Monetary Realism

Understanding The Modern Monetary System…

David Beckworth and Obama’s need for a “FDR Moment”

“No one doubts Congress’s power to create a vast and varied federal bureaucracy. But where, in all this, is the role for oversight by an elected President? The Constitution requires that a President chosen by the entire Nation oversee the execution of the laws.”
Free Enterprise Fund v. Public Co. Accounting Oversight Bd., 130 S.Ct. 3138 (2010)

Let him remember, by the way, that the unforgivable crime is soft hitting. Do not hit at all if it can be avoided; but never hit softly.
Theodore Roosevelt, 25th President of the United States

David Beckworth posted a fascinating piece today that makes a great historical analogy.

Last year Christina Romer argued that Fed chairman Ben Bernanke needed a Volcker moment. What she meant is that like Paul Volcker in the early 1980s, Bernanke needs to rise to the occasion and adopt a new monetary regime radical enough to solve the big economic problem of the day… Maybe it is time for us to admit that Bernanke will never have his Volcker moment. He has had many opportunities and whether because of groupthink at the Fed, political power of savers, or a failure by him to read Scott Sumner’s blog, Bernanke cannot seem to find his Volcker moment. It is not clear he ever will. So instead of hoping Bernanke has a Volcker moment, maybe we should be hoping for President Obama to have a FDR moment.
The Fed had allowed aggregate demand to collapse for three years when FDR responded. He signaled that he wanted the price level to return to its pre-crisis level (i.e. increased expectations of higher nominal spending) and acted upon it by having the Treasury Department devalue the gold content of the dollar. This dramatically increased the monetary base and spurred a sharp increase in aggregate demand.
So how could President Obama have his FDR moment? Like FDR, he should signal his intentions for higher level of nominal spending and follow through on it by having the Treasury Department take the reins of monetary policy from the Fed. President Obama could do this by announcing a NGDP level target that would be implemented by the Treasury Department creating large-denomination platinum coins that would be deposited at the Fed and used to fund checks to the public. The Treasury Department would keep making these coins until the the NGDP level target was hit. If NGDP went above the target the Treasury Department would issue bonds to withdraw the excess money.

This is very very good advice (I must admit that’s a very clever use of platinum coins) and he does have Bernanke’s number. Ben Bernanke seems like a genuinely decent man but he is, at heart, a college professor. Some men are born to lead armies and other men to write books about the battle. You can’t expect the war hero to be a gifted writer, nor the professor to lead men by command presence and neither to be an effective President (Teddy Roosevelt, of course, excepted on all counts).

There was no Volcker moment simply because unlike Tall Paul or the two Roosevelts, Bernanke lacks the nerve of a riverboat gambler. And that’s fine, he never ran for office or promised bold leadership. The bigger problem is that the President’s last real job was law professor, so he’s not temperamentally suited to follow Beckworth’s advice either.

In FDR’s time, the President actually had greater authority over the Federal Reserve (until the 1935 Humphrey’s Executor decision, the President had the power to both hire and fire Fed governors), but I doubt it makes a difference in our present difficulties. The economy is a mess and if the President were willing to lead, I don’t doubt the Fed board would cooperate.

Every football fan knows that the prevent defense only prevents you from winning. If Obama doesn’t step up and embrace his FDR moment this year, he’s simply handing Mitt Romney the opportunity to embrace HIS FDR moment next year.

(Mike Sankowski here. Steve Waldman has been talking about common ground among the MMT and MM crowds. I think “NGDP level target from President Obama supported by using a Trillion Dollar Coin” is a brilliant mashup! )



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49 Responses

  1. Norme says

    NGDP targeting might have worked when pegged to gold when the dollar could be debased easily. Today it means the central bank will buy unlimited assets to stoke inflation. It supposes the Fed can stoke inflation, other than the supply side kind that affects prices but doesn’t necessarily lead to employment and real consumption based demand.

    It is supposed to shock folks suffering a balance sheet recession into buying that big screen TV before the price rises or into home equity. It’s supposed to shock investors into action, spur the stock market and the wealth effect. So, how’s that working out under our current monetary stance?

    Yea, NGDP targeting, as a central bank policy will not work,. It kicks the can down the road supporting asset prices. It does not float all boats on the sea of liquidity unless the consumer relying on the wealth effect is, well, affected. Now, if NGDP targeting were a productive fiscal policy designed to put money into the hands of the consumer and make something useful, fine. If that means a trillion dollar coin. Fine. If that means we get a little demand inflation instead of fiscal austerity, all the better. We can normalize the economy relatively quickly.

