How to avoid our own lost decade by Lawrence Summers

Mosler: Jun 13, 2011

The deficit hawks have ripped the headline deficit doves to shreds.

The problem is the deficit doves, as previously discussed.

Again, here’s why:


June 12 (FT) — Even with the 2008-2009 policy effort that successfully prevented financial collapse, the US is now halfway to a lost economic decade. In the past five years, our economy’s growth rate averaged less than one per cent a year, similar to Japan when its bubble burst. At the same time, the fraction of the population working has fallen from 63.1 per cent to 58.4 per cent, reducing the number of those in jobs by more than 10m. Reports suggest growth is slowing.

Mosler: Jun 13, 2011



Beyond the lack of jobs and incomes, an economy producing below its potential for a prolonged interval sacrifices its future. To an extent once unimaginable, new college graduates are moving back in with their parents. Strapped school districts across the country are cutting out advanced courses in maths and science. Reduced income and tax collections are the most critical cause of unacceptable budget deficits now and in the future.

Mosler: Jun 13, 2011



You cannot prescribe for a malady unless you diagnose it accurately and understand its causes. That the problem in a period of high unemployment, as now, is a lack of business demand for employees not any lack of desire to work is all but self-evident, as shown by three points: the propensity of workers to quit jobs and the level of job openings are at near-record low; rises in non-employment have taken place among all demographic groups; rising rates of profit and falling rates of wage growth suggest employers, not workers, have the power in almost every market.

Mosler: Jun 13, 2011



A sick economy constrained by demand works very differently from a normal one. Measures that usually promote growth and job creation can have little effect, or backfire.

Mosler: Jun 13, 2011

A ‘normal’ economy is one with sufficient demand for full employment, so there’s no particular need to promote even more demand.


When demand is constraining an economy, there is little to be gained from increasing potential supply.

Mosler: Jun 13, 2011

True. The mainstream theory is that increased supply will lower prices so the same incomes and nominal spending will buy the additional output. But it doesn’t work because the lower prices (in theory) work to lower incomes to where the extra supply doesn’t get sold and therefore doesn’t get produced. And it’s all because the currency is a (govt) monopoly, and a shortage in aggregate demand can only be overcome by either a govt fiscal adjustment and/or a drop in non govt savings desires, generally via increased debt. And in a weak economy with weak incomes the non govt sectors don’t tend to have the ability or willingness to increase their debt.


In a recession, if more people seek to borrow less or save more there is reduced demand, hence fewer jobs. Training programmes or measures to increase work incentives for those with high and low incomes may affect who gets the jobs, but in a demand-constrained economy will not affect the total number of jobs. Measures that increase productivity and efficiency, if they do not also translate into increased demand, may actually reduce the number of people working as the level of total output remains demand-constrained.

Mosler: Jun 13, 2011



Traditionally, the US economy has recovered robustly from recession as demand has been quickly renewed. Within a couple of years after the only two deep recessions of the post first world war period, the economy grew in the range of 6 per cent or more – that seems inconceivable today.

Mosler: Jun 13, 2011




Inflation dynamics defined the traditional postwar US business cycle. Recoveries continued and sometimes even accelerated until they were murdered by the Federal Reserve with inflation control as the motive. After inflation slowed, rapid recovery propelled by dramatic reductions in interest rates and a backlog of deferred investment, was almost inevitable.

Mosler: Jun 13, 2011

Not so true, but not worth discussion at this point.


Our current situation is very different. With more prudent monetary policies, expansions are no longer cut short by rising inflation and the Fed hitting the brakes. All three expansions since Paul Volcker as Fed chairman brought inflation back under control in the 1980s have run long. They end after a period of overconfidence drives the prices of capital assets too high and the apparent increases in wealth give rise to excessive borrowing, lending and spending.

Mosler: Jun 13, 2011

Not so true, but again, I’ll leave that discussion for another day.


After bubbles burst there is no pent-up desire to invest. Instead there is a glut of capital caused by over-investment during the period of confidence – vacant houses, malls without tenants and factories without customers. At the same time consumers discover they have less wealth than they expected, less collateral to borrow against and are under more pressure than they expected from their creditors.

Mosler: Jun 13, 2011



Pressure on private spending is enhanced by structural changes. Take the publishing industry. As local bookstores have given way to megastores, megastores have given way to internet retailers, and internet retailers have given way to e-books, two things have happened. The economy’s productive potential has increased and its ability to generate demand has been compromised as resources have been transferred from middle-class retail and wholesale workers with a high propensity to spend up the scale to those with a much lower propensity to spend.

Mosler: Jun 13, 2011

Probably has some effect.


What, then, is to be done? This is no time for fatalism or for traditional political agendas. The central irony of financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending, it is only resolved by increases in confidence, borrowing and lending, and spending. Unless and until this is done other policies, no matter how apparently appealing or effective in normal times, will be futile at best.

Mosler: Jun 13, 2011

Partially true. It’s all about spending and sales. We lost 8 million jobs almost all at once a few years back because sales collapsed. Businesses hire to service sales. So until we get sales high enough to keep everyone employed who’s willing and able to work we will have over capacity, an output gap, and unemployment.


