Home > Main > The Budget Deal: Why we should be concerned about the word “Solvency”

The Budget Deal: Why we should be concerned about the word “Solvency”

April 11, 2011

Tom Hickey brings up a great point:

Nice analysis, TC, but I wonder why we are so absorbed in the “solvency” issue wrt MMT. Everyone recognizes that fiat currencies have advantages and disadvantages and that one of the disadvantages is debasement. Given certain conditions including “fiscal irresponsibility,” of course a fiat currency can implode. So what? Fixed rates have their advantages and disadvantages, too. But the fact is that the world is running on fiat currency at present and that is the system we have to deal with. The question is, what is the best approach to this.

The possibility of “solvency” or debasement is a red herring — a distraction. It certainly is not a good argument against the use of MMT principles in economic policy. This is the monetary system we have, whether one understands MMT or not. Stupidity is a risk of liberal democracy. If the people elect fools (not mentioning any names but you know who), they will have to suffer the consequences. But if they elect wise people who understand how the monetary system works (so far in very short supply) and how to deal with it, then the outcome can be expected to be better than otherwise.

Unfortunately, Tom is only right if by everybody he means “a small highly educated fraction of the population”.  Most people believe the government can “go broke”.

So we now have the new budget deal, and it will be horrible for most working U.S. citizens, and probably not so good for the rest of the world either.  If this reduction in spending and tightening of rates reminds you of 1937, it should.  We have a nice recession in 2012 to look forward to experiencing.

Corporate profits will begin to deteriorate rapidly once this bill is passed.  The actual implementation of the spending cuts will cause huge disruptions in profits quite quickly.  Basically, begin to short the stock market in a similar manner to exiting in a May seasonal pattern beginning once the budget is passed.   “Sell in May and go away” is a good idea for this year…Ritholtz readers, take notice.

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  1. Tom Hickey
    April 11, 2011 at 9:43 pm

    “Unfortunately, Tom is only right if by everybody he means “a small highly educated fraction of the population”.  Most people believe the government can “go broke”.”

    Here I am to explain what I was thinking.

    Many people are afflicted with cognitive dissonance and this is evident in their thinking about money. On one hand, most people think of government as a big household that has to balance its budget, just like everyone else, or it will go broke.

    On the other hand, most people realize that government has a printing press, too. They also know that the US government issues money that is not convertible (fiat), and this makes them afraid that “out of control government spending” will lead to inflation. They are also afraid that the Fed is “printing money” and debasing the currency. Most people dont’ realize that you can’t have it both ways. So they can be played on both these scores.

    It’s actually not too difficult to remove this cognitive dissonance if someone is willing to think through it. We can get this out there through persistence.

    • TC
      April 11, 2011 at 10:06 pm

      Hi Tom,

      Sorry it came out sounding so harsh. There is a huge amount of cognitive dissonance on this topic – somehow there are those two opposite ideas co-existing in peoples heads.

      I guess one of the ways I am trying to take a sword to this dissonance is to make sure that people know that “going broke” is impossible, and mocking opinion shapers when they get it really wrong. Getting Bill Gross and Rogoff to not just admit but have to put it into speeches and widely distributed newsletters helps to shatter this cognitive dissonance. These guys just told everyone in the world MMT is correct – we cannot go broke! I count this as a huge victory.

      Once we get the debate on to inflation exclusively, we are one step closer to a more rational public finance debate. Heck, if we just had a debate over inflation for the next year, our life would be much more prosperous. We wouldn’t even be considering budget cuts at this point.

      This:

      “it’s actually not too difficult to remove this cognitive dissonance if someone is willing to think through it. We can get this out there through persistence.”

      It seems to me that working on an emotional level with this reaches a far broader section of people. My page views have skyrocketed since I started writing more emotional posts. The post with about solvency and debasement for some reason really resonated, even though it reads like a spittle-flecked rant.

      Again, sorry about the overly harsh words. I sometimes kick these out really fast, and don’t always proof them for how they might look to people. Please know that I really respect the work you do – you are the MMTer most willing to really engage opposition on a fair and persistent basis. Not only that, but you do it a lot. What is the statement – showing up is 80% of life? Thanks!

      • Tom Hickey
        April 11, 2011 at 10:45 pm

        Tc, I did not take that as harsh at all. Just thought would clarify.

        I think your insolvency v. debasement post was excellent. It really but the matter in the right perspective.

        There are two claims we have to dispense with.

        1. The US can become insolvent, “go broke,” “run out of money,” etc.

        2. We as a country “can’t afford” to (fill in the blank), or The US “doesn’t have” the money for (fill in the blank).

        We are going to hear a lot of both from the politicians in the coming weeks and months.

        • TC
          April 12, 2011 at 8:45 am

          I think of this as a multi-decade project, just based on the old:

          1. Ridiculed
          2. Violently Opposed
          3. Accepted as self-evident

          We’re in the beginning of the violently opposed stage – there is still tons of ridicule from nearly every corner of the economics profession.

          I find it interesting that the first people to get this are the finance types. I was exposed to Warren through a hard core bond guy – a member of the CBOT for 30 years – who said to pay attention to this. Mike Norman is a finance guy. I am a finance guy.

          Finance guys know the accountants are the ones who tell the lawyers to draft a letter informing people they are bankrupt. When you know a bit of accounting, you know the difference in level of assumptions. Nick Rowe – a hugely smart guy – thinks the ITBC is accounting. It isn’t. The only assumption of true accounting is that the total must be zero. The ITBC just assumes more money causes inflation – there is no allowance for money demand. But Nick still thinks it constrains the government.

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