Progressives

Connecting the Dots – Deficit Reduction Is Not About Insolvency

Joseph M. Firestone — Thu, 11 Aug 2011 20:09:15 -0400

Warren Mosler

(Editor's note: I'm re-posting this here from moslereconomics.com with a follow-on commentary of my own with the permission of Warren Mosler)

From Warren Buffet to Alan Greenspan,

And from all the responses to the S and P downgrade by
economists and financial professionals from the 4 corners of the world,

THE WORD IS OUT!

The US government is the issuer of the US dollar.

So no matter how large the federal deficit might be:

The US government can always make any payments in US dollars that it wants to.
There is no such thing as the US govt. running out of US dollars.
The US government always has the 'ability to pay' any amount of US dollars at any time.

NOW CONNECT THE DOTS TO:

The US is not dependent on tax revenue or foreign borrowing to be able to spend.

And,
whereas Greece is not the issuer of the euro,
much like the US states are not the issuer of the US dollar,

THERE IS NO SUCH THING AS THE US BECOMING THE NEXT GREECE

There is no such thing as the US getting cut off from spending
by the financial markets and forced to go begging to the IMF
to get US dollars to spend.

Nor is the US government subject to market forces driving up interest rates on US Treasury bills.

EVEN AFTER BEING DOWNGRADED US TREASURY BILL RATES REMAIN NEAR 0%

Why, because, any nation that issues its own currency also sets it's own interest rates.
So in the US, the Federal Reserve Bank votes on the interest rate

SO, THEN,

WHAT IS THE POINT OF DEFICIT REDUCTION?

Suddenly, it's NOT solvency.
The US is suddenly NOT going broke.
Social Security is suddenly NOT broken.
There is suddenly NO risk the US will not be able to make all payments as promised.

So now,

the deficit hawks must CHANGE THEIR REASONS FOR DEFICIT REDUCTION
or shut up!

they must FLIP FLOP
or shut up!

Yes, there is a new reason they can flip flop to.

Inflation.

They can start claiming the current path of deficit spending will lead to inflation.

Fine.

Bring it on!

First, they need to do the research,
as they haven't even thought about this yet.

Then they have to convince Congress to cut social security and medicare
Not because we might become the next Greece
Not because the US government checks might bounce someday
Not because the deficit will burden our grand children

But ONLY because some day,
if we don't do something when the time comes
and even though we don't have an inflation problem now,
and haven't had one in a very long time,
SOME DAY far in the future,
inflation might go from x% to y%.

Fine.

Do you think Congress would take draconian steps now,
during this horrendous recession,
to make things worse
by cutting Social Security?
and by cutting funding or public infrastructure?
and by raising taxes?

How about we get the word out and find out, thanks!

Commentary

Joe Firestone

I'll try my best to spread the news that THE WORD IS OUT! And also spread the further news that the Government can't run out of money, no matter how much it owes and that there is no solvency problem.

So there is also no deficit reduction problem, no national debt problem, or any Social Security, Medicare, or Medicaid problems, or grandchildren burden problems based on fears of, or claims about, insolvency unless we pay our debts back!

I have to say however, that even though THE WORD IS OUT that solvency is not a problem, and that the austerity/human sacrifice crowd must now either fall silent or flip flop to inflation as their new rationalization for driving working people into poverty; I don't think for a minute that they will do either one.

Instead, I think they will assume that the news will never get out to most people and that they are free to go on with their same old narrative about possible insolvency making austerity necessary, without people either laughing at them or calling them liars. The MSM is unlikely to notice that the Government can create currency whenever it wants to, and they will just forget about the admissions made this week after the S & P downgrading, and reinforce the old money scarcity story, without missing a step, to please the Peter Petersons, Kent Conrads, Alice Rivlins and David Walkers of this world. The president already did this in a speech he made today.

So, I think that besides doing our best to spread THE WORD, we also need to pressure the President to prove that the United States Government has no solvency problems, and can never run out of money. In other words, we need to call for the President to use very high value Proof Platinum Coin Seigniorage (PPCS) to begin to pay back the national debt and also to create a balance in the Treasury General Account (TGA) that is so large that no insolvency claims are even thinkable.

The basic idea is to mint a $60 Trillion platinum coin, turn it into electronic credits at the Fed, use the money, first to pay down $6.2 Trillion in debt immediately and the rest as it falls due, and confront Congress with a balance of of about $52 Trillion in the Treasury General Account (TGA). Then, facing that $52 Trillion in available financial resources, and with the President using the bully pulpit, let's see the austerity/human sacrifice crowd, even with all the money in the world behind them, try to justify voting for spending cuts in entitlements and other much needed areas of domestic spending.

(Cross-posted from Correntewire.

How do vanden Heuvel and Meyerson Expect Him to Get By the Austerians

Joseph M. Firestone — Thu, 11 Aug 2011 13:05:52 -0400

Yesterday, must have been jobs day at The Washington Post since they ran two columns calling for job creation: one by Katrina vanden Heuvel and the other by Harold Meyerson. The crux of vanden Heuvel's column is:

Consistent, tenacious persuasion is an extraordinarily powerful tool. The Republican Party understands this. Over the past several months, it has relentlessly repeated its false mantra that spending cuts create jobs. And the public, in response, increasingly believes this to be true. What then, is to stop the president, powered by a movement of dedicated and mobilized Americans, from making his own case for the economy? What is to stop him from convincing the American people that the things the economy requires are the things we ought to be fighting for? What is required other than will? Great leaders, when confronted by crisis, act.

