Big Brother Tech as Massive Growth Sector

Quite seriously, Big Brother Tech is going to be a massive growth industry in the years ahead. In fact, it already is a massive growth sector. See CIA-funded tech start-up Palantir that is now worth over $5 Billion on private markets.

Let's hope that many of the potentially good things that could come out of Big Data will not be too negatively impacted by the rapidly declining reputation of Big Brother Tech, but clearly this is going to be an area of robust debate that is only going to get more complex in the future.

In related news, Google is claiming that they are not part of any government surveillance program called "Prism" or anything else.

Here is Google CEO Larry Page:

First, we have not joined any program that would give the U.S. government—or any other government—direct access to our servers. Indeed, the U.S. government does not have direct access or a “back door” to the information stored in our data centers

My question: The operative word is "directly."  Could they be indirectly providing access to the government, perhaps through a 3rd party government contractor like Palantir? Moreover, can they confirm if they are giving direct access to ANY 3rd party entity at all?  It will be telling if these follow-up questions get answered in the days ahead....


One other pithy question: Is journalist Glenn Greenwald the new Winston Smith??

Difficult Debt Deficit Debates

The Atlantic Magazine’s Economy Conference illustrates structural biases in debt debates but presents a path forward.

Perhaps the most perplexing structural bias in the political media’s contemporary debate on “debt and deficits” is the near total absence of any mention of private debt. Public sector debt dominates the debate. This is curious given that outstanding private sector debt in the US is still nearly triple the size of federal debt (see chart below). Furthermore, the current debate’s narrow focus on public debt is taking place in the aftermath of the Global Financial Crisis, which was caused by the collapse of an unsustainable private debt bubble emanating out of the household sector and the financial system. Excessive public debt had nothing to do with the crisis.  Moreover, a growing body of evidence now suggests that changes in private leverage are primarily a driver of economic activity, whereas changes in public debt are largely an inverse reaction to economic activity. Public deficits tend to rise in downturns and shrink during periods of strong growth, independent of any further discretionary policy modifications. Therefore, to the extent that changes in private sector and public sector debt interplay with each other, they tend to have an inverse causal relationship.

 Last Month’s Atlantic Live Economy conference in Washington DC was a microcosm of the strange contradictions in contemporary debt debates, but also offered a path forward. To the Atlantic’s credit, the purported focus of the conference was on the impact of private debt on the economy. During part of the opening discussion, Naked Capitalism publisher Yves Smith, former PIMCO executive Paul McCulley, and columnist Robert Kuttner all attempted, in various ways, to discuss the complex cross-sector interplay of private debt, the financial system, and public debt. The same could be said of Professors Michael Hudson, Steve Keen and New America Foundation’s Director Sherle Schwenninger, during the second panel. Professor Keen’s highly compelling Powerpoint presentation displaying the strong influence of private sector leverage on economic growth and employment received the day’s only audience ovation. Perhaps the most notable sign of a mini-breakthrough in debates on debt occurred during an afternoon presentation by Richard Vague of The Governor’s Woods Foundation, and The Atlantic’s own editor Steve Clemons. Reminiscent of Keen’s presentation, Vague showcased the causal interplay between changes in private debt, public debt and economic growth. Furthermore, they introduced a rich collection of data sets on private debt and financial (im)balances spanning a wide cross-section of countries.

Unfortunately, aside from these bright spots, significant portions of the conference resembled conventional media debates on debt, where the word “debt” is synonymous with “public debt” and the sheer existence of private debt garners scant attention. From Gene Sperling, National Economic Council Director for President Obama, to right-wing activist Grover Norquist, DC beltway heavyweights demonstrated this bias towards public debt fixation regardless of their political ideology.

Revealing Anecdote:

A little noticed, yet fascinating incident in the early morning panel starkly illustrated the structural bias of “debt debates.” Prior to the late arrival of Maya MacGuineas, a prominent DC beltway figure in the pro-austerity group “Fix the Debt,” the panelists engaged in a robust debate on the complex interaction of private and public debt. Yves Smith and Paul McCulley provided a comprehensive analysis on financial deficits and surpluses among the private, public, and current account sectors and how surpluses in one sector lead to deficits in others. All panelists discussed the implications of household and private sector debt and deleveraging. Rather than examining public debt in isolation, the panelists held a comprehensive, enlightening discussion on the feedback effects between debts and deficits throughout all sectors of the economy.

Upon MacGuineas’ arrival, however, Ed Luce, debate moderator and respected correspondent for the London Financial Times exhibited how most mainstream figures have internalized the structural bias towards public debt fixation at the expense of other debt. Luce prompted MacGuineas with a question on “debt.” MacGuineas responded with a discussion on the perils of public debt. Luce made no effort to broaden the debate beyond an isolated focus on pubic debt. Thus, what had began as a thoughtful discussion on the feedback effects of debt and deficits between all sectors of the economy became the typical pedestrian debate on public debt in isolation. The mini-breakthrough that took place moments before was quickly forgotten, and the panelists were unable to break from the structural bias of the debate. The rest of the panel discussion continued within the typical boundaries of contemporary debt debates. Reflecting the power of the debate’s structural bias is that such asymmetries go—not only unquestioned—but largely unnoticed.

The structural biases of debt debates will make transitioning to the more important discussion surrounding private debt quite difficult. Regardless of the conference’s imperfections, The Atlantic Magazine deserves credit for attempting to break the structural bias in contemporary debt debates and offering a path forward.

Please "Like" Fix the Real Debt. on Facebook and spread the word!

Please Like "Fix the REAL Debt" on Facebook

We've been pushing this new group called "Fix the REAL Debt" over the last few weeks.

At this point, the group appears to be mostly a Facebook page but it aims to ramp up over the weeks and months ahead into a large grassroots movement to counter the pro-establishment, pro-austerity group "Fix The Debt."

I highly recommend you "Like" it's Facbook page and read the full description. Excerpt pasted below:

Private debt in the US now stands at about 250% of GDP, down from a peak of over 300% back in 2008. Public debt held by the public stands around 80% of GDP. All serious discourse on debt must address the relative size of private and public debts and how they impact the broader economy and interact with each other. 
We believe the dominant political and media discussions around “Debt” and “Deficits” are woefully inadequate because they largely ignore the size, magnitude, and relative importance of PRIVATE debt. Any serious "debt discourse" must include an analysis of TOTAL debts, public and private.
It was private debt by over-leveraged financial institutions and households that lead to the massive financial asset credit bubble and subsequent global financial collapse.

The great tragedy of the almost fetish-like focus on public deficits is that it has come at the expense of all discussions on private debts. This is especially sad considering that private debts drove the 2008 Global Financial Crisis and public deficits had literally nothing to do with the Crisis and economic downturn. Furthermore, it is the public’s desire to save - a very good thing considering how debt ravaged more households are – that is largely driving public deficits. In fact, the public deficits are helping enable the private sector’s desire to save and pay down its own debts, both by issuing plentiful Treasury bills and by taking less money out of the private economy than it is putting in. Therefore, under current conditions, any effort by the public sector to engage in austerity will likely backfire, even to the stated goal of reducing public deficits. Moreover, there is growing consensus that continued debt challenges of the private sector - especially households – are playing a disproportionate role in impairing the economic recovery. Economists call this the "balance sheet recession" thesis. 
The great tragedy of the almost fetish-like focus on public deficits is that it has come at the expense of all discussions on private debts. This is especially sad considering that private debts drove the 2008 Global Financial Crisis and public deficits had literally nothing to do with the Crisis and economic downturn. Furthermore, it is the public’s desire to save - a very good thing considering how debt ravaged more households are – that is largely driving public deficits. In fact, the public deficits are helping enable the private sector’s desire to save and pay down its own debts, both by issuing plentiful Treasury bills and by taking less money out of the private economy than it is putting in. Therefore, under current conditions, any effort by the public sector to engage in austerity will likely backfire, even to the stated goal of reducing public deficits. Moreover, there is growing consensus that continued debt challenges of the private sector - especially households – are playing a disproportionate role in impairing the economic recovery. Economists call this the "balance sheet recession" thesis. 

Steve Keen, debt debates, and Fixing the REAL Debt

One of the most frustrating aspects of the shallow debate on "debt/deficits" is the complete absence of any mention of PRIVATE sector debt within the accepted frames of debate. This is especially unfortunate because private debt is about triple the size of public debt in the US,  and changes in private leverage are a more critical driver of the broader economy. Generally speaking, changes in public debt are primarily a response to the health and activity of the broader economy, whereas changes in private debt drive the broader economy. What's especially sad about this misplaced emphasis on public debt is that it's occurring in the aftermath of the 2008 Financial Crisis, a crisis that was brought on entirely from a credit bust that emanated out of the financial system and driven by over-leverage in the household and banking sectors. Excessive public debt had nothing to do with the bubble, crash, or subsequent economic doldrums. Effectively, the austerity caucus has been able to pull a brilliant "bait and switch" by taking the public's understandable allergy to "debt" and turn it into an exclusive obsession on public debt instead of a focus on private debt or a broader discussion on why our economic growth model is so overly dependent on credit expansion. Most tragically, public policies that obsess with public austerity actually hinder the over-indebted private sector's needed desire to net save and fix its own debt problems in a post crash environment. Therefore, the distorted framework of the current debt debate actually exacerbates the economy's REAL debt challenges. Please see debt diagram below:

One of the most articulate thought leaders on private leverage and the complexity of the financial system is Australian Heterodox Economist Steve Keen. In prior posts, we've been encouraging our readers to contribute to his Kickstarter fundraiser for his groundbreaking visual modeling tool Minsky. Please see here.



