The World According to Koo – The Facile Keynesian Story

We came across an article by Rex Nutting yesterday the title of which at first made us suspect that a Krugmanesque rant was in the offing: „Investors demanding larger government deficits“.

This title seemed to suggest that Nutting holds, a la Krugman, that the current very low and at times even negative interest rates on the most highly rated government debt are an open invitation to the government to spend even more  money it doesn't have. To his credit, Nutting doesn't quite fully veer off into this type of nuttiness, so to speak.

Rather, he suggests that ultra-low interest rates on certain government debt show that there is a 'shortage of safe assets', a concept we have discussed in these pages before (more on this in a follow-up post). Here is Nutting's central point:


„And, despite what S&P says, nothing is safer than a T-bill. The government shouldn’t run a big deficit merely because investors demand it, but the strong demand should reassure those who worry that the United States is turning into Greece. There’s a big difference between the U.S. and Greece: We can sell our bonds, and they can’t sell theirs, at least not at a reasonable rate of interest.

Of course, once the global economy is healed thoroughly, demand for safe assets like Treasuries will subside and our interest rates will rise. Washington’s costs for servicing the debt will go up. But we shouldn’t think that this will happen very soon: Investors are willing to lend money to the government for five years at about 0.75%, and for 10 years at less than 2%. After taking expected inflation into account, investors are willing to lock up their money for 10 years at a negative real interest rate. These investors, at least, don’t expect a boom any time soon. And they certainly aren’t frightened by the prospect of default.“


We would note to this that it is not possible to know when the US might 'turn into Greece'. Greek interest rates suggested that there would be no trouble whatsoever for many years – until they didn't anymore. Granted, the US is unlikely to be beset by similar problems in the near future. Of course Nutting is unable to keep from asserting further below in his article that 'cutting the deficit too soon would be dangerous' for the economy. 'Excessive debt reduction' he writes, will 'create unemployment and a recession'.

This assertion makes non sense as we have often pointed out. This view presupposes that government is in possession of a secret stash of resources that floats about in the ether somewhere,  outside of the ambit of the market economy. However, that is definitely not the case. Every single cent the government spends it must perforce take from those in the private sector that possess or produce wealth. It is simply not possible to increase 'aggregate spending' by means of the government going on a deficit spending spree. Moreover, massive deficit spending as a rule tends to invite the even greater evil of monetary inflation on the part of the central bank.

The so-called 'multiplier' of deficit spending may well be negative, as several studies have suggested (inter alia those by Robert Barro) – in layman's terms: when the government deficit-spends, the effect on the economy is to make it shrink, not to make it grow. This is actually quite easy to grasp on a conceptual level as well. After all, government spending as a rule wastes scarce resources, as government bureaucrats are not guided by the profit motive and have therefore no idea whether what they are doing is economically sensible or not. Moreover, capital is scarce. Whenever government competes for scarce resources with the private sector, producers of wealth will be put at a competitive disadvantage.  Mind, this is not even considering the vast scope for corruption and theft that usually attends government spending.  Anyone arguing in favor of deficit spending might as well argue that 'socialism works'. Well, it doesn't. Government spending doesn't help the economy: it burdens it.

A short while after having digested Nutting's article, we came across a screed by one Anthony Mirhaydari who writes for MSN Money. Our interest was  piqued by the title: “The world's $8 trillion debt hole”.

In this case, we expected to read a cautionary tale about the massive unproductive debtberg that presently threatens civilization as we know it. Alas,  far from it. The sub-title already gives Mirhaydari's game away:


“There's a huge pit of private and public borrowing we have to work our way out of to really get the developed world's economy moving again. And budget-cutting won't do the job.”


(emphasis added)

Say what? How can you possibly 'work your way through a huge pit of private and public borrowing' without cutting budgets? By winning the lottery?

