Recovery: when every fired local, state, and federal worker takes a private sector job down as well and when the U.S. government can borrow at today's absurdly-low terms, it is criminal stupidity not to pull government spending forward into the present and push taxes back into the future (all within the ten-year PAYGO rule, of course). Since the macroeconomic situation is worse now than it was ever projected to get when the first Recovery Act was passed and since the U.S. government can borrow on better terms now than it could at the time of the first Recovery Act, it is time for a second Recovery Act--fifty percent federal government purchases and aid to the states, fifty percent tax cuts--somewhat larger than the first was.
Accelerating government purchases is a no-brainer (except to those political fools who govern us by saying “no” to anything that comes from the Obama White House). Federal revenue sharing is another no-brainer.
My quibble is with Brad’s suggestion that half of the 2nd Recovery Act should be half from tax cuts. Why? Well in the standard Keynesian model, the impact effect from a dollar of tax cuts is dampened by the marginal propensity to consume as at least some of the tax cut is saved even by borrowing constrained households. For households that are not borrowing constrained, pushing taxes back has no effect on consumption demand today. In other words, the more of the supposed fiscal stimulus that comes from tax cuts – the less bang for the buck we get. Was not this one of the problems with the first Recovery Act?
The problem I see with standard Keynesianism is the unwarranted belief that the economy is in a slump that will be overcome by fiscal stimulus. That is a pipe dream in that technological innovation, real capital development, and monopolistic consolidation have created an end of the road for a 40 hour work week. There is simply no way to profitably employ the people of the United States for 40 hours a week. And I use the term "profit" as it would apply to all persons including the wage earners.
ReplyDeleteThe jobs that have been lost, have been lost for good. And the well paying "jobs" that might exist in the future are too few and very dependent upon post graduate educations. The 40 hour work week is an enormous obstacle to support of the working class. There are not enough "jobs". Even if we returned manufacturing to the US, there still wouldn't be enough jobs.
Stimulus will have to go on forever. And it will take the form of unemployment insurance forever or until we reduce the standard work week.
That is why QE2 is so important. All of this crap about the debt is being wrongly applied as the BOOGERMAN. If the Fed owns the debt instruments, the debt matters not. Yes! That is printing money. And that is exactly what is needed now and in the future. The tax system must be designed to recover this money at the very top of the economy. While the Fed holds the debt then all the interest on the debt inures to the benefit of the treasury. So the size of the debt is irrelevant but for the fact that the dollar must retain enough value to allow government to purchase the requisite goods and services needed to serve the people.
Taxation is what gives value to fiat money.
I am having a little difficulty concerning the total amount of quantitative easing in which the FED will have engaged by the end of this fiscal year (Oct 1, 2011). The Fed started the OFFICIAL quantitative easing last Feb, or so (2009) with an intent to monetize one trillion
ReplyDeleteaccording to Krugman.
The FED is now adding another .6 trillion. Based on those numbers, the FED has essentially monetized about half the deficits of 2009 and 2010.
The real amount of QE is probably closer to $1.4T.
I think it is enormously important to truly evaluate what QE does and to intelligently discuss the long run effects. Because if the FED holds the debt (QE is open market purchase of government debt instruments like T-Bills, or even direct purchase of the bills from the treasury), then all of the interest on that debt inures to the benefit of the treasury. The same is true of any other assets (like mortgages) held by the FED. And the important point that seems to be escaping all the bone head pseudo capitalists is that there is no reason to ever pay that debt. No reason to turn around and rewind the purchase. Th interest on these holdings can be ignored of dispatched to the treasury.
The interest is a source of revenue for government as opposed to a cost.
Where does the Fed get the money to pay the interest? Well obviously from the same magic horn of plenty that it got the money to buy the T-Bills in the first place. The point is that so long as this purchasing does not cause serious inflation then this process can be continued. Should inflation become a problem then (and only then) will the FED need to sell the T-Bills on the market. That sale will have to be at higher interest rates, but that is the way the FED typically tries to control inflation.
