Here’s a piece I published in HuffPost back on Oct 18, 2010. A flash from the past – three years ago – predicting that QE2 would prove to be as impotent as QE1 had been. And here we are, folks. No recovery in sight–at least once you get off Wall Street.

We’re now set–yet again – to go off the fiscal cliff. Some have begun to talk again of the Trillion Dollar Coin – an idea President Obama has again rejected. He fears it would get tied up in the courts. So what? That would take years to settle.

Or perhaps he doesn’t want to break the logjam. Politically, he’s winning while the Republicans self-destruct.

However, here’s a better idea. We’ve got museums and national parks shut down. Why not sell them to the Fed? We can find a few trillion dollars of Federal Government assets to sell – and the Treasury can pay down enough debt to postpone hitting the debt limit for years. Heck, if we run out of Parks and Recreation facilities to sell, why not have the Fed start buying up National Defense? How much are our nukes worth? That should provide enough spending room to keep the Deficit Hawk Republicans and Democrats happy for a decade or two.

Have you ever been inside one of the Fed’s buildings? Nice, huh? Good place to display art and artifacts. There’s little doubt that the Fed knows how to put on a good show. (Note I was recently in Colombia and found that the central bank does own and run museums – and does an excellent job. When you’ve got the magic porridge pot, you can afford good housekeeping.) Imagine the Fed running the National Parks. Without budget constraints! Fine wine served at every campfire. Flushing toilets – not those smelly old pits. And hot showers. Mints left on pillows before you turn in for the night. Hot espresso with your wake-up call. Bullet train to the top of Half Dome.

And the Fed has pretty safe safes – good places to store the nukes. Call me crazy, but I think I’d feel a bit more comfortable with either Uncle Ben or Aunt Janet with fingers on the triggers than most of our past, present or future presidents.

OK, enough of that. Here’s my 2010 piece:

Why QE2 Won’t Save Our Sinking Ship continue reading…

The policies Greece has been implementing as part of the price for its two bailouts are not working the way we were told they would. That’s pretty clear if you look at the troika’s endlessly downgraded projections for key economic indicators. Here, for instance, is actual Greek unemployment, compared to a series of troika projections (source):

One common response to these apparent failures is to say that we just need to hold on, keep the faith, and perhaps double down on the strategy; eventually, internal devaluation and austerity will bear fruit. It is unfortunate, though not surprising, that this has become the “responsible” position; the stance of the supposed steadfast realist.

Presumably it appeals to some deep-seated moral intuitions about the need to pay for past “excesses” or to suffer short-term pain for long-term gain, or some such pablum. And in that context, pointing to increases in poverty, falling living standards, and eye-popping levels of unemployment may not have the rhetorical effect we might hope for, at least among those who see themselves as committed to the policy strategy — perhaps it only reinforces their self-image as defenders of “tough choices” standing steely-eyed in the face of populist clamor.

There are no signs that the internal devaluation strategy is having anything like the effect on growth we were told it would have. But even if we were to grant the assumption that net exports will pick up at some point in the future at a sufficient pace to generate a modest recovery, the problem with the idea that we just need to wait a while longer and cut a little deeper is that we risk serious damage to the tissue of the body politic while we indulge this (we should say radical) intellectual experiment.

The strains are already showing: “While the neo-Nazis won nearly 7 percent of the vote in the 2012 elections, which allowed them to enter parliament with 21 seats, recent public opinion polls suggest that they may now enjoy as much as 20 percent of the public’s support.” This is from C. J. Polychroniou, documenting the recent surge of the neo-Nazi movement in Greece. The policy-prolonged depression isn’t the only reason this is happening, says Polychroniou, noting the history of authoritarian and fascist strains in Greece, but it is playing the key enabling role, he argues: “The surge of neo-Nazism in Greece certainly would not have been possible without the ongoing economic catastrophe and the social decay caused by the policies of fiscal sadism conceived by the EU and the IMF.” (Read the rest here.)

And as for the time horizon of the austerity endgame, take a look at this table from Paul De Grauwe and Yuemei Ji. They’ve calculated how long it would take for countries on the eurozone periphery to halve their debt levels, assuming they run primary surpluses of various sizes (of 2, 3, or 4 percent) and assuming that the nominal interest rate on member-state debt equals nominal growth of GDP (which, as they point out, is not yet the case).

“The issue,” they write, “is whether their political systems will have enough resilience to maintain such ‘temporary’ austerity programmes in order to slowly and painfully draw down the levels of debt.” Even if you’re able to manfully wave away all the waste of human potential that will result from sticking to the policy status quo, betting that Greece’s social and political fabric can hold out for this long is a risky, irresponsible gamble.

There are alternatives.

