Re: NYTimes.com Article: A Fiscal Train Wreck

[pdavidso <pdavidso@xxxxxxx>]

I think your reply to the Krugman article is great Warren!

Paul

>===== Original Message From Warren Mosler <mosler@xxxxxxxxxxxxxx> =====
>--- fthayer@xxxxxxxx wrote:
>> This article from NYTimes.com
>> has been sent to you by fthayer@xxxxxxxxx
>>
>>
>> You should critique this and send to
>> pkrugman@xxxxxxxxxxxxxx
>
>FRED,
>
>HOW ARE YOU???!!!
>
>CC'd to the good Dr., but he's probably too far 'out
>of paradigm' to expect a response.
>
>>
>> fthayer@xxxxxxxx
>>
>>
>> A Fiscal Train Wreck
>>
>> March 11, 2003
>> By PAUL KRUGMAN
>>
>>
>> With war looming, it's time to be prepared. So last
>> week I
>> switched to a fixed-rate mortgage. It means higher
>> monthly
>> payments, but I'm terrified about what will happen
>> to
>> interest rates once financial markets wake up to the
>> implications of skyrocketing budget deficits.
>
>MUCH LIKE JAPAN.  DEBT TO GDP 5X THE US, 7%
>ANNUAL DEFICITS, DOWNGRADED TO JUNK, YET 3 MOS
>JGB'S FUND AT .0001$ AND 10 YEAR JGB'S AT .7%.
>
>MORAL:  RATES GO UP IN US ONLY IF FED RAISES THEM
>OR MARKETS EXPECT FED TO RAISE THEM.  NOT BECAUSE
>OF DEFICITS PER SE.
>>
>> >From a fiscal point of view the impending war is a
>> lose-lose proposition. If it goes badly, the
>> resulting mess
>> will be a disaster for the budget.
>WE NEED A FED DEFICIT OF AT LEAST 5% OF GDP, MAYBE
>7%+ TO RESTORE NON GOVT NET FINANCIAL 'SAVINGS'
>AND SUFFICIENT AGGREGATE DEMAND TO USE UP OUR
>EXCESS CAPACITY (ESPECIALLY LABOR!).  REMEMBER
>GOVT DEFICIT = NON GOVT SURPLUS OF NET FINANCIAL
>ASSETS.
> If it goes well,
>> administration officials have made it clear that
>> they will
>> use any bump in the polls to ram through more big
>> tax cuts,
>> which will also be a disaster for the budget. Either
>> way,
>> the tide of red ink will keep on rising.
>
>IT WILL RISE ANYWAY, JUST A QUESTION OF HOW.
>PROACTIVELY VIA SPENDING INCREASES OR TAX CUTS,
>OR THE UGLY WAY- FALLING REVENUES AND INCREASED
>TRANSFER PAYMENTS AS INSUFFICIENT AGG DEMAND
>BITES HARDER.
>
>>
>> Last week the Congressional Budget Office marked
>> down its
>> estimates yet again. Just two years ago, you may
>> remember,
>> the C.B.O. was projecting a 10-year surplus of $5.6
>> trillion.
>
>IN OTHERWORDS, A DROP OF $5.6 T IN NON GOVT SAVINGS!
>THAT WAS A RIDICULOUS PROPOSITION!  NON GOVT SAVINGS
>IS THE 'FINANCIAL EQUITY' THAT SUPPORTS THE CREDIT
>STRUCTURE.
>
> Now it projects a 10-year deficit of $1.8
>> trillion.
>
>I WOULD GUESS A 'NEUTRAL' DEFICIT FOR 10 YEARS
>WOULD BE ABOUT 3% OF GDP, WHICH IS ABOUT 5 TRILLION
>(DON'T HOLD ME TO THE EXACT MATH HERE!)
>
>>
>> And that's way too optimistic. The Congressional
>> Budget
>> Office operates under ground rules that force it to
>> wear
>> rose-colored lenses. If you take into account - as
>> the
>> C.B.O. cannot - the effects of likely changes in the
>> alternative minimum tax, include realistic estimates
>> of
>> future spending and allow for the cost of war and
>> reconstruction, it's clear that the 10-year deficit
>> will be
>> at least $3 trillion.
