Bond Vigilantes Could Target US: Roubini


Economist Nouriel Roubini on Wednesday voiced concern over a compromise on extending tax cuts struck by US President Barack Obama and Republican leaders, saying the agreement could expose the US to bond vigilantes who will drive up the price of yields.

Bond vigilantes – the term was coined by economist Ed Yardeni in the 1980s to describe major investors who demand higher yields to compensate for the perceived risks resulting from large deficits – could derail the country’s precarious recovery, some economists say.

Roubini, who has been dubbed Dr Doom since he accurately forecast the latest financial crisis, said on Twitter: “Obama-GOP tax deal costs $900 billion over two years. US kicking the can further down the road. Are bond vigilantes starting to wake up?”

Republican leaders and the White House agreed earlier this week to extend tax cuts on all income groups for two years and extend unemployment benefits in a deal which they hope will spur economic growth and cut unemployment.

Roubini is not alone in thinking the deal could worsen the US deficit and put the country at risk.

Chinese central bank adviser Li Daokui said on Wednesday the fiscal health of the United States was worse than Europe’s, and that the dollar had so far been shielded from trouble because markets are still focused on debt-laden European countries.

US bond prices and the dollar would fall when the European situation stabilizes, Daokui said.

Mosler: Dec 8, 2010

As a kid growing up I would have thought big time university professors would know better than this.

It should be obvious to him that markets follow expectations of future Fed policy, they don’t cause it. The fed funds rate changes only when the Fed votes to change it, and the NY Fed has a good enough understanding of its own monetary operations to implement the FOMC’s will. The fact that under Geithner they never could hit a fed funds target is another story for another time, but rest assured it had nothing to do with bond vigilantes.

Yields are probably going up for two reasons. The first is the expectation that fiscal expansion does work and therefore the Fed is more likely to hike that much sooner. Note that GDP forecasts being raised by most all economists, who also were ready to lower forecasts if the tax cuts are allowed to expire.

The currency is a public monopoly, and as a simple point of logic (not theory or ideology) a monopolist sets two prices. One is how the item exchanges for itself, what Marshall called the ‘own rate’ and for the currency is the interest rate.

In other words, the Fed/govt. sets the entire term structure of risk free rates, one way or another, whether it likes it or not and/or knows it or not.

A monopolist also sets the terms of exchange for his item vs all other things, which for the currency is called the ‘price level’.

In other words, the price level is necessarily a function of prices paid by govt. when it spends, also whether it knows/likes it or not.

Chinese liquidity drill

Mosler:  June 26, 2013

With floating fx, it’s necessarily about price (interest rate) and not quantity.

That includes China’s ‘dirty float’, a currency not convertible on demand at the CB, but with periodic CB market intervention.

Loans necessarily create deposits at lending institutions, and they also create any required reserves as a reserve requirement is functionally, in the first instance, an overdraft at the CB, which *is* a loan from the CB.

So from inception the assets and liabilities are necessarily ‘there’ for the CB to price.

Liquidity is needed to shift liabilities from one agent to another.

For example, if a depositor wants to shift his funds to another bank, the first bank must somehow ‘replace’ that liability by borrowing from some other agent, even as total liabilities in the system remain unchanged.

That ‘shifting around’ of liabilities is called ‘liquidity’.

But in any case at any point in time assets and liabilities are ‘in balance.’

It’s when an agent can’t honor the demand of a liability holder to shift his liability to another agent that liquidity matters.

And if a bank fails to honor a depositor’s request to shift his deposit to another institution, the deposit remains where it is. Yes, the bank may be in violation of its agreements, but it is ‘fully funded.’

The problem is that to honor its agreements to allow depositors to shift their deposits to other banks, the bank will attempt to replace the liability by borrowing elsewhere, which may entail driving up rates.

Likewise, banks will attempt to borrow elsewhere, which can drive up rates, to avoid overdrafts at the CB when the CB makes it clear they don’t want the banks to sustain overdrafts.

The problem is that only the CB can alter the total reserve balances in the banking system, as those are merely balances on the CB’s own spread sheet. Banks can shift balances from one to another, but not change the total.

So when the total quantity of reserve balances on a CB’s spreadsheet increases via overdraft, that overdraft can only shift from bank to bank, unless the CB acts to add the ‘needed’ reserves.

