The U.S. is in a debt and deficit crisis

The U.S. is in a debt and deficit crisis, but the crisis is that the deficit is too little and that households (not the government!) hold too much debt.

We must absolutely spend our government money wisely; toward productive things like infrastructure and employing people. There are plenty of things to spend the money on that won't compete with the private sector, will actually help the private sector, and are way more efficient then letting so many resources sit and do nothing. The government is not facing a debt default of any kind and we are no where near inflation let alone hyperinflation. We are trying to stave off deflation of the variety experienced by Japan for over a decade which earned it the title of 'the lost decade'. The government doesn't need to borrow (or tax) to spend, but it can do so if it wants to at historically low rates.

We must have a deficit to stimulate aggregate demand because consumers are under way too much debt to do it themselves. Business can't thrive without spending and consumers can't spend with so much debt to pay off and no jobs to earn an income. A debt write-down is absolutely needed. The banks received a bailout for making bad loans and, even worse, for betting multiple times on those bad loans. Debtors should receive a bailout too in the form of a write-down.

Debt and the deficit do matter.

We must write down debt and reform the financial sector (here are some good ideas). And we must increase the deficit to stimulate aggregate demand (see here).

We won't and can't recover as long as we hold so much debt and as long as the government deficit remains so small.

So, sorry Satyajit Das, you are very wrong when you say the U.S. government is in a financial crisis because it cannot sustain its debts. Note well that total U.S. debt equals total U.S. Dollar savings.

Double-Dip Optimism?

Not sure why.

From Yahoo! News about Wall Street Journal Poll:

Economists are getting increasingly optimistic about our chances of avoiding a double-dip recession.

A Wall Street Journal survey of 52 economists put the chances of falling back into a recession in the next year at one in four. That's down from a one in three chance, when the Journal put the question to the same group in September.

The Great Recession officially ended in June 2009, but since then growth has been frustratingly slow. Over the summer, anemic job growth, Europe's debt crisis and the wrangling in Washington over raising the U.S. debt ceiling sparked new fears that the economy could begin contracting again. But since then, signs have pointed to steady, though still far from strong, growth. On Thursday, the Labor Department said the number of people filing first-time claims for jobless benefits dropped to 390,000--the lowest level in seven months.

Still, economists in the survey said they expected the jobless rate to stay above 7 percent by 2014.

They also said there's a two in three chance that the Eurozone will fall into a recession, dragged down by possible Greek or Italian defaults. If that happens, the U.S. economy would likely also be affected.

I am not so optimistic. An imminent EU collapse would have widespread ramifications for the U.S. and the world as a whole. Deficit cutting will also lower aggregate effective demand and therefore growth. Private spending is unlikely to make up the difference because of the large amounts of debt still on their balance sheets.

This could be avoided if the EU creates a fiscal institution to carry out the spending necessary to prevent a collapse in demand and if the U.S. increases deficit spending and writes down large amounts of private debt, but all of these remedies seem extremely unlikely. Thus, I am rather pessimistic that we will avoid a double-dip recession.

Why is the EU failing?

The simple answer is that it divorced monetary and fiscal powers. This cannot be sustained because fiscal actions have a direct impact on the monetary system and vice versa. The EU stripped themselves of the ability to deal with crises of any kind and those who understand monetary systems predicted this from the very beginning. Among those includes Wynne Godley who wrote this article about the EU in 1992 (via New Economic Perspectives).

I just want to highlight one paragraph, but I highly recommend reading his entire piece.

Let me express a different view. I think that the central government of any sovereign state ought to be striving all the time to determine the optimum overall level of public provision, the correct overall burden of taxation, the correct allocation of total expenditures between competing requirements and the just distribution of the tax burden. It must also determine the extent to which any gap between expenditure and taxation is financed by making a draft on the central bank and how much it is financed by borrowing and on what terms. The way in which governments decide all these (and some other) issues, and the quality of leadership which they can deploy, will, in interaction with the decisions of individuals, corporations and foreigners, determine such things as interest rates, the exchange rate, the inflation rate, the growth rate and the unemployment rate. It will also profoundly influence the distribution of income and wealth not only between individuals but between whole regions, assisting, one hopes, those adversely affected by structural change...Almost nothing simple can be said about the use of these instruments, with all their inter-dependencies, to promote the well-being of a nation and protect it as well as may be from the shocks of various kinds to which it will inevitably be subjected...I recite all this to suggest, not that sovereignty should not be given up in the noble cause of European integration, but that if all these functions are renounced by individual governments they simply have to be taken on by some other authority...The counterpart of giving up sovereignty should be that the component nations are constituted into a federation to whom their sovereignty is entrusted.

