Monday, January 04, 2010

Deficits don't matter during deflation

Seriously. Especially deficits that are largely caused *by* deflation -- the majority of the current federal deficit is caused by a collapse in tax revenues combined with an explosion in unemployment-related expenses, both of which were caused by the real deflation in the economy.

Look: When you're in deflation, it is a reasonable and valid thing to PRINT MONEY. And a deficit during deflation is one way to do so -- simply issue $1 trillion in Treasury notes, have the Federal Reserve buy them, and voila, you just printed $1 trillion dollars that are going to end up in the hands of people who are going to spend it and thus create demand and thus jobs. The Chinese might not like it because it lowers the returns on their stash of Treasuries having all this freshly printed money showing up for Treasury auctions, but fuck the Chinese. If they don't like it, they can simply stop buying Treasuries. Ain't no shortage of other people wanting to buy Treasuries right now, it's the perfect mattress money instrument in a deflationary cycle because you know you're going to be paid at the end, whether with tax money or rollover from freshly-sold Treasuries or freshly printed money doesn't matter to you, and you don't have to worry about robbers breaking into your house and looting your money-stuffed mattresses. And this has the advantage of also getting that money out from under mattresses and back moving in the economy again, since the federal government is going to *spend* it, not use it to stuff mattresses, and the people who get the money are in turn going to spend it, and so on and so forth...

As for morons whining, "but... but... INFLATION!" -- uhm, look. Do you know what the non-energy-related inflation rate was in November 2009? Hint.... ZERO. Nada. Zilch. There was not any. Which is BAD, for reasons I've explained earlier you need a small amount of inflation in a capitalist economy in order to motivate money to come out from under mattresses and start contributing to economic activity. And December (when the numbers come out on the 15th) is going to be even worse, because the only way the Christmas retailers got *any* sales was by slashing prices.

But... but... the Federal Reserve has been printing money with all the abandon of the Weimar Republic finance ministry, you say? Who the fuck cares. According to the flow of funds data, all that freshly printed dough has been taking a loop through the economy, heading back into the banking system, and... and... uhm, is RIGHT BACK IN THE FEDERAL RESERVE as reserves. The Fed has printed about 4 TRILLION dollars since 3Q 2008, and flows to bank reserves on deposit with the Federal Reserve account to, uhm, err, 4.861 trillion dollars since 3Q 2008. (See table F.108, p25). It ain't doing *shit* to cause inflation, because if it's sitting on reserve in the Federal Reserve it's just high-tech mattress money, with a velocity of 0 and thus a contribution to economic activity of $0 (economic activity is velocity * money supply, no velocity -- under mattress -- means it don't exist as far as the economy is concerned).

In short: We have jack shit going on inflation-wise in our economy, and the deficit is not going to be a problem as long as we're in deflation because we can just print it away because, like, uhm, folks. There's this new technology called the PRINTING PRESS, y'know?! And when inflation *does* rear its ugly head, it's likely to be as a result of increased economic activity, at which point a) the Federal Reserve can put a hold on bank reserves to keep them from flowing back into the economy, until b) they can un-print the money (via selling off the Treasuries and corporate bonds they bought) needed to keep inflation from getting out of control, while c) taxes are raised to pay down the deficit and therefore unprint sufficient money to keep shit from getting out of hand. This is all fucking *textbook*, people, lessons learned from the original Great Depression. The fact that there are ideologues who refuse to acknowledge the data we gathered from the Great Depression and the models we built from that data... fuck them. They got their heads stuck so far up their fucking asses it's a wonder they ain't talking out of their navels. I don't agree on the Obama administration's priorities in many cases, but running up a deficit during deflation ain't one of my problems with them.

-- Badtux the Monetary Penguin

1 comment:

  1. Well, one of the points in my post was that Obama is being spooked by deficit hawks, to our general detriment. (I've added more links since your visit.)

    The entire right of center political spectrum - which, as near as I can tell, includes everybody except Bernie Sanders and Al Franken - is drinking von Mises' koolaid.

    About a year ago, over at Edge of the West there was a whole series of posts on New Deal Denialism. It has become chapter and verse for the Republicans. You can't just say "fuck them" when they appear to be gaining political momentum.

    And Obama can't or won't stand up to them. He's too god-damned conservative. That's why the stimulus package was a fraction of what was needed, and it's why we're heading into a 1937 relapse. Except I think it's going to be more like 1932.

    Regarding China, you're on Krugman's wavelength. Here's what he said on 12/31, with a bonus comment on protectionism.

    "First, there’s the claim that we can’t confront the Chinese because they would wreak havoc with the U.S. economy by dumping their hoard of dollars. This is all wrong, and not just because in so doing the Chinese would inflict large losses on themselves. The larger point is that the same forces that make Chinese mercantilism so damaging right now also mean that China has little or no financial leverage.

    Again, right now the world is awash in cheap money. So if China were to start selling dollars, there’s no reason to think it would significantly raise U.S. interest rates. It would probably weaken the dollar against other currencies — but that would be good, not bad, for U.S. competitiveness and employment. So if the Chinese do dump dollars, we should send them a thank-you note.

    Second, there’s the claim that protectionism is always a bad thing, in any circumstances. If that’s what you believe, however, you learned Econ 101 from the wrong people — because when unemployment is high and the government can’t restore full employment, the usual rules don’t apply."

    But nobody is listening.



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