Or when one bank has excess reserves which forces another into overdraft, and the surplus bank won’t lend to the deficit bank.

This is all routinely addressed by the CB purchasing securities either outright or via repurchase agreements. It’s called ‘offsetting operating factors’, which also include other ‘adds and leakages’ including changes in tsy balances at the fed, float, cash demands, etc.

And when the CB does this they also, directly or indirectly, set the interest rate as they do, directly or indirectly, what I call ‘pricing the overdraft.’

So to restate, one way or another the CB sets the interest rate, while quantity remains as it is.

And those spikes you are seeing in China are from the CB setting rates indirectly.

The evidence from China is telling me that the western educated new kids on the block flat out don’t get it, probably because they were never told the fixed fx ‘monetarism’ they learned in school isn’t applicable to non convertible currency???

In any case the CB is the monopoly supplier of net reserves to its banking system and therefore ‘price setter’ and not ‘price taker’, and surely they learned about monopoly in school, but apparently/unfortunately have yet to recognize their currency itself is a simple public monopoly?

Thinking back, this is exactly the blunder of tall Paul back some 33 years ago. He made the same rookie mistake, for which he got credit for saving the US, and the world, from the great inflation of his day.

However, the fact that he made it worse, vs curing anything is of no consequence.

What matters is how the western elite institutions of higher learning spin it all…


Saudi Arabia cuts all oil prices to U.S., Asia – Bloomberg (OIL)

Mosler: Dec 4, 2014

Crude pricing

The Saudis are the ‘supplier of last resort’/swing producer. Every day the world buys all the crude the other producers sell to the highest bidder and then go to the Saudis for the last 9-10 million barrels that are getting consumed. They either pay the Saudis price or shut the lights off, rendering the Saudis price setter/swing producer.

Specifically, the Saudis don’t sell at spot price in the market place, but instead simply post prices for their customers/refiners and let them buy all they want at those prices.

And most recently the prices they have posted have been fixed spreads from various benchmarks, like Brent.

Saudi spread pricing works like this:

Assume, for purposes of illustration, Saudi crude would sell at a discount of $1 vs Brent (due to higher refining costs etc.) if they let ‘the market’ decide the spread by selling a specific quantity at ‘market prices’/to the highest bidder. Instead, however, they announce they will sell at a $2 discount to Brent and let the refiners buy all they want.

So what happens?

The answer first- this sets a downward price spiral in motion. Refiners see the lower price available from the Saudis and lower the price they are willing to pay everyone else. And everyone else is a ‘price taker’ selling to the highest bidder, which is now $1 lower than ‘indifference levels’. When the other suppliers sell $1 lower than before the Saudi price cut/larger discount of $1, the Brent price drops by $1. Saudi crude is then available for $1 less than before, as the $2 discount remains in place. Etc. etc. with no end until either:

1) The Saudis change the discount/raise their price.

2) Physical demand goes up beyond the Saudis capacity to increase production.

And setting the spread north of ‘neutral’ causes prices to rise, etc.

Bottom line is the Saudis set price, and have engineered the latest decline. There was no shift in net global supply/demand as evidenced by Saudi output remaining relatively stable throughout.

The Global Economy

If all the crude had simply been sold to the highest bidder/market prices, in a non monetary relative value world the amount consumed would have been ‘supply limited’ based on the real marginal cost, etc. And if prices were falling do to an increased supply offered for sale, the relative price of crude would be falling as the supply purchased and consumed rose. This would represent an increase in real output and real consumption/real GDP(yes, real emissions, etc.)

However, that’s not the case with the Saudis as price setter. The world was not operating on a ‘quantity constrained’ basis as the Saudis were continuously willing to sell more than the world wanted to purchase from them at their price. If there was any increase in non Saudi supply, total crude sales/consumption remained as before, but with the Saudis selling that much less.

Therefore, with the drop in prices, at least in the near term, output/consumption/GDP doesn’t per se go up.

Nor, in theory, in a market economy/flexible prices, does the relative value of crude change. Instead, all other prices simply adjust downward in line with the drop in crude prices.

Let me elaborate.

