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05 May 2012


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"Steve is right and your alarmist friend needs to find out how the the monetary system works operationally before he reads books that he doesn't have the background to judge accurately"

I caution you against this kind of nastiness. Understand? pl



"What happens if a whole country – a potential ‘region’ in a fully integrated community – suffers a structural setback? So long as it is a sovereign state, it can devalue its currency. It can then trade successfully at full employment provided its people accept the necessary cut in their real incomes." This is from the 1992 Lynne Godley article that you linked to. My point overall would be that the kind of massive devaluation that you seem to think acceptable would destroy the fabric of American life through reduction of the standard of living to the point that collapse of the xsisting order would be likely. pl



Unlike involuntary default or bankruptcy, inflation, or even hyperinflation, certainly is something that can befall, and indeed be brought on by, a government that, like ours, issues its own non-convertible currency. On that much, I agree.

In particular, such a government can err by spending too much of its own currency into existence, or by taxing too little of it out of existence, at a time when the private sector's demand for goods and services is already outstripping the ability of the economy to respond by increasing supply.

But with respect: The chances of this happening to the U.S., now or anytime in the foreseeable future, seem to me very remote. On the contrary, our economy is still running disastrously far below capacity and, if present trends are not interrupted, will continue to do so for years to come. That indeed is the entire reason for our peristent high unemployment--and thus the primary reason for our 'large' deficits as well.

It's of course conceivable that someday we may find ourselves with the exact opposite problem (excessive demand), and hence with the need to either cut government spending, or raise taxes, or both, to head off demand-pull inflation. Compared to where we now sit, that would be a 'good problem to have.'

But that day, if it ever comes, won't be hastened by 'printing money' (e.g., by purely financial operations such as the Fed swapping Treasuries for Reserves). Nor will it be heralded by any particular size of deficit or level of public debt. The only measure that matters here is that of the real capacity of the economy to produce, relative to total demand (spending), both public and private.

I must add that I am convinced, in part due to your instruction, that there are several good reasons to conclude our military involvement in Afghanistan. You have articulated these far more ably and credibly than I, for one, ever could, for which I am grateful. But affordability, at least in the narrow financial sense, is not, God help us, one of those reasons.


I have no problem with your suggestions save SS, as it's been pointed out it already is means tested by being taxable for higher incomes. However, these are just band-aids on the real problem. There's a simple accounting identity:

trade deficit = public debt + private debt

As long as we keep running large trade deficits, either the government or businesses and individuals (or both) will need to increase their debt load. It's really as simple as that, we can't cut spending or tax ourselves out of the problem. If we can't run a trade surplus we can't pay off the foreign held debt we've accrued.

My suggestion is to eliminate the fraud of "free trade" (which is anything but - see http://hts.usitc.gov/ and http://farm.ewg.org/ to see a small portion of what free trade means today).


This would require a Congress comprised of rational actors.

I just don't see that happening.


No, sir, that's not what I'm talking about at all. Our problems stem not from government deficits but from trade deficits. Even if the federal government were to balance its budget we would still need to print to pay for the trade deficits. If you solve the trade deficit problem then the government budget problem will largely go away.

The dollar is way overvalued. Of course, if you're reading Austrians or even worse, modern day Republican economists (which I assume you are noting your use of the term 'fiat'), then you'll hear next to nothing about trade. When was the last time we had a trade surplus? How can the value of your currency not decline in the face of structural trade deficits? If you insist on keeping your currency overvalued then how do you fix these structural trade deficits?

An acquaintance of mine had a line in a movie one time that went something like this, '... work the problem people, work the problem'. It helps if the problem is correctly identified.


With all due respect - if we had to stop importing Chinese trinkets the 'existing order' would collapse? If that's the case then don't we have far larger problems than governmental deficits?

Devaluation is inevitable given our trade policies of the past which have been a colassal failure from the American point of view. Putting it off means you can't even begin to address the other problems.



This has turned into a typical economics argument with many opinionsand all masquerading as "sacred truth." pl

William R. Cumming

Well PL I guess you disagree with former VP Cheney who stated that deficits don't matter or some such trash talk.

What I find most interesting is that Treasury Secretaries who announce that they favor a strong dollar are still retained and those who wobble are fired. In fact since the devaluation of the dollar by Nixon [as good a starting point as any} the 1970 dollar is now worth less than $.05! Few understand the implications of this fact just as few understand how successfully the US paper money is counterfeited world wide.

But the story I really love is Robert Rubin in a C-130 going to Russian in his official capacity supposedly t exchange new $100 bills for worn out ones floating around in Russia. This was just before a certain politician was elected. Well the new bills were successfully delivered but somehow the old bills never made it back to US furnaces.

Even though foreign contributions of USA Presidential campaigns are against the law, whether by governments or other organizations, or individuals, I guess the USA does not feel that is an appropriate policy for its own foreign policy.

