge rise in the propensity to save and you cannot claim that the resultant rise in the public debt was useless.

    A higher saving economy will have a higher public debt to gdp ratio. The public debt is not “set” by the government. In general it is both dependent on the government expenditure and the propensity to save/consume.

    Japan was a case of the failure of the government to use the power of fiscal policy to reach full employment.

    If simple statistical analysis has any rightness to it, Japan’s unemployment is better than that of the Western world! So do I then conclude that higher public debt means lower unemployment?

    There is no need to worry about hyperinflations. It is like saying cars are bad because some drunkard killed a few people while driving and hence let us ban cars. At any rate, the description of hyperinflation is very involved and one needs to go into things such as rise in demand above production capacity and wage-price spirals and so not. It is not so simplistic as telling a story of helicopter drops.

    A proper description involving the external sector is a topic for another day but Japan has none of these issues. It is a huge creditor of the rest of the world, *not* a debtor! A fall in its exchange rate will put Japanese manufactures into an advantageous position and hence more success and this will lead to a strengthening of its international creditor status!

    • Japanese product quality is superior to German products, so it can trade its way out of any debt issues it has. Consumers are not concerned about price when purchasing Japanese products, so they do not need to devalue their currency to trade out of their issues. PROVIDED the Japanese can get access to cheap energy, they will have comparitive advantage with the rest of the world.

      Japan’s immigration policy and ageing population is the biggest issue. Do they allow immigration which gives them a labour pool to work with and pay for an ageing population. Or do they robitise even further to maintain export output? I think robotising is the solution, as it maintains the quality advantage people around the world expect.

  4. Aziz,

    You claim that “large debt loads can lead to painful spells of deleveraging…”. Well obviously ALL ELSE EQUAL deleveraging has a deflationary effect. We all know that. But there is no reason why stimulus can’t counteract that deflationary effect.

    As to Japan, unemployment there has never risen to the recent levels seen in the US or in some Euro countries, so I don’t know what this “economic depression” is that you and others refer to in Japan. But if a bit of depression has resulted from deleveraging in Japan, that can only be because they haven’t implemented enough stimulus to counter the deflationary effect of said deleveraging.

    And why on Earth would “high and growing public sector deficits lead to contractionary tax hikes and spending cuts”? If an economy needs stimulus, then run a deficit (funded by either printed money or debt – it doesn’t make much difference, as Keynes pointed out). Personally I think national debts are pointless, as did Milton Friedman, so I prefer to see deficits consist simply of printing money and spending it (or leaving money in taxpayers’ pockets).

    In contrast, if an economy starts overheating, do the opposite: run a surplus. It’s all dead simple.

    You then say “And what governments cannot guarantee is that the money they print will have value. This is determined by market participants.” Agreed. As I said above, if “market participants” start spending their recently boosted supply of money too fast and inflation looms, then government just needs to raise taxes (or cut public spending). And the latter DOES NOT NEED to result in what you call “contractionary deleveraging”. Assuming government raises taxes by the right amount (and admittedly that’s a difficult thing to get EXACTLY RIGHT), the only net effect to ward off excess inflation: i.e. there is no disastrous deflationary effect or rise in unemployment.

    I completely fail to see the problem.

    • Ralph —

      Well obviously ALL ELSE EQUAL deleveraging has a deflationary effect. We all know that. But there is no reason why stimulus can’t counteract that deflationary effect.

      If the government balance sheet is deleveraging it is by definition not engaging in stimulus. So I assume you mean monetary stimulus, like a private debt jubilee?

      If an economy needs stimulus, then run a deficit (funded by either printed money or debt – it doesn’t make much difference, as Keynes pointed out). Personally I think national debts are pointless, as did Milton Friedman, so I prefer to see deficits consist simply of printing money and spending it (or leaving money in taxpayers’ pockets).

      Ah but my point is that “running a deficit” is not the way to approach it because it will later be offset by tax hikes and spending cuts, irrespective of whether the economy is booming or not. That’s my point, and I’m pretty sure that’s what occurred in Japan. The way I would do it from here on out is by directly writing down debt by expanding the money supply without adding a cent to the “national debt” and thus increasing debt fears. The Fed programs post-2008 had the wrong target — they targeted reinflating the banks and financials when instead they could have targeted gradually writing down consumer debt.

      • Aziz,

        You say “So I assume you mean monetary stimulus, like a private debt jubilee?” No, I didn’t mean that. My point (not expressed too clearly) was that if the private sector is deleveraging (i.e. private sector entities are paying off debts to each other), that will have (as we agree) a deflationary effect. But that effect is easily countered by government implemented stimulus (which I think should take the form of simply printing money and spending it into the economy).

        Next, you say “Ah but my point is that “running a deficit” is not the way to approach it because it will later be offset by tax hikes and spending cuts, irrespective of whether the economy is booming or not.” What on Earth is the point of “offsetting” recently created money if the economy is not “booming”? There is absolutely no point. I.e. the money just needs to be left in private sector pockets.

        This is simply Keynes’s paradox of thrift point (a point repeated by MMTers using different phraseology). That is, if private sector entities want to hold a larger stock of monetary base or government debt (which MMTers call “private sector net financial assets”), then why not let them?

        The Japanese are ultra-keen savers. They like having about $15,000 each in their bank accounts plus a chunk of government debt in their pension pots. So why not let them? If that keeps them happy, then keep them happy.

        Re your last sentence, I fully agree that the Fed should not have reflated banks. I.e. all stimulus money should go to Main St, not Wall St. Unfortunately banks have got the US government by the b*lls: i.e. banks can threaten to destroy the US economy unless they get loads of free taxpayers’ money. Thus a complete re-jig of the banking system is needed to weed out what is in effect a protection racket run by banks.

        As to your idea about “targeting down consumer debt”, I flatly disagree. Government should provide whatever level of stimulus is needed to bring full employment. As to the extent to which private sector entities want to become indebted to each other: that’s up to them. If a lender and borrower act irresponsibly and both of them go bust, then s*d them. Their pain is a lesson for everyone else: a lesson that the daft human race needs to re-learn with monotonous regularity.

        • My point (not expressed too clearly) was that if the private sector is deleveraging (i.e. private sector entities are paying off debts to each other), that will have (as we agree) a deflationary effect. But that effect is easily countered by government implemented stimulus (which I think should take the form of simply printing money and spending it into the economy).

          Yes, this is very clear, and I agree (with a few caveats I am sure you agree with about not favouring any particular sector, not picking winners and losers, trying to not create malinvestment e.g. China’s unwanted and unused infrastructure today). The key thing, though is under your method you’re not adding to the public debt. This might seem like a point of semantics, but if stimulus spending creates public debt, the empirical reality is that later on the recovery may be damaged by tax hikes (and other austerity measures) as seems to have occurred in Japan. If you’re not adding to the public debt (i.e. if you’re doing it as a monetary operation, e.g. spending the money into the economy through a blanket debt forgiveness program) then there is no risk of contractionary austerity later on.

          What on Earth is the point of “offsetting” recently created money if the economy is not “booming”? There is absolutely no point. I.e. the money just needs to be left in private sector pockets.

          You could call the multiple historical realities of governments raising taxes and killing a recovery “irrational” behaviour, and you could call creditors and markets worrying about public deficits as “irrational” behaviour, but that doesn’t change the fact that they historically they have tended to do so, with very real consequences (nor does it change the fact that public deficits themselves have led to very real problems in the past — wars, trade wars, etc). Governments and markets sometimes behave irrationally

          Thus a complete re-jig of the banking system is needed to weed out what is in effect a protection racket run by banks.

          Agree very much.

  5. Ramanan —

    I think you use an exogenous/Monetarist argument about printing presses etc. The model you seem to have is the government injecting excess cash notes into the economy – something like helicopter drops – and the excess eliminated by purely by a price rise.