The answer to this question is that President Obama's been telling people since 2009 that we are running out of money and can't afford programs that aren't deficit neutral, and recently he's made clear that he's for $4 Trillion in spending cuts/tax increases including cuts to entitlements over the next decade. So how can he now argue that we can afford the many things we need to do to create jobs and improve the economy?

Katrina vanden Heuvel doesn't address this question. She advises him about what he ought do to improve the economy; but not on how he can show Congress, a media steeped in neoliberalism, and the people that not only do we need his job creation measures but also that we can afford them. Without that kind of explanation, what good is the exhortation that he should vigorously advocate for job creation policies? The first pushback he'll get to any proposal is “that's irresponsible; we can't afford it”!

I found Harold Meyerson's column a good bit more interesting than Katrina vanden Heuvel's, but no more enlightening about how to get around the “we can't afford it” objection. He says:

Which leaves us with this stark reality: If the federal government doesn’t intervene massively to help the economy, the economy will oscillate between neutral and reverse for many years.

What should that intervention look like? First, don’t just extend the 2-percentage-point reduction in the employee payroll tax, which is normally set at 6.2 percent. Eliminate the tax altogether, for employers and employees, at least temporarily. It would increase by $2,100 the take-home pay, and buying power, of workers making $50,000 annually. It would make it easier for small businesses to resume hiring. . . .

The payroll tax can’t be suspended indefinitely without compromising Social Security, which it funds. Its suspension should end when unemployment falls to a specified level — say, 7 percent.

Interestingly, this is an important provision in Warren Mosler's multi-part Modern Monetary Theory (MMT) --based proposal for creating full employment. Warren's been advocating it for 3 years now. Glad to see Harold Meyerson take it up. Meyerson goes on:

We’ll need other, less fleeting forms of stimulus, too. You should call for renewing aid to state and local governments. . . .

Warren and other MMT economists also advocate state revenue sharing. In Warren's proposal the states would be given $500 per person which they might use to prevent Government lay-offs. Some propose as much as $1,000 per person in revenue sharing.

Meyerson's next and last proposal is:

Infrastructure bank or no, you need a long-term program to make our nation navigable again. . . .

Those kinds of projects may take years to realize. Your first stimulus failed to establish a fast track for creating less-capital-intensive jobs in maintenance, rehabilitating buildings, and child- and elder care. It deferred job creation to state and local governments, which have taken forever to set up even such relatively low-tech endeavors as home-weatherization projects. This time around, you should acknowledge the bottlenecks in your first stimulus and call for a federal job corps to do this kind of work.

This is also reminiscent of an MMT proposal, specifically the MMT Federal Job Guarantee, which would end unemployment in a few months by providing a job at a living wage with fringe benefits to any American who wanted to work.

In sum, even though he doesn't admit it in his column, Meyerson's program is very similar to the program for recovery proposed by MMT economists such as Warren Mosler, L. Randall Wray, Stephanie Kelton, and others. Is this a case of MMT reaching the mainstream? That may be the case; but if so it's without attribution.

Both vanden Heuvel's and Meyerson's column, while exhorting him to do things that are undeniably needed by Americans, fail to tell him how, given the Republican House, he can politically beat the drive toward austerity to get them done. Without that, it's hard to see how either of these posts can help anyone. Fortunately, I've already done that here and here.

The ONLY practical way to do it given the current political and institutional constraints in Washington is to use very high value Proof Platinum Coin Seigniorage (PPCS) to demonstrate to people that 1) the national debt is being extinguished and will be nearly completely eliminated in 3 years; 2) Congressional Appropriations for deficit spending can be made without issuing debt for the foreseeable future; 3) the Federal Government can never become insolvent (“run out of money”), unless Congress makes that happen; and 4) there's plenty of money available for not only jobs programs like Meyerson's, but also for Medicare for All, rebuilding infrastructure, creating a world class educational system, and all the other critical things the US must do to make things work here again.

The basic idea is to mint a $60 Trillion platinum coin, turn it into electronic credits at the Fed, use the money, first to pay down $6.2 Trillion in debt immediately and the rest as it falls due, and confront Congress with a balance of of about $52 Trillion in the Treasury General Account (TGA). Then, facing that $52 Trillion in available financial resources, and with the President using the bully pulpit, let's see the austerity/human sacrifice crowd, even with all the money in the world behind them, try to justify voting against a job program like Meyerson's or Warren Mosler's. Please see the posts I've linked to above for more details of my proposal.

(Cross-posted from Correntewire.

Still Superman?

Joseph M. Firestone — Sun, 07 Aug 2011 23:31:43 -0400

There have been many reactions to S & Ps action in downgrading the credit rating of the US, Apart from the widespread annoyance and repudiation of S & P and its procedures, there are some who are saying that it won't have much effect on interest rates. Others even saying that it is a “non-event,” and still others saying that S & P should be investigated and prosecuted on a number of grounds. However, I found two views of the “non-event” particularly interesting.

The first was Warren Buffet's quoted by Fox Business news:

Berkshire Hathaway Chairman and CEO Warren Buffett told the FOX Business Network that S&P's downgrade of the United States' triple-A credit rating "doesn't make sense."

