Posts Tagged ‘accounting identities’

First MMT Talking Point Identified!

June 15, 2011 Comments off

Mike Norman has a great new quote up from Warren Mosler.

“All government spending is printing money. And all taxation and spending reductions are ‘un-printing’ money.”

I think this qualifies for our first talking point over here at the Traders Crucible!  You’ll see up on top, right in front of the Wall of Shame, the new Page “Talking Points.”  This page will be a warehouse of ways to talk about how we can fix the economy with better understanding of how it works.

Over time, this page will become a good resource for the entire MMT community.  We need good ways to convey the messages, ways that are truthful, easy to understand, and convincing.

I thought about appropriating about 80% of Mike Normans recent Television interview – it was that good.


Businesses do not hire more people when Corporate Profits are high

June 9, 2011 4 comments

Corporate Profits vs. Employment

Here is a quick chart I made over at the Federal Reserve bank of St. Louis of Corporate profits and hiring since 1990.

The red line is the growth in employment since the prior year in percent.   The blue line is the change in corporate profits since the prior year in percent, inflation adjusted.

You can see that the corporate profits were growing at a faster rate in the 2000’s compared to the 1990’s, but the rate of employment growth was lower.

This is not rocket science.  This is easy to think about, and the data is easy to find.

Businesses hire more people when they are swamped with demand, not when they have high profits.

Why the Budget Ceiling Fight is good news to the Traders Crucible

June 7, 2011 2 comments

The biggest political fight of the last few months has been over the budget ceiling.   This fight is great, great news for the U.S. Public.

The obsession with the debt ceiling makes one things perfectly obvious: The U.S. cannot default unless it is forced to by politicians.  Although talking about default scares people, the politicians are starting to get it.

The policy implications of this are huge – it changes the entire debate.  For example – Grover Norquist is currently a very powerful person.  But as it becomes widely recognized that Grover Norquist believes in unicorns, he will become much less powerful.  His entire career is built on making people believe something that cannot be true.  Take away the potential for default, and the obsession with trying to make the government smaller through a U.S. default does not make sense at all. It’s like going around claiming the sky is falling or something equally preposterous. Grover Norquist will be a much less powerful person in the near future.  He has reached his apex of power, and in 5 years, his message will seem anti-U.S., because his basic framework will be recognized as factually incorrect.

Here is John Boehner saying we cannot default:

“The American people will not stand for such an increase unless it is accompanied by meaningful action by the president and Congress to cut spending and end the job-killing spending binge in Washington,” Boehner said.

“While America cannot default on its debt,” he continued, “we also cannot continue to borrow recklessly, dig ourselves deeper into this hole and mortgage the future of our children and grandchildren.”

More here and here.  John Boehner is the guy leading the fight against raising the debt ceiling.

Once this idea is accepted, the argument must – MUST – move to a debate about inflation. So, the debate is moving to a debate about inflation. And not just about inflation, but rather an explicit argument over how much inflation is acceptable for the United States.

Thats where we are today.

Here is Interfluidity:

“Robert Kuttner has a great column about the “rentier class” and the struggle between “between the claims of the past and the potential of the future”. See responses by Adam LevitinMike KonczalPaul KrugmanYves Smith and Matt Yglesias.”

Now, here is a A-list blogging lineup of people beginning to discuss reasons for higher inflation vs. lower inflation.  These are thought leaders, unlike the lowly Traders Crucible, so this discussion actually matters in the wider world.

But this is a debate we win.  The path to a win might be long and twisted, but the path only leads in one direction. As soon as people start looking at the constraints on government, at some point soon they will run across the fact that there is no Government Budget Constraint other than that of politically acceptable inflation.

So the entire debate is moving in a direction that is very, very helpful to real people, which is good news for me!

I started with one post, and have realized it’s like 4 posts.   More soon!

Can a Sovereign Debt Jubilee Work for the Eurozone?

May 28, 2011 7 comments

This is one of the most interesting articles I’ve read about the crisis, How to destroy the web of debt.

The article makes a series of bold claims:

  • The Eurozone could reduce its overall debt to GDP ratio from 40% to 15% by canceling interlinked debt.
  • Ireland could reduce its debt/GDP from 130% to under 20%
  • 6 countries – Ireland, Italy, Spain, Britain, France, and Germany – can reduce their debt/GBP by over 50%
  • France can be virtually debt free, with 0.06% debt/GDP

In real world terms, what would be done is make a trade between countries for each others debt, and then just cancel the debt because in some real way, you can’t owe money to yourself.  So Ireland would trade with Greece – Ireland would give Greece its debt back in exchange for Greece giving Ireland its debt back.

Image from NYT

In some cases, it would require a three way trade. For example, look at the interaction of Ireland, Portugal, and Spain.  Portugal could reduce its debt by $80bn – or over 25% – just by netting out the debt it owes to Spain and Ireland with the debts owed among the countries.  Ireland would get a $40 bn reduction.

These are not trivial amounts of money.

All of this relies on the realization that the taxpayers are both the ultimate owners of the debt and the ultimate debtors.  German taxpayers owe a bunch of money to German pension funds, which are owned by German taxpayers.  The same idea can be applied across borders.

A Sad Statistic for the Traders Crucible

May 19, 2011 3 comments

I was looking through the statistics today on the Traders Crucible back end.  The wordpress backend is great – it shows what search terms people use to get to the blog.  As soon as you check the visitors to the blog, the search terms show up right below – so its nearly impossible to avoid looking at them.