Kenneth Rogoff placed an editorial in Wednesday’s Financial Times defending the Cameron government’s austerity policies as a kind of insurance against the possibility of investor flight from UK government debt.

He concedes that the specific form of austerity that was implemented in the UK was ill-advised — public investments in infrastructure, he says, can be stimulative and pay for themselves. Nevertheless, he argues that in retrospect austerity in general was wise because we couldn’t have known for sure that the markets wouldn’t have panicked and ceased purchasing UK debt if the government had run higher deficits.

Now, one thing we might want to recall is that the UK’s austerity policies have not been hugely successful at shrinking the debt-to-GDP ratio.

What we’re looking at here is the “fiscal trap” phenomenon Greg Hannsgen and Dimitri Papadimitriou have written about. Austerity can be a pretty inefficient policy — assuming one’s goal is the reduction of debt ratios. (As Paul De Grauwe and Yuemei Ji recently found, this is clearly the case on the eurozone periphery: “more intense austerity programmes coincide with increasing government debt ratios.”)

But even if UK austerity were more successful at shrinking public debt ratios, we would want a better sense of the probabilities and downsides involved in Rogoff’s “you never know,” market panic scenario. Just how valuable is this insurance? Because we know pretty well what the costs of austerity are (a point Rogoff appears to concede) — high unemployment, heightened insecurity, and all the attendant deterioration in well-being.

What are the benefits? If we succeeded in reducing the UK’s public debt ratio by, say, 5, 10, or 20 percentage points, how significantly would that reduce the risk of market panic for a country that controls its own currency, according to this insurance theory?

More importantly, how disastrous would Rogoff’s market panic be if it came about? His story is that a collapse of the eurozone could have led financial markets to stop buying UK gilts, which would require immediate and harsh austerity (because the government would have to balance its budget absent the ability to borrow). But as Simon Wren-Lewis (no MMTer) points out, the UK already has an “insurance” policy against this kind of market revolt — namely, it issues its own currency:

… [the monetary authority] will buy any government debt that cannot be sold to the financial markets. Rogoff says that, if the markets suddenly forsook UK government debt “UK leaders would have been forced to close massive budget deficits almost overnight.” With your own central bank this is not the case – you can print money instead.

So we should really be comparing the costs of austerity to the costs of printing money in the event that markets turn on the UK (if we generously grant the premise that reducing public debt ratios in the near term would have any significant impact on diminishing the probability of such an event). Absent an explanation as to why printing money under such circumstances would be far worse than the damage already done by budget cuts, it’s hard to see why austerity is an insurance policy worth the hefty price.

We’ve just returned from Rio de Janeiro, where the Levy Institute held a conference cosponsored by the Multidisciplinary Institute for Development and Strategies (MINDS), supported by the Ford Foundation. The two day conference dealt with global financial governance, financial reregulation, and development challenges in a Minskyan context — a lot of discussion of the regulation of global capital flows, Brazil’s economic prospects, and debate about whether China’s economy represents a development model to be imitated or a ticking time bomb of financial instability; along with the usual focus on banking regulation and reform.

Paul McCulley, former PIMCO director and phrase-coiner (“Minsky moment” and “shadow banking”), delivered the keynote. Speakers and panelists included academics, financial market practitioners, and former and current government officials (Paulo Nogueira Batista, who sits on the Executive Board of the IMF, gave a fascinating inside glimpse at the coalitions and dynamics at the Fund and talked about how delays in implementing reforms designed to give emerging economies more sway in the structures of global financial governance risk creating a crisis of legitimacy).

The full program, including speakers’ powerpoint presentations, is available. Audio clips can be accessed here (video may also be available in the near future).

The next Minsky conference will be held in Athens, November 8-9.

Congressional Republicans may or may not suffer politically from the government shutdown and upcoming debt ceiling fight, but in terms of policy they have already secured a significant and lopsided victory in the battle over the budget, whether they realize it or not.

Repeal of the Affordable Care Act seems pretty unlikely (not just because the President is wildly unlikely to repeal his signature legislation in return for something his opponents also claim to want — raising the debt limit — but also because he seems determined to learn from his 2011 mistake and is unlikely to grant any concessions in return for not defaulting on financial commitments). Still, below all the shutdown/debt limit/ACA drama, the discretionary budget number that Senate Democrats are offering to Republicans (the “clean” continuing resolution) represents a near-complete capitulation to GOP demands.