    The bottom line is, simply boosting stock prices will not spur and sustain consumption by itself. We need money in circulation and a productive labor force. Investment will take care of itself in such a case, under easy monetary policy equities are simply overvalued and oil prices are too high. The former is a sign of a healthy economy, the latter is life support.

  2. Vincent Cate says

    Michael Sankowski
    These countries are doing everything in their power to keep their currencies weak against the USD so they can undercut US goods.
    Then, as soon as the currency lost 30%, our export sector would be so attractive to the outside world, we’d be swamped with orders for our goods
    But getting to hyperinflation would require something so far outside of what we’re proposing it is practically impossible.

    Other countries can keep their currencies weak by printing money and buying gold, or anything else. They do not need to buy US dollars or Treasuries to keep their currency weak. This is a common flaw people make. If the US dollar looks like a really bad investment then central bank reserves will move to other assets.

    The USA is importing much more than it is exporting. If the currency goes down in value by 30% it hurts the US on buying oil and other imports much more than the small export sector gains. In the 1970s when the dollar became worth less and oil more expensive it did not help the US economy. The impact of higher oil prices hurts everything right away. While it is true that exporters would be swamped with orders, ramping up production for exports takes time to build factories and is really slow change. This is like the “broken window fallacy” where an economist just sees the good effects and does not look at the bad effects.

    When a government makes a country a bad location for business the factories and means of production are moved to other countries. This is clearly happening with the USA. When a country gets hyperinflation people from other countries come in and buy up stuff really cheap. Everything from breakfast to cars to factories is cheap. Anything that can be taken out and moved to a more reasonable country will go. Hyperinflation is not good for a countries productive capacity.

    • Michael Sankowski says

      They do not need to buy USD to support the price of the USD, but they do. You need to remember somebody needs to sell their currency and buy USD for the relative prices to change.

      They could rely on the market to do it for them, but why let someone else do it?

      Then hyperinflation just doesn’t “happen”. We don’t go from 2% inflation to 200% inflation in one day. nope, there are stops at 5%, 10%, 20%, 50%, 100%.

      The weaker USD at those points would cause a massive demand for U.S. made products and services. All those programmers getting put out of work by Chinese and Indian programmers, the millions of manufacturing jobs – all of those would come back. The investment opportunity in the US would be huge.

  3. JK says

    “This is why Cullen is pounding the table over productive capacity forming a natural barrier to hyperinflation. It would take a galaxy of monetary and fiscal irresponsibility to overcome the productive capability of the most productive country in human history”

    This seems to highlight one of the major points that MMR says is missing from MMT and other economic analysis. That is, the ability produce things that domestic citizens as well as foreign citizens want to buy is the #1 guaranteer of a specific currency’s value? Is this an accurate protrayal of what you all are saying?

    • Cullen Roche says

      We’re just pointing out what should be an obvious fact. The backbone of any economy is production and the higher the quality of this production the faster trajectory at which the living standards of that society is likely to increase. At times, MMTers even say that we don’t even need to produce things on our own so long as we can rely on someone from abroad to produce them. Production takes a back seat in MMT. As long as you can fill the aggregate demand hole you can just keep everything humming along….That seems like a very incomplete view of the world in my opinion and exposes a deep flaw particularly in the foreign sector view from the MMT perspective.

      But honestly, do you guys really want to rehash all of this stuff?

      • JK says


        I don’t know why you’re referring to me as “you guys” …I’m just an economics student trying to learn. I only came accross Modern Money less than a year ago. Have I ever said here or at PragCap that MMT is right and MMR is wrong? Or even argued that case?

        • JK says

          oh… because I referred the MMR people as “you all” ..then must be one of “them” (MMT)? I’m pretty sure I’ve never referred to MMT has “us” or any pronoun that includes me in it.

          Like I said, I’m just trying to learn. I happen to me a M.A. economics student at UMKC, but this is my first semester. Forgive me for still trying to undersand how MMR and MMT differ. I mean’t no offense by referring to MMR people as “you all.”

        • Cullen Roche says

          Yes, your comment came across as though you were writing from an opposing position. Apologies for assuming as much.