"I don't get it," Buffett told FBN late Friday night. In fact, Buffett reaffirmed his belief in the quality of the United States' credit telling FBN, "In Omaha, the U.S. is still triple A. In fact, if there were a quadruple-A rating, I'd give the U.S. that.”

Buffett also said:

"Think about it. The U.S., to my knowledge owes no money in currency other than the U.S. dollar, which it can print at will. Now if you're talking about inflation, that's a different question."

And so, now we know that Warren Buffett gets a fundamental premise of MMT!

He knows that the US cannot become insolvent because it can make USD at will and it owes nothing that is not denominated in USD!

We can only hope that he'll clue in his friend Barack Obama that the US is NOT running out of money. Perhaps Mr. Buffett even knows about Proof Platinum Coin Seigniorage (PPCS) and he can tell his friend Barack that using it would be a good way to give S & P a sharp stick in the eye.

The other reaction was one to my post on S & P tugging Superman's cape. The commenter asserted that, considering the US Government's domination by an increasingly powerful oligarchy, “the US Government is not Superman.” This squares with views being expressed by Yves Smith and others that this downgrade is about a power struggle. People who write about this struggle characterize it differently.

I think it is a power struggle between sovereign nation states and globalizing international elites whose loyalties are to the emerging new international feudalism in which corporations and enormously wealthy individuals wield the only real power. Some write as if they think that nation states are already and irrevocably subordinate to international elites. But I think that is not yet true.

The forces of nationalism are not yet spent, and will still be used against the international elites when the reality of their growing power and its negative impacts on working people are both fully recognized. People still need nation states for physical protection. People without a favored position in the emerging plutocracy still owe their primary loyalties to their nations, and I don't think they will long accept the subordination of their national Governments and institutions to foreign powers, whether those are other nations or international financial interests. At the moment, the influence of globalizing elite institutions is very great and very real; but they still exist and function on the sufferance of nation states and their internal politics, however parasitical they may be.

Even with all its faults and the mess being made by the special interests and the parties, the US is still Superman if we can free ourselves from the constraints imposed by various Congresses in the past, and from the financial lilliputians.

1. As I say in this piece, and Marshall Auerback says in this one, the US (the Fed and the Treasury) can control interest rates contrary to the desires of the bond markets and the vigilantes. There is no realistic prospect that benchmark interest rates will go up unless the Government wants them to.

2. The US can also de-certify the ratings agencies and prosecute rating agency executives for fraud and other violations. I think they'd be well-advised to do so, if only to show S & P who's boss. And

3. The President, finally, can use very high value PPCS and kill the “austerity” trope of the international elites for good.

So, forgive me my optimism, I still think that's Superman!

(Cross-posted from Correntewire.

Standard & Poor's Tugs on Superman's Cape

Joseph M. Firestone — Sat, 06 Aug 2011 02:24:09 -0400

Last December, my friend, beowulf, had this to say at the time Moody's began to make noises about downgrading US debt. He said:

”I don’t think we’ll see Moody’s or any other rating service based in the US ever downgrade US Treasuries. It would cause a tremendous amount of financial loss and would leave Moody’s and its executives exposed to criminal prosecution. If I were Moody’s general counsel, I’d tell the CEO in no uncertain terms, Do Not Tug On Superman’s Cape.

14th Amendment, Sect. 5

”. . . .the validity of the public debt of the United States, authorized by law… shall not be questioned”

Criminal Mischief statute

18 US 1361. Government property or contracts

"Whoever willfully injures or commits any depredation against any property of the United States, or of any department or agency thereof, or any property which has been or is being manufactured or constructed for the United States, or any department or agency thereof, or attempts to commit any of the foregoing offenses, shall be punished as follows:

If the damage or attempted damage to such property exceeds the sum of $1,000, by a fine under this title or imprisonment for not more than ten years, or both; if the damage or attempted damage to such property does not exceed the sum of $1,000, by a fine under this title or by imprisonment for not more than one year, or both."

But, Standard & Poor's has decided to tug on Superman's cape by downgrading US debt to Double A status for the first time in history. Don't get me wrong, I'd love to see S & P executives frog-marched out of their offices and imprisoned for a year for violating the criminal mischief this statute. After their role in the Crash of 2008, that's the least they should get from an outraged populace. However, I have to say that their action will be of little or no consequence if the Treasury responds correctly to their foolishness.

Contrary to popular belief, and also the apparent belief of this Administration, ratings agencies and the bond market itself don't actually control the interest rates that Governments like the United States must pay. Sure, they will determine interest rates if the Government sits idly by and lets them drive the market.

However, the Federal Reserve and the Treasury, can target bond interest rates and set these for the bond markets by manipulating bank reserves. Specifically, one way to do this (As Warren Mosler suggests), is that the Treasury can cease issuing long-term bonds, and sell only three-month bonds. Three-month bond interest rates are generally controlled by overnight rates for bank reserves, and overnight rates can be driven down to near zero by flooding the banks with excess reserves. That's basically how the Japanese keep their bond interest rates near zero, and that's how we can do the same.

Alternatively, another move we can make to remove the effects of the bond markets and the ratings agencies upon public finances, is for the Treasury to stop issuing debt in advance of deficit spending. If we did this, the credit rating agencies and the interest rates in the bond market would be irrelevant from that day forward. And we can do it using Proof Platinum Coin Seigniorage (PPCS) to generate revenues to pay back debt, and deficit spend current or future appropriations.

