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America's Debate _ Economy and Business _ What is so Bad about the Defict?!?!

Posted by: brinn Nov 5 2010, 02:41 AM

It seems that the U.S. and much of Europe has become obsessed with deficits, debt reduction and austerity. The question for debate is simple:

What do you see as the negative economic effects of persistent deficits?

Posted by: Hobbes Nov 5 2010, 03:02 AM

What do you see as the negative economic effects of persistent deficits?

That's easy. Eventual economic collapse. Governments are no different than any other entity..they can't keep spending more than they make forever. Eventually, the debt becomes large enough that financing it becomes problematic, and those purchasing the bonds start demanding higher rates, causing ever larger deficits, causing rates to go even higher--and the death spiral begins. The only way out of that spiral is to print enough money to pay off the debt to a manageable level, causing inflation to jump dramatically. Given that much of our debt resides overseas in China, and the Chinese won't much appreciate have so much of their investment depreciate in value, WWIII could potentially ensue. That 'negative' enough?

Posted by: akaCG Nov 5 2010, 03:05 AM

What do you see as the negative economic effects of persistent deficits?

At some point, a nation (just like a household) reaches a point of indebtedness when its lender(s) will not only refuse yet another request for yet another "just to tide me over" loan, but will find it really, really difficult to resist bursting out into open laughter while doing so.


Posted by: Belshazzar Nov 5 2010, 03:11 AM

In addition to what was said above, interest needs to be paid on the debt. As deficits (and in turn national debt) increase, interest goes up and will eventually reach the point where it will be more expensive than anything else on the budget. And we have to pay taxes on it.

Posted by: Hobbes Nov 5 2010, 05:30 AM

QUOTE(Belshazzar @ Nov 4 2010, 10:11 PM) *
In addition to what was said above, interest needs to be paid on the debt. As deficits (and in turn national debt) increase, interest goes up and will eventually reach the point where it will be more expensive than anything else on the budget. And we have to pay taxes on it.


We had actually hit that point some time ago. It is only the artificially lowered interest rates since then that kept the interest on the debt from exploding the budget. Interest rates won't stay this low forever. Given that, and the projected $20 Trillion debt by 2020, interest on the debt is expected to $1 Trillion annually. Add that to the current $700 billion structural deficit (deficit we accrue based on past obligations with no new spending) and the deficit, with no additional or increased spending, will be $1.7 Trillion. That's about equal to current revenue. What do you think we'd call someone who's credit card payments equalled their income? Bankrupt...and then some.

QUOTE
At some point, a nation (just like a household) reaches a point of indebtedness when its lender(s) will not only refuse yet another request for yet another "just to tide me over" loan, but will find it really, really difficult to resist bursting out into open laughter while doing so.


That is the point that Greece et al were nearing earlier this year. If you look at the various metrics that were applied to them (debt to GDP, deficit to GDP, etc)...we are in the same place they are already. The only difference is that investors still had confidence in us, whereas they lost it for Greece. Note that there are already rumblings of lowering our credit rating, which is the beginning of the inevitable crash. What constantly amazes me is that this impending doom doesn't raise much of a blip on the radar screen, even though it completely dwarfs all the other problems that do. Everyone is complaining about the speedbump, while ignoring the bridge being out. We are going to get our comeuppance for this, and when it comes, since we've ignored it for sooooo many years, its going to be a beast.

FWIW...reports are out the debt commission (do we really need a commission to tell the numbskulls in Washington they're spending too much? If they can't figure that out for themselves, they should immediately resign as being too incompetent for their position) has already taken entitlements, the looming additional $70 Trillion in unfunded liabilities, off the table. To me, this calls into question their aptitude for the job assigned to them as well. We'll just get another whitewashing with steps deemed 'politically acceptable' which do nothing to actually address the problem. You heard it here first! smile.gif

Posted by: Dingo Nov 5 2010, 05:56 AM

What do you see as the negative economic effects of persistent deficits?
Deficits would be less of a problem if we spent the borrowed money wisely. If the money were spent to become energy self-sufficient and ecologically sustainable and turned us toward a peace time locally based economy then inevitably the debt would diminish to zero. Our growing deficits are due to bad political decisions, which include bad economic and environmental ones. The deficits are only a symptom. It's the bad politics that are leading us to a debtor's crash.

Posted by: Hobbes Nov 5 2010, 06:39 AM

I think that's very true, Dingo. Our structural deficit is due to politically expedient decisions made that had long term financial ramifications that were just completely ignored.

There is a very simple cure for this. Force the government to enact separate loans for each new expenditure--fund them like projects. That way the true cost of each program would have to be calculated with the legislation, or else no funding could be provided. Politicians don't do this for that very reason. Projects of the type you propose, which would essentially be investments, would be quite easy to both justify and fund using this method. 'Pork' projects would not. But when you roll them all up into some homogenous general fund, they all get lost--as does the actual money spent, which is why we have a $700 billion structural deficit.

Posted by: brinn Nov 5 2010, 11:19 AM

What do you see as the negative economic effects of persistent deficits?

I hope some of you have an open mind and are at least willing to contemplate a different perspective. Let me explain why I, and many functional finance advocates, believe that the problem of the deficit is completely overblown:

Many of the concerns raised above are relics from when the US was on the gold standard. The US dollar is now a non-convertible, floating, fiat currency and because it is backed by nothing tangible, save for the ability of the currency to extinguish US tax liabilities, it is a completely different animal than any convertible currency.

The US government is the monopoly issuer of the US dollar and, because it has the ability to issue currency at will, there is functionally no solvency risk, nor can there be any solvency risk unless the US makes a political decision to default either through maintaining a hard and fixed debt ceiling or through some other act of congress. The only true restraint is inflation.

http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3629 made the following comments at the opening of the annual Economic Symposium sponsored by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyo., on August 29, 1997.
Central banks can issue currency, a noninterest-bearing claim on the government, effectively without limit. They can discount loans and other assets of banks or other private depository institutions, thereby converting potentially illiquid private assets into riskless claims on the government in the form of deposits at the central bank.
That all of these claims on government are readily accepted reflects the fact that a government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit. To be sure, if a central bank produces too many, inflation will inexorably rise as will interest rates, and economic activity will inevitably be constrained by the misallocation of resources induced by inflation. If it produces too few, the economy's expansion also will presumably be constrained by a shortage of the necessary lubricant for transactions. Authorities must struggle continuously to find the proper balance.


Combine this fact with the fact that the US has no foreign denominated debt (all US debt is denominated in US Dollars) and I’m assuming that no one will disagree that the US can effectively “print” as much currency as is needed to service any debt it currently possesses.

With just this single simple observation we are already moving away from the common view that government finance is analogous to financing a household. The key difference is that households (and states) are users of the currency and as such are constrained by revenues. A household or state must generate income through wages, taxation, debt issuance or other means before it can spend. The sovereign issuer of a currency, like the federal government, is not revenue constrained and must actually spend before it can tax. Without the issuance of US dollars (federal government spending) there would be no US dollars to tax. Again, please understand that I’m not claiming that the US can print $1,000,000 for each and every citizen without consequence (inflation is ultimately the only meaningful consequence) but only attempting to establish some basic terms where we can agree before continuing the conversation. I’ve got to go to work but I’ll try to add more later.

Posted by: AuthorMusician Nov 5 2010, 01:24 PM

What do you see as the negative economic effects of persistent deficits?

I don't. It's a number game that gets linked to production. Conservatives seem okay with deficits when Republicans are in charge and become all in a tizzie about deficits when Democrats are in charge. That's a political game linked to the number game.

Another part of the number game is investing. We just went through what a mess that can become, and we'll probably go through it again.

What's wrong with comparing this number game to a household budget is that the household cannot make the rules for the number game. It's either play the game or drop out altogether. The government can change the rules.

Several variations on rule changes have been tried. I don't think that all the variations have been tried, but I'm not smart enough to come up with something else. It's the difference between driving a car and inventing another mode of transportation. I am sure that there are other ways to get from point A to point B, but I don't know what they are.

Posted by: lederuvdapac Nov 5 2010, 01:30 PM

QUOTE(brinn)
The US government is the monopoly issuer of the US dollar and, because it has the ability to issue currency at will, there is functionally no solvency risk, nor can there be any solvency risk unless the US makes a political decision to default either through maintaining a hard and fixed debt ceiling or through some other act of congress. The only true restraint is inflation.


Technically, this is correct. But inflating away the debt is essentially admitting that you are insolvent anyway. The choice for the United States is quite clear. Either we admit that we made mistakes, that the federal government made promises it cannot possibly keep and default - or - we will inflate away to devalue our debt and simultaneously destroy our currency and economy. We are definitely going for the latter option. Paying off the debt is impossible. Paying for future entitlements is impossible. Inflation is the stated and intended policy. People need to get this through your heads. I don't care if you are Republican, Democrat, or whatever. You need to understand that it is the expressed and explicit policy of the central bank and the Congress to create inflation and steal your money. Not literally of course. They can steal your money without ever having to reach into your pocket. They just steal your money's value and bring down the economy around us.

QUOTE(brinn)
With just this single simple observation we are already moving away from the common view that government finance is analogous to financing a household. The key difference is that households (and states) are users of the currency and as such are constrained by revenues. A household or state must generate income through wages, taxation, debt issuance or other means before it can spend. The sovereign issuer of a currency, like the federal government, is not revenue constrained and must actually spend before it can tax. Without the issuance of US dollars (federal government spending) there would be no US dollars to tax.


While again, technically correct, there is a nuance I would like to address. The US government isn't the sovereign issuer of currency, the Federal Reserve is. There is the appearance of an independent central bank that holds a monopoly on the currency and they can issue the currency via their discount window. So although the Federal Government spends $4 trillion, the actual money supply is much higher than that.

Posted by: brinn Nov 6 2010, 12:02 AM

Leder,

For my purposes I am simplifying things by consolidating Central Bank and Treasury operations and referring to them as the Fed. The distinction between the two makes no difference to my arguments. Also I’m assuming that you agree that solvency is not an issue but that inflation is.

What I want to do first is establish that the national debt (the sum of the cumulative annual deficits) is merely the accounting offset for private sector savings and that can be done with a simple analogy that is originally attributed to Warren Mosler. I first encountered this analogy on Prof. Bill Mitchell’s Website “Billy Blog”.

Imagine the economy is a household which is comprised of you (the parent) and your kids. You the parent are analogous to “government” and the kids comprise the non-government or private sector. As the government you decree that you will offer 100 of your business cards per week to the kids if they agree to tend the garden on a weekly basis.

Naturally, the kids resist as they have no use for worthless business cards so you create demand for your “currency” (the business cards) by establishing a tax that can only be extinguished by remitting them. You declare that the kids will need to pay you 100 business cards per week to remain living in your household.

Immediately, by imposing a tax obligation in the currency of issue (the business cards) you have created a demand for the currency and created the conditions to allow you to transfer private resources (the kid’s labor) to the public sector (your garden). However, also note that you must spend the 100 cards each week before the kids can pay the tax of 100 cards. This illustrates that government spending must precede taxation and that taxation is not a revenue source for the government (i.e. taxing or taking your business cards from your kids does not allow you to spend your cards in the first place). You are the monopoly issuer of your cards and you are never financially constrained in your business cards (the currency).

This arrangement is analogous to a fiat currency like the US dollar. You can then extend this analogy and begin to track your currency transactions via a spreadsheet. This eliminates the need to “print” more business cards. Your spreadsheet represents “bank entries” which record all the outflows (spending) and inflows (taxation). If you make an error and add an extra zero to your spending one week, you wouldn’t have to “print” 900 new cards but your kids would be better off by 900 cards because it would show up as a deposit in their account.

Under the conditions above, the household budget would be balanced each week: You spend 100 cards and the kids pay you 100 cards to extinguish their tax liability. Note that the kids will be unable to accumulate any cards (that is, save) because they can only get access to the volume of cards that you make available via spending.

If you want to teach your kids to save you will either need to increase the business card wage for their labor while leaving your tax unchanged, ask them to do more labor each week and thus increase their wages while leaving your tax unchanged or keep paying them the same amount for the same labor and lower your tax. Let say you provide them with 120 cards per week as wages (government spending) but keep the tax at only 100 cards. Your budget will now be running a deficit of 20 cards per week but the kids can now save 20 cards per week because your spending (the government spending) has provided the “finance” for the savings. As the weeks go by the kids could accumulate more and more savings (numbers in the spreadsheet would increase) and you would soon see that the non-government saving over time is the exact record of the cumulative deficits being run by you (the government). Same as the US economy.

Extend the analogy further; Your kids now want to make more money (cards) and earn a return on their savings. As it stands, the only way they will be able to do that is if you decide to pay interest on their savings. This is equivalent to you offering them a government bond (a bit of paper saying that if they deposit their savings with you each week that you will pay them back at some future time plus some interest paid, of course, in business cards). Your issuance of debt establishes a non-zero rate of interest in your household and increases the kid’s wealth. Note that you were not forced to issue the bond to enable you to continue to run a deficit. The bond simply replaced non-interest bearing savings (reserves in our “banking” system) with an interest-earning asset (the bond).

Work the analogy backward and you can see how a federal surplus reduces private sector savings. Any surplus must be met by either:

a) A demand for more work to earn the shortfall – noting that the household has now reduced employment levels (in hours) and there is some underemployment creeping in. If you chose to reduce your deficit by not employing one of your kids you would have generated unemployment.

cool.gif A sale of private possessions to get some cards. In this simple case, It is likely that the kids would offer your bonds (the bits of paper) for sale to get the funds. So the surplus begins to eat away at your kids wealth.

or

c) A reduction in savings that are not being stored in bonds.

Regardless of the response, the budget surplus strains your kid’s liquidity and forces them to reduce wealth. If you kept running budget surpluses, your kids would eventually run out of assets and their labor would be underutilized.

If you are at all interested in learning more yourself, I would recommend you google Bill Mitchell (Billy Blog), or Warren Mosler (The Center of the Universe). Both are at the forefront of functional finance or Modern Monetary Theory as it is commonly known (although it’s really neither modern nor theoretical). Also check out New Economic Perspectives which is the website of the University of Missouri, Kansas City’s economics department.

If this discussion gains any traction I’ll address inflation concerns later.

Posted by: Hobbes Nov 6 2010, 01:18 AM

QUOTE(brinn @ Nov 5 2010, 06:19 AM) *
What do you see as the negative economic effects of persistent deficits?

I hope some of you have an open mind and are at least willing to contemplate a different perspective. Let me explain why I, and many functional finance advocates, believe that the problem of the deficit is completely overblown:


Your analysis doesn't indicate why it is overblown. No one has said that the U.S. will default on its debt (although that is an option).

QUOTE
The US government is the monopoly issuer of the US dollar and, because it has the ability to issue currency at will, there is functionally no solvency risk, nor can there be any solvency risk unless the US makes a political decision to default either through maintaining a hard and fixed debt ceiling or through some other act of congress. The only true restraint is inflationhation


Exactly. What level of inflation are you comfortable with? What level of inflation will those foreign entities holding our debt be happy with? The concept of carrying wheelbarrows full of money to buy a loaf of bread is not that far fetched--it has happened both here and elsewhere around the world before. Does the accompanying devaluation of savings (already something Americans don't do enough of) a good thing? I agree that the government can do this. However, one shouldn't neglect the fact that there are very large negative consequences of doing so--including, as I mentioned, heightened potential of WWIII ensuing.

QUOTE
The sovereign issuer of a currency, like the federal government, is not revenue constrained


Which is EXACTLY the problem.

QUOTE
and must actually spend before it can tax.


Not true. Sufficient currency exists for the economy to function, and therefore for activities to happen which can be taxed, without any additional government spending. Further, money can be injected into the economy through the Fed (we've been doing this the last couple of years already), again without the government having to spend anything.

Here's the real problem I have with those advocating the deficit is no big deal. It just encourages more deficits. Eventually, as you state, rampant inflation will be the result. We've seen what impact that can have in the http://hubpages.com/hub/Hyperinflation_in_Post_World_War_I_Germany. Note the woman shoveling money into the fire to keep warm...and tell me--is that image really 'overblown'?

QUOTE(AuthorMusician)
What's wrong with comparing this number game to a household budget is that the household cannot make the rules for the number game. It's either play the game or drop out altogether. The government can change the rules.


No, not really, they can't. They can shuffle the shells around alot, but reality will always catch up with them in the end. Again, we've seen this start to happen already, in Greece, Spain, etc. Near chaos resulted, only mitigated when other countries stepped up and fixed it. They could do this because Greece has a relatively small economy. We're in about the same position as Greece. Who's the big brother out there that's going to save us? That entity doesn't exist.

QUOTE
What I want to do first is establish that the national debt (the sum of the cumulative annual deficits) is merely the accounting offset for private sector savings


Disagree. Rather, it is the running sum total of governmental fiscal incompetence.

The word 'merely' doesn't even belong in a sentence with something totalling tens of trillions of dollars of an obligation. It just doesn't. You think that woman shoveling money into her furnace felt this was 'merely the accounting offset for private sector savings'? I would suspect anyone telling her that then would have been roundly slapped, and rightfully so. This, in fact, is a perfect example of why we should never (never never never never) let those in the ivory tower make decisions for those of us who aren't. Reality gets ignored in the ivory tower, where they can play with numbers and formulas, and just ignore the nasty realities that get in the way of their cozy mathematical manipulations.

Posted by: Dingo Nov 6 2010, 01:22 AM

My first comment added for clarification.

QUOTE(Hobbes @ Nov 4 2010, 11:39 PM) *
QUOTE(Dingo)
What do you see as the negative economic effects of persistent deficits?

Deficits would be less of a problem if we spent the borrowed money wisely. If the money were spent to become energy self-sufficient and ecologically sustainable and turned us toward a peace time locally based economy then inevitably the debt would diminish to zero. Our growing deficits are due to bad political decisions, which include bad economic and environmental ones. The deficits are only a symptom. It's the bad politics that are leading us to a debtor's crash.

I think that's very true, Dingo. Our structural deficit is due to politically expedient decisions made that had long term financial ramifications that were just completely ignored.

There is a very simple cure for this. Force the government to enact separate loans for each new expenditure--fund them like projects. That way the true cost of each program would have to be calculated with the legislation, or else no funding could be provided. Politicians don't do this for that very reason. Projects of the type you propose, which would essentially be investments, would be quite easy to both justify and fund using this method. 'Pork' projects would not. But when you roll them all up into some homogenous general fund, they all get lost--as does the actual money spent, which is why we have a $700 billion structural deficit.

"Force the government to enact separate loans for each new expenditure-". How do you pay off a military project or a school? A road I could see because you could apply tolls. One problem is in determining the real public cost of the project. Depending on what cost basis you apply you could determine say gasoline generating $15 dollar a gallon or more in public costs. That would include military, environmental and health costs projected into the future. I have no problem with the principle of treating each public outlay as a loan that needs to be paid back. I just don't see how to make it practical.

Posted by: brinn Nov 6 2010, 03:13 AM

QUOTE(”Hobbes”)
Your analysis doesn't indicate why it is overblown. No one has said that the U.S. will default on its debt (although that is an option).
It is overblown because it is necessary for private sector liquidity. If the government begins to run a surplus when aggregate demand is collapsing it will exacerbate the situation and likely result in deflation.


QUOTE(”Hobbes”)
What level of inflation are you comfortable with? What level of inflation will those foreign entities holding our debt be happy with? The concept of carrying wheelbarrows full of money to buy a loaf of bread is not that far fetched--it has happened both here and elsewhere around the world before. Does the accompanying devaluation of savings (already something Americans don't do enough of) a good thing? I agree that the government can do this. However, one shouldn't neglect the fact that there are very large negative consequences of doing so--including, as I mentioned, heightened potential of WWIII ensuing.
Are you truly concerned with hyperinflation in the US? Hyperinflation is largely a result of a collapse of supply. Inflation is very well understood and can be managed via taxation, and monetary and fiscal policy. What is our rate of inflation currently? What is Japan’s rate of inflation?


QUOTE(”Hobbes”)
Not true. Sufficient currency exists for the economy to function, and therefore for activities to happen which can be taxed, without any additional government spending.
Sure, the government can run temporary surpluses but a consistent surplus will result in a collapse of demand as private sector wealth is eroded. It’s an accounting identity and can’t be debated.

QUOTE(”Hobbes”)
Further, money can be injected into the economy through the Fed (we've been doing this the last couple of years already), again without the government having to spend anything.
Can you clarify how the fed injects money into the system without spending?

QUOTE(Hobbes”)
Here's the real problem I have with those advocating the deficit is no big deal. It just encourages more deficits. Eventually, as you state, rampant inflation will be the result.
in a sense I agree but it’s much too simplistic to state that the deficit is all bad. In our current environment we need a larger deficit (either through targeted spending designed to create jobs or through drastic reductions in taxes) but as soon as private sector demand is restored and unemployment is drastically reduced, spending can be reduced and taxation levels can be raised to limit inflation.

QUOTE
We've seen what impact that can have in the Weimar Republic in Germany after WW I. Note the woman shoveling money into the fire to keep warm...and tell me--is that image really 'overblown'?
It’s not overblown, just not applicable. Weimar Germany’s hyperinflation was due primarily to three things: The requirement to pay reparations in a foreign currency, A positive feedback mechanism in the wage/price index that was negotiated by the strong labor union in Germany resulting in spiraling wages, and the occupation of the Ruhr region which was the manufacturing heart of germany which effectively shut down production. None of these conditions are present in the US. Again, what is our inflation rate?

QUOTE(”Hobbes”)
Again, we've seen this start to happen already, in Greece, Spain, etc. Near chaos resulted, only mitigated when other countries stepped up and fixed it. They could do this because Greece has a relatively small economy. We're in about the same position as Greece. Who's the big brother out there that's going to save us? That entity doesn't exist.
We are in no way shape or form analogous to Greece. Greece is part of the European currency union and is therefore not sovereign in their own currency. They are revenue constrained and need to tax or borrow to spend. All economies in the ECU share this risk. It is a flawed system. Other countries did not step in and fix Greece. The European Central Bank began buying their debt which supported them. It is analogous to the US federal government providing funding to a state.




QUOTE(”Hobbes”)
The word 'merely' doesn't even belong in a sentence with something totalling tens of trillions of dollars of an obligation. It just doesn't.
Hobbes, You do realize that the trillion dollar debt that you reference is really the sum total of all savings held by the private sector, no? You do realize that the "deficit could be repaid tomorow by moving the funds held in Bond accounts at the fed back to reserve accounts at the fed. Voila, Debt paid!

With the massive stimulus and two rounds of QE where’s the inflation you’re so concerned about? Do you think it’s a coincidence that our last budget surplus ended in 2001, and was reported as the longest surplus since 1927-1930. Do those dates ring a bell? Is it a mere coincidence that the first six US depressions followed the first six sustained budget surpluses? Is it a coincidence that in 1836, President Jackson actually paid off the federal debt and the worst depression on record followed.
It’s time to rethink your position. The situation isn’t what you think it is, despite how much the “logic” may appeal.

Posted by: Belshazzar Nov 6 2010, 03:18 AM

QUOTE(Hobbes @ Nov 5 2010, 09:18 PM) *
Here's the real problem I have with those advocating the deficit is no big deal. It just encourages more deficits. Eventually, as you state, rampant inflation will be the result. We've seen what impact that can have in the http://hubpages.com/hub/Hyperinflation_in_Post_World_War_I_Germany. Note the woman shoveling money into the fire to keep warm...and tell me--is that image really 'overblown'?


Yes, you can only devalue your currency so much before something like that happens. My grandfather grew up in the Weimar Republic and he used to say that people would joke about papering their walls with marks because it was cheaper to do that than to buy wallpaper. Of course, we haven't gotten to that level yet, but if we ever do, hopefully China will consider us "too big to fail" and we'll get a bailout. laugh.gif

Posted by: Curmudgeon Nov 6 2010, 05:03 AM

What do you see as the economic effects of persistent deficits?

I have an image in my mind. Was it John F. Kennedy that pointed to Richard Nixon and said, "Would you buy a used car from this man?"

Whenever I have purchased a car, it always seemed that the salesman had to get the sales manager's approval. As I never met the sales manager, I always took it as a euphemism for, "Yes! Time for a cup of coffee!"

Lately, I hear that China and other foreign governments are picking up our debts. (In History class in High School, we were told that it was the Rockefellers and the like who financed the nation through the world wars.) Foreign corporations are funding the Republican political campaigns. Somewhere in the back room, I have an image of Karl Rove having no interest in politics, government, or power. I have a vision of him as the sales manager who is approving the deals and pocketing a commission. If he felt any ownership for this country, he might be concerned; but I think that he just sees his bank balance growing. It doesn't occur to him that if the Chinese foreclose on our mortgage, he won't have a country to live in...

Let's propose an alternative that we can sell to the wealthiest 2% of the American population. If they invest in Savings Bonds, T-Bills, Republicoins, or whatever; we'll pay them a higher interest rate than we pay foreign investors, and the interest earned will be tax free if the loans are held in America by American citizens or corporations that can prove 90% or better American ownership. They can hold onto the notes, and use them as collateral for borrowing the money they need from American banks, etc., to finance factories, payrolls, etc. The nation will still be in debt to the wealthiest Americans. That's already how we finance our cars, our homes, our educations. As a society, we are accustomed to being in debt. It is only the wealthiest that really fear that their granchildren will actually have to pay off the national debt. If they're holding the notes, they'll want to collect the interest and discourage the government from prepaying the balance.

Posted by: brinn Nov 6 2010, 02:49 PM

QUOTE("Curmudgeon")
Lately, I hear that China and other foreign governments are picking up our debts. (In History class in High School, we were told that it was the Rockefellers and the like who financed the nation through the world wars.)...

...If he felt any ownership for this country, he might be concerned; but I think that he just sees his bank balance growing. It doesn't occur to him that if the Chinese foreclose on our mortgage, he won't have a country to live in.

...It is only the wealthiest that really fear that their granchildren will actually have to pay off the national debt. If they're holding the notes, they'll want to collect the interest and discourage the government from prepaying the balance.


Curmudgeon,

China does not fund the US. Sale of treasuries to China, or any other entity for that matter, are not done as a source of funding but rather as a reserve drain allowing the fed to maintain control of short tem interest rates. Without bond sales the overnight rate would be pushed to zero. Keep in mind that the US has no foreign denominated debt but does have foreign holders of our currency. Let me explain further and keep in mind that this description is not theoretical but strictly operational. It's not how the system should work or how people say it works but rather, how it does work.

To understand the accounting behind treasury sales one must first understand that all foreign holdings of US currency are held at US reserve banks. When China sells goods to the US, the dollars that they receive in exchange are held in the US at a US reserve bank. This is a crucial point; the dollars never leave the US banking system. Once the Chinese have these dollars they can buy US dollar denominated goods and services, sell the currency to a willing buyer for another currency, hold the currency in the reserve account (earning 0%) or buy a treasury note or bill which will give them a small interest return on their deposit. If they buy a treasury note the reserve bank essentially moves the money from the reserve account at the Fed (the reserve account can be thought of as a checking account as the owner of the account can remove funds whenever they want. In banking terms a checking account is known as a demand deposit account or DDA as the owner can demand payment of funds at any time) to a T-Bill which functions just like a savings account or a certificate of deposit. A certificate of deposit (CD) is a deposit with a bank that earns interest but that can’t be taken out prior to the agreed upon maturity date, just like a T-Bill.

So the analogy is that the Reserve bank takes these dollars that are held in China’s US reserve checking account and places them in a T-Bill which, for all intents and purposes, is a certificate of deposit. When a regular bank takes $1,000 from your checking account and puts it into a CD the bank has no more nor less funds than it had a moment ago. The difference is that your funds have gone from being available upon demand to being available (with interest) at a set point in the future. Your liquidity has been exchanged for the ability to earn interest. The same dynamic is occurring with the sale of bonds.

So what happens when the bonds are ready to be redeemed? In effect, at the maturity of the T-Bill, the reserve bank takes the balance from the “CD” and transfers it back to the “checking account” of the owner with a small amount of interest added. Debt paid. The fact that the balances never leave the banking system but are simply transferred from one account to the next is the key to understanding that repayment of bonds is not an onerous task that requires the US to collect the funds to make the payment but nothing more than an accounting entry.

Given that explanation, thinking of foreign held treasuries as debt is not entirely accurate as it should be clear that treasuries more closely resemble savings rather than debt. As long as our economy remains healthy and US innovation continues, there will be a demand for our currency as it is the only currency that can purchase US assets. Theoretically, it is possible to inflate our way to the point that our currency becomes undesireable but that would presume that we have no control over inflation which is clearly not true.

Additionally, if China decides to stop buying treauries what will they do with the US dollar reserves they've built up? They can buy US dollar denominated assets, provided they can find a willing seller, or they can sit on them and earn nothing. If they buy US assets, products or services it will do nothing but increase demand in the US economy which is exactly what the US economy currently needs. If they continue to buy treasuries, the act of purchasing treasuries drains liquidity from the system and acts as a necessary offset to inflationary pressures.




Posted by: Hobbes Nov 6 2010, 03:35 PM

QUOTE(brinn @ Nov 5 2010, 10:13 PM) *
QUOTE(”Hobbes”)
Not true. Sufficient currency exists for the economy to function, and therefore for activities to happen which can be taxed, without any additional government spending.
Sure, the government can run temporary surpluses but a consistent surplus will result in a collapse of demand as private sector wealth is eroded. It’s an accounting identity and can’t be debated.


The private sector can generate wealth all on its own--it doesn't need the government for that. That is the myth that government operates under, though--witness the recent stimulus programs, none of which can be economically justified or achieved their indicated result.

It is an accounting identity, though--it is an accounting of exactly how fiscally inept our government is.

Let me ask a very simple question: If deficits are so good, then why, with our constant stream of deficits, don't we have an increasing governmental revenue stream which makes deficits unnecessary?

QUOTE
QUOTE(”Hobbes”)
Further, money can be injected into the economy through the Fed (we've been doing this the last couple of years already), again without the government having to spend anything.
Can you clarify how the fed injects money into the system without spending?


Through loans from banks. What does the Fed EVER spend anything on? It's not a spending entity.

QUOTE
QUOTE(Hobbes”)
Here's the real problem I have with those advocating the deficit is no big deal. It just encourages more deficits. Eventually, as you state, rampant inflation will be the result.
in a sense I agree but it’s much too simplistic to state that the deficit is all bad. In our current environment we need a larger deficit (either through targeted spending designed to create jobs or through drastic reductions in taxes) but as soon as private sector demand is restored and unemployment is drastically reduced, spending can be reduced and taxation levels can be raised to limit inflation.


I'm not stating the deficit itself is all bad--I'm stating that HUGE deficits lead to economic problems. Eventually, an enending stream of even modest deficits will cause problems too. It's unavoidable. Again, consider interest rates. They are artificially low right now, and even with those, we have a $700 billion structural deficit. Interest rates WILL return to normal, and probably even higher, and this will add about another trillion dollars to that. That will put us at close to a $2 Trillion deficit, with no new spending at all, and not considering the impact of all our future unfunded liabilities. Rampant inflation, which you have stated (and I agree) is the 'limiting factor', WILL result.

As for the last part of your statement, spending CAN be reduced...but it never IS. Further, how do you solve the problem when the spending amount you need to reduce is greater than your budget? You can't eliminate more than all government spending. Nor can you tax all money away (which is why comparisons of our debt and deficit to GDP is a singularly ridiculous and meaningless number--it assumes the government can tax at 100%, which of course can never happen.) Hence, you will have an unsolvable problem using only those two levers---again leading to rampant inflation as the only possible result.
QUOTE
QUOTE
We've seen what impact that can have in the Weimar Republic in Germany after WW I. Note the woman shoveling money into the fire to keep warm...and tell me--is that image really 'overblown'?
It’s not overblown, just not applicable. Weimar Germany’s hyperinflation was due primarily to three things: The requirement to pay reparations in a foreign currency, A positive feedback mechanism in the wage/price index that was negotiated by the strong labor union in Germany resulting in spiraling wages, and the occupation of the Ruhr region which was the manufacturing heart of germany which effectively shut down production. None of these conditions are present in the US. Again, what is our inflation rate?


I'm not concernecd with what our inflation rate is, I'm concerned with what it will be. The situation we have would be akin to telling someone on the beach a tidal wave is coming, and having him reply that the water is fine right now. Our inflation rate is low because our economy is weak, and demand is limited. Hardly the go forward position we'd want to maintain, right?

QUOTE
QUOTE(”Hobbes”)
Again, we've seen this start to happen already, in Greece, Spain, etc. Near chaos resulted, only mitigated when other countries stepped up and fixed it. They could do this because Greece has a relatively small economy. We're in about the same position as Greece. Who's the big brother out there that's going to save us? That entity doesn't exist.
We are in no way shape or form analogous to Greece. Greece is part of the European currency union and is therefore not sovereign in their own currency. They are revenue constrained and need to tax or borrow to spend. All economies in the ECU share this risk. It is a flawed system. Other countries did not step in and fix Greece. The European Central Bank began buying their debt which supported them. It is analogous to the US federal government providing funding to a state.


Absolutely we are. Look at all the metrics used to indicate how bad their governmental finances were, and we are on par on all of them.


QUOTE
QUOTE(”Hobbes”)
The word 'merely' doesn't even belong in a sentence with something totalling tens of trillions of dollars of an obligation. It just doesn't.
Hobbes, You do realize that the trillion dollar debt that you reference is really the sum total of all savings held by the private sector, no? You do realize that the "deficit could be repaid tomorow by moving the funds held in Bond accounts at the fed back to reserve accounts at the fed. Voila, Debt paid!


What funds held in Bond accounts? There are no funds there...the money from the bonds is collected to cover current expenses--there isn't any money in Bond accounts. That's why the bonds are issued, because the government doesn't have the money. If the funds were there...why do they need to keep issuing bonds?

