From the, ‘The only thing we have to fear is fear itself’ department, we have this article by a presumably real economist in New Deal 2.o:
Jobs Summit Charade: Is the government out of money, or is Obama completely misguided?
Friday, 12/4/2009, by Marshall Auerback
Marshall Auerback explodes the myth that the government will somehow ‘run out of money’ if it creates jobs. In his view, the only resource we lack is political courage.The government of the largest economy has run short of money. At least that is what Mr. Obama sought to convey at his “jobs summit” yesterday. The President said he would entertain “every demonstrably good idea” for creating jobs, but he cautioned that “our resources are limited.”
What a confidence-inspiring notion. How can we possibly solve the problem of unemployment in these circumstances? The preposterousness of the statement is only matched by the paucity of economic understanding that it manifests.
Marshall observes the US is a sovereign entity that manufactures its own currency; it cannot run out of money.
Does any other entity in the world issue US dollars? No. The national government does this under monopoly conditions. If you or I tried to do it, we would go to jail for counterfeiting. The government money monopoly was invented to mobilize resources to serve what government perceived to be the public purpose. Of course, it is only in a democracy that the public’s purpose and the government’s purpose have much chance of alignment, but this presupposes at least a working understanding of how a modern monetary system operates.
So here’s how it really works:
Any US dollar government deficit exactly EQUALS the total net increase in the holdings US dollar financial assets of the rest of us — businesses and households, residents and non residents — what’s called the ‘non government’ sector. In other words, government deficits = increased ‘monetary savings’ for the rest of us. It doesn’t matter if the financial assets are owned by American citizens or by Chinese manufacturers. The government spends money by electronically crediting bank accounts and those funds show up in the bank accounts held by the rest of us — the non-government sector.
What Marshall says is true, what is also true is the sovereign will run out of credibility far sooner than it runs out of (borrowed) cash. I presume Marshall is an economist, he does not appear to understand money at all. He fails to detect its current purpose against the backdrop of massive finance- generated credit*. He refuses to recognize money as a derivative, as a claim and nothing else.
Marshall’s argument ignores scale. His argument is a fragment against the immensity of finance credit. The new credit that Marshall desires must add to mass of legacy debt that exists, unpayable. According to the Bank of International Settlements, the totality of credit – finance’s claims against the production of the world – is over 600 Trillion- with- a- T Dollars! Finance credit is serviced by the expansion of finance’s balance sheet, the addition of more credit. $600 trillion becomes $1200 trillion which becomes $2400 trillion … becoming asinine long before that lofty total is reached. The danger of rounded- off amounts of imbalanced derivative positions falls greater than the GDP of the entire world! What results is the increasing irrelevance of the credit system as a whole, rather than the value of its claims. Finance is the new Zimbabwe.
Marshall avoids the entire issue of the cost of servicing increased sovereign debt. Because he doesn’t dig into credit creation deeply enough, he ignores the trap that is created by extensive sovereign borrowing. Government borrowing by way of supply and demand in credit markets keeps interest rates very low. The more governments borrow, the lower the money cost falls: the world becomes overstuffed with redundant claims in markets where claims are not in demand. His argument – identical to those of the other faux- Keynesians who populate the real economist profession – consigns the sovereigns: to endless and increasing borrowing … to running ever- faster to remain in place. Otherwise, reducing the flow of borrowing allows for the increase in interest costs – again due to supply and demand in the marketplace – which rapidly overwhelms the ability of the governments to service existing loans through additional borrowing.
I learned all this from my mother; never borrow to pay off other loans. Never use capital for operating expenses. I learned this when I was – uh – twelve!
At the same time, the increase in credit represents a shift from less credit- worthy appearing private finance toward sovereigns which appear more credit worthy. The burdens of default jump from private to public borrowers. The Citigroup/HSBC/Deutche Bank defaults are now appearing in Dubai, China, Saudi Arabia, and are becoming more likely in Greece, Spain, Venezuela and elsewhere. Adding more debt is simply dandy … up to a point where it becomes a self- reinforcing disaster.
By borrowing more, governments manipulate the credit market, which makes it hard to measure the ‘real’ cost of money by that market. Governments can borrow at decreasing cost until they cannot any more. What is that inflection point?
At the deepest level Marshall misrepresents reality. His argument is intellectually dishonest. Governments as well as finance and banks can create claims against goods but not the goods themselves. Government can print more money but cannot print jobs.
It also cannot print oil which is where our jobless problem originates. Workers have been too expensive for ten years against the backdrop of uncertain fuel availability or rising trend fuel prices. Marshall cannot formulate a correct solution to a problem he misrepresents to himself.
The question to sovereigns is when will interest costs rise.
Without going into charts and graphs, the efforts of the past sixteen months in the United States and for far longer in Japan and elsewhere has been to hold money costs as low as possible. This is so institutions mired in extremis by the current crisis can ‘earn their way back into profitability’ by pocketing the spread between the low money cost and the returns on money they themselves lend. The reason these companies need to do so is the large and expanding portfolios of uncollectable legacy loans on (or off) their books.
Since the employed cannot profit on the borrowing spread, the costs of extending credit to them – by employing them – cannot be recovered, except by the means that put them into unemployment in the first place. At the same time, their continued borrowing is becoming a desperate necessity to the companies – even more so than to the hapless ex- employees. Without more loans extended and then repaid at high rates of interest, the companies cannot hope to earn their way back into solvency.
As the subsidy lending continues, a paradox emerges. On one hand the failing loans expand at a rate equal to the increase in subsidy, which renders the entire effort futile. On the other hand, the appearance of institutions without obvious public distress suggests that the worst aspects of the crisis are past and that subsidy lending can be ended soon. Reducing the subsidy lending would remove significant political and monetary/fiscal stress from the government. This is the center of Obama’s remark about not being able to afford to lend jobs into existence.
I would suggest that what the credit market is tending to measure is less the money- cost of money but ‘full faith and credit’, itself. At some level of lending faith becomes skepticism, then revulsion. Problem is … nobody can tell in advance what the level of lending is. Certainly, increasing the level shortens the odds of its appearing sooner rather than later.
What is needed is an entirely different approach that does not simply bandage a part of the problem but addresses the whole. We live beyond our means, both money means and energy means. The first step is to start figuring out what the optimum means might be and figure out how to make them work for the greatest number.
Anything else is just more self- serving lies.
* BTW, the purpose of money today is to allow those who engage in the business of finance (gamblers) to exit comfortably toward the chaotic future while avoiding any appearance of work. “The casino is closing, please cash in your chips!”