      • Tom Hickey says

        Cullen, I am just interested in what specifically MMR would do differently, even if it is just incorporates what is already out there without change. I don’t think it is just me either. This question comes up with others as well. The assumption is that you folks will articulate this when you get time, since you seem to imply that this is a key aspect of MMR.

        As Scott, has said, MMT doesn’t have a lot to say about endogenous money or production because MMT economists accept the analysis of PKE regarding these areas. I am aware of how and where MMT economists disagree with some PK economists, wherein lies the distinction between PKE and MMT. But Scott could explain that a lot better than I, since I am not knowledgeable in the lit. of PKE.

        • Cullen Roche says

          Tom, you’re asking for rigid answers to dynamic problems. As if there is a one size fits all answer to the economy. I am afraid I don’t have that answer and neither does MMT. You and I know MMR is incredibly heterodox and far more flexible than MMT. We don’t have one rigid set of proposals or fixes for the economy. And we’re much more open to other schools of thought which is why you see us gaining traction with a broad audience. I am afraid you’re looking for answers to questions that cannot be answered. I know it’s very appealing from an academic perspective for MMT to have one rigid set of explanations and proposals that supposedly solve FE and PS, but the reality is that the world is not that simple. And it’s not MMR’s job to provide those fixes. We have a broad array of opinions regarding policy and all of us don’t agree precisely, but they’re certainly not mainstream ideas and they’re certainly not rigid and they’re most definitely not framed as core components of MMR that are “central” to its existence. The economy is too dynamic for such rigidity.

        • Tom Hickey says

          Thanks for the clarification, Cullen. That is quite different from what I had assumed based on what you said. So one of your main objections distinguishing MMR from MMT is that MMT takes a rigid and inflexible approach while MMT takes a dynamic flexible one, applying solution to current problems eclectically without taking a specific view regarding policy, strategy, or tactics? Sort of an ad hoc approach within an overall framework of how the economy functions based on a synthesis of prior economic views?

        • Michael Sankowski says

          Well, ad hoc might be a bit extreme. Imagine a martial arts master, fighting an opponent. Are the masters techniques ad hoc? Yes, and no. He applies a series of standard techniques informed by his personal strengths and real time necessity of the fight.

          I’d say being informed by PK, Godley, MMT, and some of the contributions of MMR to form policies which apply to current political and economic reality isn’t exactly ad hoc. Neither is it some rigid structure.

          I am not claiming we’re some masters or gurus.

          We do know the goal is getting more people working.

          I won’t let my principles get in the way of getting more people working. If I have to make deals with people who support NGDP per capita level targeting to achieve this goal more quickly, I’ll do it over and over again. I won’t let the good be the enemy of the best.

        • Tom Hickey says

          Good analogy with the marital arts, which I have been practicing for decades, i fact I trained in boxing in highschool, then switched to internal Chinese systems later (taiji, bagua, and da cheng). Da cheng doesn’t use forms, and I also studied a nameless-formless method, so I get flexibility of approach.

          In the martial arts, tactics are ad hoc, determined the situation at hand. However, policy and strategy are ingrained through long practice, so that the tactics are intuitive (“practice natural”) and happen without having to think (there’s no time to think). So you are saying that there is a relative fixed theory (martial arts style), as well as policy (rules of engagement in different contexts — terminate, disable, control) and strategy (personal adaptation of theory and policy). Is that about right?

        • beowulf says

          Brazilian Jiu-Jitsu was added to Army (and later, Air Force) basic training after the Pentagon decided they wanted to be on whatever side the Gracies were on. :o)
          “I remember the Gracies came up and we had a class with them; Royce Gracie, he was the first guy,” recalled Robinson, who serves as the Level IV Master Trainer for 3rd Brigade, 2nd Infantry Division. “He had 30 guys from the battalion and he went down the row and beat each dude individually in a row, no breaks, and he was barely breaking a sweat by the end. He was choking dudes out, arm bars, leg bars – you name it, he was throwing it on these guys. He was just destroying these guys. And then he was like, ‘OK, now let me show you how I did it.’ And that’s what started the combatives program for the Ranger battalion.”

        • Michael Sankowski says


          I studied for about 8 years all together myself. I used to be able to move ok. I did hapkido and then tiajitsu/ninjitsu.

          I’d be interested in the nameless/formless art – where did it originate? All of the schools have background somewhere.

