Keeping it Real: Cash, Clunkers and Why Our GrandChildren Have Nothing to Fear

Conversation fragment overheard the other day:

“This deficit thing. It worries me. My grandchildren you know?”  To which his interlocutor replies:  “Yes, it worries me too. We just can’t keep this up.”

And so it goes.  The grandchildren are trotted out.  We shudder in collective guilt, thinking about the financial hardship that our selfishness imposes on the progeny of our progeny.  We acquiesce to the necessity of it all, to the “deficit reduction” measures that we are told will, like some awful tasting cold medicine, go down hard but cure all.

And on the left, we the progressives, tip our hats in this direction when we urge tax increases in the midst of a recession or at best a weak recovery, when we quibble about the size of the “problem” and how it can “solved” at some later point, when we worry about sounding shrill and being left out of the debate lest we be viewed as not sufficiently “hard nosed” and “realistic.”

And so the game is lost without realizing it, and real pain, real costs, are imposed on our communities in the name of entries in some accountant’s ledger — the homeless really did suffer the knife of the Martin cuts, doctors really did disappear, nurses really did decamp for greener USA pastures, our health care system really was infirmed, welfare recipients really did suffer, the cause of social democracy really did suffer a body blow.  But boy did that ledger look pretty.  Somehow, on the budget debate, mesmerized by numbers and debt explosion equations, we lose sight of real people and real costs, something we normally excel at.

But here’s the thing.  These real losses and the accountant’s logic behind them are all so pointless, so unnecessary, so strategically short-sighted, so “angels dancing on a pin head” in their futility.  There is another way to tackle these issues, understand their dynamics, and pick away at what is admitedly a granite-like policy convention anchored in the concrete of the household budget metaphor.   And that is to realize that debt — issued in our own truly sovereign currency (not Italy, not Ireland, not Greece, not Spain, not the Euro) — is nothing more than a distribution mechanism, a time machine of purchasing power from now and into the future, a legal IOU qualitatively different from cash only in its duration but prized by the financial sector for its ability to generate benchmark, rock-solid returns even in times of financial crisis.  But it has no or little bearing on the real capacity of our society to produce now or into the future. It does not crowd anything out.  It does not rob from the ability of our children and their children to consume food, live in homes, drive modern vehicles, attend or enjoy the benefits of a quality education without indenturing themselves for decades to come.   Unless of course we let it.  Budget cuts today work against all those things tomorrow — they erode education, they forestall necessary environmental action, they eliminate healthy food options, they put people on the streets.

As an MMT luminary likes to rhetorically ask : “How many vehicles have we sent back in time to 1947?”  Think about that statement. The fact is that we are the beneficiaries of the spending — yes deficit spending — that came before us through the consumption of the real goods that this spending created.  The schools, roads, water works, sewer treatment, agricultural output (subsidized no less), financial services, and so much more that the horrific, appalling deficit spending of yesteryear made possible.  And yet the resulting “mountain of debt” (not even necessary debt but that is for another post) that was “imposed” on my parents or even my generation has never felt like anything other than a gift except when it was used as a powerful guilt-inducing metaphor to ram down budget cuts.

And so that this post doesn’t offend too greatly, so that my peers do not dismiss my post as the rant of yet another frustrated outsider but really an insider, I will conclude by urging the reader to check out this post by James Galbraith, the heretic whose graced the PEF with his presence a few years back.    The salient bit: “When our Treasury wishes to make a payment, it sends a signal, by computer, to the payee’s bank. The bank posts the payment by changing a number in the bank account of the payee. The payee, on checking his or her account, now realizes that she or he has a larger balance, and so larger spending power. That’s all there is to it.”  Or read this post by Randy Wray and Marshall Auerback where they rightfully demonstrate why so much of the US and Canadian left is just plain wrong about  Obama’s recent budget.

Read these pieces a few times over.  Let it sit.  Follow the logic.  And let’s prepare to fight the long hard fiscal battle that begins with developing the intimate knowledge of the institutional mechanisms that really do give us, our society, the power to make the world a better place for our grandchildren.