QUOTE
With the massive stimulus and two rounds of QE where’s the inflation you’re so concerned about? Do you think it’s a coincidence that our last budget surplus ended in 2001, and was reported as the longest surplus since 1927-1930. Do those dates ring a bell? Is it a mere coincidence that the first six US depressions followed the first six sustained budget surpluses? Is it a coincidence that in 1836, President Jackson actually paid off the federal debt and the worst depression on record followed.
It’s time to rethink your position. The situation isn’t what you think it is, despite how much the “logic” may appeal.


No, I don't think it is. Flip your logic around. We are currently undergoing the largest deficits we ever have, with the government spending more than twice what it takes in. Is our economy surging ahead? Hardly. If this worked as you say it does...we do we EVER have recessions? We doesn't Japan just spend its way back into prosperity? Do you really think they're undergoing decades of stagnation on purpose?

Posted by: brinn Nov 6 2010, 06:36 PM

QUOTE("Hobbes")
The private sector can generate wealth all on its own--it doesn't need the government for that. That is the myth that government operates under, though--witness the recent stimulus programs, none of which can be economically justified or achieved their indicated result.
Of course private sector can generate goods and services on its own. I haven't claimed otherwise. However, currency is not wealth but is rather and accounting of wealth. It is the score of wealth , not the wealth itself.

QUOTE("Hobbes")
Let me ask a very simple question: If deficits are so good, then why, with our constant stream of deficits, don't we have an increasing governmental revenue stream which makes deficits unnecessary?
Let me answer this question with a question of my own and if you feel it doesn't clarify enough I'll try to expand further. What would happen if the government, in an attempt to pay off the national debt, instituted a 100% tax on all privately owned assets?

QUOTE("Hobbes")
Through loans from banks. What does the Fed EVER spend anything on? It's not a spending entity.
So congress does not enact spending programs? Where did the stimulus come from? Scott Pelley of 60 Minutes asked Bernanke this specific question in March of 2009. The question and repsonse is http://www.realclearpolitics.com/articles/2009/03/bernanke_60_minutes.html below:

QUOTE
PELLEY: Is that tax money that the Fed is spending?

BERNANKE: It's not tax money. the banks have-- accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. so it's much more akin to printing money than it is to borrowing.


QUOTE("Hobbes")
I'm not stating the deficit itself is all bad--I'm stating that HUGE deficits lead to economic problems. Eventually, an enending stream of even modest deficits will cause problems too. It's unavoidable. Again, consider interest rates. They are artificially low right now, and even with those, we have a $700 billion structural deficit. Interest rates WILL return to normal, and probably even higher, and this will add about another trillion dollars to that.
Hobbes, what is the natural rate of interest? I'm assuming since you believe that they are "artificially" low right now that you have an idea of what the natural rate should be. Additionally, reality does not support your thesis. For example, the 30 year treasury as of today it sits at 3.875%. Historically the 30 year was 13.45% in 1981 and has been decreasing ever since. Unless my data is incorrect, the national debt has increased from about $900 Billion in 1980 to over $13 trillion in 2010. But how could this be? How do long term rates decline while the deficit increases? Have rates been held "artificially" low for the last 30 years? Shouldn't the market be punishing the US for our fiscal recklessness by now? It seems that the market has given the US a vote of confidence in complete contradiction to prevailing wisdom on deficits. Odd isn't it? additionally, japan has one of the highest debt to GDP ratios of any developed country on the face of the earth. debt was 170.4% of GDP according to http://www.visualeconomics.com/gdp-vs-national-debt-by-country/. A look at http://www.bloomberg.com/markets/rates-bonds/government-bonds/japan/ today shows me that the 30 year japanese bond is currently 2.00%. Is Japan an exception to the rule as well? I'm honestly not trying to be snarky or sarcastic. I'm just frustrated that the conventional economic wisdom has been dead wrong since nixon took us off the gold standard. The forecasts of high rates and increasing inflation that were predicted have been dead wrong. Rates and inflation have done precisely the opposite of what many conventional economists thought would happen. At some point, if the theories consistently produce incorrect predictions, the theories must be questioned. If every economic forecast must be revised due to "artificial" situations or exceptions to the rule, then what good are the rules in the first place?


QUOTE("Hobbes")
I'm not concernecd with what our inflation rate is, I'm concerned with what it will be. The situation we have would be akin to telling someone on the beach a tidal wave is coming, and having him reply that the water is fine right now. Our inflation rate is low because our economy is weak, and demand is limited. Hardly the go forward position we'd want to maintain, right?
Actually your concerned with what it MIGHT be if we do not control inflation once aggregate demand is restored. Once again, inflation is well understood and is an economic condition that the fed is well equipped to deal with.

QUOTE
[Regarding the similarity between Greece and the US] Absolutely we are. Look at all the metrics used to indicate how bad their governmental finances were, and we are on par on all of them.
The metrics are not comparable as Greece is part of a monetary union and is thus not a sovereign issuer of their own currency whereas the US is. Do you truly not understand that greece is effectively a user of the euro and not an issuer? Can Greece inflate their way out of their debt even if they wanted to? Could Greece allow the euro to depreciate until foreign trade begins to pick up some of their demand? Of course the answers to both questions are no because Greece isn't the only country that uses the Euro. Do you think Germany and Greece share the same desires for the strength of the Euro? Of course not. Joining the european currency has forced the fiscal policies of the member nations into a "beggar thy neighbor" approach.

QUOTE("Hobbes")
That's why the bonds are issued, because the government doesn't have the money. If the funds were there...why do they need to keep issuing bonds?
Incorrect. Bond proceeds fund nothing but rather serve as a reserve drain and allow the fed to maintain control over short term rates. Let me explain.

As you know, banks have to maintain a reserve ratio that is set by the Fed. The reserve ratio limits the amount of deposits that that the bank can lend. For example, if the reserve ratio is set at 10% the banks must maintain 10% of all (not actually all deposits but I’m simplifying for understandability) their deposits on hand. So, for example, a bank has $100 dollars in deposits. If the reserve ratio is 10% the bank must maintain 10% of $100 or $10 in reserves and can lend out $90.

Because deposit and loan levels are changing from day-to-day and minute-to-minute, the calculation of the amount that a bank needs to legally hold for a reserve is a moving target. In effect, the government solved this problem by allowing banks to calculate their reserve requirement based upon a date that had already passed. For example, the bank would calculate the amount of deposits it had on Monday’s date and that would be the reserve requirement for Wednesday. This effectively creates a two day lag as the bank knows two days in advance what the legal reserve requirement should be.

In reality, banks don’t pay much attention to the legal reserve requirement when making loans as banks know they can borrow the money to increase their reserve position should they lend out too much or should deposit levels drop precipitously. As long as the interest rate the bank charges on loans is higher than the rate they have to pay when borrowing money, it makes sense to make every loan that they can. In effect, bank lending decisions are affected by the price of reserves, not by reserve positions. If the spread between the rate of return a bank can get from making a loan and the interbank rate is wide enough, even a bank deficient in reserves will make the loan and cover the cash needed by purchasing (borrowing) money in the funds market. This fact is clearly demonstrated by many large banks when they consistently purchase (borrow) more money than their entire level of required reserves.

So where does the money that banks borrow come from? The first place they can get the money from is other banks that have excess deposits but not enough loans. Going back to our first example, if a bank has $100 in deposits it can legally lend $90 of the money assuming a 10% reserve requirement. If it lends anything less than $90 it will have excess reserves. Banks don’t like to have excess reserves as the excess money does not earn anything for the bank. So instead of letting the excess reserve do nothing, banks will lend these funds to other banks who need cash to meet their legal reserve requirement. The rate that banks charge each other on these loans is strangely called the Fed Funds Rate but it's less confusing to think of this as the interbank rate. When you think logically about this rate you will soon realize that if the banking system as a whole does not have enough reserves to meet legal requirements than, regardless of how the reserves are divvied up via interbank loans, at least one bank will fail to meet the reserve requirement. Given this reality, the interbank loan rate would be bid up to infinity as the banks who don’t hold enough reserves bid against each other to attract money from the banks who have excess reserves knowing that at least one bank will be left short. The opposite is also true. If there are excess reserves in the banking system as a whole the rate offered will be pushed to zero as the banks with excess reserves will continue to offer their excess reserves at lower and lower rates in an effort to make even the smallest return on their excess reserves (which would otherwise earn 0%).

Now, with a rudimentary understanding of how bank reserves work we can begin to talk about Bonds. If the government spends money by buying hammers from the private sector, than the account of the company who made those hammers will increase by the price of the hammers. This also means that the bank that holds that company’s account now has more reserves as its deposit balances have increased. If, through a combination of high government spending, high savings rates (increases deposits and thus reserves) and/or low loan demand, the banking system ends up with reserves in excess of required reserves we now know that the interbank rate will be driven to zero. In order for the Fed to be able to spend AND maintain control over the short term interest rate the fed will need to drain the excess reserves to maintain the funds rate above zero. They do this by draining the liquidity (excess reserves) from the system via sales of T-bills. The sale of t-bills gives the bank a place to park excess reserves and sets a minimum rate for interbank loans. If a bank holds excess reserves the lowest rate that it will be willing to accept if it lends the excess to another bank is the rate that the government will pay on a T-Bill as the bank knows that if it doesn’t lend the funds to another bank in the interbank market it can just place those funds with the government and earn the T-Bill rate.

Voila, the Fed now has the ability to spend any amount without having to worry about the banks having excess reserves and thus driving the interbank rate to zero. The government can now spend any amount while still maintaining a positive overnight lending rate (known as the target rate). So, if the government wants to lower liquidity (reserves) it can either increase taxes (thus lowering bank reserves) or it can sell T-bills. If it wants to add liquidity to the system it can spend (run a deficit) or buy T-bills from the private sector (thus giving the private sector money in exchange for their existing T-bill savings). The mechanism works both ways.

I know this is a long post and I hope you stuck with me through this as I've attempted to make it as simple and understable as possible. To summarize, if the central bank (the fed in the US) has a positive target for the overnight lending rate, it formerly needed to provide an interest-bearing alternative to, what were then, non-interest-bearing bank reserve accounts. This was typically done by offering securities for sale in the open market to drain the excess reserves. Central Bank officials and traders recognize this as "offsetting operating factors" since the sales are intended to offset the impact of fiscal policy that would cause the Fed funds rate to move away from the Fed’s target rate. In nations like the US, Japan, and others, where interest was not paid directly on central bank reserves, the penalty for deficit spending and not issuing securities was not (apart from various self-imposed constraints) bounced government checks but a zero percent interbank rate, as is the case in Japan today. The overnight lending rate is the most important benchmark interest rate for many other important rates, including banks’ prime rates, mortgage rates, and consumer loan rates, and therefore the interbank rate (known as the Fed Funds rate) serves as the base rate of interest in the economy.

It is also interesting to note that the fed began paying interest on reserves in 2008 thus bonds don't even effectively serve the purpose of establishing an overnight rate anymore as the interest rate on reserves accomplishes the same thing.

I know this all sounds heretical but it is completely and 100% operationally consistent with how our monetary system functions. Are you open minded enough to at least consider that what you think you know may be inaccurate? If you are, check out the following PDF from Warren Mosler. http://moslerforsenate.com/wp-content/uploads/2010/06/7DIF.pdf. It's a long read but a very important one.

P.S.
Thanks for the interesting discussion Hobbes. I appreciate the lively interaction.

Posted by: Maybe Maybe Not Nov 6 2010, 10:04 PM

QUOTE(brinn @ Nov 6 2010, 09:49 AM) *
When China sells goods to the US, the dollars that they receive in exchange are held in the US at a US reserve bank. This is a crucial point; the dollars never leave the US banking system. Once the Chinese have these dollars they can buy US dollar denominated goods and services, sell the currency to a willing buyer for another currency, hold the currency in the reserve account (earning 0%) or buy a treasury note or bill which will give them a small interest return on their deposit.
Even though the "dollars" remain in the U.S., held at a U.S. reserve bank, do the Chinese not expect that a certain value adheres to those dollars? I mean, we can't just decide the dollars they "have" are worth less than they were when the Chinese obtained them and expect no protest? Can we?

Posted by: brinn Nov 6 2010, 11:55 PM

QUOTE(Maybe Maybe Not @ Nov 6 2010, 06:04 PM) *
QUOTE(brinn @ Nov 6 2010, 09:49 AM) *
When China sells goods to the US, the dollars that they receive in exchange are held in the US at a US reserve bank. This is a crucial point; the dollars never leave the US banking system. Once the Chinese have these dollars they can buy US dollar denominated goods and services, sell the currency to a willing buyer for another currency, hold the currency in the reserve account (earning 0%) or buy a treasury note or bill which will give them a small interest return on their deposit.
Even though the "dollars" remain in the U.S., held at a U.S. reserve bank, do the Chinese not expect that a certain value adheres to those dollars? I mean, we can't just decide the dollars they "have" are worth less than they were when the Chinese obtained them and expect no protest? Can we?


They can protest but what else can they do? Declare war on us? Stop exporting to the largest consumer market on the planet?

By holding US dollars they are assuming all the risk that any holder of the currency assumes (inflation chief among them) but, in addition to the inflation risk, foreign holders also have other political risks. Do you recall back in 2005 when Chinese Oil company CNOOC tried to buy American oil company Unocal? They ended up withdrawing their $18.5 billion offer due to American political resistance to allowing the Chinese to own these strategic US assets. This is a clear example of the political risk that the Chinese assume by accumulating US dollars. Effectively the US possesses a seller's option to provide goods and services to China in exchange for their dollars. Possessing a US dollar does not give you a right to US goods and services but rather gives the seller of US goods and services an option to sell (option meant in the financial sense; like a stock option). In other words, we don't have to exchange any goods and services for those dollars if we don't want to.

If we paid China off, basically moving their saved dollars from a time deposit (US treasury) to a demand deposit (China's reserve account) all we would be doing is giving the Chinese liquidity in dollars. As I mentioned above, the Chinese would then have an option to buy US dollar denominated goods and services or save those dollars at a 0% interest rate (sure they could exchange them for another currency but then the new owner of the USDs would be in the same position as China just was with a choice of whether to spend or save them). If the Chinese (or whoever they sell the currency to) choose to buy dollar denominated goods and services, that will increase US demand and boost production.

If we owed China Yuan, the situation would be much more dire. We cannot create Yuan thus China would have a real claim on goods and services as the US would need to sell goods and services to acquire yuan to settle with China.

So given this, the obvious question then becomes "What advantages does China get from selling us goods and services for US dollars"? The answer: The act of exporting to the US helps keep chinese domestic employemnt up and their economy running. In addition to the US dollar, the Chinese are acquiring a host of other currencies and will continue to do so as long as as they need to run a current account surplus to support domestic production. Additionally, they maintain a large currency reserve in USD which allows them to keep the yuan pegged to the USD thus making their exports more attractive.

Hope that helps.

Posted by: lederuvdapac Nov 7 2010, 12:15 AM

QUOTE(brinn)
Stop exporting to the largest consumer market on the planet?


Yes. You are under the false assumption that our consumption is the driver of the world economy. This is wrong. We are the caboose. The producers are the engine of the economy. China has 1.3 billion consumers. If the Chinese finally allow their currency to appreciate - something that will happen anyway since the US is pursuing a policy of intentional devaluation - every Chinese citizen will get the equivalent to a giant pay raise. They don't need us. They can consumer their own products. This WILL happen eventually. The developing world will decouple from the US economy and continue to go strong. We are the world's largest debtor. We can't pay off our debts. Eventually the world will figure this out.

Posted by: brinn Nov 7 2010, 12:23 AM

QUOTE(lederuvdapac @ Nov 6 2010, 08:15 PM) *
QUOTE(brinn)
Stop exporting to the largest consumer market on the planet?


Yes. You are under the false assumption that our consumption is the driver of the world economy. This is wrong. We are the caboose. The producers are the engine of the economy. China has 1.3 billion consumers. If the Chinese finally allow their currency to appreciate - something that will happen anyway since the US is pursuing a policy of intentional devaluation - every Chinese citizen will get the equivalent to a giant pay raise. They don't need us. They can consumer their own products. This WILL happen eventually. The developing world will decouple from the US economy and continue to go strong. We are the world's largest debtor. We can't pay off our debts. Eventually the world will figure this out.


Who has the largest GDP on the planet? And what happens when the yuan appreciates and the trade surplus begins to shift in our favor? You're assertion that we can't pay our "debts" is patently false. The "debt" could be paid tomorrow with nothing more than an accounting entry. Operational fact. Not economic theory.

Posted by: lederuvdapac Nov 7 2010, 12:31 AM

QUOTE(brinn)
Who has the largest GDP on the planet?


The US for now. But what does that matter? GDP includes government spending and consumption. Consumption is a consequence of economic growth, it is not the driver of it. We are only able to consume because we borrow from places like China, Japan and Saudi Arabia. Once the borrowing stops because interest rates rise, the party is over.

QUOTE(brinn)
And what happens when the yuan appreciates and the trade surplus begins to shift in our favor?


Why would that happen? What are we going to export? Why do you assume that the US would be the ones who be doing the exporting instead of another developing country in Asia or Africa?

QUOTE(brinn)
You're assertion that we can't pay our "debts" is patently false. The "debt" could be paid tomorrow with nothing more than an accounting entry. Operational fact. Not economic theory.


It would destroy our economy! The debt is insurmountable without causing massive depression. Our debt obligations far exceed our ability to ever pay it. Either we would raise taxes to such absurd levels that it would leave nothing for the productive economy or we would inflate away our debts which would destroy our currency and make our savings and capital evaporate. There is no easy way out of it. We can have an honest strategic default on our debt or we can choose to destroy our currency. Those are the options.

Posted by: Maybe Maybe Not Nov 7 2010, 01:00 AM

QUOTE(brinn @ Nov 6 2010, 06:55 PM) *
Maybe Maybe Not: "Even though the 'dollars' remain in the U.S., held at a U.S. reserve bank, do the Chinese not expect that a certain value adheres to those dollars? I mean, we can't just decide the dollars they 'have' are worth less than they were when the Chinese obtained them and expect no protest? Can we?"

They can protest but what else can they do? Declare war on us? Stop exporting to the largest consumer market on the planet?


Wow. Seriously? You might be surprised what people (and countries) will do when pushed too far. (I won't be.)

I agree that there are complexities to the situation that might restrain the Chinese (or anyone else) from taking action lightly. But I agree with Hobbes from his post #2 in this thread - war isn't out of the question.

Posted by: skeeterses Nov 7 2010, 04:00 AM

QUOTE(brinn @ Nov 5 2010, 11:41 AM) *
It seems that the U.S. and much of Europe has become obsessed with deficits, debt reduction and austerity. The question for debate is simple:

What do you see as the negative economic effects of persistent deficits?

If asked this question 25 years earlier under Reagan's term, the typical American would not care. In fact even with the current state of America's economy, I don't think the typical American is thinking about the possibility of a complete financial collapse, though I wouldn't rule that out.

I think it boils down to Envy. I'm sorry to mention that word because some other posters have accused me of that when I talk about issues such as the disparity between the rich and the poor in America, but I can explain nonetheless. Throughout the economic crisis of the past 5 years, the Government has given hundreds of billions of dollars in bailouts to companies that American taxpayers feel are unworthy and in the midst of those bailouts, some of the bailed out companies have continued paying lavish salaries and benefits to their top employees. That kind of distrust has helped waken a lot of Americans up to a lot of other financial issues in the Government such as Sweet Heart contracts, High Salaries for politicians, and the suspicion that some Civil Servants are being paid middle class salaries for unproductive work.

The reasons that Americans should be questioning the Federal spending lies partly in the fact that people who work in the Federal Agencies, and the Federal Contractors, are in the solid middle class range with most of the health benefits paid for, enough vacation time and money to travel, and retirement benefits if an employee works long enough. All that, while many Americans outside the beltway are losing their middle class lifestyle. If the Federal Government cannot fix the economy in terms of growing the middle class again or delivering justice to the White Collar crooks on Wall Street, the rest of America will become very wary of supporting a big bureaucracy. As much as I would like the see the Federal Government fix the economy, I do not expect them to create 20 million office jobs, nor do I wish to see the Government try such a thing.

Posted by: brinn Nov 7 2010, 03:53 PM

QUOTE(lederuvdapac @ Nov 6 2010, 07:31 PM) *
We are only able to consume because we borrow from places like China, Japan and Saudi Arabia. Once the borrowing stops because interest rates rise, the party is over.

We do not borrow from China, Japan, nor Saudi Arabia. What we are doing is financing a foreign desire to save in US dollars. The relationship is much more akin to a consumer depositing funds in a bank. The US is effectively the bank and China, Japan and Saudi are the consumers. They take their US dollar earnings (not Yuan, Yen or Riyal) and buy a bond because their choices are limited to earning a positive interest rate or earning zero. The same reason you place your dollars into a savings account at a bank. As you know, deposits held at a bank are held as liabilities on the bank's balance sheet. The bank owes you these deposits back thus the bank is "borrowing' from you in exactly the same manner that the US "borrows" from China, Japan, and Saudi. So the question then becomes, when was the last time you heard of a bank shutting down because they were attracting too many depositors?

QUOTE(Leder)
QUOTE(brinn)
You're assertion that we can't pay our "debts" is patently false. The "debt" could be paid tomorrow with nothing more than an accounting entry. Operational fact. Not economic theory.


It would destroy our economy! The debt is insurmountable without causing massive depression. Our debt obligations far exceed our ability to ever pay it. Either we would raise taxes to such absurd levels that it would leave nothing for the productive economy or we would inflate away our debts which would destroy our currency and make our savings and capital evaporate. There is no easy way out of it. We can have an honest strategic default on our debt or we can choose to destroy our currency. Those are the options.


Just as the Bank always shutters their doors when they repay your savings account by moving your balance to a checking account, right?. Once the "debt" is "repaid" (effectively moved from the fed reserve bond accounts to the fed reserve "reserve" accounts) it is possible that liquidity would need to be drained from the system to avoid inflation (done via, more bond sales, increased taxation or increased rates) but that would only need to be done if the holder of the funds (China for example) decides to spend their dollar holdings by purchasing dollar denominated US goods and services. With all due respect, strategic default or hyperinflation are only considered reasonable options because of a lack of understanding of how the monetary system actually works. Once one gains an understanding of reserve accounting and sectoral balances the economics become much clearer, more logical and straightforward. Your assertions were once accurate but inapplicable after 1971 when the US converted to a completely non-convertible, floating fiat currency. Your citing gold standard theory and advocating gold standard policies in a fiat currency environment.



Posted by: Maybe Maybe Not Nov 7 2010, 04:16 PM

QUOTE(brinn @ Nov 7 2010, 10:53 AM) *
We do not borrow from China, Japan, nor Saudi Arabia. What we are doing is financing a foreign desire to save in US dollars. The relationship is much more akin to a consumer depositing funds in a bank. The US is effectively the bank and China, Japan and Saudi are the consumers. They take their US dollar earnings (not Yuan, Yen or Riyal) and buy a bond because their choices are limited to earning a positive interest rate or earning zero. The same reason you place your dollars into a savings account at a bank.
And the dollars deposited in our bank by others are then essentially loaned back to ourselves to finance a government that is spending way more than it takes in. The effect is the same as a loan although the financial reality may be more complex.

So when those others ask for their deposits back and we don't have anything to give them, or the bank says the billion dollars they put in are really only worth 8 or 9 hundred million, those others get upset.



QUOTE(brinn @ Nov 7 2010, 10:53 AM) *
As you know, deposits held at a bank are held as liabilities on the bank's balance sheet. The bank owes you these deposits back thus the bank is "borrowing' from you in exactly the same manner that the US "borrows" from China, Japan, and Saudi. So the question then becomes, when was the last time you heard of a bank shutting down because they were attracting too many depositors?
Really? That's an accurate description of what's happneing? Other countries are "rushing" to deposit all their money in the U.S.?

What's happening is that some big customers with a lot of money already deposited are getting skittish about the bank's solvency and hoping it doesn't fail.

Posted by: akaCG Nov 7 2010, 04:31 PM

QUOTE(brinn @ Nov 5 2010, 07:19 AM) *
... I’m not claiming that the US can print $1,000,000 for each and every citizen without consequence ...
...

Why not?

Posted by: brinn Nov 7 2010, 04:39 PM

QUOTE(akaCG @ Nov 7 2010, 11:31 AM) *
QUOTE(brinn @ Nov 5 2010, 07:19 AM) *
... I’m not claiming that the US can print $1,000,000 for each and every citizen without consequence ...
...

Why not?

Operationally, it could. Functionally, it would cause inflation.

Posted by: akaCG Nov 7 2010, 06:00 PM

QUOTE(brinn @ Nov 7 2010, 12:39 PM) *
QUOTE(akaCG @ Nov 7 2010, 11:31 AM) *
QUOTE(brinn @ Nov 5 2010, 07:19 AM) *
... I’m not claiming that the US can print $1,000,000 for each and every citizen without consequence ...
...

Why not?

Operationally, it could. Functionally, it would cause inflation.

How about just $45,000 (per citizen share of U.S. National Debt)? Or just $15,000 (per citizen share of U.S. debt held by foreigners)?

At what point does the "functional finance" model, upon leaving the "frictionless" world of theory, crash headlong into the "immovable object" of reality (e.g. "Stop diluting the value of the money I've worked so hard to make, or else!!!") and ceases to function (pun intended)?

Posted by: brinn Nov 7 2010, 07:36 PM

QUOTE(MMN)
Really? That's an accurate description of what's happneing? Other countries are "rushing" to deposit all their money in the U.S.?
Yes, what I wrote is an accurate description. Your interpretation of what I said is not. What other countries are "rushing" to do is to sell their goods and services to the US consumer. Once they have sold their goods and services they have no choice but to "deposit" their funds in the US reserve bank as that is how the payment for goods and services in US dollars clears. They have no other option if they are accepting US dollars. Their choice is then to convert their reserve balances to treasuries and earn interest or leave the funds in their account and maintain liquidity but forego a return on their holdings.

QUOTE(MMN)
And the dollars deposited in our bank by others are then essentially loaned back to ourselves to finance a government that is spending way more than it takes in. The effect is the same as a loan although the financial reality may be more complex.
No. It may appear that bond proceeds and taxes are funding our spending but they are not. Both taxes and bonds sales are liquidity drains but are not necessary for funding. What does it mean to loan ourselves something that we can create at will? Go back to my analogy of the business cards and the household. Does the father need collect business cards from his kids in order to issue more?


QUOTE(akaCG)
How about just $45,000 (per citizen share of U.S. National Debt)? Or just $15,000 (per citizen share of U.S. debt held by foreigners)?

At what point does the "functional finance" model, upon leaving the "frictionless" world of theory, crash headlong into the "immovable object" of reality (e.g. "Stop diluting the value of the money I've worked so hard to make, or else!!!") and ceases to function (pun intended)?
This has been done before. What were Bush's 2008 tax rebate checks but exactly this on a smaller scale? Aside from the moral hazard of such a course, it would likely allow private households to deleverage significantly. It would boost aggregate demand and the increased demand would likely begin to lower unemployment levels. Once employment levels have increased and the output gap decreases any additional spending would be inflationary. The government would need to increase taxes and increase rates to drain liquidity and dampen economic activity. Inflation will not increase while unemployment is is this high and subsequently, the output gap is extremely large. Only spending in excess of the economy's ability to produce will produce inflation.

Posted by: Maybe Maybe Not Nov 7 2010, 08:44 PM

QUOTE(brinn @ Nov 7 2010, 02:36 PM) *
QUOTE(MMN)
Really? That's an accurate description of what's happneing? Other countries are "rushing" to deposit all their money in the U.S.?
Yes, what I wrote is an accurate description. Your interpretation of what I said is not. What other countries are "rushing" to do is to sell their goods and services to the US consumer. Once they have sold their goods and services they have no choice but to "deposit" their funds in the US reserve bank as that is how the payment for goods and services in US dollars clears. They have no other option if they are accepting US dollars.
So they want the U.S. consumer, they just don't trust the financial intermediary they must go through to do so?

What's the difference? If they don't believe they're getting a fair shake from the financial intermediary, the whole thing falls apart. (Especially when they realize the buying power of the people they're selling to is being artificially propped up by their own money.)

Trust is a must.



QUOTE(brinn @ Nov 7 2010, 02:36 PM) *
[
QUOTE(MMN)
And the dollars deposited in our bank by others are then essentially loaned back to ourselves to finance a government that is spending way more than it takes in. The effect is the same as a loan although the financial reality may be more complex.
No. It may appear that bond proceeds and taxes are funding our spending but they are not. Both taxes and bonds sales are liquidity drains but are not necessary for funding. What does it mean to loan ourselves something that we can create at will?
We can't create it at will. Not without consequences. You've said so yourself.

There is no free lunch.

Posted by: brinn Nov 8 2010, 12:19 AM

QUOTE(MMN)
So they want the U.S. consumer, they just don't trust the financial intermediary they must go through to do so?

What's the difference? If they don't believe they're getting a fair shake from the financial intermediary, the whole thing falls apart. (Especially when they realize the buying power of the people they're selling to is being artificially propped up by their own money.)

Trust is a must.


Based upon the trade deficit I'm seeing no lack of trust in the US currency. But let's assume that the dollar begins to lose value because foreign holders begin to sell the dollar for other currencies. What happens to the relative value of goods and services produced by a nation when the value of their currency drops? I'm sure you know that the goods and services produced by the country with the weaker currency become more affordable for nations with a stronger currency. This shifts the balance of trade in favor of the weaker currency. Agreed? If the value of the US dollar drops, our exports become more attractive and the "evil" trade deficit begins to shrink. This is currently, exactly the goal of the Obama administration as they try to coerce China to unpeg the Yuan and let it float freely. Does it not trouble you that what you fear (foreigners not wishing to save in our currency) is currently the explicit goal of our foreign economic policy with China?

The real wealth of a nation is all the goods and services it produces plus all the goods and services it imports minus all the goods and services that are exported. This is essentially known as the real terms of trade and, currently, it is heavily weighted in the US' favor. If Obama's efforts to get the yuan to float are succesful our trade defict will shrink and our real terms of trade with China will suffer.

QUOTE(MMN)
We can't create it at will. Not without consequences. You've said so yourself.

There is no free lunch.


We can create it at will if we understand how to manage the consequences of our actions. Question for you MMN: Why hasn't all the stimulus and two rounds of QE failed to move inflation?

As long as the US economy remains productive, and as long as we do not borrow in a foreign currency, and as long as we have the political will to drain liquidity once the output gap shrinks, we'll be fine. Of course, the last requirement in the list is the one we need to worry about most as politicians have shown a tendency to do what is best for them rather than what is best for the country but if the operational realities of the monetary system were more widely understood it wouldn't be difficult to hold politician's feet to the fire if inflation began to increase. Besides, inflation is a long way off and won't become possible until the outgap gap shrinks considerably. Only spending above and beyond the economy's capacity to produce more goods and services is inflationary.

Posted by: skeeterses Nov 8 2010, 04:43 AM

QUOTE(brinn @ Nov 8 2010, 09:19 AM) *
We can create it at will if we understand how to manage the consequences of our actions. Question for you MMN: Why hasn't all the stimulus and two rounds of QE failed to move inflation?

Better yet, why hasn't all the stimulus and two rounds of QE stimulated the economy? You seem to have a very short term memory when you talk about there being "no inflation" despite all the money the Fed has pumped into the economy. Not too long ago, gasoline was selling for over $4/gallon, and before that, houses were skyrocketing in value with all the cheap credit going around.

Your idea about the value of the currencies adjusting via the Free Market and re-adjusting the flow of goods to balance out the Trade Deficit seems like a good idea, except for one thing. International Trade doesn't happen in a Free Market. Most of the Trade Agreements that get negotiated tend to favor politically well connected firms on both sides of the Ocean instead of the market place deciding. Rarely do these imbalances get resolved with happy endings. A lot of "Free Market" economists thought that the Chinese consumers would have loads of cash to buy American products after America running up gargantuan trade deficits with that country for 2 decades now. Instead, a lot of the surplus money ended up going into a Real Estate Bubble over there while a relatively small number of factory owners profited from the trade deficits.

Posted by: CarpeDinkum Nov 8 2010, 06:23 AM

Hi All -

I just want to say I'm enjoying the spirit of debate here. I don't know alot about economics (more cars and computers), but it seems like folks need to get a better handle on how the economy works. Seems like we elect politicians that mainly play to our fears and hopes, but nothing changes for our better. Sol it's boom and bust, with the left saying we have to chop off the right side of the ship and throw it overboard. We get sick of that and elect the Right, who says we have to chop off the left side of the ship and throw it overboard and so it goes until we're ALL left walking the plank. Hopefully nobody will decide that the masts have to go overboard to save the country. Of course, after the left and right sides of the ship are chopped off, maybe everybody will get together in the middle and decide that it's better to come up with a new plan than it is to drown. I don't understand political theory; I'm kind of tired of political pie-in-the-sky on both sides of the fence anyway.

Now, what I understand from what I've been reading is that the U.S. economy isn't based on the gold standard anymore and that the U.S. can't run out of it's own currency or be indebted in it's own currency. I also understand that the Gov't can't spend one way that will fix America forever, just like you can't eat a meal that will satisfy you for the rest of your life.

Please try to keep it simple. Seems to me there's a lot on the line here and while I can't say our elected officials are ENTIRELY out for their own good, it's not going to do us any good to hire politicians to help us get back to work if they don't know how the economy works. From what I've read here, any of 'em that talks about U.S. bankruptcy should get a pink slip, and that damn soon. The changes need to start with us. We can't make proper decisions if WE don't know the facts. Let's lay out some facts, right here.