>
>FOR SURE, AS ABOVE, JUST A QUESTION HOW, NOT HOW MUCH,
>OVER TIME.
>
>>
>> So what? Two years ago the administration promised
>> to run
>> large surpluses. A year ago it said the deficit was
>> only
>> temporary. Now it says deficits don't matter. But
>> we're
>> looking at a fiscal crisis that will drive interest
>> rates
>> sky-high.
>
>ONLY IF THE FED RAISES THEM.
>
>>
>> A leading economist recently summed up one reason
>> why:
>> "When the government reduces saving by running a
>> budget
>> deficit, the interest rate rises." Yes, that's from
>> a
>> textbook by the chief administration economist,
>> Gregory
>> Mankiw.
>
>IT'S BACKWARDS, WITH ALL DUE RESPECT, TO THE DYNAMICS.
>WHEN GOVT RUNS A DEFICIT, NON GOVT FINANCIAL SAVINGS
>GOES UP BY THAT EXACT AMOUNT, TO THE PENNY, AS A
>MATTER OF ACCOUNTING.  IT'S AN ACCOUNTING IDENTITY!!!
>
>>
>> But what's really scary - what makes a fixed-rate
>> mortgage
>> seem like such a good idea - is the looming threat
>> to the
>> federal government's solvency.
>>
>> That may sound alarmist:
>IT IS!  GOVT SPENDS ONE WAY ONLY- BY CREDITING
>A MEMBER BANK ACCOUNT.  THERE IS NO SOLVENCY ISSUE.
>
> right now the deficit,
>> while huge
>> in absolute terms, is only 2 - make that 3, O.K.,
>> maybe 4 -
>> percent of G.D.P. But that misses the point.
>AGREED!  (FOR A DIFFERENT REASON, OF COURSE!)
>
>
> "Think
>> of the
>> federal government as a gigantic insurance company
>> (with a
>> sideline business in national defense and homeland
>> security), which does its accounting on a cash
>> basis, only
>> counting premiums and payouts as they go in and out
>> the
>> door.
>
>EXCEPT IT 'ISSUES' IT'S OWN CURRENCY!
>
>
> An insurance company with cash accounting . .
>> . is an
>> accident waiting to happen." So says the Treasury
>> under
>> secretary Peter Fisher;
>
>AGREED, WHEN IT'S LIABILITIES ARE IN SOMEONE ELSE'S
>CURRENCY!
>
> his point is that because of
>> the
>> future liabilities of Social Security and Medicare,
>> the
>> true budget picture is much worse
>YOU MEAN 'HIGHER' I PRESUME...
>
> than the
>> conventional
>> deficit numbers suggest.
>>
>> Of course, Mr. Fisher isn't allowed to draw the
>> obvious
>> implication: that his boss's push for big permanent
>> tax
>> cuts is completely crazy.
>
>NOT.
>
> But the conclusion is
>> inescapable. Without the Bush tax cuts, it would
>> have been
>> difficult to cope with the fiscal implications of an
>> aging
>> population.
>
>WHAT DOES 'FINANCE' IN ONE'S CURRENCY OF ISSUE
>HAVE TO DO WITH THE DEPENDENCY RATIO????????
>
> With those tax cuts, the task is simply
>> impossible.
>
>A SOCIAL SECURITY PAYMENT CONSISTS OF GOVT CREDITING A
>MEMBER BANK ACCOUNT.  THAT'S ALL IT CAN BE.  LIKE A
>TEACHER HANDING OUT GOLD STARS....
>
> The accident - the fiscal train wreck -
>> is
>> already under way.
>
>WHAT'S GOING TO HAPPEN?  TSY CHECKS GOING TO BOUNCE?
>FED EMPLOYEE GOING TO GET AN ELECTRIC SHOCK WHEN HE
>TRIES TO CREDIT A MEMBER BANK ACCOUNT?????
