When I attended the fiscal sustainability counter-conference, much of the discussion was theoretical and technical and avoided normative or political conjecture. All of the panelists were aware of the political landscape for deficity dovery, and were even more aware of the implications of deficit reduction for the poor and unemployed. However, until reading Rick Wolff’s latest, I don’t think I really grasped the political meaning of the deficit debate and how skewed it is.
In today’s class-divided societies, classes differ over what governments should do and who should pay the taxes. Governments in such societies often turn to borrowing — which produces national debts — as ways to defer and postpone the political problems of resolving class struggles focused on the state…
Employers and employees struggle everywhere over what activities the government should and should not perform. Employers want governments to support and enhance the profits they seek (build and secure the transportation and communication infrastructures they want, educate their workers, protect their markets, enforce their contracts in courts, etc.). Employees, in contrast, want the government to support their incomes, families, and standards of living…
The two sides’ relative strengths — their organizations and resources — usually determine the patterns of government expenditures and what portion of the tax bill each side pays. Rarely employers and employees agree on these contentious issues…
Governments fear the political costs of going so far in placating one side that they risk being ousted from power by the other side. Borrowing thus eases their problems at least temporarily…
Of course, lenders to governments come chiefly from employers, not employees. Lenders are, of course, complicit in building up national debts because they collect most of the interest payments from the borrowing governments. From the employers’ perspective, the national debt often looks like an attractive lesser evil…
Lenders to governments understand that class struggles postponed may thereby be sharpened…
The lenders therefore began refusing to lend any more to Greece (or even to roll over debt coming due) or they demanded much higher interest rates. In effect, lenders demanded that the Greek government either tax employees more or else cut government spending on employees to free up money to service Greece’s national debt…
The moral of the story of class struggles and national debts is this: government borrowing is capitalism’s very employer-partisan way out from a political dead end…Americans will confront the same basic situation as the immense and growing US national debt brings its lenders to a similar crossroads.
There’s a key difference between Wolff and the deficit dove crowd- the doves, drawing on Modern Monetary Theory, believe that there aren’t limits to government’s borrowing capabilities, at least not for advanced economies. Wolff, however, assumes that the deficit, and the debt in turn, will eventually reach a breaking point, even in the US, the reserve currency issuer. I’m not in a place to judge who is right here. However, I really like Wolff’s idea about viewing deficits as a way of deferring class struggle until the inevitable clash. It mirrors his argument about how consumer borrowing delayed class struggle over stagnating wages, and I think, helps us understand the present political economy.
Nick,
Clearly, Wolff’s idea of a “breaking point” shows he does not understand the fundamental differences between the U.S. on the one hand vs. Greece, you and me on the other. By comparing Federal deficits to consumer borrowing, he displays an profound ignorance of federal finances. There is, in fact, no comparison or similarity between then two, despite his semantic confusion.
The U.S. went off the gold standard in 1971, to give itself the unlimited power to create money. We misleadingly call that power “borrowing,” when in fact it simply is money-creation.
Neither Greece nor you nor I have that power (Greece is constrained by a “Euro standard”), so they and we must borrow, and our debts are burdens to us. In contrast, the U.S. does not need to borrow, and its so-called “debts” (money-created), are no burden to it whatsoever.
Here is how the U.S. “borrows.” The U.S. creates unlimited T-securities out of thin air.
Most nations have with the Federal Reserve Bank, two accounts: A checking account and a savings account, where its T-securities are held. When a nation wishes to buy our T-securities (aka “lend” to us) the U.S. government transfers dollars (only dollars, no other currency) from that nation’s checking account in the Federal Reserve bank to its savings account in the same bank.
This savings account misleadingly is called “debt,” but in fact it merely is an account that holds dollar-denominated T-securities, i.e. dollars.
Then, when the T-securities mature, the Fed transfers the money, plus additional for interest, back to the nation’s checking account in the same bank.
These transfers are balance sheet notations. Nothing physical moves. If, for instance China wished to buy $1 trillion in T-securities, it first would have to put one trillion dollars in its checking account at the Fed. Then the Fed would transfer the money to China’s saving account at the same bank.
China cannot remove this money. It must stay at the Fed. Even were China to sell its T-securities to another nation, the dollars must stay at the Fed bank.
Given the reality that T-security sales merely involve the transfer of money between two accounts at the U.S. Fed, money which never can leave the Fed, how do T-security sales represent any financial problem for the U.S.?
Answer: They don’t, and that is why the misleadingly named “debt” represents no threat to U.S. solvency or growth.
See: FIVE MYTHS.
Rodger Malcolm Mitchell
The issue involved in debt is whether or not a country is monetarily sovereign.
ON one hand, the US, UK, Japan, Australia, Canada and many others are monetarily sovereign. They issue their own currency and not financial constrained. They can always issue currency to meet obligations denominated in their currency. The only constraints are real. If countries issue too much currency, stimulating nominal aggregate demand in excess of real output capacity, then inflation will occur. If the opposite, then deflation, resulting in economic contraction and rising unemployment to the degree that wages and prices are sticky. Ideal fiscal policy balances nominal aggregate demand with real output capacity, resulting in full employment along with price stability.
The other constraint is exchange rates. If issuance threatens to weaken the currency relative to other currencies then the exchange rate will reflect this and they will pay more for imports. But they will also increase exports, which automatically serve to strengthen the currency eventually, ceteris paribus.
On the other hand, the EMU nations relinquished monetary sovereignty when they joined the EMU, and countries that peg their currencies to other currencies are not monetarily sovereign. Also, countries that borrow in other currency thereby limit their monetary sovereignty as well, since they cannot create the currency in which the debt is denominated.
See Marshall Auerback’s post today at Huffington Post.
Yes Virginia, There Is a Difference Between Greece and the U.S.
Where the class warfare enters is the preference of creditors, especially bond holders, for deflation. As a result they prefer policies that favor their interests at the expense of debtors. Moreover, this presently involves a policy that is in contravention of the Fed’s mandate to target both inflation and unemployment. Presently, the Fed attempts to use unemployment as a tool to target inflation rather than as a target itself. Fiscal policy is not being used because it is in the grip of those preaching fiscal responsibility” as an economic necessity when, for monetarily sovereign nations, this is just a “moral” argument without economic substance. Examining the interests of those advancing it one finds that it is self-serving and promotes the interest of plutocratic oligarchy.
The message of MMT is that if fiscal policy were used properly, then monetarily sovereign nations could manage supply and demand to achieve full capacity utilization, full employment and price stability.
Excellent clarification of a widely misunderstood area, Rodger.
Thanks Tom,
The Auerback article you suggested, is quite good. But is anyone listening? Doubtful.
I even have been unable to explain it to my college graduate friends. They just <know that debt is bad and surplus is good — and don’t bother them with facts.
The fundamental problem facing America is, amazingly, a semantic one. The use of the word “debt” rather than “net money created,” and the use of the word “borrow” rather than “create money” has confused even the most prominent experts, let alone the public.
Few people understand that since 1971, the federal government has not borrowed, nor has it accumulated debt in the classical sense. It merely has created and sold T-securities, which it can do indefinitely.
Inflation only becomes a concern when we reach full employment, a situation sadly a long way off.
I’ve been writing about this for 15 years, (See: FREE MONEY )with what I suspect is minimal impact.
Rodger Malcolm Mitchell
That link should have been FREE MONEY
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