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The myth is that a profligate welfare system for Greek workers has resulted in the Mediterranean country’s fiscal problems. Marshall Auerback and Rob Parenteau crush that myth here.  Aside from problems with the Euro itself, the reality is that the fiscal imbalances are a result of the top 20% of Greek taxpayers paying essentially no taxes.

Here’s one of the critical paragraphs, although I highly recommend the whole thing:

” if one looks at total social spending of select Eurozone countries as a per cent of GDP through 2005 (based on OECD statistics), Greece’s spending lagged behind that of all euro countries except for Ireland, and was below the OECD average. Note also that in spite of all the commentary on early retirement in Greece, its spending on old age programs was in line with the spending in Germany and France.”

So I guess Greek Mythology lives on….


I was at an economics presentation a few days back.  It was one of those things where the speaker had the audience all terrorized and running scared from the national debt, the current size of the deficit and waxing poetic about the budget surpluses generated by the Republican Congress in the late 90’s.  One of the things he said stood out at me:  “The Government can create jobs, but it can’t create wealth.”  I took a moment to assess that statement, and began thinking about vertical and horizontal money.

Bank Credit is what is termed by Chartalism as “horizontal money.” ( This is really a Post-Keynesian concept developed by Basil Moore)  That is to say, when bank credit is created, there is an asset and a liability that are equal.   So within the private sector (Banks, Businesses and Households), when bank credit is created, no “net” financial assets are found or created.  There is no equity.  One person’s asset, or savings, is equal to another person’s debt.

Government spending, however, is “vertical money,” that is, it is dropped into the private sector without a corresponding liability in that sector.  A Government liability adds net financial assets, or equity, into the private sector.  Most people think that Government debt is a liability of the private sector.  This is false.  In fact, it’s just the opposite.  Government debt is an asset of the private sector entity which holds it.

By spending into the economy, the Government “creates wealth.” It creates savings in the private sector which would be absent in a purely private credit economy.  Of course, the Government doesn’t determine the distribution of that savings other than it’s initial expenditure.  Where it ends up is a function of spending and savings decisions by private sector actors.

So it’s important to remember that the overall savings of the private sector will exactly equal the Government overall deficit (total debt).  This is vertical money.  Any other savings which is created by the private sector will be dis-savings of another private sector entity.  This is horizontal money.  It’s a critical concept for understanding our money system.

European leaders announced the latest and greatest solution to their currency problems yesterday. This will kick the can down the road a ways, but ultimately they have not identified the only real solution–true fiscal union with a backstop of the Euro-states by the European Central Bank-which will cause the markets to back down from higher rates on State debt. We will be back talking about problems with the Euro in short order without a doubt.

Greg Mankiw, Harvard professor, and the guy who wrote the book on economics (literally), is in the New York Times yesterday, proclaiming inflation to be right around the corner.  Mankiw begins:

“AS the economy languishes, politicians and pundits are debating what to do next.”  You’re the expert Greg, what should we do next?

“as we search for answers, it is useful to keep in mind those fates that we would like to avoid”

Mankiw then goes on to describe the recent fates of four countries: France, Greece, Japan and Zimbabwe.

He starts with, and brushes over quickly, Zimbabwe, whose currency fell apart in a heap of hyperinflation in 2008.  Mankiw knows we are nothing like Zimbabwe, but it doesn’t hurt to remind the public occasionally of what happens with excess money printing.

He moves on to Japan, whose fits of recession and deflation over the past 20 years have American policy makers wary –rightfully so, in my opinion—of the same thing happening here.  This is why the Obama administration is pushing for fiscal stimulus, he says.  But then quickly warns:

“Yet this fiscal policy comes with its own risks. The more we rely on deficit spending to keep the economy afloat, the more we risk the kind of sovereign debt crisis we have witnessed in Greece over the past year. The Standard & Poor’s downgrade of United States debt over the summer is a portent of what could lie ahead.  In the long run, we have to pay our debts — or face dire consequences.”

And this sums up everything that is wrong with mainstream macroeconomics today, as well as the disgusting fear-mongering and mis-education the media—including the New York Times—engages in to confuse the public and keep them ignorant of the way economics really works.  First off, Greece is a currency user.  They have to tax or borrow their way to Euro’s, while the US is the issuer of the dollar. The notion that sovereign governments can only borrow their currency from private banks is a red herring with no basis in reality. There is no need to tax or borrow our way to dollars, as we can issue as many as we like at no cost.

I find it hard to believe this is a distinction Mankiw is not able to make, as markets around the world have been screaming it for some time now.  The same applies to Japan.  Markets know currency issuers can always pay their debts, and so they trust them and demand their currencies.  Not so for currency users like Greece.  Second, in the 350 year history of the United States, we have always “paid our debts.”  But only one time—with disastrous consequences—did we pay it off completely.  So it’s a nonsensical statement to suggest that we should pay off the national debt. If we did then the private sector would have no savings.  Mankiw likely knows this as well, but saying so doesn’t serve the interests of those who pay him to write fearmongering articles on the dangers of government spending.  These dangers have very little basis in reality.

There is a lot more that is wrong with this article, including trite statements like getting “our fiscal house in order,” and suggesting that if we don’t reform entitlement spending “in the next several decades, taxes will have to rise.”  I don’t know about you, but when we’re 25 million jobs short of full capacity, worrying about whether my tax rate is going to be 10% higher in 20 years seems chiefly the concern of fools and charlatans.

And so Mankiw goes back to teach his macroeconomics at Harvard.  It’s too bad, such prestigious and expensive schools deserve a better education than Mankiw is likely providing their students.

