Please consider £11 Trillion Debt Wave as Governments Borrow More Than Ever Before.
Governments need to borrow £11 trillion on financial markets this year, breaking the £10.9 trillion record set in the recession-fighting spending spree at the height of the financial crisis.
Most of this is caused by governments refinancing existing debt mountains as the bonds issued to finance earlier debt-fueled spending mature.
But more than £2 trillion is new borrowing as nations continue to add to their national debts, according to data on rich-world economies from the Organisation for Economic Co-operation and Development (OECD). The US budget deficit hit more than 4% of GDP last year.
Austerity Nonsense
Amidst all this nonsensical talk of austerity, government debt keeps expanding, and expanding, and expanding.
The MMTers will simply come back with claims we need to double debt or triple it, or whatever multiple it takes, effectively embracing AOC’s idiotic Green New Deal.
And where foolish thinking prevails, look no further than Chicago where we have yet Another Idiotic “Free Money” Proposal, This One From Chicago Mayor Rahm Emanuel.
In the real world I ask, Tax the Rich! Tax the Rich! How’s it Working Out?
MMTers will respond that government debt doesn’t matter at all. So, why tax anybody? After all, government always spends money wisely.
Mike “Mish” Shedlock
Failing: Weimar Republic, Venezuela, Zimbawbe, Greece, Argentina, Argentina, Argentina, Spain, Spain, Spain, Rome, USSR. How many times does it have to happen. What makes this time different?
What, exactly, is failing? Your post leave a lot unanswered. What is it you’re worried about; or are you trying to sell something?
So, why tax anybody? – you ask. The purpose of federal income tax in a fiat currency system is to REGULATE THE ECONOMY. It’s how you hit the desired inflation rate. Hence, federal taxes do not actually ‘pay’ for anything.
Precisely 👍
Indeed. Money in nothing other than accounting and keeping score. You cannot run out of money anymore than that you have to cancel a game because there are not enough points. Look at how much money West Germany could suddenly come up with to invest in East Germany and in Russia after the fall of communism. Of course you can run our of real resources — that is the point of keeping score. Pulling East Germany out of the ditch wouldn’t have happened if left to the private sector alone … they would have let the uncompetitive industry in the East asphyxiate … there are examples enough in the world of poor areas adjacent to prosperous ares within the same jurisdictinos.
Of course you can run our of real resources — that is the point of keeping score.
I’m not sure I understand. For example?
Behind all this detail-noise seems to be a situation that must be dealt with in the next couple decades. Worldwide.
“Money” has become too important to leave to individual nation states.
Money is always trying to become universal. The larger and higher-bandwidth the world of money is, the better. The more efficient. The more accurate. The more effective.
But, currently, no one knows how to decouple “money” from nation states. Some essential problems:
How do you stop counterfeiting? Where’s the power that ensures honesty behind a unit of “money”?
How do you ensure privacy? Or do you give up on privacy – go whole-hog with the global village?
How much “money” should there be?
How do you stop getting in a “winner takes all” trap?
How do you fit the money world with human psychology?
How do you “pay” for functions communal, geographic entities currently do?
The crypto guys are madly trying to solve such problems. But, clearly, they have a long, long way to go.
The current world, letting a small group of people trade currencies at high volumes with low overhead, may be the best long-term solution.
Who knows?
Not enough to cover there debt so they just make more. Just think how many new millionaires this will create.
So as a nation we’d be better positioned with a national surplus that would eventually result in no national debt? With a fiat monetary system wouldn’t that result in a collapse of the monetary base?
National surplus is saving for a rainy day. If that sounds like a good idea then it probably is. The monetary base is largely fixed at what central banks fix it at (Fed balance sheet plus cash and coins in circulation). The (highly elastic) money supply, on the other hand, is very variable and relies more on private sector activity: banks lending to the public. The fiat money system is doomed and once sound money returns, individuals and Govt will no longer be able to live beyond their means.
Ok, but within our current fiat money system running a national surplus would come at the detriment of the monetary base. That was my only thought.
Fiat money may be doomed, but sound money using precious metals are politically debased when necessary.
I know full well what MMT is: Idiocy
The theory that governments cannot default on debt in their own currency is accurate though. On that one truism comes a lot of horse shit.
Government can only not default on debt in their own currency, according to the narrowest, formal definition of what is a default. By any practical means, handing over gold, only to get toilet paper in return, is effectively being defaulted on.