The fiscal debate must accept that the greatest threat to our creditworthiness is a sustained period of slow growth.

Mosler: Jun 13, 2011

NOT TRUE!!! And here’s where the headline deficit doves lose the battles and now the war. There is no threat to the credit worthiness of the US Government. We can not become the next Greece- there simply is no such thing for the issuer of its currency. Credit worthiness applies to currency users, not currency issuers.


Discussions about medium-term austerity need to be coupled with a focus on near-term growth.

Mosler: Jun 13, 2011

There he goes again. This is the open door the deficit hawks have used to win the day, with both sides now agreeing on the need for long term deficit reduction. And in that context, the deficit dove position that we need more deficit spending first, and then deficit reduction later comes across as a ploy to never cut the deficit, and allow the ‘problem’ to compound until it buries us, etc.


Without the payroll tax cuts and unemployment insurance negotiated last autumn we might now be looking at the possibility of a double dip.

Mosler: Jun 13, 2011

They certainly helped, and ending work for pay hurt, and even with whatever support that provided, we are still facing the prospect of a double dip.


Substantial withdrawal of fiscal stimulus at the end of 2011 would be premature. Stimulus should be continued and indeed expanded by providing the payroll tax cut to employers as well as employees.

Mosler: Jun 13, 2011

True, except the extension to employers works to lower prices, as it lowers business costs. This is a good thing, but it adds to aggregate demand only very indirectly. To get it right, I’d suspend all FICA taxes to increase take home pay of those working for a living which will help sales and employment, and to cut business costs, which, in competitive markets, works to lower prices.


Raising the share of payroll from 2 per cent to 3 per cent is desirable, too. These measures raise the prospect of sizeable improvement in economic performance over the next few years.

Mosler: Jun 13, 2011

True, as far as it goes. Too bad he reinforces the overhanging fears of deficit spending per se. You’d think he’d realize everyone would like to cut taxes, and that it’s the fears of deficit spending that are in the way…


At the same time we should recognize that it is a false economy to defer infrastructure maintenance and replacement.

Mosler: Jun 13, 2011



and take advantage of a moment when 10-year interest rates are below 3 per cent.

Mosler: Jun 13, 2011

Bad statement!!! This implies that if rates were higher it would make a difference with regards to our infrastructure needs during times of a large output gap, as it perpetuates the myths about the govt somehow being subjected to market forces with regard to its ability to deficit spend. Again, this mainstream deficit dove position only serves to support the deficit hawk fear mongering that’s won the day.


and construction unemployment approaches 20 per cent to expand infrastructure investment.

It is far too soon for financial policy to shift towards preventing future bubbles and possible inflation, and away from assuring adequate demand.

Mosler: Jun 13, 2011

True! But, as above, he’s already defeated himself by reinforcing the fears of deficits and borrowing.


The underlying rate of inflation is still trending downwards and the problems of insufficient borrowing and investing exceed any problems of overconfidence. The Dodd-Frank legislation is a broadly appropriate response to the challenge of preventing any recurrence of the events of 2008. It needs to be vigorously implemented. But under-, not overconfidence is the problem, and needs to be the focus of policy.

Policy in other dimensions should be informed by the shortage of demand that is a defining characteristic of our economy. The Obama administration is doing important work in promoting export growth by modernising export controls, promoting US products abroad and reaching and enforcing trade agreements. Much more could be done through changes in visa policy to promote exports of tourism as well as education and health services. Recent presidential directives regarding relaxation of inappropriate regulatory burdens should also be rigorously implemented.

Mosler: Jun 13, 2011

Too bad he’s turned partisan here, as I’m sure he’s aware of how exports are real costs, and imports real benefits, and how real terms of trade work to alter standards of living. So much for intellectual honesty….


Perhaps the US’ most fundamental strength is its resilience. We averted Depression in 2008/2009 by acting decisively. Now we can avert a lost decade by recognising economic reality.

Mosler: Jun 13, 2011

First we need to recognize financial reality, and unfortunately he and the other headline deficit doves continue to provide the support for the deficit myths and hand it all over to the deficit hawks. Note that, as per the President, everything must be on the table, including Social Security and Medicare. To repeat, fearing becoming the next Greece is working to turn ourselves into the next Japan.

Emerging market currencies take a battering By Katrina Bishop


January 24 (CNBC) — Emerging market currencies continued to take a beating on Friday — with Turkey’s lira hitting a new record low against the dollar yet again — amid growing concerns about the U.S. Federal Reserve’s monetary guidance.

On Friday, the dollar strengthened to 2.3084 against Turkey’s currency. Investors also piled out of the South African rand and Argentina’s peso, and both the Indian rupee and the Indonesian rupiah fell to two-week lows against the dollar. Meanwhile, the Australian dollar fell to $0.8681 – its lowest level in three-and-a-half years.

“The market is in panic mode. We have huge psychological fear that is going to emerging markets, despite a global environment that hasn’t changed that much,” Benoit Anne, head of global emerging market strategy at Societe Generale, told CNBC.

“My bias at this stage — although it’s a bold one — is that this is all about the credibility of the Fed with respect to its forward guidance. This fear that the Fed is going to tighten quicker than expected is translating into emerging markets.”