        • Tom Hickey says

          I studied this with an ex-Army master sergeant who had learned it from a Taiwanese journalist with whom he had studied for twenty years. I don’t know where the lineage of the Chinese person and I don’t know that he ever even revealed it. The Chinese were very reticent to talk about these things at that time. It’s only recently that they opened the closet door to non-Chinese.

          The basis of the teaching was Taoism. The marial arts aspect was based on developing intuition and awareness, Very subtle, which is why no name and form. Very Taoist. We studied Taoism by living it as part of the training. My mentor emphasized applied Taoism more than martial arts, in fact. He saw martial arts as just one aspect among many, and the others actually much more useful to modern life than martial arts. I was a grad student in philosophy at the time and that philosophical ( what I would call “spiritual” basis ) appealed to me rather than just fighting.

          There is also the qigong aspect to the internal Chinese arts, martial and otherwise. Qigong means “energy work.” It is all about developing internal energy and subtle awareness.

          According to Taoism, name and form result in rigidity. Rigidity results in predictability, what martial artists call “signaling.” The objective, as in Western boxing is to send out no signals and read the signals that the opponent is sending subliminally. This is quite useful in the whole of life, as one may imagine.

          Very Chinese, minimal words needed, and experience emphasized over explanation.

        • Michael Sankowski says


          I think this post gets to some small part of the question you are asking.

          JKH was very careful about keeping the discussion focused on the technical details in the S = I + (S – I) discussion.

          I was not careful at all.

          I said:

          “Personally, I think the (S-I) is necessary to give S and I long lasting nominal meaning. This difference allows the private sector to issue meaningful and measurable claims against value created. If I own 50% of a company, what exactly does that mean to the rest of the world? S-I gives that 50% a widely agreed upon unit of account to measure value. It’s a massive benefit the government provides the private sector.”

          which speaks directly to the relationship between productivity and nominal value. And

          “Well, what is common stock issued by a company? We know Savings is not Investment. Does the real world value of Apple computer really net out to zero? Of course not. We are happy as hell the company Apple computer issued claims on equity worth many billions of dollars out in the world. People accept those financial assets as being valuable. Fortunately, we have a nominal amount of (S-I) to help make the nominal valuation of those claims more accurately reflect the real world value relative to other items.”


          “Then, this equation addresses Godley’s Theorem, which states the fiscal balance must increase for growth to happen. We can increase credit or government deficits, or the CA deficit, but usually the least disruptive of these to increase is the government deficit.”

          I am proud of that piece, even if it’s not technical. It’s vastly hard to explain this stuff, and my time is limited.

        • Tom Hickey says

          Thanks, Mike.

  4. Tom Hickey says

    MS: “This is why Cullen is pounding the table over productive capacity forming a natural barrier to hyperinflation.”

    It’s generally agreed that this is matter for the private sector and some hold that government policy can play a positive role. The usual prescriptions in this regard are funding education, R& and infrastructure, and keeping interest rates attractive for investment. Keynesians focus on maintaining demand and full employment. Michael Hudson also suggests taxing economic rents and leaving productive contributions alone.

    Keynesians focus on maintaining demand (income) and full employment.The neoliberals take a supply side (investment) approach, recommending more deregulation and less intervention in markets.

    Where does MMR stand on specifics? How about a post on how MMR sees productive capacity (growth) and worker productivity (standard of living) being increased.

  5. beowulf says

    The sad part of this story, I should have mentioned originally, is that Beckworth (and Romer’s) mention of a “Volcker moment” makes it sound like Paul Volcker is deader than Kurt Cobain. Volcker is still very much alive and is, indeed, the road not taken in the most colossal presidential appointment screwup since Eisenhower picked a Supreme Court justice as a result of his Attorney General being late to a speech (“Not until after Eisenhower had announced the selection was I informed that Brennan was only reading the prepared address of Chief Judge Alfred Vanderbilt, who was ill.”).

    For God knows what reason, our President though Tim Geithner was better qualified to be Secretary of the Treasury than Paul Volcker. I’m sorry, anyone who thinks, who is capable of thinking that, is a moron– Robert Rubin excepted (he had his Citigroup shares to think of).
    From that early point flowed a series of bad decisions in both policy and politics. At the time, a frustrated Sen. Byron Dorgan, a Democrat, warned Obama: “You’ve picked the wrong people. I don’t understand how you could do this. You’ve picked the wrong people!”