Nope, you simply take aboard the Keynesian philosophy as espoused by Richard Koo – the man who has or over two decades been sitting in the middle of the biggest failure of Keynesian deficit spending policy the world has yet seen and still doesn't get it. Writes Mirhaydari:


“What's worse, after years and years of credit-fueled indulgences, the bill has come due. It's big. Really big. And it's acting as a drag on growth. According to Credit Suisse strategist Andrew Garthwaite, excess debt in the developed world now totals $8 trillion, or 20% of rich-world gross domestic product.

Until that chunk of change is dealt with — until we start paying it down, default on it or grow the economy so that it doesn't look so big — the recovery's not going to take flight, the job market won't normalize and home prices will stay down.

And the only way out is through more debt, at least in the short term. That may seem counterproductive. But here's why it's true.”


(emphasis added)

You can probably already imagine what comes next. 'We're in an exceptional situation', the 'laws of economics no longer apply', etc. – therefore, up is down, black is white and if you want the cart of the economy to move, you should best put it before the horse.

He elaborates as follows:


“The risk, according to Koo, is that households become too poor to save and repay their debts and the economy falls into a depression in a downward spiral of lower home prices, loan losses and layoffs. This is the debt-deflation spiral (.pdf file) that Irving Fisher warned about during the Great Depression. The gist of it is that lower asset prices (for things like housing) encourage debt liquidation, which weakens the economy, encouraging even lower asset prices, a weaker economy and yet more liquidation. Until households start to recover, businesses will be loath to spend on expansion and investment. And the weaker economy that results further damages the government's finances. The cycle feeds on itself.

The other risk is that governments, which act as the borrower and spender of last resort in these situations, tighten their belts prematurely. This, as I've said before and has been borne out in the economic research (.pdf file), was responsible for the 1937 double-dip that extended the Great Depression. And it was also responsible for the 1997 and 2001 slowdowns that extended Japan's deflationary spiral.

Koo's solution is massive borrowing and spending by the public sector on the scale of what was seen during World War II. Not only did this put an end to the Great Depression, imperial Japan and Nazi Germany, it also led to a new era of middle-class prosperity and U.S. manufacturing prowess.

Instead of supercarriers and cruise missiles, the hope now is that we'd spend the money on new schools, energy technologies needed to end our dependence on foreign oil and health-care breakthroughs that improve care and reduce cost.

Japan's experience shows that this can work. The Japanese government's debt-to-GDP ratio swelled by 92% between 1990 and 2005, or around $6 trillion. Koo points out that, assuming the economy would've returned to its pre-bubble 1985 level without this support, the Japanese spent $6 trillion to prevent the loss of nearly $30 trillion in economic output during that period. That's because Japan largely prevented Fisher's debt deflation cycle from playing out (Some suggest Japan's gains would have been better had it not tightened its budget in 1997 and 2001).”


That this egregious nonsense continues to find an audience is absolutely stunning to us. Koo's 'solution' has produced countless bridges to nowhere in Japan, and after two decades of diligent application has left the country mired with a public-debt-to-GDP ratio closing in on 230% with – predictably – nothing to show for it. The only thing that seems reasonably certain at this point is that this Japanese debt mountain will blow sky-high one of these days. Mind, Koo is correct to assert that the downturn in Japan can be viewed as a 'balance sheet recession'. We have no problem with this terminology per se. It is his proposed cure that is problematic.

There's not a shred of poof for Koo's assertion that Japan 'would have lost $30 trillion in output if it had not spent $6 trillion'. Since we can not go back in time and check what would have happened had Japan not spent the money, we are supposed to simply take Koo's word for it (he probably has a nifty mathematical model that 'proves' it. We could easily construct a similarly nifty model disproving it).

As to the 'historical research' that allegedly shows that big government spending 'ended the depression' – as we have frequently pointed out, this is simply a case of faulty history and even faultier theory. The correct assertion would be: 'if not for massive government intervention, there would not even have been a Great Depression'.