Despite having lost the popular vote for the Presidency, Senate, and House, Republicans were not only able to extract major concessions on discretionary spending, but to exceed even their original demands, as Dylan Matthews observes: “So we’ve been cutting spending at a faster pace than Paul Ryan wanted to when Republicans took over Congress.” This figure by Michael Linden and Harry Stein illustrates the situation (they call this a “compromise,” but I’m not sure that’s the best choice of labels):

What this means is that, even if we avoid a debt limit crisis and a lengthy shutdown — both of which would weigh on the already sluggish economic recovery — tight fiscal policy will continue to limit economic growth. And that’s the best case scenario. (Those who are trying to game out the political consequences of these various showdowns and governing crises should take this into account — the GOP will ultimately benefit from a sluggish economy, even if in the short run the public ends up blaming them for the shutdown.)

The Levy Institute will soon be releasing its newest strategic analysis for the United States (the late Wynne Godley, whose work at the Levy Institute inspires the model used in these economic forecasts, was recently featured in the New York Times). The past couple of analyses have underscored the difficult bind the US economy has been placed in as a result of Congress’s devotion to budget austerity. Aggregate demand has to come from somewhere; if it isn’t from abroad (exports), it will have to come from domestic sources. If government spending increases are not forthcoming — and we’ve every reason to believe they’re not — then the only way to reach even the modest growth numbers projected by many (including the Congressional Budget Office) is through a big rise in household and business indebtedness. In other words, if we continue to run discretionary budgets that out-Paul-Ryan Paul Ryan, we’ll either be stuck with insufficient growth or a dangerous ballooning of private leverage (absent any new developments in the foreign sector).

I have recently signed the “Economists’ Warning” on the situation in the eurozone, which states that

It is essential to realise that if the European authorities continue with policies of austerity and rely on structural reforms alone to restore balance, the fate of the euro will be sealed.

The Economists’ Warning was published by the Financial Times (“European governments repeat mistakes of the Treaty of Versailles,” September 23), and a reply by Professor Gilbert of the University of Trento appeared in the Letters section on September 25.

Professor Gilbert seemed to imply that the Economists’ Warning was advocating external support for Southern European countries in trouble — a position that is not apparent in the original document, which only advocated “concerted action” among eurozone members.

My reply to Professor Gilbert was published late last week in the Letters section of the Financial Times. I argue that structural reforms have already been implemented in Italy: such reforms aimed at cutting pension payments to generate a structural reduction in the government deficit (matched of course by a reduction in the purchasing power of people in retirement) and increasing flexibility in the labor market. The chart below documents the dramatic drop in employment since 2007 — almost one million jobs, with a fall in full-time positions of 1.77 million partially compensated by 813,000 new part-time positions.

In a recent report on Greece we have argued along similar lines: structural reforms and austerity have pushed the unemployment rate to unprecedented levels, and increased competitiveness achieved through lower labor costs has done (and will do) little to improve the external balance, while it has contributed to a dramatic drop in domestic demand.

Professor Gilbert responded to my letter in the Comments section of the Financial Times, and since I hope this discussion could be of interest to others (the Letters section of the FT is only open to subscribers), I would suggest continuing it on this blog.

First of all, what strikes me in Professor Gilbert’s reply is his view of economists as a group of scientists who share the same beliefs: continue reading…

(first appeared in Social Europe)

Never miss a party – especially one you’ve been desperately waiting for for so long. This much the authorities in Europe’s currency union clearly understand. As soon as Eurostat had released its first estimate for GDP growth in the spring quarter in mid August (1^st estimate here), which was missing the by now customary negative sign, the champagne began to flow, it seems, accompanying all-round self-congratulatory shoulder slapping.

For instance, Spain’s economy minister Luis de Guindos confidently noted that “Spain will show clearly the quality of the policies implemented in the eurozone” (FT.com 4 September 2013). And European Commission President José Manuel Barroso declared in his State of the Union Address on 11 September 2013 that “the facts tell us that our efforts have started to convince.” Germany’s finance minister Wolfgang Schäuble also joined the chorus, just in time for the federal election, proudly announcing in The Financial Times that “while the crisis continues to reverberate, the eurozone is clearly on the mend both structurally and cyclically.” Dr Schäuble declared with poise that “what is happening turns out to be pretty much what the proponents of Europe’s cool-headed crisis management predicted. The fiscal and structural repair work is paying off, laying the foundations for sustainable growth,” and then went on to boast that “despite what the critics of the European crisis management would have us believe, we live in the real world, not in a parallel universe where well-established economic principles no longer apply” (“Ignore the doomsayers: Europe is being fixed,” FT.com 16 September 2013; see comment by this author: “The euro crisis is not even close to being over, Mr Schäuble”).

Apparently Germany’s “stability-oriented” prescriptions for the land of the euro are now doing their magic just as Dr Schäuble had always promised they would. Fiscal contractions are now proving expansionary after all, just with a little bit of a delay, while growth-enhancing structural reforms are beginning to bear fruit too, it seems. The euro authorities are making sure though not to miss any chance at emphasizing that more of the same medicine will be needed to do even more good going forward.