No you don’t,you don’t know or understand MMT. You’re a charlatan.
MMT works – Debt Works – Deficits Don’t Matter – What a hoot
The demise of the middle class must be your definition of “works”
Thanks Mish you’ve exposed an important point. The real question popularized MMT must answer is how will the increase in the U.S. debt to GDP ratio, and the continued financialization of the U.S Economy (Stock/Bond Market price inflation) effect Income inequality. If the GDP/debt ratio is increasing you have more money producing nothing, obviously increasing Inequality.
I’ve been bitching about capital flight for a while. Few people seem to understand what wealth is. It isn’t dollars, or even stocks or bonds. It is the actual brick, mortal, steel and copper plant and equipment that is able to produce the goods and services that people want and need more cheaply than anybody else. Every time a factory closes in the US and one opens somewhere else, we become poorer as a nation. True that stocks and bonds are an ownership stake in the assets or ROI of a particular business, but the wealth resides in the ability to produce. We are printing money to cover the capital flight or destruction of domestic capital, or whatever you want to call it. Money is ultimately worth only what there is to buy with it. Overseas dollars that don’t come back to buy US goods and services buy Treasuries instead. The government essentially plasters over the shortfall by creating debt. This allows things look OK on the surface while our economy rots at the root. Ultimately it is not about money, but capital. We are burning our capital in trade for cheap crap from overseas. The federal government must run a deficit at least as large as the balance of trade deficit to keep the game alive. At some point this will break down. MMT will not save us.
Great comment. I’ll take it down the rabbit hole a bit further. Even more important than the capital itself, is the knowledge in how to create and use the capital. If I ship a car factory overseas and still know how to build a new one here with the skilled workers to utilize the machinery, I’m still okay. However, when I lose the human skills, then we get really poorer.
I no longer have a population of highly-skilled, well-paid welders and machinists, but now have a population of low-skilled, low-paid baristas and Uber drivers. I say we are practically there already, and when you wonder why the working class went for Trump, their’s your answer.
Skills and capital go hand in hand, as you say. Capital is generally the limiting ingredient, though. No matter how many Khan academy lectures on aerodynamics an Afghan cave dweller watches, his skills doesn’t add up to Boeing. While once the capital is there, people have a good track record of figuring out how to make use of it.
Absolutely right. I laughed at Mish’s post about a Telsa factory in China that will produce 500,000 cars a year. The plant and equipment will reside on Chinese soil. All of the IP will be stolen and Elon Musk won’t be permitted to repatriate a single dollar. Great plan.
And, yes, whole trades are disappearing, never to return.
So a quick primer on MMT.
Trad view of government spending: government takes your money (taxes), uses it to buy stupid stuff (F-35s, bridge to nowhere), but it doesn’t have enough so it has to borrow some. Borrowing competes with public sector credit needs driving interest rates up. Everyone is worse off.
MMT view: government prints money to buy stupid stuff. Printed money ends up in bank accounts. Government taxes some of it back but not all. So it borrows back the rest. Borrowing does not conflict with private sector cause the government just printed new money to start with. It is just absorbing the printed money back so it doesn’t cause inflation.
I tend to think the MMT definition of how the system works is accurate. And the definition of “buys stupid stuff” is in the eye of the beholder. Lockheed loves F35s and road contractors love bridges to nowhere.
I type way to slow to point out all your errors. Suffice it to say, your view presumes that something can be had for nothing.
MMT is not correct on how things work. Things could work as they describe but they don’t.
For example, according to MMT the US government is not limited by taxes and borrowing. This is wrong. They do not have to be limited by them but they self-impose the restriction of never overspending what is in the Treasury account so in practice they are. It leads to shutdowns over debt ceilings that is nothing more than political gamesmanship but it is how it currently works. The US government taxes and borrows, then spends. MMT incorrectly claims it is the reverse. Again, it could work their way. But in actual practice it does not.
The government does not print money to spend. The only money printing they do is to supply FRNs to the Fed. They do not spend funds into existence as they do not overdraw the Treasury Account. They could and I’m sure the Fed would honor it but they don’t and that is the reality of what takes place.
MMTers think that the government needed to spend the currency into the economy so that people could pay taxes in it. That is not the case for the FRN, which was and is introduced via Federal Reserve Banks and which, before FDR’s XO, could be redeemed for gold. What MMT describes was true for US Notes, but not FRNs.
