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10-22-2011, 12:26 PM   #1
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An Insurance Company With An Army

Krugman is funny..........

I gather, from what Iíve been reading and hearing in various places, that the right-wing line is that itís all Solyndra ó that your tax dollars are going to pay for vast numbers of wasteful projects.

Now, even the Solyndra story is a lot more nuanced than that. But this seems like a good time to repeat, once again, the truth about federal spending: Your federal government is basically an insurance company with an army. The vast bulk of its spending goes to the big five: Social Security, Medicare, Medicaid, defense, and interest on the debt.

But what about recent deficits? Theyíre caused mainly by a fall in revenue and a mostly automatic increase in spending on safety-net programs. Oh, and the federal government has been providing aid to state and local governments, largely to limit layoffs of schoolteachers.

The amounts spent on anything remotely resembling Solyndra is a rounding error on a rounding error. Itís just not what your government does on any significant scale.

And if you want smaller government, either youíre talking about cuts in the big five, or you have no idea what youíre talking about.
sort of..........

10-22-2011, 01:51 PM   #2
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O/T addendum Re: Krugman.. a funny thing happened that put 2 things together
MMT, Again - Readers' Comments -
Dr. Krugman,

Two comments:

(1) You're still confusing a "liquidity trap," which is only applicable under a fixed foreign exchange rate regime, for a flexible foreign exchange rate regime Japan-like balance sheet recession/contained depression (households in the case of the US's post-credit bubble collapse). Well, we're no longer operating under the former.

(2) You continue to believe in the textbook myth of the money multiplier and that commercial banks actually lend reserves into the real economy. This is false.

Aside from refuting the notion that a country such as the US can face solvency risk, MMT's strength lies in its understanding of modern banking mechanics and their relation to Federal Reserve operations, as well as its appreciation for the radical differences between fixed rate and floating rate FX regimes. These are the two main areas where you still need to do a bit more digging, IMHO.

And 2)

The Money Multiplier: Fact or Fiction?

During the financial crisis, the divergence has been even greater. Reserve balances have
recently increased dramatically, going from around $15 billion in July 2007 to over $788 billion
in December 2008. Despite this increase by a factor of 50, no similar increase in any measure of money, as suggested by the multiplier, could be found. Hence, while the actual multiplier was
about twice the theoretical multiplier in 2003, it was about 1/50th of the theoretical multiplier in
2008. Considering other measures of money, the monetary base, the narrowest definition of
money, doubled over that period while M2 grew by only 8Ĺ percent.3
Casual empirical evidence points away from a standard money multiplier and away from
a story in which monetary policy has a direct effect on broader monetary aggregates. The
explanation lies in the institutional structure in the United States, especially after 1990.
Since 2008, the Federal Reserve has supplied an enormous quantity of reserve balances
relative to historical levels as a result of a set of nontraditional policy actions. These actions
were taken to stabilize short-term funding markets and to provide additional monetary policy
stimulus at a time when the federal funds rate was at its effective lower bound. The question
arises whether or not this unprecedented rise in reserve balances ought to lead to a sharp rise in
money and lending. The results in this paper suggest that the quantity of reserve balances itself
is not likely to trigger a rapid increase in lending. To be sure, the low level of interest rates could
stimulate demand for loans and lead to increased lending, but the narrow, textbook money
multiplier does not appear to be a useful means of assessing the implications of monetary policy
for future money growth or bank lending.

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