Professor Keen was on Yahoo Finance earlier today and gave a fantastic interview on the importance of private debt and how it deserves primacy in any real debate on debt. Instead of Paul Krugman, Steve Keen should go on these shows because he is better able to reframe the debates to include private debt. No offense to Paul Krugman, he is a fantastic writer and has gone further than most mainstream pundits with a big platform in challenging the conventional notions of the mainstream media and the austerity caucus. Moreover, it is exceptionally hard to shift the focus of these debates towards private debt when the media frame rarely acknowledges that private sector debt even exists. Having been on a few of these shows myself, I can attest to how difficult it is to challenge this dominant frame. Keen is one of the few who is able to pull it off.

Incidentally, your humble scribbler will be at The Atlantic Live Economy conference tomorrow. Interestingly, the purported focus of the conference will be private debt! Steve Keen, Michael Hudson, Yves Smith among others will be on panels. It will be fascinating to see how much of actual focus of the conference is private debt. or if the discussion just reverts back to the shallow debate on public deficit fetishes that we usually get.

Finally, please "Like" the page "Fix the REAL Debt" on Facebook. The movement is in the early stages and hopes to broaden the narrow and shallow focus of the conventional debt debate.

BOLLOCKS! Moody's Downgrades UK debt for first time in history. Blames AUSTERITY!

Osborne Austerity Discredited

What is most notable about the UK Debt downgrade is not the downgrade itself, but the text.  Moody’s is NOT attributing their downgrade to the usual mantras from the austerity caucus such as “fiscal profligacy” and “bond market vigilantes.” Instead they are blaming “slow intermediate term growth” and, most importantly, blaming that slow growth on “the ongoing domestic public- and private-sector deleveraging process.”

Obviously, as the MMTers know too well, concerns of a technical default are misplaced because the UK  (like the US, Japan, Canada, Australia, Switzerland, etc)  is an autonomous fiat currency issuer and therefore can’t default on its debt unless it chooses to do so. However, implied in the text are the exact concerns that non-austerians of all disciplines have been repeating incessantly: Austerity in a downturn is counter-productive even to the goal of reducing public debt because it hinders growth and therefore impairs the capacity of the private economy to generate revenue and pay the public deficits. Simply put, taking more money away from the private economy does not help increase activity in the private economy. Furthermore, this is doubly true after a credit bubble bust because the private sector is deleveraging in an effort to fix its own debt problems. Any efforts by the public sector to simultaneously deleverage is almost guaranteed to backfire.

Several big questions follow: 

1. Will the UK’s Tory lead government make a course correction from their austerity polices? Prime Minister David Cameron and Chancellor of the Exchequer George Osborne have staked quite a bit on austerity, so it seems unlikely. OTOH, they are smart men and they aren't suicidal. My guess: Pressure may come from their coalition allies, the  Lib Dem Party. 

2. Will this impact policy in other parts of the world? It appears that the austerity caucus is on the (slight) defensive in the Euro area and the US, fully on the run in Japan, but the entrenched power of the austerity narrative and their interests are quite strong.  

3. Will we finally start to see a much needed focus in the US political media on (the far larger and more consequential)  private debt and deleveraging and how private debt interacts with public debt after a major credit bust? Could we start to see calls for private debt resturucting and additional fiscal accommodation?  I'm hopeful but pessimistic. I doubt we will start to see Steve Keen instead of Ed Rendell on the Joe Scarborough Show. I would love to see a change in narrative and a move away from an intellectually shallow festishization of public deficits, but I doubt it. 

Support Steve Keen's program MINSKY on Kickstarter!

Please join me and consider supporting the critically important work of Australian professor Steve Keen through this Kickstarter campaign! He's building a ground breaking model to formalize the legendary work of Hyman Minsky. Modeling financial fragility, instability, leverage and banking is woefully inadequate in current mainstream models. Keen's work is critical to move the ball forward. And if his work wins a Nobel Prize someday, you've got SERIOUS bragging rights of being one of his genuinely early backers!