    Where do I mention a price rise? You seem to have misread my piece. I am not worrying about inflation. I am addressing the very specific point that rising public debt leads to contractionary deleveraging. If the rest of the world — governments, creditors, the public — was working from an MMT-style model than that deleveraging would not be so inevitable. The actual effects of adopting an MMT-style fiscal/monetary policy are not really discussed in the piece, but would depend very much on the specifics of the economy at the time of adoption. Personally, I think a better “stimulus” than anything suggested by MMTers is some kind of large-scale private debt jubilee, but that is another issue for another day.

    Japan was a case of the failure of the government to use the power of fiscal policy to reach full employment.

    If simple statistical analysis has any rightness to it, Japan’s unemployment is better than that of the Western world! So do I then conclude that higher public debt means lower unemployment?

    Japan and the USA contemporarily are not meaningfully comparable. Japan is almost 20 years along the road into the deleveraging trap, and the USA is only 4 years in. They are also vastly different cultures.

    You seem to think that I am arguing that MMT-style monetary/fiscal policy is necessarily bad. I am not. I am arguing that MMT-style policy is necessarily politically unfeasible.

    There is no need to worry about hyperinflations. It is like saying cars are bad because some drunkard killed a few people while driving and hence let us ban cars. At any rate, the description of hyperinflation is very involved and one needs to go into things such as rise in demand above production capacity and wage-price spirals and so not. It is not so simplistic as telling a story of helicopter drops.

    Hyperinflation is mostly to do with the collapse of the real productive economy, as opposed to the printing of money, in my opinion.

    • Sorry misread your piece about inflation. But I thought you were defending orthodox positions when you said “In the real economy people in general and creditors (and Germans) in particular are very afraid of inflation and increases in the money supply” and “not solely as a result of excessive money printing”. Now it may not have been your intention but such phrasing is used by people who defend fiscal contraction. No offense to you.

      Also, what is “excessive money printing”?

      “I am addressing the very specific point that rising public debt leads to contractionary deleveraging.”

      Are you suggesting that a rise in public debt leads to both contraction and deleveraging or both?

      “I am not. I am arguing that MMT-style policy is necessarily politically unfeasible.”

      Okay understand your position although I am no fan of MMT but have lot of agreements. But your piece did come out as a defense of mainstream positions.

      • I’m not defending those positions, I’m just saying that that is how most people think, which makes the implementation of these kinds of policies that increase the public debt level politically infeasible. This is why we need different policies which help relieve the depression but do not increase the public debt level.

        Also, what is “excessive money printing”?

        Well, a fairly rudimentary definition of that would be when the monetary base grows faster than the underlying economy (the counterpart of which being “excessive credit growth” when credit grows faster than the underlying economy).

        Are you suggesting that a rise in public debt leads to both contraction and deleveraging or both?

        Public deleveraging, which all things being equal is contractionary.

        But your piece did come out as a defense of mainstream positions.

        I’d say I’m being even more heterodox than the MMTers, to be honest, but let’s not get into the “more heterodox than thou!” game! Haha.

        • You are not more heterodox than academic MMT’ers, and I find it a ridiculous statement because you have not the slightest inkling of what it really means to be “heterodox” (it does not mean being a contrarian, it means having a completely different worldview of how the world operates in the case of the neoclassical mainstream vs. non-neoclassical, non-mainstream…meaning, for example, that we go so far as to attack thinking of the economy through some supply and demand diagram. if you had any idea what you were saying you’d immediately know how foolish a statement that is.

        • I know precisely what heterodox means, and you assuming I don’t doesn’t reflect well on you. Go and read through what I’ve written for the last year and a half.

          As I said, I think it’s stupid to get into an argument of who is the “most heterodox” — because it is a subjective argument — but if we define heterodox as “rejecting equilibrium/neoclassicalism”, then I pretty much reject its methodology and conclusions from Walras to Hicks and Samuelson to Arrow and Debreu, to Kydland and Prescott, to Friedman, to Krugman, etc. The academic economics I have time for is the empirical work in behaviourism (Kahnemann and Tversky, etc) institutionalism (Acemoglu, etc) as well as certain aspects (e.g. business cycle) of Post-Keynesian micro and macro theory (Keen, Minsky) and Austrian micro and macro theory (Menger, Hayek, Lachmann, Kondratieff, Say).

          The basic claim that “deficits never matter as long as you have your own currency” is extremely dubious. The historical reality of currency collapse in various nations seems to falsify this idea. Expectations matter, and the perception of a sovereign printing money to cover expenses has historically been unsettling to populations and creditors. You can argue that this is irrationality on behalf of the market (I agree — markets are generally irrational), but that doesn’t make it any less real.

        • The only reason why the USA can print to infinity is the unshakeable faith by the worlds uber rich 1 percent investors, which have achieved their wealth by dubious means, that investing in US dollars in a US bank account, US real estate and companies is a SAFE haven for the future. Life is fantastic in the USA if you are rich.

          Combined with military conquest enabling company access to defeated sovereign wealth, you have a strength by DECREE currency.

          When I see US governments protecting Russian and Ukrainian thieves (and other nationalities) then I know the US dollar is safe.

          China does not offer such protection, so the Yuan will not be reserve currency until then.

  6. It’s very difficult to compare Japan and the US. Japan didn’t start printing money until 10 years after and they’ve had deflation. The US has not. Japan has a declining population and a declining workforce; the US is projected to have an increasing population for the next 100 years. Total debt/GDP did not decline in Japan(I’m using different numbers for Japan than you, my numbers tell me they had 400% debt/GDP in 1990 and 493% debt/GDP in 2008) while it has in the US. The US doesn’t have all of the structural problems as Japan either. Again, the US started to print money early as an immediate response to the crisis. Japan waited around 10 years to do so. The US has, thus far, avoided a debt deflation; Japan was stuck in a debt deflation for basically 20 years.

  7. “In Japan a huge deleveraging (i.e., a reduction in expenditure to pay down debts and increase credit quality) led to a rapid rise in the public debt.”

    No, public debt rose as a result of attempting to bail out their banks and provide “other” stimulus.

  8. frances capola is truly the most morally bankrupt person i have ever read. people like her are the reason why innocents are encouraged into such utterly vacuous thinking, so they think the primary cause of a problem is “private debt” because, don’t be silly! Government debt is always okay!!!!!

  9. maybe if we just permit each individual on earth to be their own government printing press so that all debt is government debt issued by its own central bank then we can never again in human history worry about debt! YAY!!!!!!!

  10. im convinced a main reason for so much of this confusion is that people seriously struggle to accept the fact that they are essentially just slaves

    Michael Maloney: “We Pay Tax for the Privilege to Have Currency”

  11. “And high and growing public sector deficits lead to contractionary tax hikes and spending cuts.”

    Spending cuts ? Has Japan had contractionary spending cuts ?

    “where twenty years of crunching debt deflation has preceded”

    Japan has barely had any deflation, and think about the whole Fisherine debt-deflation from the point of view of Cantillon-effects for one moment.

    If a credit contraction occurs following a credit expansion, and it leaves you as a debtor with an asset that has depreciated in value. What happens if the central bank tries to reinflate the economy ? (as it always does)

    It can, depending on who you are, lift your wage-rate through general price-inflation (or CPI, if you wish) by for example 3 %, but if the monetary inflation hits certain goods in a particular way such that your actual living expenses rises by 10 %, what has actually happened here ?

    Is your ability to pay down debt improved ? Of course not.

    This is why I regarded debt-deflation theory as very problematic and outright dangerous depending on how one interprets it.

