While the sovereign does not need to issue bonds in order to fund deficit spending (because the sovereign, being able to enforce legal tender laws, does not need to fund deficit spending at all), it can sometimes be a good idea to issue bonds in a volume that happens to coincide with the amount of deficit spending.

Imagine that you are deficit spending because you are in a balance sheet recession. The fact that you are in a balance sheet recession means that a lot of the legal tender you deficit spend is going to end up in somebody's mattress, to offer collateral against potential margin calls.

This is not really a problem - after all, you can just deficit spend more. But what happens when you have lifted the economy out of depression? Why, all the legal tender that was hidden in mattresses to guard against margin calls that never did come (partly because you were deficit spending to get the economy afloat again) is going to come out of those mattresses.

This is why you want to, during the recession, exchange some of the legal tender in the mattresses for T-bonds. For the purpose of guarding against margin calls, T-bonds are very nearly as good as legal tender, so you do not impose any great drain on any actual cash flow. But when the mattress-stuffing people discover that the recession is over and attempt to take their money out of their mattresses, they will find that when it comes to doing anything other than covering your ass from a margin call, T-bonds are considerably less useful than legal tender.

So by issuing T-bonds during your deficit spending, you can obtain greater control of the process of returning the money stuffed in mattresses into the political economy.

- Jake

Friends come and go. Enemies accumulate.

There is also a third possibility of your list - the crisis is so deep that no Keynesian spending, however gross, would wake the conventional economy up.

This would have nothing to do with the depth of the crisis, and everything to do with the underlying economic fundamentals of the crisis.

There are four factors of production that are required to make a modern industrial state work: Raw materials, labour, capital and financial assets. "Economic crisis" is normally taken to mean that there is unemployed labour, because unemployed labour creates real hardship for real human beings, something that unemployed raw materials, financial assets or capital typically does not.

Now, if we define an economic crisis as a surplus of labour relative to requirements, then it must mean that one of the other three factors of production forms a bottleneck.

If and only if the bottleneck is a lack of financial assets in the right places at the right times, Keynesian deficit spending can help. But if the shortage is in financial assets, as opposed to real capital or raw materials, then there is no crisis so deep that adequate Keynesian spending will not bridge the shortage of financial assets.

If, on the other hand, the shortage is in real capital or raw materials, then there is no crisis so shallow that it can be bridged by Keynesian spending, because under a shortage of raw materials or real capital, Keynesian spending would not be addressing the problem.

- Jake

Friends come and go. Enemies accumulate.

The problem is not just one of on what the money is spent but also one of who gets the money. We need to remember that the "Great Recession" is largely the result of those who have wealth being afraid to invest and unable to practically consume more than a tiny fraction of their existing income. Increasing taxation on this tiny group and then spending those revinues for socially useful purposes would be appropriate in these circumstances.

Giving TBTFs more money, as has been done with TARP, is only useful to prevent their insolvency from becoming undeniable. Since it is their excesses and folly that has let to the GFC, it might be a good idea to let them be "resolved" instead of giving them more money.

On the other hand, money that is credited to those without wealth in return for labor provided performing socially needed tasks pays for the accomplishment of those tasks AND gets spent on consumption, which will boost the economy. It might also be sensible to enact policies that result in the return of some of the manufacturing operations that have been shipped abroad so as to re-create a more balanced economy.

As to your perception that the conversation is going sideways, it seems that what would be forward to you would be towards more "austerity". That path seems very likely to end in a death spiral of debt-deflation. If we want to get out of the liquidity trap, etc. in which we find ourselves we need a combination of fiscal and monetary policies and re-regulation that begins to reverse the massive wealth disparities that current policy has generated and that undoes some of the damage done by globalization.

"It is not necessary to have hope in order to persevere."

This discussion is drifting sideways...

Of course the one thing that has not been explicitly discussed here is the role of debt and debt to GDP ratios in the existing crisis. In Neo-Classical Economics debt is not a consideration. In the real world it is. The Fed and the ECB are both pursuing policies that are aimed at facilitating the use of bank created debt to extract the last drop of blood from the body economic in their respective areas. This has, in the USA, been accomplished via a giant control fraud where the financial sector first, starting in the '80s, looted and destroyed the Savings and Loan Associations and turned mortgage issuance into a game for commercial banks, the Fed provided increasingly cheap money through low interest rates, anti-regulators were appointed to all significant regulatory bodies and then Congress repealed Glass-Steagall. The result is that money creation came to be a more lucrative for profit exercise by the big banks on Wall Street in conjunction with the shadow banking system.

Finance turned malignant and banks no longer loaned money for productive enterprises. Instead they financed the buy-out of existing productive enterprises and shipped the production to China, etc. Most of the debt they have created through serial bubbles is essentially fraudulent, or counterfeit debt, as Jerome would have it. We are now in the situation that the debt has grown to a point, in 2007, that it could no longer be serviced by borrowing the interests for "interest only" payments and we have entered a deleveraging cycle where the economy is contracting and the overall situation is deflationary.

It is not possible to repay the accumulated debt at this point, nor should most of it be repaid -- except for the unfortunate fact that bogus assets have been sold to all of the pension funds, etc. Given those facts the banks and financial institutions involved should be resolved, the executives prosecuted and what is owed to the banks canceled while what the banks have paid out to officers should be clawed back to pay for the damages.

That is what should be done. Then we could begin to recover from the damage that has been inflicted. We will see what actually happens. Were we to do what needs to be done we could then turn to investing in projects that provide renewable energy and transportation based on that energy. That is truly the vital task, but the ongoing looting is preventing us from getting there. Worse, in the USA and Europe all of the major political parties have bought into the idea that what must be saved is the very financial system that is continuing to suck the life out of the economies.

Two links give a good perspective on these processes:

Steve Keene's AMI Talks at the recent American Monetary Institute in Chicago in FLV format -- the talk by Steve and the talk by Michael Hudson are both worth the effort of watching. Unfortunately transcripts don't seem to be available.

Steve has created stock-flow economic circuit models of economies that actually produce results very similar to the crash we had in 1929 and 2008 and Steve focuses on the role of debt. He talks about "why credit money doesn't have to crash and why it always does." Hint -- it is the motivations of the bankers. He also shows some very elegant dynamic models of the economy based on stock and flow and resolves a dilemma of neo-classical economics, which cannot account for profits! and which is inherently prone to crashes by showing where it goes wrong.

Michael Hudson's talk brings the criminal element into the discussion Steve started. His thesis, well, one of them, is that banking has essentially been turned into a criminal enterprise, but we just are not prosecuting the crime. Hudson provides an insider's view of how all this happened. Very worth while.

The other is Chris Whalen's presentation at an American Enterprise Institute gathering that also included Nouriel Roubini. Several good talks there, but follow the instructions to get to Chris's presentation. He explains why the US TBTFs are going to fail in 2011 and he urges, in effect, new leadership that will repudiate the bogus debt and write it down instead of pretending it is real.

An understanding of these processes and a means of clearly presenting this information to a lay audience has been my goal for a while now.

 

"It is not necessary to have hope in order to persevere."