It is pretty bad when economists and politicians keep yapping about the debt and the way the nation will go bankrupt because of it. Deficits are seen to add to the debt. But the debt that is held by the FED is NOT REALLY debt owed to the public although that is how it is classified. The debt held by the FED is the property of the US government just as the debt instruments in the Social Security trust fund.
The question for Krugman is "why would the FED _EVER_ be forced to sell the T-Bills it has accumulated?". The answer is that these bills _can_ be sold to stave off the inflation monster if and when the inflation monster ever comes. At present that is certainly not the case. Krugman also worries that the FED will have a loss if it "HAS TO SELL" at a bad time. Whereas the FED bought the T-bills with money from the ether then the FED can't possibly have a loss. Why don't the economists and the politicians quit lying?
Trucker:
ReplyDeleteYou said that the debt held by the Fed is just like debt held by the SS trust fund.
That would be intragovernmental debt, not debt held by the public, but would be part of our total debt.
I understand the interest is paid in Treasury securities to the Treasury, for, I gather that is actually loan interest.
The Fed hasn't paid cash for the Treasuries. Therefote, it has borrowed the Treasuries, right?
If so, it would be a liability on the Fed's balance sheet, and an asset for the Treasury.
I don't think, though, the Fed transactions are like the transactions between Treasury and the SS trust funds.
If that was the case, intragovernmental holdings debt would be a lot higher.
Can you provide any links to back your premise?
I am really trying to learn about the Fed, but only in manaageable chunks. At this point, my knowledge is basically zero.
Don Levit
Don says:
ReplyDelete"The Fed hasn't paid cash for the Treasuries. Therefore, it has borrows the Treasuries, right?". Wrong. The purchase of the Treasuries is pursued to put more money into the system and to reduce the interest rates on the particular Treasuries being purchased. Such blasting of "cash" into the economy should be inflationary to a large enough extent to offset the current deflationary economy. These are NOT "repo agreements".
The Fed can't have any liabilities in the sense of a normal person, family, business or bank has liabilities. The Fed can create whatever money it needs to pay off any liability it might have. So the use of that word is very misleading regarding the Fed.
The other "lie" is the use of the phrase "debt held by the public" in that holdings of the FED are currently included in that basket. That is pig manure as I have said. Those T-Bills are not in the hands of "the public" (the Chinese, the Japanese, the banks, and the rich people.) there is no reason to ever "mature" them and no reason to fear interest expense on them.
From Dean Baker -------
There is a simple way to avoid a sharp rise in the interest burden associated with a higher debt. The Federal Reserve Board can buy and hold the debt that is currently being issued by the Treasury to finance the deficit. The logic of this is straightforward. If the Fed holds the debt, then the interest on the debt is paid to the Fed. The Fed then returns the interest to the Treasury each year, meaning the net cost to the government is zero.
------------
Trucker and Dean:
ReplyDeleteSo, are the Fed purchases added to debt held by the public or not?
If not, why not just have the Fed buy enough Treasuries to absolve us of those debts, over $13 trillion?
Seems a great way to absolve ourselves and our descendants, and the Treasury gets more money to boot!
Don Levit
That is one of the problems, Don. The phrase "Debt Held By the Public" is a bloviation that has no meaning _BECAUSE_ it includes the debt held by the FED.
ReplyDeleteNotice how
http://www.treasurydirect.gov/govt/resources/faq/faq_publicdebt.htm
tap dances around the issue. They still play the game of "is the FED a private sector entity or a government entity". But if the T-Bills held by the FED are purchased with money that is backed by the full faith and credit of the US government and the interest inures to the benefit of the treasury, then to most of us the T-Bills are OWNED by the government and not by some private entity called the FED. The FED oversees the banking system. It is NOT part of the banking system.
The FED cannot monetize all the debt because that would cause the dollar to lose purchasing power to the extent that no one would care about accumulating dollars and no one would build battle ships or roads or bridges or anything else. It is tax collections that give the dollars their primary value. If taxes are not collected, the government is neutered.
What Obama did today with his tax capitulations is to tell the corporations that they have won and that the banks will now decide who wins and who loses. And if the banks take too much out of the economy, the FED will simply create more and give it to the banks. If the banks get the new money then there is no inflation. They just get more powerful and that is deflation. QE2 can and should cause some inflation based on the stimulus that has not yet been fully spent. That is good, but Obama is now a Republican. And I hope he roasts in hell.