    • Uhhhh, you do recognize that this theory is what caused Irving Fisher to support the abolition of fractional reserve right? It’s called The Chicago Pan. There was even an IMF paper on it. I’d also like to point out how much of a difference 2-3% inflation makes vs -1-(-2)% inflation. It has to do with the mathematics of compounding.

      The reason Japan didn’t have debt deflation has to do with the type of debt. The type of private debt Japan had a massive amount of debt held by households. Same for the United States and many other countries in the developed world. Household debt doesn’t clear very quickly because households are much less likely to file bankruptcy than a business is. This is because businesses and corporations don’t have much trouble shedding debt and restructuring very quickly. It’s also easier for them to restructure debt(convert debt to equity, so on and so forth) because of legal reasons and because of other reasons as well. If you’re a household, you can’t just throw out the kids can you? The type of debt crisis plays an essential role in the way the debt can be liquidated. Since this is a household debt crisis, that’s why I think the crisis hasn’t been as severe as The Great Depression was(at least in the US and Japan).

      • Of course Japan had the forces of debt deflation after the housing bubble burst. Some of it was offset by massive increases in the monetary base and other measures to keep the system liquid. But looking at the bigger picture, Japan has lower nominal GDP today than in 1990:

        • What that graph shows is that they didn’t print enough money. They didn’t take up serious monetary easing until 2001; their deleveraging started in 1990. Then, they had a falling population to add on top of that. All issues that the US never had to worry about.

          I’d also like to add that I don’t think hyperinflation is going to be an issue unless something really bad happens. I’m not a Bernanke fan, but I’m pretty sure he’s read history and that he’s read about Weimar; the US isn’t going to turn into Weimar. That being said, we may have some sizable inflation and our costs of living will definitely drop because we are poorer. However, the US won’t turn into Japan. The US doesn’t have a falling population and the US started to print money early. The US’s total debt/GDP ratio has actually fallen. The Japanese ratio didn’t fall for a long period until around 10 years after their deleveraging started. I’d also like to see more debt restructured in the US. This means more refinancing of mortgages for homeowners/individuals and a conversion of debt to equity for corporations and financial institutions.

          Either way, we’re dealing with a household debt crisis. This is why business/corporate profits are just fine, because non-financial businesses are just fine. The reason we’re not having enough consumer spending is because it’s households that are heavily indebted so we’re seeing the recession play out in a different way. This is also why a regular liquidation won’t work because households won’t be likely to default on their debts. The Great Depression, on the other hand, had extremely high levels of business sector debt, which is why it was so much more severe on unemployment.

        • “Of course Japan had the forces of debt deflation after the housing bubble burst. Some of it was offset by massive increases in the monetary base and other measures to keep the system liquid. ”

          I know they had credit contraction by the private sector, but debt-deflation. Really ? Debt-deflation entails that changes in the price level makes debt burdens bigger.

          Saying “of course” does not solve the issue.

          I dont know what nominal gdp was supposed to show.

        • Japan did have an increase in the debt/income ratio until 1998. Therefore, you definition of a debt deflation making debts harder to surface is exactly what happened until 1998 in Japan.

      • I see, another follower S. Keen.

        I know fisher wanted to abolish frb. Dont see the relevance to my post.

        Concerning compounding, i agree. But it does touch the fact I pointed out that keynesian or fisherine/monetarist definition of price-inflation is very misleading. It talks about a “general price level”, but there is no such thing as a “general person”.

        Debt-deflation theory does not concern whether the debt is business or household, all that matters is banking collapse, changes in CPI and the debt load.
        This talk about households is also nonsensical, in several countries people are (as it should be) not personally libel for their debts but only the assets they put up as collateral.

        If you have credit contraction, then the fact that a household wants to pay down debt does not help. It will be too large to service.

        • I agree that price inflation is misleading. However, I want to get you to think about this in a different way. The whole idea of Minsky, Keynes, Keen, Ray Dalio, and company is that debt have risen too far relatively to incomes due to this unsustainable credit expansion. In fact, the reason it was unsustainable was because debts kept rising relative to incomes. The financial crisis was the point where debt/income ratios could not rise further. What Irving Fisher’s debt deflation theory says is the idea that debt contraction not only causes income contraction, but due to the nonlinear effects of deflationary liquidations, debt/income ratios could increase further even as debts are contracting due to the second and third order effects on income. Therefore, getting stuck in a debt deflation may actually be counter-productive to having a healthy economy. If you think about this from a Keynesian perspective, it makes perfect sense. Steve Keen also points out(as Keynes noted many times), correctly, that all of these results are highly sensitive to the initial conditions. The data supports this as there were many situations where debt/income ratios actually rose during debt deflations(1929-1933) and made the recoveries longer, more drawn out, and more (unnecessarily) painful. This is especially true when the economy is not running at full capacity(producing as much as it otherwise could).

      • Hard Money Man —

        What NGDP shows that even in spite of all the money printing, NGDP stayed flat. That’s an awful lot of deflation to offset. And look at the price of the bonds. If the price of money is sitting at the zero bound, that is evidence enough of significant deflationary forces.

      • As an Accountant I would have to agree. But in Australia, if you don’t have equity in a home and only household furnishings, and a low income job, you are better off filing for Bankruptcy, keeping the consumer goods you have (excluding a car over 6k) and ride it out for 5 years. You would have more disposable income for 5 years.

        Who bears these consumer losses? Banks. Who pays? The taxpayers who pay for the bailed out banks.

        In Australia, banks were not bailed out because we have full recourse house lending. Bankruptcy is required to extinguish housing debts. if you have negative equity, are earnng less than 40k or lose your job, you are better off filing for Bankruptcy, move in with parents etc and rebuild equity. We are seei g negative equity in poorer suburbs of Australia, so with interests low in Australia, this strategy could cause a huge property slump. It is not widely promoted. Only the shrewdest advisors are recommending it.

  12. So you’re basically managing expectations. You think that as private debt grows, the general/political concern of solvency is raised more and more causing tax hikes and soendinf cuts. This is not an argument against MMT; it’s against stupidity and false understandings of how things work. This is not MMT’s fault.

      • So, how does that make MMT “wrong”? Does it make basic mathematics wrong that people say and think stupidly that they can end up with LESS total, after-tax, disposable income after their pre-tax income increases to the point that a part of it will be income-taxed at a higher rate? The fact that “in the real world” people have some extremely wrong and misguided ideas about all sorts of things, material-physical and social-cultural does not make theories that are actually accurate “wrong”.

        • It means that accelerating government debt levels are still likely to throw an economy into recession as panicked politicians enact mathematically unnecessary (but politically expected) austerity programs.

  13. “government as we understand it is a relatively recent phenomenon”

    Top 10 Reasons Why the Mafia is Better than the State

    To really understand just how tragic the futility of centralisation is, watch
    The Untouchables, made in 1986 about prohibition

  14. Pingback: Why Modern Monetary Theory is Wrong About Government Debt [Azizonomics] « Mktgeist blog

  15. I should add Peter Leeson (the scholar delivering his lecture in video 1 above) is no dummy!! Just check out his CV (www.peterleeson.com/), he also is another person behind the forceful new discipline of Law and Economics (http://en.wikipedia.org/wiki/Law_and_economics) and has what will no doubt be a wicked new book coming out, titled – Anarchy Unbound: Why Self-Governance Works Better than You Think. Cambridge: Cambridge University Press, forthcoming.

  16. The Japanese debt is 95% owned by Japanese citizens, so it just represents an internal transfer of income. My understanding is that a good part of the debt is held as part of retirement savings. The public part of the Japanese retirement system employs a formal, public bond-purchasing system.

    By contrast, when Americans pay into Social Security, they don’t get a government bond, they just get an informal “commitment” from the government. The total volume of that commitment is not formally counted as part of the national debt. In Japan, since the worker accumulates bonds, the retirement commitment is formally counted as part of the debt.