In short, the bond markets and the ratings agencies aren't in control of US public finances. They are not in a position to influence what our taxing or spending policies ought to be, or whether we will default on our obligations. So, their tug on Superman's cape is of no consequence for us, directly.

On the other hand, the ratings agencies are currently hurting US states, and Eurozone nations with their deeply corrupted ratings processes and judgments. We should take very seriously Bill Mitchell's Conclusion in his post on outlawing the credit rating agencies:

"The real question that I always ask is why governments allow these undemocratic criminal organisations to exist. They can just outlaw them. This would force the corporate players to create better ways of informing the markets about their risk characteristics and leave governments alone to do what they are democratically elected to do – advance public purpose.

(Cross-posted from Correntewire.

Modern Monetary Theory: The Last Progressive Left Standing

Joseph M. Firestone — Tue, 14 Jun 2011 01:36:22 -0400

The headline progressives are in full retreat. They have found out the hard way that their bleeding heart pleadings -- 'yes, the financial markets might destroy us, but how can we cut this or that worthy cause' -- don't cut it. They have fallen into the out of paradigm world that takes it as gospel that the U.S. is at imminent risk of becoming . .

GOP Social Security Lies: Orrin Hatch Edition

Daniel Marans — Wed, 11 May 2011 16:05:05 -0400

This week was chock full of GOP Senators ignoring or actively distorting the truth about Social Security. Senator Orrin Hatch (R-UT), ranking member on the Senate Finance Committee, made his own disingenuous contribution to the volumes of conservative misinformation about the program at a Committee hearing on Tuesday.

Welcome to the club, Senator Hatch. Last Friday, former Senator and Fiscal Commission Co-Chair Alan Simpson (R-WY) called Social Security a “Ponzi scheme” and wished away inconvenient facts about life expectancy. Ezra Klein and Jonathan Chait have already covered that issue top-to-bottom.

But Hatch’s less colorful distortions have been absent from the media. In his opening statement at Tuesday’s hearing, “Perspectives on Deficit Reduction: Social Security,” Hatch parroted the frequently deployed—and frequently discredited—connard that the Social Security trust fund is “just a bunch of IOUs.”

For many years, the Social Security Trust Fund ran surpluses. Under the unified budget, those surpluses masked the size of the deficits the federal government was running. By law, the trust fund is made whole by the issuance of Treasury IOUs to the trust fund to reflect the surpluses and interest. In the late 1990s, under a Republican Congress and Democratic President, that trend reversed briefly, but returned back to normal under Congresses and Presidents of both parties. …

To be sure, those IOUs sitting in the Parkersburg, West Virginia offices of the Treasury’s Bureau of Public Debt are claims against the federal government. They’ve got to be paid. How will they be paid if the trust fund comes to rely on them?

Hatch’s remarks are confusing. On the one hand, he concedes that the trust fund’s treasury bonds are “claims against the federal government” that have “got to be paid,” but then he refuses to call them United States Treasury bonds, opting instead for the belittling “Treasury IOUs” and “IOUs.” (A cursory look at the Social Security Administration web site clears up any doubt about the status of the trust fund bonds. “By law, income to the trust funds must be invested, on a daily basis, in securities guaranteed as to both principal and interest by the Federal government.”)

If Hatch seriously only considers United States Treasury bonds “IOUs,” then he was casting aspersions on the full faith and credit of the United States government, and the ability of our government to honor any of its debts. He might as well have been speaking at a hearing on a trade agreement with China, referring to the bonds the United States owes its largest trading partner as IOUS.

Somehow I think Hatch would be reluctant to say it in that context. The American business community would be none too pleased.

No, it is more likely that Hatch was cynically using the term “IOUs” to undermine confidence that Social Security will “be there” for coming generations, and perpetuate the common misunderstanding that the trust fund has been “raided” by the government.

That wasn’t Hatch’s only distortion of Social Security at the hearing. His question for Charles Blahous, a conservative policy expert and a Public Trustees of the Social Security trust fund, turned into a back-door attack on the program. Hatch asked what kind of combined Social Security benefit a couple would receive, if the husband were the sole breadwinner, had average annual earnings of $150-200,000, and claimed benefits at age 70. Blahous answered that the husband, who would be considered a maximum taxable earner (Currently $106,800), would probably receive a benefit in the range of $30,000, and the wife would receive a benefit of 50% of that, which is $15,000. Together, they would receive a combined benefit of $45,000. Blahous correctly stipulated, however, that this would be reduced to stay under the family maximum benefit, which was $40,711.69 in 2009.

Wrapping himself in the progressive mantle, Hatch used Blahous’s answer to denounce Social Security for not being progressive enough. Hatch said it was “immoral” that Social Security should be paying out such large benefits to wealthy Americans, while the average annual benefit hovered around $13,000. He went further, suggesting that this was a serious financial drag on the program. “I imagine there are many such similar-earning couples” getting huge Social Security benefits, Hatch declared. He insisted that Social Security could be made solvent if we just reduced benefits for the caviar set.

Then, the facts got in the way. Blahous pointed out that historically only 1 percent of beneficiaries had earnings equivalent to the taxable maximum. So contrary to his assumptions, Hatch’s hypothetical high-flying couple is statistically insignificant. (Senator, your class is showing.) Thus, the financial part of Hatch’s argument is null and void.