Posted by: brinn Nov 8 2010, 12:08 PM

QUOTE("Skeeterses")
Better yet, why hasn't all the stimulus and two rounds of QE stimulated the economy?
Simple Answer: Because the stimulus largely went to wall st and banks to help shore up their balance sheets in the mistaken belief that banks weren't lending because they were reserve constrained. I'm an executive at relatively small bank and I can assure you that when we make a loan we don't care about the level of deposits in our bank because we know that if our reserve calculation falls short at the end of the calculation period we can borrow money in the interbank market. When we make a loan all we care about is the spread between our cost of funds and the rate on the loan and the borrower's ability to repay. That's it.

So the reason that the stimulus has had no effect is because it wasn't properly targeted. What we are experiencing is a balance sheet recession where main st. has too much debt. The stimulus did nothing but add to bank reserves and the money isn’t actually getting into circulation. Main Street deleveraging continues unabated. Additionally, high unemployment and idle production capacity exacerbates the situation. As it stands, banks are holding cash, loan demand is weak and velocity is minimal.

Reagrding, QE: Operationally it is a non-event and is likely actually deflationary in nature. QE basically purchases private holding of treasuries and provides cash (reserves in banks). It replaces an interest earning asset with a non-interest earning asset and forces the holder of the cash to seek other areas of investment. It will lower rates further along the yield curve as the feds purchase longer term bonds with this round of QE. Because QE is simply an asset swap and adds no real assets to the private sector it has no net effect on the level of private sector wealth and serves only to lower rates further and force savers to seek alternative investments.

Have to go to work now but I'll respond to your inflation concerns later today.

Posted by: Ted Nov 8 2010, 01:55 PM

QUOTE(brinn @ Nov 4 2010, 09:41 PM) *
It seems that the U.S. and much of Europe has become obsessed with deficits, debt reduction and austerity. The question for debate is simple:

What do you see as the negative economic effects of persistent deficits?

Payment of interest. Which amounts to money lost to the bad habit of overspending. Money spent on interest is not available for other uses and often requires increased Taxes to reduce deficits. Increased Taxes reduce economic activity and may lead to even more borrowing.

The recent election indicates that consumers are not lost on the issue. Out of control and pork barrel spending needs to end – Now

QUOTE
In FY2010, the Treasury Department spent $414 Billion of your money on interest payments to the holders of the National Debt. Compare that to NASA at $19 Billion, Education at $93 Billion, and Department of Transportation at $78 Billion.
http://www.federalbudget.com/



Posted by: CarpeDinkum Nov 8 2010, 04:31 PM

Thanks Brinn. That helps me understand what's going on with QE and why it's not helping restore jobs. The banks are scared to lend and the borrowers are scared to borrow. Can't say that I blame them.

So the Fed just keeps doing the same thing and it seems it's not helping that much. Is there anything else the Fed can do or are they just a one trick pony?

On inflation, it seems that bubbles have had a much more destructive effect on our economy than general inflation has. I'm not sure how to address that so we can head off the next bubble. Seems like there's always the sociopathic element, from the guy that says "I'll get the loan, gut the house and sell the pieces on Craigslist" to the corporate version of the same thing: "I'll bundle the loans, gut the value and sell what's left over to a mutual fund manager". The both of them should be in jail! We need some way of keeping that stuff under control and trusting our elected officials doesn't seem to be getting the job done.



Posted by: skeeterses Nov 8 2010, 04:41 PM

QUOTE(brinn @ Nov 8 2010, 09:08 PM) *
So the reason that the stimulus has had no effect is because it wasn't properly targeted. What we are experiencing is a balance sheet recession where main st. has too much debt. The stimulus did nothing but add to bank reserves and the money isn’t actually getting into circulation. Main Street deleveraging continues unabated. Additionally, high unemployment and idle production capacity exacerbates the situation. As it stands, banks are holding cash, loan demand is weak and velocity is minimal.
...........
Have to go to work now but I'll respond to your inflation concerns later today.

But you do know where the Fed was trying to go with the money, right? I'm assuming that you've been keeping up with the news about housing and the trouble with the carmakers. If people's mortgage payments are worth more than the market values of their homes, shopping and other "consumer activities" can go out the window very fast. Unfortunately, were to actually succeed in bringing housing prices back up, that could have the effect of driving even more people from their homes because of the affordability issue. The reason I mention this is because housing is one of the top economic concerns in this country right now, and many Americans are simply opposed to the Fed trying to prop up housing prices. Other things that have gone up in price are utilities, healthcare expenses, and education costs.

Also, the Deficit is not simply a numbers issue that can be solved by simply rearranging the accounting records. There are various programs like the "War on Terror", the healthcare entitlements, social security, transportation infrastructure, and even farm subsidies. Since you're new to the board, we need to hear your views on the other issues to see which Government programs would help the economy and which ones would simply enrich the lobbyists.

Posted by: brinn Nov 8 2010, 10:07 PM

QUOTE(Skeeterses)
But you do know where the Fed was trying to go with the money, right? I'm assuming that you've been keeping up with the news about housing and the trouble with the carmakers. If people's mortgage payments are worth more than the market values of their homes, shopping and other "consumer activities" can go out the window very fast.
Exactly why it was ill conceived and didn't work. A much more efective way of actually increasing aggregate demand is by lowering taxes. Eliminate FICA for as long as it takes to restore private sector balance sheets and you would see an organic stabilization in housing as people pay down debts and free up more income for mortgage payments (which in turn helps the banks) and for other purchases. QE does nothing as it adds no new net financial assets to the private sector and only changes maturities.

QUOTE(Skeeterses)
Also, the Deficit is not simply a numbers issue that can be solved by simply rearranging the accounting records. There are various programs like the "War on Terror", the healthcare entitlements, social security, transportation infrastructure, and even farm subsidies. Since you're new to the board, we need to hear your views on the other issues to see which Government programs would help the economy and which ones would simply enrich the lobbyists.
In point of fact I've been on the board longer than you. Check my "Join Date". I've just never been a prolific poster.

Regardless, my stance on any of those issues is completely irrelevant as the nature of monetary operations is apolitical. Funding of any of those is not a question of currency but rather a question of the real resources that it takes and the opportunity cost that is lost when those real resources are used for that purpose rather than another. Just as the issue of social security is not whether we will have the money to support seniors in the future but rather will our economy be productive enough to provide the resources for our seniors. Currency is just the method of keeping score. Once one understands how monetary operations function the political decisions of what deserves to be funded can be addressed.


QUOTE(Carpe Dinkum)
Thanks Brinn. That helps me understand what's going on with QE and why it's not helping restore jobs. The banks are scared to lend and the borrowers are scared to borrow. Can't say that I blame them.
You're welcome. Glad at least one person is finding this interesting and not immediately erecting an ideological wall. I'll post more later.

QUOTE("CarpeD")
So the Fed just keeps doing the same thing and it seems it's not helping that much. Is there anything else the Fed can do or are they just a one trick pony?
I'll get back to this.


Posted by: Maybe Maybe Not Nov 8 2010, 11:44 PM

QUOTE(brinn @ Nov 8 2010, 05:07 PM) *
QUOTE(Carpe Dinkum)
Thanks Brinn. That helps me understand what's going on with QE and why it's not helping restore jobs. The banks are scared to lend and the borrowers are scared to borrow. Can't say that I blame them.
You're welcome. Glad at least one person is finding this interesting and not immediately erecting an ideological wall. I'll post more later.
I hope I'm not seen as "erecting an ideological wall."

I think the idea that "trust is a must" is merely a different way to express what Carpe Dinkum has expressed here.



Posted by: CarpeDinkum Nov 9 2010, 03:19 AM

Naw MMN, I think you're just trying to understand it all, like me. If we get a good basic understanding of things, then we can make better decisions about who we elect. If we don't, then it's little different than having a company and hiring people don't know how to do the job and won't learn.

What do you think about the Fairtax thing? Seems OK to me (to the degree that we need to be taxed in the first place). I was reading that compliance costs for federal taxes (for individuals and corporations) amount to 20 cents for every tax dollar the government gets. That seems like a huge waste right there. Of course, a lot of compliance jobs would go out the door if we did that, but even if we used 1 penny for every tax dollar to get those folks trained for a different line of business, that would be 25 billion as opposed to 500 billion. Big interim hit to the GDP though...

Does anybody else have any figures on those compliance costs? Does that sound reasonably accurate?

Posted by: pj4xtrader Nov 9 2010, 03:30 AM

brinn thanks for having the courage to fight the deficit terroist tha dominate the mainstream media. Perhaps your efforts can help shift the debate of monetary operations and fiscal policy to the realm of public purpose, instead of the focus on the accounting entries.

Posted by: CarpeDinkum Nov 9 2010, 05:17 AM

Yeah, the media has been contributing heavily to the dumbing-down of America. Of course, we have to take some responsibility for running out and tossing McSenators and McPresidents down our throats. Easy to get and politically tasty, but you'd better set some money aside for the triple bypass surgery.

Posted by: Maybe Maybe Not Nov 9 2010, 11:56 AM

QUOTE(pj4xtrader @ Nov 8 2010, 10:30 PM) *
brinn thanks for having the courage to fight the deficit terroist tha dominate the mainstream media. Perhaps your efforts can help shift the debate of monetary operations and fiscal policy to the realm of public purpose, instead of the focus on the accounting entries.
Yes. Clearly we have the ability and the right to spend more than we take in year after year after year with no consequences. All we have to do is say that our $13 trillion national debt (a debt to which we add with each year's deficit) doesn't really exist since we owe that debt to ourselves. Magic!

Posted by: brinn Nov 9 2010, 12:30 PM

QUOTE(Maybe Maybe Not @ Nov 9 2010, 06:56 AM) *
QUOTE(pj4xtrader @ Nov 8 2010, 10:30 PM) *
brinn thanks for having the courage to fight the deficit terroist tha dominate the mainstream media. Perhaps your efforts can help shift the debate of monetary operations and fiscal policy to the realm of public purpose, instead of the focus on the accounting entries.
Yes. Clearly we have the ability and the right to spend more than we take in year after year after year with no consequences. All we have to do is say that our $13 trillion national debt (a debt to which we add with each year's deficit) doesn't really exist since we owe that debt to ourselves. Magic!

MMN,

We have the right to consume all that we can produce plus all that the foreign sector is willing to sell us (note that I say "willing" as foreign desire for US dollars in exchange for their goods and services is completely voluntary). Have you ever heard of the sectoral balances approach to economics? At it's heart, it states that in order for one sector of the economy (private, foreign, or government) to be in surplus another sector MUST be in deficit. In the US both the foreign sector (via our large trade deficit) and the private sector (via private savings) are in surplus. This means that mathematically, the government sector must run a deficit. Simple double entry accounting clearly shows one that not all sectors can be in surplus. So if the private sector wants to save and be in surplus and the US desires to be a net importer and not an exporter, the only sector that can absorb these surpluses is the government. If you prefer that government runs a surplus you can advocate for that but be clear that what you are advocating is for one or both of the private and foreign sectors to be in deficit. With a simple understanding of the real terms of trade and a notion that the US consumer should be saving more, you can think this through for a moment and tell me if driving the private or foreign sectors into deficit to offset the desired government surplus is truly the best course of action.

Posted by: Mrs. Pigpen Nov 9 2010, 02:48 PM

QUOTE(brinn @ Nov 9 2010, 08:30 AM) *
QUOTE(Maybe Maybe Not @ Nov 9 2010, 06:56 AM) *
QUOTE(pj4xtrader @ Nov 8 2010, 10:30 PM) *
brinn thanks for having the courage to fight the deficit terroist tha dominate the mainstream media. Perhaps your efforts can help shift the debate of monetary operations and fiscal policy to the realm of public purpose, instead of the focus on the accounting entries.
Yes. Clearly we have the ability and the right to spend more than we take in year after year after year with no consequences. All we have to do is say that our $13 trillion national debt (a debt to which we add with each year's deficit) doesn't really exist since we owe that debt to ourselves. Magic!

MMN,

We have the right to consume all that we can produce plus all that the foreign sector is willing to sell us (note that I say "willing" as foreign desire for US dollars in exchange for their goods and services is completely voluntary).


I've been reading this thread with interest, and still honestly have no idea about the logic here. Do I understand correctly that your argument is, as long as foreign companies are willing to sell to us, it doesn't matter how much we owe because they have to hold those dollars after the exchange? Could you site a country that no one is willing to sell goods to because their currency isn't honored? I haven't heard of the "sectoral balance approach" to economics, but I have heard of exchange rates....the US dollar is converted to foreign currency instantly with the push of a button..so goods can be bought, then converted (at whatever exchange rate) just as when I lived in Italy I could go to an Italian money machine and get out cash, INSTANTLY, in euros, even though my bank account was in US dollars. As the value of the US dollar changes with respect to other currencies, the exchange rates start to change and that is reflected in the price of goods, but it's not like those billions in US dollars have to be stored under a gient made-in-China mattress overseas, after the sale of goods, awaiting some blackmarket exchange.

Posted by: pj4xtrader Nov 9 2010, 04:02 PM

What is real economic wealth?

Let us examine life on the American frontier. A family on a farm had no choice but to be self-sufficient. The only way this family could save for their future, would be to amass and maintain a buffer stock of resources, e.g.(grain, seed, salted meats, apple cider and tanned hides). If by some unfortunate circumstance (drought, locust or wind storm) next years crop were damaged or destroyed, the family would have reserves to a degree and would not starve. The families buffer stock would be a measure of their wealth.

Today, due to advances in logistics, communications and the financial sectors, families, feeling less dislocated have come to replaced buffer stocks of usable resources with financial assets, confident that the market will offer those resources in exchange for their financial assets. These financial assets are a measure of a families wealth. What is lost is that these financial buffer stock, in the event of catastrophic crop failure do not offer the same level of security. Surely, no one would argue that it does not matter how many dollars are in your wallet if the market has no food to bare.

Today, the media and our public officials tell us we have a housing crisis yet no homes were destroyed and construction crews go without work. They say we need to better educate our children yet they propose to layoff teachers. Millions go hungry yet the supermarket dumpsters are overflowing with unsold spoiling food.

I ask again, what is real economic wealth?



QUOTE(Mrs. Pigpen @ Nov 9 2010, 09:48 AM) *
QUOTE(Brinn @ Nov 9 2010, 08:30 AM) *
QUOTE(Maybe Maybe Not @ Nov 9 2010, 06:56 AM) *
QUOTE(extruder @ Nov 8 2010, 10:30 PM) *
Brinn thanks for having the courage to fight the deficit terrorist Thai dominate the mainstream media. Perhaps your efforts can help shift the debate of monetary operations and fiscal policy to the realm of public purpose, instead of the focus on the accounting entries.
Yes. Clearly we have the ability and the right to spend more than we take in year after year after year with no consequences. All we have to do is say that our $13 trillion national debt (a debt to which we add with each year's deficit) doesn't really exist since we owe that debt to ourselves. Magic!

MMN,

We have the right to consume all that we can produce plus all that the foreign sector is willing to sell us (note that I say "willing" as foreign desire for US dollars in exchange for their goods and services is completely voluntary).


I've been reading this thread with interest, and still honestly have no idea about the logic here. Do I understand correctly that your argument is, as long as foreign companies are willing to sell to us, it doesn't matter how much we owe because they have to hold those dollars after the exchange? Could you site a country that no one is willing to sell goods to because their currency isn't honored? I haven't heard of the "sectoral balance approach" to economics, but I have heard of exchange rates....the US dollar is converted to foreign currency instantly with the push of a button..so goods can be bought, then converted (at whatever exchange rate) just as when I lived in Italy I could go to an Italian money machine and get out cash, INSTANTLY, in euros, even though my bank account was in US dollars. As the value of the US dollar changes with respect to other currencies, the exchange rates start to change and that is reflected in the price of goods, but it's not like those billions in US dollars have to be stored under a gient made-in-China mattress overseas, after the sale of goods, awaiting some blackmarket exchange.



Mrs. Pigpen

I have been a currency trader for many years, and I assure you that no financial transaction is complete with the push of a button. When you use a credit or bank card at a department store and they hand you a receipt and your merchandise, on the surface it would appear that the transaction was instantaneous. But the payment clearing process is a bit more complex and in most cases takes a few days be complete.

Every bid to buy a currency must be matched with an ask to sell at a specific exchange rate. Effectively a person or entity in the possession of a currency can only exchange it with a person or entity in the possession of the currency desired at a specific exchange rate. Banks in the interbank system facilitate the transaction by matching bids to asks plus their spread.

Retail Forex traders often believe these transactions to instant because all customer bids were matched with a broker ask and vice versa, all trades only existed within the broker and were never a part of the Forex market.

Your Bank withdraw seemed instant and for the most part is completed relatively quickly because the bank held both dollar and euro reserves and sold you their euro asset for your dollar asset at a specific exchange rate plus the spread that they charge for the service.

What often seems very simple and quick on the surface is often more complex and consumes more time.

Posted by: Mrs. Pigpen Nov 9 2010, 04:29 PM

QUOTE(pj4xtrader @ Nov 9 2010, 12:02 PM) *
QUOTE(Mrs. Pigpen @ Nov 9 2010, 09:48 AM) *
QUOTE(Brinn @ Nov 9 2010, 08:30 AM) *
QUOTE(Maybe Maybe Not @ Nov 9 2010, 06:56 AM) *
QUOTE(extruder @ Nov 8 2010, 10:30 PM) *
Brinn thanks for having the courage to fight the deficit terrorist Thai dominate the mainstream media. Perhaps your efforts can help shift the debate of monetary operations and fiscal policy to the realm of public purpose, instead of the focus on the accounting entries.
Yes. Clearly we have the ability and the right to spend more than we take in year after year after year with no consequences. All we have to do is say that our $13 trillion national debt (a debt to which we add with each year's deficit) doesn't really exist since we owe that debt to ourselves. Magic!

MMN,

We have the right to consume all that we can produce plus all that the foreign sector is willing to sell us (note that I say "willing" as foreign desire for US dollars in exchange for their goods and services is completely voluntary).


I've been reading this thread with interest, and still honestly have no idea about the logic here. Do I understand correctly that your argument is, as long as foreign companies are willing to sell to us, it doesn't matter how much we owe because they have to hold those dollars after the exchange? Could you site a country that no one is willing to sell goods to because their currency isn't honored? I haven't heard of the "sectoral balance approach" to economics, but I have heard of exchange rates....the US dollar is converted to foreign currency instantly with the push of a button..so goods can be bought, then converted (at whatever exchange rate) just as when I lived in Italy I could go to an Italian money machine and get out cash, INSTANTLY, in euros, even though my bank account was in US dollars. As the value of the US dollar changes with respect to other currencies, the exchange rates start to change and that is reflected in the price of goods, but it's not like those billions in US dollars have to be stored under a gient made-in-China mattress overseas, after the sale of goods, awaiting some blackmarket exchange.



Mrs. Pigpen

I have been a currency trader for many years, and I assure you that no financial transaction is complete with the push of a button. When you use a credit or bank card at a department store and they hand you a receipt and your merchandise, on the surface it would appear that the transaction was instantaneous. But the payment clearing process is a bit more complex and in most cases takes a few days be complete.

Every bid to buy a currency must be matched with an ask to sell at a specific exchange rate. Effectively a person or entity in the possession of a currency can only exchange it with a person or entity in the possession of the currency desired at a specific exchange rate. Banks in the interbank system facilitate the transaction by matching bids to asks plus their spread.

Retail Forex traders often believe these transactions to instant because all customer bids were matched with a broker ask and vice versa, all trades only existed within the broker and were never a part of the Forex market.

Your Bank withdraw seemed instant and for the most part is completed relatively quickly because the bank held both dollar and euro reserves and sold you their euro asset for your dollar asset at a specific exchange rate plus the spread that they charge for the service.

What often seems very simple and quick on the surface is often more complex and consumes more time.


Fair enough. I still don't see why a country could not convert currency with relative ease, if not at the drop of a button. I suppose it's similar to the stock market? If you own a million shares you can't attempt to sell it all at once or the stock will go into a death spiral and whatever is left will be worth much less...so you have to do it slowly?

Do you agree then with the premise that as long as foreigners are willing to sell us goods, we have nothing to fear regardless of how much we owe?

Posted by: Hobbes Nov 9 2010, 04:33 PM

QUOTE(pj4xtrader @ Nov 8 2010, 10:30 PM) *
brinn thanks for having the courage to fight the deficit terroist tha dominate the mainstream media. Perhaps your efforts can help shift the debate of monetary operations and fiscal policy to the realm of public purpose, instead of the focus on the accounting entries.


FWIW, public purpose has been what the debate has been about from the beginning (not this thread, but the entire discussion of the deficit). The whole issue is that creating more debt and unfunded liabilities than can be managed is absolutely against the public purpose. 'Sovereign currency" aside, what our (and most) governments are doing is no different than anyone running up huge debts on their credit cards--it's great fun while it lasts, but the ride eventually comes to a very painful end.

QUOTE(MrsPigPen)
Do you agree then with the premise that as long as foreigners are willing to sell us goods, we have nothing to fear regardless of how much we owe?


It depends on what you mean by 'fear'. Foreigners will always be willing to sell us goods. What will change is how much currency will be required to conduct the transaction (ie, inflation and exchange rates).

QUOTE(brinn)
Once one understands how monetary operations function the political decisions of what deserves to be funded can be addressed.


That's just it--there are no political decisions currently as to what deserves to be funded...pretty much anything goes, funded or not.

QUOTE(brinn)
Have you ever heard of the sectoral balances approach to economics? At it's heart, it states that in order for one sector of the economy (private, foreign, or government) to be in surplus another sector MUST be in deficit.


It can state that all it wants, but it is fundamentally false. All sectors of an economy can grow without any of them being in deficit. Economies grow due to productivity increases, and those can be across the board, and even across the globe. Consider that we benefit from buying goods from a foreign country (else we wouldn't buy them), the foreign country benefits from selling those goods to us, and governments in both countries then benefit from increased tax revenue.

Further consider that we have also had, at various times, global recessions in which all sectors were in deficit, further invalidating the sectoral balances approach. Sadly, I'm sure those in power will gladly latch on this as a means of justifying governmental deficits. Garbage in, garbage out--what we're left with is naturally just garbage....and a whole lot of debt to show for it.

QUOTE(brinn)
QUOTE(Hobbes)

Let me ask a very simple question: If deficits are so good, then why, with our constant stream of deficits, don't we have an increasing governmental revenue stream which makes deficits unnecessary?

Let me answer this question with a question of my own and if you feel it doesn't clarify enough I'll try to expand further. What would happen if the government, in an attempt to pay off the national debt, instituted a 100% tax on all privately owned assets?


Revolt...and proof that my explanation of the ridiculousness of using GDP as the denominator when creating debt/deficit ratios is valid. What your question doesn't do is address mine at all.

Posted by: CarpeDinkum Nov 9 2010, 05:07 PM

QUOTE(Maybe Maybe Not @ Nov 9 2010, 03:56 AM) *
QUOTE(pj4xtrader @ Nov 8 2010, 10:30 PM) *
brinn thanks for having the courage to fight the deficit terroist tha dominate the mainstream media. Perhaps your efforts can help shift the debate of monetary operations and fiscal policy to the realm of public purpose, instead of the focus on the accounting entries.
Yes. Clearly we have the ability and the right to spend more than we take in year after year after year with no consequences. All we have to do is say that our $13 trillion national debt (a debt to which we add with each year's deficit) doesn't really exist since we owe that debt to ourselves. Magic!


MMN, I don't think we can have the Govt pump money into the private economy forever without consequence. It's just that the consequence for the US is NOT bankruptcy. It's inflation. Let's not trust the "talking heads" that are just out there to get votes or viewer market share.

It's like someone saying that if you floor the gas pedal on your car and keep it there, it will change colors on you. Clearly, that's not the danger and you wouldn't be driving for long if you thought it was.

Posted by: Hobbes Nov 9 2010, 05:20 PM

QUOTE(CarpeDinkum @ Nov 9 2010, 12:07 PM) *
QUOTE(Maybe Maybe Not @ Nov 9 2010, 03:56 AM) *
QUOTE(pj4xtrader @ Nov 8 2010, 10:30 PM) *
brinn thanks for having the courage to fight the deficit terroist tha dominate the mainstream media. Perhaps your efforts can help shift the debate of monetary operations and fiscal policy to the realm of public purpose, instead of the focus on the accounting entries.
Yes. Clearly we have the ability and the right to spend more than we take in year after year after year with no consequences. All we have to do is say that our $13 trillion national debt (a debt to which we add with each year's deficit) doesn't really exist since we owe that debt to ourselves. Magic!


MMN, I don't think we can have the Govt pump money into the private economy forever without consequence. It's just that the consequence for the US is NOT bankruptcy. It's inflation. Let's not trust the "talking heads" that are just out there to get votes or viewer market share.

It's like someone saying that if you floor the gas pedal on your car and keep it there, it will change colors on you. Clearly, that's not the danger and you wouldn't be driving for long if you thought it was.


Actually, if you do that, it WILL change colors eventually (red shift)...so by your own analogy, then perhaps the talking heads have a point, in that as you approach the limits, extreme things happen.

FWIW...no one really thinks the U.S. will go bankrupt. The consequences of that are worse than the consequences of printing money to solve the problem. What you're missing, I think, is that the two are really essentially the same thing. You don't need to print the money (causing inflation) to solve the problem unless you are essentially bankrupt, unable to pay your bills without resorting to simply printing the money.

Posted by: brinn Nov 9 2010, 05:50 PM

A couple quick thoughts while I'm at lunch:

Glad to see you in this thread Mrs. P. I've always looked at you as one of the more openminded and less ideoligically driven posters on this site and I'm hoping you read some of the background info on monetary monetary theory and get a better handle on the operational realities of our system. I'll try to answer more of your questions later this evening and hope you remain interested.

QUOTE("pj4xtrader)
I have been a currency trader for many years, and I assure you that no financial transaction is complete with the push of a button. When you use a credit or bank card at a department store and they hand you a receipt and your merchandise, on the surface it would appear that the transaction was instantaneous. But the payment clearing process is a bit more complex and in most cases takes a few days be complete.

Every bid to buy a currency must be matched with an ask to sell at a specific exchange rate. Effectively a person or entity in the possession of a currency can only exchange it with a person or entity in the possession of the currency desired at a specific exchange rate. Banks in the interbank system facilitate the transaction by matching bids to asks plus their spread.

Retail Forex traders often believe these transactions to instant because all customer bids were matched with a broker ask and vice versa, all trades only existed within the broker and were never a part of the Forex market.

Your Bank withdraw seemed instant and for the most part is completed relatively quickly because the bank held both dollar and euro reserves and sold you their euro asset for your dollar asset at a specific exchange rate plus the spread that they charge for the service.

What often seems very simple and quick on the surface is often more complex and consumes more time.


Absolutely correct. An excellent explanation and much better than I could have offered. Thank you. Looks like I'm not the only "crackpot" out there! wink.gif

QUOTE(Hobbes)
'Sovereign currency" aside, what our (and most) governments are doing is no different than anyone running up huge debts on their credit cards--it's great fun while it lasts, but the ride eventually comes to a very painful end.
What do you mean "Sovereign currency aside"? The whole of the issue turns upon the nature of soveriegn currency and how it differs from commodity based currencies. We cannot discuss this issue and leave soveriegn currency aside. With no offense, your continued insistence that national governements, who are issuers of currency, are analagous to individuals is completely wrong. Individuals and nations are two completely different animals. I've tried to demonstrate that fact throughout this thread and hopefully, this evening I'll try to approach it once again from a different angle. If one person reading this decides to look further into this and does some independent research and gains a better understanding of monetary operations than it will have been well worth the effort.


Posted by: pj4xtrader Nov 9 2010, 05:49 PM

Mrs. Pigpen

Yes, for the most part I agree. What escapes most is that when we buy from foreigners the transaction is complete without any new foreign debt. Example, Chinese company sell Wal Mart $100 mil. worth of tee shirts. Wal mart commercial bank account is debit $100 mil, the commercial banks account at the Fed is debit $100 mil, the Chinese central bank's account at Fed is credited $100 mil, Chinese company's commercial bank's account at the Chinese central bank is credited $100 mil, Chinese company's commercial bank account is credited $100 mil. Payment process complete, no debt.

What is commonly referred to as debt only exist when the Chinese company decides to by treasury securities in order to earn interest on their newly earn $100 mil. If they decide to repatriate they have to transact as any currency trader transacts. For the most part whoever offers Yuan for those dollars will likely spend those dollars in dollar denominated markets or buy treasury securities.

Posted by: pj4xtrader Nov 9 2010, 05:56 PM

What is real economic wealth?

Let us examine life on the American frontier. A family on a farm had no choice but to be self-sufficient. The only way this family could save for their future, would be to amass and maintain a buffer stock of resources, e.g.(grain, seed, salted meats, apple cider and tanned hides). If by some unfortunate circumstance (drought, locust or wind storm) next years crop were damaged or destroyed, the family would have reserves to a degree and would not starve. The families buffer stock would be a measure of their wealth.

Today, due to advances in logistics, communications and the financial sectors, families, feeling less dislocated have come to replaced buffer stocks of usable resources with financial assets, confident that the market will offer those resources in exchange for their financial assets. These financial assets are a measure of a families wealth. What is lost is that these financial buffer stock, in the event of catastrophic crop failure do not offer the same level of security. Surely, no one would argue that it does not matter how many dollars are in your wallet if the market has no food to bare.

Today, the media and our public officials tell us we have a housing crisis yet no homes were destroyed and construction crews go without work. They say we need to better educate our children yet they propose to layoff teachers. Millions go hungry yet the supermarket dumpsters are overflowing with unsold spoiling food.

I ask again, what is real economic wealth?

Posted by: akaCG Nov 9 2010, 07:02 PM

I thought I'd introduce some stats into the discussion, along with some commentary:

http://www.ustreas.gov/tic/mfh.txt: down from $936.5 Billion in Aug'09 to $868.4 Billion in Aug'10. That's a 7.8% DECREASE.

Is that due to China's selling FEWER goods to the U.S., and therefore earning fewer dollars, perhaps? Nope. http://www.census.gov/foreign-trade/balance/c5700.html#2010:

In the first 8 months of 2010, the Chinese racked up a trade surplus of $173.4 Billion, compared to their $143.8 Billion trade surplus during the same period the previous year. That's a 20.6% ... INCREASE.

But surely they just decided to invest all those extra dollars that they're stuck with in U.S. stuff (factories, real estate, software companies, etc.), as opposed to Treasuries, right? Wrong. To wit:

QUOTE
...
Aug. 26 (Bloomberg) -- China’s direct investment in the U.S. plunged in the first half ...

China’s non-bond investments in the U.S. slumped 47 percent to $1.6 billion, ...
...

Meanwhile, ...
QUOTE
...
In contrast to the cutbacks made in the U.S., China’s acquisitions in other nations in the Americas and Europe more than doubled, rising to $20.1 billion from $8.4 billion a year earlier, ...
...

Link: http://www.businessweek.com/news/2010-08-26/china-cuts-u-s-investment-heritage-foundation-says.html

It seems that U.S. Treasuries and U.S. stuff aren't the only things that the Chinese aren't buying. They aren't buying the "functional finance" concept either.


Posted by: CarpeDinkum Nov 9 2010, 07:51 PM

AKA -


Haven't we been TRYING to get them to do that for a couple of administrations now?

In any case, I'm sure there's a point where they don't need to accumulate savings in $US at the same rate every month and it makes more sense to balance it out with savings in other currencies.

Posted by: Hobbes Nov 9 2010, 08:21 PM

QUOTE(akaCG @ Nov 9 2010, 02:02 PM) *
I thought I'd introduce some stats into the discussion, along with some commentary:

http://www.ustreas.gov/tic/mfh.txt: down from $936.5 Billion in Aug'09 to $868.4 Billion in Aug'10. That's a 7.8% DECREASE.

Is that due to China's selling FEWER goods to the U.S., and therefore earning fewer dollars, perhaps? Nope. http://www.census.gov/foreign-trade/balance/c5700.html#2010:

It seems that U.S. Treasuries and U.S. stuff aren't the only things that the Chinese aren't buying. They aren't buying the "functional finance" concept either.


No. It is due to a conscious effort by the Chinese to move away from investments in U.S. Treasuries due to their concern over inflationary issues, thus devaluing their investment. The Chinese aren't stupid...they see the writing on the wall as well. They have been shifting that money into natural resources, which have a natural hedge against inflation, and which are doubly valued in that it secures those resources for their consumption.

Which raises yet another problem with our deficit--what happens if we have an 'x' trillion budget deficit, and there is no one willing, or able, to purchase the debt to finance it? This has also happened recently..we have already had t-bill issues that didn't sell out their full allotment.

QUOTE
What do you mean "Sovereign currency aside"? The whole of the issue turns upon the nature of soveriegn currency and how it differs from commodity based currencies. We cannot discuss this issue and leave soveriegn currency aside. With no offense, your continued insistence that national governements, who are issuers of currency, are analagous to individuals is completely wrong. Individuals and nations are two completely different animals. I've tried to demonstrate that fact throughout this thread and hopefully, this evening I'll try to approach it once again from a different angle.


No, that is NOT the whole of the issue. It is PART of the issue, but simply saying 'sovereign currency!' does not make all the issues brought up magically disappear. Therefore, if one has to choose, it is better to not talk about it all than it is to talk about it as if it is the panacea which makes all things good and well. That's simply false.

Posted by: Ted Nov 9 2010, 08:29 PM

QUOTE(Hobbes @ Nov 9 2010, 03:21 PM) *
QUOTE(akaCG @ Nov 9 2010, 02:02 PM) *
I thought I'd introduce some stats into the discussion, along with some commentary:

http://www.ustreas.gov/tic/mfh.txt: down from $936.5 Billion in Aug'09 to $868.4 Billion in Aug'10. That's a 7.8% DECREASE.

Is that due to China's selling FEWER goods to the U.S., and therefore earning fewer dollars, perhaps? Nope. http://www.census.gov/foreign-trade/balance/c5700.html#2010:

It seems that U.S. Treasuries and U.S. stuff aren't the only things that the Chinese aren't buying. They aren't buying the "functional finance" concept either.


No. It is due to a conscious effort by the Chinese to move away from investments in U.S. Treasuries due to their concern over inflationary issues, thus devaluing their investment. The Chinese aren't stupid...they see the writing on the wall as well. They have been shifting that money into natural resources, which have a natural hedge against inflation, and which are doubly valued in that it secures those resources for their consumption.

Which raises yet another problem with our deficit--what happens if we have an 'x' trillion budget deficit, and there is no one willing, or able, to purchase the debt to finance it? This has also happened recently..we have already had t-bill issues that didn't sell out their full allotment.

QUOTE
What do you mean "Sovereign currency aside"? The whole of the issue turns upon the nature of soveriegn currency and how it differs from commodity based currencies. We cannot discuss this issue and leave soveriegn currency aside. With no offense, your continued insistence that national governements, who are issuers of currency, are analagous to individuals is completely wrong. Individuals and nations are two completely different animals. I've tried to demonstrate that fact throughout this thread and hopefully, this evening I'll try to approach it once again from a different angle.


No, that is NOT the whole of the issue. It is PART of the issue, but simply saying 'sovereign currency!' does not make all the issues brought up magically disappear. Therefore, if one has to choose, it is better to not talk about it all than it is to talk about it as if it is the panacea which makes all things good and well. That's simply false.


Good question. And the unpleasant answer is that the price goes up (return rate) making the debt more expensive to maintain

But with uncertainty in the world there will always be buyers for US Treasury Bonds
http://www.lewrockwell.com/englund/englund58.1.html

Posted by: akaCG Nov 9 2010, 08:37 PM

QUOTE(CarpeDinkum @ Nov 9 2010, 02:51 PM) *
AKA -

Haven't we been TRYING to get them to do that for a couple of administrations now?
...

I'm not aware of any administration that has tried to get China to reduce their holdings of U.S. Treasuries (which, keep in mind, roughly amount to the last 3.5 years' worth of their trade surpluses with us) and/or reduce their U.S. direct investments (which, of course, would help job creation here). If you can summon information to the contrary, I'd be most interested.

QUOTE(CarpeDinkum @ Nov 9 2010, 02:51 PM) *
...
In any case, I'm sure there's a point where they don't need to accumulate savings in $US at the same rate every month and it makes more sense to balance it out with savings in other currencies.

Isn't it interesting that this desire for diversification on China's part happens to coincide with a period when the U.S. is behaving like the proverbial "cricket" while Europe and others, rejecting our pleas to follow suit, are behaving like the proverbial "ant"?

Posted by: pj4xtrader Nov 9 2010, 08:54 PM

akaCG

I am not sure I understand how China's choices on portfolio allocation fits into the discussion. If you mean to attribute changes in their portfolio to our deficits, are we to believe that the US running a deficit is a new turn of events.

The fact that they were able to purchase commodities, as well as European and Asia assets tells us that someone wants to hold those dollars.

Posted by: Hobbes Nov 9 2010, 09:11 PM

QUOTE(Ted @ Nov 9 2010, 03:29 PM) *
QUOTE(Hobbes @ Nov 9 2010, 03:21 PM) *
[Which raises yet another problem with our deficit--what happens if we have an 'x' trillion budget deficit, and there is no one willing, or able, to purchase the debt to finance it? This has also happened recently..we have already had t-bill issues that didn't sell out their full allotment.


Good question. And the unpleasant answer is that the price goes up (return rate) making the debt more expensive to maintain

But with uncertainty in the world there will always be buyers for US Treasury Bonds
http://www.lewrockwell.com/englund/englund58.1.html


Both true. That is the prime reason our rates haven't shot up already...as bad as we might be, most other places in the world are currently worse. The kicker to that is that there are other options for investment besides government bonds, as the Chinese are demonstrating. The simple fact that they are moving away from stashing their money in our bonds should be great cause for concern--who else is currently generating the surplus needed to purchase our debt? As buyers dwindle, rates will have to go up, lrequiring more borrowing to finance the debt, causing more concern about fiscal stability, causing rates to go up even more....thus leading to the dangerous spiral I have been describing.

Good thing we can just make an accounting entry to make it all go away, otherwise we might need to be a bit concerned. Funny we haven't done that already, we could spend that interest money on alot more productive things than interest. Hmmmmm.....

Posted by: Amlord Nov 9 2010, 09:59 PM

QUOTE(brinn @ Nov 5 2010, 07:02 PM) *
What I want to do first is establish that the national debt (the sum of the cumulative annual deficits) is merely the accounting offset for private sector savings and that can be done with a simple analogy that is originally attributed to Warren Mosler. I first encountered this analogy on Prof. Bill Mitchell’s Website “Billy Blog”.


The national debt is not an offset for private sector savings. To say this, the private sector must have no alternative to government bonds. Clearly, there are alternatives, they are simply riskier.

QUOTE(brinn @ Nov 5 2010, 07:02 PM) *
Immediately, by imposing a tax obligation in the currency of issue (the business cards) you have created a demand for the currency and created the conditions to allow you to transfer private resources (the kid’s labor) to the public sector (your garden). However, also note that you must spend the 100 cards each week before the kids can pay the tax of 100 cards. This illustrates that government spending must precede taxation and that taxation is not a revenue source for the government (i.e. taxing or taking your business cards from your kids does not allow you to spend your cards in the first place). You are the monopoly issuer of your cards and you are never financially constrained in your business cards (the currency).


Again, this is not correct. Government spending is backed by the authority that the government has to tax the productive capacity of its citizens. You don't tax first and spend second. No government does. You spend first and tax afterward. The tax is the government imposing itself on the wealth of its citizens. Of course there is a limit to the level that the citizens will allow themselves to be taxed. Theoretically there is no limit on taxation beyond the wealth of the nation. Practically, however, the limit is much lower.

QUOTE(brinn @ Nov 5 2010, 07:02 PM) *
This arrangement is analogous to a fiat currency like the US dollar. You can then extend this analogy and begin to track your currency transactions via a spreadsheet. This eliminates the need to “print” more business cards. Your spreadsheet represents “bank entries” which record all the outflows (spending) and inflows (taxation). If you make an error and add an extra zero to your spending one week, you wouldn’t have to “print” 900 new cards but your kids would be better off by 900 cards because it would show up as a deposit in their account.


This analogy is true to the fact that there is nothing tangible behind our currency, just as there is nothing tangible behind these business cards. The spending is limited by the productive capacity of the citizens (the children). However, what happens when it is the neighbor that wants his garden raked.

QUOTE(brinn @ Nov 5 2010, 07:02 PM) *
Under the conditions above, the household budget would be balanced each week: You spend 100 cards and the kids pay you 100 cards to extinguish their tax liability. Note that the kids will be unable to accumulate any cards (that is, save) because they can only get access to the volume of cards that you make available via spending.


Here is where the analogy breaks down. The children in the real world produce more than the government has consumed. The business cards have value not because the parent has issued them, but because they represent actual labor that the children are willing to perform. I believe you are confusing government bonds with currency.

QUOTE(brinn @ Nov 5 2010, 07:02 PM) *
If you want to teach your kids to save you will either need to increase the business card wage for their labor while leaving your tax unchanged, ask them to do more labor each week and thus increase their wages while leaving your tax unchanged or keep paying them the same amount for the same labor and lower your tax. Let say you provide them with 120 cards per week as wages (government spending) but keep the tax at only 100 cards. Your budget will now be running a deficit of 20 cards per week but the kids can now save 20 cards per week because your spending (the government spending) has provided the “finance” for the savings. As the weeks go by the kids could accumulate more and more savings (numbers in the spreadsheet would increase) and you would soon see that the non-government saving over time is the exact record of the cumulative deficits being run by you (the government). Same as the US economy.


Are you claiming that the entire real value of the US is equivalent to the government debt? Or that savings in the US are equal to the government debt? Neither is true. http://www.bea.gov/briefrm/saving.htm

If the debt and savings are somehow related, why is the savings rate at its lowest now while the debt is at its highest (in terms of GDP)? http://www.creditwritedowns.com/2010/02/chart-of-the-day-u-s-savings-rate-over-last-60-years.html

QUOTE(brinn @ Nov 5 2010, 07:02 PM) *
Extend the analogy further; Your kids now want to make more money (cards) and earn a return on their savings. As it stands, the only way they will be able to do that is if you decide to pay interest on their savings. This is equivalent to you offering them a government bond (a bit of paper saying that if they deposit their savings with you each week that you will pay them back at some future time plus some interest paid, of course, in business cards). Your issuance of debt establishes a non-zero rate of interest in your household and increases the kid’s wealth. Note that you were not forced to issue the bond to enable you to continue to run a deficit. The bond simply replaced non-interest bearing savings (reserves in our “banking” system) with an interest-earning asset (the bond).


Bonds are more properly defined as a claim on future government revenues.

QUOTE(brinn @ Nov 5 2010, 07:02 PM) *
Work the analogy backward and you can see how a federal surplus reduces private sector savings. Any surplus must be met by either:

a) A demand for more work to earn the shortfall – noting that the household has now reduced employment levels (in hours) and there is some underemployment creeping in. If you chose to reduce your deficit by not employing one of your kids you would have generated unemployment.

cool.gif A sale of private possessions to get some cards. In this simple case, It is likely that the kids would offer your bonds (the bits of paper) for sale to get the funds. So the surplus begins to eat away at your kids wealth.

or

c) A reduction in savings that are not being stored in bonds.

Regardless of the response, the budget surplus strains your kid’s liquidity and forces them to reduce wealth. If you kept running budget surpluses, your kids would eventually run out of assets and their labor would be underutilized.

This is nonsense (unless I missed a definition or I read something wrong). The government does not create wealth for the citizen. If the government was in surplus and had no debt that would mean that it would be storing the productive output of the country. If it does have debt, a surplus means paying down its past overspending. If there was no debt the government should obviously not be running much of a surplus.

In the real world, the US government has overspent by a year's worth of the entire country's output. While you could say that this means it generated a year's worth of GDP for nothing, that "wealth" comes at a price: future demand on the productive output of the citizens. Since there is a real limit on the amount the government can tax from its citizens, the risk of that spending increases over time, causing interest rates to rise. Maybe we aren't at that point just yet, but we are close. The citizens of the US are close to a tax revolt as demonstrated by the TEA party. That means it is riskier to bet that the government can levy the taxes required to pay the interest on past debt and continue to run up new debt. The taxing authority is not unlimited and that is where your analogy falls apart.

Posted by: brinn Nov 9 2010, 11:53 PM

QUOTE(Hobbes)
It can state that all it wants, but it is fundamentally false. All sectors of an economy can grow without any of them being in deficit.
This is an accounting identity, not a theory. If it is wrong, then five centuries of double entry book keeping must also be wrong. But since it is clearly wrong, I’m certain you will be able to show me a single country on the face of the earth that runs a trade surplus, has a positive private savings rate, and who’s government does not run a cumulative deficit. I’ll await that example.

QUOTE(Hobbes)
Further consider that we have also had, at various times, global recessions in which all sectors were in deficit, further invalidating the sectoral balances approach.
we must be talking past each other as this statement is clearly false. It is impossible for all three sectors to be negative as, per accounting, all three net to zero. You would have to show me a nation that had a cumulative deficit, a trade deficit and no privately held wealth. Once again, if you can provide me with an example (any nation will do) I can easily prove to you that one of the sectors was in deficit.

QUOTE(Hobbes)
Let me ask a very simple question: If deficits are so good, then why, with our constant stream of deficits, don't we have an increasing governmental revenue stream which makes deficits unnecessary?

QUOTE(Brinn)
Let me answer this question with a question of my own and if you feel it doesn't clarify enough I'll try to expand further. What would happen if the government, in an attempt to pay off the national debt, instituted a 100% tax on all privately owned assets?



Revolt...and proof that my explanation of the ridiculousness of using GDP as the denominator when creating debt/deficit ratios is valid. What your question doesn't do is address mine at all.
Of course there would be revolt as this would effectively remove 100% of privately held (non-government) assets from private hands. But it would be exactly the amount (to the penny) that would be needed to “pay back” the national debt.

I can see how this may not have answered your question satisfactorily though. If you are asking why previous annual deficits have not supplied the private sector with enough assets to support our economy without running additional deficits I can answer that as well. Poor investment decisions, poor rate decisions, unwise and inefficient government spending, and massive trade deficits among other factors have all conspired to create the current recession. This manifests in a lack of aggregate demand and recapitalization of private sector balance sheets (i.e. individual savings rates increase and consumption rates decrease). The economy will continue to slow even more but eventually demand will increase once sufficient deleveraging has occurred. This could be years or decades without intervention. The recovery process could be spurred by a massive tax decrease which will serve to speed up the deleveraging process. The only way this can happen though would be through increasing the deficit as tax revenues would initially fall. After demand has improved the economic automatic stabilizers will force the deficit down as transfer payments (unemployment and social welfare etc…) are lowered and tax receipts begin to increase.

To be clear, I am not advocating continual deficits but only pointing out that deficits are a crucial tool in the fiscal toolbox and are not to be feared if they are properly understood. For any given government and set of policies there is an optimum level of deficit. Currently, tax rates are much too high for the size for our government. If you are liberal and wish to expand public policy or if you are conservative and want to remove entitlements and cut spending you can do either. The key is understanding the proper level of taxation (as a liquidity drain not as a source of funding) that coincides with the level of government spending and deficit that you advocate. The optimum level will provide near full domestic employment and very little output gap while taxing at a level that minimizes inflation.


QUOTE(akaCG)
It seems that U.S. Treasuries and U.S. stuff aren't the only things that the Chinese aren't buying. They aren't buying the "functional finance" concept either.
Excellent turn of a phrase, but, much like physics, functional finance operates whether they believe in it or not. Again, this is not theory but rather process.

Certainly China has been avoiding longer maturity debt, likely out of fear of capital losses and have shifted some of their portfolio to other currencies (likely to diversify so that they will not lose if the dollar depreciates, and perhaps to pressure US authorities to keep the dollar strong). Regardless, if China decides to diversify its currency holdings it certainly could. The Euro and or Yen are likely targets as both are relatively strong currencies. It can gain foreign currencies in two manners; by exporting to other countries or via currency purchases.

Regarding the first) If China decides it wants Euro’s there are complications as the eurozone has no equivalent to US treasuries. The eurozone only offers euro-denominated debts of individual governments (I’m sure China would love to pile into some Greek bonds!) and each have different risk ratings. Additionally, the volume of Chinese exports and subsequent purchase of euro bonds would increases risk by driving down risk premiums with China absorbing too much country-specific risk to likely feel comfortable. Also, the euro nations as a whole (and Germany in particular) attempts to constrain domestic demand in order to promote exports. Do you think that Europe is going to reverse course and allow itself to be a source of net demand for Chinese exports? Japan presents similar problems for China as Japan is an export driven economy.

Regarding the second) if China sold its dollars and bought euros this would weaken the dollar and strengthen the euro and thus lose more US exports than it would gain in euro zone exports. Also, because China does seem concerned about the value of its dollar holdings, it would not be wise to cause dollar depreciation via this tactic. They have painted themselves into a corner and will find it difficult to divest the US dollar that easily. Mrs. Pigpen made this correct observation above. There are very strong incentives against abrupt dramatic shifts in currency holdings.

QUOTE(Hobbes)
Both true. That is the prime reason our rates haven't shot up already...as bad as we might be, most other places in the world are currently worse. The kicker to that is that there are other options for investment besides government bonds, as the Chinese are demonstrating. The simple fact that they are moving away from stashing their money in our bonds should be great cause for concern--who else is currently generating the surplus needed to purchase our debt? As buyers dwindle, rates will have to go up, lrequiring more borrowing to finance the debt, causing more concern about fiscal stability, causing rates to go up even more....thus leading to the dangerous spiral I have been describing.
The market has little say in the rate of bonds for a country with a sovereign currency. The government determines the rates on short term debt and could do so on longer term debt as well if it so desired. Your rationalization that the reason that rates are currently low is due to everyone else being worse than us is not true. Look at any graph of Japan's deficit and bond rates and you'll see an exploding deficit and steadily decreasing bond rates (current japanese rates are near zero). Japan must be an exception to the rule as well. If you can't find a link to this data via google please let me know and I'll dig one up to prove my statement. Japan sets the rates on it's bonds as does the US.

QUOTE(Amlord)
The national debt is not an offset for private sector savings. To say this, the private sector must have no alternative to government bonds. Clearly, there are alternatives, they are simply riskier.
To clarify my terminolgy; private sector savings is the sum total of the net US dollar denominated assets held by both the US and foreigners.

QUOTE(Amlord)
QUOTE(brinn)
Immediately, by imposing a tax obligation in the currency of issue (the business cards) you have created a demand for the currency and created the conditions to allow you to transfer private resources (the kid’s labor) to the public sector (your garden). However, also note that you must spend the 100 cards each week before the kids can pay the tax of 100 cards. This illustrates that government spending must precede taxation and that taxation is not a revenue source for the government (i.e. taxing or taking your business cards from your kids does not allow you to spend your cards in the first place). You are the monopoly issuer of your cards and you are never financially constrained in your business cards (the currency).


Again, this is not correct. Government spending is backed by the authority that the government has to tax the productive capacity of its citizens. You don't tax first and spend second. No government does. You spend first and tax afterward. The tax is the government imposing itself on the wealth of its citizens. Of course there is a limit to the level that the citizens will allow themselves to be taxed. Theoretically there is no limit on taxation beyond the wealth of the nation. Practically, however, the limit is much lower.
Please refer to the bolded part in my quote above. I think you'll find we are in agreement on this point at least.

I'll answer the rest of your points in a while as you make insightful observations and seem to be willing to, at least, entertain my points and challenge them with logic that we can discuss.

Posted by: Maybe Maybe Not Nov 10 2010, 12:31 AM

QUOTE(brinn @ Nov 9 2010, 07:30 AM) *
Have you ever heard of the sectoral balances approach to economics? At it's heart, it states that in order for one sector of the economy (private, foreign, or government) to be in surplus another sector MUST be in deficit. In the US both the foreign sector (via our large trade deficit) and the private sector (via private savings) are in surplus.
So our trade defitict turns out to be a "surplus." MORE MAGIC!!!

And if we change all the negative and positive signs, we actually have $13 trillion to SPEND. This is genius.

Posted by: brinn Nov 10 2010, 02:26 AM

QUOTE(Maybe Maybe Not @ Nov 9 2010, 07:31 PM) *
QUOTE(brinn @ Nov 9 2010, 07:30 AM) *
Have you ever heard of the sectoral balances approach to economics? At it's heart, it states that in order for one sector of the economy (private, foreign, or government) to be in surplus another sector MUST be in deficit. In the US both the foreign sector (via our large trade deficit) and the private sector (via private savings) are in surplus.
So our trade defitict turns out to be a "surplus." MORE MAGIC!!!

And if we change all the negative and positive signs, we actually have $13 trillion to SPEND. This is genius.
The sarcasm is noted but unnecessary. If you don't understand the concept I'll be happy to try to explain further by excerpting Rob Parenteau's intro to sectoral balances titled http://neweconomicperspectives.blogspot.com/2009/07/coherently-confronting-us-macro.html. Rob Parenteau, CFA, is the sole proprietor of MacroStrategy Edge and a research associate with the Levy Economics Institute of Bard College.

We can enter this approach from the standard macro observation that in any accounting period, total income in an economy must equal total outlays, and total saving out of income flows must equal total investment expenditures on tangible assets. The financial balance of any sector in the economy is simply income minus outlays, or its equivalent, saving minus investment. A sector may net save or run a financial surplus by spending less than it earns, or it may net deficit spend as it runs a financing deficit by earning less than it spends.

Furthermore, a net saving sector can cover its own outlays and accumulate financial liabilities issued by other sectors, while a deficit spending sector requires external financing to complete its spending plans. At the end of any accounting period, the sum of the sectoral financial balances must net to zero. Sectors in the economy that are net issuing new financial liabilities are matched by sectors willingly owning new financial assets. In macro, fortunately, it all has to add up. This is not only true of the income and expenditure sides of the equation, but also the financing side, which is rarely well integrated into macro analysis.

We can next divide the economy into three major sectors: the domestic private sector (including households and businesses), the government sector, and the foreign sector and ask a simple question relevant to current developments. What happens if the domestic private sector tries to net save, with no attending change in the government or foreign sector financial balances?

If households attempt to net save by spending less than they are earning, and businesses attempt to net save (reinvesting less than their retained earnings), then nominal incomes and real output will be likely to fall. Money incomes and economic activity will tend to contract until private savings preferences are reduced (with essential goods and services taking up a larger share of household income as incomes fall), or until depreciation leaves businesses and households inclined to invest once again in durable assets. Common sense suggests that a drop in private income flows while private debt loads are high is an invitation to debt defaults and widespread insolvencies – that is, unless creditors are generously willing to renegotiate existing debt contracts en masse.

...In fact, the US economy has dipped into a mild version of Fisher’s debt deflation process as nominal GDP has fallen, wage and salary income flows have fallen, the CPI and other inflation measures have dropped into deflation, and private debt delinquencies and defaults are still spreading. Following the shocks to tangible and financial asset prices, credit availability, and the labor market, the US private sector, by our calculations, has swung from a 4.5% of GDP deficit spending position three and a half years ago to a 4% net saving position as of Q1 2009. This exceeds the 8% of GDP swing in the private sector financial balance witnessed as the tail end of the 1973-5 recession – it is an enormous adjustment, to put it mildly.

Had the current account deficit (which, remember, is the trade balance plus net income flows related to asset holdings, equals foreign net saving) not shrunk from 6% to 2% of GDP over the same period, while the combined government fiscal deficit increased from 1.5% to 6% of GDP, then the attempt by the private sector to complete such a dramatic swing in its financial balance position would have ended in a very sharp and severe debt deflation.


Not magic, not sophistry, just thoughtful (and not even controversial) economic analysis.

Posted by: CarpeDinkum Nov 10 2010, 02:43 AM

QUOTE(akaCG @ Nov 9 2010, 12:37 PM) *
QUOTE(CarpeDinkum @ Nov 9 2010, 02:51 PM) *
AKA -

Haven't we been TRYING to get them to do that for a couple of administrations now?
...

I'm not aware of any administration that has tried to get China to reduce their holdings of U.S. Treasuries (which, keep in mind, roughly amount to the last 3.5 years' worth of their trade surpluses with us) and/or reduce their U.S. direct investments (which, of course, would help job creation here). If you can summon information to the contrary, I'd be most interested.



I just recall the Bush adminstration addressing the trade imbalance with China and that's continued into the Obama administration. Guess I should have said "across two administrations".


Posted by: Hobbes Nov 10 2010, 03:02 AM

QUOTE(Amlord @ Nov 9 2010, 04:59 PM) *
This analogy is true to the fact that there is nothing tangible behind our currency, just as there is nothing tangible behind these business cards. The spending is limited by the productive capacity of the citizens (the children). However, what happens when it is the neighbor that wants his garden raked.


I want to focus on the point in bold, which I believe is incorrect, and leads to the faulty representation of our debt/deficit in terms of GDP. The government's spending is NOT limited by the productive capacity of its citizens. It is limited by its ability to tax that productive capacity (its revenue, rather than the country's)...which is significantly less than their capacity to produce. Therefore, the correct denominator to use when expressing the debt and deficit is NOT the GDP, it is governmental revenue. They used to do this, but then the numbers got too scary, so basically they just made the denominator bigger to 'fix' it. Note that our current debt would be something like 6 times governmental revenue, with projections for that to reach about 10 times by 2020. The true magnitude of the problem is hidden by the use of the false denominator.

QUOTE
This is an accounting identity, not a theory. If it is wrong, then five centuries of double entry book keeping must also be wrong. But since it is clearly wrong, I’m certain you will be able to show me a single country on the face of the earth that runs a trade surplus, has a positive private savings rate, and who’s government does not run a cumulative deficit. I’ll await that example.


No need. It falls flat on both of the examples I gave, which you neglected (as seems to be quite common in this thread) to address. There are a great many factors which lead to governments running a a deficit, the primary ones being political, not economical...so it is impossible to isolate them on the factors you specify. Just because they don't doesn't mean they can't, as both of my (unrefuted) examples demonstrate. However, if an example you need...China for probably more than a thousand years, India for a slightly lesser time frame, and most oil producing countries until they bought into this sort of nonsense--all of which are now struggling economically, thereby proving my point on both ends. Also, please stop with these being nothing more than accounting entries. If you truly believe that, then quite frankly this whole discussion is pointless. I laud you on your stance on getting more people to learn more about governmental finance...but going this direction is not going to accomplish that.

Now maybe you can now address my initial question of why, if this is all true, countries such as Japan have been unable to simply 'deficit' their way out of their economic doldrums? Are they just making the wrong accounting entries? Ditto for every country every time they have a recession? When we're in a recession, do we see a rapid rise in governmental revenue (the accounting offset), leading to corresponding large government surpluses? The answer to this latter question is, of course, no, further refuting the concept of sectoral balance, were that still necessary.

Posted by: akaCG Nov 10 2010, 03:52 AM

Came across this bio of Abba Lerner, the father of "functional finance", earlier today (bolding mine):

QUOTE
...
Lerner’s main contribution to macroeconomic policy is his concept of functional finance. Lerner thought that if governments wanted to increase aggregate demand so as to maintain employment, and if the federal budget was balanced, the government should run a deficit by increasing government spending or decreasing taxes. If, on the other hand, the government wanted to decrease aggregate demand, it should, if the budget was balanced, run a surplus by decreasing government spending or raising taxes. ...
...

Link: http://www.econlib.org/library/Enc/bios/Lerner.html

Seems to me, that's quite different from saying that our continued deficits and increasing debt are no problem because our fiat currency system creates a hermetically sealed environment whereby all that's involved is a bunch of double-entry bookkeeping federal budget entries that offset each other to the penny.

Mr. Lerner seems to have been quite aware that the ole adage "The dose makes the poison" applies in the case of deficits and debt as well.

Posted by: Hobbes Nov 10 2010, 04:19 AM

QUOTE(brinn @ Nov 9 2010, 06:53 PM) *
To be clear, I am not advocating continual deficits but only pointing out that deficits are a crucial tool in the fiscal toolbox and are not to be feared if they are properly understood. For any given government and set of policies there is an optimum level of deficit. Currently, tax rates are much too high for the size for our government. If you are liberal and wish to expand public policy or if you are conservative and want to remove entitlements and cut spending you can do either. The key is understanding the proper level of taxation (as a liquidity drain not as a source of funding) that coincides with the level of government spending and deficit that you advocate. The optimum level will provide near full domestic employment and very little output gap while taxing at a level that minimizes inflation.


Then it seems that we are in violent agreement, and having an esoteric policy (or philosophy) discussion. Nothing wrong with that (used to enjoy those very much back in college)...they can be both fruitful and fun...we just need to understand that that is what we are having. In that spirit, I agree that they can indeed be a useful tool in the fiscal toolbox. Given the perpetual deficits, and more importantly the corresponding large structural deficit we have, would you agree that it has so far been an overused tool? Using deficits occassionally as a way of controlling the economy is one thing. Using them constantly as a way of providing services you can't afford is another thing entirely...would you agree?

QUOTE
The economy will continue to slow even more but eventually demand will increase once sufficient deleveraging has occurred. This could be years or decades without intervention. The recovery process could be spurred by a massive tax decrease which will serve to speed up the deleveraging process. The only way this can happen though would be through increasing the deficit as tax revenues would initially fall. After demand has improved the economic automatic stabilizers will force the deficit down as transfer payments (unemployment and social welfare etc…) are lowered and tax receipts begin to increase.


Again we're in violent agreement, mostly, I think. Note that most of the 'intervention' being proposed is actually geared to prevent the necessary deleveraging, and thereby actually prolonging the recession

Given the above, I hesitate to bring this up, but....

QUOTE
The market has little say in the rate of bonds for a country with a sovereign currency.


Completely false. The market has every say in the rate of bonds...sovereign currency has nothing to do with it one way or another (although inflationary concerns might make the market decide the rate needs to go up). A country can't force people, especially people in other countries, to buy the bonds (again, regardless of whether its currency is sovereign or not)...the market sets the price for those just as it does for everything else. Now, if by 'rate' you mean the fixed rate of interest a given bond provides, then the seller does set that (again, sovereign currency or no), but the buyer takes that into consideration when deciding what price to pay for that bond. All decided by the market, all completely disregarding the sovereignity of the currency. This seems fairly obvious, making me wonder what exactly was the point you were trying to make. Perhaps if you clarify?

Posted by: pj4xtrader Nov 10 2010, 04:49 AM

QUOTE(Hobbes @ Nov 9 2010, 11:19 PM) *
QUOTE(Brinn @ Nov 9 2010, 06:53 PM) *
To be clear, I am not advocating continual deficits but only pointing out that deficits are a crucial tool in the fiscal toolbox and are not to be feared if they are properly understood. For any given government and set of policies there is an optimum level of deficit. Currently, tax rates are much too high for the size for our government. If you are liberal and wish to expand public policy or if you are conservative and want to remove entitlements and cut spending you can do either. The key is understanding the proper level of taxation (as a liquidity drain not as a source of funding) that coincides with the level of government spending and deficit that you advocate. The optimum level will provide near full domestic employment and very little output gap while taxing at a level that minimizes inflation.


Then it seems that we are in violent agreement, and having an esoteric policy (or philosophy) discussion. Nothing wrong with that (used to enjoy those very much back in college)...they can be both fruitful and fun...we just need to understand that that is what we are having. In that spirit, I agree that they can indeed be a useful tool in the fiscal toolbox. Given the perpetual deficits, and more importantly the corresponding large structural deficit we have, would you agree that it has so far been an overused tool? Using deficits occassionally as a way of controlling the economy is one thing. Using them constantly as a way of providing services you can't afford is another thing entirely...would you agree?

Given the above, I hesitate to bring this up, but....

QUOTE
The market has little say in the rate of bonds for a country with a sovereign currency.


Completely false. The market has every say in the rate of bonds...sovereign currency has nothing to do with it one way or another (although inflationary concerns might make the market decide the rate needs to go up). A country can't force people, especially people in other countries, to buy the bonds (again, regardless of whether its currency is sovereign or not)...the market sets the price for those just as it does for everything else. Now, if by 'rate' you mean the fixed rate of interest a given bond provides, then the seller does set that (again, sovereign currency or no), but the buyer takes that into consideration when deciding what price to pay for that bond. All decided by the market, all completely disregarding the sovereignity of the currency. This seems fairly obvious, making me wonder what exactly was the point you were trying to make. Perhaps if you clarify?


Hobbes,

If there were to be a bond offering with no bidders and the bonds went unsold, the dollars that would purchased those bonds remain in the banking system as excess reserves that would affectivly drive the Fed Funds rate to zero as that is the rate payed on reserve balances.

Would you agree that the our current economic crisis started out as a financial crisis?

Would you agree that every dollar that the gov. spends and does not tax add to the penny that amount to non gov. net financial assets (including the foreign sector)?

Posted by: akaCG Nov 10 2010, 04:52 AM

QUOTE(Hobbes @ Nov 9 2010, 11:19 PM) *
...
QUOTE
The market has little say in the rate of bonds for a country with a sovereign currency.


Completely false. The market has every say in the rate of bonds ... sovereign currency has nothing to do with it one way or another (although inflationary concerns might make the market decide the rate needs to go up). A country can't force people, especially people in other countries, to buy the bonds (again, regardless of whether its currency is sovereign or not)...the market sets the price for those just as it does for everything else. Now, if by 'rate' you mean the fixed rate of interest a given bond provides, then the seller does set that (again, sovereign currency or no), but the buyer takes that into consideration when deciding what price to pay for that bond. All decided by the market, all completely disregarding the sovereignity of the currency. ...
...

Absolutely correct. The government can only dictate the coupon rate, not the yield to maturity. Market conditions (how much, or even whether, buyers want to bid for the bonds) dictate the latter.

Posted by: pj4xtrader Nov 10 2010, 05:32 AM

QUOTE(Hobbes @ Nov 9 2010, 10:02 PM) *
QUOTE(Amlord @ Nov 9 2010, 04:59 PM) *
This analogy is true to the fact that there is nothing tangible behind our currency, just as there is nothing tangible behind these business cards. The spending is limited by the productive capacity of the citizens (the children). However, what happens when it is the neighbor that wants his garden raked.


I want to focus on the point in bold, which I believe is incorrect, and leads to the faulty representation of our debt/deficit in terms of GDP. The government's spending is NOT limited by the productive capacity of its citizens. It is limited by its ability to tax that productive capacity (its revenue, rather than the country's)...which is significantly less than their capacity to produce. Therefore, the correct denominator to use when expressing the debt and deficit is NOT the GDP, it is governmental revenue. They used to do this, but then the numbers got too scary, so basically they just made the denominator bigger to 'fix' it. Note that our current debt would be something like 6 times governmental revenue, with projections for that to reach about 10 times by 2020. The true magnitude of the problem is hidden by the use of the false denominator.

QUOTE
This is an accounting identity, not a theory. If it is wrong, then five centuries of double entry book keeping must also be wrong. But since it is clearly wrong, I’m certain you will be able to show me a single country on the face of the earth that runs a trade surplus, has a positive private savings rate, and who’s government does not run a cumulative deficit. I’ll await that example.