    • This is true, but their debts are 25 times their revenue. They spend 50% of their government revenue on interest alone and they spend 65% of their government revenue on social security. If they try to set a 2% inflation target and interest rates move at all, they’ll spend their entire tax revenue on interest. When you have as much debt as Japan does, the expenses move exponentially while the revenues move linearly when you print money. Japan is about to have a massive bond crisis. Japan is finished.

      The best solution is to print money and take a sudden devaluation of their currency by wiping out their government debt in one full sweep. This will cause hyperinflation and Japan is in serious trouble. Another problem with Japan is that Japan has a falling population. Basically, they have less and less people working while they have more and more people to support. They’re running a massive Ponzi scheme that’s going to end soon. They are finished.

      • If 95% of the debt is owned by Japanese, then all of those interest payments are going from Japanese to Japanese. Maybe the distributional consequences are bad, but it can’t mean Japan is finished.

        • The problem is that debt represents a cumulative amount. There have been countries that have had hyperinflation/currency crises when most of the debt was not external. Another thing to remember is that even if they do pay the debt, they’ll have to pay it in worthless yen. They don’t have a choice. They have rising structural deficits due to a falling population and workforce and the only way to pay for those deficits is to print money. When you add to that point that they keep printing more and more every year due to their larger and larger deficits, they’ll have to have hyperinflation or a currency crisis, probably both. When you spend 50% of your tax revenues on debt service alone, what are you going to do? They spend 50% on debt service and 65% on social security. Their mandatory expenses already dwarf their tax revenue.

          Yes, their public does own their debt, but as Reinhart and Rogoff point out, that does not mean they won’t have hyperinflation/currency crisis. Their structural problems are what will kill them. They have a falling population and workforce, what else are they going to do? They already have a weak economy so raising tax rates won’t do very much and raising taxes and cutting spending would destroy them from a demand point of view. They’ll go into recession and that would cause revenues to fall while spending goes up. Basically, what I’m saying is that there is no easy way out for Japan. It’s not so much their deficit and public debt as it is their structural issues. Their deficit and debt just worsen the problem.

        • They’re screwed with or without it. If they do target it and their interest rates shift, they’re really screwed. The BOJ could lose control very quickly. I think it’s just absurd that central bankers and economists think the government/central bank has complete control of an economy at all times. They’re just deceiving themselves.

    • Precisely. Japan also spent much of that debt on infrastructure, so real net national wealth was preserved, combined with an export model focussed on quality products and you have a model that can’t be co pared to the USA. The USA is in unchartered territory.

      provided Japan can get access to cheap energy, such as Australian gas fields (which the are currently investing in) then Japan will be fine.

      Don’t forget Japan has had deflation due to the decline in price of consuer goods, access to China and cheap resources and food from Australia. Deflation is actually a good thing. Unemployment only increased due to huge productivity gains due to robotisation and Japanese style JIT systems.

  17. “Maybe society should be ruled by natural elites…but tThe term Anarchism is vilified by anyone with power…but at its root, anarchism is just the idea that structures of hierarchy and domination are not self-justifying; and that they have to instead justify themselves. They have, in other words, the burden of proof to bear” ~ Noam Chomasky

      • Whether he said it or not, it offers an extraordinarily weak and contentless definition of anarchy. Almost any political philosophy one can think of will defend the idea that there must be some justification for coercion and coercive institutions.

        • In that the purpose of any group is to secure, something for nothing, the political process is simply encouraging people to sign on to their own flogging.

    • As an idealistic teenager from the wrong side of the tracks, I thought the “ELITES” had the best intersts of the people at heart. But after gaining their knowledge and studying them, I realise they use their intelligence and influence for their own personal gain. Even Philanthropists love the limelight.

      Anarchism requires universal moral values for it to work. Like a Bikie gang. The rules are clear, cross the line and the group strikes the law breaker.

      I am still not entirely convinced that Central Banks execute impartial and benevolent policy. One minute they are raising rates to pop a bubble, then they drop hard. if you are rich, this access to cheap credit, is music to your ears. Surely this action is planned well ahead at socialite parties, clubs etc. these guys walk very small social circles.

      Many property owners in Australia have negative equity due to unnecessary rate rises. Now rates have dropped, but the economy has slowed. Some have lost homes due to unemployment, only to rent a house from “investors” taking advantage of cheaper homes and cheaper loans.

  18. There is also the issue of constraints, i.e, constraints that lead to the productive use of the power to create money/credit. The constraints on private (horizontal) sector credit creation were very dysfunctional and led to misallocation,cronyism and a private sector debt bubble. I suspect many who are vexed by government (vertical) sector credit/money creation/allocation worry about similar dysfunction and cronyism. Edward Harrison talks (amongst other things) a little about this here http://www.creditwritedowns.com/2012/09/more-on-government-tax-coercion-versus-fiat-money-liberty.html

  19. I am not an economist and I haven’t the foggiest idea about MMT. However, I have a fairly rudimentary grasp of Keynes and classical eco. I am more interested in the political side of “political economy”, to use an old term.

    It seems to me that the point you make is more political rather than economic. For example, the Japan total debt is still high. Could they have not tried to inflate it away? Japanese inflation has been about 1% or less for 20 years or so? Couldn’t the Japanese target a bit higher inflation?

    One obvious way to do it would be to just announce that some of the debt the central bank holds (it holds a lot) will be held indefinitely. In effect, a permanent injection of money into the economy rather than issuing new bonds when the old ones come due. (Dean Baker has made the same argument: here and here)

    Japan’s productivity growth has been pretty good . So they can probably afford a higher inflation target.

    The point you make about people in general and creditors not liking inflation is ok. But in my view, the people are ok with inflation as long as living standards improve even faster — which is possible due to productivity growth). Creditors are another matter. Well, there must be a political struggle with them.

    • Well, huge debt loads have a deflationary bias. Japan did try (and is continuing to try) a heck of a lot of helicopter monetary methods, but it’s not really reviving the economy. I think Japan is up to QE10 or 11 now. Shinzo Abe continues to promise nominal GDP targets (which should bring down the debt/GDP ratio) but a lot of Japanese people claim that he has no intention of doing such a thing and is just talking down the Yen in a desperate act of mercantilism. We shall see.

      • Well, I agree it has a deflationary bias, but isn’t the mechanism exactly the same as you outline in your post? The govt. tries to wind down its stimulus some time and tries to consolidate and the economy sputters.

        As far as I know Japan has indeed tried a lot of QE, but has tried to target inflation only earlier this year (see Dean Bakerlinked above) – a 1% inflation target. Abe is asking for central bank to target 2% inflation target and promising more fiscal stimulus — both of them seem perfectly good suggestions to me.

      • Now that Abe has set the 2% policy target, we need to revisit this in a new topic. Also Warren Buffet is comfortable with US Debt to GDP levels, being lower now than at then end of WW2.

        But I think this is wrong, as at the end of WW2 the USA was the only manufacturer, and the population of the USA invested in War Bonds, not international creditors. China did not exist as a manufacturer, and Germany and Japan were in ruins.

        Refer to the article I sent you in an email.

    • If their inflation causes interest rates to rise, they won’t be able to service their debt without a massive exchange rate devaluation. This is because your tax revenues move linearly with increases to inflation(and thus NGDP) while their expenses go up exponentially. The end will be hyperinflation. They spend 50% of their revenues on debt service alone and they spend 65% on social security. Add to that that they have a falling population and workforce. The idiot central bankers think they can control everything while not realizing that the economy is not a linear system. The economy is a complex, nonlinear, dynamic system that we cannot control. The day of reckoning is almost here. I can’t tell you the exact date, but Japan will need to either restructure its debts or take a massive exchange rate devaluation.