In a market economy (not to say that we actually have one) only one price need be set and with all others gravitating towards ‘indifference levels’. In fact, one price must be set or it’s all a ‘non starter’. So which price is set today? Mainstream economists ponder over this, and, as they’ve overlooked the fact that the currency is a public monopoly, have concluded that the price level exists today for whatever ‘historic’ reasons, and the important question is not how it got here, but what might make it change from today’s level. That is, what might cause ‘inflation’. That’s where inflation expectations theory comes in. For lack of a better reason, the ‘residual’ is that it’s inflation expectations that cause changes in the price level. And not anything else, which are relative value stories. And they operate through two channels- workers demanding higher wages and people accelerating purchases. Hence the fixation on wages as the cause of inflation, and using ‘monetary policy’ to accelerate purchases, etc.

Regardless of the ‘internal merits’ of this conclusion, it’s all obviated by the fact that the currency itself is a simple public monopoly, rendering govt price setter. Note the introduction of monetary taxation, the basis of the currency, is coercive, and obviously not a ‘market expense’ for the taxpayer, and therefore the idea of ‘neutrality’ of the currency in entirely inapplicable. In fact, since the $ to pay taxes and buy govt secs, assuming no counterfeiting, ultimately come only from the govt of issue, (as they say in the Fed, you can’t have a reserve drain without a prior reserve add), the price level is entirely a function of prices paid by the govt when it spends and/or collateral demanded when it lends. Said another way, since we need the govt’s $ to pay taxes, the govt is, whether it knows it or not, setting ‘terms of exchange’ when it buys our goods and service.

Note too that monopolists set two prices, the value of their product/price level as just described above, and what’s called the ‘own rate’/how it exchanges for itself, which for the currency is the interest rate, which is set by a vote at the CB.

The govt/mainstream, of course, has no concept of all this, as inflation expectations theory remains ‘well anchored.’ ;)

In fact, when confronted, argues aggressively that I’m wrong (story of my life- remember, they laughed at the Yugo…)

What they have done is set up a reasonably deflationary purchasing program, of buying from the lowest bidder in competition, and managed to keep federal wages/compensation a bit ‘behind the curve’ as well, partially indexed to their consumer price index, etc.

And consequently, govt has defacto advocated pricing power to the active monopolist, the Saudis, which explains why changes in crude prices and ‘inflation’ track as closely as they do.

Therefore, the way I see it is the latest Saudi price cuts are revaluing the dollar (along with other currencies with similar policies, which is most all of them) higher. A dollar now buys more oil and, to the extend we have a market economy that reflects relative value, more of most everything else. That is, it’s a powerful ‘deflationary bias’ (consequently rewarding ‘savers’ at the expense of ‘borrowers’) without necessarily increasing real output.

In fact, real output could go lower due to an induced credit contraction, next up.


Deflation is highly problematic for banks. Here’s what happened at my bank to illustrate the principle:

We had a $6.5 million loan on the books with $11 million of collateral backing it. Then, in 2009 the properties were appraised at only $8 million. This caused the regulators to ‘classify’ the loan and give it only $4 million in value for purposes of calculating our assets and capital. So our stated capital was reduced by $2.5 million, even though the borrower was still paying and there was more than enough market value left to cover us.

So the point is, even with conservative loan to value ratios of the collateral, a drop in collateral values nonetheless reduces a banks reported capital. In theory, that means if the banking system needs an 8% capital ratio, and is comfortably ahead at 10%, with conservative loan to value ratios, a 10% across the board drop in assets prices introduces the next ‘financial crisis’. It’s only a crisis because the regulators make it one, of course, but that’s today’s reality.

Additionally, making new loans in a deflationary environment is highly problematic in general for similar reasons. And the reduction in ‘borrowing to spend’ on energy and related capital goods and services is also a strong contractionary bias.

Euro Endgame


I’ve tried to think of a happy ending here and there simply isn’t one.

Mosler: Nov 29, 2010

That’s like thinking for the endgame of the US if you believe the federal budget needs to be balanced. There isn’t one in that case either. The end game is always for the fiscal authority to run a deficit. Which means the ECB in the euro zone.


They won’t let the Euro collapse which means Germany leaving is out of the question. But Germany won’t just become the funding source for all of these periphery nations.