My appearance on HuffPost Live

Segment on Fiscal Deficits, etc

More thoughts later

http://live.huffingtonpost.com/r/segment/federal-budget-deficit-/50aa8a65fe344438f8000140

The Grand Bargain debate we actually need

This current debate over the “fiscal cliff” and supposed need for a “Grand Bargain” on debt and deficits is depressing. The entire frame of the discussion primarily centers on a disagreement over the ratio of tax increases to expenditure cuts. To a lesser extent, there’s also a debate on the specific types of spending reductions and tax increases to be implemented. But what we do NOT have is a robust debate on the total value of the debt-reduction. It seems set in stone that a debt reduction of “$4 Trillion over 10 years is necessary” and the only source of disagreement is how we get to that $4 Trillion figure. We are merely having a debate on the type of austerity, with no debate on the necessity or appropriateness of austerity given the current economic climate. In that sense, the austerians have already won. Depressing.

Just a quick review of facts:

1. Treasury bills continue to trade at historic lows, with 10 year Treasuries hovering around a ridiculously low 1.6%. They've been around or below 2% since August 2011. These are literally 1930’s style rates.
2. Inflation remains nearly non-existent, with core inflation around 1-2%.
3. The Job market remains somewhere between average and anemic, depending on your sector, geography, and other factors.
4. GDP growth at around a mediocre 2%.
5. Private sector balance sheets still impaired from the fallout of the credit bubble collapse.
6. Overwhelming evidence is that austerity in a weak economy destroys the economy’s capacity to create the surplus profits that are required to service debt. Therefore, it’s counter-productive even to the purported goal of reducing public debt.
7. The only real constraint on sovereign debt that is denominated by the sovereign currency issuer is inflation, currency depreciation, and interest rates, though these factors are inter-related. The main real constraint is inflation.

Supply Side / Keynesians grand bargain of growth

You would think in this type of an environment, the political parties would be competing over proposals on how to grow the economy and create jobs.  You would also think in this type of an environment, “bi-partisan groups of lawmakers” would be busy crafting a compromise that borrowed economic growth strategies and job creation strategies from the major ideological blocks. But instead, they are debating over competing versions of austerity.

With universal agreement that the economy is somewhere between extremely weak and fairly weak, it is a sad example of our political dysfunction that the current political discourse is dominated by competing versions of austerity, with most other topics effectively crowded out.

So here’s my big idea: How about grand bargain for economic growth?

In a nutshell, let’s close loopholes and use the revenue for a combination of public investment in infrastructure and broad based cuts to marginal tax rates. Conservative supply-siders believe that broad based permanent tax cuts (especially for the wealthy) spur investment and entrepreneurship, and Progressives wax optimistically on the virtues of public investment, especially in depressed times.

Call it a Supply Side / Keynesians grand bargain of growth!

Strange bedfellows? Certainly.

Each side gets a bit of what they want. Best of all, both sides are getting something that is at least plausibly relevant to the current climate of economic weakness.

Best of all, there would be epic HOWLS of “unsustainable deficits!”  from the Very Serious People on the DC Cocktail party circuit!

But a growing economy is BY FAR the most important ingredient for reducing the fiscal deficit. Once the economy is growing, the deficit takes care of itself, or at the very least, it becomes far easier to address.

Mind you, this wouldn’t solve all of our economic growth challenges. We’d still have other things to figure out. First off, we’d still have to deal with household balance sheets that are still impaired with too much debt, and are thus holding the economy back from a robust recovery that tax and spending stimulus alone will not fully solve.

Most importantly, we’d have to develop a long term economic growth model that isn’t nearly as dependent on a credit bubble, a move away from the “growth model” (if we can even call it that) of the last 30 years.

But at least a “growth bargain” would move us in the right direction. Even the discussion itself would be an improvement. It would move us forward.

Right now, we’re still moving backwards. 

My Debate on Government Spending and Debt on TV debate show The Heat

Fun times. Energetic debate. Friendly staff. Nice opponent, at least when he's off camera!

I'll have more thoughts later.

Thoughts Before Obama-Romney Debate

Just a few thoughts before things kick off

1. Obama better be prepared.  He may have the lead, but Romney is VERY effective in debates, more than some of the critics are willing to admit, and he's had far more time to prep. It's pretty much all he's been doing since June. Obama basically started prep last week and he will not have as much room for error in a fairly tight race. However much of the "awkward/mean rich guy" Romney comes off, he's still an intellectual heavy weight. Romney was a Harvard Business School Baker Scholar, which is very prestigious, perhaps the equivalent of Obama's inclusion in the Harvard Law Review. In raw mental aptitude, Obama and Romney are equivalents. In fact, in terms of the combined intellectual horsepower of both candidates, this could be the most impressive we've seen since Nixon v JFK in 1960. So both candidates are intellectual equivalents,  but one has been prepping since June, the other since last week.