  6. Obsvr-1 says

    US would be better off if Obama were to have a Warren G. Harding moment.

    • KainIIIC says

      That’s pretty cryptic. You think Biden would be better?

      • Obsvr-1 says

        nope to the dope, but that would just be temporary.

  7. geerussell says

    I’m happy to see a monetarist awakening to the need for fiscal policy. The last sentence in the Beckworth quote struck me as a little sketchy though.

    ” If NGDP went above the target the Treasury Department would issue bonds to withdraw the excess money.”

    Am I reading that wrong or does bond issuance not do what he thinks it does?

    • Detroit Dan says

      I appreciate Cullen’s outreach to Beckworth and others of goodwill. But let’s not pretend that we agree with the Monetarists on how the economy works…

      • Cullen Roche says

        I very much agree Dan. We don’t agree on how the system works. But we need to reach out and compromise because no one will agree on everything with everyone. I think David is reaching out. We should reach back. We won’t agree on everything, but there IS overlap. I think David and I are finding some of it….I think there’s more there.

        • Detroit Dan says

          Agreed Cullen. Very constructive approach!

      • Michael Sankowski says

        Yeah, I know. We do not agree on that.

        But lets focus on what we do agree on.

        First, we agree there is a shortage of aggregate demand.

        Then, we agree an NGDP level target is far superior to (an inflation target and a vague promise to help out employment).

        I am taking Steve W’s idea to heart and seeing where it goes. I had reached out to Steve on this many months ago now, and he came up with a path which works better than the status quo and is possible.

        David B is a quasi-MM, but heck, he was able to embrace the Trillion Dollar coin, and call for fiscal. It’s the least we can do to make a step to NGDP level targeting.

        Would I prefer something like the TC rule? Yes.

        But if we can get Scott Sumner to say “Yeah, let’s have President Obama announce an NGDP level target and finance it with a few Trillion Dollar Coins until Bernanke wakes up”, I’d pop a bottle of champagne.

        The goal here isn’t to be right. The goal is to get the economy moving.

        • Detroit Dan says

          “The goal here isn’t to be right. The goal is to get the economy moving.”

          Actually, I think that part of the goal is to be right about how the economy works. It was Beowulf who pointed me to this paper by Colander which describes the demise of functional finance in theory.

          Quoting Colander: Why were the neoKeynesians willing to agree to such a synthesis that theoretically precluded Keynesian economics? As I argued in The Coming of Keynesianism to America their primary interest was policy; theory for them was something that led to a model with acceptable policy conclusions… Like many compromises based on short-run policy concerns, the neoKeynesian compromise had within it the seeds of destruction of neoKeynesian economics.”

          There is also a new book by Thomas Palley that argues: “the crisis is at a deep level the product of a flawed economic policy paradigm derived from a set of flawed economic ideas. Escaping the crisis means replacing that policy paradigm and the ideas from which it derives. That is a massive challenge involving both a political contest and an intellectual contest. We need to win both.”

        • Michael Sankowski says

          :) Well, part of why MMR was started was to keep the economics separate from the policies. We’re Godleyists at the core, but we’re aware of how we can advance our goals too.

          I should write a post on this. Great stuff, DD

        • Detroit Dan says

          Thanks Mike. I’ve been citing MMR a lot, most recently when someone asked about MMT’s take on the trade deficit…

  8. Tom Hickey says

    Looks to me like DB just threw in the towel and admitted that a fiscal solution managed by the Treasury is needed now that monetary policy has shown it self to be ineffective. If he wants to call that NDGP targeting, so be it.

    • Cullen Roche says

      I think he’s just being open minded. This idea is as likely to be implemented as NGDP targeting of the kind David would prefer. But I think he’s acknowledging a really important fact and one that I’ve been trying to emphasize in recent weeks – there’s a lot of overlap in what the different schools are all trying to achieve and a little compromise from each might actually move us forward towards something that can then be implemented. Personally, I applaud David’s open mindedness and I think the rest of us would be wise to approach policy and ideas in the same manner. I think there’s a great deal of potential collaboration and enlightening discussion that can come from simple compromise like this and I think David is taking a brave and important step in the right direction. MMR hopes to reciprocate when possible.

      • beowulf says

        “President Obama could do this by announcing a NGDP level target that would be implemented by the Treasury Department creating large-denomination platinum coins that would be deposited at the Fed and used to fund checks to the public. The Treasury Department would keep making these coins until the the NGDP level target was hit.”