Mosler: Nov 29, 2010

Right, it has to be the ECB. Just like Texas can’t fund the other states.


I think they should just vote to remove Ireland and Greece with a partial debt restructuring. They’d actually be doing them a huge favor while also avoiding massive collateral damage in the banking system.

Mosler: Nov 29, 2010

Likewise, the ECB has to fund the deposit insurance to make it credible and workable.


Then they could target their efforts on saving Spain and the Euro.

Mosler: Nov 29, 2010

Problem is, they all need to be saved.

As credit sensitive entities like the US states their debt to gdp ratios need to be below 20% to be ‘stand alone.’ <

The reason Luxembourg is that low is because they never did have their own currency, and so never could get higher than where they were.

The other national govts had their own currencies before joining the euro, and therefore had deficits appropriate for being the currency issuer, which is equal to non govt savings desires. Problem was they joined the euro, turned over the currency management to the ECB, and kept their old debt ratios. The informed way to have merged would have been to have the ECB take over their national debts, and let them start clean. But it happened the way it happened and now they have to move forward from here.


Ireland and Greece go it alone, the world panics for a few months and then everyone realizes that we’re all better off. Then the Euro continues to exist until it causes another crisis in 15 years (assuming no central funding system is created)….

Mosler: Nov 29, 2010

They already have a central funding system in place- the ECB buying nat govt bonds in the secondary markets. While far from my first choice on how to do things for a variety of economic and political reasons, it does function to keep member nations solvent, for as long as the ECB keeps doing it.

My proposal remains the most sensible but not even a consideration- per capita ECB annual distributions to the govts to pay down debt of the member nations beginning with an immediate 10% of GDP distribution. To do this they first have to understand why it’s not inflationary, which means they have to understand inflation on the demand side is a function of spending, and the distribution does not increase govt spending.

That’s a big leap from their inflation expectations theory of inflation. They believe that anything that increases people’s expectation of inflation is what actually causes inflation. And they believe that because they have still failed to recognize that the currency itself is a (simple) public monopoly.

That means the price level is a function of prices paid by the govt of issue when it spends, whether it knows it or not, and not a function of expectations.

So while in fact it is the economy that needs the govt’s funds to pay its taxes, and therefore the economy is ‘price taker’, they instead believe that it is the govt that needs the economy’s funds to be able to spend.

CB announcements

Mosler: Nov 30, 2011

Just looks like the Fed lowered the rate on its swap lines to keep libor down, which had been moving up to its prior swap line rate.

No big deal, apart from the fact the Fed shouldn’t be allowed to lend on an unsecured basis like this without explicit approval of congress:

Lending unsecured on an unlimited basis has the potential to be highly inflationary.

With the currency a public monopoly, the price level is necessarily a function of prices paid at the point of govt spending and or collateral demanded when govt lends.

Allowing unlimited unsecured lending has the potential to vaporize the currency. And while in this case that kind of abuse isn’t likely, the potential is there.

Financial repressionists painting frauds

Mosler: Apr 22, 2013

Conclusion: The financial repressionists have it all backwards.

So the idea is the govt is ‘pushing rates down’ through QE and the like, thereby keeping rates below the rate of inflation, and that without this active ‘financial repression’ rates would otherwise be higher and not ‘repressed’.

That is, the govt is interfering with the ‘free market’ by said pushing of rates down, and this ‘distortion’ adversely affects all kinds of things, as happens with any interference in said ‘free markets’:

Well, to begin with, interest rates are subject to market forces with fixed exchange rate regimes, like a gold standard, currency board arrangement, or other such ‘peg’ where the govt by law exchanges the currency to some ‘reserve’ thing at a fixed rate. So today this would, at best, apply to HK, for example.

However, it does not apply to floating fx regimes, where the currency has no conversion features at the govt of issue, like the $US, yen, pound, euro, etc. etc. etc. contrary to the claims of the repressionists.

Either way, the currency is a public monopoly, with taxation a coercive, non market ‘interference’. And, of course, monopolists are ‘price setters’ rather than ‘price takers’.

With a gold standard, for example, the govt sets the price of gold and in theory allows all other price to express relative value as they continuously gravitate towards floating indifference levels.