No need. It falls flat on both of the examples I gave, which you neglected (as seems to be quite common in this thread) to address. There are a great many factors which lead to governments running a a deficit, the primary ones being political, not economical...so it is impossible to isolate them on the factors you specify. Just because they don't doesn't mean they can't, as both of my (unrefuted) examples demonstrate. However, if an example you need...China for probably more than a thousand years, India for a slightly lesser time frame, and most oil producing countries until they bought into this sort of nonsense--all of which are now struggling economically, thereby proving my point on both ends. Also, please stop with these being nothing more than accounting entries. If you truly believe that, then quite frankly this whole discussion is pointless. I laud you on your stance on getting more people to learn more about governmental finance...but going this direction is not going to accomplish that.

Now maybe you can now address my initial question of why, if this is all true, countries such as Japan have been unable to simply 'deficit' their way out of their economic doldrums? Are they just making the wrong accounting entries? Ditto for every country every time they have a recession? When we're in a recession, do we see a rapid rise in governmental revenue (the accounting offset), leading to corresponding large government surpluses? The answer to this latter question is, of course, no, further refuting the concept of sectoral balance, were that still necessary.


China's Trade surplus allows for the private sector to net save and the gov. sector to be in balance or surplus. All three balance to 0. In their case the foreign sector is the injection that offsets the other sectors leakages.

Posted by: brinn Nov 10 2010, 05:48 AM

QUOTE(akaCG @ Nov 9 2010, 10:52 PM) *
Came across this bio of Abba Lerner, the father of "functional finance", earlier today (bolding mine):
QUOTE
...
Lerner’s main contribution to macroeconomic policy is his concept of functional finance. Lerner thought that if governments wanted to increase aggregate demand so as to maintain employment, and if the federal budget was balanced, the government should run a deficit by increasing government spending or decreasing taxes. If, on the other hand, the government wanted to decrease aggregate demand, it should, if the budget was balanced, run a surplus by decreasing government spending or raising taxes. ...
...

Link: http://www.econlib.org/library/Enc/bios/Lerner.html

Seems to me, that's quite different from saying that our continued deficits and increasing debt are no problem because our fiat currency system creates a hermetically sealed environment whereby all that's involved is a bunch of double-entry bookkeeping federal budget entries that offset each other to the penny.

Mr. Lerner seems to have been quite aware that the ole adage "The dose makes the poison" applies in the case of deficits and debt as well.

Yes, Abba Lerner was one of the forefathers of the concepts I'm discussing. I applaud you for researching the issue yourself and hope you continue to look into it. Google Modern Monetary Theory and you'll find a wealth of information. As far as your quote from econlib above though, you're misreading it. The wording of the sentence is not as clear as it could be. The intent of the description is to establish the position of the balanced budget as the default state and introduce the concept of using deficit or surplus to move the budget away from a balanced state to either increase or decrease aggregate demand.

I reference the wikipedia page on http://en.wikipedia.org/wiki/Functional_finance as evidence. Wiki states:

The principal ideas behind functional finance can be summarised as:

- Governments have to intervene; the economy is not self-regulating.
- The principal economic objective of the state should be to ensure a prosperous economy.
- Money is a creature of the state; it has to be managed.
- Fiscal policy should be directed in the light of its impact on the economy, and the budget should be managed accordingly, that is, 'balance' is not important in itself.
- The amount and pace of government spending should be set in the light of the desired level of activity, and taxes should be levied for their economic impact, rather than to raise revenue.
- Principles of 'sound finance' apply to individuals. They make sense for households and businesses, but do not apply to the governments of sovereign states, capable of issuing money.

Rules for fiscal policy
Lerner postulated that government's fiscal policy should be governed by three rules:

1. There government shall maintain a reasonable level of demand at all times. If there is too little spending and, thus, excessive unemployment, the government shall reduce taxes or increase its own spending. If there is too much spending, the government shall prevent inflation by reducing its own expenditures or by increasing taxes.
2. By borrowing money when it wishes to raise the rate of interest and by lending money or repaying debt when it wishes to lower the rate of interest, the government shall maintain that rate of interest that induces the optimum amount of investment.
3. If either of the first two rules conflicts with principles of 'sound finance' or of balancing the budget, or of limiting the national debt, so much the worse for these principles. The government press shall print any money that may be needed to carry out rules 1 and 2.


Hopefully that clarifies.


QUOTE(Hobbes)
No need. It falls flat on both of the examples I gave, which you neglected (as seems to be quite common in this thread) to address.
I've looked back through the thread to see what examples you've provided and found nothing. I may be mistaken or just missing something. Could you point me to the post or just let me know what examples I've neglected or failed to address? Considering I'm debating 7 or 8 different people I think I've done a fairly admirable job of trying to address the vast majority of concerns that other posters have raised while supporting my positions clearly and logically. if you feel I've missed something that you feel is particularly relevant, than by all means just point it out and I'll do my best to address it.

Note that I have read the following comments and will rebut these issues in a relatively timely fashion.

QUOTE(Hobbes)
However, if an example you need...China for probably more than a thousand years, India for a slightly lesser time frame, and most oil producing countries until they bought into this sort of nonsense--all of which are now struggling economically, thereby proving my point on both ends. Also, please stop with these being nothing more than accounting entries. If you truly believe that, then quite frankly this whole discussion is pointless. I laud you on your stance on getting more people to learn more about governmental finance...but going this direction is not going to accomplish that.

Now maybe you can now address my initial question of why, if this is all true, countries such as Japan have been unable to simply 'deficit' their way out of their economic doldrums? Are they just making the wrong accounting entries? Ditto for every country every time they have a recession? When we're in a recession, do we see a rapid rise in governmental revenue (the accounting offset), leading to corresponding large government surpluses? The answer to this latter question is, of course, no, further refuting the concept of sectoral balance, were that still necessary.
What I can say before signing off is that based upon this last paragraph It's clear that you still don't understand the concepts behind the sectoral balances approach. One would not expect to see an increase in governmental revenues during a recession, one would expect to see a decrease in governmental revenues and subsequently an increase in the deficit (the government sectoral balance becomes more negative) due to the increased unemployment payments amongst other things. The approach is truly not that difficult and very logical. Read the article I linked above from Rob Parenteau and see if it makes more sense and I'll elaborate more tomorrow.

Have a good night.

Just saw you snuck in before my reply pj4xtrader. Once again you're "right on the money". Pun obviously intended.

Have a good night.

Posted by: CruisingRam Nov 10 2010, 06:08 AM

Brinn- I LOVE this thread- best of the year vote IMHO-

Okay- now, to my question- I am assuming bankers and politicians in Europe are as versed in these economic models as you- so why would any Euro country give up soveriegnty over thier currency? In fact, why would any country?

Posted by: CarpeDinkum Nov 10 2010, 07:18 AM

QUOTE(CruisingRam @ Nov 9 2010, 10:08 PM) *
Brinn- I LOVE this thread- best of the year vote IMHO-

Okay- now, to my question- I am assuming bankers and politicians in Europe are as versed in these economic models as you- so why would any Euro country give up soveriegnty over thier currency? In fact, why would any country?



THAT should be a good read. Seems like the Greeks got themselves trapped in a fools-gold standard.

Posted by: CruisingRam Nov 10 2010, 08:13 AM

QUOTE(CarpeDinkum @ Nov 9 2010, 11:18 PM) *
QUOTE(CruisingRam @ Nov 9 2010, 10:08 PM) *
Brinn- I LOVE this thread- best of the year vote IMHO-

Okay- now, to my question- I am assuming bankers and politicians in Europe are as versed in these economic models as you- so why would any Euro country give up soveriegnty over thier currency? In fact, why would any country?



THAT should be a good read. Seems like the Greeks got themselves trapped in a fools-gold standard.


I am pretty sure I know why the Greeks did it- but I don't understand, under Brinns explanation,why Germany, France or England would!

Posted by: Julian Nov 10 2010, 11:19 AM

QUOTE(CruisingRam @ Nov 10 2010, 08:13 AM) *
QUOTE(CarpeDinkum @ Nov 9 2010, 11:18 PM) *
QUOTE(CruisingRam @ Nov 9 2010, 10:08 PM) *
Brinn- I LOVE this thread- best of the year vote IMHO-

Okay- now, to my question- I am assuming bankers and politicians in Europe are as versed in these economic models as you- so why would any Euro country give up soveriegnty over thier currency? In fact, why would any country?



THAT should be a good read. Seems like the Greeks got themselves trapped in a fools-gold standard.


I am pretty sure I know why the Greeks did it- but I don't understand, under Brinns explanation,why Germany, France or England would!


England didn't. Neither did the rest of the UK, because that's the level of government the policy decision to join the Euro would need to be taken at. But I'm as keen as you are to hear Brinn's explanation of why Germany or France tought the Euro was a good idea.

Posted by: brinn Nov 10 2010, 12:29 PM

QUOTE(Hobbes)
I laud you on your stance on getting more people to learn more about governmental finance...but going this direction is not going to accomplish that.


Well, well, well....welcome to thread CR and Julian. What a pleasant surprise and thanks for the kind words. Despite Hobbes assertions to the contrary I see that maybe my efforts are causing some to question classical neo-liberal economic theories that are both dominant and, unfortunately, incorrect. I'll try to answer your questions regrding the EU more fully either at lunch or this evening and I know I also have to address Hobbes' points although it appears that pj4xtrader already pointed out that China's sectoral balances include a massive trade surplus which "finances" China's domestic desire to save (private sector surplus) and allows the government to run a relatively balanced budget (public sector neutral, neither deficit nor surplus).

The short answer regarding the euro and the european currency union (ECU) is that they wanted to create a monetary union and currency that would compete with the US and the Yen as a reserve currency, attract foreign investment, and make the EU a formidable economic block. Unfortunately most politicians and economists DO NOT understand the ramifications of their proposals or the likely outcomes. MMT or functional finance is heterodox as compared to the orthodoxy of neo-classical econ (i.e. smith, friedman, keynes, the austrian school etc...) and thus has not been able to make much headway in the public debate. The vast majority of economic theory was developed prior to the widespread implementation of fiat currencies thus neo-classical econ is riddled with theory that assumes commodity based currencies.

Google "Warren Mosler Seven Deadly Innocent Frauds" and you should be able to find a link to a 60 page PDF that lays the foundation of MMT in laymen's terms. I am not being dramatic when I state that it may be the most important 60 page read of your life.

More later...

Posted by: Maybe Maybe Not Nov 10 2010, 01:36 PM

brinn,

Money is only a representation of some other thing of value - it represents some tangible item of value (including, for example, someone's labor). Money enables us to trade more easily what we have of value for what someone else has of value. In a very basic example where there are only two people, me having money is a claim on what the other person has of value, and money the other person has is a claim on what I have of value. (Things get a lot more complicated when people in different areas are using different kinds of money. It has to be established how the two monies relate to each other. And somebody has to hold it and exchange it But the money still only represents something else of value - it is never a thing unto itself.)

If we find or create more things of value, we need more money to represent those things. No problem. But if we merely increase the amount of money without increasing the things of value themselves, we get inflation. If we find or create more things of value, we can either enjoy that value by "spending it" to improve our current situation, or by storing it for use later.

In addition to making trading easier in the moment, money also makes it convenient for us to store value, to create more things of value than we need now, saving it up for use later. And it makes it convenient for us to borrow, to use value now that we expect to have or create in the future. Thus, the use of money allows a very convenient back and forth with lots of different users, and it turns out that all this back and forth allows for efficiencies that themselves increase the number of things of value that are produced or held.

In this context, the idea that when a certain sector of an economy creates more value than it uses, this MUST BE accompanied and balanced by some other sector using more than it creates ignores the possibility that there may be more value being added to the economy as a whole. (A rising tide lifts all boats, right? Except a rising tide somewhere means an ebbing tide somewhere else ... unless more water has somehow been added to the system.)

And I still don't understand how a trade deficit can be seen as a "surplus" in the economy. One sector of an economy continually using more than it creates is sustainable only to the extent that this sector has a lot of stored value or that the other sectors are continually able and willing to create more than they use, and "lend" it to the "borrowing" sector. I have a "trade deficit" when I'm buying things of value (using up my stored value or even borrowing from my partner) to a greater extent than I'm producing and selling things of value to my trade partner. If I have a bunch of stored value, I'm OK. I can use it up whenever and however I like; but when instead I'm borrowing based on the expectation of value I will create or find in the future, I can get into trouble if my partner believes I don't intend to (or can't) pay him back.

Can you explain where I have the principles wrong, or where I have applied them incorrectly?

Posted by: CruisingRam Nov 10 2010, 06:01 PM

Funny MMN- I have been reading Brinn's link, and much over it I am having to go over and over- EXCEPT the part that puzzles you- why? Because I deal with China and importing/exporting, and for this, it is the easiest part to understand, and why I can grasp a portion of what Brinn is putting out there as fact- I am no economist, I am a businessman that deals in manufacturing. What he says about importing and our currency is pretty easy to see once you have a transaction with a foriegn country that is completly done in USD, which, most transactions are done in USD. Basically, most of the world is giving an interest free loan ot the US by using our currency. Even though I am buying a Chinese product, I am dealing entirely in US dollars, and at no time did my money actuallly leave the US, or rather, the majority if it did not- I know the account I have transfered the money to, and it is a US bank, in US Dollars. They, in turn, have spent most of that money in the US. The shipping company, the customs fees etc were all here in US dollars. That money never really leaves the US at all. It is never converted to any other currency anyway.

All the money I spend on forriegn goods goes to a bank in Ohio, mostly, and none ofi it is is ever converted to any other currency, even the portion that goes to China, it is in turn used to buy raw materials and pay thier employees- in USD. All the employees at the factory I buy from is paid in US dollars at this time even!

So, back to my reading assignemt at this time- I can only think this will help me in my future endevours LOL




Still Brinn- I can't believe that the main proponents of Economic policy in Europe are any lLESS informed than you or any other top level policy maker- those countries are very, very pragmatic and not sujper ideological- if anything, Germany is the most pragmatic government I have ever seen, a bit too beholden to regulation, loving big government a bit much, but pragmatic. Also- the biggest exporter in the world still I think- I don't think China has passed them yet, AND by far the biggest exporter by population, ever. They have only 88 million people, and are exporter far outside the size of thier population and country size/resources.

On this argument I also take Leder to taks a bit- the folks that run our economy- and I am not talking elected officials, are at least as versed in Austrian economics as he is, and some of them are life long adherents, such as Greenspan.

Personally, I don't believe any economic school of though or explanation is 100% accurate, I think it is too organic and changing in some areas- though, so far, I am not educated enough on your links to really post a coherent rebuttal, nor can I find a good example of it's failings.

edited to add: AD is not allowing me to spell check, or go to the middle of a paragraph to correct typos or sentence structure, please bear with me on this one

Posted by: brinn Nov 10 2010, 06:18 PM

QUOTE(MMN)
Money is only a representation of some other thing of value - it represents some tangible item of value (including, for example, someone's labor). Money enables us to trade more easily what we have of value for what someone else has of value. In a very basic example where there are only two people, me having money is a claim on what the other person has of value, and money the other person has is a claim on what I have of value. (Things get a lot more complicated when people in different areas are using different kinds of money. It has to be established how the two monies relate to each other. And somebody has to hold it and exchange it But the money still only represents something else of value - it is never a thing unto itself.)

If we find or create more things of value, we need more money to represent those things. No problem. But if we merely increase the amount of money without increasing the things of value themselves, we get inflation. If we find or create more things of value, we can either enjoy that value by "spending it" to improve our current situation, or by storing it for use later.

In addition to making trading easier in the moment, money also makes it convenient for us to store value, to create more things of value than we need now, saving it up for use later. And it makes it convenient for us to borrow, to use value now that we expect to have or create in the future. Thus, the use of money allows a very convenient back and forth with lots of different users, and it turns out that all this back and forth allows for efficiencies that themselves increase the number of things of value that are produced or held.
Excellent summation! I find myself agreeing wholeheartedly with nearly all of this.

QUOTE(MMN)
In this context, the idea that when a certain sector of an economy creates more value than it uses, this MUST BE accompanied and balanced by some other sector using more than it creates ignores the possibility that there may be more value being added to the economy as a whole. (A rising tide lifts all boats, right? Except a rising tide somewhere means an ebbing tide somewhere else ... unless more water has somehow been added to the system.)
I think you may be thinking about this above the level of accounting which is where we may be talking past each other. The sectoral balances approach is concerned with the exchange of dollars (not value, but dollars) between the three sectors of an economy. We start with two sectors , government and private (or non-government). The government is the issuer of a fiat currency and the private sector is a user of currency as it lubricates transactions as you said above (With currency you don't need to have the double coincidence of needs that makes barter economies such a bitch). The private (or non-government) sector, as users of the currency, is then further divided into two sub-sectors which are the domestic private sector and the foreign private sector. This allows us to incorporate foreign trade into the paradigm. At the outset the government has all the currency (as it is the currency issuer) and the two parts of the private sector have no currency but possess all the goods and services. The government then institutes a tax to create a demand for the currency. Without a tax there would be no desire for the private sector to provide any goods and services to the government as the government has nothing the private sector needs or wants. Why would the private sector want worthless pieces of paper with dead presidents on them when you can't even exchange these things for a small portion of gold or some other commodity? However, once a tax payable ONLY in the currency of issue has been established, then the private sector has a need to provide the government sector with goods and services in order to obtain the only thing that can be used to extinguish their tax obligation; the currency of issue! By imposing a tax that can only be extinguished via remittance of US dollars the government has created a demand for US dollars and must now purchase goods and services from the private sector so that the private sector will possess the currency from which the tax is to be paid. Looked at in this manner, it becomes clear that the government must spend BEFORE it can tax for without spending in the currency of issue, the private sector only possesses goods and services and no currency.

Going back to my family household analogy at the beginning of the thread (re-read it now to familiarize yourself with the basic concepts), If the government spends $10 dollars or $100 billion dollars in year 1 and then establishes taxes of $10 or $100 billion dollars the government budget will be in balance. $10 spent, $10 collected in taxes aresulting in no deficit and a perfectly balanced budget. At this point the government sector is in balance. The sectoral balances approach states that the sum of the balances in each sector of the economy must be zero at all times and if we look at this example we can see that this holds true. The government sector is in balance ($0), the private domestic sector has no currency but no debt ($0), and we haven't even introduced a foreign sector yet so it is obvious that the foreign sector has no currency nor debt as well ($0). The sum of the sectoral balances is $0 as $0(government sector) plus $0(domestic private sector) plus $0(foreign private sector) equals $0. Now, if the government spends the same $10 but only institues a tax of $6 then the private sector will be able to save $4 as the government has spent $10 into the economy buy purchasing private sector goods and services but has only asked for a portion of that $10 back. The $4 that remains in the private sector is now considered a surplus of $4 as it represents the sum total of the currency held by the private sector (it is also the sum total value of all the assets that remain in the private sector as prices in the economy will be organized around the amount of currency in circulation (as you mention above). You will now notice that the government sector, who spent $10 but only collected $6 now is running a deficit of $4 but, that $4 deficit is offset by the $4 of savings that remains held by the private sector. Once again, the sectoral balances net to zero; -$4(government sector defict) plus +$4(domestic private sector surplus) plus $0(foreign private sector balance) equals zero. I could extend this example to include a foreign private sector but I think you can see how that would work given this brief into. When you have a sovereign issuer of currency the sectoral balances MUST equal zero as one sectors surpluses must have come from another sectors deficits.

Did that clarify at all?

QUOTE(CR)
Funny MMN- I have been reading Brinn's link, and much over it I am having to go over and over- EXCEPT the part that puzzles you- why? Because I deal with China and importing/exporting, and for this, it is the easiest part to understand, and why I can grasp a portion of what Brinn is putting out there as fact- I am no economist, I am a businessman that deals in manufacturing. What he says about importing and our currency is pretty easy to see once you have a transaction with a foriegn country that is completly done in USD, which, most transactions are done in USD. Basically, most of the world is giving an interest free loan ot the US by using our currency. Even though I am buying a Chinese product, I am dealing entirely in US dollars, and at no time did my money actuallly leave the US, or rather, the majority if it did not- I know the account I have transfered the money to, and it is a US bank, in US Dollars. They, in turn, have spent most of that money in the US. The shipping company, the customs fees etc were all here in US dollars. That money never really leaves the US at all. It is never converted to any other currency anyway.

All the money I spend on forriegn goods goes to a bank in Ohio, mostly, and none ofi it is is ever converted to any other currency, even the portion that goes to China, it is in turn used to buy raw materials and pay thier employees- in USD. All the employees at the factory I buy from is paid in US dollars at this time even!

So, back to my reading assignemt at this time- I can only think this will help me in my future endevours LOL
Great example and thank for you for sharing your experience. It is only once the discussion moves past theory into operational reality that this stuff begins to resonate. As I said earlier in the thread, I espouse no theory, only operational reality. Glad your finding it interesting. If you have any questions please let me know and I'll either answer or get someone that knows to answer.

Posted by: Maybe Maybe Not Nov 10 2010, 06:21 PM

QUOTE(CruisingRam @ Nov 10 2010, 01:01 PM) *
Funny MMN- I have been reading Brinn's link, and much over it I am having to go over and over- EXCEPT the part that puzzles you- why? Because I deal with China and importing/exporting, and for this, it is the easiest part to understand, and why I can grasp a portion of what Brinn is putting out there as fact- I am no economist, I am a businessman that deals in manufacturing. What he says about importing and our currency is pretty easy to see once you have a transaction with a foriegn country that is completly done in USD, which, most transactions are done in USD. Basically, most of the world is giving an interest free loan ot the US by using our currency.
But our currency is merely OUR measure of the value of other things - not a thing of value in itself. Using OUR measure doesn't (or shouldn't, or doesn't logically demand that they) give us any sort of advantage. It's a convenience, not a thing.

One might claim one can't bake a cake because of a shortage of flour or sugar. But what would we think of someone who claimed not to be able to bake a cake because of a shortgage of teaspoonfuls?



QUOTE(CruisingRam @ Nov 10 2010, 01:01 PM) *
Even though I am buying a Chinese product, I am dealing entirely in US dollars, and at no time did my money actuallly leave the US, or rather, the majority if it did not- I know the account I have transfered the money to, and it is a US bank, in US Dollars.
The dollars may never have left the US, but where did what the dollars REPRESENT go?

Posted by: CarpeDinkum Nov 10 2010, 06:26 PM

QUOTE(CruisingRam @ Nov 10 2010, 10:01 AM) *
edited to add: AD is not allowing me to spell check, or go to the middle of a paragraph to correct typos or sentence structure, please bear with me on this one


CR -

Thanks for your insight. It helps me understand a bit more of all of this too.

You might have some browser add-in problems there. If you have a different browser installed, try it instead and see how you come out. If that works, you might have to go through your add-ins or at least update them.


Posted by: Maybe Maybe Not Nov 10 2010, 07:20 PM

QUOTE(brinn @ Nov 10 2010, 01:18 PM) *
Excellent summation! I find myself agreeing wholeheartedly with nearly all of this.
Cool. Good starting piont.


QUOTE(brinn @ Nov 10 2010, 01:18 PM) *
The sectoral balances approach is concerned with the exchange of dollars (not value, but dollars) between the three sectors of an economy.
Therein lies the problem. There can be no real disconnect between the dollars and the things they represent, only a theoretical disconnect made possible by thinking of dollars as things of value in and of themselves.



QUOTE(brinn @ Nov 10 2010, 01:18 PM) *
]Going back to my family household analogy at the beginning of the thread (re-read it now to familiarize yourself with the basic concepts), If the government spends $10 dollars or $100 billion dollars in year 1 and then establishes taxes of $10 or $100 billion dollars the government budget will be in balance. $10 spent, $10 collected in taxes aresulting in no deficit and a perfectly balanced budget. At this point the government sector is in balance. The sectoral balances approach states that the sum of the balances in each sector of the economy must be zero at all times and if we look at this example we can see that this holds true. The government sector is in balance ($0), the private domestic sector has no currency but no debt ($0), and we haven't even introduced a foreign sector yet so it is obvious that the foreign sector has no currency nor debt as well ($0).
...
You are talking about currency balances - but currency balances only exist as a REFLECTION of value balances.

Posted by: CruisingRam Nov 10 2010, 07:32 PM

QUOTE(Maybe Maybe Not @ Nov 10 2010, 11:20 AM) *
QUOTE(brinn @ Nov 10 2010, 01:18 PM) *
Excellent summation! I find myself agreeing wholeheartedly with nearly all of this.
Cool. Good starting piont.


QUOTE(brinn @ Nov 10 2010, 01:18 PM) *
The sectoral balances approach is concerned with the exchange of dollars (not value, but dollars) between the three sectors of an economy.
Therein lies the problem. There can be no real disconnect between the dollars and the things they represent, only a theoretical disconnect made possible by thinking of dollars as things of value in and of themselves.



QUOTE(brinn @ Nov 10 2010, 01:18 PM) *
]Going back to my family household analogy at the beginning of the thread (re-read it now to familiarize yourself with the basic concepts), If the government spends $10 dollars or $100 billion dollars in year 1 and then establishes taxes of $10 or $100 billion dollars the government budget will be in balance. $10 spent, $10 collected in taxes aresulting in no deficit and a perfectly balanced budget. At this point the government sector is in balance. The sectoral balances approach states that the sum of the balances in each sector of the economy must be zero at all times and if we look at this example we can see that this holds true. The government sector is in balance ($0), the private domestic sector has no currency but no debt ($0), and we haven't even introduced a foreign sector yet so it is obvious that the foreign sector has no currency nor debt as well ($0).
...
You are talking about currency balances - but currency balances only exist as a REFLECTION of value balances.



MMN- that is true for ALL human commerce, no matter what the system. Things are only worth what someone is willing to pay or trade for them- a house, a car, a loaf of bread are worth exactly what one will pay for them- after that, everything is just an accounting entry.

This the old joke- three chinese men fall down a well, and they only have the clothes on thier backs, and thier hats. Trading thier hats back and forth, when rescued, they have made themselves rich on hat futures. thumbsup.gif

Posted by: Ted Nov 10 2010, 08:48 PM

QUOTE
QUOTE(CruisingRam @ Nov 10 2010, 01:01 PM)
Funny MMN- I have been reading Brinn's link, and much over it I am having to go over and over- EXCEPT the part that puzzles you- why? Because I deal with China and importing/exporting, and for this, it is the easiest part to understand, and why I can grasp a portion of what Brinn is putting out there as fact- I am no economist, I am a businessman that deals in manufacturing. What he says about importing and our currency is pretty easy to see once you have a transaction with a foriegn country that is completly done in USD, which, most transactions are done in USD. Basically, most of the world is giving an interest free loan ot the US by using our currency.



Not really. The problem with China is the value of their currency against ours. If its too low than we pay more (in USD) for what we buy and get less for our dollar.
QUOTE
China's undervalued currency is costing the U.S. economy more than $200 billion per year in lost growth and is reducing American employment by as much as 1 million jobs, two leading international trade economists claim.

Beijing uses currency manipulation to maintain the value of its currency, the yuan, at an artificially low value, which makes its exports much cheaper and its imports more expensive, charged Nobel laureate Paul Krugman and C. Fred Bergsten, director of the Peterson Institute for International Economics.
The currency manipulation keeps the yuan, also known as the renminbi, undervalued by 25 percent on a trade-weighted basis and 40 percent relative to the dollar and provides China with an unfair trade advantage in violation of international trading rules, Mr. Bergsten charged.
http://www.washingtontimes.com/news/2010/mar/15/chinas-yuan-value-hits-us-economy-experts-say/


And Obama backed off from a confrontation on the issue in Oct.


http://www.reuters.com/article/idUSTRE69E0OB20101016

Posted by: pj4xtrader Nov 10 2010, 08:59 PM

QUOTE(Maybe Maybe Not @ Nov 10 2010, 01:21 PM) *
QUOTE(CruisingRam @ Nov 10 2010, 01:01 PM) *
Funny MMN- I have been reading Brinn's link, and much over it I am having to go over and over- EXCEPT the part that puzzles you- why? Because I deal with China and importing/exporting, and for this, it is the easiest part to understand, and why I can grasp a portion of what Brinn is putting out there as fact- I am no economist, I am a businessman that deals in manufacturing. What he says about importing and our currency is pretty easy to see once you have a transaction with a foriegn country that is completly done in USD, which, most transactions are done in USD. Basically, most of the world is giving an interest free loan ot the US by using our currency.
But our currency is merely OUR measure of the value of other things - not a thing of value in itself. Using OUR measure doesn't (or shouldn't, or doesn't logically demand that they) give us any sort of advantage. It's a convenience, not a thing.

One might claim one can't bake a cake because of a shortage of flour or sugar. But what would we think of someone who claimed not to be able to bake a cake because of a shortgage of teaspoonfuls?


QUOTE(CruisingRam @ Nov 10 2010, 01:01 PM) *
Even though I am buying a Chinese product, I am dealing entirely in US dollars, and at no time did my money actually leave the US, or rather, the majority if it did not- I know the account I have transferred the money to, and it is a US bank, in US Dollars.
The dollars may never have left the US, but where did what the dollars REPRESENT go?


This analogy is akin to a construction crew arriving at a site were all materials to build are present but does not start because they don't have any inches. The difference between inches and dollars is, that no one has hoards of inches, an inch is strictly a unit of measure. There is no demand for an inch.

One may argue that money is only a unit of measure, but dollars are not. Dollars are currency. There is demand for dollars.

When a State imposes a tax obligation, and set that which it will except as payment of said tax (in this case dollars) it creates demand for that thing. We must acquire dollars to pay our tax obligation.

Our government is no different then any other single supplier monopoly in that only the state can issue its currency. That being the case the currency can be analysed the same as any other commodity, the same matrix apply.

With regard to dollars not leaving the country.

Following WWII Japan decided to rebuild by exporting. For 60 years they have been sending us an average of 2 million cars per year, in return they have gotten dollars deposited in their account at the FED. We have had the use of 2 million cars per year, they have amassed large deposits or our currency and bare all the risk inherent to holding a currency. If they decide today to use these large deposits to by our cars, I think you would agree that Ford, GM, and Chrysler along with most Americans would not object. Only today our market would surely demand more then the $3k per car on average that we payed them. One would be surprised if their dollars would purchase a quarter of 120 million they gave us. Yet they feel that they are winners of trade, and for the most part we feel we are losers.

Posted by: Maybe Maybe Not Nov 10 2010, 09:32 PM

QUOTE(CruisingRam @ Nov 10 2010, 02:32 PM) *
This the old joke- three chinese men fall down a well, and they only have the clothes on thier backs, and thier hats. Trading thier hats back and forth, when rescued, they have made themselves rich on hat futures. thumbsup.gif
Yeah. That's a joke. Not a serious economic policy.

Posted by: CruisingRam Nov 10 2010, 09:41 PM

QUOTE(Maybe Maybe Not @ Nov 10 2010, 01:32 PM) *
QUOTE(CruisingRam @ Nov 10 2010, 02:32 PM) *
This the old joke- three chinese men fall down a well, and they only have the clothes on thier backs, and thier hats. Trading thier hats back and forth, when rescued, they have made themselves rich on hat futures. thumbsup.gif
Yeah. That's a joke. Not a serious economic policy.



Well, it is more of a parable to illustrate the (sometimes) intangible quality of wealth production and the exchange of goods and services. I know you probably got it- but anyway- rolleyes.gif - it illustrates that NOTHING has any intrinsic value beyond what the purchaser is willing to pay, and fiat money, in the end, is no more or less intangible than any other good in the end- becuase a value has to be placed on it based on need. Right now, to the good fortune of the US, the dollar is, for all intents and purposes, the world currency- and this is why a deficit, both in government spending and trade deficit is both normal and okay for the US (and some other countries, the Euro union is the most puzzling to me personally, and again, they are as educated as Brinn IMHO, and the German economy has been tightly managed and well managed for decades, with the the usual ups and downs, but very pragmatic- I am interested in Brinn's comments on this)-

Brinn- correct me if I am wrong, but as long as the USD is the currency of choice, the deficit is an okay thing, correct? Or am I over-simplifying?

Posted by: brinn Nov 10 2010, 09:48 PM

QUOTE(pj4xtrader)
This analogy is akin to a construction crew arriving at a site were all materials to build are present but does not start because they don't have any inches. The difference between inches and dollars is, that no one has hoards of inches, an inch is strictly a unit of measure. There is no demand for an inch.

One may argue that money is only a unit of measure, but dollars are not. Dollars are currency. There is demand for dollars.

When a State imposes a tax obligation, and set that which it will except as payment of said tax (in this case dollars) it creates demand for that thing. We must acquire dollars to pay our tax obligation.

Our government is no different then any other single supplier monopoly in that only the state can issue its currency. That being the case the currency can be analysed the same as any other commodity, the same matrix apply.

With regard to dollars not leaving the country.

Following WWII Japan decided to rebuild by exporting. For 60 years they have been sending us an average of 2 million cars per year, in return they have gotten dollars deposited in their account at the FED. We have had the use of 2 million cars per year, they have amassed large deposits or our currency and bare all the risk inherent to holding a currency. If they decide today to use these large deposits to by our cars, I think you would agree that Ford, GM, and Chrysler along with most Americans would not object. Only today our market would surely demand more then the $3k per car on average that we payed them. One would be surprised if their dollars would purchase a quarter of 120 million they gave us. Yet they feel that they are winners of trade, and for the most part we feel we are losers.
Once again, completely accurate.

MMN,

Where has our ability to produce gone to? I have a neighbor in construction who is out of a job. He still knows how to build houses but no one is willing to pay him these "dollars" to produce because no one has the dollars to spare right now. Once aggregate demand is restored either through deleveraging or via injections of currency via targeted govt spending or reductions in taxes, then my neighbor will be able to produce the value he is capable of producing because others will have the dollars to and desire to employ this mans labor and the fruits of his labor.