TRUCKER:
ReplyDeleteTHANKS FOR THE LINK.
IT SAYS "INTRAGOVERNMENTAL HOLDINGS INCLUDE FEDERAL FINANCING BANK SECURITIES."
THEN IT SAYS "oBLIGATIONS ARE ISSUED TO THE PUBLIC BY THE FEDERAL FINANCING BANK TO FINANCE IRS OPERATIONS."
WHAT IS THE DIFFERENCE BETWEEN FEDERAL FINANCING BANK SECURITIES AND THE OBLIGATIONS ISSUED BY THE FFB TO FINANCE ITS OPERATIONS?
IF THIS $600BILLION IS CONSIDERED OBLIGATIONS ISSUED TO THE PUBLIC,
ARE THESE INDIVIDUAL PEOPLE WHO HAVE BOUGHT THE TREASURIES FROM THE FED? IF SO,IT SHOULD INCREASE THE PUBLIC DEBT.
IS THAT ACTUALLY THE CASE?
WAS PART OF THE $1.4 TRILLION DEFICIT LAST YEAR INCLUDING THE TREASURY SECURITIES BOUGHT BY THE FEDERAL FINANCING BANK?
IF IT IS DEBT HELD BY THE PUBLIC, WHY ISN'T INTEREST PAID AS A CURRENT EXPENSE TO THE BONDHOLDERS RATHER THAN TO THE TREASURY?
THIS DOES NOT MAKE SENSE TO ME, FROM WHAT I KNOW ABOUT DEBT HELD BY THE PUBLIC AND INTRAGOVERNMENTAL HOLDINGS COMPRISING TOTAL DEBT.
THIS DEBT SEEMS TO BE VERY DIFFERENT.
TIMES HAVE CERTAINLY CHANGED SINCE MY GRANDFATHER MADE THIS STATEMENT: "WHAT YOU OWE, YOU OWE. WHAT YOU OWN YOU MAY NOT OWN."
DON LEVIT
"what is the Difference" just use Google. THE FFA and the FED are two totally different animals. I will discuss the FFB or FFA no further.
ReplyDeleteTo my knowledge there were NO T-bills in the $1.4T offering bought by the FFB.
Google is your friend. Use it.
"The Fed hasn't paid cash for the Treasuries. Therefote, it has borrowed the Treasuries, right?"
ReplyDeleteDon take your wallet out of your pocket.
Then sit down.
Open your wallet and examine the legend at the top of whatever Benjamins and Jacksons you might have.
Unless you are really old-fashioned chances are each of them is called a "Federal Reserve Note".
Now you might not be excited that the various Federal Reserve Banks, who are not entirely part of the Federal Government, have the ability (subject I guess to the Governors of the Fed) to literally print cash. Well congrats, you can join the Ron Paul Revolution, but the pure fact is that those banks are literally printing 'cash' and exchanging it for existing Treasuries. They are not 'borrowing' anything.
You are clinging to the idea that somewhere there is a real stock of dollar value not tied to Full Faith and Credit of the U.S. and moreover not outsourced to the various Federal Reserve Banks. Well there isn't, it ultimately is all FIAT MONEY. Bwa, ha , ha!
On the other hand despite some rockiness here and there the world is more or less comfortable allowing the U.S. to pay its own debts in its own Central Bank currencies to the tune of an additional $600 billion in zero interest paper this year. You don't have to like it, or even understand it. But that lack of understanding plus a CAPS LOCK key is not necessarily advancing the debate here.
Bruce:
ReplyDeleteYou seem to think, due to a fiat currency, we have nothing to worry about concerning the dollar.
Full faith and credit is assured. By golly, we've been honoring those treasuries for so many years, why can't we continue doing so?
Do you understand that honoring Treasuries in the Social Security trust fund is just like paying for battleships? The dollars come out of current revenue and debt. The only difference between paying beneficiaries of Social Security and buying battleships is that battleships need an appropriation?
Don Levit