But just because Hatch was silenced in the hearing room, by a conservative policy expert no less, it does not diminish the traction his line of questioning has in the media and with the public. Fiscal hawks have repeatedly claimed the progressive high ground in their calls to flatten the benefit formula and eviscerate Social Security’s middle class benefits. And, at first, even to reasonable people, it sounds convincing.

Only when you start to look at the details do you realize that it is a back-door attack on Social Security’s integrity. Because there are so few of Hatch’s $150K earners, rolling back benefits for them barely saves Social Security any money at all. (Click here for a complete fact sheet on means-testing.) For that they’d have to dip down to seniors in the $50-60,000 range—as Lindsey Graham and Rand Paul do in their “progressive” Social Security plan.

The Republicans’ real agenda is not to make Social Security more progressive, but rather weaken the program’s political advantages over other government programs. You see, Social Security’s progressivity is hidden. Benefits are earnings-related, so they are larger in absolute terms for higher earners—and seem regressive. But they replace a larger proportion of pre-retirement earnings the lower your lifetime earnings. Therein lies the progressive part. Plus, wealthier beneficiaries’ benefits are taxed as income to help fund the program.

Attempts to disturb this delicate balance of redistribution-by-stealth jeopardize upper middle class support for Social Security by turning it into another welfare-style subsidy program that they have no stake in. That way, Republicans, who don’t believe in Social Security for ideological reasons, will be able to chop the program to pieces with greater political ease.

Consider the GOP’s treatment of more “progressive” welfare programs in recent budget talks.

Home heating oil for the poor? Cut under threat of a government shutdown.

Food stamps for poor children? Cut under threat of a government shutdown.

Medicaid? Gutted in the GOP budget, and still a part of Republican demands to raise the debt ceiling.

On Social Security itself, Hatch is new to the progressive cause. Back in 2007, he voted with his Republican colleagues to privatize Social Security. Was that the “moral” thing to do?

Standard and Poor's: Bring It On!

Joseph M. Firestone — Tue, 19 Apr 2011 02:54:34 -0400

(Author's Note: In December I posted a piece on Moody's threat to downgrade the US's Rating in International Bond markets. I argued that Moody's action was foolish. Today, Standard and Poor's actually revised the US ratings outlook from stable to negative, but continued its sovereign credit rating at ‘AAA/A-1+’. This roiled the markets yesterday and led the New York Times to carry a debate among 7 economists including Randy Wray, one of the best known among economists using the Modern Monetary Theory (MMT) paradigm in economics. Randy and a number of others in the Times debate, believe that the ratings change has little or no significance.

My post filed in December, presents a more detailed analysis of why Randy and the other skeptics are right, so I thought it deserved a reprise. Please use your imagination and just replace "Moody's" with "Standard and Poor's." The arguments against the ratings agency morons remain the same. In my view Congress should just put 'em out of business, and while they're at it, bring some indictments against them for the fraudulent AAA ratings they gave to the derivatives that, in turn, triggered the Crash that ruined the lives of so many people. Let's finally see some of these perps in jump suits.)

Yesterday, as reported in Money News, Moody's made me laugh, with the following pronouncements:

” . . . it could move a step closer to cutting the U.S. Aaa rating if President Barack Obama's tax and unemployment benefit package becomes law. . . .

“The plan agreed to by Obama and Republican leaders last week could push up debt levels, increasing the likelihood of a negative outlook on the United States rating in the coming two years . . .

“A negative outlook, if adopted, would make a rating cut more likely over the following 12-to-18 months.

“For the United States, a loss of the top Aaa rating, reduce the appeal of U.S. Treasurys, which currently rank as among the world's safest investments.

"From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth," Moody's analyst Steven Hess said in a report sent late on Sunday.”

Here Moody's is referring to the increase in the debt, and the debt-to-GDP ratio caused by the tax deal, and also to the predicted lesser value of Treasuries which will presumably lead to the US paying higher interest rates and having greater interest costs on the national debt than it otherwise would have had. In addition, Moody's believes that the likely $900 billion cost of the tax deal will make the US more likely to default on the national debt.

I found this a laughing matter for a number of reasons. First, as Jane Hamsher points, out only 5 days earlier Moody's had said there was no prospect of a ratings cut if the tax deal passed. Their sudden change of opinion greatly undercuts their credibility.

Second, as is widely known, all the ratings agencies including Moody's gave the CDOs and CDSs that led to the collapse of AIG their highest ratings. In addition they downgraded Japan's credit ratings a long time ago, with no measurable impact on its bond interest rates or costs, even though Japan's debt-to-GDP ratio has continued to increase over time and is now in the neighborhood of 200%. So, one may be forgiven for wondering why anyone should listen to the ratings ravings of Moody's and the other agencies at all. In fact, one may begin to suspect that their ratings have little influence on the bond markets, and also, given the Japanese case, that the bond markets don't control the interest rates that Governments sovereign in their own currency must pay.

default could be caused by a Congress which acts stupidly, and in a manner contrary to the Constitution, to constrain the Treasury from paying its obligations when they come due, coupled with a Treasury that accepts Congress's constraint in conflict with the clear admonition of the Constitution that the debts of the United State shall not be questioned.

