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The CBO should be embarrassed......In one short paragraph they get so many economic concepts and facts wrong that everyone associated with this report should be summarily fired.  I take it as a testament of just how broken the neo-liberal economics framework is that such flawed logic and analysis can be accepted as gospel.  What hope is there for a prosperous American economy and society when so many falsehoods can be spread without so much as a whimper of criticism from the mainstream media and economics communities.  Here's the full link to the executive summary of the CBO's most recent budget projections report:

http://www.cbo.gov/...

The paragraph in question is the second from the bottom but I'll blockquote it here so that we can go through the misinformation line by line:

"Such high and rising debt later in the coming decade would have serious negative consequences: When interest rates return to higher (more typical) levels, federal spending on interest payments would increase substantially. Moreover, because federal borrowing reduces national saving, over time the capital stock would be smaller and total wages would be lower than they would be if the debt was reduced. In addition, lawmakers would have less flexibility than they would have if debt levels were lower to use tax and spending policy to respond to unexpected challenges. Finally, a large debt increases the risk of a fiscal crisis, during which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates."
Lets start at the beginning:
"Such high and rising debt later in the coming decade would have serious negative consequences:"
Sounds scary right?  Since US sovereign "debt" is nothing more than the total amount of US dollars that have been deposited into interest bearing Securities accounts at the Federal Reserve Bank and because every Treasury bond, note, and bill is a safe financial asset to whomever owns one.....I think it should be incumbent on the CBO to please explain why an increase in non-Govt financial assets held at our central bank will have 'serious negative consequences' for the economy.

They give a hapless explanation in the next line but leave out two absolutely critical elements.....

"When interest rates return to higher (more typical) levels, federal spending on interest payments would increase substantially."
Yes, if interest rates rise.....interest payments go up.  However, to leave out the detail that the Fed and Chairman Bernanke are 100% in charge of setting and controlling interest rates is a major oversight.  The CBO makes no mention whatsoever about the timing and cause of a possible interest rate increase.  In order to be intellectually honest, they must include something like, 'at some point the Fed will see fit to return interest rates back to more historic norms, however the timing of this decision is at the discretion of the FOMC.'  Alas, their analysis of interest rates is all wrong.  I would like to believe that after nearly 4 years of quantitative easing and explicit zero-interest rate policy by the Fed, people would finally start to recognize the obvious.....that Federal interest rates are not a phenomenon controlled by the market, but a policy variable that is set by the central bank.  I don't know how many times Chairman Bernanke must repeat this, he has never tried to hide this foundational truth.  We can also look to history to prove this point.....In particular, the stagflation episode of the late 70's....its a conventional wisdom myth that Fed Chairman Volcker whipped inflation by raising interest rates above 15% and keeping them there... (of course that period of inflation was wholly due to a quadrupling of the price of a barrel of oil but thats a post for another day).....but is the CBO incapable of putting two simple bits of logic together, if QE can set rates low and Volcker could set rates high, how much more proof does the CBO need to finally admit that they are wrong about the nature of the Govt's interest rates.  Furthermore, the CBO never even tries to explain why the public receiving more interest income from the Federal Govt would be the necessarily and obviously bad thing they so matter-of-factly portray it as.
"Moreover, because federal borrowing reduces national saving, over time the capital stock would be smaller and total wages would be lower than they would be if the debt was reduced."
There is where the CBO goes totally off the rails.  Federal deficit spending DOES NOT reduce national savings.  This is evidenced by the following national financial balances accounting compiled and provided by the St. Louis Fed.  This is national accounting 101 and its a crime that the CBO feels no need to justify why such a statement doesn't comport with the actual evidence of reality.  As we can clearly see, when the Govt's deficit gets larger, the financial assets or savings of the private sector also get larger as a result.  This is exactly the opposite of what the CBO claims, and yet there is no outrage be found anywhere.  Republicans are silent because they mistakenly want the deficit to be smaller, and Democrats are going around thumping their chests because they too, think the Govt should provide fewer financial assets to the public.....Shameful.
"In addition, lawmakers would have less flexibility than they would have if debt levels were lower to use tax and spending policy to respond to unexpected challenges."
This is totally illogical.  The US Govt is a monetary sovereign.  The US Govt is the creator and distributor of our national currency.  Federal Reserve Notes (aka the US dollar) did not even exist until 1913 and the passage of the Federal Reserve Act.  The US dollar is not a commodity that exists in nature, the US Govt creates them by crediting and debiting bank accounts via computer spreadsheets in the digital world or the Fed literally prints the paper version.  This Constitutional right and ability is not somehow diminished because there is more money on deposit at the Federal Reserve Bank.  Although there are many examples of people admitting as much, just watch these short youtube videos (no more than 2 minutes) in the links below of the two most recent Fed Chairmen publicly stating this obvious truth:

Bernanke on how the Fed credits and debits accounts to create money:
http://www.youtube.com/...

Greenspan responding under oath to Paul Ryan about why SS can never become insolvent because the Govt can always create the money to pay benefits:
http://www.youtube.com/...

Greenspan on Meet The Press about why US Treasury bonds are always repaid when they mature and as such why they are among the world's safest financial assets:
http://www.youtube.com/...

So unless the CBO thinks these two gentlemen are lying, the burden of proof should be on them to explain why their claim that the Govt's ability to spend money will somehow be burdened if the public has more financial assets (RE: Treasury bonds).

And in conclusion.......

"Finally, a large debt increases the risk of a fiscal crisis, during which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates."
This last statement is so fraught with mythology its hard to know where to start.  Lets ignore the last two Fed Chairmen in the links above as to the Govt's ability to always create more of its OWN currency.  Lets put aside the reality that the Fed is the body in control of federal interest rates and not the market as is clearly the reality.  And lets conclude with an even more simple proof of how wrong this last line from the CBO is.  The 21 current primary dealers that have the privilege of buying Treasury bonds directly from the Govt, are REQUIRED to offer bids and act as counter-parties at new Bond auctions.  This from the operating policy page at the N.Y. Fed's own website....

"Primary dealers should participate similarly in support of Treasury auctions: the New York Fed will expect a primary dealer to bid in every auction, for, at a minimum, an amount of securities representing its pro rata share, based on the number of primary dealers at the time of the auction, of the offered amount. Its bid prices should be reasonable when compared to the range of rates trading in the when-issued market, taking into account market volatility and other risk factors."

http://www.newyorkfed.org/...

If a layman like me can so easily provide evidence that the CBO is making multiple false claims and assumptions, where is the reporting from the financial press and mainstream media?  As long as these neo-liberal economic myths pervade our national discourse and the economics community at large, We The People will suffer as a result.  Economics can't claim to be a "science" when clearly, factually inaccurate presumptions are never questioned, reformed, and updated over time as is the foundation of all the other scientific disciplines.

Please join our group here at Kos "Money and Public Purpose" as we are the only group that examines and analyzes the economy through our modern fiat monetary reality and not through a flawed gold standard view that has been over since August 15, 1971.  We can't beat the deficit terrorists if we don't know how our modern monetary system works and we continue to believe that the Federal Govt's budget operates just the same as a household or business.

MMT = Reality
neweconomicperspectives.org
http://mythfighter.com/...

Originally posted to Auburn Parks on Sat May 25, 2013 at 07:13 AM PDT.

Also republished by Money and Public Purpose.

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