Posted by: Ted Nov 10 2010, 09:49 PM

QUOTE
CR
for all intents and purposes, the world currency- and this is why a deficit, both in government spending and trade deficit is both normal and okay for the US


What a ludicrous idea. Debt is never good and the higher the debt the more of our productive labor/resources goes into paying the interest payments instead of using the money for other purposes like fixing roads, healthcare etc.

Just the fact that we can raise/borrow money (we have credit) does not mean using it is necessarily “good”

Posted by: akaCG Nov 10 2010, 09:58 PM

QUOTE(pj4xtrader @ Nov 10 2010, 03:59 PM) *
...
Following WWII Japan decided to rebuild by exporting. For 60 years they have been sending us an average of 2 million cars per year, in return they have gotten dollars deposited in their account at the FED. We have had the use of 2 million cars per year, they have amassed large deposits or our currency and bare all the risk inherent to holding a currency. If they decide today to use these large deposits to by our cars, I think you would agree that Ford, GM, and Chrysler along with most Americans would not object. Only today our market would surely demand more then the $3k per car on average that we payed them. One would be surprised if their dollars would purchase a quarter of 120 million they gave us. Yet they feel that they are winners of trade, and for the most part we feel we are losers.

Currently, Japan's holdings of U.S. Treasuries amount to roughly 10 years' worth of their trade-balance surpluses with us. IOW, the average "age" of the dollars they are holding in U.S. Treasuries is 5 years.

You appear to think that the "cost base" for the dollars that Japan is currently holding in U.S. Treasuries has been stuck in 1950, when cars cost $3,000. That, to put it bluntly, is bizarre. And your doing so begins to raise the suspicion in my mind that you are simply regurgitating, pretty much verbatum, the following from Mosler's paper (I've been going over it today, as time permitted):
QUOTE
...
Think of all those cars Japan sold to us for under
$2,000 years ago. They’ve been holding those dollars in
their savings accounts at the Fed (they own U.S. Treasury
securities), and if they now would want to spend those
dollars, they would probably have to pay in excess of
$20,000 per car to buy cars from us. What can they do about
the higher prices? Call the manager and complain? They’ve
traded millions of perfectly good cars to us in exchange for
credit balances on the Fed’s books that can buy only what
we allow them to buy.

...

...

...

... for over 60 years, Japan has, in fact,
been sending us about 2 million cars per year, and we have
been sending them little or nothing. And, surprisingly, they
think that this means they are winning the “trade war,” and we
think it means that we are losing it. We have the cars, and they
have the bank statement from the Fed showing which account
their dollars are in.

Same with China. ...
...


Oy vey.

Posted by: Maybe Maybe Not Nov 10 2010, 11:19 PM

QUOTE(brinn @ Nov 10 2010, 04:48 PM) *
Where has our ability to produce gone to?
Do you see any difference between the ability to produce, and actual production?

This is the problem with the focus on money. It leads us to the shortage of teaspoonfuls, even in cases where there is no shortage of flour or sugar with which to make a cake.

It seems to me that your position is that even where we don't have a lot of flour and sugar, we have plenty of teaspoonfuls.

Posted by: pj4xtrader Nov 11 2010, 12:58 AM

akaCG,

I'm not sure I get your point. I used the example because it illustrates that exports are real costs and imports are real benefits, as well as, real terms of trade.

Are you saying that it is incorrect?

Posted by: Hobbes Nov 11 2010, 01:14 AM

QUOTE(brinn @ Nov 10 2010, 07:29 AM) *
QUOTE(Hobbes)
I laud you on your stance on getting more people to learn more about governmental finance...but going this direction is not going to accomplish that.


Well, well, well....welcome to thread CR and Julian. What a pleasant surprise and thanks for the kind words. Despite Hobbes assertions to the contrary I see that maybe my efforts are causing some to question classical neo-liberal economic theories that are both dominant and, unfortunately, incorrect.


Don't confuse me with supporting those either--I find pretty much all economic theories extremely lacking when it comes to practical application. There is no other discipline in which there is so much disagreement, and I'm not sure a single hard and fast rule has come out of any of it. Great for philosophizing or arm-chair quarterbacking, but not much else. Descriptive, rather than prescriptive.

QUOTE
So where does the money that banks borrow come from?'


Incorrect, and irrelevant question. The actual question which addresses this issue is: So where does the money that government spends come from? Your question addresses the Federal Reserve System, while it is the Department of Treasury that manages the U.S. Public Debt, which is what the issue was around.

Posted by: brinn Nov 11 2010, 02:35 AM

QUOTE(MMN)
Do you see any difference between the ability to produce, and actual production?
Yes, the key is demand. Without demand, real resources are sitting idle and human resources are being underutilised and wasted. We have plenty of flour and sugar and are the most productive economy on the planet. What we need is dollars to repair balance sheets and restart demand so that we can put that actual production back to work.

QUOTE(Ted)
What a ludicrous idea.
Not ludicrous, just very counterintuitive for those who have been steeped in neo-classical economic theory.

QUOTE(CR)
Brinn- correct me if I am wrong, but as long as the USD is the currency of choice, the deficit is an okay thing, correct? Or am I over-simplifying?
As I've stated earlier, the defict is a tool that can be manipulated to either increase or decrease demand and also increase or decrease inflation. There is no doubt that if a given deficit is too large for the productive capacity of an economy than any additional spending (or reductions in taxation which is essentially the same thing) will be inflationary. Likewise if a country is experiencing a lack of demand the deficit can always be expanded thus injecting new net assets into the economy and spurring demand.

All nations with sovereign currencies have the ability to use a deficit to prop up private demand. I'm sure that being the reserve currency has it's advantages but the ability to run deficits is not confined to the US. In 2001 Argentina switched from a currency that was pegged to the dollar to a floating rate currency. This allowed them to stop accumulating US dollars and freed the government to run deficits without being beholden to the international bond market. The country completed a massive turnaround shortly thereafter. The government was able to provide a level of prosperity for its citizens and, despite defaulting on their debts prior to going sovereign, foreign investment returned.

As far as the European Currency Union goes, it was a terrible mistake. The eurozone was sold a bill of goods CR. By people who are entrenched in outdated economic theory. They thought it would work but the cracks are obvious.

I quote Prof. http://bilbo.economicoutlook.net/blog/?p=7909. Bill Mitchell is a professor at the University of Newcastle, Australia and the director of an MMT think tank:

First, the nations’ leaders agree to surrender their currency sovereignty – they didn’t have to but chose to. They largely mislead their citizens with spurious arguments about optimal currency areas and the rest of the sophistry that the neo-liberal economists happily fed them.
In doing so, they give up their monetary policy independence and so differential circumstances cannot be dealt with by variations in interest rates. [Edit Brinn: In other words if one country in the ECU has lower aggregate demand (Greece) and another has high aggregate demand (Germany), the currencies will not re-equilibrate to balance trade disparities which is what happens when countries have floating rate currencies. Countries with little economic activity see their currency devalue which makes exports more attractive and begins to attract foreign demand.)]

Second, they then invented ridiculous fiscal constraints which have no basis in anything that relates to the way the real economy and the monetary system interacts. Mostly these constraints were a reflection of long-standing suspicions (racism, etc) – that is, they were ideological and political.

Third, Germany then introduces harsh labour market reforms to not only screw their own workers but also to ensure that the other EMU partners are behind the 8-ball.

Fourth, the EMU bosses refuse to introduce any fiscal redistribution capacity to ensure the member states achieve similar growth in real living standards.

Fifth, when the whole things meltdowns due to its design and the German strategy, the nations which are now in extreme crisis are told they have to introduce harsh pro-cyclical fiscal policies [Edit Brinn: pro cyclical meaning that taxes will be raised while aggregate demand is collapsing thus causing aggregate demand to collapse further] to savage living standards of their citizens.

No reasonable economist would ever advocate pro-cyclical fiscal policy. It is the exemplar of the abandonment of public purpose. All of this also tells us that this is no federation which cares about its individual components. The way the ECB and Brussels is approaching the Greek disaster (and statements coming out of Germany – read the Der Spiegel article) demonstrates that there is no “federal-state” solidarity. The question that arises is why bother then.


This last point is important as the countries in the ECU are in a very similar position to the states in the US in that they must tax and/or issue bonds to spend. The key difference between the US states and the european countries is that the US states are united politically whereas the european countries are not. In other words, the european countries share the same fiscal authority (the european central bank) but don't have the same fiscal goals. They are not politically unified like the individual states of the USA.

Finally, it is possible that Germany understood what the ramifications of the ECU would be as their domestic wage policies, which keep German wages low, allow them to run a trade surplus. This surplus finances their spending so that they do not need to rely on the bond market to finance themselves unlike the PIIGS.

Posted by: lederuvdapac Nov 11 2010, 02:47 AM

QUOTE(brinn)
Yes, the key is demand. Without demand, real resources are sitting idle and human resources are being underutilised and wasted. We have plenty of flour and sugar and are the most productive economy on the planet. What we need is dollars to repair balance sheets and restart demand so that we can put that actual production back to work.


brinn, you have it all completely backwards. Money is just a medium of exchange. Its value is based upon the production of goods and services in an economy. The more productive that an economy is, the more valuable the currency (when held constant) as the same amount of dollars can purchase more goods (increased purchasing power). Productions drives demand, not the other way around.

Where does demand come from? Demand comes from our productive labor being exchanged for wages. The more productive/valuable our labor, the higher wages we are paid and the more demand that we have. So you see, increasing demand without an increase in production only serves to drive up the prices of the existing supply of goods and services. The problem has never been a lack of [aggregate] demand. The problem is that there was overinvestment and malinvestment in many industries. Capital and labor was misallocated. This means that we built too many houses, there are too many workers in the financial sector, and there is not enough production of consumers goods.

The problem with aggregation is that you lose the sense for the real economy. Boost aggregate demand- what does that mean? All demand isn't the same as all products aren't the same. Artificially increasing demand for goods or services that are already overpriced only serves to further distort the economy.

Posted by: akaCG Nov 11 2010, 05:01 AM

Scenario:

A bunch of states (California, Illinois, Michigan, Massachussetts, New Jersey, New York, etc.) and hundreds, if not thousands, of counties/municipalities across the country go bankrupt (they, just like households, do not have available to them the default-is-impossible feature(s) of a fiat currency system, after all).

Questions:

What does the "functional finance" model have to say about such a scenario? Could the federal government just simply bail all of them out in full, in the interest of pursuing the goal of offsetting the huge drop in national-level aggregate demand that would result from the soaring unemployment that such a scenario would entail, and do so without any inflationary effects whatsoever? And, for that matter, could the federal government just keep doing that ad infinitum, whenever a state/municipality fails?


Posted by: CruisingRam Nov 11 2010, 05:13 AM

QUOTE(akaCG @ Nov 10 2010, 09:01 PM) *
Scenario:

A bunch of states (California, Illinois, Michigan, Massachussetts, New Jersey, New York, etc.) and hundreds, if not thousands, of counties/municipalities across the country go bankrupt (they, just like households, do not have available to them the default-is-impossible feature(s) of a fiat currency system, after all).

Questions:

What does the "functional finance" model have to say about such a scenario? Could the federal government just simply bail all of them out in full, in the interest of pursuing the goal of offsetting the huge drop in national-level aggregate demand that would result from the soaring unemployment that such a scenario would entail, and do so without any inflationary effects whatsoever? And, for that matter, could the federal government just keep doing that ad infinitum, whenever a state/municipality fails?


First off, let me say, I tend more toward austrian school than this model I am reading now- it is new to me, and I understand counter-intuitive thought very well- any motorcyclist will tell you about counter-intuitive thought LOL- but I do understand the idea that the government takes a loan by printing more money. Most of our money goes over seas. WE basically get a 0% interest free loan from the rest of the world, and we could go back to the household analogy- how many folks would like to get an interest free loan, with no terms of payment, in fact, really impossible to have you pay, and you just keep getting the loan over and over, but don't have to pay it back, well, most of it- you may have to pay a small portion of it back- but3/4 of the loan never needs to be repaid, so you can pay back the 1/4 to the folks that may demand it back without interest, and use that 3/4 money over and over to keep paying back the 1/4 that you actually need to pay back, but have no real obligation to do so. Who wouldn'tlove those terms? In fact, the borrowers BEG to keep loaning you money, and get mad if they can't keep giving you interest free loans. Okay- the rest of the debate- I am not that educated- but that is basically the way US dollar works as far as I can tell /

akacg- that is a good question. I know why the individual states can't bail themselves out in the same manner that the US feds can, again, the ability to print money. But that is a valid question- why not?

Posted by: Hobbes Nov 11 2010, 06:02 AM

QUOTE(CruisingRam @ Nov 11 2010, 12:13 AM) *
QUOTE(akaCG @ Nov 10 2010, 09:01 PM) *
Scenario:

A bunch of states (California, Illinois, Michigan, Massachussetts, New Jersey, New York, etc.) and hundreds, if not thousands, of counties/municipalities across the country go bankrupt (they, just like households, do not have available to them the default-is-impossible feature(s) of a fiat currency system, after all).

Questions:

What does the "functional finance" model have to say about such a scenario? Could the federal government just simply bail all of them out in full, in the interest of pursuing the goal of offsetting the huge drop in national-level aggregate demand that would result from the soaring unemployment that such a scenario would entail, and do so without any inflationary effects whatsoever? And, for that matter, could the federal government just keep doing that ad infinitum, whenever a state/municipality fails?

akacg- that is a good question. I know why the individual states can't bail themselves out in the same manner that the US feds can, again, the ability to print money. But that is a valid question- why not?


It's an extremely valid question--we're in the process of evaluating doing exactly that currently, starting with California.

Posted by: CarpeDinkum Nov 11 2010, 07:32 AM

QUOTE(Hobbes @ Nov 10 2010, 10:02 PM) *
QUOTE(CruisingRam @ Nov 11 2010, 12:13 AM) *
QUOTE(akaCG @ Nov 10 2010, 09:01 PM) *
Scenario:

A bunch of states (California, Illinois, Michigan, Massachussetts, New Jersey, New York, etc.) and hundreds, if not thousands, of counties/municipalities across the country go bankrupt (they, just like households, do not have available to them the default-is-impossible feature(s) of a fiat currency system, after all).

Questions:

What does the "functional finance" model have to say about such a scenario? Could the federal government just simply bail all of them out in full, in the interest of pursuing the goal of offsetting the huge drop in national-level aggregate demand that would result from the soaring unemployment that such a scenario would entail, and do so without any inflationary effects whatsoever? And, for that matter, could the federal government just keep doing that ad infinitum, whenever a state/municipality fails?

akacg- that is a good question. I know why the individual states can't bail themselves out in the same manner that the US feds can, again, the ability to print money. But that is a valid question- why not?


It's an extremely valid question--we're in the process of evaluating doing exactly that currently, starting with California.


I'll get behind this one too; I'm sure funtional finance must have something to say on the subject. If a state goes down, does the nation have as much to offer? Does that affect the value of the $US and what consumers have to choose from? Would it be treated it differently if US Govt. was complicit as opposed to the state simply managing to bankrupt itself?

Though I think we need to be a bit more careful about taking a macro view and making a micro statement about it. Tends to get a bit messy....

Posted by: CruisingRam Nov 11 2010, 08:17 AM

I am not sure if there is even an economic discussion when it comes to this question though- I think it is all local politicians with little to no grounding in economics, just playing politics for the most part.

Posted by: Maybe Maybe Not Nov 11 2010, 11:35 AM

QUOTE(brinn @ Nov 10 2010, 09:35 PM) *
QUOTE(MMN)
Do you see any difference between the ability to produce, and actual production?
Yes, the key is demand. Without demand, real resources are sitting idle and human resources are being underutilised and wasted. We have plenty of flour and sugar and are the most productive economy on the planet. What we need is dollars to repair balance sheets and restart demand so that we can put that actual production back to work.
I disagree. What we need is for everyone to trust that the monetary system is fair and not being used just to make the books look better. THEN, everyone will resume the constant back and forth trading of value that makes the system more efficient and productive. When I'm not sure (and China isn't either) the system is going to be an accurate reflection of true value, I hold back and hunker down where I can. (Of course, if I realize someone I know and trust is going to go broke if I don't keep trading with them, I might keep it up as long as I can ... but again, only so long as I trust I'm going to get full and fair value eventually.)

There ARE sometimes good reasons for deficit spending. But I don't buy the idea that it's never a problem and can (indeed MUST) go on forever.

Posted by: pj4xtrader Nov 11 2010, 02:37 PM

QUOTE(Maybe Maybe Not @ Nov 11 2010, 06:35 AM) *
QUOTE(brinn @ Nov 10 2010, 09:35 PM) *
QUOTE(MMN)
Do you see any difference between the ability to produce, and actual production?
Yes, the key is demand. Without demand, real resources are sitting idle and human resources are being underutilised and wasted. We have plenty of flour and sugar and are the most productive economy on the planet. What we need is dollars to repair balance sheets and restart demand so that we can put that actual production back to work.
I disagree. What we need is for everyone to trust that the monetary system is fair and not being used just to make the books look better. THEN, everyone will resume the constant back and forth trading of value that makes the system more efficient and productive. When I'm not sure (and China isn't either) the system is going to be an accurate reflection of true value, I hold back and hunker down where I can. (Of course, if I realize someone I know and trust is going to go broke if I don't keep trading with them, I might keep it up as long as I can ... but again, only so long as I trust I'm going to get full and fair value eventually.)


There ARE sometimes good reasons for deficit spending. But I don't buy the idea that it's never a problem and can (indeed MUST) go on forever.


The element of trust in the currency domestically is greatly over blown. As long as the state has the ability to enforce the tax obligations, we will offer our goods and services in exchange for dollars, trust or no trust.

No credible economist would argue that lack of faith in the dollar is the cause of this recession. I think you would agree, that most unemployed Americans would got to work for dollars if given the opportunity.

Lack of faith in the dollar would imply inflation. We are currently experiencing deflation, due the the revaluation that followed the financial crisis. A dollar buys more house now then three years ago for example.

Posted by: CarpeDinkum Nov 11 2010, 04:14 PM

QUOTE(Maybe Maybe Not @ Nov 11 2010, 03:35 AM) *
There ARE sometimes good reasons for deficit spending. But I don't buy the idea that it's never a problem and can (indeed MUST) go on forever.


That's correct, as far as I understand. Sometimes it's appropriate, sometimes not.

Posted by: brinn Nov 11 2010, 04:59 PM

First, let me apologize for not having answered all the questions and rebuttals that everyone has posted here. They are all valid questions and deserve answers. I’ll eventually try to get to them all but the length of my replies and the thought and detail that I try to put into my posts limit my ability to post more. I’m trying to go with the flow of the debate and respond as much as possible but I have a full-time job, and a family that needs attention as well (not to mention the arduous task of managing 3 fantasy football teams in my other spare time!). I thank you all for bearing with me and for an immense improvement in the tone of debate. Hopefully you’re beginning to realize that I’m a regular guy who happened to get into this monetary theory stuff simply because I saw a difference between how our bank funded our commercial lending, and thus our reserve position (we use interbank market and various fed programs like the federal home loan bank), and how I had been taught that banks lend via fractional reserves. It didn’t line up and I was researching the issue on the net when I came upon MMT and the explanations it offered matched what was occurring in my bank. I began to look into much more and have become convinced that the observations that MMT makes are valid.

Also, quick word of thanks to pj4xtrader for chiming in as well. I appreciate having someone else who understands the concepts and can help in responding to all the questions.

QUOTE(Leder)
, you have it all completely backwards. Money is just a medium of exchange. Its value is based upon the production of goods and services in an economy. The more productive that an economy is, the more valuable the currency (when held constant) as the same amount of dollars can purchase more goods (increased purchasing power). Productions drives demand, not the other way around.

Where does demand come from? Demand comes from our productive labor being exchanged for wages. The more productive/valuable our labor, the higher wages we are paid and the more demand that we have. So you see, increasing demand without an increase in production only serves to drive up the prices of the existing supply of goods and services. The problem has never been a lack of [aggregate] demand. The problem is that there was overinvestment and malinvestment in many industries. Capital and labor was misallocated. This means that we built too many houses, there are too many workers in the financial sector, and there is not enough production of consumers goods.

The problem with aggregation is that you lose the sense for the real economy. Boost aggregate demand- what does that mean? All demand isn't the same as all products aren't the same. Artificially increasing demand for goods or services that are already overpriced only serves to further distort the economy.
I see demand and output as two sides of the same coin. Neither can exist without the other and we may never be able to solve the chicken-and-egg conundrum of what came first. I do believe that in modern currency economies demand is the primary driver of output and income. I fear that we may not be able to resolve our fundamental disagreement on this issue (As you know, this fundamental disagreement goes back a lot further than me and you!). I’ve been reading this board long enough to know that you’re thoughts on economics seem to align most closely with the Austrian school, and MMT and the Austrian schools approach the problems from different ends of the spectrum. With that said, I’ll still make a pitch and try to tell you why I think that demand is currently more important:

Assume a simple two person economy with one person acting as the government and the second as the private sector. As I’ve hopefully demonstrated prior, for the private sector to remain employed and maintain any level of savings the government sector must employ the private sectors resources and maintain a deficit balance. In this two person economy, the private sector has no other source of dollars other than through providing goods and services to the government sector .

Now move this simple model closer to a real world economy and divide the private sector into an external or foreign sector (where exports and imports are recorded) and a private domestic sector.

Now let’s expand our two person model into a three person model (leaving aside the foreign sector for a moment) and assume that the domestic sector is further divided into an employee and a business. Once the government has spent currency into circulation the private sector employee now has the option of providing his labor to the business for dollars as long as the government continues to spend more currency into existence than is taken out via taxation as we want to make sure that private sector maintains enough liquidity to lubricate private transactions.

Now, the employee provides productive resources to the business which pays it an income. The business, in turn, uses the productive resources provided by the employee to make goods and services which it sells to the employee. The employee can buy these goods and services with the income it receives from the sale of labor or any other productive inputs.

This is a standard macroecon circular flow model and I believe we can draw some insights from it. Let’s assume a steady-state economy where the business firms expect to sell $100 worth of goods and services each period and hire labor accordingly paying out $100 in national income. The households in turn spend all this income on consumption and do not save. Each period, the expectations of the firms will be supported by the spending decisions of the consumers and output and national income will remain the same at $100.
Now, consider what happens to our model if our employee (or households within an economy) decide to save. Any desire to save lowers consumption and the circular flow will be broken as the business quickly discovers that they have unsold output. Assume the employee decides to save $20 of his $100 income. At the close of the fiscal period the business finds that it has $20 worth of unsold output or, essentially, excess inventory. Normal business operating cycles would signal to the firm management that output needed to be adjusted which results in lower future output and, likely, some level of layoffs. In this manner, output and employment are functions of aggregate spending. Firms form expectations of future aggregate demand and produce accordingly because there is uncertainty about actual demand.

Once, unsold inventories begin to accumulate, businesses realize that they have over produced and output is adjusted accordingly. As firms begins to layoff workers in accordance with their expectations and the desire to remain profitable, the loss of private income begins to multiply and those unemployed workers reduce spending elsewhere. Our small economy is now on the path to recession.

Unless there is an offsetting source of spending to fill the expenditure loss (gap) that is created via the private sector’s desire to save, the economy will contract and income, consumption, and saving will all fall. Thus, savings leakage reduces both output and national income.

As long as the private sector has a desire for net savings, the only way the economy can remain at its original level of activity is if there is a new or exogenous (originating from outside the original circular flow model) source of expenditure to match the withdrawal of consumption that occurs because of saving. So, unless the government sector or foreign sector steps in to spend the $20 that was withdrawn from our circular flow via savings, the recessionary tendency will be present. (I’m simplifying for clarity here as investment could fund the gap as well.)

Now, consider what occurs if the government decides to institute an income tax of 20%. Given the current national income level of $100, the government would require $20 and for the sake of simplicity we assume that all the taxes are removed from household income. The effect should be obvious, the loss of $20 in income reduces the private household sectors ability to spend (reducing disposable income) and requires additional exogenous spending to make up for the demand leakage.

Add a desire to import goods and services from abroad and you have another domestic demand leakage. If households are net importers the amount that is being imported will need to filled by an exogenous source (exports or government spending). As a massive net importer, the US experiences a large drain on domestic demand due to our desire to import goods and services from abroad rather than purchasing them domestically. If this demand leakage is not filled by an exogenous source then aggregate demand falls and national income falls. Income adjustments ensure that at least one other balance (government budget or private domestic balance) goes into equal deficit. If the private sector resists the need to “finance” that deficit by increasing indebtedness, then national income contracts further and government is forced out of a balanced budget as the automatic stabilizers in the US economy (think of this as increasing welfare and unemployment spending) kick in and tax revenues simultaneously decline.

This is why a balanced budget is not realistic for any economy that runs a trade deficit. A balanced budget would force the private domestic sector into increased indebtedness if national income was to remain unchanged and eventually the private sector would resist the increased deterioration its balance sheet and attempt to save overall. At that point the income adjustments would force the budget into greater deficit although at much higher levels of unemployment.

The UK is currently engaging in pro cyclical policies and introducing austerity measures. I am willing to bet that they either abandon these policies as the economy sinks into further recession and unemployment begins to rise precipitously or that they are unable to carry out their desires and the deficit expands despite their efforts and helps to support the private sector. This will result because it is very unlikely that the UK will become a net exporter in the near future.

To summarize, if you withdraw spending from an economy, aggregate demand is going to decline and the economy will adjust by contracting output and employment. These losses will then ripple throughout the supply chain and spread out into the wider economy as lost incomes lead to further losses of spending.


QUOTE(akaCG @ Nov 11 2010, 12:01 AM) *
Scenario:

A bunch of states (California, Illinois, Michigan, Massachussetts, New Jersey, New York, etc.) and hundreds, if not thousands, of counties/municipalities across the country go bankrupt (they, just like households, do not have available to them the default-is-impossible feature(s) of a fiat currency system, after all).

Questions:

What does the "functional finance" model have to say about such a scenario? Could the federal government just simply bail all of them out in full, in the interest of pursuing the goal of offsetting the huge drop in national-level aggregate demand that would result from the soaring unemployment that such a scenario would entail, and do so without any inflationary effects whatsoever? And, for that matter, could the federal government just keep doing that ad infinitum, whenever a state/municipality fails?


Short answer is yes. There are certainly moral hazards in that approach. As Leder pointed out previously, malinvestment and wasteful spending are not productive uses of government funds. But, the inflow of federal dollars would boost demand in the state (how long that boost would last depends on how the states employ the funds) and increase state revenues as state taxes increase due to the increased economic activity. The approach could be carried out so long as their is excess productive capacity within the economy as inflation is the only limit on government spending and spending in excess of capacity to produce is certainly inflationary.

Posted by: Hobbes Nov 11 2010, 05:35 PM

QUOTE(pj4xtrader @ Nov 11 2010, 09:37 AM) *
The element of trust in the currency domestically is greatly over blown. As long as the state has the ability to enforce the tax obligations, we will offer our goods and services in exchange for dollars, trust or no trust.

No credible economist would argue that lack of faith in the dollar is the cause of this recession. I think you would agree, that most unemployed Americans would got to work for dollars if given the opportunity.

Lack of faith in the dollar would imply inflation. We are currently experiencing deflation, due the the revaluation that followed the financial crisis. A dollar buys more house now then three years ago for example.


Agree. However, lack of trust in the government and what will happen if it continues down this path IS a significant factor in the current recession. Businesses don't know what their taxes will be, what their health care costs will be, what interest rates will be, etc etc

QUOTE
Short answer is yes. There are certainly moral hazards in that approach. As Leder pointed out previously, malinvestment and wasteful spending are not productive uses of government funds. But, the inflow of federal dollars would boost demand in the state (how long that boost would last depends on how the states employ the funds) and increase state revenues as state taxes increase due to the increased economic activity. The approach could be carried out so long as their is excess productive capacity within the economy as inflation is the only limit on government spending and spending in excess of capacity to produce is certainly inflationary.


There wouldn't really be a boost. The bailout would just cover continuing expenses, which the states can't currently afford. So, you'd have a lack of a pullback, not really a boost.

Posted by: CarpeDinkum Nov 11 2010, 06:07 PM

QUOTE(Hobbes @ Nov 11 2010, 09:35 AM) *
There wouldn't really be a boost. The bailout would just cover continuing expenses, which the states can't currently afford. So, you'd have a lack of a pullback, not really a boost.


You'd have a lack of a pullback if the fed spending happened to be preemptive. I think Brinn was talking about stepping in after the fact, which would indeed boost demand. Hopefully to nominal levels and hopefully as part of little bit of fiscal education concerning how the state might head such things off in the future.

I think you're talking about the same thing, it's where in the process the spending is introduced.

Posted by: pj4xtrader Nov 11 2010, 07:21 PM

QUOTE(Hobbes @ Nov 11 2010, 12:35 PM) *
QUOTE(pj4xtrader @ Nov 11 2010, 09:37 AM) *
The element of trust in the currency domestically is greatly over blown. As long as the state has the ability to enforce the tax obligations, we will offer our goods and services in exchange for dollars, trust or no trust.

No credible economist would argue that lack of faith in the dollar is the cause of this recession. I think you would agree, that most unemployed Americans would got to work for dollars if given the opportunity.

Lack of faith in the dollar would imply inflation. We are currently experiencing deflation, due the the revaluation that followed the financial crisis. A dollar buys more house now then three years ago for example.


Agree. However, lack of trust in the government and what will happen if it continues down this path IS a significant factor in the current recession. Businesses don't know what their taxes will be, what their health care costs will be, what interest rates will be, etc etc

QUOTE
Short answer is yes. There are certainly moral hazards in that approach. As Leder pointed out previously, malinvestment and wasteful spending are not productive uses of government funds. But, the inflow of federal dollars would boost demand in the state (how long that boost would last depends on how the states employ the funds) and increase state revenues as state taxes increase due to the increased economic activity. The approach could be carried out so long as their is excess productive capacity within the economy as inflation is the only limit on government spending and spending in excess of capacity to produce is certainly inflationary.


There wouldn't really be a boost. The bailout would just cover continuing expenses, which the states can't currently afford. So, you'd have a lack of a pullback, not really a boost.


In response to your first point. The impact of market expectations are also usually overblown. While a household's concern of a decline in income can effect spending decisions, businesses will only cut production (employment) if sales decline. A business will only increase production if demand increases. A factory with rising sales will hire and invest in equipment, even in the face of a tax hike. The factory would borrow if it needed to.

To your second point, any federal spending that increases aggregate demand will lead to an increase in sales, incomes, employment and increasing tax receipts local and federal.

Posted by: CruisingRam Nov 11 2010, 08:06 PM

http://news.yahoo.com/s/nm/20101027/bs_nm/us_corporates_cash_moodys

That is not QUITE always true- factories will hoard cash and delay ramping up production even in the face of rising demand in the expectation of slow or stagnant growth, there is some consumer confidence issues at play even right now- many companies are hoarding cash reserves in anticipation of an economic down turn even as we type this debate, even though orders are rising fairly quickly.

Posted by: CarpeDinkum Nov 11 2010, 08:20 PM

QUOTE(CruisingRam @ Nov 11 2010, 12:06 PM) *
http://news.yahoo.com/s/nm/20101027/bs_nm/us_corporates_cash_moodys

That is not QUITE always true- factories will hoard cash and delay ramping up production even in the face of rising demand in the expectation of slow or stagnant growth, there is some consumer confidence issues at play even right now- many companies are hoarding cash reserves in anticipation of an economic down turn even as we type this debate, even though orders are rising fairly quickly.


I think factories aren't alone in this; consumers do it as well. Of course every major media source has to get out there and talk about Dow 2500 and double-dip. As if they had the wherewithall to make any such projections in the first place.

Posted by: brinn Nov 11 2010, 09:43 PM

QUOTE(Hobbes)
There wouldn't really be a boost. The bailout would just cover continuing expenses, which the states can't currently afford. So, you'd have a lack of a pullback, not really a boost.
Even if we assume that all that was provided was enough to maintain continuing expenses the difference would be significant as it would prevent continuing and accelerating unemployment. If a state is in a recessionary spiral the state will likely begin to cut services and employees first and state transfer payments next. Each of these cuts, will impact demand as decreases to private incomes lowers demand. An inflow of fed funds can halt the spiral and allow the state to boost (or maintain if we grant your assumption) demand.

QUOTE(Hobbes)
...lack of trust in the government and what will happen if it continues down this path IS a significant factor in the current recession. Businesses don't know what their taxes will be, what their health care costs will be, what interest rates will be, etc etc
It sounds like your refering to a kind of Ricardian Equivalence (RE). If so, the theory of RE has so many holes you could drive a truck through them. Take a look at the Wiki entry for RE and you see just a few of the critiques. Even Harvard economist Robert Barro, who took up the flag of RE and tried to carry it, now believes that the theory has many flaws.


QUOTE(akaCG)
Scenario:
A bunch of states (California, Illinois, Michigan, Massachussetts, New Jersey, New York, etc.) and hundreds, if not thousands, of counties/municipalities across the country go bankrupt (they, just like households, do not have available to them the default-is-impossible feature(s) of a fiat currency system, after all).

Questions:

What does the "functional finance" model have to say about such a scenario? Could the federal government just simply bail all of them out in full, in the interest of pursuing the goal of offsetting the huge drop in national-level aggregate demand that would result from the soaring unemployment that such a scenario would entail, and do so without any inflationary effects whatsoever? And, for that matter, could the federal government just keep doing that ad infinitum, whenever a state/municipality fails
I was just thinking moe about this and realized that, effectively, the european central bank is doing exactly this for many of the PIIGs. From the November 2, 2010 http://online.wsj.com/article/BT-CO-20101102-713448.html:

The European Central Bank bought Irish government bonds Tuesday as the yield spreads between Irish and German government bonds hit record-wide levels, a person familiar with the trades said Tuesday.