The objective risk of default by the US Government is not increased by the increased size of the deficit, debt, or debt-to-GDP ratio. And Moody's view that the risk of default is increased by such increases, only shows that Moody's doesn't understand the monetary operations of nations sovereign in their own currencies. Increases in these numbers don't in any way lessen the constitutional authority of the Government (including the Congress) to spend or make money. It's basic solvency, in other words is untouched by the tax deal, and if Congress allows the Executive to use its currency powers, then the risk of default as a result of the deal is exactly zero. Whatever additional risk exists as a result of the deal, comes only from the increased likelihood that Congress, mistakenly thinking that the Government is like a household, or, or ideological reasons, determined to "starve the beast" might constrain the Executive from meeting its obligations, and declare a US default of its obligations when there is no reason to do so.

Fourth, my biggest laugh came at the underlying assumption of Moody's report, namely that its ratings and the bond market itself actually control the interest rates that Governments like the United States must pay. Sure, they will determine interest rates if the Government sits idly by and lets them drive the market. However, the Federal Reserve and the Treasury, can target bond interest rates and set these for the bond markets by manipulating bank reserves. Specifically, one way to do this, is that the Treasury can cease issuing long-term bonds, and sell only three-month bonds. Three-month bond interest rates are generally controlled by overnight rates for bank reserves, and overnight rates can be driven down to near zero by flooding the banks with excess reserves. That's basically how the Japanese keep their bond interest near zero, and that's how we can do the same.

Alternatively, another move we can make to remove the effects of the bond markets and the ratings agencies upon public finances, is for Congress to stop requiring new debt issuance in coordination with deficit spending, and for the Treasury to stop issuing debt. If we did this the credit rating agencies and the interest rates in the bond market would be irrelevant from that day forward.

In short, the bond markets and the ratings agencies aren't in control of US public finances. They are not in a position to influence what our taxing or spending policies ought to be, or whether we will default on our obligations. In fact, at this point in our history, Congress is mandating that we have a national debt. It is forcing us to have one.

Congress mandates that we borrow our own previously created money from the Chinese, Japanese, and Middle Eastern nations and pay them interest on a commodity (our money), that we have an unlimited ability to create, while they also complain about the very same national debt they are always re-creating and increasing, and then tell us that we can't afford unemployment insurance, enough Federal Spending to create full employment, Social Security, Medicare for All, good educations for our kids and grandkids, and emergency programs to create new energy foundations for our economy.

Forget about Moody's! They're part of the great distraction preventing us from focusing on our real problems. There's nothing that Moody's and the bond markets can do to hurt us, unless we let them. Let's not let them. Tell them to bring it on! And, if they do, tell them to keep in mind Beowulf's admonition:

”I don’t think we’ll see Moody’s or any other rating service based in the US ever downgrade US Treasuries. It would cause a tremendous amount of financial loss and would leave Moody’s and its executives exposed to criminal prosecution. If I were Moody’s general counsel, I’d tell the CEO in no uncertain terms, Do Not Tug On Superman’s Cape.

14th Amendment, Sect. 5

”. . . .the validity of the public debt of the United States, authorized by law… shall not be questioned”

Criminal Mischief statute

18 US 1361. Government property or contracts

"Whoever willfully injures or commits any depredation against any property of the United States, or of any department or agency thereof, or any property which has been or is being manufactured or constructed for the United States, or any department or agency thereof, or attempts to commit any of the foregoing offenses, shall be punished as follows:

If the damage or attempted damage to such property exceeds the sum of $1,000, by a fine under this title or imprisonment for not more than ten years, or both; if the damage or attempted damage to such property does not exceed the sum of $1,000, by a fine under this title or by imprisonment for not more than one year, or both."

And Bill Mitchell's Conclusion in his post on outlawing the credit rating agencies:

"The real question that I always ask is why governments allow these undemocratic criminal organisations to exist. They can just outlaw them. This would force the corporate players to create better ways of informing the markets about their risk characteristics and leave governments alone to do what they are democratically elected to do – advance public purpose.

Further. as part of my preferred financial market reforms I would render illegal a whole swag of derivative assets which would lessen the problem of pricing risk.

It is time to wean the private financial markets off these agencies. The best way would be to declare them illegal.

The last thing that a sovereign government should be doing right now is cutting back on its fiscal stimulus."

Which, of course, is exactly what Moody's wants us to do.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

Once Again, the National Debt Is Congress's Fault

Joseph M. Firestone — Wed, 23 Mar 2011 23:19:02 -0400

(Author's note: I've offered this idea a couple of times over the past few months here, with surprisingly little reaction. I'm trying once again, because I'm persuaded that much of the leverage that conservatives and Republicans have over our fate is due to the belief that most people hold that federal deficits, the national debt, and the GDP ratio are important, and that we must bring them under control to avoid Government insolvency. In addition every one seems to believe that the existence of the debt is due the to the profligacy of the Government, its monumental waste, and the lack of courage of its politicians who spend too freely to please constituents, gain campaign contributions, and help themselves to stay in office. None of this is true. The current existence of the National Debt, and also of a non-zero public debt-to-GDP ratio is the inevitable result of a technical decision that Congress has made about how the Treasury should finance its spending. This post talks about that decision, points out that its consequence is the National Debt, and also points out that the very existence of the National Debt is the fault of Congress.)