This is wrong

This afternoon, I noticed something about the search terms, and felt a bit sad.  Somebody found the Traders Crucible looking for the terms “Wynne Godley accounting identity“.   Wha??!  But it is true.  I did a search for “Wynne Godley accounting identity”, and The Traders Crucible is the first result.

If you are not familiar with Mr. Godley, he is the giant of looking at the world of money through the proper lens of balance sheet accounting.  He created a matrix of accounts that balance – must balance  – and revolutionized the way to look at modern economies that issue fiat currencies.

His matrix of accounts allows anyone to look at what is happening in an economy and see both the flows (what is going where)  and the stocks (how much of anything) in the economy.  I consider this matrix to be the basic data of economics – equivalent to realizing or wondering if light has a speed, so then you must devise a test to measure that speed.

The thing about his work is that even if his structure of accounts is wrong, or you disagree with his choices, the basic framework must be correct!  It’s a balance sheet approach that balances across multiple, coherent, and complete national accounts.  It’s like arguing with the sun, or the ocean.  You can argue, but the ocean is still there.

It’s hard to discover the emergent rules of human economic behavior until you have some really basic data.  We can make up cool stories and investigate how those stories work like we do in most economics, or we can collect some data first and try to make up stories that fits the data.  Mr. Godley’s work allows us to collect that data properly, so we can make up useful stories that help humans be proactive in the world.

The Traders Crucible came up ahead of Mr. Godley’s own papers and presentations. I’ve been blogging for about 6 months. I am a piker compared to Mr. Godley – a man who devoted his productive work life to developing something very, very useful.

I’ve mentioned Wynne a handful of times.  And let’s face it –  I’ve written a handful of semi-popular posts that appeal to a dedicated but still small audience, but this isn’t The Big Picture or Naked Capitalism.  I hope that in some other world of the multi-verse, the Traders Crucible never has to exist, and Mr. Godley has his proper place in the world of economics.

And maybe, in this world, I can help his work be noticed.

Categories: Main Tags: , ,

Wall Of Shame – Suggestions Welcome!

May 19, 2011 Comments off

I started up a Wall of Shame, where I am collecting quotes from supposed experts who make the claim the U.S. (or any other nation that issues its own fiat currency) can default on its debt.

Default has a specific meaning.  These experts that I list are clearly misinformed about how our monetary system works, and are misinforming the public.

Here is a link to the Wall of Shame.  In general, I will not include entire publications, unless the publication is really adamant about how the U.S. must default and say it over and over. Zerohedge – well, they probably have an article about the U.S. not being able to sell bonds at the end of QE II about 4 times a week, then assorted other claims about the bankrupt U.S. ( and Japan, and ect…) sprinkled into the mix.  Zerohedge makes the cut.

[Update: I almost forgot!!!  Accepting Suggested Candidates for the Wall of Shame in the comments!  Put your worst quotes and offenders there – and we can debate their worthiness to be forever inscribed upon the wall.  ]

Our Story so far…

May 11, 2011 25 comments

Just to recap the story so far, here at The Traders Crucible:

Government Budget Constraint: I think we put this old horse down.  [Update: More here.  We cannot tell ex ante if we are violating or holding to the no Ponzi assumption with any certainty.  Any violation is and can only be ex post knowledge. We can only act on what we can see today, which is probably inflation and the treasury yield curve. If you think there are unobservable factors and risks, well, how can we know what they are and what should we do about them today besides pray to the gods? If you want to take rational action, you need to act on the observables.]

Solvency vs. Debasement:  We Cannot Become Insolvent.  We Can Debase the Currency. Even Bill Gross – head of Pimco and the largest bond trader in the world – admits it now.

The TC rule: A simple rule that gives a target budget deficit. It will probably be linked to a floating tax holiday.  Needs work – and I have a post/update brewing, but it isn’t all bad as it stands today!

The Meta-Critique: Can we know this information before we make the decision? We cannot make decisions using information we do not know ex ante. Can we know this information at all?  I am seeing this pop up over at Matt Rognlie’s place.

Anti-Democratic Conspiracy in Economics: I’ll have more to say on this, but it is everywhere.

MMT on the move:  Moving to Violently Opposed.  Even Caroline Baum of Bloomberg fame knows about us. Paul Krugman is talking smack at us. The next step must be Self-Evident!

We live in bubble land:  We live in a world where the economy demands credit bubbles. Mr. Rowe disagrees with my interpretation. but I suspect that real rates, and not an unobservable, unknowable natural rate(ex ante and ex post – thanks JKH!), will prove to be the cause of this.

Shadow stats and the Hyperinflation Hoax: Gaining Traction here too.  The myth that we have high inflation right now, but the government won’t report it, is surprisingly common.

Crushing Austrian critiques of MMT: It’s obvious how to do it.  Looking at the comments section at The Pragmatic Capitalist (Cullen is doing gods work over there) and reminds me how hard it is to think scientifically.  Some people – smart, educated, talented, productive people – can miss the subtle differences of scientific vs. logical thought, and there is little we can do to remove the scales from their eyes.

Oil demand is inelastic: We cannot impact the price of oil at all – so why bother with targeting it with monetary policy?  Matt Rognlie says something similar here.

More soon!

%d bloggers like this: