Home > Main > MMT Flogs Bill Gross in Public Stockades…and where do you put an Ocean?

MMT Flogs Bill Gross in Public Stockades…and where do you put an Ocean?

March 11, 2011

One of the core premises of MMT is that the funds to purchase government debt is created through the deficit spending of the debt.  In other words, the there is 1:1 relationship (or very close to 1:1) between the amount of debt issued and the money available to purchase that debt.

The MMT premise is that the base money supply is defined by the amount of deficit spending, and not by deposits in banks.  Of course, the amount of deficit spending usually matches up quite well with the amount of debt issued.

So when Bill Gross decides to ask “who is going to buy all of this debt that the U.S. Treasury will issue?”, he is missing something so huge about government deficits, bonds, and savings that it boggles the mind.  The money will be there – it must be there – by the accounting identity we know and love: Public Deficit = Private Savings + Currency Account Surplus

He certainly knows about the Widow Maker trade – Japan’s experience with Quantitative Easing.  Why would he think the experience of the U.S. will be any different?

Japan did QE  back in the early 2000’s – and look at their bond yields and inflation rates over the last decade.   The “Widow Maker” trade – where the BV’s have been calling for massive increases in Japanese government bond yields for as long as I’ve been following the markets – has been making Widows for going on 20 years now. Bill Gross knows this very, very well…why is he wading into the same situation in the U.S and not looking at the historical record of Japan?

From a conventional standpoint, Bond Vigilantes are theoretically correct – so why have they been wrong for 20 years in the case of Japan? Why didn’t QE I cause vast amounts of inflation?  QE I has already been in effect for over 2 years!  $1.75 Trillion by March 2009.  It’s March 2011, folks. 24 months.  And again, $1,750,000,000,000.  Where is the 10% core inflation rate?

Let’s look at the Japan experience with government debt in view of the MMT statement – really Mosler’s statement – about the funds available to purchase government debt being created by the deficit spending.  Read this  Pimco (!) interview about Japans experience with QE – it’s like a Onion article on Quantitative easing.

Choice Quotes:

In March 2001, the Bank of Japan (BoJ) began an historic new monetary policy known as “quantitative easing” in an effort to revive Japan’s economy and end the deflationary decline in consumer prices. Five years later, on March 9, the BoJ ended the quantitative easing policy, satisfied that the Japanese economy was on the path to stable, reflationary growth.


Q: Why did the BoJ decide at the March 8-9 meeting to end the quantitative easing policy?Masanao: Quantitative easing worked; the Japanese economy is recovering and core consumer prices are rising. Before the BoJ’s March meeting, the year-on-year change in Japan’s core CPI had been positive for three consecutive months, and the core CPI has now increased for four consecutive months. Most importantly, BoJ policymakers expect a sustained recovery and continued increases in core consumer prices, fulfilling the conditions laid out in the commitment to maintain quantitative easing.

In 2011, these quotes read like an alternative history of Japan that never happened.  Japan didn’t have significant inflation at any point in the 00’s. We know that even in 2006 Inflation in Japan was very low.  We know that even 5 years after QE was tried by Japan, they had deflation for months on end.

Where can you store an Ocean?

One distinguishing factor with very, very popular currencies like the Euro, Yen, and USD is that there is so much of it floating around.  We know this from the amount of trade and economic activity, from the number of assets and investments in those currencies, and from the amount of trading that happens in these currencies.   You could say there are oceans of these currencies out there.

So where can you put an ocean?   Where can you store this much of something?  You don’t have many choices. You need a place big enough to store ocean sized volumes.  For the U.S. Dollar, there needs to be an asset class that can absorb $14,000,000,000,000 notional value of U.S. Dollars.   I have a suggestion –  the U.S. Government Debt market is a good fit.

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