Pope Benedict XVI on the Environment

Major issues in our day concern our environment, including global warming, increasing extinction of species, deterioration of natural resources, etc. Reading other Catholic blogs there seems to be a wide variety of opinions on global warming, non-renewable energy sources, and protecting the environment in general, so I thought it expedient to write a post on what Pope Benedict had to say about this topic in Caritas en Veritate.

Highlights are my own:

48. Today the subject of development is also closely related to the duties arising from our relationship to the natural environment. The environment is God's gift to everyone, and in our use of it we have a responsibility towards the poor, towards future generations and towards humanity as a whole. When nature, including the human being, is viewed as the result of mere chance or evolutionary determinism, our sense of responsibility wanes. In nature, the believer recognizes the wonderful result of God's creative activity, which we may use responsibly to satisfy our legitimate needs, material or otherwise, while respecting the intrinsic balance of creation. If this vision is lost, we end up either considering nature an untouchable taboo or, on the contrary, abusing it. Neither attitude is consonant with the Christian vision of nature as the fruit of God's creation.

Nature expresses a design of love and truth. It is prior to us, and it has been given to us by God as the setting for our life. Nature speaks to us of the Creator (cf. Rom 1:20) and his love for humanity. It is destined to be “recapitulated” in Christ at the end of time (cf. Eph 1:9-10; Col 1:19-20). Thus it too is a “vocation”[115]. Nature is at our disposal not as “a heap of scattered refuse”[116], but as a gift of the Creator who has given it an inbuilt order, enabling man to draw from it the principles needed in order “to till it and keep it” (Gen 2:15). But it should also be stressed that it is contrary to authentic development to view nature as something more important than the human person. This position leads to attitudes of neo-paganism or a new pantheism — human salvation cannot come from nature alone, understood in a purely naturalistic sense. This having been said, it is also necessary to reject the opposite position, which aims at total technical dominion over nature, because the natural environment is more than raw material to be manipulated at our pleasure; it is a wondrous work of the Creator containing a “grammar” which sets forth ends and criteria for its wise use, not its reckless exploitation. Today much harm is done to development precisely as a result of these distorted notions. Reducing nature merely to a collection of contingent data ends up doing violence to the environment and even encouraging activity that fails to respect human nature itself. Our nature, constituted not only by matter but also by spirit, and as such, endowed with transcendent meaning and aspirations, is also normative for culture. Human beings interpret and shape the natural environment through culture, which in turn is given direction by the responsible use of freedom, in accordance with the dictates of the moral law. Consequently, projects for integral human development cannot ignore coming generations, but need to be marked by solidarity and inter-generational justice, while taking into account a variety of contexts: ecological, juridical, economic, political and cultural[117].

49. Questions linked to the care and preservation of the environment today need to give due consideration to the energy problem. The fact that some States, power groups and companies hoard non-renewable energy resources represents a grave obstacle to development in poor countries. Those countries lack the economic means either to gain access to existing sources of non-renewable energy or to finance research into new alternatives. The stockpiling of natural resources, which in many cases are found in the poor countries themselves, gives rise to exploitation and frequent conflicts between and within nations. These conflicts are often fought on the soil of those same countries, with a heavy toll of death, destruction and further decay. The international community has an urgent duty to find institutional means of regulating the exploitation of non-renewable resources, involving poor countries in the process, in order to plan together for the future.

On this front too, there is a pressing moral need for renewed solidarity, especially in relationships between developing countries and those that are highly industrialized[118]. The technologically advanced societies can and must lower their domestic energy consumption, either through an evolution in manufacturing methods or through greater ecological sensitivity among their citizens. It should be added that at present it is possible to achieve improved energy efficiency while at the same time encouraging research into alternative forms of energy. What is also needed, though, is a worldwide redistribution of energy resources, so that countries lacking those resources can have access to them. The fate of those countries cannot be left in the hands of whoever is first to claim the spoils, or whoever is able to prevail over the rest. Here we are dealing with major issues; if they are to be faced adequately, then everyone must responsibly recognize the impact they will have on future generations, particularly on the many young people in the poorer nations, who “ask to assume their active part in the construction of a better world”[119].