2. Obama has to frame everything as a "choice" between him and his opponent, and NOT as a referendum on him. I think this is particularly important if it comes down to a debate on the deficits and austerity, Obama HAS to frame austerity as the antithesis of "Jobs and Employment". This inverse relationship between austerity and jobs is pretty standard centrist mainstream economic policy, but the austerity forces have been quite effective at breaking that inverse relationship in the public's consciousness between austerity and growth/jobs. To some extent, they've even manage to conflate the two and imply that more cuts at the federal level (at least in the abstract) will equate to more growth and jobs, a totally ridiculous proposition, borne out by reams of evidence. This will be tough pivot for Obama to make, but if he can pull it off, it will be impressive.

Bernanke Goes All In...but will it work?

I doubt it

1. IMHO monetary policy is overrated in general, and won't work with today's specific conditions (private sector deleveraging, lack of final demand) and may even have the unfortunate side effect of blowing more asset bubbles, or at least fueling additional financial market volatility. In an absolute best case scenario, it will be a slight net positive at the margins. For those of us who think monetary policy is WAY overrated (by both supporters and critics), Central Bank Omnipotence is a myth, Monetarism is a sham, this will be a great test to prove our point. Bernanke's "Bazooka" may prove to be a water pistol. 

2.Even it it succeeds in bringing down mortgage rates, that doesn't do very much if there isn't a plan to reduce household debt  and clean up their balance sheets.  With household balance sheets still in terrible shape, the credit channel is basically "clogged' so the normal transmission mechanism for monetary policy (be it conventional or unorthodox) doesn't work. Bernanke, being a student of the Great Depression, believes it was monetary policy that was primarily responsible for pulling the US out of the Great Depression. Some of those conditions do not apply today. For instance,  in 1933, during the recovery from the Great Depression, monetary policy "worked" because the credit channel had become "unclogged" after the bad debt had been written off, both during the nihilistic uncontrolled liquidation by Pres. Hoover and Treasury Sec Mellon, and then finally during the controlled liquidation of FDR's bank holiday. Moreover, in 1933, there was also signification fiscal policy accommodation - remember The New Deal?

3.  The immediate effect of QE on the real economy will reduce interest income in private portfolios, as longer dated Treasury securities are traded down for shorter dated / lower yielding Treasury securities or zero yielding cash. This will have the perverse effect of reducing final demand, at least in the short term. Remember, all QE (and all monetary operations, for that matter) does is swap assets and therefore change the composition of existing financial assets in the private economy. It does not change net financial assets in the private economy. Only fiscal policy can do the latter. 

4. With that said, lets NOT diminish the significance of Bernanke's announcement. This was a HUGE game changer for the Fed today! With their indefinite quantity of asset purchase( NO limits of size or duration) and also explicit targeting of the labor market, and explicitly saying that the burden of proof will be on those who want to stop QE, the default will now be continued QE into infinitude, even leaving the door open to purchase other type of assets. Bernanke isn't just putting the Fed on the line, he's putting the entire school of  Monetarism on the line! Do "Expectations" of future central bank activity matter in the real economy - outside of speculative finance? We will see. For those of us who believe that monetary policy is smoke in mirrors fantasy about "Playing Expectations" more akin to a mystical faith than actual economics or social science, we are happy because now we get to see this all-in experiment. For monetary policy enthusiasts everywhere, this HAS to work. If not, the credibility of the Fed (and Central Banks everywhere) will be shattered, because at the end of day, all CB's have is credibility. 

Financial ZOMBIELAND, the Movie!

Well, not quite a movie, but a short video. Long time readers will remember the 1st post on this version of the blog last July. See here, It remains one of the most popular posts of this blog.

Now you can enjoy the video version!
And yes, we're still in ZOMBIEland

Romney and Risk Free Access to Leverage

This is what a "Romney Fund" gets: Risk Free Access to Leverage

But don't you know that "the debt markets" are "efficient", so that this can't happen? Isn't that what the textbook said? How could this be?

Video: Economic Inequality

Here we go!

Good Decision on the World Bank President

The decision by President Obama to nominate Dr Jim Yong Kim to Chair the World Bank is a good one. The Dartmouth University President has real world experience in public heath and poverty alleviation in the "developing" world (aka "Emerging economies" or "the Global South", or formerly known as "The 3rd World", the latter no longer politically correct, though I should note that the term was probably coined by the legendary Anti-colonialist Jawarllahal Nehru, the 1st Prime Minister of independent India, but that's the subject of another post).

Anyways, this was a bold stroke. He's done some groundbreaking work on fighting HIV and Tuberculous. I believe Dr Kim is the 1st "Non-white Male" to be named Pres. of "The Bank".

It's a refreshing change from the typical person who usually gets this gig; senior, unemployed, "white-haired", US public official, banker or other retreads that know nothing about global poverty, or at least the alleviation of it -the ostensible mission of "The Bank"

Best of all, he's NOT Larry Summers. If it were Larry Summers, I would have vomited immediately.