We can e.g. point to the depression of 1921, where the government ran a surplus and the Fed hiked rates instead of lowering them. Price deflation was even worse during this episode than during the early years of the Great Depression. And yet, today no-one remembers this 'laissez faire' downturn because it was over so quickly. Alas, the anti – interventionists not only have historical data on their side, they also have economic theory on their side.

We will try to explain below what exactly is wrong with the whole 'Fisherian debt-deflation' and Keynesian 'liquidity trap' view that allegedly makes massive government spending during recessions a necessity.

In Keynes' view, what happens is what Mirhaydari describes above: the economy is envisaged as a kind of circular flow system, where one individual's spending becomes another individual's income and so forth. If too many people in this flow-diagram decide to save instead of spending and banks no longer expand credit and borrowers no longer want to borrow, the central lank is supposed to arrest this process by lowering interest rates as far as is necessary to bring the level of spending back up. If however the 'zero bound' in administered interest rates  is reached, the economy is held to be mired in a so-called 'liquidity trap'.

In other words, saving is evil. If people 'save too much', the flow of spending and income ceases and the economy goes into a never-ending slump. Once the 'liquidity trap' condition is reached and the central bank can no longer stimulate the economy, the government must step in and start spending (e.g. on 'public works' projects like the ones Mirhaydari references above), in order to restore confidence and get people to reduce their savings again.

On the surface, all of this appears to be reasonable. The problem is however that economics is not only about the phenomena glimpsed on the surface. It is just as it is with the 'broken window fallacy'. The unseen is more important than what can be immediately seen. Just as we can not get richer by smashing in windows, we can not make the economy better by interest rate manipulation and deficit spending.


What Really Happens In The Business Cycle

As Frank Shostak points out in this article, the Keynesian story is inter alia hampered by focusing solely on the veil of money. Money is merely a medium of exchange – it facilitates exchanges and helps us to get around the 'coincidence of wants' problem. For instance, there may always be a demand for a food producer's products – an individual may want to eat bread every day –  but an individual's demand for clothing or other more durable goods is not so frequent. So a shoemaker who wants to buy bread can not expect that the baker's demand for shoes will always temporally coincide with his demand for bread. Money – the generally accepted medium of exchange – helps us to get around this problem. Moreover, no rational economic calculation would be possible without money and money prices. The use of a medium of exchange is thus what makes the highly specialized division of labor and the modern complex economy possible.

However, we must never lose sight of the fact that what every one of us is producing is not actually money. We produce goods and services that can be exchanged for money, but not money as such. As Shostak points out, the Keynesian story is completely focused on money. What is spent is money and what is saved is money. However, what really happens when we decide to save is that we forego consumption. We may do so by not spending a certain amount of money we have received in exchange for our production, but this means that for the money saved, there is now an equivalent amount of consumer goods that remain unconsumed. So what ultimately is saved is not money as such, but the consumer goods that were produced but not consumed. An equivalent to the saver's contribution to the economy's pool of real funding remains 'out there' and is thus available for use by other economic agents,  as a rule in production.

The totality of these saved consumer goods represents the economy's pool of real funding, or its 'subsistence fund'. As Richard von Strigl points out in 'Capital and Production', it is not possible to adopt longer, more productive production processes unless the size of the pool of real funding is sufficiently large to fund them. As we have discussed in our article on the economy's production structure,  one can easily grasp this fact by imagining a very simple economy, for instance an 'autistic exchange' economy populated by a single actor. The production of a simple capital good that will improve the productivity of consumer goods production – we used the example of Robinson Crusoe who decides to fashion a stick in order to make his harvesting of berries more productive – requires that the actor save enough consumer goods to sustain him during the time needed for production of the capital good.

This basic fact is not altered in a complex exchange economy with an extensive division of labor. All those involved in the production of capital goods still depend on the availability of saved final goods that can sustain them while the capital goods they produce go through the various stages of production and finally ripen into new consumer goods. The fact that the various stages of production in the modern economy work synchronously does not change the importance of the time element: from the moment a land factor such as e.g. the raw material copper is produced and goes through the various processes necessary to furnish the various consumer goods that require this input, the same amount of time passes that would pass if the processes were arranged sequentially.