And by the way I estimate up to 80% of all expenditures of funds by US forces and auxiliaries in Iraq and Afghanistan were siphoned off by corruption [not that anti-financial corruption training is not a part of civil affairs education] would it not have been cheaper before and even now just to cut our USA assistance to those two countries to 20% of that currently being provided and still get the same actual bang for the buck. The same ratio probably applies in MENA generally for USA financial assistance and in Egypt specifically. As you have pointed out what are the Egyptian military really designed to prevent other than revolutions?

WE do know that about 40% of Chinese military expenditures are on maintaining internal control not for fighting external enemies.

Morocco Bama

Economics is a smokescreen. If you follow this to its rightful roots, you quickly realize that there is no intention to ever pay down the deficit. I've mentioned the short-termed philosophy amongst the majority of the Plutocrats these days on another thread, and that is in play as we speak. Presumably, if you allow the Bush tax cuts to sunset, it would necessarily follow that the Plutocrats would have to help pay a more substantial share of the debt, assuming of course that they didn't find another way around it which they are very capable of doing. But let's say that's a correct assumption for the sake of argument. Well, you now have the Plutocrats paying a significant share of their "wealth" to ChiCom, and there's no chance in hell they are going to let that happen. They will not agree to return their arbitraged gains. Currently, because of deregulation, the Plutocrats are able to take all that recently accelerated accumulated "wealth" and accelerate it even further and faster with speculation in everything under the sun, earning them significant returns for little or no effort on their part, but with life and death consequences for those living on the margins. In effect, that speculation becomes a regressive tax via inflation for those struggling to get by, on top of having cuts to the few government bennies to which those on the margins, the legions, have become accustomed.

It's aptly described by what I refer to as The Quickening and it goes hand in hand with the implications of the fast-approaching Singularity. We've reached the threshold, the crucible, if you will. Once we pass through, there's no going back, and the momentum is forcing our hand. The crucible will squeeze Humanity to its breaking point, but the forces, known and unknown, which have brought us to this point are powerful and are exerting both a push from behind and a pull from ahead, and any countervailing forces produced by Humanity alone are too weak and too little, it appears, to stem the tide.

Few things will ultimately remain from our previous existences, and the things that do, the artifacts, material and immaterial, will be unrecognizable as such in their new context, but one thing that will surely remain in tact is that powerfully perpetual axiom, "you cannot have your cake and eat it, too." But, you can pretend.


I will post more when not on my mobile but Yeats' lines have never been more true. Your points are excellent, Sir, but no one is willing to enact them because of the entrenched interests that think, among other things, you can have socialized medicine and open borders.

I think that things are coming to a head. Hopefully you'll be around to help guide whatever society follows, Sir.


Amileoj and Martin Wales

Even in the late 50s and early 60s when I was an undergraduate, the name of Keynes was abroad in the land. I actually have heard of him. I see that you have also. I understand the principals and principles of his work and agree with them within certain boundaries. I think that your view of the federal budget and the "money" in the federal budget is that deficits are largely meaningless and that the numbers are really just "markers" that indicate progress or the lack of it in inflating, deflating or reflating the economy as may be desirable. All true, but only true IMO until that view of "the numbers" collides with political reality and the realiy of international trade. One of you writes that you cannot imagine that the US would reflate the economy to a point at which hyperinflation becomes a big problem resulting in a devaluation of the US dollar so that international trade can only be financed by a valuation of the dollar that beggars most Americans. Actually, a lot of us uninformed people can easily imagine such a situation. We think that the present drive to continue to apply Keynesian principles leads directly in that direction. Of course, to get to that point of reflation a further massive stimulus program would be needed. You will never see that. The Congress, influenced by people like me, will never pass it. These possibilities are the most likely case. 1- Fear of massive devaluation of personal assets and income and 2- A resulting refusal to pass any more stimulus bills is real. That being the case, is not my program the best alternative? pl

steve g

Re: The Quickening
Agree with your analysis. From what
I have read the Plutos are pulling
out of Europe and getting into cash.
Spain will be the domino that may or
may not bring these events to the
singularity of no return as we know it.
Any suggestion the US is immune from the
coming catastrophe is naive at best. The
trillions of sham balance sheets will be
exposed sooner or later. The question might
be a hard or soft shredding of socities.

Byron Raum

All of your calm is based on the foundation of "We control the reserve currency of the world." How long do you think this is going to stay the case?

Do you think the Chinese, the Russians, the Arabs, the South American states, not to mention the Iranians, do not consider this fact to be an existential threat, and are working hard to mitigate this to the extent that it is possible for them to do so?

Are you arguing that economies of over 5 billion people are powerless to work against this, and that this will continue to be so in perpetuity?

In the entire world, we are the only country tha has an active political party working hard to reduce the power of our government, and thereby, the power of our own country.