The U.S. central bank has promised that it will not raise interest rates until unemployment hits 6.5 percent – but some analysts are concerned that rate hikes could come sooner than expected.

U.S. monetary policy has always had a significant on emerging markets, and the Fed’s bond-buying program boosted risk sentiment, causing investors to turn their back on so-called “safe havens” and pile into assets seen as riskier – such as emerging market currencies.

Speculation of Fed tapering in 2013 hit emerging markets hard, with currencies including India, Turkey, Russia and Brazil coming under intense pressure in 2013. But Anne added these recent moves were likely to be more temporary.

“It’s a matter of weeks rather than the whole year 2014 as a total write off for emerging markets,” he said. “Although it will take the Fed re-establishing its credibility towards forward guidance before we see respite in emerging markets.”

Mosler: Jan 14, 2014

Seems no one is pointing out how this is all looking a lot like ‘catch up’ vs last year’s yen move?

As previously discussed, the proactive yen move from under 80 to over 100 vs the dollar- a 30% or so pay cut for domestic workers in terms of prices of imports- was an internationally deflationary impulse.

It’s called ‘currency wars’ with the exporters pushing hard on their govts to do whatever it takes to keep them ‘competitive’. And all, at least to me, shamelessly thinly disguised as anything but. And, in fact, it’s not ‘wrong’ to call it ‘dollar appreciation’ rather than EM currency depreciation given the deflationary bias of US (and EU) fiscal and monetary (rate cuts/QE reduce interest income for the economy) policy.

This is a highly deflationary force for the US (and EU) via import prices and lost export pricing power, also hurting earnings translations and, in general weakening US domestic demand, as increased domestic oil output doesn’t reduce net imports as much as would otherwise be the case.

And while I’m not saying energy independence is a ‘bad thing’ note that the UK has been largely ‘energy independent’ for quite a while, so there’s obviously more to it.

The optimal policy move for the US is fiscal relaxation- like my proposed FICA suspension- to get us back to full employment and optimize our real terms of trade. (and not to forget the federally funded transition job for anyone willing and able to work to facilitate the transition from unemployment to private sector employment as the economy booms).

But unfortunately Congress is going the other way and making it all that much worse.

EU Said to Draft Gazprom Complaint as Putin Prepares G-20 Talks By Gaspard Sebag


August 26 (Bloomberg) — European Union regulators are drafting a formal antitrust complaint against OAO Gazprom, which supplies a quarter of the EUs natural gas, threatening to escalate a probe thats been attacked by Russian President Vladimir Putin.

Officials are working on a statement of objections against Russias state-owned gas export monopoly, according to three people familiar with the probe, who asked not to be named because the status of the inquiry is confidential.

A complaint over allegations that the company abused its dominant position in the gas market may be sent by the end of the year if Gazprom and the EU fail to open settlement talks, said one of the people.

A showdown with Gazprom risks inflaming relations with Russia just as Putin prepares to host a meeting of leaders from the Group of 20 nations next month in St. Petersburg. Russian Foreign Minister Sergei Lavrov warned this month that if the European Union imposes antitrust sanctions against Gazprom, it will be difficult for the company to operate in markets where it faces open discrimination.

The case has the potential to seriously disturb EU-Russia relations, said Thijs Van de Graaf, a researcher at the Ghent Institute for International Studies in Belgium. Gazprom is not a normal company in Russia. It does not only give account to its shareholders but also serves political goals.

Mosler: Aug 28, 2013

And if you recall from a write up a few years back Russia promised not to take advantage like this. Who would’ve thought?

In any case it’s bad real terms of trade for euro zone gas buyers, but helps exports of whatever Russia buys with the inflated euro revenues, with export prices held down by austerity, etc.

Jack Lew to press Germany on domestic demand

Mosler: Aug 28, 2013

Wrong, Jack, press for domestic demand HERE(tax cut and/or spending increase)

It’s called optimizing real terms of trade. What you are doing is subversive!


Mosler: May 31, 2013

Unfortunately what Japan risks is an exit from headline deflation but no growth in output and employment to show for it. What they’ve done might be to cause the currency to depreciate about 25% via ‘portfolio shifting’, which may not expand real domestic demand. In fact, in real terms, it may go down, leaving them with higher prices and a lower standard of living.

Yes, the currency shift makes imports more expensive, which means there will be some substitution to domestic goods which cost more than imports used to cost, but less than they now cost. But for many imports there are no substitutions, so the price increase simply functions like a tax increase.

And yes, exports, particularly nominal, will go up some, but so does the cost of inputs imported. And yes, some inputs sourced elsewhere will instead be sourced locally, adding to domestic employment and output, but not to real domestic consumption.

At the macro level what counts is what they do with regards to keeping the govt deficit large enough to accommodate the need to pay taxes and net save. Net exports ‘work’ by reducing real terms of trade when the govt purchases fx, which adds net yen to their economy. I call the fx purchases ‘off balance sheet deficit spending’. But so far the govt at least says they aren’t even doing that, and the lifers etc. now deny having done much of that either?.

What has changed fundamentally is they are importing more energy since shutting down their nukes. Again, this functions as a tax on their economy (taxonomy for short? really bad pun intended!).

