Marshall’s magical money machine (A grim fairy tale)
Marshall Auerback, over at New Deal 2.0, lives in a fantasy world where his magical money machine can make the economic crisis disappear. Of course, you might say that Marshall is hallucinating – perhaps, even ask for some of what he is smoking. But, he swears he is sober. Washington can spend as much as it wants or needs to pull the economy out of its current crisis. Moreover, Washington must do this, or the result will be even more dire than that we face presently, as he wrote last fall:
The fact is, if the government deficit does not grow fast enough to meet the saving needs of the private domestic sector, national income will decline, and, given the size of the private sector’s debt problem, a full-blown debt-deflation process will emerge.
The problem, as Marshall explains, is a little matter of accounting:
Even though private individuals and firms face external constraints as they accumulate debt, “household budget” analogies do not hold true for government, as Galbraith, Wray and Mosler argue:
“[I]f we take households or firms as a whole, the situation is different. The private sector’s ability to spend more than its income depends on the willingness of another sector to spend less than its income. For one sector to run a deficit, another must run a surplus (saving). In principle, there is no reason why one sector cannot run perpetual deficits, so long as at least one other sector wants to run surpluses.
In the real world, we observe that the federal government tends to run persistent deficits. This is matched by a persistent tendency of the nongovernment sector, which includes the foreign sector, to save. Its “net saving” is equal (by identity) to the government’s deficits, and its net accumulation of financial assets (or “net financial wealth”) equals, exactly, the government’s total net issue of debt-from the inception of the nation. Debt issued between private parties cancels out, but that between the government and the private sector remains, with the private sector’s net financial wealth consisting of the government’s net debt.”
The reality is — and it is a tyranny of accounting, not a theoretical impediment, since the financial balances of the three sectors must sum to zero — that the only way to return to a fiscal surplus, or even a fiscal balance, without taking the private sector back to a deficit spending position, is if the trade balance can be heroically improved. The failure to recognize this relationship is the major oversight of neo-liberal analysis.
We are not sure what Marshall means by the statement that this, “is a tyranny of accounting, not a theoretical impediment,” but, we will let that go for a minute, since, essentially, he is simply conceding national accounting is a gimmick – a tautological statement wherein the gross national financial balance must be equal to the sum of its respective parts.
On this account, if the private sector consumes 100 percent of what it produces, the non-productive government sector has nothing to consume. If the government sector is to consume anything, the private sector must consume less than it produces, or the country must run a trade deficit. It is this increment of production in excess of what the private sector consumes that forms the government deficit (assuming that the tax rate is zero). As we said, there is nothing mysterious or particularly enlightening about this; the national income is equal to the sum of its parts: businesses, households, government, and net foreign trade.
However, if things were this simple, we would not be arguing about them. Marshall could live in his fantasy world, and the rest of us could spend the day on the beach, lazily reading trashy gothic novels. Instead, we have to chase Marshall down the rabbit hole of real world political economy, where, somehow, we end up with a shit load of idle money in the form of government surpluses, or private savings, or foreign trade deficits, or some combination of the three.
Suddenly, and without warning, the national income doesn’t equal the national income.
How did we get here – by falling through a looking glass, or while passed out on a bed as our house is carried away in a tornado – is not all that clear from Marshall’s post. As is typical in political economy, the writer assumes circumstances that scream out for explanation without offering any such explanation. He then immediately proceeds to offer a solution based entirely on the idea that, in this case only, one plus one plus one plus one doesn’t equal four:
Economy: Doctor Auerback, it hurts when I do this.
Doctor Auerback: Well, don’t do that.
While Marshall is not quite clear how it comes that all this idle cash suddenly appears in the form of idle savings, government surpluses, or trade deficits, he nevertheless assures us that it can all be fixed if Washington could be convinced to run up massive open-ended chronic deficits. To the response that government is already running up massive open-ended chronic deficits that will break the country’s finances, Marshall introduces us to his magical money machine:
Deficit hawks fail to understand that not all debt is created equally. As James Galbraith, L. Randall Wray and Warren Mosler have argued, there is no legitimate analogy to be drawn about the budgets of the government (which issues the currency) and the budgets of the non-government sector like households and firms, etc. (which uses that currency). The former does not have a financial constraint and can spend freely whereas the latter has to “finance” all spending either through earning income, drawing down savings or liquidating assets.