Will Reks

What is your opinion of the failure of austerity policies in Europe? That is what the right is proposing as the solution for our own debt crisis.

The Paulites would say they are not going far enough.

If implemented such policies would mean massive short-term pain. Long-term I don't know.

I don't have an issue with any of your solutions other than I think the cap on social security taxes should be lifted on incomes above 106,000.

Also, the major cause of future debt will be the ever-increasing cost of our healthcare system. The answer is not to shift those costs to people. It would be back-breaking. We need to find a way to control those costs Canada/Europe style or quasi private/public models like that of Singapore/Taiwan.

Keynesian stimulus is probably a nonstarter in Congress. However, our infrastructure needs amount to $2 trillion in repairs and modernization. The private sector is not suited for this.


In addition to jonst's objections, means testing will likely add another layer of bureaucracy to the program and make it more, not less, expensive.

Under other circumstances I might be open to raising the official retirement age, but we should be making it easier for older people to retire and make room for younger workers, not less so. It's not as if 65 is particularly young, especially if you don't have a comfy office job.

Paul Deavereaux

Yes, quite correct. Referring to the original post, timid steps such as you list are meant to keep the place afloat for another couple years. Fumbling around, worrying about a loose button when the entire shirt is ready to fall off your back isn't gonna fix anything.

Financial jerrymandering is partly what got us into this mess, that and the ultra-rightwing capitalists who would have us licking their boots at 5 cents an hour and calling it 'market forces' at work.


Col: People confuse our development deficit with a stimulus deficit. We have been dismantling our productive economy for decades and we wonder why we keep having relatively jobless recoveries.

We have simple, hard work to do. America needs "redevelopment", not short-term stimulus.


Col. Lang, with respect, your program is a good start, but it cannot solve the problem.

That problem is that American economy is fast falling behind in terms of productivity and efficiency and that unless major economic reform is implemented the decline in American standards of living will accelerate.

Even the Pentagon is aware that without a strong economy its capabilities will be compromised. The issue is that American Macroeconomic reform is stalled stone dead. If you are standing still, you are going backwards.

Reforming education and healthcare are just the tip of the iceberg. Every American system is now sclerotic as far as I can tell - justice and prisons, financial regulation, etc. etc. Each and every one has its special interest groups who are engaged in rent seeking behaviour - with great success. This is killing you.

Take environmental regulation/global warming for example. It was an American businessman Twenty Five years ago that taught pollution = wasted money. The most profitable firms in an undistorted free market economy are the ones that pollute THE LEAST.

To put that another way; whole swathes of the developing world are bypassing the coal/oil energy route and going straight to Solar or other alternatives - not much infrastructure required either. Then there are the Germans with their maddening recycling and energy savings laws. What that translates into is that one day, after the next energy shock, American companies suddenly find themselves uncompetitive because of excessive energy costs.

In a telling development just announced, Cessna is going to build Caravans in China. They already bought Continental engines and Cirrus Corp. They are going to start taking on the American Aerospace industry - arguably the jewel in the crown, and that Sir is a major export earner that must now be regarded long term as under threat.


No, your program is the absolute worst thing we could do. God help us if it comes to pass.

The math doesn't lie. Listen to it.


There is no opinion needed when it comes to austerity policies. They will fail just as they have everywhere they have been tried. I find it somewhat humorous that people who use math/physics to watch HDtv off satellites, use computers, talk on smartphones, go to the moon with slide rules, etc. then tell us the same mathematical equations are wrong when it comes to economics.

It's really kind of sad that so many of us are mathematically and scientifically functionally illiterate. Were that not the case we wouldn't even be having this discussion.

Tim Vincent

Where do you buy your drugs?
I want to buy the same.
I'll never have another serious thought.

Mark Gaughan



Walrus "... fast falling behind in terms of productivity and efficiency..." Where is this true? Productivity per labor hour is higher than ever.

Reform education? That is a state level matter. All the Republican presidential candidates have said they want to eliminate the (Federal) Department of Education. States from Florida to California are shifting the full cost of education to the individual student. That is the only reform being considered.


This has been on the cards since 2005 and prudent folk who were in the know started getting debt free and biasing towards cash and foreign assets back then.

You may have heard of the rash of foreign "Private Equity" deals back in 2006/2006. Those were the big guys getting their cash out of America. Our airline - Qantas and our biggest supermarket chain were targets of such bids, but they didn't quite come off.

Since then the boyze have been in and out of oil and grain several times. The sharemarket and bondmarket is rigged and prices are moving on low volumes, as Wall Street tries to save itself from what is coming.

My advisors reckon physical gold is good at present. They say the game is not to make any money - just to lose as little as possible. Europe has enough financial resources to save itself - if it has the political will to do so. However if I was a hardworking German, I guess I'd be less enthused about bailing out "Lazy" Greeks, etc. But as Krugman points out, economics is not a morality play.

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