This includes interest rates (the ‘own rate’ for the currency) which then fluctuate based on ‘storage costs’ of the object of conversion which includes govt default risk with regard to conversion. The same holds for other fixed exchange rate arrangements.

With floating exchange rate policy, without govt interference, the ‘risk free rate’ is permanently at 0%, as there is no conversion option, and therefore no conversion default risk.

In this case, the only way rates can be supported at higher levels is by ‘govt interference’. This includes paying interest on reserve balances at the Fed, issuing Treasury Securities, and open market operations where the Fed buys and sells Treasury securities directly or via repurchase agreements and other such arrangements. All of these function as ‘interest rate support’ to keep rates higher than otherwise.

So once again, and another ‘who would have thought’, it seems the mainstream has it entirely backwards. Yes, govt is ‘interfering’ in the interest rate markets, but rather than engaging in ‘repression’ via ‘pushing rates down’ it’s instead engaging in ‘rentier support’ by pushing rates up.

So if these ‘free market types’ want to make the case that govt isn’t sufficiently interfering to push rates up to adequately support holders of various financial assets, fine. Bring it on! But more likely the realization of what they’ve actually be purporting should be embarrassing enough to cause them to back off for at least 3 or 4 minutes, don’t you think?

Warren Mosler has a plan but no takers


May 8 (MarketWatch) — If youre ever tempted to think the euro zone has turned the corner and is on the right track, go have a chat with Warren Mosler and hell set you straight.

The former hedge-fund manager and an original proponent of what has come to be known as modern monetary theory gave a talk recently at a wealth management conference in Zurich that took a pessimistic view of the euro righting itself on its current path:

The European slow-motion train wreck will continue until there is recognition that deficits need to be larger, Mosler said at the conclusion of his analysis. The continuing efforts at deficit reduction will continue to make things worse.

Mosler suggested several measures that could turn around the situation in the euro zone, though he acknowledged there is little chance they will be adopted.

The euro authorities need to accept that deficits should be allowed to go up to 8% of gross domestic product, instead of the current 3%, as the only way to create the monetary conditions for full employment and economic growth.

The European Central Bank should make a policy rate of 0% permanent. The ECB, as the source of the euro zones fiat money, should guarantee the debt of all euro countries and guarantee deposit insurance for all euro-zone banks, which would entail taking over bank supervision.

Individual countries in the euro zone, like individual states in the U.S., are trapped in a procyclical monetary and fiscal environment. Because they have no sovereign currency, they must reduce spending in a downturn.

In the U.S., the federal government can operate countercyclically, by running a sufficiently large deficit to provide net savings to the private sector. The ECB is the only institution in the euro zone that does not have revenue constraints and could play a countercyclical role.

Because money is a public monopoly, when the monopolist restricts supply by not running a sufficient deficit, it creates excess capacity in the economy, as evidenced by high unemployment.

Mosler says the deficit can result from lower taxes or increased government spending, whatever your politics prefers. But policies aimed at reducing the deficit are doomed to keep an economy depressed.

And theres more. All successful currency unions include fiscal transfers, Mosler said. In Canada, this is written into the constitution and in the U.S. it is achieved through the federal budget.

In Europe, this would mean that some authority like an empowered European Parliament would direct government spending to the areas with the highest unemployment.

Clearly all of this is well beyond what Europe is currently capable of doing, and the leaders in power have implicitly or explicitly rejected all of these potential fixes.

The reality is, Mosler noted, that there is no political support for higher deficits, no political support for leaving the euro, and beyond reducing deficits the only remaining fixes are taxes on depositors and bondholders like those seen in Cyprus and Greece.

Mosler, who currently manages offshore funds and produces sports cars on the side, says his views, which have been taken up and elaborated by a post-Keynesian school of economics, are based on his experience as a money manager.

And, he adds, he has a substantial following of asset managers for his ideas because these are people who are paid to get it right.

The current stopgap measures proposed by the ECB notably the putative outright monetary transactions to bail out a country under certain conditions, which has yet to be used have a dubious legal basis and are so much smoke and mirrors, Mosler said.

In this Zurich talk, Mosler did not draw any further conclusions regarding his pessimistic view of the euros current course, but a website devoted to Mosler Economics in Italy, where MMT has a considerable following, spells out what it could mean in a post called 10 reasons to return to the lira.