On the other hand, as above, buying fx by either the private or public sector is, functionally, deficit spending, which in this case first supports exports, but could add some to aggregate demand, depending on the details of relevant propensities to consume, etc.

The entire point of all this is Japan can cause some ‘inflation’ as nominal prices are nudged up by the currency depreciation, but with only a modest increase in real output via an increase in net exports that fades if not supported by ongoing fx purchases. And all in the context of declining real terms of trade as the same amount of labor buy fewer imports, etc. which is the engine that makes it ‘work’ on paper.

And for the global economy it’s another deflationary shock in a deflationary race to the bottom as other wanna be exporters compete with Japan’s massive cut in real wages.

So yes, they are trying to cause inflation, but not for inflation’s sake, but as a way to increase output and employment. But I’m afraid what they are missing that the causation doesn’t work in that direction.

In conclusion, this was the thought I was trying to flesh out:

Just because increasing output can cause inflation, it doesn’t mean increasing inflation causes real output and employment to increase.

sorry, this all needs a lot more organizing. Will redo later.

My response to a post on an Italian Keynes blog

Mosler: Dec 9, 2012

First, let me remind that MMT was originally ‘Mosler Economics’ which began with ‘Soft Currency Economics’ (1993) which can be found at Also, highlights of the ‘history of MMT’ are in ‘The 7 Deadly Innocent Frauds of Economic Policy’ free online also on my website. Note too that ‘Soft Currency Economics’ was a result of my first hand experience after 20 years in banking and monetary operations. I had never read Keynes, or even heard of Lerner, Knapp, or had any knowledge of any ‘post Keynesians’. So while it may be true that MMT can be derived from one school of thought or another, it didn’t happen that way. And, for example, when I put forward my ‘real vs nominal’ discussion of fiscal transfers in a monetary union earlier this year, explaining how the production of public goods and services for the benefit of the entire union is in fact a real cost to the region that receives the funding to produce these public goods and services, that was also ‘original MMT thought’ (fully recognizing the shortcomings of such a statement!)..

Second, if there is a ‘fundamental’ contribution of MMT to ‘the literature’ it’s the explicit recognition that a currency like the dollar is in fact a simple public monopoly, and all the rest follows. Along those lines I have lectured on the long standing ‘Keynes vs the Classics’ discussion, where the Classics argued there can be no unemployment without monopoly, and Keynes argues there in fact can be persistent unemployment even without monopoly, due to the effects of unspent income, etc. in the monetary system. My response is they both failed to explicitly recognize the currency itself is a public monopoly. Notional demand is from taxation and from savings desires, and notional supply from state spending and/or state lending. And unemployment is the evidence of a restriction in supply from the monopolist- the failure to spend enough to satisfy the need to pay taxes and the desires to net save in that unit of account. So the classics were right in that unemployment does come from monopoly, but they failed to recognize the applicable monopoly. And Keynes was right, the problem was on the monetary side, but he failed to recognize the currency itself was a simple public monopoly, even though he described it much along those lines. If Keynes had recognized the currency was a monopoly, he surely would have explicitly said so in this discussion, and many other places as well to support many of his contentions. I’ll post this and then go on with additional response to the above blog.

With regard to circuit theory, when I first met the Post Canadians ;) in the mid 1990’s who I very much respect, especially the M&M’s (Mario and Marc), and read a bit of circuit theory, it seemed so ‘intuitively obvious’- a case of ‘goes without saying’- I wondered why it was even worth writing about! And my first comment was that while I fully agreed with what they were saying, it didn’t ‘start from the beginning’ in that it began with firms borrowing to pay workers, but never discussed why anyone would work for the currency in the first place. I explained to them that it about the currency being a simply public monopoly, with tax liabilities the ‘driving force’ behind the ‘government circuit’ where, at the macro level, taxation creates sellers of real goods and services, including labor, which is why people work for businesses, etc. Professor Alain Parguez immediately picked up on this and added it to his model in his next paper, only to be severely criticized and isolated by much of the ‘Circuitist’ community for many years! Most came around to accept it over the years, though some continue to fail to do so.

“I think it’s worth remembering that this thesis is a rigorous foundation of the theory of relative prices and distribution in the development of the so-called “theory of production”, which, among others, Leontief and Sraffa have made outstanding contributions above (see Pasinetti 1975; Kurz and Salvadori 1995, cf. Petri also 2004). In particular, in the light of the theory of production and the above-mentioned argument and its implications can be extended to so-called “long term”, and the objections of Krugman (2011) to the MMT can be effectively criticized.”

Relative prices, yes, but MMT reveals the source of absolute nominal prices. And it’s very simple. As everyone knows, a monopolist is ‘price setter’ rather than ‘price taker’.

And a monopolist is price setter for two prices. The first what Marshall called the ‘own rate’ which how his ‘item’ exchanges for itself. With a currency this is the rate of interest, which we know is set by the CB and not ‘the market’ as we know the CB is monopoly supplier of reserves to its banking system, and therefore is price setter as it prices the banking system’s marginal cost of funds. The second is how the monopolist’s ‘item’ exchanges for other goods and services, which we call ‘the general price level’.