Note 1: When you walk into the World Bank, there is a brilliant water-flow exhibit, and a line that says "Our dream is a World Without Poverty" - to which I add "Especially for those for work here!".

Note 2: The World Bank does not take retail deposit accounts, even if you are a frequent global traveler. You won't find any tellers, but the cafeteria food is amazing.

Please hit the Drum.

“So mommy, where does the bank get its money?”

(Note: True story)

I remember asking this question several times back when I was a little kid. See, at that time, before ATMs, folks had to walk into a bank and request money from a teller, the old fashion way. My parents, perhaps because they were very risk adverse immigrants who were fearful of being robbed, didn’t believe in carrying lots of money in their wallets. Therefore, we would go to the bank often. Very often. Needed food? Go to the bank on the way to the supermarket! Wanted to buy me a toy? Go to the bank first! That’s why I actually liked going to the bank – every trip to the toy store was preceded by a trip to the bank, and I was a lucky kid who had lots and lots of toys! Nothing expensive, just a ton of little match box cars, model airplanes, action figures, etc. 

For me, banks were a fun place. They gave my parents money so I could get toys! COOL! So on several occasions, from about age 4 or 5 onward, I would ask: “mommy, where does the bank get money?” My mom would try to explain, but I wouldn’t really understand. Then, I think by about age 7 or 8, I finally understood what a deposit was. I learned that the money the banks were giving my parents was just money that my parents had already deposited into the bank. How deflating! Up till then, I thought of banks as a special place that would magically give my parents money they printed out of thin air – so I could then get my toys! For me, this was WORSE than finding out that Santa Claus wasn’t real. Growing up was tough.

Except, now I’m finding out that many my early childhood notions of “magical banks printing money out of thin air” may actually have had some elemental truth, particularly when a bank makes a loan!

My nightmarish journey into the land of Endogenous money with Post Keynesians, MMT , “Horizontalists”,  Neo Charterlists where everything I was taught is now wrong!  

Truthfully, I’m still very much getting my head wrapped around this stuff. Until recently, most of my knowledge on the basics of the monetary system was from the standard Greg Mankiw type economics text books and related mainstream thinking – including “anti-establishment” visionaries from within the mainstream – all of which assume that banks lend out of savings / reserves and governments and banks need access to a loanable funds market, etc. As only a few people know, much of this does not apply to a fractional reserve banking system under a pure sovereign fiat currency regime, which is our modern reality.

This is my new understanding of the actual operational reality. Knowledgeable folks please give feedback via email or comments if I got this correct:

1.       Banks create loans when they see good opportunities from “credit worthy” borrowers. Their focus is on profit, which in the case of a bank is driven by their estimated odds that they will get paid back at a given interest rate within a given term.  

2.        These loans are made 1^st, out of thin air(!), with NO  regards to reserves.

3.       After they make the loan, the bank goes and finds reserves on the interbank market – where the newly created loan has already created its own deposit for the loan recipient (or the recipient of the loan recipient’s funds, etc), and therefore the pool of reserves needed to fund the loan has been increased by the act creating the loan itself ! Freaky and totally circular!

4.       In accounting terms, when  a bank makes a loan, it does the following:

a.       The new loan is an asset on the bank’s balance sheet – because it generates interest income for a bank

b.      The reserves needed to “fund” this loan are immediately available and marked as a deposit -liability because the bank incurs an interest cost

c.       Banks are not reserve constrained, only capital constrained.  Therefore, assuming no shortage of debt investment opportunities (new asset creation on the balance sheet) for a bank, the only thing that stops a bank from expanding credit is its assets to equity ratio.

5.       This entire process is called “Endogenous Money” because the money supply is driven by the credit creation of private banks (thus “endogenous”) and NOT by the central bank, which is EXACTLY the opposite of what is taught in the banking / monetarism chapters of every mainstream economics textbook.

a.       Private bank credit creation drives money supply, NOT Central Bank actions of creating / eliminating reserves

b.      New bank loans create new deposits which create the reserves needed to fund the loan. (Wray 2002)

c.       Banks are not reserve constrained, they are capital (equity) constrained

d.      Increasing the supply of reserves or “base money” by the central bank will not axiomatically spur credit expansion or money supply expansion

e.      Banks do not “lend out of savings”, they just lend.  Later, they go get the required funding, which the loan itself created. 

f.        The monetary money multiplier (money supply is a multiple of the monetary base controlled by the central bank) as taught in almost every economics or banking textbook is FALSE. Moreover, the money multiplier has not recently “crashed”; it never existed to begin with.