        To clarify what Beckworth wrote here, I took this to mean Tsy would fund the budget deficit with coin seigniorage instead of issuing new T-bonds (or raising taxes). However, his phrase “used to fund checks to the public” ambiguous. I don’t see any way for Tsy or the Fed to get around the need for congressional appropriations on new spending. However Tsy could fund already approved appropriations (by filling the deficit with seigniorage). Can’t speak as to the NGDP policy ramifications, but it seems to me that freezing the debt clock (or in the case of buying back Fed-held debt, rolling it backwards), would have the greatest political impact.

        • Obsvr-1 says

          it would be very difficult to get the congress to appropriate the necessary spending that is being suggested with “Platinum Coins” or “Direct Seiniorage”; however they could very quickly reduce SS (payroll) tax to zero (about $800B) not collected ( or “spent”) back into the private sector to drive Agg Demand. If that is not enough, they could eliminate the 18% gas tax. They have about $2.8T in total tax intact to play with.

        • Dan Kervick says

          Exactly beowulf. I just made that very point on Beckwith’s site. Under the US system of government, for the Treasury to “issue checks”, the spending needs to be authorized by Congress. The Treasury can mint and cash the coin all by itself to boost the balance in the public Treasury. But only Congress can authorize the disbursement of funds from the public Treasury. There is no imperial presidency edict to work around the need for Congress to spend; just as their is no imperial central bank workaround.

          I really don’t get it. Why have so many otherwise smart people on both the center-right and the center-left spent more than two years ignoring the heart of the problem and the location of the solution? Why aren’t concerned economists lobbing salvo after salvo at one of the most incompetent, malevolent, ignorant and criminally negligent Congresses the United States has ever had? Why aren’t they pummeling the timid and conformist President who doesn’t want to confront them? Capitol Hill and the White House are ground zero; that’s where the death star is. It’s not in Ben Bernanke’s office.

          The politicians have spent two years leaving people unemployed and firing other people on purpose. They have starved the country of net financial assets on purpose. They dangled US government default before the world audience on purpose. The White House appointed an addled commission of incompetent deficit cranks on purpose. They have decriminalized mass financial fraud on purpose. Congress is even now passing budgets on purpose to grind the country down under austerity , with nothing to hang that lunacy on but Ayn Rand’s children’s novels and ridiculous theories about crowding out and contractionary expansion – theories that have been spectacularly and laughably disproven every day for three years now in the zany European laboratory of Crackpot Cameron and Mad Doktor Merkel!

          Congress really ought to be dragged out onto the mall and beaten with sticks. But maybe we could at least get economists to rise up and demand they take all those big donor di**s out of their mouth and act?

          The Federal Reserve is a creature of Congress and has all of its powers due to a legislative delegation by Congress of the monetary authority constitutionally granted to Congress. Any time Congress wants it could pass a law directing the Fed to credit the account of the Treasury by any amount Congress desires. It could then pass a series of laws directing the Executive Branch to spend that money. It could do this without raising taxes and without borrowing a single additional cent. If for some reason they prefer that Treasury mints a platinum coin to create the fat additional balance in the Treasury account, that will work too. But these are just two different means for implementing the same result: making money form scratch for the government to spend.

          If someone wants to add something to the legislation calling this new phase of activity “NGDP level targeting”, I have no objection. I would just as well prefer they call it “SSM targeting” – as in “spend a shitload of money targeting.” Anyway, can’t we agree ahead of time that any new technocratic targeting regime is likely to collapse in short order anyway, just like monetary aggregate targeting did in the past?

          Is this really rocket science? In practice isn’t the idea just to spend a shitload of money until things are booming and inflation is kicking in, and then to cut back on the spending? Does the practical challenge really change if you come up with some technical targeting formula for doing this, setting a numerical target that probably can’t be hit with accuracy and will be ignored anyway as soon as practical political expediency demands it?

        • Detroit Dan says

          Dan K–

          Well spoken.

          I have been referencing your comments from the discussion with “K” at Interfluidity (SRW’s post on the depression choice), and they were well received. I appreciate your work as you have saved me a lot of time and effort by thinking various things through and providing coherent comments and explanations…

        • Dan Kervick says

          Thank you DD. K doesn’t seem to think so :) I have to admit that I find that whole subject very difficult. Negative nominal rates is a world so different than the regular world that it is very hard to reason through what stays the same and what changes in that environment.