I say it this way- the price level is necessarily a function of prices paid by the issuer when it spends, and/or collateral demanded when it lends.

“However, as Lavoie has shown, it is derived from a simple accounting convention: some modern monetary theorists analyze the central bank and the state as if they were a single sector consolidation. The mystery is easily solved, then. However, it should also add that this consolidation, in the current political and institutional reality, does not exist.” First, I do very well know, recognize, and account for the institutional realities at all times. As I do know that no matter how you look at it, spending comes first before taxing of borrowing for the issuer of the currency, which includes his designated agents

Congress is the issuing authority, and has assigned various tasks to the Treasury and Fed to carry out its will.

The Fed operates a spread sheet that contains the accounts of its member banks, as well as an account for the Treasury.

I begin, for purposes of this discussion, at inception, with no balances in any accounts.

Any payment of taxes would require the Fed to debit a member bank account and credit the account of the treasury.

This is impossible with no balances in the member bank accounts, unless they are permitted to have negative balances.

However, negative balances- overdrafts- are functionally loans from the Fed, an agent of Congress. This means paying taxes via overdraft is paying taxes via obtaining a loan from the Fed. That is, in this example, the Fed must lend the dollars that it accounts for as payment of taxes.

The way ‘insiders’ say it, there can’t be a ‘reserve drain’ without a ‘reserve add’.

That is, the dollars to pay taxes and to buy treasury securities necessarily ‘come from’ govt. spending and/or lending.

There is no way around it. Any issuer must issuer before he can collect the thing he issues as a simple point of logic.

regarding trade, with a floating exchange rate there is ‘continuous balance.’ For example, in the case of the US, with perhaps a $400 billion trade deficit, it can be said that we have the goods and services we imported, and non residents are holding the additional $400 billion of $US financial assets they received in payment, and at this point in time there is that ‘balance’ which has resulted in the current exchange rate martix.

So I see only ‘balance’ at any given point in time, never ‘imbalance’, as a point of logic. Am I missing something? If so, rather than I write about every possible question I can imagine you might raise, can I ask for any of you to give me an example of why this is a ‘problem’ so to speak? Thanks!

“In a period in which the theme of the insertion of foreign capital in the ownership and control seems to go beyond the scope of the last strategic assets in public hands and even get to lick the banking system, it would be good to do a lot more clarity on this point .”

Yes, at any time I see public purpose in sourcing matters of strategic purpose domestically. For example, you do not want to outsource the programming of your military software which could render it useless in time of war. And I see public purpose in producing goods and services with strategic military purpose domestically, like the steel that goes into maintaining the military, and domestic sources of energy, food, etc. etc. Again, government is there for public infrastructure that serves public purpose, which includes strategic planning.

On the other hand, I don’t see the public purpose in not allowing non residents to sell us most of what we call ‘consumer goods and services’ where, for example, a cut off in time of war would not alter the outcome of the war.

Along these lines, I see a serious problem with the euro zone’s dependence on Russian energy supplies, even though Russia has ‘promised’ never to cut them off.

That and $20 will get you a cup of coffee in Rome….

I see the euro zone as paying a heavy price in regards to real terms of trade with Russia and others, due to arrangements that I don’t see serving public purpose, though the certainly do serve influential private purpose.

Remember, economically speaking, employment is a real cost to the worker. He is selling his time. The real benefit is the output. So I suggest you look at real consumption with regard to the euro members, to see who’s winning and losing economically. But yes, any monetary union needs a system of fiscal transfers to ensure full employment and price stability. And I suggest the reason it doesn’t happen is because it’s not widely understood that if a region is assigned the production of public goods and services, in real terms that process is a real cost to that region, as it’s employed to produce real goods and services that other parts of the union are consuming. Instead, because that region gets funding, it’s assumed that region is benefiting in real terms. In other words, fiscal transfers can be effected to use the areas of higher unemployment to produce goods and services that are exported to the rest of the union. This all comes back to exports being real costs, and imports real benefits, etc.

let me conclude today that as a matter of simple game theory labor is not a fair game, and if not supported in some manner real wages will stagnate at very low levels. This is because people must ‘work to eat’ while business hire only if they can make a desired return on investment.

For me it suits public purpose to make sure people actually working for a living and producing real goods and services consumed by the majority are worthy of being supported with high levels of education, health care, and other such publlc services, as well as being fed, housed, and clothed at levels that make feel proud to be members of that society. The proposals on my website are intended to work to that end.

My story of the Thatcher era

Mosler: May 31, 2013

Here’s how I remember it all. I didn’t look anything up, with the idea that memories matter.

The ‘golden age’ from WWII was said to have ended around 1973. Inflation and employment was remembered as relatively low, productivity high, the American middle class thriving.

Why? Keynes was sort of followed. The Kennedy tax cuts come to mind. But also of consequence and ignored was the fact that the US had excess crude production capacity, with the Texas Railroad Commission setting quotas, etc. to support prices at maybe the $2.50-$3.00 price range. And stable crude prices, though maybe a bit higher than they ‘needed’ to be, meant reasonable price stability, as much was priced on a cost plus basis, and the price of oil was a cost of most everything, directly or indirectly.

