Re: NYTimes.com Article: A Fiscal Train Wreck

[Warren Mosler <mosler@xxxxxxxxxxxxxx>]

Thanks!  Check out Tom's new article, 'Paying for the
War' just added to www.mosler.org and let me know what
you think, if you get a chance.

Warren

--- pdavidso <pdavidso@xxxxxxx> wrote:
> 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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> >>
> >>
> >
> >
> >=====
> >http://www.mosler.org
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> >
> >Primary email contact:  wmosler@xxxxxxxxxx
> >
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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
>


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