Money isn’t created by the US government. It is created primarily by commercial banks and to a lesser extent the Fed. Legally what the banks and Fed create (deposits) is not money, but it de facto is money (and I’m sure would be ruled as such if challenged in court), At any rate it is possible to convert deposit “money” to legal / lawful money at no cost.
So if government printed then borrowed enough to buy up everything in the US, so that nothing was left for anyone else and everyone starved to death, that would not “conflict with private sector?” Or only half of everything? A quarter of everything?…..
Money isn’t wealth. All it is, is claims on wealth. Printing more money, doesn’t make more wealth. It just takes wealth from those who have it, and hands it to those who printed up new claims to it. Government buying stupid stuff with printed money, doesn’t create new stupid stuff. All it does, is transfer stupid stuff from private people, to government. Hence reduces the amount of stupid stuff available for private investment and consumption. The exact mechanism by which government lays claim to stupid stuff, doesn’t matter. At gunpoint, via taxes, via printing…. All that matters is that the stupid stuff is no longer available for private use. Hence, whatever government does to obtain their stupid stuff, conflicts with the private sector. No childish “theory” can ever change that.
Yes, it all hinges on what the money/debt is used for. If it is an investment in production, there may be a return. If it is just consumption, than that won’t apply. It is not that easy to distinguish consumption and productive investment, since productive investment also consumes resources and labor. Fogging the view are all the rationalizations that anything that makes money (even banks) must be productive somehow, when a great deal of financial and commercial activity is in fact extractive.
The tired prejudice that government spending never produces anything is at odds with the fact that all prosperous countries owe the possibility of doing business to their public wealth (education, infrastructure, research, communications, civil services that work). In contrast, many poor countries have low taxes, almost no effective government intervention in anything, but no structures in which and on which you can build competitive businesses. That is why Japan and Mozambique are different. Government can sponsor nation wide facilities which never get off the ground if the long-term commitment is not present.
These MMTers think we live in a one-world nation or that all the debt is owed to ourselves. Computers from the Caymans have certainly manipulated debt auctions by the Treasury. Imagine a world where dollars are no longer the reserve currency and then see what happens to our interest rates. That day is eventually coming because eventually debt undoes all dominant civilizations. It is simply a matter of time. The debt crises will hit in the 21st century for sure and likely sometime in the 2020s. The last time we had this severe a debt crisis was in the 1920s. This one won’t be as painful but at some point public and private debt will come home to roost because there aren’t enough tax dollars to service the debt. We only pay interest on it !
If the MMT point of view is correct, federal bonds aren’t the same thing as “debt” in the sense you or I have debt. If you can print your own money, you can’t really have debt in the sense that you have to sacrifice a future expenditures to satisfy current debts. The key is to be able to borrow in your own currency, because you can pay off your debt in your printed currency.
Now, if we reach a point where we have to borrow in Chinese Remnimbi in order to buy stuff from China, then we’re in real trouble.
If MMT was correct, there would be no problem with everyone being able to simply print money to eviscerate debt.
Somehow central bankers and vote-buying politicians think they have discovered the “easy” way to prosperity, a rising standard of living and societal wealth (and cementing their own power).
No hard work, no sacrifice and no savings needed.
But this craziness has been tried all throughout history. From Genghis Khan, to the Romans, to modern day (Zimbabwe, Germany, Argentina, Venezuela, etc.).
It all works for awhile, while it burns through the real wealth of what was built before – until it doesn’t.
Then comes repression, misery, bankruptcy, changes of government and war.
The only reason the system hasn’t collapsed already is due to abnormally low interest rates. Logically, I can’t believe that this is even a discussable subject, as any way you spin it you cannot get more debt to pay more debt in the long run. Thousands of years of history indicate this, many empires in the past collapsed over insurmountable debt.
This insanity will eventually lead to NEGATIVE interest rates at all points along the yield curve – because it simply must, to keep the debt-money system from imploding into a deflationary black hole. But good luck having a functioning economy with negative interest rates. So we shall see. Interesting times, indeed.
The beauty of negative interest rates will be realized when the govt outlaws cash and converts to digital money. They can then debit your account every month. This is one way they could pay down their national debt. Its all good. It the benevolent govt extorting your money.
Of course the real insanity is that the additional debt is recorded as an increase in GDP. Equivalent to someone taking out a loan and declaring the proceeds as income on their tax return. Only a PHD could rationalize this treatment.