But in the early 1970’s demand for crude exceeded the US’s capacity to produce it, and Saudi Arabia became the swing producer, replacing the Texas Railroad commission as price setter. And, of course, price stability wasn’t their prime objective, as they hiked price first to about $10 by maybe 1975, which caused a near panic globally, then after a too brief pause they hiked to $20, and finally $40 by maybe 1980.

With oil part of the cost structure, the consumer price index, aka ‘inflation’, soared to double digits by the late 70’s. Headline Keynesian proposals were largely the likes of price and wage controls, which Nixon actually tried for a while. But it turned out the voters preferred inflation to their government telling them what they could earn (wage controls on organized labor and others) and what they could charge. Arthur Burns had the Fed funds rate up to maybe 6%. Miller took over and quickly fell out of favor, followed by tall Paul in maybe 1979 who put on what might be the largest display of gross ignorance of monetary operations with his borrowed reserve targeting policy. However, a year or so after the price of oil broke as did inflation giving tall Paul the spin of being the man who courageously broke inflation. Overlooked was that Jimmy Carter had allowed the deregulation of natural gas in 1978, triggering a massive increase in supply, with our electric utilities shifting from oil to nat gas, and OPEC desperately cutting production by maybe 15 million barrels/day in what turned out to be an unsuccessful effort to hold price above $30, as the supply shock was too large for them and they drowned in the flood of no longer needed oil, with prices falling to maybe the $10 range where they stayed for almost 20 years, until climbing demand again put the Saudis in the catbird seat. Meanwhile, Greenspan got credit for that goldilocks period that again was the product of stable oil prices, not the Fed (at least in my story.)

So back to the 70’s, and continuous oil price hikes by a foreign monopolist. All nations experienced pretty much the same inflation. And it all ended at about the same time as well when the price of crude fell. The ‘heroes’ were coincidental. In fact, my take is they actually made it worse than it needed to be, but it did ‘get better’ and they of course were in the right place at the right time to get credit for that.

So back to the 70’s. With the price of oil being hiked by a foreign monopolist, I see two choices. The first is to try to let there be a relative value shift (as the Fed tries to do today) and not let those price hikes spill into the rest of the price level, which means wages, for the most part. This is another name for a decline in real terms of trade. It would have meant the Saudis would get more real goods and services for the oil. The other choice is to let all other price adjust upward to keep relative value the same, and try to keep real terms of trade from deteriorating. Interestingly, I never heard this argument then and I still don’t hear it now. But that’s how it is none the less. And, ultimately, the answer fell somewhere in between. Some price adjustment and some real terms of trade deterioration. But it all got very ugly along the way.

It was decided the inflation was caused by unions trying to keep up or stay ahead of things for their members, for example. It was forgotten that the power of unions was a derivative of price power of their companies, and as companies lost pricing power to foreign competition, unions lost bargaining power just as fast. And somehow a recession and high unemployment/lost output was the medicine needed for a foreign monopolist to stop hiking prices??? And there was Ford’s ‘whip inflation now’ buttons for his inflation fighting proposal, and Carter with his hostage thing adding to the feeling of vulnerability. And the nat gas dereg of 1978, the thing that actually did break the inflation two years later, hardly got a notice, before or after, and to this day.

As today, the problem back then was no one of political consequence understood the monetary system, including the mainstream Keynesians who had been the intellectual leadership for a long time. The monetarists came into vogue for real only after the failure of the Keynesians, who never did recover, and to this day I’ve heard those still alive push for price and wage controls, fixed exchange rates, etc. etc. in the name of price stability.

So in this context the rise of Thatcher types, including Reagan, makes perfect sense. And even today, those critical of Thatcher type policies have yet to propose any kind of comprehensive proposals that make any sense to me. They now all agree we have a long term deficit problem, and so put forth proposals accordingly, etc. as they are all destroying our civilization with their abject ignorance of the monetary system. Or, for some unknown reason, they are just plain subversive.


It was the blind leading the blind then and it’s the same now.

And that’s how I remember it/her.

And i care a whole lot more about what happens next than about what happened then.


Post debt ceiling crisis update

Mosler: Aug 3, 2011

With the debt ceiling extended, the risk of an catastrophic automatic pro cyclical Treasury response, as previously discussed, has been removed.

What’s left is the muddling through with modest topline growth scenario we’ve had all year.

With a 9% budget deficit humming along, much like a year ago when markets began to discount a double dip recession, I see little chance of a serious collapse in aggregate demand from current levels.

It still looks to me like a Japan like lingering soft spot and L shaped ‘recovery’ with the Fed struggling to meet either of its mandates will keep this Fed ‘low for long’, and that the term structure of rates is moving towards that scenario.

With the end of QE, relative supply shifts back to the curve inside of 10 years, which should work to flatten the long end vs the 7-10 year maturities. And the reversal of positions related to hedging debt ceiling risks that drove accounts to sell or get short the long end work to that same end as well.

The first half of this year demonstrated that corporate sales and earnings can grow at reasonable rates with modest GDP growth. That is, equities can do reasonably well in a slow growth, high unemployment environment.