In short, although new consumer goods constantly emerge due to the ongoing synchronous processes of production, if one wants to add a new stage of production in order to improve productivity, enough must be saved to satisfy current consumer demands, maintain existing capital, and forward present goods in sufficient quantity to all those engaged in the ongoing as well as in the new production processes one wishes to add. Obviously, none of this depends on how much money a central bank prints. It depends solely on the growth in real savings, i.e. the growth of the pool of real funding.

As a side note here: although what is saved are consumer goods, from the point of view of the entrepreneurs forwarding these present goods to labor, land owners and capitalists of the preceding production stage, they become effectively capital goods, as they are employed and used up in the production process. Naturally all these factors of production are being paid for with the ultimate present good: money – the good that can be exchanged for all other goods. Capitalists are not running around and distributing sandwiches to their workers; nevertheless, the sandwiches must exist, otherwise the workers could not eat (sandwiches in this case are simply used as a stand-in for 'food').

In order to see what happens in a recession, one must first consider how a recession comes about. Recessions are best described as the economy's attempt to rectify the errors of a preceding boom. They are viewed as negative events of course, but the reality is that a recession is akin to a healing process.

The damage to the economy does not occur during the recession as is commonly assumed. It occurs during the boom. There are often several ingredients driving an economic boom, but the sine qua non for a boom is the element of  credit expansion. By this we refer to credit expansion via the creation of fiduciary media through inflationary bank credit, also known as money from thin air.  When additional fiduciary media are thrown on the loan market, the market interest rate will be artificially lowered ; in  a central bank-led banking cartel this will be accomplished by the central bank decreeing a 'target rate' for overnight funds which it fixes by supplying the necessary amount of reserves to the banking system to essentially accommodate all credit demand that arises at this rate. It is of course also possible that maintenance of the target rate requires the draining of excess funds in the interbank market, but since central banks as rule keep rates artificially low, this eventuality is a bit like the dodo. It has largely died out.

A salient feature of an expansion of the credit and money supply is that the newly created money will enter the economy at specific points. It is not going to be the case that demand for all goods suddenly increases and that therefore all prices rise proportionately. The new credit will be allocated to those economic sectors that appear most likely to produce profits. On the eve of the boom investment in these sectors may actually look quite sensible. A distortion of relative prices will then ensue and attract ever more investment and factors of production to the sector or sectors concerned. Artificially lowered interest rates and plentiful credit send an important, but falsified signal: they indicate that savings are more plentiful than they really are. Alas, the only thing that has really become more plentiful is money and credit. Since the time preferences of consumers have actually not changed, the pool of real savings has not increased sufficiently.

Once newly created money enters the system, it immediately leads to exchanges of nothing for something. If people decide to save, i.e., to forego consumption, then the cash balances they accumulate are so to speak 'backed' by their contribution to the pool of real savings. With money from thin air, no such contribution in the form of preceding production exists. Alas, the money can and will be used to acquire real resources. Hence 'nothing' is exchanged for 'something'.

If entrepreneurs now decide to embark upon a lengthening of the economy's production structure, they must proceed from the  assumption that the saving, investment and consumption schedules of consumers agree with this introduction of more productive, but also more time-consuming production processes. In order to illustrate this with a very simple example, let us say that  additional savings equal to 1,000 monetary units at an annual interest rate of 5% are added to the pool of real savings for the duration of one year. This enables an additional investment of 1,000 m.u., which will increase output sufficiently to allow for 5% more consumption a year hence and ideally produce an entrepreneurial profit in addition to the interest rate return. Note how savings, investment and consumption schedules are perfectly aligned in this example: savers forego consumption of 1,000 m.u. worth of goods in the present, in order to be able to consume 1,050 m.u. of goods in a year's time. For the duration until their savings mature, present goods valued at 1,000 m.u. can be forwarded by entrepreneurs to the factors of production for the production processes this additional investment makes possible. Their production plans must be coordinated in such a way that the additional consumer goods emerge a year hence.  This is of course a very simplified look at the processes involved, which are in reality highly dynamic, as new information and market data constantly emerge and impinge on the plans of all actors in the economy.