These reasons include the ability to lower taxes, allow the government to pay off debts to the private sector and implement a works program to provide employment and improve the public infrastructure. Read the post (in Italian).

Lest this all seem like so much pie in the sky, keep in mind that the forces that gave the protest movement of Beppe Grillo a quarter of the vote in Italys recent election will only grow as continued austerity deepens Europes recession.

So remain optimistic if you like, but youve been warned.

Mosler: May 8, 2013

Radical fixes needed to make the euro work.

Schäuble Calls on Italy to Pursue Structural Reform


July 16 (WSJ) — German Finance Minister Wolfgang Schäuble called on Italy to pursue its ambitious structural reform efforts if it wants to boost its economic-growth prospects. “Especially since growth forecasts for Italy have been reduced recently, it’s important to reform and cut the debt level convincingly,” he said. Italian Prime Minister Matteo Renzi has presented ambitious and broad-based reforms, he added. “The Stability and Growth Pact is the foundation for politico-economic cohesion in Europe,” said Mr. Schäuble. “The Stability and Growth Pact provides sufficient flexibility. It’s doesn’t stand in the way of structural reforms; quite the opposite, it promotes them.”.

Mosler: Jul 18, 2014

This is a direct response to Prime Minister Renzi who asked for what can be described as a minuscule amount flexibility with the deficit rules. (Note that Schauble didn’t even say said reforms would boost growth, only ‘growth prospects’, whatever that means.)

The problem is that for any given level of govt spending (a political decision) tax liabilities are too high to allow ‘savings desires’ to be accommodated. And ‘the debt level’ is best thought of as the ‘money supply’ (deposits at the CB) that’s the euro ‘savings’/net financial assets of the non govt sectors:

Said another way, the currency itself is the EU’s public monopoly, and the mass unemployment is necessarily the evidence that the monopolist is restricting the ‘supply’ of net financial assets demanded by the economy.

Said another way, for all practical purposes said reforms don’t increase aggregate demand. At best they address what I call distributional issues.

My proposal is for Italy to deliver an ultimatum to the EU giving them 30 days to relax the 3% deficit limit and eliminate the 60% debt/GDP limit.

If the EU refuses, Italy has two choices:

1. Do nothing as the destruction of their civilization continues

2. Begin taxing and spending in ‘new lira’ with fiscal policy that promotes output and employment.

And note that if they do go to ‘new lira’ and retain their now constitutionally mandated balanced budget requirement, it will all get even worse.

Macroeconomic Populism Returns - By Paul Krugman


February 1 (NYT) — Matthew Yglesias says what needs to be said about Argentina: theres no contradiction at all between saying that Argentina was right to follow heterodox policies in 2002, but it is wrong to be rejecting advice to curb deficits and control inflation now. I know some people find this hard to grasp, but the effects of economic policies, and the appropriate policies to follow, depend on circumstances.

Mosler: Feb 3, 2014

Yes, unemployment- source of the greatest economic loss as well as a social tragedy and a crime against humanity, is always the evidence deficit spending is too low. There is no exception as a simple point of logic. The currency is a simple public monopoly, and the excess capacity we call unemployment- people looking to sell their labor in exchange for units of that currency- is necessarily a consequence of the monopolist restricting the supply of net financial assets.


I would add that we know what those circumstances are! Running deficits and printing lots of money are inflationary.

Mosler: Feb 3, 2014

Why the undefined ambiguous empty rhetoric?


and bad.

Mosler: Feb 3, 2014

What does ‘bad’ mean here? For example, there is no evidence that inflation rates at least up to 40% hurt real growth, and more likely help it. Politically, however, it may be ‘very bad’. But those are two different things.


in economies that are constrained by limited supply.

Mosler: Feb 3, 2014

Limited supply of what? Labor? Hardly! In fact, full employment is even more critical, if that’s possible, when there are limited supplies of other resources. Wasn’t Rome built without electricity, oil, bulldozers, the IMF, etc. etc.? OK, it took more than a day, but it was built. There is always more to do than people to do it. Economically, unemployment is never appropriate policy.


they are good things when the problem is persistently inadequate demand.