However, a new realization has finally dawned on investors and the mainstream media. They now seem to realize that government spending cuts reduce growth, with no clarity on how that might translate into higher future private sector growth. That puts the macroeconomic picture in a bind. The believe we need deficit reduction to ward off a looming financial crisis where we somehow turn into Greece, but at the same time now realize that austerity means a weaker economy, at least for as far into the future as markets can discount. This has cast a general malaise that’s been most recently causing stocks and interest rates to fall.

With crude oil and product prices leveling off, presumably because of not so strong world demand, the outlook for inflation (as generally defined) has moderated, as confirmed by recent indicators. As Chairman Bernanke has stated, commodity prices don’t need to actually fall for inflation to come down, they only need to level off, providing they aren’t entirely passed through to the other components of inflation. And with wages and unit labor costs, the largest component of costs, flat to falling, it looks like the the higher commodity costs have been limited to a relative value shift. Yes, standards of living and real terms of trade have been reduced, but it doesn’t look like there’s been any actual inflation, as defined by a continuous increase in the price level.

However, the market seem to have forgotten that the US has been supplying crude oil from its strategic petroleum reserves, which will soon run its course, and I’ve yet to see indications that Lybia will be back on line anytime soon to replace that lost supply. So it is possible crude prices could run back up in September and inflation resume. For the other commodities, however, the longer term supply cycle could be turning, where supply catches up to demand, and prices fall towards marginal costs of production. But that’s a hard call to make, until after it happens.

With the debt ceiling risks now behind us, the systemic risk in the euro zone is now back in the headlines. Unlike the US, where the Treasury is back to being counter cyclical (unemployment payments can rise should jobs be lost and tax revenues fall), the euro zone governments remain largely pro cyclical, as market forces demand deficits be cut in exchange for funding, even as economies weaken. This means a slowdown to that results in negative growth and rising unemployment can accelerate downward, at least until the ECB writes the check to fund counter cyclical deficit spending.

China had a relatively slow first half, and the early indicators for the second half are mixed. Manufacturing indicators looked weak, while the service sector seemed ok. But it’s both too early to tell and the numbers can’t be trusted, so the possibility of a hard landing remains.

Japan is recovering some from the earthquake, but not as quickly as expected, and there has yet to be a fiscal response large enough to move that needle. And with global excess capacity taking up some of the fall off in production, Japan will be hard pressed to get it back.

Falling crude prices and weak global demand softening other commodity prices, looks dollar friendly to me. And, technically, my guess is that first QE and then the debt ceiling threats drove portfolios out of the dollar and left the world short dollars, which is also now a positive for the dollar.

The lingering question is how US aggregate demand can be this weak with the Federal deficit running at about 9% of GDP. That is, what are the demand leakages that the deficit has only partially offset. We have the usual pension fund contributions, and corporate reserves are up with retained earnings/cash reserves up. Additionally, we aren’t getting the usual private sector borrowing to spend on housing/cars as might be expected this far into a recovery, even though the federal deficit spending has restored savings of dollar financial assets and debt to income ratio to levels that have supported vigorous private sector credit expansions in past cycles.

Or have they? Looking back at past cycles it seems the support from private sector credit expansions that ‘shouldn’t have happened’ has been overlooked, raising the question of whether what we have now is the norm in the absence of an ‘unsustainable bubble.’ For example, would output and employment have recovered in the last cycle without the expansion phase of sub prime fiasco? What would the late 1990’s have looked like without the funding of the impossible business plans of the .com and y2k credit expansion? And I credit much of the magic of the Reagan years to the expansion phase of what became the S and L debacle, and it was the emerging market lending boom that drove the prior decade. And note that Japan has not repeated the mistake of allowing the type of credit boom they had in the 1980’s, accounting for the last two decades of no growth, and, conversely, China’s boom has been almost entirely driven by loans from state owned banks with no concern about repayment.

So my point is, maybe, at least over the last few decades, we’ve always needed larger budget deficits than imagined to sustain full employment via something other than an unsustainable private sector credit boom? And with today’s politics, the odds of pursuing a higher deficit are about as remote as a meaningful private sector credit boom.

So muddling through seems here to stay for a while

Senator Richard Blumenthal- not so innocent subversion


April 14, 2011

The Honorable Timothy J. Geithner

Secretary of the Treasury.

1500 Pennsylvania Ave. NW.

Washington, DC 20220.

Dear Mr. Secretary,.

We write to urge you to make fundamental currency misalignment a central issue at the G-20 meeting in Washington, DC this week. For too long, this issue has festered, harming not only American companies and workers, but also the economy of every country that meets its International Monetary Fund (IMF) commitments to allow the level of its currency to be determined by markets.

The consistent interference of a few countries in currency markets creates an uneven global playing field, perversely encouraging other countries to intervene as well. The resulting currency misalignments distort global markets, creating instability at a time when the world can ill afford it.

While multiple countries are guilty of currency manipulation, China unfortunately stands out from the rest. Its mercantilist policies occur on a grand scale. In the fourth quarter of 2010, China intervened in currency markets by purchasing $2 billion worth of foreign currency a day, adding $199 billion to its foreign currency reserves. Not surprisingly, in its recent 2011 Global Economic Outlook, the IMF calls the RMB “substantially weaker than warranted” and finds a “key motivation for the acquisition of foreign exchange reserves seems to be to prevent nominal exchange rate appreciation and preserve competitiveness.”