This would explain why the hyperventilating hyperinflationists have been hyperlaughingly wrong in their predictions of imminent hyperinflation over the last 3 years. Though Central Banks have flooded the market with reserves, this does nothing to increase the money supply, whose expansion is entirely dependent on credit expansion in the private banking sector. But under the current balance sheet recession, private sector deleveraging limits credit demand, thus precluding further credit expansion and money supply expansion. This is kind of like what that famous guy said in 1936 about "pushing on a string", except it seems to further expand on it.

Few questions:

Q1.How does Zombie Banks fit into all of this? Does that preclude credit expansion if the bank is sitting on toxic assets at inflated prices?

Q2. Would putting the banks into receivership in 2009 and writing down their toxic assets have “cleared the credit channel” and allowed credit expansion to resume?

Q3. What if I take a loan from my bank, cash it immediately, and put it under the mattress? Does that preclude the automatic expansion of deposits and reserves that a bank loan would otherwise create? (perhaps operationally irrelevant because the central bank will still provide the reserves, but I’m still curious )

Some final thoughts:

6.       Much of this operational process has been absolutely confirmed by the greater transparency of operations of the banking system over the last 20 years (Mark Lavoie - 2011), but only a few people have bothered studying it. What have the rest of you people been doing this whole time? Going long on toilet paper futures, eh?

7.       The view of endogenous money creation aligns with the Schumpeterian entrepreneurial economic development view, as new credit creation facilities the new purchasing power required to fund revolutionary and discontinuous economic expansion (Randall Wray – 1993)

8.        I almost wish I hadn’t discovered MMT. This is hard and addictive, which is a terrible combo. I want to go back to “lending out of savings” as all the mainstreamers and Austrians accept. That was easier to understand. This makes my head hurt. My next post will be on something simple and frivolous!

9.       Does your head hurt too? Try TMZ for relief!

Feedback and critiques and further assistance welcome!

"Economists don’t understand the financial system....."

or at the very least they WAY over-simplify, and that includes people like Jeff Sachs and Paul Krugman who should know better.

This from a great post by blogger Cathy O'neil at the Blog Mathbabe (via Naked Capitalism) on a "panel discussion on the GFC with Paul Krugman, Edmund Phelps, Jeffrey Sachs, and George Soros" . Click on over to her fantastic post and show her blog some love!

Only George Soros (a non-economist) had something more interesting to say:

He started by saying that we should all acknowledge that, as nice as it would be to think we can model the economy and feel control over the situation, this is a pipe dream and we should get used to not really knowing what will happen when we do one thing versus another. He suggested that we should instead work together to develop a theory, or perhaps even an philosophy, that assumes uncertainty itself.

My thoughts: 

In your humble scribbler's opinion, Soros as long understood Keynes', Popper's and Taleb's "Uncertainty as unquantifiable, uninsurable, and unmeasurable Risk". Similarly, his theory of  "Reflexivity" jives well with notions of markets as (at times)  non-self-correcting entities that tend towards disequilibrium and instability. In contrast, the Neo-Classical synthesis orthodox "mainstream" left or right all assume at least long-run stability/ equilibrium and only debate "short run" market inefficiencies.

The sooner we get over our Control Illusion and accept true uncertainty and the perils of complexity - none of which will be solved by perfect markets or perfect central planners -  the sooner we can properly implement what Hyman Minsky recommended, a solid system of buffers, stabilizers and shock absorbers.

Once again, show Mathbabe some traffic love by checking out her most fab post! 

UPDATE: My thoughts on the nomination for World Bank President

MMT in the House! "Rouge" school of economics gets mainstream press in the Wash Post!

After a long hiatus I had to come back and post about this much deserved attention recently given by a mainstream US media organ, The Washington Post, to heterodox economics - specifically the Post Keynesian and MMT (Modern Monetary Theory) schools!

This is potentially a big moment and could signal an opening for launching "rogue", "maverick" and "non mainstream" heterodox thinking into the "mainstream"!

Pasted below is a great chart from the article outlining the “family trees” of the Post-Keynesian, the “mainstream” Keynesian and Neo-Classical schools.

The fact that MMT even received this kind of attention in the mainstream media is itself now becoming a story. FT Alphavile had a few great posts here and the major Post Keynesian blogs from the Univ. MO Kansas City, Levy Institute and Naked Capitalism – all blogs we have links to on the side bars – were mentioned in the article and all reacted quickly to the watershed moment

Wash Post journalist Dylan Mathews should be credited for doing this piece on a niche school of thought that has shown considerable recent growth in the blogosphere and significant indirect impact through its influence on some mainstream economists, no doubt because of its unmatched track record of predictive success over the last decade. . Of course, the piece could have been much better, but often when a mainstream journalist writes about an unfamiliar niche topic they will miss pertinent - even basic - facts, along with bringing a pro-mainstream bias. 