Mosler: Feb 3, 2014

Unemployment is the evidence of this ‘inadequate demand’ which is necessarily created by taxation, the ultimate source of all demand for a given currency. In fact, taxation functions first to create unemployment- people looking for work paid in that currency. That’s how govt provisions itself- it creates people looking for jobs with its taxation, then hires those unemployed its tax created. What sense does it make for govt to create more unemployed than it wants to hire??? Either hire the unemployed thus created, or lower the tax!!!!!!!!!!!!


Similarly, unemployment benefits probably lead to lower employment in a supply-constrained economy; they increase employment in a demand-constrained economy; and so on.

Mosler: Feb 3, 2014

With more that needs to be done than there are people to do it, the economy isn’t supply constrained until full employment. And nominal unemployment benefits are about the level of prices, wages, and the distribution of income rather than the level of potential employment, etc.


And just to repeat a point I’ve made many times, those of us who understood IS-LM predicted in advance that the actions of the Bernanke Fed wouldn’t be inflationary, while the other side of the debate was screaming debasement.

Mosler: Feb 3, 2014

It’s not about ISLM, which is fixed fx analysis. It’s about recognizing that there is always precious little difference between balances in reserve accounts at the Fed and securities accounts at the Fed.


There’s something else to be said about Argentina and, it seems, Turkey namely, that were seeing a mini-revival of what Rudi Dornbusch and Sebastian Edwards long ago called macroeconomic populism. This involves, you might say, making the symmetrical error to that of people who think that running deficits and printing money always turns you into Zimbabwe; its the belief that the orthodox rules never apply. And its an equally severe mistake.

Mosler: Feb 3, 2014

Unfortunately most of the ‘orthodox rules’ apply to the fixed fx policies in place when they were first stated, and not to today’s floating fx.


Its not a common mistake these days; a few years ago one would have said that only Venezuela was making the old mistakes, and even now its just a handful of countries. But it is a mistake, and we need to say so.

Mosler: Feb 3, 2014

Yes, mistakes are being made by all of the headline economists and the global economy is paying the price.

There is no right time for the Fed to raise rates!

Mosler: Oct 13, 2014


I reject the belief that economy is strong and operating anywhere near full employment. I also reject the belief that a zero-rate policy is inflationary, supports aggregate demand, or weakens the currency, or that higher rates slow the economy and reduce inflation. Additionally, I reject the mainstream view that employment is materially improving, the output gap is closing, and inflation is rising and returning to the Fed’s targets.

What I am asserting is that the Fed and the mainstream have it backwards with regard to how interest rates interact with the economy. They have it backwards with regard to both the current health of the economy and inflation, and, therefore, their discussion of appropriate monetary policy is entirely confused and inapplicable.

Furthermore, while I recognize that raising rates supports both aggregate demand and inflation, I am categorically against raising rates for that purpose. Instead, I propose making the zero-rate policy permanent and supporting demand with a full FICA tax suspension. And for a stronger price anchor than today’s unemployment policy, I propose a federally funded transition job for anyone willing and able to work to facilitate the transition from unemployment to private sector employment. Together these proposals support far higher levels of employment and price stability.

So when is the appropriate time to raise rates? I say never. Instead, leave the fed funds rate at zero, permanently, by law, and use fiscal adjustments to sustain full employment.


My first point of contention with the mainstream is their presumption that low rates are supportive of aggregate demand and inflation through a variety of channels, including credit, expectations, and foreign exchange channels.

The problem with the mainstream credit channel is that it relies on the assumption that lower rates encourage borrowing to spend. At a micro level this seems plausible- people will borrow more to buy houses and cars, and business will borrow more to invest. But it breaks down at the macro level. For every dollar borrowed there is a dollar saved, so any reduction in interest costs for borrowers corresponds to an identical reduction for savers. The only way a rate cut would result in increased borrowing to spend would be if the propensity to spend of borrowers exceeded that of savers. The economy, however, is a large net saver, as government is an equally large net payer of interest on its outstanding debt. Therefore, rate cuts directly reduce government spending and the economy’s private sector’s net interest income. And looking at over two decades of zero-rates and QE in Japan, 6 years in the US, and 5 years of zero and now negative rates in the EU, the data is also telling me that lowering rates does not support demand, output, employment, or inflation. In fact, the only arguments that they do are counter factual- the economy would have been worse without it- or that it just needs more time. By logical extension, zero-rates and QE have also kept us from being overrun by elephants (not withstanding that they lurk in every room).