Perhaps this is a good time then for a reality check. continue reading…

Stephanie Kelton recently sat down with L. Randall Wray to discuss, among other things, the news that the Federal Reserve will refrain for the time being  from tapering its asset purchases (QE).

Wray took the occasion to elaborate on his view that quantitative easing is ineffective as economic stimulus and that — given the tools at its disposal — the Fed can’t actually carry out its dual mandate (on employment and price stability).

One interesting wrinkle here is that Wray makes this case not just with regard to asset purchases — which even some QE supporters have admitted don’t accomplish much in and of themselves — but also the “expectations channel” (forward guidance).

Kelton and Wray also touch on the latest debt ceiling showdown and the future of retirement security programs.

Download or listen to the podcast here.

Regarding spurious policy arguments about “excessive growth of the money stock”: Ed Dolan posts helpfully to Economonitor on the more realistic approach suggested by the theory of endogenous money. In particular, I took note of the following passage, which brings up a point that I wrote about recently:

 “Formally, a model that includes a minimum reserve ratio or target plus unlimited access to borrowed reserves would not violate the multiplier model, in the sense that at any given time, the money stock would be equal to the multiplier times the sum of borrowed and non-borrowed reserves. However, the multiplier would have no functional effect, since the availability of reserves would no longer act as a constraint on the money supply. Economists describe such a situation as one of endogenous money, by which they mean that the quantity of money is determined from the inside by the behavior of banks and their customers, not from the outside by the central bank.”

In this simplified setting, the constant known as the “money multiplier” becomes the “credit divisor,” a concept defined in a short article I wrote recently for the forthcoming Elgar volume Encyclopedia of Central Banking.

Using the divisor D, instead of

bank reserves ×  M = money,

one can write

credit/D = bank reserves.

The equation reflects a theory in which causality runs from left to right, reflecting the endogeneity of reserves.

Indeed, the divisor is far more realistic as a model of the money-creation process than the money multiplier. The collapsing money multiplier in the figure in Dolan’s post corresponds to a rapidly rising credit divisor.

The post also points out that after loan demand, “the second constraint is bank capital.” The post notes that when this constraint is binding, the idea of a “reserve constraint” is still more irrelevant. Also, a profitable and solvent bank that wishes to expand its lending can usually increase its capital by retaining earnings or by other moves, as Marc Lavoie and others have pointed out in the academic literature. Moreover, Lavoie observes that a commercial bank having difficulty raising capital might be able get the central bank to purchase its shares in some countries.  Lavoie’s account can be found in his fairly comprehensive essay, “A Primer on Endogenous Money,” in Modern Theories of Money, edited by Louis-Philippe Rochon and Sergio Rossi, Edward Elgar, 2003.

From a policy perspective, a fast-growing stock of money is not generally a “cause” of inflation, though it can be an effect of rising prices or economic activity. (Of course, interest rates that were low enough long enough could cause inflation in a situation in which there was a lack of unused productive capacity.) Central banks cannot fix the growth rate of money to achieve a desired inflation rate, by setting the growth rate of bank reserves. For, as the concept of the credit divisor illustrates, the latter are also endogenous in a modern banking system.

The following table has been computed using data from the latest (April 2013) IMF World Economic Outlook database, with IMF estimates starting in 2013 for most countries.

In my view, these projections are based on heroic assumptions and wishful thinking. The eurozone is supposed to improve its position, even though the current account balance of Germany is supposed to drop substantially (from 1.52 percent of US GDP in 2012 to 0.93 percent in 2018): Greece, Italy, Portugal, and Spain are all supposed to move from a current account deficit in 2012 to a surplus from 2013 onwards, and France is also supposed to reduce its current account deficit.

It therefore seems that the IMF is assuming some equilibrating process inside the eurozone, but overall this area will either be importing less from abroad (while keeping its exports constant) or exporting more. In the former case, the eurozone will impart a deflationary impulse to its trading partners. In the latter case, which area is supposed to absorb the additional eurozone exports? Looking at the table, the candidates are either the United States, which is projected to see its current account deteriorate even further, or developing countries.

If export-led growth from China – the only country in the BRICs for which the IMF projects an improvement in its current account – and the eurozone must rely on additional demand from developing countries, plausibly out of borrowing, global imbalances will trigger a new round of financial instability worldwide.

The other puzzling feature in IMF projections is the substantial fall in the current account of OPEC countries. Is the IMF hoping for a permanent shift of the world economy away from oil products, and therefore a fall in the price of oil? If this is the case, I would expect a fall in the US current account deficit, rather than an increase. But given the permanent turmoil in the Middle East, hoping for a consistent drop in the price of oil may be wishful thinking.