>
>>
>> How will the train wreck play itself out?
>
>DEPENDS ON THE UNDERSTANDING OF THOSE THEN IN
>CONTROL.  INFLATION MAYBE.  BUT NO BOUNCED GOVT CHECKS
>FOR SURE.
>
>Maybe a
>> future
>> administration will use butterfly ballots to
>> disenfranchise
>> retirees, making it possible to slash Social
>> Security and
>> Medicare.
>
>THEY MAY INDEED USE THESE TYPES OF ARGUMENTS TO CUT
>BENEFITS!  THEY ALREADY ARE!  YOU AND YOUR FIXED
>EXCHANGE RATE ANALYSIS ARE PART OF THE PROBLEM, NOT
>PART OF THE ANSWER!
>
>
> Or maybe a repentant Rush Limbaugh will
>> lead the
>> drive to raise taxes on the rich. But my prediction
>> is that
>> politicians will eventually be tempted to resolve
>> the
>> crisis the way irresponsible governments usually do:
>> by
>> printing money, both to pay current bills and to
>> inflate
>> away debt.
>
>THERE IS ONLY ONE WAY FOR GOVT TO SPEND.  THEY
>CREDIT AND ACCOUNT.  THERE IS NO DISTINCTION BETWEEN
>'PRINTING MONEY' AND ANY OTHER WAY OF SPENDING ONE'S
>OWN CURRENCY.  THIS IS A FLOATING EXCHANGE RATE
>REGIME- THE CURRENCY IS NON CONVERTIBLE- GET WITH THE
>PROGRAM!!!
>>
>> And as that temptation becomes obvious, interest
>> rates will
>> soar.
>
>ONLY IF THE FED RAISES THEM...
>
>It won't happen right away. With the economy
>> stalling
>> and the stock market plunging, short-term rates are
>> probably headed down, not up, in the next few
>> months, and
>> mortgage rates may not have hit bottom yet. But
>> unless we
>> slide into Japanese-style deflation,
>
>THE LAST MAJOR NATION TO ALLOW ITS BUDGET TO GO INTO
>SURPLUS AND WIPE OUT HEAPS OF PRIVATE SECTOR NET
>FINANCIAL EQUITY WAS JAPAN IN 1987-1982...
>
> there are much
>> higher
>> interest rates in our future.
>
>JUST AS SOON AS THE FED IS PROMPTED TO ACT.
>>
>> I think that the main thing keeping long-term
>> interest
>> rates low right now is cognitive dissonance.
>
>NOT SUPPLY AND DEMAND???????  WHO WOULD HAVE THOUGHT..
>
> Even
>> though
>> the business community is starting to get scared -
>> the
>> ultra-establishment Committee for Economic
>> Development now
>> warns that "a fiscal crisis threatens our future
>> standard
>> of living"
>
>NOW YOU SAY IT THREATENS REAL OUTPUT???  WITH TODAY'S
>LACK OF AGG DEMAND THE OUTPUT GAP IS MASSIVE AND
>GROWING.  AND YOUR THINKING SERVES TO PERPETUATE IT.
>
>
> - investors still can't believe that the
>> leaders
>> of the United States are acting like the rulers of a
>> banana
>> republic. But I've done the math, and reached my own
>> conclusions - and I've locked in my rate.   
>>
>FRED, THIS IS A DISGRACE TO THE ECONOMICS PROFESSION.
>
>BEST,
>
>WARREN
>
>
>>
>>
>>
>>
>http://www.nytimes.com/2003/03/11/opinion/11KRUG.html?ex=1048390999&ei=1&en=a
845d2139fa4e693
>>
>>
>>
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>
>
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Paul Davidson
Editor, Journal of Post Keynesian Economics
University of Tennessee
SMC 503
Knoxville, Tennessee 37996-0550
phone # (561)369-1951; fax #(561)369-1951;
email pdavidson@xxxxxxx
http://econ.bus.utk.edu/davidsonextra/Davidson.html