      • Suvy,
        I do not know where you got the 50% of revenue on debt service, but from world bank data ( here , they only have 15% of expense on interest payments. Keep in mind that about half of their public debt is held by the central bank, which just refunds money to the treasury.

        As for interest rates rising, and exchange rate devaluation, I doubt how it will matter. Japan hardly has any net external debt since it’s been running trade surpluses forever. Japan’s public debt. is just owed to other Japanese.

        Again, my above exposition could be totally economically illiterate. But hyperinflation in Japan seems a very remote possibility to me.

        • Right here. I’m using the MOF/BOJ data. Just do the calculations. They spend about 50% of their revenues on debt service and 25% of their government spending is on debt service.

          If you also look at it, you’ll notice their social security spending dropped, but that’s because they’re issuing a new bond with a revenue flow attached to it, which they didn’t describe and they put a note on a different page about it. Does it sound kinda sketchy? It should. They’re absolutely screwed. I hear all this stuff, and then I look at their budget. I really hope the US doesn’t turn Japanese.

          Click to access e20111224a.pdf

        • Just because they have no external debt doesn’t mean that they can’t default. They are running trade surpluses/current account surpluses, but their current account surpluses are dwindling. What they’re doing is simply unsustainable and they don’t have the population demography to turn that around. They’re basically screwed. If they don’t support their economy with deficit spending, AD collapses which will cause tax revenues to fall and they won’t be able to balance their budget(they’re already at capacity with unemployment at around 4%). If they do continue deficit spending, they’ll have to fund their larger and larger deficits with more and more money printing. This will eventually cause inflation and the slightest amount of inflation will blow them up. The math is very straightforward. The only question is when, but we can never know exactly when a crisis is going to occur.

        • Suvi,
          It seems that you’re looking only at tax revenues and not total revenues with your 50% figure. You are neglecting the “government bond issues” (which is about the same as tax expenditures). This is probably just old debt being rolled over. So the total debt service is 25% of total revenue.

          About the debt service: see figure on page 6. Only about 11% of revenue is interest payments. The rest is: “redemption of national debt” (by which I assume debt which is held by central bank itself — which is just refunded to govt).

          About your larger points: unemployment is indeed 4% but workweeks for Japanese have shortened. The economy is much below capacity. The economy is demand-constrained, not supply-constrained. Japan’s economy may not be growing, but productivity is still growing well (see the links on my post). Also, population is decreasing, but that is not necessarily a bad thing since it is so crowded there.

        • Anand, when you’re rolling over debts, that’s not a good thing. It just makes you more vulnerable for a crisis–especially when doing so on shorter time frames. The biggest thing is what happens when the qualitative behaviors of the people change. In financial crises, what usually happens is that there’s some sort of a trigger that causes the bomb to blow up. Any sort of shift in sentiment absolutely destroys them. Remember that MV=PY. Right now, output is constant or falling while M is increasing so everything depends in V. Now V has been falling so far, but what if it increases. If so, prices increases. Remember that the nominal interest rate is the real rate of interest plus the rate of inflation. So once prices increases, their borrowing rates, their interest expense, and the cost of rolling over their debt skyrocket. For me, the important factor isn’t their interest on their debt, it’s the cost of servicing their debt because that’s the number that shifts with a shift in behavior. For me, it’s not a question if whether, but when. Their rolling over their debt and spending a significant amount on interest. What if their costs go up just a bit, they blow up.

        • I agree with your sentiments. debt is internal and not external. Spending is on infrastructure and not overseas interest expenses or divdend repatriation. I note Suvy’s link to the MOF page 10 is probably the best news I have seen coming from a Government paper since the GFC. Cheap natural gas sourced from Australia, and high end quality exports will ensure Japan remains stable and the YEN stronger relative to the USA.

        • Suvy,

          Firstly, let’s agree that interest service is only 11% of expenses (and of course much less % of GDP). It is of course not trivial, but nothing scary either.

          Your argument about interest rates is misplaced for 2 reasons:

          a) You cannot look at just total debt (since half the debt is owned by the central bank). If one takes your argument to the logical extreme, your argument will work as well if the central bank holds all of the debt. Clearly, that is not true.

          b) If indeed the interest rates rise, then bond prices will fall . Thus the central bank can buy up the debt at lower prices, changing the debt burden, without changing the interest service burden. This is of course a thought experiment.

          As a perspective enhancing viewpoint: Japan has got through a 20 year period of GDP stagnation with very low unemployment, shorter workweeks, highest life expectancy, good productivity growth (better than US) and less crowding. These are not unimportant things.

          Japan’s economy could have done much better than the mess it is now, but most Americans would live much better and longer if they could be “like Japan”. Most Americans (of course not the creditors) would jump at that chance.

        • Let’s take a look at how much of the debt is owned by the central bank.

          1. It’s a mistake to look at interest. If you read the history of financial crises; the more often you roll over your debt, the more likely you are to have a crisis. This is what history tells us. Not only this, but the maturity of the length of the debt plays an essential role as well. You must look at debt service. The interest itself is not the important number, the important number is the costs of debt service.

          2. The BOJ does not own half of the debt of Japan, it holds 104.9 trillion yen of the government bonds or 11.1% of all government bonds–nowhere close to 50%.

          3. You claim that if yields go up, the BOJ can buy bonds for cheaper since bond prices fall. If indeed bond yields increases and bond prices fell, the yen would fall in value(due to the value of yen denominated assets falling). This would put an upward pressure on prices in the country. Upward pressure on prices means that as inflation increases, interest rates also go up. This causes a further drop in the value of their bonds. Now, add to this that you’re printing money to buy bonds, which in turn increases the money supply and puts an upward pressure on prices, which could drive up interest rates even more. This drives up interest rates, drives down bond prices and causes the exchange rate to fall further. Now, you’re stuck in a nasty feedback mechanism where you have ever increasing deficits from increasing borrowing costs, you have falling bond prices that lead to a higher price level, these higher price levels and weaker currency leads to higher inflation which keeps the feedback loop going.

          In economics classes, you’re taught that the economy is like a well oiled machine that central banks and policy makers can control. In reality, it’s not. It’s a complex, nonlinear, dynamic system with very complicated feedback mechanisms that could kill you. I can actually build a mathematical model of the behavior of this system if you’d like to see it.

          I read Rogoff and Reinhart’s book, This Time is Different: 800 Years of Financial Folly. It seems to me that you’re giving an explanation of why this time is different. I just don’t buy it. If you look at history and you look at financial crises, this one is coming. Countries with debts denominated in their own currency have had hyperinflation. Countries with massive domestic debts have default(either through an outright default or through a currency devaluation, etc) in the past. Not only that, but sovereign defaults happen in clusters. That’s what’s most likely to happen again soon. Before World War II, almost 50% of the world restructured their debts. Since then, we haven’t seen many sovereign defaults. We’ve reached a point where we’re nearing the end of an other debt cycle(which only happens once a lifetime). I can’t tell you the day that Japan has a massive currency devaluation/hyperinflation, but I can tell that the day is coming. Mathematically, it seems clear.

        • By the way, I was actually looking at some historical data on Japan. After World War II(1946), domestic debt was around 80% of Japan’s liabilities. They ended up having over 500% inflation and basically defaulted on their debts due to inflation. The obvious reason for this spending was World War II, but their sovereign debt levels now are nearing those seen at that time. Japan may not have a war, but they have more and more people leaving their workforce that need to be taken care of and less and less people that can work. They’ve had a fertility rate of 1.3 children/woman over the past 20 years too. They don’t have the population growth to sustain the Ponzi scheme that is social security.

        • a) About BOJ holding of govt. debt, it seems you are right about those figures. Perhaps I was confusing it with net and gross debt? I will investigate.

          b) About the mechanism of inflation you talk about. That is the whole point: to create inflation. But there is no reason to suppose that it will be an uncontrolled behaviour. Why is it not feasible for the inflation to stabilize at, say 3% instead of the 0% right now?

