As a matter of national accounting, the domestic private sector cannot net save unless and until foreign or government sectors net deficit spend. Call this the tyranny of double entry bookkeeping: the government's deficit equals by identity the non-government's surplus. Hence, if the US private sector is to rebuild its balance sheet by spending less than its income, the government will have to spend more than its tax revenue. The only other possibility is that the rest of the world begins to dis-save massively--letting the US run a current account surplus--but that is highly implausible, and socially undesirable, since it means we export our economic output, rather than consume it domestically. And if the government deficit does not grow fast enough to meet the saving needs of the private domestic sector, national income will decline, which, given the size of the private sector's debt problem, will generate a huge debt deflation. This is the foundation of modern monetary theory. Would that the IMF and the G20 understood these basic facts. The anodyne communiqué from last weekend's Pittsburgh summit makes clear that this is not the case. Western policy makers appear determined to consign us to years of additional economic misery because of the continued embrace of a flawed market fundamentalist economic paradigm. So far, instead of trying to revive the productive economy, most of the G20's resources have consisted of mouth-to-mouth resuscitation for a dying financial sector. This has not "worked" to the extent that last weekend's communiqué advertised. The best analogy to describe the current state of our financial system is that we have placed scaffolding over a decaying building, but done little to repair the underlying structure. What happens when the economic scaffolding is removed via "exit strategies", as the G20 participants have advocated? ... For many generations, we didn't face the unprecedented financial fragility we are experiencing today. But there are good reasons why we avoided this until recently. We have spent the past quarter century eviscerating what was fundamentally a robust structure originally devised during New Deal, a system which basically saved the US capitalist system and served the interests of its citizens very well until it was hijacked by a bunch of corporate predators under the guise of deregulation and neo-liberalism.
Hence, if the US private sector is to rebuild its balance sheet by spending less than its income, the government will have to spend more than its tax revenue. The only other possibility is that the rest of the world begins to dis-save massively--letting the US run a current account surplus--but that is highly implausible, and socially undesirable, since it means we export our economic output, rather than consume it domestically. And if the government deficit does not grow fast enough to meet the saving needs of the private domestic sector, national income will decline, which, given the size of the private sector's debt problem, will generate a huge debt deflation.
This is the foundation of modern monetary theory. Would that the IMF and the G20 understood these basic facts. The anodyne communiqué from last weekend's Pittsburgh summit makes clear that this is not the case. Western policy makers appear determined to consign us to years of additional economic misery because of the continued embrace of a flawed market fundamentalist economic paradigm.
So far, instead of trying to revive the productive economy, most of the G20's resources have consisted of mouth-to-mouth resuscitation for a dying financial sector. This has not "worked" to the extent that last weekend's communiqué advertised. The best analogy to describe the current state of our financial system is that we have placed scaffolding over a decaying building, but done little to repair the underlying structure. What happens when the economic scaffolding is removed via "exit strategies", as the G20 participants have advocated?
...
For many generations, we didn't face the unprecedented financial fragility we are experiencing today. But there are good reasons why we avoided this until recently. We have spent the past quarter century eviscerating what was fundamentally a robust structure originally devised during New Deal, a system which basically saved the US capitalist system and served the interests of its citizens very well until it was hijacked by a bunch of corporate predators under the guise of deregulation and neo-liberalism.
The only other possibility is that the rest of the world begins to dis-save massively--letting the US run a current account surplus--but that is highly implausible, and socially undesirable, since it means we export our economic output, rather than consume it domestically.
So why is this seen as the path to growth and prosperity by so many countries, rich ones like Germany and Japan included? Is it that claims on the rest of the world are naturally seen with suspicion while claims by the rest of the world on the US are safe and natural?
Strange lopsided thinking there... In the long run, we're all dead. John Maynard Keynes
Of course the US financial sector was only too happy to facilitate this process while they extracted fees and profited from "carry trades" made possible by the arrangement. And the financial sector's faithful servants, the mainstream economists, the mainstream media and most of the politicians, the people who are supposed to understand this stuff, kept reassuring the electorate that this was the result of US superiority and was the natural order of things. Religious leaders long ago learned the power of telling people soothing and reassuring things. Mainstream economics is just the new Church.
I recall a friend, who had a masters in economics and dropped out of a PhD program at UCLA in the 60s on account of a gag reflex problem, telling me in the '90s that us getting all of these products and other countries just accumulating US paper was like us just getting the stuff for free. That confounded me and didn't seem right, but I couldn't say why. Ignorant me. I didn't see how there would not be a price at some point. So now perhaps it was "prescient me."
All of these factors have been there in reasonably plain sight for years. Perhaps the take-away is that "connecting the dots is a non-trivial task and that ugly truths are only likely to be acknowledged in the face of ugly events, if then. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