The second channel is the inflation expectations channel. This presumes that inflation is caused by inflation expectations, with those expecting higher prices to both accelerate purchases and demanding higher wages, and that lower rates will increase inflation expectations.

I don’t agree. First, with the currency itself a simple public monopoly, as a point of logic the price level is necessarily a function of prices paid by government when it spends (and/or collateral demanded when it lends), and not inflation expectations. And the income lost to the economy from reduced government interest payments works to reduce spending, regardless of expectations. Nor is there evidence of the collective effort required for higher expected prices to translate into higher wages. At best, organized demands for higher wages develop only well after the wage share of GDP falls.

Lower rates are further presumed to be supportive through the foreign exchange channel, causing currency depreciation that enhances ‘competitiveness’ via lower real wage costs for exporters along with an increase in inflation expectations from consumers facing higher prices for imports.

In addition to rejecting the inflation expectations channel, I also reject the presumption that lower rates cause currency depreciation and inflation, as does most empirical research. For example, after two decades of 0 rate policies the yen remained problematically strong and inflation problematically low. And the same holds for the euro and $US after many years of near zero-rate policies. In fact, theory and evidence points to the reverse- higher rates tend to weaken a currency and support higher levels of inflation.

There is another aspect to the foreign exchange channel, interest rates, and inflation. The spot and forward price for a non perishable commodity imply all storage costs, including interest expense. Therefore, with a permanent zero-rate policy, and assuming no other storage costs, the spot price of a commodity and its price for delivery any time in the future is the same. However, if rates were, say, 10%, the price of those commodities for delivery in the future would be 10% (annualized) higher. That is, a 10% rate implies a 10% continuous increase in prices, which is the textbook definition of inflation! It is the term structure of risk free rates itself that mirrors a term structure of prices which feeds into both the costs of production as well as the ability to pre-sell at higher prices, thereby establishing, by definition, inflation.

Finally, I see the output gap as being a lot higher than the mainstream does. While the total number of people reported to be working has increased, so has the population. To adjust for that look at the percentage of the population that’s employed, and it’s pretty much gone sideways since 2009, while in every prior recovery it went up at a pretty good clip once things got going:

The mainstream says this drop is all largely structural, meaning people got older or otherwise decided they didn’t want to work and dropped out of the labor force. The data clearly shows that in a good economy this doesn’t happen, and certainly not to this extreme degree. Instead what we are facing is a massive shortage of aggregate demand.


There is no right time for the Fed to raise rates. The economy continues to fail us, and monetary policy is not capable of fixing it. Instead the fed funds rate should be permanently set at zero (further implying the Treasury sell only 3 month t bills), leaving it to Congress to employ fiscal adjustments to meet their employment and price stability mandates.

Keynes after 75 Years: Rethinking Money as a Public Monopoly - L. Randall Wray


Economists and government policymakers fail to recognize that money is a public monopoly. The result of this misunderstanding is unemployment and inflation, says Senior Scholar L. Randall Wray. The best way to operate a money monopoly is to set the “price” and let the “quantity” float, as exemplified by Hyman P. Minsky’s universal employer-of-last-resort program.

Understanding how a monopoly money works would advance public policy formation a great deal, says Wray. And since banks are given the power to issue government money, failure to constrain what they purchase fuels speculative bubbles that are ultimately followed by a crash. The real debate should be over the proper role of government—how it should use the monetary system to achieve the public purpose.

ABSTRACT: In this paper I first provide an overview of alternative approaches to money, contrasting the orthodox approach, in which money is neutral, at least in the long run; and the MarxVeblen-Keynes approach, or the monetary theory of production. I then focus in more detail on two main categories: the orthodox approach that views money as an efficiency enhancing innovation of markets, and the Chartalist approach that defines money as a creature of the state. As the state’s “creature,” money should be seen as a public monopoly. I then move on to the implications of viewing money as a public monopoly and link that view back to Keynes, arguing that extending Keynes along these lines would bring his theory up to date.

Mosler: Apr 6, 2011

Good to see this- been suggesting it for quite a while.