          As I said before, hyperinflation seems a very remote possibility for Japan right now.

          By the way, this FT post is talking about the same thing I was talking about. They are discussing the option of just buying debt and holding indefinitely (or canceling which is the same thing) in UK.

        • If the 3% inflation target moves their interest rates at all, they’ll be completely finished. It’d be checkmate. Again, a lot of this stuff depends on the behaviors of people. When does the market’s reaction shift? We simply do not know. For me, the 70-80% currency devaluation is a best case scenario. I can see this thing getting really, really ugly for Japan. They cannot afford any sort of shift in their interest rates at all.

          I’d also like to note that if you take a look in history, there is a nonlinearity with respect to inflation. In these types of situations, you try to create inflation for the longest time and it doesn’t materialize. Then, all of a sudden, you can have out of control inflation. I think Japan could easily be stuck in such a scenario. The more and more they continue on their status quo, the greater the probability of collapse. They’re making themselves more and more fragile with each passing minute.

  20. Debt IS the problem. Not only that, but the creation of money is a bigger problem.

    It’s always the really simple things [the Truth] that people miss because they assume that [fill in the blank], “must be.” And this is the primary purpose of every institution [to convince the masses that this is the case].

    It wasn’t too long ago when most people gave a great deal their labor-value to The Church and or the monarchy. There’s always a long line of institutions, at the ready, more than happy to take whatever they can pry out of your wallet.

  21. When governments ‘save’ banks, companies and economies, essentially they change their debts from private to public, by a mechanism that is complex but indisputable. The essential for a sound, healthy culture is that organisations – of whatever nature and magnitude – that can’t hack it be allowed to fail.

    • I agree. Government Departments and Big business are the refuge of the well off, private schooled, insecure types. Without government taxation of entrepreneurial hard working people who get off their backsides and do the job right the first time with precision, then you would not have a source of funding to pay these parasites and crony supplier contracts. New IT suppliers with revolutionery systems can’t get a look in for Government or big business supply contracts. The insecure Managers do not want to take a chance, instead they go for the known brand at higher cosy. An absolute waste.

      Starve the beast by bartering with customers, suppliers and watch the system implode. For example one can rarely need to use cash or formal systems if one has a large enough network.

    • Rather than taking private losses onto the public balance sheet, governments need to realize the losses and encourage the restructuring of debts. For corporations and financial institutions, the best way is to convert debt to equity across the board. For households and individuals, it involves a combination of debt writedowns, reduction of interest payments, reduction of interest rates, etc. A little bit of inflation could do some good to wipe out the debts as well. All of these things(including the inflation) will involve some sort of pain, but there is no choice. The other solution(like Japan) is to kick the can down the road for 25 years and turn a private debt crisis into a sovereign debt crisis.

  22. The OP clearly does not understand MMT or sectoral balances. The government deficit – private savings. It’s an accounting identity – all transactions are two sided.

    • It’s not because a fiat economy is not a closed system. Money can be created by the central bank, or endogenously by market participants. Your accounting identities are tautological.

  23. Pingback: Why Modern Monetary Theory is Wrong About Government Debt | My Blog

  24. This is of course different than a household or business, who cannot create currency. As currency users, rather than currency issuers, their debt must be serviced by currency raised through economic activity. This is an example of the fallacy of composition .

  25. While you are considering ‘debt’ much more broadly than MMT does, I don’t think it is intrinsically contrary to MMT to look more closely at private debt (credit cards, etc.) than it has. MMT is just about fiat money systems, and certainly the dollars in private debt are fiat dollars. But I would like to take one debt out of your equation, and that is the so-called national debt at the Fed. It doesn’t exist.
    I came to this conclusion originally as a student of MMT when I became enamored with the trillion dollar coin solution to the national debt at the Fed. But as I studied the question further and tried to get more understanding of the details of the process by which the Fed acquired the securities from the banks, I began to have my doubts. Could the Secy of Treasury use the $1 trillion coins to buy back the securities if the securities were already redeemed for the United States? No, there would be no authorization for such a purchase because it would amount to buying the securities for the government a second time, and while the first was authorized, Congress would not have authorized a second purchase.
    So, I looked more closely at why the securities at the Fed might be redeemed already for the United States.
    Most of us here are familiar with how the Treasury issues securities to borrow money from banks via a public auction. Banks buy the securities and Treasury gets the money. The securities are a debt of the United States to the banks at this point. But later the banks put the securities back up for sale at the auction and the Fed comes and buys them with money it creates out of thin air. It is not generally acknowledged that with this act the Fed has redeemed the debt of the United States to the banks.
    But then it is generally assumed that the debt has now shifted to the Fed. Now, early on I realized that the Fed was a creation of the United States Congress, and further its use of money created out of thin air was an exercise of Congressional power to create money delegated to the Fed. So, it didn’t come all together for me until a few days ago when I realized that the Fed is an agent, a servant of the United States, and that it was buying the securities not with Fed money but with government money. And then an analogy made it clear what happens.
    Does the Fed have a claim for the Treasury or the taxpayers to pay it the full cost of the securities it has acquired? No. It has no more claim than a bank clerk would have to be paid for the purchase of a security from a customer using bank money. The Fed is an agent, a servant of the United States that is authorized by the United States in the FRA of 1913 as amended to buy and sell securities in the open market. This is just like a bank clerk authorized by the bank to purchase securities from customers for the bank.
    So, just as the bank clerk doesn’t own the securities it has bought and thus can claim a debt be paid it for them, the Fed doesn’t own the securities it has acquired with government money (money created out of thin air). The United States owns the securities.
    But the United States allows the Fed to retain them and to draw upon them for sales of securities to banks to drain money from the banks during inflations. It allows the Fed to purchase securities from banks to augment its pile of securities and also because this introduces newly created money out of thin air into the banking system, to be used to fight deflations. The United States does not owe itself the debt obligation in possessing the securities, because the debt is between the United States and someone else.
    So in conclusion, the Fed has redeemed the debt between the United States and the banks; that makes the money obtained by the Treasury from the banks debt-free money; deficit spending “creates and spends new money”; the United States and not the Fed “owns” the securities acquired for it by the Fed; the United States does not owe itself the debt obligations on the securities it now possesses; neither Treasury nor taxpayers owe the Fed for the securities (except for a transaction fee of 6% of the interest on the securities); and there is no accumulated debt consisting of the securities held at the Fed that the United States or the taxpayers owe to the Fed. There is no national debt at the Fed.
    MMTers will also recognize that the result is equivalent to the Treasury’s issuing its own debt-free money as new money created and spent into the economy. But the use of securities with intermediary banks to manage inflation and deflation is special to the current practice, but nothing would prevent a Treasury-based fiat money system from creating ways of controlling for inflations and deflations.

  26. Hey guys! We of the Economics laity — [could workers, small business owners, and investors call ourselves Economics users or practitioners?] — are hurting for sound advice to defend ourselves and families. We are aware that inflation, unprecedented government debt, currency counterfeiting, bubbles bursting, etc. have consequences! But what consequences? If you will forgive a strained analogy: in the olden days, news reporting was simply Who, What, When, Where, Why and How; in this case, we don’t need the Why.

    I* haven’t understood anything in this thread except the last sentence in Aziz’s original post (“All debt matters.”) and the first two Comments (impermanence’s and Aziz’s about “counterfeit” money creation and bubbles bursting). In contrast, billionaire Jim(?) Rogers lets everyone know that he holds no US (or other weak) currency, and invests in precious metals and basic commodities, e.g., agriculture.