50. This responsibility is a global one, for it is concerned not just with energy but with the whole of creation, which must not be bequeathed to future generations depleted of its resources. Human beings legitimately exercise a responsible stewardship over nature, in order to protect it, to enjoy its fruits and to cultivate it in new ways, with the assistance of advanced technologies, so that it can worthily accommodate and feed the world's population. On this earth there is room for everyone: here the entire human family must find the resources to live with dignity, through the help of nature itself — God's gift to his children — and through hard work and creativity. At the same time we must recognize our grave duty to hand the earth on to future generations in such a condition that they too can worthily inhabit it and continue to cultivate it. This means being committed to making joint decisions “after pondering responsibly the road to be taken, decisions aimed at strengthening that covenant between human beings and the environment, which should mirror the creative love of God, from whom we come and towards whom we are journeying”[120]. Let us hope that the international community and individual governments will succeed in countering harmful ways of treating the environment. It is likewise incumbent upon the competent authorities to make every effort to ensure that the economic and social costs of using up shared environmental resources are recognized with transparency and fully borne by those who incur them, not by other peoples or future generations: the protection of the environment, of resources and of the climate obliges all international leaders to act jointly and to show a readiness to work in good faith, respecting the law and promoting solidarity with the weakest regions of the planet[121]. One of the greatest challenges facing the economy is to achieve the most efficient use — not abuse — of natural resources, based on a realization that the notion of “efficiency” is not value-free.

51. The way humanity treats the environment influences the way it treats itself, and vice versa. This invites contemporary society to a serious review of its life-style, which, in many parts of the world, is prone to hedonism and consumerism, regardless of their harmful consequences[122]. What is needed is an effective shift in mentality which can lead to the adoption of new life-styles “in which the quest for truth, beauty, goodness and communion with others for the sake of common growth are the factors which determine consumer choices, savings and investments”[123]. Every violation of solidarity and civic friendship harms the environment, just as environmental deterioration in turn upsets relations in society. Nature, especially in our time, is so integrated into the dynamics of society and culture that by now it hardly constitutes an independent variable. Desertification and the decline in productivity in some agricultural areas are also the result of impoverishment and underdevelopment among their inhabitants. When incentives are offered for their economic and cultural development, nature itself is protected. Moreover, how many natural resources are squandered by wars! Peace in and among peoples would also provide greater protection for nature. The hoarding of resources, especially water, can generate serious conflicts among the peoples involved. Peaceful agreement about the use of resources can protect nature and, at the same time, the well-being of the societies concerned.

The Church has a responsibility towards creation and she must assert this responsibility in the public sphere. In so doing, she must defend not only earth, water and air as gifts of creation that belong to everyone. She must above all protect mankind from self-destruction. There is need for what might be called a human ecology, correctly understood. The deterioration of nature is in fact closely connected to the culture that shapes human coexistence: when “human ecology”[124] is respected within society, environmental ecology also benefits. Just as human virtues are interrelated, such that the weakening of one places others at risk, so the ecological system is based on respect for a plan that affects both the health of society and its good relationship with nature.

In order to protect nature, it is not enough to intervene with economic incentives or deterrents; not even an apposite education is sufficient. These are important steps, but the decisive issue is the overall moral tenor of society. If there is a lack of respect for the right to life and to a natural death, if human conception, gestation and birth are made artificial, if human embryos are sacrificed to research, the conscience of society ends up losing the concept of human ecology and, along with it, that of environmental ecology. It is contradictory to insist that future generations respect the natural environment when our educational systems and laws do not help them to respect themselves. The book of nature is one and indivisible: it takes in not only the environment but also life, sexuality, marriage, the family, social relations: in a word, integral human development. Our duties towards the environment are linked to our duties towards the human person, considered in himself and in relation to others. It would be wrong to uphold one set of duties while trampling on the other. Herein lies a grave contradiction in our mentality and practice today: one which demeans the person, disrupts the environment and damages society.