  • Yeah, OK. Borrowing is fine. Until it becomes significant enough on a macro scale that it starts making the Canadian dollar less credible, which leads to inflation, which erodes everyone’s purchasing power. If debt is so great, why not just spend, spend, spend, and not tax anyone?

  • David: “If debt is so great, why not just spend, spend, spend, and not tax anyone?”

    So long as we are using the spending to create real wealth in either good or services, there is no reason whatsoever not to do exactly as you suggest.

    Once our economy (the real one that makes actual things and valuable services, as opposed to the fantasy that we call the “monetary economy”) reaches it’s capacity to produce and so cannot produce any more, then and only then do we have to start taxing in order to destroy excess spending power and avoid unnecessary inflation.

    In a modern monetary system, such as we actually have in Canada (but pretend, against the reality, that we do not), the purpose taxation serves is to destroy excess money by taking it out of circulation, and to give the money presently in circulation value by virtue of the fact that taxes have to be paid in that currency.

    We are presently allowing our illusions about what money is and what it is for, to make ourselves poorer and poorer, for no good reason at all.

  • The mistaken idea that governments are like households, and must arrange their finances accordingly seems to have a long life. It has caused great grief in recent years, as deficit hawks have gained authority in all federal political parties. Deficit doves — deficits are needed to fight recession — seem already to have flown off for the winter, without waiting for economic recovery. De-bunking this analogy remains a priority for anyone who thinks democracy is important.
    The analysis of Wray and others from the Levy Institute needs to be balanced by an understanding of the difference between a reserve currency country, and a country that needs to amass U.S. dollars in order to participate in world trade and finance. What Wray calls a sovereign country is one with a floating exchange rate, as well as a national currency. In practice that means the U.S. dollar floats and others adjust to it by changing interest rates (Canada), or controlling capital flows (China). While the Canadian government can spend without borrowing or taxing because it has a national currency, it must be conscious of the foreign exchange value of the Canadian dollar, and the flows of international capital.
    The world cannot have a balance of payments deficit. Ideally countries would only borrow in their own currency, and pay for imports in their own currency. Getting to this scenario would require the world adopt a version of the International Clearings Union proposed by Keynes at Bretton Woods. Not many people understand this idea, and it needs to be discussed more widely. So far the use of the U.S. dollar, and the exorbitant privilege it confers on the issuers (including global banks) has precluded debate on international monetary reform. The growth of foreign exchange markets since 1944, have made the Keynes plan look rather quaint. But as the house of cards comes down, we should know there is a better way of organizing international monetary relations.

  • Duncan,
    Couldn’t agree more re: household debt metaphor.

    On the reserve currency issue, Bill Mitchell has written a helpful post that addresses precisely this concern. I find it convincing although I confess to having some residual un-articulated angst about the external effects of a pure MMT world.

    In any case, the major point stands: current account deficits are an indication of the desire of foreigners to accumulate our currency (they don’t ‘finance’ anything, rather we supply that which they demand) and imports are a real benefit; exports a real cost.

    Here’s the link:


