Recent comments

much of this debate as a misunderstanding of national accounts in our currency arragement as a fulcrum. when The Catholic Association lauds Ryan, it says (http://goo.gl/Y6w6Z), it quotes him: "One approach gives more power to unelected bureaucrats, takes more from hard-working taxpayers to fuel the expansion of government, and commits our nation to a future of debt and decline. This approach is proving unworkable – in Congress, in our courts, and in our communities. "This path fails to do justice to either subsidiarity or solidarity. It dissolves the common good of society, and dishonors the dignity of the human person. "Our budget offers a better path, consistent with the timeless principles of our nation’s founding and, frankly, consistent with how I understand my Catholic faith. "We put our trust in people, not in government. Our budget incorporates subsidiarity by returning power to individuals, to families, and to communities." this lays bare Ryan's lack of economic competence -- which is unsurprising in any politician of either party, even (especially?) one lauded for their economic vision. Ryan (and politicians generally) see government debt as the public sector equivalent of private debt, the stock of which they think of as a burden which future tax revenues will have to be diverted to service (or reduce), eventually bringing some kind of fiscal crisis. even the Democratic side would acquiesce that deficit spending is bad, and that in good economic times a countercyclical government should run a surplus -- as it did under Clinton -- to prevent the accumulation of sovereign debt. as i've learned over the course of twenty years in finance, nothing could be farther from the truth. the United States dollar is a fiat currency with unlimited convertibility at a floating rate. as such -- and completely unlike the operation of a fixed-convertibility (e.g. gold-standard, or euro within the eurozone) currency -- it has absolutely no need to raise funds through tax in order to spend. taxes do not "fund" anything; there is no linkage between tax revenue and outlays. the US government creates dollars when it spends them (by marking up the payee's bank account in a computer) and literally destroys dollars when it collects them in tax. to the extent that it creates more than it destroys, it adds to the stock of net financial assets in the private sector. this is essential to understand, because the myriad consequences of this operational reality destroy Ryan's notions of the beneficence of fiscal subsidiarity. in light of this, how do we comprehend our times? we have seen a massive boom and bust in private sector credit caused by an extended period of widespread fraudulence in mortgage finance. the bust has ruined the balance sheet of many private sector entities -- banks, households, pensions, insurers, some businesses linked to housing. these entities began in 2008 to repair their balance sheets by halting new borrowing and redirecting income to debt service and reduction that had been employed in consumption, which of course deprives many other businesses and households not linked directly to housing of their incomes, forcing them to cut their spending as well -- starting a self-reinforcing spiral of declining income. this is a pattern of Depression that has been seen many times in the past. we know, however, that the government deficit is equal to the net gain in private sector financial assets -- which is also to say that, when the private sector engages to reduce net debt and improve its equity position, the public sector must run a deficit equal and opposite to that improvement. this explains why we have seen much larger government deficits -- private sector balance sheet repair is driving them. mind you, this would happen irrespective of the level of spending Congress may set -- should Congress plan to spend too little to satisfy the private sector's desire to improve its balance sheet, the deficit will be compelled to increase through a reduction in economic activity that diminishes tax revenues until the required deficit materializes. read that again -- when Ryan (or anyone else) talks about cutting spending to cut deficits, he betrays his lack of understanding. Congress does not control the deficit flow; the private sector does by determining in aggregate how large a surplus it must run. but the system does feed back, and if Congress insists on cutting spending or raising taxes in an effort to reduce deficits they reduce economic activity and effectively make it harder for the private sector to repair itself -- the increased difficulty being reflected in greater damage to balance sheets, thereby increasing the impetus for repair and ultimately increasing the sum total of the deficits Congress will ultimately have to run. this behavior has been directly observed in several Depressions, including Japan in the 1990s, the US and Europe in the 1930s and elsewhere the currency-issuer attempted to reduce deficits during a Depression. so what is the optimal solution to escaping Depression? the only way out is facilitating the private sector's balance sheet repair -- which in the case of a very large financial crisis means running large government deficits for an extended period. this is only possible for the party that stands on the other side of the currency users of the private sector, the currency issuer. every other entity -- households, businesses, municipalities, states -- is required on some level to balance its books. for these entities Ryan's concerns would be very valid. a company or household cannot run large deficits ad infinitum without eventually collapsing into bankruptcy. the currency issuer can -- because it can never go bankrupt, as it creates the dollars it spends with and which its debt is priced in without limitation -- and must in order to balance the dollar universe and facilitate private sector balance sheet repair. this puts a very severe circumscription on the utility of subsidiarity -- in a Depression, an impaired private sector is completely dependent on the currency issuer to avoid a death spiral of income and asset destruction that will suck in and destroy first the bad, then the good until the entire society is so impoverished that it can no longer save anything, finally shutting off the income leakage that drives the crisis, a level at which the private sector no longer can run a surplus. that is incidentally where the US was headed (but did not get close to reaching) under Hoover's repeated but unsuccessful efforts to balance the federal budget by cutting spending and raising taxes in order to stay on the gold standard between 1929 and 1933, until FDR mercifully took the US off the standard on June 5 1933. no matter how we might like to organizationally devolve power to localities and individuals, these are still necessarily currency users who are dependent on the competence of the operations of the currency issuer. Ryan is being either disingenuous or ignorant in claiming that people should simply work this out for themselves without the interference of the government. Ryan and others are further concerned that the increase in the public debt stock that necessity (as above, it is very much unavoidable and necessary) entails will result in an ever-increasing amount of tax revenue diverted to debt service and ultimately a fiscal crisis that results in an American 'bankruptcy' or a dramatic rise in Treasury-based interest rates. but we can see that these concerns are operationally null. because the US government can spend any amount of dollars without regard to tax or any other limitation, it can buy back at any price at any time any amount of its debt or indeed any dollar asset it desires -- which means it unilaterally sets the rate of interest. (this is notably not true of European sovereigns like Italy or Spain, who are tied to a euro that they cannot unilaterally create and so are currency users like any household or business or US state.) nor clearly can the US go bankrupt when it can unilaterally obviate its debt at any time and create any amount of dollars to service whatever debt it chooses to issue. some observants may argue that this could mean devaluing the currency -- and i completely agree, the creation of large amounts of net financial assets by the operation of the currency issuer will tend to devalue the currency, all else being equal. but i would also argue that this would only be likely should the rate of creation of net financial assets by the government exceed the rate of cancellation of gross financial assets in the private sector. this process within the private sector has driven deflation in debt-financed US assets (eg houses) much as it did in Japan in the 1990s. moreover, even in terms of trade, we would have to devalue at a greater rate than competing economies and their currencies to see a material reduction against them. you'll hear none of this in the popular political discourse of our times, more's the pity -- but it is common knowledge in select places like the operations folks at the Fed (who have of course a long-running familiarity with the machinery of the currency) and has quietly become ever more widely acknowledged in financial circles as the 2008 crisis upended and destroyed various other dubious but politically useful theoretical economic frameworks. one must hope and pray that a greater competence overtakes our political leaders before they engage in counterproductive fiscal attacks in the name of subsidiarity and solidarity.