The video proves Phd”s are really idiots when it comes to common sense. In theory there is no difference between practice and theory, but in practice there is. Her idiotic theory is that govt can use debt productiviely ie self liquidating like a business would use to make a product to sell. We all know that is a joke when it come to govt. Second she assumes that its okay until inflation occurs. Guess what inflation will never occur because the magicians in the monetary politburo will never publish true inflation stats. If measured by the same parameters prior to the 1998 cha;nge iin the way it was measured, it would show inflation running at over 6%. The reason they changed the way inflation was measured was to keep COLA raises low on entitilements. It also allows the Ivory tower Phd’s in the fed to keep intersest rates artificially lower. This keeps govt debt financing costs lower and also enriches the financiers. No wonder no one can affort houses, insurance , college etc etc. This is why people turn to socialism and communism becasue they know something is fubb but cant figure out why. Capitalism works until you have a govt that is coruppted by the capitalist money.
At one time I would have agreed with you, Mish, but not any more. I would have thought that 21 trillion in debt would have broken the US government and the USD. But no, it doesn’t matter. So why would 42 trillion matter or 542 trillion matter? We are already in the stratosphere of gigantic numbers and clearly it doesn’t matter. Hard money people like myself must accept this reality. MMT does work.
True and for the life of me I can’t figure out why the ponzi keeps going. Japan has been doing it for a couple of decades and their govt dept is 3x gdp. They monetize all govt debt and buy stocks on top of it. We are on the same path, europe and China. Its like living in an alice in wonderland world.
Exactly and everyone predicts that Japan will crater. It should have cratered already. In fact people still buy the yen as a safe currency and I just have to shake my head. The yen should be toilet paper but here they are thirty years later.
“MMT does work.”
That is like saying financial fraud works. Madoff got away with it for some time before it crashed in on him. MMT’s day of reckoning will come.
It will come? Like Japan’s day of reckoning came? NOT! Madoff couldn’t print money – if he could he would still be going. You could wait several generations for the day of reckoning to come but I bet it never does.
MMT describes what the monetary system is doing right now. So, if Japan keeps going for another 20 years will you believe it then?
The entire universe revolved around a flat earth for a lot longer than 20 years. “MMT,” or whatever the currently ruling Junta names the arbitrary justification for their “inevitable and deserved” rule, can survive as long as the Junta does.
As an excuse for totalitarian overreach, that is. As an explanation for how the world supposedly works In_General, a “theory” that postulates that a society of two people, A and B, will remain not just stable, not just prosperous, but in fact even more prosperous than all alternatives; if one assumes A can declare something, and only this something, which he, and only he, can print up at will, is suddenly “legal tender”, and that B will then “have an obligation” to work to obtain enough of this something to pay the taxes A declares B owns….. etc., etc.. is so ridiculous that you’d think even three year olds would see right through it.
But again, as long as A has the guns (or swords) and B doesn’t… The universe revolved around the earth, after all, for as long as the Catholic Church had the swords to make it so.
I think if we look at objectively socialism doesn’t work for the same reasons capitalism doesn’t work. Greed will win out in any system man can make.
I have no idea if MMT is a valid or not, but it would be good to have a more complete understanding of what they are promoting. Here is a Stefanie Kelton video worth watching:
You don’t know Mish very well do you?
Thanks for the video@JohnH
I could not help but see her in a Holiday Inn doing a pitch for a $395 cassette tape package to an audience of striving, naive souls. The linguistic slight of hands were cringe-worthy, for sure, for sure.
Spoiler alert: She wraps it up at 39:00-ish with a standard, Keynesian pitch.
Something to keep in mind: Slickster sales people always include kernels of truth in their pitch. She acknowledges that, underlying any economy, you gotta produce stuff.
Models that are meaningfully valid, are valid always. Not just in one, or a few, extremely special cases, which just happen to be simultaneously “right here, right this minute,” and “complex enough that the complexity itself makes reasoning about anything at all intractable.”
The reason you “have no idea if MMT is a valid or not,” is because you haven’t bothered with something so trivial as to check for the simplest case: A society consisting of you and me.Do that, and you wont even have to bother wondering about any case more complex.
No problem, just borrow more money to service the existing debt. What could possibly go wrong?
America is a monetarily sovereign Nation with a Free floating non convertible Fiat currency and can never go broke.It does not borrow, especially now from itself. America is only resource constrained,i.e. labor,land and materials,and there are no shortages. #LearnMMT, #Insist, #EachOneTeachOne,#MMTwoke (hashtags are for reference and research).
* correction “not”..line3