Now imagine that the increase in the pool of real savings has not taken place, but instead money from thin air to the tune of 1,000 m.u. has been added to the loanable funds market. Obviously entrepreneurs will then still believe that they are able to embark on new investments amounting to this sum; in reality, though, no additional real resources have been made available. By bidding for such resources they now divert them from whatever other employments they were otherwise destined for. Evidently then their activities are no longer in accordance with the wishes of consumers, since consumers did not actually curtail their present consumption in favor of saving and investment. If this happens on a sufficiently grand scale, the errors in the assumptions underlying the new investment projects will sooner or later come to light. Eventually it will turn out that the available resources are simply not sufficient to actually even finish all the investment projects undertaken.  As Ludwig von Mises noted on this point:


“The whole entrepreneurial class is, as it were, in the position of a master-builder whose task it is to erect a building out of a limited supply of building materials. If this man overestimates the quantity of the available supply, he drafts a plan for the execution of which the means at his disposal are not sufficient. He oversizes the groundwork and the foundations and only discovers later in the progress of the construction that he lacks the material needed for the completion of the structure. It is obvious that our master-builder's fault was not overinvestment, but an inappropriate employment of the means at his disposal.”


In other words, the problem is malinvestment. The investments in the sectors of the economy that have been the focus of the boom are not in accordance with actual consumer demands. Other sectors the expansion of which may have been more sensible have in the meantime been deprived of the resources their expansion would have required.

At the point when the boom crosses the threshold into recession, entrepreneurs usually find that there is now a plethora of raw materials, half-finished materials, durable capital goods and so forth for their planned expansions, but not enough resources remain available to focus on their current business. A sudden drop in the prices of capital goods is usually the hallmark of the beginning depression. This happens because as it becomes increasingly clear that the real funding to finish certain investment projects is lacking, a desperate bidding for funds begins, which drives market interest rates back up.

Once a structure of production that is not sustainable is put in place, a bottleneck in the production of consumer goods will eventually emerge: since consumers have not curtailed their consumption, the bidding away of factors from the lower order (consumption) stages to the higher order (capital goods) stages of the production structure will lead to a situation where, paraphrasing  Shostak, 'more consumer goods are tied up in sustaining the structure of production than are released'. 

This however means that the pool of real funding perforce begins to decline. It turns out that capital has in fact been consumed. It becomes impossible to continue with all the economic activities that are underway; non-productive activities that are only seemingly profitable due to the artificially lowered interest rate will have to be liquidated. Banks will become cautious and reduce their lending activities. An economic slump begins

Of course the central bank can at this point attempt to counter the contraction by lowering its administered interest rate and creating more money from thin air. However, this can not change the fact that the pool of real savings is in trouble – it can therefore only make the situation worse. Such credit expansion only appears to work as long as it is possible to divert more wealth into non-productive activities. Once the pool of real funding shrinks, it no longer matters how much additional credit expansion is undertaken. The banks can not lend what is not there (i.e., there may be more money, but money is only the medium of exchange – if the pool of real resources that funds all economic activity is declining, there is de facto no longer anything left that can be lent out). In this situation, further inflationary lending will only increase the mount of non-performing loans on the banks' books.


The Role of 'Idle Resources'

Keynesians routinely assert that the above still means that government should jump into the breach, for the reason that during a recession there are 'idle resources' – this is to say, factors of production that are in theory available but are no longer being put to use. This, so it is held, is a waste that needs to be countered by government spending that so to speak leads to an 'unidling' of such resources.