It is Congress's fault that we have a national debt at this point in our history. And also Congress can largely get rid of this debt over a 10 year period any time it wants to.

The national debt exists today because when the nation went off the Gold Standard in 1971 and adopted its fiat currency system, Congress did not repeal its mandate, very appropriate when our currency was convertible to Gold on demand, in least in theory, requiring that the Government back all its deficit spending with already existing borrowed dollars

whose convertibility was covered by our holdings of Gold. This Congressional mandate to borrow funds by issuing debt instruments when the Government deficit spends, is what has caused the national debt to persist.

Had Congress repealed it when President Nixon took the country off the Gold Standard, and had we ceased to issue debt at that time, then the Government would have re-paid all of our 1971 debts as they came due, and our national debt today would be zero and our debt-to-GDP would now be at 0%.

The Congressional mandate to issue debt when the Government deficit spends has no useful function today, and the interest income it provides for mostly wealthy investors and foreign Governments who buy Treasury Securities is simply a form of welfare for the rich. In fact, it is welfare that will cost the Treasury almost $12 Trillion over the next 15 years if we continue the policy of issuing debt instruments.

Any positive effects this policy produces are vastly outweighed by the bad effects of having to cope politically and economically with the concerns of people who believe that the increases in the debt, and the debt-to-GDP ratio give us a fiscal sustainability problem whose priority outweighs everything else. Even though the national debt has no effect on national solvency; it is a political problem. It magnifies the political strength of conservatives and weakens progressives because it makes people afraid to deficit spend since then the country will be “going into debt.”

Congress needs to repeal the mandate forcing the Government to issue debt instruments on a dollar for dollar basis with deficit spending, right now. If it does so it will:

-- cease to provide welfare payments in the many Trillions of Dollars over the next 15 years mainly for the rich and foreign nations,
-- gradually pay off the $14 plus Trillion Federal debt entirely,
-- have rapidly decreasing Federal interest costs over the next decade until they entirely disappear,
-- have no further need to take difficult votes about increasing the Federal debt limit,
-- have no further need to worry about borrowing money from the Chinese, or the oil rich states, or the Japanese, that our grandchildren will one day have to re-pay,
-- have no further need to worry about what the bond markets think or are going to do, or
-- to worry about our debt or deficit spending being “fiscally unsustainable” when we want the Government to spend money to sustain the unemployed, help us end unemployment altogether, provide a more generous Social Security system for aging Americans rather than cutting the inadequate benefits we have now, fulfill American needs for new infrastructure, develop a re-invented first class educational system, and provide Medicare for All, among our other needs.

If Congress refuses to remove its requirement to issue debt, when it can easily do so at any time, then it's habitual complaints about its size should cease at once and no longer pollute our political debates.

My earlier posts on this subject were met with anticipated responses claiming that ceasing debt issuance would inevitably lead to inflation because of the increase in the money supply caused by merely "printing money." People who believe this, do so because they think that dollar for dollar debt issuance associated with deficit spending removes as much currency from the non-Government sector as the Government spends, and because of this damps down any inflation that may result from the Government spending.

This reasoning is faulty on two counts. First, increases in the money supply caused by Government spending do not result in demand-pull inflation until the point of full employment is reached because the increased demand produced by the Government is met by the private sector with supply increases rather than price increases. We have known that since Keynes. A very good recent account of the consequences of just creating money through deficit spending unaccompanied by debt issuance is this post by Professor Bill Mitchell. Yet another is this very good one by Professor Scott Fullwiler.

In addition, Professor Stephanie Kelton, shows that while Government debt issuance may transfer money back to the Government, it still leaves a net financial asset in the private sector, specifically, the Government debt instrument. As Scott Fullwiler points out in a comment on Stephanie Kelton's post, it is highly debatable that the net addition of a debt instrument to the private sector is less inflationary than just leaving additional cash would have been, and very likely that the debt instrument is actually more inflationary because 1) one can get more financial leverage from it than one can get from money, and 2) it adds more interest to the private sector than a cash deposit would.

The United States has many very real problems which it can help to address with Government programs. The deficit spending required to solve our problems shouldn't be constrained by the non-existent problem of that national debt, or the fantasy of stabilizing a debt-to-GDP ratio that also represents a non-existent problem, or the misguided notion that the issuance of debt makes deficit spending less inflationary than it otherwise would be. To make sure that deficit spending is not so constrained, Congress needs to repeal its debt issuance mandate now before the American people learn the truth that Congress, itself, is responsible for all the angst we hear about the deficit, the debt, and the debt-to-GDP ratio.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

"Third Way" Lies About Progressive Stance on Social Security

Daniel Marans — Thu, 20 Jan 2011 11:31:06 -0500

Third Way's Social Security reform proposal deserves to be judged on its merits. But the outright lies its leaders are spreading about the position of progressive groups on Social Security do not. Plugging their reform proposal in Politico, Third Way's Jim Kessler and David Kendall claim that progressives are denying that Social Security has any problem at all. This is patently false. There is not one progressive group that denies Social Security will face a modest shortfall in 26 years. In fact, thus far, at least four progressive figures or groups have put forward their plans for filling this shortfall. They include reports issued by: Rep. Jan Schakowsky (D-IL); former SEIU head, Andy Stern; Demos, EPI and the Century Foundation's initiative "Our Fiscal Security;" and the Campaign for America's Future's "Citizens' Commission on Jobs, Deficits and America's Economic Future."