    * With another plea for forgiveness (I don’t want to be seen as a narcissist like Obama): I didn’t “just fall off the turnip truck”: I have served on three Advisory Committees of the National Academies of Science and Engineering.

    • I think that as long as a currency records the value of a hard days work, and is exchanged with someone for their hard days work, then that currency is moral.

      When it is printed and distributed to people who acquire hard days work assets, then something has to give.

      Bartering was the basic transaction, money just smoothed the exchange. If I exchanged an Ox for a toothpick, and you realised what I did after I ate the Ox, would you be upset?

      For this reason I feel that MMT is immoral,and Central Banks attempting to regulate the money supply and its value is predatory. Cheap loans to well connected people meant that they own 10 houses, while a couple on minimum wage has to spend 30% or more of their wages on rent, instead of owning the family home. This came about because of the policy of Greenspan and cheap money.

      • Do you deny that in our system, the government creates new money and will spend it as needed to counter deflation? That takes place with deficit spending. MMT indexes the CPI, the unemployment level, and other indicators of deflation to determine when deficit spending is recommended. So, is it immoral to allow millions of workers to be unemployed because there is not enough money circulating to sustain a level of production that would employ all those currently unemployed workers? I think so. MMT is neutral on morality, but many MMTers seem to be progressives with concern for the welfare of the nation as promoted in the Preamble to the Constitution. MMT will deficit spend when there is deflation. It does not recommend deficit spending (money creation and spending) when there already is inflation and full employment. If there is serious inflation it will recommend cutting spending, increasing taxes, have Fed sell lots of bonds, encourage savings, encourage imports–do what it takes to remove money from circulation until employment and prices begin to decline.

        • You say: “MMT indexes the CPI, the unemployment level, and other indicators of deflation to determine when deficit spending is recommended”

          And I do not believe the Government Statistics. Remember the Government Statistician is paid for by guess what, THE GOVERNMENT.

          Most people during the year buy essentials which have gone up. The goods that have deflated are not purchased with such regularity. So I disagree with the Statistics used.

          MEDIAN wages have declined when compared with Median goods and services purchased.

          But they will never show that statistic, as it will cause wage inflation and an increase in Government benefits.

          I study Statistical Mathematics so I know the difference. The media always quotes AVERAGES! The average is pulled up by the 1%! The masses are going backwards! Use the Median!

        • I’m a quantitative psychologist with expertise in multivariate statistics, factor analysis and structural equation modeling.
          You may be right that there are better statistics to use than means, like the median.
          But the point is that there is a potential way to index when to increase monetary inflow into circulation and when to decrease it and even drain it to fight inflation. See my http://stanfrommarietta.hubpages.com/hub/The-hydrology-of-money-flows-or-MMT-and-how-do-we-fill-the-pool-without-overflowing.

  27. Reply to Adam Eran of Feb 21 @ 16:42:22:

    Your first sentence is partially correct — I do know a lot about rice pudding from experience. I also know a lot about Reagan’s presidency for the same reason. [I know little of his off-camera activity before he became a very successful two-term elected CA Governor, a sharp contrast to recent politicians who have fiscally, culturally and economically trashed CA.]

    Approving Iran-Contra was a well-intentioned (patriotic) mistake, and Reagan barely escaped the operation and the coverup. President Kennedy erred similarly in approving a CIA overthrow of the South Vietnamese head of government, and died before he, in my opinion, would have corrected it; USSR seized the moment to proxy-invade, and LBJ made it clear that “I am not going to be the first president to lose a war.” Nixon approved a political crime and got caught. The policy/practice of the Clintons (plural) and Obama administrations was/is “Do anything* that we can probably get away with; if we get caught, our media friends will protect us”.

    Reagan’s defense/foreign policy legacy is, of course, partnering with Margaret Thatcher to peacefully liberate the world from the Soviet empire’s tyranny and threat of nuclear catastrophe. “Everyone” in Washington, including close advisers, warned him not to challenge the USSR and call it “The Evil Empire”, and not to openly challenge “Mr. Gorbachev, tear down this wall!” But he did, and, with emerging pressure from heroes behind the Iron Curtain, the wall and the empire did come down.

    Of course, peaceful cold war victory (peace through strength greater than the Soviet economy could afford) required an expensive rebuilding of our military. Simultaneously, it was necessary to break hyperinflation by sharply hiking interest rates**, which (temporarily) crashed financial markets, businesses, employment, etc. Furthermore, to revive the stagnant economy, tax rate cuts were required which (temporarily) reduced government revenues. So Reagan struck a compromise deal with Democrats who controlled the congress to mitigate the deficit from the above by curbing domestic spending. The Democrats broke their word. But the economy prospered, especially in the 1990’s with world trade boosted by liberated Soviets and the Chinese policy change to capitalism (another story), the Gingrich-Clinton tax cuts and “end of welfare as we know it” (still another story), and the info tech boom.

    Regrettably for the economy and future Americans, “establishment” Republicans (not tea party supported libertarians) do NOT follow Reaganomics — lower tax RATES, growth, jobs, higher tax revenues, jobs, lower government spending, lower deficits, etc. Your slur “despicable opportunist” is, I presume, a holdover from the big government politicians and interest groups who hated the halt (sadly, merely a pause) in our descent into socialism.

    * For example, Hillary’s Vince Foster suicide evidence-tampering and FBI-gate, and Obama’s Fast&Furious and Benghazi.

    ** Credit where credit is due: Carter-appointed Fed Chairman Paul Volker joined with Reagan in administering the bitter medicine.

    • Reply to Buddy Rojek of Feb 22 @ 19:31:44: If you haven’t already, please read my reply (immediately above) to Adam Eran’s diatribe about Reagan. Of course I was not too young to experience* “the politics of the time” nor the foreign affairs/military conflicts. Except for followup jousting with a Democratic congress and press, the Iran-Contra affair was not politics; it was a foreign affairs gamble.

      • * Footnote to above: Both our daughter and future son-in-law worked in the 1976 and 1980 Reagan campaigns. She served as Regional Director of the Reagan administration Department of Health and Human Services. He was an unpaid “Advance Man” accompanying President Reagan on occasional trips throughout the eight years. Neither was privy to the Iran-Contra or other foreign operation.

    • “Approving Iran-Contra was a well-intentioned (patriotic) mistake”… Really? And approving the sale of spare parts for the weapons the U.S. sold the Shah (inherited by the Ayatollahs) that Carter wouldn’t sell them while they held our embassy personnel hostage, was that “patriotic” or “mistaken” too?

      Really, let’s lower the bar for “patriotism” until it’s OK to say “Hey, Luca Brazzi is a psychotic murderer, but he’s *our* psychotic murderer, so everything he does is jake! Let’s be patriotic and endorse his assassinations!”

      The evidence is overwhelming that Reagan administrations officials betrayed their country (apparently “patriotically) by secretly assured the Ayatollahs they’d get a better deal from Reagan, so hold onto those hostages until Carter was out! Literally within 15 minutes of Reagan taking the oath of office the hostages were freed. But he was a traitor in a “patriotic” way! (See Gary Sick’s “October Surprise” for the footnotes here)

      Let’s not forget that 70% of the American work force had a well-funded defined-benefit pension before Reagan took office. With his administration, the relatively obscure and roughly half-as-remunerative (defined contribution) 401K became the rule, and large companies — GE, AT&T, Verizon, etc. — looted their workers’ pension plans to goose corporate profits and CEO compensation. See Ellen Schultz’s “Pension Heist” for footnotes.

      Reagan (like many of the Democrats you mention, including Obama) was an unprincipled opportunist, willing to sell out his country and its founding principles for personal gain. If you don’t get that, I say get back to what you know: rice pudding.