However, if one looks at this closely, it becomes clear that most of these idle resources are simply the left-overs of the malinvestments of the boom. They are idle for a good reason – there simply no longer exists a demand for the goods they were meant to produce. Often we find that certain specific capital simply lacks the necessary complementary capital to be sensibly employed.

Consider for instance certain branches that were part of the housing boom. There is no longer a big demand for building materials, as homes are now in vast oversupply. What point would there be in 'unidling' a factory producing bricks, if no-one actually needs more bricks?

As so often, the error in the Keynesian analysis is that it looks only at aggregate numbers. 'Capacity utilization' in the aggregate is lower than it used to be at the height of the boom, so it is held that one should strive to bring this aggregate number back up. But a great deal of this idle capacity was meant to produce things that simply are no longer in accordance with actual consumer demand. To the extent that factors of production are non-specific, it is easy to transfer them to more suitable employments. Entrepreneurs are doing this of their own accord; no government intervention is required for them to perform this task.

On the other hand, the more specific the capital that has been malinvested is, the more likely it is that it can no longer  be put to profitable use in alternative  employments. Such capital needs to be liquidated. Contrary to the idea that it would be a good thing to 'unidle' it, it would actually be quite a bad thing that is apt to delay recovery, since once again scarce resources would be tied up in activities that are plainly uneconomic.

The central point one needs to grasp here is that capital is not a homogeneous blob. It consists of a complex latticework of heterogeneous, complementary goods.

The Keynesian scenario is, as Roger Garrison remarks in 'Time and Money', merely a 'special case' of the Austrian business cycle theory, but it is not the 'general case'. It would only be applicable in a world mired in such a deep depression that all  branches of business are beset by idle capacity. In the real world, busts are concentrated in those sectors of the economy where the biggest malinvestments occurred during the boom.



From the above we can infer that there actually is no such thing as a 'liquidity trap'. In reality, it is a decline in the pool of real funding that trips up the economy. Contrary to the idea that an increase in savings is a 'bad thing' during a recession and that what needs to be pushed is consumption, an increase in savings is necessary to lay the foundations for renewed economic growth. As a rule, those investments that can no longer be supported by the smaller pool of real funding will need to be abandoned: the capital structure must be temporarily shortened and factors of production must be redeployed into the lower order (consumer) goods production stages. Only once the balance between capital and consumer goods production has been restored to the extent that the pool of real funding is once again able to grow will it make sense to think about investing in a renewed lengthening of the production structure.

By adopting policies like large deficit spending programs that lead to more consumption, the opposite processes of those required for healing the economy are set into motion. One simply can not spend and consume oneself back to prosperity. Only saving and investment can achieve this goal.



In the context of our recent stock market related observations we wanted to mention that Jason Goepfert at sentimentrader pointed out yesterday that  Rydex traders are now extremely confident of a continuation of the recent rally. The ratio of assets deployed in bull to bear funds is almost at a new record high:



The Rydex bull/bear ratio, via sentimentrader. The bullish consensus is dangerously high – click chart for better resolution.



Caveat emptor.



Chart via



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5 Responses to “Deficit Spending, Monetary Pumping and The Business Cycle”

  • mc:

    “The Japanese government’s debt-to-GDP ratio swelled by 92% between 1990 and 2005, or around $6 trillion. Koo points out that, assuming the economy would’ve returned to its pre-bubble 1985 level without this support, the Japanese spent $6 trillion to prevent the loss of nearly $30 trillion in economic output during that period.”

    I would like to point out, assuming the Japanese economy would have returned to the pre-industrial era of 1885 without (deficit spending), Japan actually saved nearly the entirety of their economic production over that period. I don’t see any issue with assuming the number that I am going to use in my calculation.

    • They didn’t save anything. It is all gone. The mere capacity of banks to spin debt into money and debt instruments means nothing. We piled up $5 trillion in debt the last year of the boom before the crisis with a zero savings rate. Someone owned it. The whole thing was hocked. The entire debt savings game is what blew the fuse in Japan in the first place. There have been very little growth in Japan since. Rothbard said 30 and 40 years ago this kind of nonsense would be perpetuated.