52. Truth, and the love which it reveals, cannot be produced: they can only be received as a gift. Their ultimate source is not, and cannot be, mankind, but only God, who is himself Truth and Love. This principle is extremely important for society and for development, since neither can be a purely human product; the vocation to development on the part of individuals and peoples is not based simply on human choice, but is an intrinsic part of a plan that is prior to us and constitutes for all of us a duty to be freely accepted. That which is prior to us and constitutes us — subsistent Love and Truth — shows us what goodness is, and in what our true happiness consists. It shows us the road to true development.

Understanding Fiat Money

There seems to be a lot of confusion concerning just what gives money its value or even what money really is. I think that evidence has shown that this is a somewhat elusive issue, because the nature and role of money has varied throughout history (See David Graeber's book "Debt: The first 5000 years").

But almost invariably, money has represented a credit-debt relation. Money is one person's asset and another's liability. It has taken many forms throughout history: gold, tokens, coins, tallies, people, cigarettes, and even numbers in bank accounts. There really are too many to name in a reasonable amount of time. But the important point is that the object represented a relation or social obligation. The gold or whatever was the asset of one individual but the liability of another.

Money in recent history has evolved from precious metals and the gold standard to paper money and eventually to pure credit represented by numbers in bank accounts or so the tale goes. But if gold was what gave money its value (supposedly) and our paper currency or even our pure credit currency isn't backed by gold then what gives it its value?

That is, if money is a credit-debt relation and not merely an object, then what gives it value? Some contend that the goods it can buy is what gives it value, i.e. that it is backed by real goods. This seems to make sense, because after all, paper money is pretty worthless in and of itself. It doesn't do anything but get you other things that do have some use-value. I suppose you could use it as kleenex (as in one of my favorite movies), but clearly its physical properties are not what give it value. Pure credit money would have no value at all then.

Instead, we give it value by accepting it. Just like the key to obtaining a loan (a debt) is getting it accepted by a creditor, the key to any money is getting it accepted. I can create my own money, essentially IOUs, but the only way that it would have value is if someone was willing to accept it usually in exchange for something. They might do this if they trust me to make good on my promise to pay them back whatever it is that I said I'd pay them back.

Acceptance, then, is the key to any money having value. All monies fall into a sort of hierarchy of acceptance. Not many people would be willing to accept my IOUs, but perhaps they would accept them from a higher more powerful institution, say a bank. In fact, that's what bank loans are, bank money. They aren't US Dollars. They are convertible into US Dollars, but they aren't initially US dollars.

So why do we use US dollars as currency? Because our government requires us to pay our taxes and fines to them in US dollars. To pay taxes we need to obtain US dollars. We do this by working for the state, offering goods and services to the state in exchange for US dollars. We then use those dollars to pay our taxes. Logically, the gov’t must pay out at least as many dollars as it requires in taxes, otherwise some of us wouldn’t be able to pay our taxes and would face the punishment of not paying our taxes. But even more likely, it will have to pay out more dollars than it requires us to pay in because we will want to save and prepare for future tax liabilities. This means that the govt MUST spend at a deficit (gov’t spending>taxes).

Because we need US dollars to pay taxes, we will also use them to exchange for other goods and services outside of the government sector because others will also need US dollars to pay their taxes. So long as the tax liability is sufficiently high and on a sufficient amount of the people in the nation, US dollars will be the most accepted form of money. If taxes aren’t high enough, then inflation can become an issue. Spending should be high enough to provide the public with enough dollars to pay back in taxes and to satisfy their desire for net financial saving. With this understanding, you can see that a balanced budget would be disastrous! Deficits do matter; the right sized deficit is what we need, not a balanced budget.

To sum up, acceptance is what gives money its value, not real goods and services (note however that real goods and services are what matter in an economy because we create money in order to obtain or lay claim to those goods and services, but that the value of money still depends on acceptance). Taxes are what make state money the most accepted form of money in a nation, and it is therefore the state’s ability to issue a tax on its people that gives it its power over the monetary system.

Moving to a gold standard would not remove this power from the state. It would only restrict their ability to respond to economic or financial crises much like in the early 20th century.

For more on this topic I recommend this post from L. Randall Wray.