      BTW, crediting Volcker with squeezing inflation out of the economy is disputed by MMT economist Warren Moseler. He says Carter de-regulating natural gas is what did the job. Also your idea that Reagan’s noble gift to the military-industrial (prison-media) complex was what defeated the Soviets is also disputed by many commentators who note that oil prices went from $42/bbl (which is what Russia counted on) to roughly $10, based on the deregulated natural gas, and increases in supply like Alaska’s North Slope coming online, coupled with the demand reduction that the recession wrought.

      There’s a lot more to dispute in your post… the idea that “Morning in America” (the Reagan recovery) was more than an average business cycle recovery with exceptionally low capital investment, for one example. See Krugman’s “Peddling Prosperity” for the footnotes here. He’s not to kind to Clinton, either.

      But the overall tenor of your posts leads me to believe that you’ll discount anything factual, or any citations I make. After all, those are from people with an agenda (http://www.time.com/time/magazine/article/0,9171,1692027,00.html debunks the Laffer curve saying lower taxes increase revenue, for example). You prefer your fairy tales to the reality-based conclusions that are readily available with very little research.

      And this is an all-too-human failing. Even “The Emporer’s New Clothes” notes that after the child pointed out the Emporer’s nakedness, he didn’t go back to the castle to dress, but grimly continued the parade. Max Planck — the discoverer of the quanta of “quantum mechanics” — says “The truth never triumphs; it’s opponents simply die out. Science advances one funeral at a time.”

      …And those scientists who disputed quantum mechanics (now experimentally confirmed within one part in two billion) weren’t dummies. So it’s not intelligence we’re talking about here. Perhaps it’s imagination — which Einstein said was far more important than intelligence.

      Imagine for a moment that you’re mistaken, and Reagan represents the worst America has to offer. Just imagine. No need to agree… It’s possible, no?

  28. Pingback: Optimum Taxation Policy and the Impact of Public Debt Under Modern Monetary Theory | Decisions, Decisions, Decisions

  29. The analysis here is non-sensical. You can’t just look at the leverage/deleveraging of two sectors and ignore the third!

  30. Pingback: Monday Morning Links | timiacono.com

  31. Aziz ignores sectoral balances, which tell us there are 3 ways to grow an economy 1) deficit spending 2) private debt or 3) exports.

    Yes, politicians make all kinds of stupid choices (see Kalecki for an explanation of why those stupid choices usually favor the rich).

    Our job is to point out that a better world is possible.

  32. If you are going to counter MMT, you should at least state its premises correctly rather than arguing against a straw man of your own creation. MMT DOES worry about deficits but in relation to employment and utilization of human resources for the benefit of society.

  33. MMT would discourage deficit spending during a period of rising inflation after full production and full employment have been reached. Right now we are more concerned with encouraging deficit spending to inject new money in the economy because we have been in a long recession.

  34. Does Azizonomics breakdown the so-called national debt into its components? For example a large part of the private sector debt is really private and foreign investors who have bought US Treasury securities because it is lower risk than a private bank depository. US Treasury securities are just safe time deposits, like bank CD’s, placed in accounts at the Fed. They are not used to fund government operations.
    The Fed which holds their time deposit accounts (like CD’s) will just return the principal on deposit and add any earned interest, which it can just create out of thin air. This goes on all the time.

    Deficit spending is conducted with Treasury issuing marketable securities and selling these at public auction to banks. Treasury spends the money it gets from the banks on the deficit. When the securities mature, the banks can put them up for sale again at the public auction and the Fed will buy them. That will redeem the debt to the banks and make the deficit spending money debt-free money. Furthermore the Fed buys them with money it creates out of thin air, new money. Because of the fungibility of money, we can also regard the money Treasury got from the banks for these securities as the new money entering the economy. The banks in the meantime are back to their original state with restored reserves from the Fed’s purchase of the securities from them. Hence deficit spending is money creation and spending. And the Fed never physically buys any securities directly from the Treasury.

    Or the Treasury can roll-over the debt on the marketable securities by replacing mature securities with new securities with new interest and redemption dates. This can go on indefinitely.

    Intragovernment securities like the those at the Social Security Trust Fund cannot be bought directly by the Fed. But that is no problem if the Treasury issues new marketable securities to get the money to pay the Trust Funds. (When paid with this money the Trust Fund debt is redeemed). The banks buy them, then later can put them up for auction and the Fed will buy them, redeeming the government’s debt to the banks. Fed will buy with money it creates out of thin air.

    So there is really no problem national debt. It is being paid down all the time, or can be paid down piece by piece as needed.

    And taxpayers are not needed to pay off the national debt. This is the basic fallacy with these national debt fear mongers. And no new
    legislation is needed to do what is being done now.

  35. Japan is in “depression”? What do you base that on? Japan’s GDP per capita growth regularly outpaces Western countries. True, Japan is unique in that its population is shrinking. So looking only at GDP, an aggregate figure, gives a distorted picture. First-time visitors to Tokyo are usually blown away and then confused: “Where’s the recession?!” they ask. Housing, infrastructure, healthcare, etc have all improved significantly in the last couple of decades. Joblessness is 3.6%, and there’s a lot fewer homeless around.

  36. However, even diabetic patients who may have excellent glucose levels
    (glucose) control can develop diabetic neuropathy.
    Some types of herbs have been known to help decrease pain levels.
    Exercise and Diet For people with diabetes and neuropathy, these things ‘ exercise and diet
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  37. Une personne qui n’est pas confrontée à un problème de poids ne se
    rend pas compte de ce que cela représente que de vivre au quotidien avec des kilos en trop.

  38. Most of the ‘government debt’ is really not for borrowing to fund government operations, but for obligations to return to investors the dollars they have paid the government for US Treasury securities. Usually that money is not
    from banks but private and foreign investors. Their dollars are sequestered away in security accounts at the Fed in the form of the securities themselves
    as book entries in ledgers at the Fed. The sale of these securities are actually potentially deflationary because they are not in circulation. Inflation and deflation only occurs when dollars are being used to buy goods and
    services, and more (less) money exists in the economy in someone’s hands than is needed to clear the market of those goods at stable prices. So those with the excess dollars can bid up the price on things bought. If not enough money is circulating, then prices must drop to clear the market. But then
    people who borrowed previously find they are under water, because when
    prices drop businesses have to let go some of their employees or lower the wages they pay, and people no longer have the incomes they need to pay off their loans.

    But I assume you are interested in debt from its inflationary/deflationary impacts on the economy. You want to understand when bubbles in the
    economy will bust, creating problems for the economy.

    I think private debt is much more important than government debt these days. Government debt figures are grossly inflated by investor purchases
    of US securities. And the Fed by buying up US securities held at banks by
    Quantitative Easing has quietly been paying off the government’s debt to the banks. The Fed usually buys mature or near mature securities. But then
    as the securities mature in Fed’s hands, the Fed goes to the Treasury and swaps them for new securities. That completely redeems the debt on the old,mature securities in the swap. The mature securities are extinguished by the Treasury.

    The new securities, while technically computed in Congress’s formula for national debt, are not issued yet by the Fed, while the Fed technically holds the new securities in its name, they just represent lines set aside in the books for when those securities will be sold to the public by the Fed. It will do so, mostly when the economy becomes inflationary. By selling securities to banks, investors, it will draw money for the time being out of circulation in the economy, thus cooling off the inflation as far as the government’s deficit-created money is concerned.

    What economics needs to be concerned with is private created debt. When banks lend, they create dollars and lend them to borrowers. If banks are
    not prudent, but get involved in things like, subprime mortgages, CDO’s, derivatives, they actually are gambling with those things, and creating a bubble they hope to get rich on. The neoclassical economics did not see the last Great Recession coming from excess public debt, and economics needs to formulate theories to account for such events. Government needs to regulate private banks to prevent bubbles and their collapse in the private sector. The government sector is rather well under control.

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