  • anto:


    I was watching a great interview with Robert Prechter over at Elliott Wave:

    Mr. Prechter mentions that, since the DOW is measured in $s, and the Fed has been printing dollars like crazy lately, the DOW chart is skewed. His implication, I assumed was that you need to look at the Elliott Waves on a DOW/Gold chart, rather than a DOW/$ chart (obviously likewise for S&P).

    I only have the most amateurish understanding of EW theory, but this seems to make so much sense that I wonder, why even apply EW counting to the DOW/$? Isn’t it hopelessly distorted due to the inflation of the underlying price unit?

  • LRM:

    I see Roche as creeping away from MMT due to his disagreements as he has started MMRealism
    Here is a recent post comment

    “Or take a modern example, Zimbabwe. Zimbabwean $’s did not collapse because there was a lack of enforcement or fear. The Mugabe govt was brutal, killing anyone who disagreed with his positions. He was the epitome of force. But the downfall of his economy came at the hands of production. Not a lack of force. Mugabe couldn’t scare people into using his currency and being productive. And when the production of the farms collapsed the currency went with it. There was no amount of legal or tax force that Mugabe could implement to keep the currency afloat and in demand. Obviously, MMTers will say that tax receipts fell, but that’s a byproduct of the collapse in production. It all starts at the top of the economic hierarchy with production. All else is secondary. Clearly, this proves that production sits atop the hierarchy as you can have a brutal and forceful dictator at work while also having a currency collapse around him. Taxes did not drive demand for Z $s.”

    I am posting here to see if someone feels he is moving in the direction of Austrian thought? This comment on the importance of production and not just $$$$ seems in line with some of the thoughts in Acting Man’s post here

  • LRM:

    “We would note to this that it is not possible to know when the US might ‘turn into Greece’. Greek interest rates suggested that there would be no trouble whatsoever for many years – until they didn’t anymore. Granted, the US is unlikely to be beset by similar problems in the near future.”

    “Every single cent the government spends it must perforce take from those in the private sector that possess or produce wealth”

    I have been following this site to try to understand how our monetary system works. I confess I do not know who has the correct version so I follow here for one point of view and I follow Cullen Roche at Pragmatic Capitalist for another view.
    Both sites seem to make good cases but they could not be further apart. The MMT now MMR Roche would say that the private sector can not spend one single cent unless it is first spent into creation by the government. The private sector needs government spending first in order to have the “cents” and that the government deficit is the non government savings by definition using the sectoral balances formula.
    Also the MMR crowd make a big distinction between a country that can issue their own currency like the USA and a country that can not such as Greece.
    They often write that as soon as someone does not distinguish between these that one should stop reading as the issuer of currency will never ever NOT be able to pay its debt. They do say debt matters as too much will lead to inflation. However, in the present monetary system of currency issuers, bonds are not necessary to fund expenditures. The government does not check in its account to see if it is OK to write a check . Its check will never bounce.
    Given the way currency issuers are able to continue to increase debt without end, I think that MMR is correct on this issue. Bond vigilantes have no power over currency issue countries.
    However, it is totally different with the currency user like Greece.
    Now, I really want to believe that savings and savers are necessary for production. However, banks do not create loans from savings. This is how the banking system works now. Savers are not being rewarded now and Bernanke stated that he wishes to PUSH savers into more risky allocations so that he can get the economy working. I feel this pain personally as under normal average interest rates, I saved enough for my retirement but now I must eat capital. Bernanke does not want savings because in this current monetary system, it is not necessary to create growth.
    It would be nice to get back to Austrian money creation but for now It does not seem to totally explain how the system currently works.
    Sorry for the ramble and I do enjoy your posts and continue to learn a lot. It just amazes me that educated people from different schools of thought can not agree on how basic things work but even more amazing is that the average Joe will never even question where money comes from and why it behaves like it does!!!

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