        • Michael Sankowski says

          I am reading something right now (on David B’s suggestion) about deflation (!! yep) being a good thing. It’s not entirely crazy, and it might have something useful to add to the conversation.

        • Tom Hickey says

          I can see disinflation as having some benefits but outright deflation in the context of high levels of private debt? Sounds like a recipe for disaster. I’ll be interested to hear your take on it.

        • myth buster says

          Debt or no debt, foreign countries own trillions of U.S. dollars or instruments redeemable for U.S. dollars. If they get the impression that the US is fundamentally unserious about EVER balancing the budget, and instead intends to follow the Weimar Republic’s decision to solve the deficit by printing money (or doing the equivalent), all of that money will be flooding the US markets to buy up whatever capital goods and commodities they can buy, lest they be caught with a currency that will rapidly spin into hyperinflation. The problem is not so much the money printing as the fact that you can’t control the reaction of foreigners to it and thereby avoid a panic. Panic kills, and once a stampede is started, there is no stopping it until it runs its course.

        • Michael Sankowski says

          You are missing something absolutely gigantic in your chain of logic.

          There is simply no way China would allow their currency to appreciate against the USD/EUR/JPY any faster than it is currently appreciating. If they sold their Treasuries, and then sold the USD the received from those sales, the CNY would skyrocket against the other currencies of the world

          This applies to every major foreign holder of U.S. Treasuries. Selling USD in exchange for any other currency causes their currency to appreciate.

          The situation you describe – the USD loosing 50% of its value against the CNY and JPY – would almost certainly cause the greatest economic boom of our lifetime

        • Dunce Cap Aficionado says

          “The situation you describe – the USD loosing 50% of its value against the CNY and JPY – would almost certainly cause the greatest economic boom of our lifetime”

          That might be the single best example of how misunderstood the global monetary and economic paradigm are by even very, very smart people.

        • Dunce Cap Aficionado says

          Sorry that was worded poorly, looks like I’m calling you smart and saying your wrong. Obviously not the case.

          The fact that ‘losing 50% of its value (keywoard coming…) against other currncies is considered ‘bad’ by so many smart people is what I was really talking about.

        • Michael Sankowski says

          No worries!

          This gets back to Cullen pounding the table about productive capacity. Can you imagine U.S. products at a 50% off sale around the world? Our CAD would go to CAS by 15-20%. Yes, we’d have inflation, but who could care when you’re working 50 hours a week and getting a 10% real-money raise?

          Don’t forget that 3 sector balance model- we want to close that CAD gap, and one way to do this would be to devalue the USD.

        • Michael Sankowski says

          Oh yeah! That’s my point.

          People claiming foreigners would sell treasuries and abandon the USD are missing the entire point of the foreign countries holding treasuries and USDs.

          These countries are doing everything in their power to keep their currencies weak against the USD so they can undercut US goods. If China decides to bail on the USD, all of a sudden the US is the lowest cost producer of nearly every product on the planet, and we produce high quality products.

          A weak USD is the last thing China, Japan, Germany, Russia, Brazil, India, Korea, France, the UK, and the rest of the world wants. We couldn’t easily devalue the USD against these currencies, because they like the USD being stronger.

          Then, as soon as the currency lost 30%, our export sector would be so attractive to the outside world, we’d be swamped with orders for our goods.

          This is why Cullen is pounding the table over productive capacity forming a natural barrier to hyperinflation. It would take a galaxy of monetary and fiscal irresponsibility to overcome the productive capability of the most productive country in human history.

          Not that it couldn’t be done. We could have hyperinflation here, and we could devalue our currency. But getting to hyperinflation would require something so far outside of what we’re proposing it is practically impossible.

        • JK says


          Is it really that easy to depreciate the domestic currency? My suspicion is that if the U.S. attempted to depreciate, they’d be met tit-for-tat… as countries like China responded accordingly to maintain the status quo. No?

  9. Cullen Roche says

    Plus, we’re likely to have another debt ceiling debate later this year after the elections. We could kill two birds with one stone!

  10. Detroit Dan says

    It’s Volcker, with a “c”.

    In my opinion, there is no more chance that Obama will have an FDR moment than there is of Bernanke having a Volcker moment.

    Good to see Beckworth getting with the MMT/MMR program…