I'm sure Mathews is being inundated with advice and criticism on "what he should have written" and  I too will indulge in giving him some advice! If I had to pick a single point about MMT’s basic contribution that Mathews completely missed, it would be the Sector Financial Balances Equation below:

Public Surplus + Private Surplus + Current Account Surplus = 0

Whether or not one agrees with the general policy prescriptions of the MMT community, this is an immutable fact of 800 years of double bookkeeping accounting, summed up beautifully in the chart below from UMKC, I’m guessing its from Randall Wray or Stephanie Kelton:

As I understand MMT (and my understanding is fairly rudimentary), this would explain why countries like Canada and Australia run both private and public sector surpluses; they run Capital account deficits(Current account surplus). Effectively, their domestic public and private surpluses allow them to "vendor finance" their export industries. In the US during the late 90s, the booming private sector was financed by attracting global direct investment and public surpluses. The private / business sector made debt (and equity) investments during the build out of the Internet backbone, thus generating tax revenue and allowing the government to run surpluses, though I gather some MMTers would argue that those surpluses were a waste because they took net financial assets out of the population's hands. Perhaps others argue that the surpluses were needed to keep the economy from overheating during the Internet bubble. Conversely, the over-indebted US private sector of today is going through a much needed debt purge and de-leveraging and has been (generally) accommodated by a public sector willing to run deficits. As this blog has frequently commented, outside of a massive debt forgiveness / reset / default program, it’s impossible for the public and private sectors to de-leverage simultaneously, at least without a massive currency depreciation, and it's impossible for all countries to depreciate their currencies simultaneously. 

One can accept the undeniable basic accounting identify of the sector financial balances but still debate the driving factors behind them and the efficacy of various policy prescriptions at any given time. Furthermore. a wider awareness of the sector financial balances would lead to a far more informed debate, whether from the "Left" or "Right". For instance, Ed Harrison of the fantastic Credit Writedowns blog has done some fantastic analysis in part because he is highly informed on the MMT world view and financial sector balances, even though he tends to be somewhat right-leaning and even Austrian in his personal policy biases.

As i've said before, many of the most precienct forecasters of the economic turmoil over the last several years were either Post Keynesian, or they were major mainstream figures like economist Nouriel Roubini and Fmr Pimco exec Paul Maaculay who themselves were heavily influenced by Post Keynesians like Hyman Minsky. Finally, I think it’s notable how even mainstream economists, both Keynsians like Paul Krugman and others, have belatedly recognized and even adopted certain elements of the MMT worldview with regards to sovereign currencies and private sector deleveraging, even if they choose to do so within their existing IS/LM or other models. 

Not to get into an academic labeling fetish exercise, but Mathews also conflates “Post Keynesian” with “MMT”. I’d argue that the communities overlap considerably, but they aren’t identical. For instance, Hyman Minsky is definitely a Post- Keynesian, but I’m not entirely sure if he could be called “MMT”. Ditto Paul Davidson, and perhaps even Steve Keen. Maybe MMT is a subset within the Post Keynesians. All Post Keynesians  understand the importance of uncertainly (unquantifiable risk), endogenous instability of the financial system, dangers of over-leverage, self reinforcing vicious feedback loops and a disbelief that market systems have an automatic self correcting tendency towards short run / long run equilibrium, in direct contradiction to their “mainstream” Keynesian and Neo-Classical/Monetarist counterparts.

My thoughts? Well, I consider myself a Minsky “Post Keynesian”, I’m not sure I’d call myself fully “MMT”, but I definitely appreciate their broader contributions, especially with regards to sector financial balances (Public Surplus + Private Surplus + Current Account Surplus = 0)  basic accounting identity, the fallacy of the loanable funds models (that’s why QE has failed to do anything good for the real economy- pumping up bank reserves doesn’t necessarily do anything in a balance sheet recession), and the critical importance of a government to be an issuer of its own sovereign currency and debt. However, my slight and secret inner Austrian is concerned that (at least in theory) an over reliance on public spending, even while a balance-sheet-constrained private sector is going through much needed deleveraging, could lead to significant longer term mal-investment, and could distract from the more critical urgency of a mass debt writedown/relief/reset/default needed in balance sheet recessions. As always, readers beware, your humble scribbler is a non-economist.....

Related Articles and Posts:

FT: Why MMT is like an autostereogram

Multiplier Effect: Washington Post Goes Unconventional 

MMR: More on Savings and Investment

Randal Wray: What is Modern Monetary Theory?

Ed Harrison: Why Austrians and MMTers should be on the same side