While multiple countries are guilty of currency manipulation, China unfortunately stands out from the rest. Its mercantilist policies occur on a grand scale. In the fourth quarter of 2010, China intervened in currency markets by purchasing $2 billion worth of foreign currency a day, adding $199 billion to its foreign currency reserves. Not surprisingly, in its recent 2011 Global Economic Outlook, the IMF calls the RMB “substantially weaker than warranted” and finds a “key motivation for the acquisition of foreign exchange reserves seems to be to prevent nominal exchange rate appreciation and preserve competitiveness.”

The IMF cites the accumulation of official foreign exchange reserves as “an important obstacle to global demand rebalancing.” Removing this obstacle should be a key U.S. priority. Ironically, China’s refusal to allow the RMB to appreciate in a meaningful way is contrary to its own best interest. Economists agree that China needs to rebalance its economy to rely more on domestic consumption than on export-led growth. This necessary rebalancing would ultimately tame Chinese inflation, improve global economic growth, and remove a key barrier to a more fruitful U.S.-China relationship.

The United States does no one a favor by downplaying this crucial issue. We urge you to work together with all countries harmed by currency manipulation to press China to allow the level of the RMB to be determined by markets, not government interventions. When everyone plays by the same rules, our entrepreneurs and workers can compete and win in the global economy.


Sen. Debbie Stabenow, Sen. Sherrod Brown, Sen. Olympia Snowe, Sen. Carl Levin, Sen. Sheldon Whitehouse, Sen. Bob Casey, Sen. Ben Cardin, Sen. Kirsten Gillibrand, Sen. Jack Reed, Sen. Richard Blumenthal.

Mosler: Nprov 18, 2011

I spoke with Senator Blumenthal for several hours on MMT just over a year ago, before he was elected Senator.

He read my book and asked the right questions.

He knows imports are real benefits, exports real costs.

He knows the trade deficit is a good thing for America.

He knows that his proposals would reduce our real terms of trade and lower our standard of living

And he knows taxes function to regulate aggregate demand, and that we can readily sustain full employment by keeping taxes at the right level for a given size of government..

He remarked that it was how he had learned it at Harvard in the 1960’s.

And he called me several times to discuss specific issues in detail

With this letter he has turned subversive for presumed political gain.

I see it as a clear case of politics over patriotism

I likewise discussed this with Senator Carl Levin, but maybe 15 years ago, who also seems to have decided to place politics over patriotism.

If I had the authority, I would prosecute for treason

Stiglitz Calls for New Global Reserve Currency to Prevent Trade Imbalances By John Detrixhe and Sara Eisen


Stiglitz Calls for New Global Reserve Currency to Prevent Trade ImbalancesBy John Detrixhe and Sara Eisen.

Mosler: Apr 12, 2011

He doesn’t seem to grasp the notion that imports are real benefits and exports real costs, nor that the national debt is nothing more than dollar balances in Fed securities accounts that are ‘paid back’ by debiting the securities accounts and crediting reserve accounts, also at the Fed. No grandchildren writing checks involved.


A “global system” is needed to replace the dollar as a reserve currency and help avoid a weakening of U.S. credit quality, said Stiglitz, a professor at Columbia University in New York.

Mosler: Apr 12, 2011

There is no such thing as weakening the ability of the US to make US dollar payments. All that’s involved is crediting reserve accounts at the fed.


The dollar fell to an almost 15-month low against the euro last week, and the U.S. trade deficitwidened more than forecast in January to the highest level in seven months.

“By taking off the burden of any single country, we don’t have to have trade deficits,” Stiglitz said in an interview in Bretton Woods, New Hampshire.

Mosler: Apr 12, 2011

He just assumes there’s some problem with a nation running trade deficits, not realizing it’s a sign of success- improved real terms of trade- and not failure.


“Things would be much worse if it were not the case that Europe was having even more of a problem, but winning a negative beauty pageant is not the way to create a strong economy.”

The benchmark 10-year Treasury note yield was at 3.58 percent on April 8, below the average of 7 percent since 1980.

Mosler: Apr 12, 2011

Deficits per se obviously don’t drive up interest rates.


“Reserves are IOU’s,” Stiglitz said. “When IOU’s get big enough, people start saying maybe you’re not a good credit risk. Or at least, they would change in their sentiment about credit risk.”

Mosler: Apr 12, 2011

Doesn’t matter with a currency issuer like the US, Japan and UK.

Japan’s ‘debt’ is nearly 3x ours, has had multiple downgrades, and their 10 year rate just ‘skyrocketed’ to about 1.3%, for example.


The existing monetary system means “there’s a very good risk of an extended period of low growth, inflationary bias, instability,” Stiglitz said.

Mosler: Apr 12, 2011

Agreed, because nations don’t realize that their taxes function to regulate their aggregate demand, and not to raise revenue per se. And seems Stiglitz doesn’t get it either.


It’s “a system that’s fundamentally unfair because it means that poor countries are lending to the U.S. at close to zero interest rates.”

Mosler: Apr 12, 2011

It’s unfair for a lot of reasons, except that one..