...The ECB's program of bond purchases was launched in May (Brinn: of 2010) in a bid to stabilize euro-zone government bond markets.

Most ECB officials are against formally discontinuing the program, fearing that this would provoke new speculative attacks against such countries as Ireland and Portugal.








CR,

The following statement was taken from the Reuters article you linked above. Just wanted to highlight a few observations that the article makes:

However, "we believe companies are looking for greater certainty about the economy and signs of a permanent increase in sales before they let go of their cash hoards, which they suffered so much to build," Moody's said in a report.

"Given low demand and capacity utilization within certain industries, companies are wary of investing their cash in new capacity and adding workers, thereby doing little to abbreviate the jobless recovery," it added.


If the government steps in and provides a boost in demand (via lowered taxes or targeted spending) these cash hordes should begin to circulate thus boosting employment, and capital expenditures and adding more demand in a virtuous circle.

Posted by: Amlord Nov 11 2010, 10:06 PM

QUOTE(brinn @ Nov 10 2010, 09:35 PM) *
All nations with sovereign currencies have the ability to use a deficit to prop up private demand. I'm sure that being the reserve currency has it's advantages but the ability to run deficits is not confined to the US. In 2001 Argentina switched from a currency that was pegged to the dollar to a floating rate currency. This allowed them to stop accumulating US dollars and freed the government to run deficits without being beholden to the international bond market. The country completed a massive turnaround shortly thereafter. The government was able to provide a level of prosperity for its citizens and, despite defaulting on their debts prior to going sovereign, foreign investment returned.

This is the Keynesian model and has proven to be inadequate in the current economic recession and malaise. Public spending cannot prop up private demand. Of course, the government is a source of demand for the private sector, but it does not drive the larger private sector. For the most part, the government does not drive long term job creation since its demand is not predictable since it is subject to the political winds.

Again, the discussion about money as if it has a demand in and of itself is the one that is overblown. Yes, people need dollars to pay their taxes. However, those dollars represent something. They are not empty business cards with nothing backing them. Dollars are representative of the productive capacity of the US economy.

The government does not simply print more money to increase the money supply (although it can, it historically hasn't). It buys bonds and mortgage backed securities, giving the seller cash that it generates out of thin air. All new cash is offset by some debt instrument. The issuing of more money creates more debt. Debt that needs to be serviced with either more debt or by paying with existing money which means it can't be used for other things.

You think that is sustainable?

Follow Chris Martenson's http://www.chrismartenson.com/crashcourse/chapter-8-fed-money-creation on the economy. This inflation is not sustainable but it is inherent in the system and cannot be avoided without severe consequences.


Posted by: Belshazzar Nov 11 2010, 10:56 PM

QUOTE(Amlord @ Nov 11 2010, 05:06 PM) *
This is the Keynesian model and has proven to be inadequate in the current economic recession and malaise. Public spending cannot prop up private demand. Of course, the government is a source of demand for the private sector, but it does not drive the larger private sector. For the most part, the government does not drive long term job creation since its demand is not predictable since it is subject to the political winds.


That could be a good argument for shifting the focus of Keynesian-style economics from simply creating demand to investing in technology and R&D. As ARPAnet was adapted for civilian use, it opened up an entirely new sector of the economy, resulting in long-term job creation. Of course, you can also argue that new technology tends to create bubbles (the dot-com bubble in this case) that adversely affect the economy. And spending money on increased R&D favors the educated classes more immediately and doesn't have the initial visibility of tax cuts or a public works program, probably making it political suicide.

Posted by: Maybe Maybe Not Nov 11 2010, 11:22 PM

QUOTE(pj4xtrader @ Nov 11 2010, 09:37 AM) *
The element of trust in the currency domestically is greatly over blown. As long as the state has the ability to enforce the tax obligations, we will offer our goods and services in exchange for dollars, trust or no trust.

No credible economist would argue that lack of faith in the dollar is the cause of this recession. I think you would agree, that most unemployed Americans would got to work for dollars if given the opportunity.

Lack of faith in the dollar would imply inflation. We are currently experiencing deflation, due the the revaluation that followed the financial crisis. A dollar buys more house now then three years ago for example.
So you think China (for example) is chomping at the bit to accrue dollars because they think it's the most stable and reliable of currencies? And that the stability and reliability of our currency is a reflection of the stability and reliability of our economy?



Posted by: pj4xtrader Nov 11 2010, 11:52 PM

QUOTE(Maybe Maybe Not @ Nov 11 2010, 06:22 PM) *
QUOTE(pj4xtrader @ Nov 11 2010, 09:37 AM) *
The element of trust in the currency domestically is greatly over blown. As long as the state has the ability to enforce the tax obligations, we will offer our goods and services in exchange for dollars, trust or no trust.

No credible economist would argue that lack of faith in the dollar is the cause of this recession. I think you would agree, that most unemployed Americans would got to work for dollars if given the opportunity.

Lack of faith in the dollar would imply inflation. We are currently experiencing deflation, due the the revaluation that followed the financial crisis. A dollar buys more house now then three years ago for example.
So you think China (for example) is chomping at the bit to accrue dollars because they think it's the most stable and reliable of currencies? And that the stability and reliability of our currency is a reflection of the stability and reliability of our economy?


Yes, this is reflected in their willingness to offer up their goods and services in exchange for our dollars. Our officials are the ones that object, this is reflected in the administrations misguided attempts to get them to allow faster appreciation of their currency.

Posted by: Hobbes Nov 12 2010, 12:19 AM

QUOTE(brinn @ Nov 11 2010, 04:43 PM) *
QUOTE(Hobbes)
There wouldn't really be a boost. The bailout would just cover continuing expenses, which the states can't currently afford. So, you'd have a lack of a pullback, not really a boost.
Even if we assume that all that was provided was enough to maintain continuing expenses the difference would be significant as it would prevent continuing and accelerating unemployment. If a state is in a recessionary spiral the state will likely begin to cut services and employees first and state transfer payments next. Each of these cuts, will impact demand as decreases to private incomes lowers demand. An inflow of fed funds can halt the spiral and allow the state to boost (or maintain if we grant your assumption) demand.


With a corresponding reduction in demand due to increased debt and its effects.

QUOTE
QUOTE(Hobbes)
...lack of trust in the government and what will happen if it continues down this path IS a significant factor in the current recession. Businesses don't know what their taxes will be, what their health care costs will be, what interest rates will be, etc etc
It sounds like your refering to a kind of Ricardian Equivalence (RE). If so, the theory of RE has so many holes you could drive a truck through them. Take a look at the Wiki entry for RE and you see just a few of the critiques. Even Harvard economist Robert Barro, who took up the flag of RE and tried to carry it, now believes that the theory has many flaws.


I'm not referring to any theory, but noted and documented attitudes currently occurring, and analysis which indicates that this is a large part of the reason why the government stimulus programs have not had the desired effect.

QUOTE(Cruising Ram)
That is not QUITE always true- factories will hoard cash and delay ramping up production even in the face of rising demand in the expectation of slow or stagnant growth, there is some consumer confidence issues at play even right now- many companies are hoarding cash reserves in anticipation of an economic down turn even as we type this debate, even though orders are rising fairly quickly.


Correct, and studies have shown that that IS what is happening currently.

QUOTE(CarpeDinkum)
I think you're talking about the same thing, it's where in the process the spending is introduced.


The difference is that we need to be careful in not talking about a spending increase occurring during the process, at least not from the state. It's really just the epitome of robbing Peter to pay Paul...Peter's state can't afford its current spending, so we're just taking funds from Paul's state and giving it to Peter. A boost implies more of an investment leading to growth. Not necessarily relevant to the point being made, but I felt relevant to the discussion as a whole.


Posted by: pj4xtrader Nov 12 2010, 12:23 AM

QUOTE(Amlord @ Nov 11 2010, 05:06 PM) *
QUOTE(brinn @ Nov 10 2010, 09:35 PM) *
All nations with sovereign currencies have the ability to use a deficit to prop up private demand. I'm sure that being the reserve currency has it's advantages but the ability to run deficits is not confined to the US. In 2001 Argentina switched from a currency that was pegged to the dollar to a floating rate currency. This allowed them to stop accumulating US dollars and freed the government to run deficits without being beholden to the international bond market. The country completed a massive turnaround shortly thereafter. The government was able to provide a level of prosperity for its citizens and, despite defaulting on their debts prior to going sovereign, foreign investment returned.

This is the Keynesian model and has proven to be inadequate in the current economic recession and malaise. Public spending cannot prop up private demand. Of course, the government is a source of demand for the private sector, but it does not drive the larger private sector. For the most part, the government does not drive long term job creation since its demand is not predictable since it is subject to the political winds.

Again, the discussion about money as if it has a demand in and of itself is the one that is overblown. Yes, people need dollars to pay their taxes. However, those dollars represent something. They are not empty business cards with nothing backing them. Dollars are representative of the productive capacity of the US economy.

The government does not simply print more money to increase the money supply (although it can, it historically hasn't). It buys bonds and mortgage backed securities, giving the seller cash that it generates out of thin air. All new cash is offset by some debt instrument. The issuing of more money creates more debt. Debt that needs to be serviced with either more debt or by paying with existing money which means it can't be used for other things.

You think that is sustainable?

Follow Chris Martenson's http://www.chrismartenson.com/crashcourse/chapter-8-fed-money-creation on the economy. This inflation is not sustainable but it is inherent in the system and cannot be avoided without severe consequences.


Dollars are a representation of something, they are a tax credit, the only thing that can retire US tax obligations. Two entities can transact without dollars if they both agree on some other medium of exchange, but if these parties are American, they will eventually need to earn dollars if they intend on pay the tax obligation that is most certainly attached to their productive endeavors.

Our productive capacity is a representative of our productive capacity, not dollars. If the state were to lose it's ability enforce it's tax, the dollars would eventually lose it's value, but our productive capacity would still exist. There are numerous examples of this.

Posted by: akaCG Nov 12 2010, 12:36 AM

QUOTE(brinn @ Nov 11 2010, 11:59 AM) *
...
QUOTE(akaCG @ Nov 11 2010, 12:01 AM) *
Scenario:

A bunch of states (California, Illinois, Michigan, Massachussetts, New Jersey, New York, etc.) and hundreds, if not thousands, of counties/municipalities across the country go bankrupt (they, just like households, do not have available to them the default-is-impossible feature(s) of a fiat currency system, after all).

Questions:

What does the "functional finance" model have to say about such a scenario? Could the federal government just simply bail all of them out in full, in the interest of pursuing the goal of offsetting the huge drop in national-level aggregate demand that would result from the soaring unemployment that such a scenario would entail, and do so without any inflationary effects whatsoever? And, for that matter, could the federal government just keep doing that ad infinitum, whenever a state/municipality fails?

Short answer is yes. There are certainly moral hazards in that approach. ...
...

Why would moral hazards present any kind of problem for the "functional finance" model?

All that the federal government would need to do is simply "create" an amount of its fiat currency that is equivalent to that required for, say, a failed State of California to meet the obligations that it is no longer able to honor, then simply "deposit" said amount in the "checking"/"savings" account that the State of California has at the Treasury/Fed.

Kind of like parents who, when their kid comes up to them and tells them that all of his credits/tokens "somehow" got lost/destroyed, simply create a new batch of credits/tokens that is equivalent to the amount that their kid "somehow" lost/destroyed.

Right?


Posted by: pj4xtrader Nov 12 2010, 12:39 AM

QUOTE(CruisingRam @ Nov 11 2010, 03:06 PM) *
http://news.yahoo.com/s/nm/20101027/bs_nm/us_corporates_cash_moodys

That is not QUITE always true- factories will hoard cash and delay ramping up production even in the face of rising demand in the expectation of slow or stagnant growth, there is some consumer confidence issues at play even right now- many companies are hoarding cash reserves in anticipation of an economic down turn even as we type this debate, even though orders are rising fairly quickly.


I think we are in agreement. There may be some lag between sales increases and subsequent increase in production and employment particularly following long, unpleasant downturns. My argument is that the tax landscape is not a major factor. I think you would agree that consumer confidence is a factor of demand not tax rates.

Posted by: CarpeDinkum Nov 12 2010, 01:17 AM

QUOTE(Hobbes @ Nov 11 2010, 04:19 PM) *
QUOTE(CarpeDinkum)
I think you're talking about the same thing, it's where in the process the spending is introduced.


The difference is that we need to be careful in not talking about a spending increase occurring during the process, at least not from the state. It's really just the epitome of robbing Peter to pay Paul...Peter's state can't afford its current spending, so we're just taking funds from Paul's state and giving it to Peter. A boost implies more of an investment leading to growth. Not necessarily relevant to the point being made, but I felt relevant to the discussion as a whole.


Yes, an examination of just how the state managed to get in to such a dilemma and along with necessary corrective action would be part of a sucessful formula. There could be any number of causes of the problem and some denial and perhaps even fraud along the way, so just writing them a check would be unlikely to get the whole job done.

Posted by: brinn Nov 12 2010, 01:35 AM

QUOTE(Amlord)
This is the Keynesian model and has proven to be inadequate in the current economic recession and malaise.
It is similar to a Keynesian approach but not identical. Additionally, it has not proven inadequate as it hasn’t been tried. Can you elaborate on what you see as the Keynesian response that has proven inadequate. What specific policies or programs are you referring to?

QUOTE(Amlord)
Public spending cannot prop up private demand. Of course, the government is a source of demand for the private sector, but it does not drive the larger private sector. For the most part, the government does not drive long term job creation since its demand is not predictable since it is subject to the political winds.
If we can’t agree that, to a private company, government spending is no different than private spending than I fear we’re at an impasse. Ask Lockheed Martin if government spending doesn’t represent demand. I think Lockheed and its employees may have a differing opinion.

QUOTE(Amlord)
Again, the discussion about money as if it has a demand in and of itself is the one that is overblown. Yes, people need dollars to pay their taxes.
Full stop. No need to go any further with “howevers” or “buts”. The requirement to pay taxes in US dollars does create a demand for dollars and that demand is real.

QUOTE(Amlord)
The government does not simply print more money to increase the money supply (although it can, it historically hasn't). It buys bonds and mortgage backed securities, giving the seller cash that it generates out of thin air. All new cash is offset by some debt instrument. The issuing of more money creates more debt. Debt that needs to be serviced with either more debt or by paying with existing money which means it can't be used for other things.
The government both sells bonds and taxes to drain the liquidity from the system that it places there via spending. This gives the fed control over the overnight rate and helps to limit inflation. Mr. Martenson is correct that government currency is created out of thin air, however, the requirement to issue debt to offset spending is a political decision and not an operational constraint. The decision to issue bonds results in a risk free return for buyers and there is no operational reason why they need to be sold. The Fed could maintain control over short term rates via paying interest on bank reserves (which it now does) and could even dictate longer term rates by offering higher rates for longer maturities. Control over inflation could be done completely via monetary policy and taxation rates.

QUOTE(Amlord)
This inflation is not sustainable but it is inherent in the system and cannot be avoided without severe consequences.
Martenson is correct regarding money creation and for that I give him credit. However, taxes destroy money thus any increase to the money supply can be offset through taxation levels and inflation can be contained. I did some research on Martenson and he has a good http://www.businessinsider.com/steve-keen-crisis-deflation-2010-11 with Steve Keen. Keen is an unconventional economist who has some views that are similar to MMT and Keen disagrees with Martenson regarding his inflation views. I give Martenson credit for entertaining opposing view points and with a little more research into the function of bond sales he could be a valuable ally for turning the US economy around.

QUOTE(Hobbes)
With a corresponding reduction in demand due to increased debt and its effects.
What increased debt? If you refer to the increase in the deficit than you are referring to Ricardian Equivalence whether you realize it or not.

QUOTE(Hobbes)
Peter's state can't afford its current spending, so we're just taking funds from Paul's state and giving it to Peter.
Once again, neither taxes nor bond sales are REQUIRED to fund spending. It is a political choice not an operational restriction. Lets say the government just prints the money up and gives it to the state with no expectation of repayment.

QUOTE(akaCG)
Why would moral hazards present any kind of problem for the "functional finance" model?

All that the federal government would need to do is simply "create" an amount of its fiat currency that is equivalent to that required for, say, a failed State of California to meet the obligations that it is no longer able to honor, then simply "deposit" said amount in the "checking"/"savings" account that the State of California has at the Treasury/Fed.

Kind of like parents who, when their kid comes up to them and tells them that all of his credits/tokens "somehow" got lost/destroyed, simply create a new batch of credits/tokens that is equivalent to the amount that their kid "somehow" lost/destroyed.
Again, it is functionally possible. The question is, is it desirable? I would prefer that changes be made to the fundamental way that the state functions to prevent it from happening again. I prefer capitalism and as part of my capitalism, I still want winners and losers.

Posted by: Hobbes Nov 12 2010, 07:04 AM

QUOTE(brinn @ Nov 11 2010, 08:35 PM) *
QUOTE(Hobbes)
With a corresponding reduction in demand due to increased debt and its effects.
What increased debt? If you refer to the increase in the deficit than you are referring to Ricardian Equivalence whether you realize it or not.


No, I'm not.

QUOTE
The Ricardian equivalence proposition (also known as the Barro-Ricardo equivalence theorem[1]) is an economic theory that suggests consumers internalise the government's budget constraint and thus the timing of any tax change does not affect their change in spending. Consequently, Ricardian equivalence suggests that it does not matter whether a government finances its spending with debt or a tax increase, the effect on total level of demand in an economy being the same


This is NOT what I am suggesting at all. I am pointing out that businesses detest uncertainty, which is a known fact. They see uncertainty in government finance, and therefore in their own finance as a result, and are withholding spending due to that. RE posits just the opposite, in fact, as the statement in bold above indicates. If we're going discuss meaningless theory, at least let's do it correctly. Regardless of the theory, though, I am saying that businesses ARE doing this currently, by their own admission, and THAT is what I am referring to, not some esotoric theory.

Posted by: CruisingRam Nov 12 2010, 07:22 AM

QUOTE(Hobbes @ Nov 11 2010, 11:04 PM) *
QUOTE(brinn @ Nov 11 2010, 08:35 PM) *
QUOTE(Hobbes)
With a corresponding reduction in demand due to increased debt and its effects.
What increased debt? If you refer to the increase in the deficit than you are referring to Ricardian Equivalence whether you realize it or not.


No, I'm not.

QUOTE
The Ricardian equivalence proposition (also known as the Barro-Ricardo equivalence theorem[1]) is an economic theory that suggests consumers internalise the government's budget constraint and thus the timing of any tax change does not affect their change in spending. Consequently, Ricardian equivalence suggests that it does not matter whether a government finances its spending with debt or a tax increase, the effect on total level of demand in an economy being the same


This is NOT what I am suggesting at all. I am pointing out that businesses detest uncertainty. They see uncertainty in government finance, and therefore in their own finance as a result, and are withholding spending due to that. RE posits just the opposite, in fact. If we're going discuss meaningless theory, at least let's do it correctly.




I am not sure if I agree with you on the uncertainty- in fact, sometimes, business thrives on uncertainty- as opportunity. Investment in third world countries is fraught with uncertainty, but profits can be made. I can't imagine a more dangerous place to do business, fraught with uncertainty, as, oh, Nigerian oil fields. Or with Cuba or Venezuala. I can't imagine an atmosphere of more anti-corporate uncertainty than Venezuala- can you?

Hobbes, in private and public, both of us have agreed that macro-economic theory has real flaws, that so often, they have to change thier theories for market realities that they didn't seem to anticipate- they all do it- free market Austrians, Kenysians, etc etc- however- have you read the stuff Brinn has put out? Not saying I understand all of it, but a great deal of it I have seen in practice, and is not really theory IMHO as describing or defining what we are seeing happen in commerce

The main part I understand the most is the international use of our currency, and how we are basically getting an interest free loan over and over again by the world using the USD for global commerce. In that, we get away with big deficit spending. Not saying it is good or bad- it is that someone else, not the US, is paying the piper on this one.

Posted by: brinn Nov 12 2010, 12:22 PM

QUOTE(Hobbes)
With a corresponding reduction in demand due to increased debt and its effects.
Is it uncertainty or, as you state here, "the increased debt and its effects"? What effects are you refering to? What do you mean by increased debt? I've only responded to what you have written but if it bothers you I won't refer to it as RE.

It sounds to me like your saying that if lockheed martin gets a $3.5 billion defense contract that they may not hire or produce more to meet that demand because of uncertainty. If that's what your saying than we can just agree to disagree.

Posted by: lederuvdapac Nov 12 2010, 02:46 PM

brinn, it looked like it took you a long time to write that post. I am flattered you would attempt to do so. Unfortunately, I see your explanation riddled with bad assumptions and bad economics.

QUOTE(brinn)
Assume a simple two person economy with one person acting as the government and the second as the private sector.


I will assume no such thing. This is the first problem of mainstream economists is that we have these models that in no way reflect actual economic exchange. You make assumptions regarding your model and then watch as your model reinforces your assumptions.

QUOTE(brinn)
As I’ve hopefully demonstrated prior, for the private sector to remain employed and maintain any level of savings the government sector must employ the private sectors resources and maintain a deficit balance. In this two person economy, the private sector has no other source of dollars other than through providing goods and services to the government sector .


A more accurate description of this two person economy is the productive individual and the parasite. The productive individual produces goods where the parasite uses force to take the production. Why would the private individual accept the other guy's currency? What would the value of the currency be worth? If the other guy produces nothing of value, the currency has no value.

QUOTE(brinn)
Once the government has spent currency into circulation the private sector employee now has the option of providing his labor to the business for dollars as long as the government continues to spend more currency into existence than is taken out via taxation as we want to make sure that private sector maintains enough liquidity to lubricate private transactions.


Once again, you have it backwards. The parasite's existence depends on the production, not the other way around.

QUOTE(brinn)
Now, consider what happens to our model if our employee (or households within an economy) decide to save. Any desire to save lowers consumption and the circular flow will be broken as the business quickly discovers that they have unsold output. Assume the employee decides to save $20 of his $100 income. At the close of the fiscal period the business finds that it has $20 worth of unsold output or, essentially, excess inventory. Normal business operating cycles would signal to the firm management that output needed to be adjusted which results in lower future output and, likely, some level of layoffs. In this manner, output and employment are functions of aggregate spending. Firms form expectations of future aggregate demand and produce accordingly because there is uncertainty about actual demand.

Once, unsold inventories begin to accumulate, businesses realize that they have over produced and output is adjusted accordingly. As firms begins to layoff workers in accordance with their expectations and the desire to remain profitable, the loss of private income begins to multiply and those unemployed workers reduce spending elsewhere. Our small economy is now on the path to recession.

Unless there is an offsetting source of spending to fill the expenditure loss (gap) that is created via the private sector’s desire to save, the economy will contract and income, consumption, and saving will all fall. Thus, savings leakage reduces both output and national income.


And here we get to the crux of the disagreement and where your misconceptions are most glaring. Savings are essential to a functioning economy. They do not deprive the economy of growth, they send a signal that consumers are holding off present consumption for future consumption. What this does is send a signal to investors via lower interest rates. The increase in savings lead an increase the availability of loanable funds which drives up the supply of loans and drives down the price. Entrepreneurs are able to borrow and invest in long term projects that will meet that future demand. This is how businesses grow and this is how jobs are created. Now this is what would happen in a free market. In our economy, the central bank controls interest rates - so the signal that is sent to investors regarding the availability of loanable funds and the ability of consumers to consume in the future is distorted.

This is exactly what happened with the housing bubble. Following the bursting of the Nasdaq bubble in 2000, the Federal Reserve dropped interest rates to 1% and held it there to spur investment and get us out of the recession. Investors took that cheap credit and invested in long term capital intensive projects, like housing. Eventually a bubble formed and people began defaulting on their mortgages because the future demand that is supposed to be a signal via interest rates was artificial and phony. No future demand existed because people had already consumed in the past. With no demand to meet the new supply, we dropped into a recession. Now we are doing the same damn thing to blow up another bubble.

Savings are the key to a healthy and productive economy. It is through underconsumption that economies grow and prosper.

QUOTE(brinn)
As long as the private sector has a desire for net savings, the only way the economy can remain at its original level of activity is if there is a new or exogenous (originating from outside the original circular flow model) source of expenditure to match the withdrawal of consumption that occurs because of saving. So, unless the government sector or foreign sector steps in to spend the $20 that was withdrawn from our circular flow via savings, the recessionary tendency will be present. (I’m simplifying for clarity here as investment could fund the gap as well.)


And here is the second fallacy of the mainstream keynesian model. Recessions are the problem. This is false. Recessions are the cure. The problem is and always has been the boom that precedes the bust. Recessions are the market's way of clearing out the bad investments and reallocating labor and capital to where they would be most productive. The inflationary boom gives way to a deflationary bust and prices adjust to the point where people can afford them again. This is not something that is to be resisted. Resiting this is like pushing up against gravity (as Japan has experienced). This is something that needs to be encouraged. The sooner our economy can adjust, the sooner we can go back to having a healthy economic recovery. Your recommendation for government spending to prop up private demand will serve to further distort the economy and keep us mired in recession.

QUOTE(brinn)
To summarize, if you withdraw spending from an economy, aggregate demand is going to decline and the economy will adjust by contracting output and employment. These losses will then ripple throughout the supply chain and spread out into the wider economy as lost incomes lead to further losses of spending.


But this is a good thing. If the market is contracting, then it is because the investments and industries that were created or thrived during the boom period was not due to actual consumer demand but due to an artificial force, whether it be cheap credit or government protections. When market pressures act upon these industries, it means that they are not using resources efficiently. It is not aggregate demand - it is a real lack of demand for their products at the price they are being offered.

Posted by: Hobbes Nov 12 2010, 03:52 PM

QUOTE(brinn @ Nov 12 2010, 06:22 AM) *
QUOTE(Hobbes)
With a corresponding reduction in demand due to increased debt and its effects.
Is it uncertainty or, as you state here, "the increased debt and its effects"? What effects are you refering to? What do you mean by increased debt? I've only responded to what you have written but if it bothers you I won't refer to it as RE.

It sounds to me like your saying that if lockheed martin gets a $3.5 billion defense contract that they may not hire or produce more to meet that demand because of uncertainty. If that's what your saying than we can just agree to disagree.


Not really. I'm saying that businesses are reluctant to staff up to meet expected or potential demand right now because of uncertainty over what their finances might be (taxes and interest rates), the cost of that labor might be (taxes and health care), and what the impact of taxes and interest rates might be on the consumer (demand). Remember, they don't even know what the tax rates for next year will be right now, and looking forward they foresee higher interest rates. They have reduced staff and are profitable, and many of them are comfortable with that until they have a better feel for how things are going to go. What has been happening with the stimulus programs is that they are adding to this effect, making them to a large degree counter productive. Even in the example you provided, with known demand, they would be conservative in how they staffed up for it, since they couldn't accurately calculate their per employee costs...and they would probably be leery the contract would be cancelled or curtailed.

Economists: http://online.wsj.com/article/SB10001424052748704720004575376923163437134.html
http://moneymorning.com/2009/05/29/obama-stimulus-economy/

Business Leaders: I posted several links to this on another thread discussing the effects of the stimulus. I am looking for them, and will post again when I find them.


Posted by: CarpeDinkum Nov 12 2010, 05:01 PM

QUOTE(Hobbes @ Nov 12 2010, 07:52 AM) *
QUOTE(brinn @ Nov 12 2010, 06:22 AM) *
QUOTE(Hobbes)
With a corresponding reduction in demand due to increased debt and its effects.
Is it uncertainty or, as you state here, "the increased debt and its effects"? What effects are you refering to? What do you mean by increased debt? I've only responded to what you have written but if it bothers you I won't refer to it as RE.

It sounds to me like your saying that if lockheed martin gets a $3.5 billion defense contract that they may not hire or produce more to meet that demand because of uncertainty. If that's what your saying than we can just agree to disagree.


Not really. I'm saying that businesses are reluctant to staff up to meet expected or potential demand right now because of uncertainty over what their finances might be (taxes), the cost of that labor might be (taxes and health care), and what the impact of taxes might be on the consumer (demand). Remember, they don't even know what the tax rates for next year will be right now. They have reduced staff and are profitable, and many of them are comfortable with that until they have a better feel for how things are going to go. What has been happening with the stimulus programs is that they are adding to this effect, making them to a large degree counter productive. Even in the example you provided, with known demand, they would be conservative in how they staffed up for it, since they couldn't accurately calculate their per employee costs...and they would probably be leery the contract would be cancelled or curtailed. If that is indeed what you are disagreeing with--it IS currently happening.


Uncertainty about taxes, finances, demand and politics; I'm with you on all of that and I think that it IS what is happening now. I think any gov. spending/taxing needs to be doing a better job of managing the booms and the busts so we can maintain an even keel.

Posted by: brinn Nov 12 2010, 05:35 PM

QUOTE(Leder)
brinn, it looked like it took you a long time to write that post. I am flattered you would attempt to do so. Unfortunately, I see your explanation riddled with bad assumptions and bad economics.
With all due respect Leder, I feel the same about your post. I don't expect you to change your mind on this as you appear to be pretty firmly entrenched in your views. You can describe the two person economy as a productive person and parasite or you can call them an angel and the devil if you prefer. neither label changes the operational realities of how the private sector obtains currency. I can see we will just continue to disagree although I may attempt to rebut some of the issues you raise if time allows particularly regarding savings and loanable funds. You are reciting classical economic theory that is just no longer applicable. Do you also subscribe to the money multiplier theory of fractional reserve banking?

Regardless, I think we will just continue to talk across each other while making little headway. I've heard the classical and austrian rebuttals ad nauseum and I know when people have settled into their own silos of thought. That's why I prefaced my comments as I did when I stated:

QUOTE(brinn)
I fear that we may not be able to resolve our fundamental disagreement on this issue (As you know, this fundamental disagreement goes back a lot further than me and you!). I’ve been reading this board long enough to know that you’re thoughts on economics seem to align most closely with the Austrian school, and MMT and the Austrian schools approach the problems from different ends of the spectrum.


That's not to say that I haven't enjoyed the conversation as your responses have been polite, direct, and supported by well-thought-out theory and I appreciate that. It'll be interesting to see who has the right of this as the austerity measures that the UK is trying to introduce should provide a nice little petri dish where some of our opposing views on fiscal policy will play out. I hope for the sake of the people of the UK that you're right and I'm wrong. flowers.gif

Posted by: CarpeDinkum Nov 12 2010, 05:37 PM

QUOTE(lederuvdapac @ Nov 12 2010, 06:46 AM) *
But this is a good thing. If the market is contracting, then it is because the investments and industries that were created or thrived during the boom period was not due to actual consumer demand but due to an artificial force, whether it be cheap credit or government protections. When market pressures act upon these industries, it means that they are not using resources efficiently. It is not aggregate demand - it is a real lack of demand for their products at the price they are being offered.



Along with poorly targeted spending by the gov., I think one needs to consider collateral damage due to fraud, (from criminal intent, inept management, etc.) in there as well. Not a small effect, by any means. Fraud by the consumer, the mortgage industry, fraud in derivatives and securities. Surely this raises the top of the curve considerably before it tends to self-regulate towards bust.

Posted by: akaCG Nov 12 2010, 05:38 PM

QUOTE(brinn @ Nov 11 2010, 08:35 PM) *
...
QUOTE(akaCG)
Why would moral hazards present any kind of problem for the "functional finance" model?

All that the federal government would need to do is simply "create" an amount of its fiat currency that is equivalent to that required for, say, a failed State of California to meet the obligations that it is no longer able to honor, then simply "deposit" said amount in the "checking"/"savings" account that the State of California has at the Treasury/Fed.

Kind of like parents who, when their kid comes up to them and tells them that all of his credits/tokens "somehow" got lost/destroyed, simply create a new batch of credits/tokens that is equivalent to the amount that their kid "somehow" lost/destroyed.

Again, it is functionally possible. ...
...

I think you mean that it's operationally possible. Like here (bolding mine):
QUOTE(brinn @ Nov 7 2010, 11:39 AM) *
QUOTE(akaCG @ Nov 7 2010, 11:31 AM) *
QUOTE(brinn @ Nov 5 2010, 07:19 AM) *
... I’m not claiming that the US can print $1,000,000 for each and every citizen without consequence ...
...

Why not?

Operationally, it could. Functionally, it would cause inflation.

So, for consistency's sake, it seems to me, one would say that:

"Creating" a fresh new batch of fiat currency in order to bail out bankrupt states/counties/municipalities is operationally possible, but functionally it would cause moral hazards.

"Creating" a fresh new batch of fiat credits/tokens in order to replace those that were lost/destroyed is operationally possible, but functionally it would cause moral hazards.

No?

QUOTE(brinn @ Nov 11 2010, 08:35 PM) *
...
The question is, is it desirable? ...
...

As far as I can tell, the supreme goal of "functional finance" is to maintain national-level full employment. So, if the State of California defaults, millions of Californians would lose their jobs, which would raise the national-level unemployment rate, which would require the federal government to "create" a fresh new batch of its fiat currency to "spend" on ameliorating the situation.

In other words, the "functional finance" answer to your question ("Is it desirable?") would seem to be an emphatic "Absolutely! Full speed ahead, damn the moral hazards!".

No?

QUOTE(brinn @ Nov 11 2010, 08:35 PM) *
...
I would prefer that changes be made to the fundamental way that the state functions to prevent it from happening again. I prefer capitalism and as part of my capitalism, I still want winners and losers.

But this is not about what you would prefer. This is about what the "functional finance" model says should happen.


Posted by: lederuvdapac Nov 12 2010, 06:00 PM

QUOTE(brinn)
neither label changes the operational realities of how the private sector obtains currency.


But its a coercive relationship - do you disagree? The private sector has no choice in accepting the currency printed up by the government due to legal tender laws. If those laws were repealed, who is to say that the $US dollar would continue to dominate economic transactions instead of a currency backed by gold, silver, a basket or metals or a basket of commodities, etc...?