Washington has the peculiar ability to spend more than it takes in without constraint, no matter how much debt it accumulates. This sets Washington apart from your family and ours, and apart from firms like Exxon-Mobil, or even nations like Greece, Spain, Italy, Portugal, and other unfortunate populations who will soon learn the consequences of living beyond their means. (Although this is purely an accounting identity, as Marshall assures us.)
Washington is a magical money machine. It creates savings for everyone else by issuing debt products:
In aggregate, there can be no net savings of financial assets of the non-government sector without cumulative government deficit spending. The sovereign government via net spending (deficits) is the only entity that can provide the non-government sector with net financial assets (net savings) and thereby simultaneously accommodate any net desire to save and hence eliminate unemployment.
Which we thought was an odd statement, since government can only sell its debt instruments on condition that someone has the money to buy them. And, if the money is already out there, how does government create savings? If pressed, Marshall will probably concede that government doesn’t create savings, it merely creates debt instruments to absorb these savings – which is to say, government spends the already existing savings of the private and foreign sector of the economy.
But, that leads to another question: why don’t the holders of the savings spend it themselves? Marshall is silent on this issue. He does not explain why the holders of national savings do not consume or productively invest their savings – perhaps leaving the mystery to another chapter of his fairy tale. In any case, we are left with a picture of an economy where hundreds of billions – even trillions – of dollars are sitting idly in accounts somewhere, not invested and not consumed by its owners, while tens of millions of working families have no jobs, no income, and no means to life.
Surprise government never borrowed those savings in the first place!
In another installment of Marshall in Wonderland, we find that not only does government not create savings, it doesn’t even borrow those billions or trillions of idle saving:
Who funds our budget deficit? It is a question taking on increasing significance, given the recent back up on longer-dated bond yields, which has been explained by many as a “buyers’ strike” in response to growing government profligacy.
The prevailing view is that since Washington borrows the saving of the foreign and private sector to fund its deficit, a growing sense of panic might develop among lenders that Washington will be unable or unwilling to make good on its debt. Not so, explains Marshall – this time with Rob Parenteau, also of New Deal 2.0:
We think this argument displays a seriously lagging understanding of how much modern money has changed since Nixon changed finance forever by closing the gold window in 1973. Now that we’re off the gold standard, neither our international creditors, nor the so-called “bond market vigilantes”, “fund” anything, contrary to the completely false & misguided scare stories one reads almost daily in the press.
This requires some explanation: Back in the days of the gray beards, if the Messiah wanted to kill a couple of thousand pregnant women in Afghanistan, he had to borrow gold for his misadventure from the Wall Street of his day – the Rothschild cartel. National currency was worthless beyond the borders of the nation, and war on the territory of another nation called for an army funded by the pure hard form of money. Trade between nations was also settled with the commodity. Gold, since it is a real commodity, requiring an honest days work down in the bowels of the earth, and can’t be reproduced on a printing press, imposed a real discipline on public finances. Nations could only borrow what they could reasonably expect to repay through tax levies on the population.
But, that was back in the olden days, before the Internet, IPhones, IPods or even color television. Life was pretty crude, and an email (it was called a letter in those days, and had to be generated using a then available, but now obsolete, analog device, called a pen) took days to reach its recipient.
According to Marshall, those days are long gone, but the limitations of a gold economy continues to assert itself in our wholly digital currency economy in the form of a unwarranted superstitious fear of public deficits. When money was real it took something real to pay off debts, but now money is a collection of electrons dancing across the monitor of a computer terminal. To repay the public debt requires only more dancing electrons.
Such is the fairy tale world in which Marshall Auerback dwells that real Afghan mothers, with real babies in their bellies, can be murdered by real American troops, using real bullets, paid for by dancing electrons.