Joining the Beltway chorus to denounce progressives as "Social Security denialists," Kessler and Kendall go so far as to say that progressive groups preemptively opposing the suggestion of benefit cuts in Obama's State of the Union address are not "progressive":

Last week, 200 progressive organizations launched a public campaign directed toward President Barack Obama that argues against any fix to Social Security that would touch future benefits. This is not only bad for Social Security; it’s not particularly progressive.

According to its trustees, the Social Security Trust Fund is due to be insolvent in 26 years — the blink of an eye on an actuarial table. At that point, benefits will be reduced by nearly one-third for current and future retirees. But these facts haven’t stopped many on the left from denying the problem exists or insisting that it can be solved by significantly raising payroll taxes.

Setting aside for a moment the latter, more subjective argument as to whether it is responsible to insist that no plan include "benefit cuts" (hint: it is), let the record show that progressive groups do not deny the existence of a problem, albeit a very minor one.

Recognition of the modest funding shortfall and the need to close it is featured prominently among the founding principles of the Strengthen Social Security Campaign, which, representing more than 215 labor, progressive, women's, disabled persons', minority and seniors', groups with over 50 million members, is the largest progressive coalition opposing Social Security cuts. The Campaign's fourth principle is:

Congress should act in the coming few years to close Social Security’s funding gap by requiring those who are most able to afford it to pay somewhat more.

We can have an earnest debate with Third Way about the advantages and disadvantages of a Social Security reform proposal that includes benefit cuts (let alone doing so in advance of negotiations with a resurgent GOP). But, as usual, Third Way and its fellow travelers would rather smear progressives as quacks, who do not accept basic mathematical calculations. No doubt knowing they would lose a fair policy debate, Third Way has taken to kneecapping those who deviate from its Republican-lite line. And that is not "particularly progressive."

Moody's: Bring It On!

Joseph M. Firestone — Tue, 14 Dec 2010 21:21:17 -0500

Yesterday, as reported in Money News, Moody's made me laugh, with the following pronouncements:

” . . . it could move a step closer to cutting the U.S. Aaa rating if President Barack Obama's tax and unemployment benefit package becomes law. . . .

“The plan agreed to by Obama and Republican leaders last week could push up debt levels, increasing the likelihood of a negative outlook on the United States rating in the coming two years . . .

“A negative outlook, if adopted, would make a rating cut more likely over the following 12-to-18 months.

“For the United States, a loss of the top Aaa rating, reduce the appeal of U.S. Treasurys, which currently rank as among the world's safest investments.

"From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth," Moody's analyst Steven Hess said in a report sent late on Sunday.”

I found this a laughing matter for a number of reasons. First, as Jane Hamsher points out, only 5 days earlier Moody's had said there was no prospect of a ratings cut if the tax deal passed. Their sudden change of opinion greatly undercuts their credibility.

Third, since the United States is a nation with a fiat non-convertible currency system, with a floating exchange rate, and no debt denominated in any foreign currency, it is impossible for the United States to be forced into a default by any external party, simply because its ability to create the money it owes its obligations in is unlimited. Voluntary default could be caused by a Congress which acts stupidly, and in a manner contrary to the Constitution, to constrain the Treasury from paying its obligations when they come due, coupled with a Treasury that accepts Congress's constraint in conflict with the clear admonition of the Constitution that the debts of the United State shall not be questioned.

In short, the bond markets and the ratings agencies aren't in control of US public finances. They are not in a position to influence what our taxing or spending policies ought to be, or whether we will default on our obligations. In fact, at this point in our history, Congress is mandating that we have a national debt. It is forcing us to have one.

”I don’t think we’ll see Moody’s or any other rating service based in the US ever downgrade US Treasuries. It would cause a tremendous amount of financial loss and would leave Moody’s and its executives exposed to criminal prosecution. If I were Moody’s general counsel, I’d tell the CEO in no uncertain terms, Do Not Tug On Superman’s Cape.

14th Amendment, Sect. 5

”. . . .the validity of the public debt of the United States, authorized by law… shall not be questioned”

Criminal Mischief statute

18 US 1361. Government property or contracts

"Whoever willfully injures or commits any depredation against any property of the United States, or of any department or agency thereof, or any property which has been or is being manufactured or constructed for the United States, or any department or agency thereof, or attempts to commit any of the foregoing offenses, shall be punished as follows:

If the damage or attempted damage to such property exceeds the sum of $1,000, by a fine under this title or imprisonment for not more than ten years, or both; if the damage or attempted damage to such property does not exceed the sum of $1,000, by a fine under this title or by imprisonment for not more than one year, or both."

And Bill Michell's Conclusion in his post on outlawing the credit rating agencies:

"The real question that I always ask is why governments allow these undemocratic criminal organisations to exist. They can just outlaw them. This would force the corporate players to create better ways of informing the markets about their risk characteristics and leave governments alone to do what they are democratically elected to do – advance public purpose.

Further. as part of my preferred financial market reforms I would render illegal a whole swag of derivative assets which would lessen the problem of pricing risk.

It is time to wean the private financial markets off these agencies. The best way would be to declare them illegal.

The last thing that a sovereign government should be doing right now is cutting back on its fiscal stimulus."

Which, of course, is exactly what Moody's wants us to do.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).