  • Hi Arun,
    Thanks for the link. The post does not get off to a promising beginning. “Billy” writes: “The Bretton Woods System was introduced in 1946 and created the fixed exchange rates system. Governments could now sell gold to the United States treasury at the price of $USD35 per ounce. So now a country would build up USD reserves and if they were running a trade deficit they could swap their own currency for USD (drawing from their reserves) and then for their own currency and stimulate the economy (to increase imports and reduce the trade deficit).”
    How can stimulating imports reduce the trade deficit?
    Overall the author make some perfectly valid points about imports being a benefit and exports a cost. That jibes with my long standing policy conclusion: you only export in order to import.
    Unfortunately the whole post reads like a “thought experiment” of the type Robert Solow is well known for. I hold you need to start in the real world where floating exchange rates do not float, and yet still require higher levels of foreign exchange holdings, than were needed under fixed rates (that were not fixed).
    When he argues that a current account deficit implies foreigners are accumulating assets in the currency of the deficit country, he makes the same conceptual error neo-classical economists have made. He has no concept of power. Is Haiti borrowing in its own currency? Most countries cannot borrow in their own currency except from the first credit tranche of the IMF (borrowing back their own deposit of foreign exchange).
    Above all he neglects what is quaintly termed financial intermediation. The derivatives market got its start in the 1970s after the Europeans decided not to buy U.S. dollars, thus “floating” their currencies. Full scale financial speculation is revealed by FX markets churning between $3 trillion and $4 trillion a day, when world trade, annually, is about $13 trillion.
    Reliance on some imagined perfectly efficient foreign exchange market is not going to help domestic monetary policy and fiscal policy work together more effectively, which seems to be why Billy argues for free floating exchange rates. When I hear the words free and markets uttered in the same breath, my sceptical instincts are aroused.
    Overall I like much of the story being told by the fiat money school. However, the main story of the economy remains structural, and medium term, and requires policy changes that address the structural flaws and imbalances. Monetary policy and fiscal policy are not enough.
    The external sector has not been successfully implemented into their analysis. Major policy work still needs to be done on banking and derivatives. Most mainstream American economists still talk as though exchange rates are determined by trade flows, see Dean Baker or Krugman, for example. The fiat money school needs to get a better theory than that.

  • You know Duncan, that brain of yours sure has an uncanny capacity.

    I just wanted to add, the real problem with debt, deficit and Keynes, is somehow thinking that everything somehow will end up working and account will actually get settled.

    Truly it is a quite simple equation that the world is again stuck on.

    Cultural belief in the fundamentals of an unworkable system.

    For profit needs and wants fulfillment do not provide for adequate unprofitable needs and wants fulfillment. Hence deficits.

    Austerity will prove to be just as destructive to profit seekers as public utility seekers.

    A profit seeking saturation level is no longer adequate for balance, the system has shown us that over the last 30 years.

    It seems Public and private debt are a necessity, so why can’t we redo the math, change the culture of who owes who and who gets rewarded and bailed out when the system fails and
    get on with the green revolution, which will be more important to the profit seekers that resist change in the economy. Green is more important than roads sewers and other such profit enablers.


    roads, sewers,

  • Re Duncan Cameron at 12:17:

    ”However, the main story of the economy remains structural, and medium term, and requires policy changes that address the structural flaws and imbalances. Monetary policy and fiscal policy are not enough.”

    I agree completely. But Arun’s main point in the original post is that many many people are paralysed by the belief that the finances of a sovereign government are the same as those of a household. They believe that if we spend too much providing ourselves the goods and services we need to live a better, fairer, greener life, we’ll mortgage our children’s future, etc.

    Hence, due to a misplaced focus on financial ratios, we indeed wind up mortgaging our children’s future by not providing them the services they need for a better and greener life.

  • Monetary and fiscal policy can certainly make things worse, and have done so consistently. Providing for our grand children requires that stop, and be replaced by some short run policy choices more in line with real goals such as reducing unemployment, and poverty. But it means structural change as well. The fiat money people seem to neglect the who owns what question, and the who does what question, and even the who gets what question. My point is that none of these can be resolved by interest rate targets, or state budgets alone.

  • The deficit spending of the near future is unlike the “deficit spending of yesteryear” which may indeed have built “schools, roads, water works, sewer treatment” etc in that a significant proportion of futue deficit spending will involve sending government cheques to public sector retirees who in turn spend it on a winter vacation (or longer) in Florida. In other words the return on spending in terms of benefit to future Canadian generations is far lower than in the past.

    Why should today’s 40 and 50-somethings agree to rollbacks of their retirement and healthcare benefits in order to fund early childhood education, anti-poverty programs, or infrastructure investment? There are a lot of them, they vote more often, and the kids and the disadvantaged of today are often second-generation Canadians, the offspring of immigrants with which today’s middle-aged and older voters don’t closely identify with.

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