Real median wage growth has been stagnant since the early 1970′s as productivity gains have flowed to the top income earners.  What this is creating is a feedback loop, whereby low income workers –those with a job–cannot buy their production, so sales drop.  Increasing the wage share of national income is going to be necessary for real recovery.

History has proven time and again that policy makers will only consider alternative solutions to existing policy when the people demonstrate en masse.  From the Labor movements of the early 20th century,  to women’s suffrage,  to the Civil Rights Movement, Vietnam and Gay and Lesbian marches of recent memory, all great change starts with people practicing their inherent rights to dissent.

I don’t wish to demonize the honest brokers of Wall St.  Most of them are hard working, not excessively wealthy, and truly working in the best interests of their clients, and to the best of their ability.  But when the crisis took hold, policy makers also made a choice.  They put all their effort and expenditure into helping the financial industry in this country, while all along it was a crisis of Main St.  It was as if they were making an oil change on a car which was also out of gas, and they didn’t realize the tank was empty.

Much of the debate in this country is obscured by dissonance and half-truths.  The mainstream media, economists and politicians want us to believe there is no alternative.  ”We are out of money,” they say, while military operations are launched on a whim, with no congressional approval and at great expense.  ”We can’t pay our debts,” we are told, as if I was so foolish as to believe that.  I know better.  I know that there is a policy agenda which can lead us back to prosperity in short order, and with little collateral damage, either for the upper or lower classes. For Wall St. and Main St.  What we are doing now is no solution.  It is allowing entrenched unemployment, poverty and mental illness take hold of our country on an unprecedented scale.

That is why I support Occupy Wall St. and hope to see it prosper and grow.  So that policy makers will see an alternative and act on it, for their sake, and for their country.

Operation twist is the media name for the Federal Reserve’s latest round of asset buying.

According to the Fed, they will be buying longer term (mostly 10 year) treasuries and selling shorter term bonds.  In addition, they will be reinvesting dividends from their asset backed securities purchases (from QE1) into additional mortgage backed securities.

The effects, although somewhat muted, will be noticeable.  This is the Fed throwing in the kitchen sink.  Long term interest rates will come down some, although not a huge amount.  If the 10-year bond falls closer to 1%, that will be a sign the economy has tipped back to recession.  Even with a low-growth scenario, Operation Twist is perhaps enough to bring fixed mortgage rates below 4% and create another round of refinancing.

This is both good and bad for banks.  The good is that a lot of questionable mortgages will get refinanced into more stable loans.  The bad is that it makes banks less profitable.

I don’t see the sales of short term bonds having much effect, as demand for short term bonds is already high and the Fed controls interest rates of that duration anyway.

The purchases of asset backed securities will also help banks clear up room to provide more lending.  Whether or not they will have a lot of profitable opportunities to do so is another question.

Finally, it must be noted that there is some deflationary effect from this.  As bond interest rates go down, there is less interest income going to the private sector.  This hurts savers who are spending out of their retirement incomes.  Interest rates are always a two-way street.  Yes, declining interest rates create demand for credit.  But it also dampens overall aggregate demand because there is less interest income in the economy.

Overall, risks remain high.  The large deficit continues to work its magic by allowing households to reduce debt, but demand remains weak and unemployment tragically high.


If the government was a household.

If the government was a household, it would have to balance it’s income with its expenses.

If the government was a household, it would at least have to have income commensurate with its debt payments.

If the government was a household, it wouldn’t be able to afford all that waste.

Except, the government isn’t a household.

The government has a printing press which allows it to create dollars to make its interest payments.

The government doesn’t need income in order to spend.

The government doesn’t need to balance its income with its expenses.

In fact, when the government balances its income with its expenses, recession and depression nearly always result.


Chartalism is an economic theory which says that money is given value through its use as payment of taxes to the state.  Charta- means token or ticket:  items which have no intrinsic value but are given value by their acceptance as payment in exchange for goods or services.

Metallism, or “commodity money” says that the unit of account will have an intrinsic value; that is, it will have value apart from its use as a medium of exchange.  The Gold Standard is an example of metallism.

Chartalism was developed by G.F. Knapp in the early 1900′s and was used by Abba Lerner in developing Functional Finance.  Modern Chartalism is referred to as Modern Monetary Theory (MMT).


In a previous post, we defined “sound money” as the practice of Governments to balance their budget over the business cycle.

Understanding why sound money principles lead to recession and depression requires an understanding of “sector balances.”

In a nutshell, the budget balances of the Government, domestic private sector and foreign sector will net to zero.  If we assume a balanced trade account (imports=exports) then the government surplus will exactly equal the private sector deficit.  Conversely, a government deficit will exactly equal the private sector surplus  (I had demonstrated this in the post linked to above, so you can go there and see it for yourself).

Once we have this, we can understand that when the Government runs consistent surpluses, the private sector will be in jeopardy.

Let’s say, for example, the Government runs a surplus of $200 billion for 3 straight years, and that the trade balance is neutral (imports=exports).  If this is the case, the private sector will have spent $600 billion more than they earned over the same period.  In order to keep up their spending, the private sector will be forced to either spend down existing savings or increase their borrowings by the same amount.

For reference, the last time the US ran consistent surpluses prior to the late 1990′s was the late 1920′s, just before the Great Depression.

This is why Governments very rarely run surpluses, why they never pay off the National Debt –the one time the US did this, in 1835, a particularly nasty depression resulted–and why attempting to run down deficits during a downturn in private credit creation, such as now, is a recipe for disaster.