Your argument is that the private sector obtains currency from the government and therefore the two are dependent on each other to make the economy function. But this is completely false. The government forces the private sector to use its currency.

QUOTE(brinn)
You are reciting classical economic theory that is just no longer applicable.


There is only good economics and bad economics. What you are reciting is bad economics. Any theory that relies on unrealistic models and aggregation will be unable to accurately describe the fundamentals of economic exchange - which occur on the individual level.


Posted by: CarpeDinkum Nov 12 2010, 06:15 PM

QUOTE(akaCG @ Nov 12 2010, 09:38 AM) *
QUOTE(brinn @ Nov 11 2010, 08:35 PM) *
...
The question is, is it desirable? ...
...

As far as I can tell, the supreme goal of "functional finance" is to maintain national-level full employment. So, if the State of California defaults, millions of Californians would lose their jobs, which would raise the national-level unemployment rate, which would require the federal government to "create" a fresh new batch of its fiat currency to "spend" on ameliorating the situation.

In other words, the "functional finance" answer to your question ("Is it desirable?") would seem to be an emphatic "Absolutely! Full speed ahead, damn the moral hazards!".

No?



Not my take on what he's said. Empathy would be of some value as guidance, but spending would have to be designed to have specific effects based on what caused the situation in the first place. You couldn't just have a rack full of "State Bailout" boxes you send via UPS, each containing a check and a note that says "Here's too much money. Don't spend it all in one place. P.S. Get it together, willya? You're embarrasing the rest of the nation".

Posted by: pj4xtrader Nov 12 2010, 07:02 PM

QUOTE(lederuvdapac @ Nov 12 2010, 01:00 PM) *
QUOTE(brinn)
neither label changes the operational realities of how the private sector obtains currency.


But its a coercive relationship - do you disagree? The private sector has no choice in accepting the currency printed up by the government due to legal tender laws. If those laws were repealed, who is to say that the $US dollar would continue to dominate economic transactions instead of a currency backed by gold, silver, a basket or metals or a basket of commodities, etc...?

Your argument is that the private sector obtains currency from the government and therefore the two are dependent on each other to make the economy function. But this is completely false. The government forces the private sector to use its currency.

QUOTE(brinn)
You are reciting classical economic theory that is just no longer applicable.


There is only good economics and bad economics. What you are reciting is bad economics. Any theory that relies on unrealistic models and aggregation will be unable to accurately describe the fundamentals of economic exchange - which occur on the individual level.


I think we all agree, the government forces the private sector to use its currency. This is achieved via tax enforcement, not with legal tender laws. As many Americans use bank credit in day to day transactions, it is only in final payment of federal taxes that the currency is absolutely necessary. Legal tender laws mainly apply to the means of discharge of settlements in US courts of law.

Posted by: Amlord Nov 12 2010, 09:48 PM

Brinn,

Your theory just doesn't hold water. It is not currency that creates demand. If it did, how could there be demand prior to the fiat currency when we were on the gold standard? Is all of human commerce driven by the desire to accumulate gold, silver, copper and other precious metals or is it driven by the desire to accumulate other (non-currency) items?

The government does demand payment of taxes in the form of its own fiat currency, but even if you had 0 dollars, you can bet your house that the government will still come after you for your tax debt. If you have no income but owe property taxes, then they will take your house. Again, the currency is a convenience for the exchange of productive resources.

Thirdly, if this model was correct, no fiat economy would ever fail. The system is infallible. However, history shows us that fiat currencies have always failed.

Marco Polo wrote of his trip to China where they had a paper currency:

QUOTE
Population and trade had greatly increased, but the emissions of paper notes were suffered to largely outrun both…All the beneficial effects of a currency that is allowed to expand with a growth of population and trade were now turned into those evil effects that flow from a currency emitted in excess of such growth. These effects were not slow to develop themselves…The best families in the empire were ruined, a new set of men came into the control of public affairs, and the country became the scene of internecine warfare and confusion.

Read more: Fiat Currency http://dailyreckoning.com/fiat-currency/#ixzz156OhirHJ


The paper currency was effective while the level of currency matched the needs of the expanding economy. Expansion of the currency does not expand the economy.

Posted by: brinn Nov 12 2010, 10:18 PM

QUOTE("akaCG")
So, for consistency's sake, it seems to me, one would say that:

"Creating" a fresh new batch of fiat currency in order to bail out bankrupt states/counties/municipalities is operationally possible, but functionally it would cause moral hazards.

"Creating" a fresh new batch of fiat credits/tokens in order to replace those that were lost/destroyed is operationally possible, but functionally it would cause moral hazards.

No?
Yes, you are correct. Poor wording on my part.

QUOTE(akaCG)
As far as I can tell, the supreme goal of "functional finance" is to maintain national-level full employment. So, if the State of California defaults, millions of Californians would lose their jobs, which would raise the national-level unemployment rate, which would require the federal government to "create" a fresh new batch of its fiat currency to "spend" on ameliorating the situation.

In other words, the "functional finance" answer to your question ("Is it desirable?") would seem to be an emphatic "Absolutely! Full speed ahead, damn the moral hazards!".

No?

QUOTE(brinn)

I would prefer that changes be made to the fundamental way that the state functions to prevent it from happening again. I prefer capitalism and as part of my capitalism, I still want winners and losers.

But this is not about what you would prefer. This is about what the "functional finance" model says should happen.
MMT, at its heart, describes the functioning of the monetary system in a non-convertible, floating exchange rate system. The observations it makes can be converted into policy prescriptions with full employment being one of those policy prescriptions. Turning the operational functioning into policy prescriptions is in the political realm and the uses that these tools can be put toward are varied. So I'll stick by my answer as I can't tell you what all economists who subscribe to MMT may or may not want, only what I would do knowing that these tools are available to me.

QUOTE(Leder)
But its a coercive relationship - do you disagree? The private sector has no choice in accepting the currency printed up by the government due to legal tender laws. If those laws were repealed, who is to say that the $US dollar would continue to dominate economic transactions instead of a currency backed by gold, silver, a basket or metals or a basket of commodities, etc...?

Your argument is that the private sector obtains currency from the government and therefore the two are dependent on each other to make the economy function. But this is completely false. The government forces the private sector to use its currency.
pj4Xtrader sums up my thoughts. It is a coercive relationship but it's the best one we have. A commodity based currency is completely unrealistic in the global economy.

QUOTE(Leder)
There is only good economics and bad economics. What you are reciting is bad economics. Any theory that relies on unrealistic models and aggregation will be unable to accurately describe the fundamentals of economic exchange - which occur on the individual level.
I agree, although telling the difference between the two is where the rubber meets the road. I'd say you were engaged in the latter. Let me give you one example that invalidates the theory that fundamentals of economic exchange can only be examined on the individual level: Have you ever heard of fallacies of composition? One of the best known fallacies of composition is "The Paradox of Thrift". As you may well know the paradox of thrift states that although an individual household engaging in savings is virtuous, if everyone in an economy decides to save that that will lead to falling demand, lower output, lower wages and unemployment which will impede the individuals ability to save. Essentially what is virtous for the individual is harmful for the group in aggregate.

Now here's where you retort that Hayek rebutted this paradox using the loanable funds theory and then I'm forced to create another novel sized post showing you why the theory of loanable funds is innaccurate. Check...your move. thumbsup.gif

P.S.
You never answered my question. Do you believe in the money multiplier theory? Also, If you don't mind me asking, are you an economics student and if so, what macro text book are you using?




Posted by: Hobbes Nov 13 2010, 05:19 AM

QUOTE(brinn @ Nov 12 2010, 04:18 PM) *
Let me give you one example that invalidates the theory that fundamentals of economic exchange can only be examined on the individual level: Have you ever heard of fallacies of composition? One of the best known fallacies of composition is "The Paradox of Thrift". As you may well know the paradox of thrift states that although an individual household engaging in savings is virtuous, if everyone in an economy decides to save that that will lead to falling demand, lower output, lower wages and unemployment which will impede the individuals ability to save. Essentially what is virtous for the individual is harmful for the group in aggregate.


As with all things there are of course two differing viewpoints on this (is there ANYTHING in economics for which this isn't the case? I have yet to find it). Your analogy is probably accurate during the point of change (while the savings is being accrued), but neglects to even consider the positive impact long term as households have cash cushions to weather bad times, or to provide for any expenditure they deem worthwhile. Generally, they are more insulated from economic downturn, making such downturn less impactful. So, what is virtuos for the individual in your example is still virtuos for the group in aggregate. Your point about the difference between examining at the micro and macro level is still a good one, but I'm not sure there is an example or case which will demonstrate a scenario in which the view of one absolutely contradicts the view of the other. The two viewpoints are different, but not necessarily ever contradictory. I would put forward that if indeed there is a difference where they are contradictory, it only makes sense to follow the position of what individuals would do, because that is the scenario that will unfold. Various studies have shown that in such situations individuals almost invariably choose the option that is better for them regardless of the impact on the group.

Posted by: brinn Nov 13 2010, 02:31 PM

QUOTE(Amlord @ Nov 12 2010, 04:48 PM) *
Brinn,

Your theory just doesn't hold water. It is not currency that creates demand. If it did, how could there be demand prior to the fiat currency when we were on the gold standard? Is all of human commerce driven by the desire to accumulate gold, silver, copper and other precious metals or is it driven by the desire to accumulate other (non-currency) items?
I have not stated that the currrency creates demand. Demand existed well before currency as is clearly illustrated by the existence of barter economies. What I am stating is that the imposition of a tax by the state that can ONLY be extinguished via payment of a currency creates a demand for currency which is satisfied by th exchange of real goods and services. If, one day the government of barterville gave everyone in their barter economy $100 in paper money and said "here, use these, you'll find them more convenient" you likely would not find that all would immediately take the government up on their offer. The imposition of a tax backed by the force of the state (leder's corecive relationship) forces the private sector to obtain the fiat currency to satisfy taxes. If you don't have the currency to pay the tax you can end up in debtor's prison (obviously, not any longer but it illustrates the origin of the states ability to enforce payment of taxes).

QUOTE(Amlord)
The government does demand payment of taxes in the form of its own fiat currency, but even if you had 0 dollars, you can bet your house that the government will still come after you for your tax debt. If you have no income but owe property taxes, then they will take your house. Again, the currency is a convenience for the exchange of productive resources.
Of course government would still come after you. The government expects that you will exchange your goods and services to obtain currency to satisfy the tax obligation. If you have $0 and can't pay your taxes the government will go after you but they won't take your house as houses are not accepted by the government in lieu of currency. What the government will do is obtain possession of your house and then auction it to a willing buyer in exchange for currency which will then be used to satisfy the tax obligation.

QUOTE(Amlord)
Thirdly, if this model was correct, no fiat economy would ever fail. The system is infallible. However, history shows us that fiat currencies have always failed.
I wouldn't say "always" failed as you'll find that nearly all fiat currencies that have failed were either convertible currencies or had a currency peg in place. Regardless, even non-convertible, floating fiat currencies can fail. Mismanagement can cause hyperinflation which would result in a currency collapse. Zimbabwe, sovereign in the Zimbabwean dollar, is failing as we speak, although, at its core, the failure is not one of the currency model but rather mismanagement of the currency AND the economy. Most importantly, Zimbabwe trashed its productive capacity when Mugabe began forcing white farmers off their land and giving the land to black citizens who had no experience in large scale farming. Zimbabwe's largest economic sector poceeded to collapse and the ensuing decline in productive capacity would have had to have been manged via a massive contraction in the money supply to avoid inflation but the oposite occured and hyperinflation was the result.

Anyway, my point is that true fiat currencies are not idiot-proof but do provide the most advantage for the state and its citizens due to the flexibility they provide in adjusting the value of the currency relative to other currencies. Of course, this applies only to those countries that both understand the capabilities that a non-conv., floating currency provides and understand how to manage the currency via spending and taxation levels. It appears that the US is, at least currently, not one of those countries. I think that's unfortunate.


Posted by: pj4xtrader Nov 13 2010, 04:38 PM

QUOTE(Hobbes @ Nov 13 2010, 12:19 AM) *
QUOTE(brinn @ Nov 12 2010, 04:18 PM) *
Let me give you one example that invalidates the theory that fundamentals of economic exchange can only be examined on the individual level: Have you ever heard of fallacies of composition? One of the best known fallacies of composition is "The Paradox of Thrift". As you may well know the paradox of thrift states that although an individual household engaging in savings is virtuous, if everyone in an economy decides to save that that will lead to falling demand, lower output, lower wages and unemployment which will impede the individuals ability to save. Essentially what is virtous for the individual is harmful for the group in aggregate.


As with all things there are of course two differing viewpoints on this (is there ANYTHING in economics for which this isn't the case? I have yet to find it). Your analogy is probably accurate during the point of change (while the savings is being accrued), but neglects to even consider the positive impact long term as households have cash cushions to weather bad times, or to provide for any expenditure they deem worthwhile. Generally, they are more insulated from economic downturn, making such downturn less impactful. So, what is virtuos for the individual in your example is still virtuos for the group in aggregate. Your point about the difference between examining at the micro and macro level is still a good one, but I'm not sure there is an example or case which will demonstrate a scenario in which the view of one absolutely contradicts the view of the other. The two viewpoints are different, but not necessarily ever contradictory. I would put forward that if indeed there is a difference where they are contradictory, it only makes sense to follow the position of what individuals would do, because that is the scenario that will unfold. Various studies have shown that in such situations individuals almost invariably choose the option that is better for them regardless of the impact on the group.


What is virtuous for the individual is operationally impossible in the aggregate. As households race to save by spending less then they earn, demand declines and incomes with it. Faced with less income households consume less in efforts to save. Demand declines further, taking incomes, employment, productive capacity and eventually asset values with it. Economic downturn begins. Falling productive capacity will lead to supply shortages that drive up prices forcing households many of which, now have no income due to unemployment, to spend their savings and possibly increase their indebtedness.

While some households, for sometime, where able to save by spending less then their income, all can not.

The leakage that is aggregate savings is unsustainable unless demand is supported, either by the injection that is deficit spending, or the injection of foreign demand via net exports. Without these injections, attempts to save in the aggregate become an economic race to the bottom where all are worse off.


Posted by: CarpeDinkum Nov 13 2010, 05:16 PM

QUOTE(brinn @ Nov 13 2010, 06:31 AM) *
QUOTE(Amlord)
Thirdly, if this model was correct, no fiat economy would ever fail. The system is infallible. However, history shows us that fiat currencies have always failed.
I wouldn't say "always" failed as you'll find that nearly all fiat currencies that have failed were either convertible currencies or had a currency peg in place. Regardless, even non-convertible, floating fiat currencies can fail. Mismanagement can cause hyperinflation which would result in a currency collapse. Zimbabwe, sovereign in the Zimbabwean dollar, is failing as we speak, although, at its core, the failure is not one of the currency model but rather mismanagement of the currency AND the economy. Most importantly, Zimbabwe trashed its productive capacity when Mugabe began forcing white farmers off their land and giving the land to black citizens who had no experience in large scale farming. Zimbabwe's largest economic sector poceeded to collapse and the ensuing decline in productive capacity would have had to have been manged via a massive contraction in the money supply to avoid inflation but the oposite occured and hyperinflation was the result.

Anyway, my point is that true fiat currencies are not idiot-proof but do provide the most advantage for the state and its citizens due to the flexibility they provide in adjusting the value of the currency relative to other currencies. Of course, this applies only to those countries that both understand the capabilities that a non-conv., floating currency provides and understand how to manage the currency via spending and taxation levels. It appears that the US is, at least currently, not one of those countries. I think that's unfortunate.


It seems that Hyperinflation CAUSES the printing of money, not so much the other way around. Destroy productive capacity (Zim) (or have it snatched away, like Weimar), add in some debt in foreign currency and you're well on your way.

Posted by: pj4xtrader Nov 13 2010, 07:56 PM

QUOTE(CarpeDinkum @ Nov 13 2010, 12:16 PM) *
QUOTE(brinn @ Nov 13 2010, 06:31 AM) *
QUOTE(Amlord)
Thirdly, if this model was correct, no fiat economy would ever fail. The system is infallible. However, history shows us that fiat currencies have always failed.
I wouldn't say "always" failed as you'll find that nearly all fiat currencies that have failed were either convertible currencies or had a currency peg in place. Regardless, even non-convertible, floating fiat currencies can fail. Mismanagement can cause hyperinflation which would result in a currency collapse. Zimbabwe, sovereign in the Zimbabwean dollar, is failing as we speak, although, at its core, the failure is not one of the currency model but rather mismanagement of the currency AND the economy. Most importantly, Zimbabwe trashed its productive capacity when Mugabe began forcing white farmers off their land and giving the land to black citizens who had no experience in large scale farming. Zimbabwe's largest economic sector poceeded to collapse and the ensuing decline in productive capacity would have had to have been manged via a massive contraction in the money supply to avoid inflation but the oposite occured and hyperinflation was the result.

Anyway, my point is that true fiat currencies are not idiot-proof but do provide the most advantage for the state and its citizens due to the flexibility they provide in adjusting the value of the currency relative to other currencies. Of course, this applies only to those countries that both understand the capabilities that a non-conv., floating currency provides and understand how to manage the currency via spending and taxation levels. It appears that the US is, at least currently, not one of those countries. I think that's unfortunate.


It seems that Hyperinflation CAUSES the printing of money, not so much the other way around. Destroy productive capacity (Zim) (or have it snatched away, like Weimar), add in some debt in foreign currency and you're well on your way.


Your assumption says nothing to explain to cause of the hyperinflation to begin with.

Posted by: CarpeDinkum Nov 13 2010, 08:23 PM

QUOTE(pj4xtrader @ Nov 13 2010, 11:56 AM) *
QUOTE(CarpeDinkum @ Nov 13 2010, 12:16 PM) *
QUOTE(brinn @ Nov 13 2010, 06:31 AM) *
QUOTE(Amlord)
Thirdly, if this model was correct, no fiat economy would ever fail. The system is infallible. However, history shows us that fiat currencies have always failed.
I wouldn't say "always" failed as you'll find that nearly all fiat currencies that have failed were either convertible currencies or had a currency peg in place. Regardless, even non-convertible, floating fiat currencies can fail. Mismanagement can cause hyperinflation which would result in a currency collapse. Zimbabwe, sovereign in the Zimbabwean dollar, is failing as we speak, although, at its core, the failure is not one of the currency model but rather mismanagement of the currency AND the economy. Most importantly, Zimbabwe trashed its productive capacity when Mugabe began forcing white farmers off their land and giving the land to black citizens who had no experience in large scale farming. Zimbabwe's largest economic sector poceeded to collapse and the ensuing decline in productive capacity would have had to have been manged via a massive contraction in the money supply to avoid inflation but the oposite occured and hyperinflation was the result.

Anyway, my point is that true fiat currencies are not idiot-proof but do provide the most advantage for the state and its citizens due to the flexibility they provide in adjusting the value of the currency relative to other currencies. Of course, this applies only to those countries that both understand the capabilities that a non-conv., floating currency provides and understand how to manage the currency via spending and taxation levels. It appears that the US is, at least currently, not one of those countries. I think that's unfortunate.


It seems that Hyperinflation CAUSES the printing of money, not so much the other way around. Destroy productive capacity (Zim) (or have it snatched away, like Weimar), add in some debt in foreign currency and you're well on your way.


Your assumption says nothing to explain to cause of the hyperinflation to begin with.


Thought Brinn covered that. No?

Posted by: akaCG Nov 13 2010, 09:20 PM

QUOTE(pj4xtrader @ Nov 13 2010, 11:38 AM) *
...
What is virtuous for the individual is operationally impossible in the aggregate. As households race to save by spending less then they earn, demand declines and incomes with it. Faced with less income households consume less in efforts to save. Demand declines further, taking incomes, employment, productive capacity and eventually asset values with it. Economic downturn begins. Falling productive capacity will lead to supply shortages that drive up prices forcing households many of which, now have no income due to unemployment, to spend their savings and possibly increase their indebtedness.

While some households, for sometime, where able to save by spending less then their income, all can not.

The leakage that is aggregate savings is unsustainable unless demand is supported, either by the injection that is deficit spending, or the injection of foreign demand via net exports. Without these injections, attempts to save in the aggregate become an economic race to the bottom where all are worse off.

Let's see how the mirror image of the above reads:

What is detrimental for the individual is operationally impossible in the aggregate. As households race to accumulate debt by spending more than they earn, demand increases and incomes with it. Faced with more income, households consume more in efforts to maintain their indebtedness. Demand increases further, taking incomes, employment, and eventually asset values with it. Economic upturn begins. Rising productive capacity will lead to supply abundances that drive down prices, forcing households, many of which have plenty of income due to full employment, to increase their savings and possibly reduce their indebtedness.

While some households, for sometime, were able to become more indebted by spending more than their income, all can not.

The overflow that is aggregate indebtedness is unsustainable unless demand is dampened, either by the drain that is surplus accumulation, or the drain of domestic demand via net imports. Without these objections, attempts to increase aggregate indebtedness become an economic race to the top where all are better off.

Thoughts?


Posted by: CarpeDinkum Nov 13 2010, 09:35 PM

QUOTE(akaCG @ Nov 13 2010, 01:20 PM) *
QUOTE(pj4xtrader @ Nov 13 2010, 11:38 AM) *
...
What is virtuous for the individual is operationally impossible in the aggregate. As households race to save by spending less then they earn, demand declines and incomes with it. Faced with less income households consume less in efforts to save. Demand declines further, taking incomes, employment, productive capacity and eventually asset values with it. Economic downturn begins. Falling productive capacity will lead to supply shortages that drive up prices forcing households many of which, now have no income due to unemployment, to spend their savings and possibly increase their indebtedness.

While some households, for sometime, where able to save by spending less then their income, all can not.

The leakage that is aggregate savings is unsustainable unless demand is supported, either by the injection that is deficit spending, or the injection of foreign demand via net exports. Without these injections, attempts to save in the aggregate become an economic race to the bottom where all are worse off.

Let's see how the mirror image of the above reads:

What is detrimental for the individual is operationally impossible in the aggregate. As households race to accumulate debt by spending more than they earn, demand increases and incomes with it. Faced with more income, households consume more in efforts to maintain their indebtedness. Demand increases further, taking incomes, employment, and eventually asset values with it. Economic upturn begins. Rising productive capacity will lead to supply abundances that drive down prices, forcing households, many of which have plenty of income due to full employment, to increase their savings and possibly reduce their indebtedness.

While some households, for sometime, were able to become more indebted by spending more than their income, all can not.

The overflow that is aggregate indebtedness is unsustainable unless demand is dampened, either by the drain that is surplus accumulation, or the drain of domestic demand via net imports. Without these objections, attempts to increase aggregate indebtedness become an economic race to the top where all are better off.

Thoughts?


I think it needs some work, but it's pointing in the right direction. Somewhere in the middle is a reliable economy; should it vary too much towards one extreme or the other, either the gov needs spend in to (or drain excess from) the private sector.


Posted by: pj4xtrader Nov 13 2010, 09:47 PM

QUOTE(akaCG @ Nov 13 2010, 04:20 PM) *
...
Let's see how the mirror image of the above reads:

What is detrimental for the individual is operationally impossible in the aggregate. As households race to accumulate debt by spending more than they earn, demand increases and incomes with it. Faced with more income, households consume more in efforts to maintain their indebtedness. Demand increases further, taking incomes, employment, and eventually asset values with it. Economic upturn begins. Rising productive capacity will lead to supply abundances that drive down prices, forcing households, many of which have plenty of income due to full employment, to increase their savings and possibly reduce their indebtedness.

While some households, for sometime, were able to become more indebted by spending more than their income, all can not.

The overflow that is aggregate indebtedness is unsustainable unless demand is dampened, either by the drain that is surplus accumulation, or the drain of domestic demand via net imports. Without these objections, attempts to increase aggregate indebtedness become an economic race to the top where all are better off.

Thoughts?


I agree, this scenario is also operationally impossible.

Posted by: akaCG Nov 14 2010, 12:31 AM

QUOTE(CarpeDinkum @ Nov 13 2010, 04:35 PM) *
QUOTE(akaCG @ Nov 13 2010, 01:20 PM) *
QUOTE(pj4xtrader @ Nov 13 2010, 11:38 AM) *
...
What is virtuous for the individual is operationally impossible in the aggregate. As households race to save by spending less then they earn, demand declines and incomes with it. Faced with less income households consume less in efforts to save. Demand declines further, taking incomes, employment, productive capacity and eventually asset values with it. Economic downturn begins. Falling productive capacity will lead to supply shortages that drive up prices forcing households many of which, now have no income due to unemployment, to spend their savings and possibly increase their indebtedness.

While some households, for sometime, where able to save by spending less then their income, all can not.

The leakage that is aggregate savings is unsustainable unless demand is supported, either by the injection that is deficit spending, or the injection of foreign demand via net exports. Without these injections, attempts to save in the aggregate become an economic race to the bottom where all are worse off.

Let's see how the mirror image of the above reads:

What is detrimental for the individual is operationally impossible in the aggregate. As households race to accumulate debt by spending more than they earn, demand increases and incomes with it. Faced with more income, households consume more in efforts to maintain their indebtedness. Demand increases further, taking incomes, employment, and eventually asset values with it. Economic upturn begins. Rising productive capacity will lead to supply abundances that drive down prices, forcing households, many of which have plenty of income due to full employment, to increase their savings and possibly reduce their indebtedness.

While some households, for sometime, were able to become more indebted by spending more than their income, all can not.

The overflow that is aggregate indebtedness is unsustainable unless demand is dampened, either by the drain that is surplus accumulation, or the drain of domestic demand via net imports. Without these objections, attempts to increase aggregate indebtedness become an economic race to the top where all are better off.

Thoughts?


I think it needs some work, but it's pointing in the right direction. ...
...

What needs work? I'm pretty sure that all I did is provide a word for word, concept for concept mirror image of "pj4xtrader"'s exposition. Is there a mismatch somewhere?

QUOTE(CarpeDinkum @ Nov 13 2010, 04:35 PM) *
...
Somewhere in the middle is a reliable economy; should it vary too much towards one extreme or the other, either the gov needs spend in to (or drain excess from) the private sector.

But, as far as I can tell, the "functional finance" model doesn't view things that way. Under that model, deficits (even continual ones) are good, because they facilitate the aforementioned "race to the top". Meanwhile, surpluses (especially continual ones) are bad, because they cause economic downturns. The "All six major economic downturns in the history of the U.S. have been preceded by the pursuit of surpluses meant to reduce debt" crops up in just about every pro-"functional finance" paper/article I've read.

Just two examples:
QUOTE
...
... the last six periods of surplus in our more than two hundred-year history had been followed by the only six depressions in our history. ...
...

Link (page 45): http://moslerforsenate.com/wp-content/uploads/2010/06/7DIF.pdf

QUOTE
...
2. With one brief exception, the federal government has been in debt every year since 1776. In January 1835, for the first and only time in U.S. history, the public debt was retired, and a budget surplus was maintained for the next two years in order to accumulate what Treasury Secretary Levi Woodbury called “a fund to meet future deficits.” In 1837 the economy collapsed into a deep depression that drove the budget into deficit, and the federal government has been in debt ever since. Since 1776 there have been exactly seven periods of substantial budget surpluses and significant reduction of the debt. From 1817 to 1821 the national debt fell by 29 percent; from 1823 to 1836 it was eliminated (Jackson’s efforts); from 1852 to 1857 it fell by 59 percent, from 1867 to 1873 by 27 percent, from 1880 to 1893 by more than 50 percent, and from 1920 to 1930 by about a third. Of course, the last time we ran a budget surplus was during the Clinton years. I do not know any household that has been able to run budget deficits for approximately 190 out of the past 230-odd years, and to accumulate debt virtually nonstop since 1837.

3. The United States has also experienced six periods of depression. The depressions began in 1819, 1837, 1857, 1873, 1893, and 1929. (Do you see any pattern? Take a look at the dates listed above.) With the exception of the Clinton surpluses, every significant reduction of the outstanding debt has been followed by a depression, and every depression has been preceded by significant debt reduction. ...
...

Link: http://www.newdeal20.org/2010/02/10/the-federal-budget-is-not-like-a-household-budget-heres-why-8230/

So, the "functional finance" model doesn't seem to agree with you about there being a "golden middle" between undesirably large surpluses and undesirably large deficits (which implies the existence of periods when the budget is balanced). Rather, it seems to consider surpluses of any size (especially continual ones) as utterly undesirable, with balanced budgets a close second on the "evil" scale. IOW, the "functional finance" version of a "golden middle" seems to reside a goodly way into the "in the red" section.


Posted by: brinn Nov 14 2010, 02:33 AM

QUOTE(akaCG)
So, the "functional finance" model doesn't seem to agree with you about there being a "golden middle" between undesirably large surpluses and undesirably large deficits (which implies the existence of periods when the budget is balanced). Rather, it seems to consider surpluses of any size (especially continual ones) as utterly undesirable, with balanced budgets a close second on the "evil" scale. IOW, the "functional finance" version of a "golden middle" seems to reside a goodly way into the "in the red" section.
The relationship between the currency issuer and the currency user requires that the government will always run a cumulative defict. It cannot be otherwise if the private sector is to possess currency. In order to extinguish the cumulative deficit the government would essentially need to remove all currency from the system which would leave the private sector with no currency and no ability to pay any taxes. As Hobbes, Amlord and others have noted, an expanding economy requires an expanding supply of currency to maintain stable currency values thus an annual deficit would be the default position given a healthy and expanding economy.

However, MMT also makes clear that management of inflation is paramount to maintaining a productive economy. This is largely accomplished via increases in the rate of taxation combined with reductions in government outlays and standard monetary policy. Thus is it clear that MMT makes no claim that surpluses are evil as annual surpluses would possibly be needed to maintain control over inflation should demand rise too quickly. In summary, it is necessary to differentiate between cumulative surpluses and deficits and periodic surpluses and deficits. The former must always be in a cumulative deficit position but the latter can be either in surplus or deficit depending upon the needs of the economy.


Posted by: CarpeDinkum Nov 14 2010, 02:53 AM

QUOTE(akaCG @ Nov 13 2010, 04:31 PM) *
So, the "functional finance" model doesn't seem to agree with you about there being a "golden middle" between undesirably large surpluses and undesirably large deficits (which implies the existence of periods when the budget is balanced). Rather, it seems to consider surpluses of any size (especially continual ones) as utterly undesirable, with balanced budgets a close second on the "evil" scale. IOW, the "functional finance" version of a "golden middle" seems to reside a goodly way into the "in the red" section.



The "Government shall maintain a REASONABLE level of demand at all times" part kinda does it for me in that respect. Am I hearing you say that ANY deficit is a pedal-to-the-metal proposition?

As far as the mirror image goes, perhaps I missed the point of it to begin with. Please explain.

Posted by: Maybe Maybe Not Nov 14 2010, 01:43 PM

QUOTE(pj4xtrader @ Nov 13 2010, 11:38 AM) *
...
What is virtuous for the individual is operationally impossible in the aggregate. As households race to save by spending less then they earn, demand declines and incomes with it. Faced with less income households consume less in efforts to save. Demand declines further, taking incomes, employment, productive capacity and eventually asset values with it. Economic downturn begins. Falling productive capacity will lead to supply shortages that drive up prices forcing households many of which, now have no income due to unemployment, to spend their savings and possibly increase their indebtedness.

While some households, for sometime, where able to save by spending less then their income, all can not.

The leakage that is aggregate savings is unsustainable unless demand is supported, either by the injection that is deficit spending, or the injection of foreign demand via net exports. Without these injections, attempts to save in the aggregate become an economic race to the bottom where all are worse off.
The idea that savings achieved by spending less than we earn necessarily leads to a decline of demand ain't necessarily so. If my income increases, I can both spend more and save more. In a healthy and expanding economy, why couldn't we see aggregate savings and aggregate spending BOTH increase? There need be no "race to save" to the extent that it damages the economy.

Posted by: brinn Nov 14 2010, 03:37 PM

QUOTE(Maybe Maybe Not @ Nov 14 2010, 08:43 AM) *
QUOTE(pj4xtrader @ Nov 13 2010, 11:38 AM) *
...
What is virtuous for the individual is operationally impossible in the aggregate. As households race to save by spending less then they earn, demand declines and incomes with it. Faced with less income households consume less in efforts to save. Demand declines further, taking incomes, employment, productive capacity and eventually asset values with it. Economic downturn begins. Falling productive capacity will lead to supply shortages that drive up prices forcing households many of which, now have no income due to unemployment, to spend their savings and possibly increase their indebtedness.

While some households, for sometime, where able to save by spending less then their income, all can not.

The leakage that is aggregate savings is unsustainable unless demand is supported, either by the injection that is deficit spending, or the injection of foreign demand via net exports. Without these injections, attempts to save in the aggregate become an economic race to the bottom where all are worse off.
The idea that savings achieved by spending less than we earn necessarily leads to a decline of demand ain't necessarily so. If my income increases, I can both spend more and save more. In a healthy and expanding economy, why couldn't we see aggregate savings and aggregate spending BOTH increase? There need be no "race to save" to the extent that it damages the economy.


Once again, no one has made the point you're trying to discredit. The scenario that pj4xtrader paints was designed to illustrate a compositional fallacy (the paradox of thrift) in response to Leder's assertion that aggregation is useless and that only by focusing on the individual can one gain insight into economic concepts. The argument is not that you, yourself, could not both spend and save more given an increasing income but rather that if ALL in an economy attempt to save that your given of an increasing income will not be possible. Again, to summarize: What is virtuous for the individual becomes harmful for all when more and more people attempt to engage in the virtuous behavior.

I've been extremely busy attempting to answer many of the questions that you all have asked and I was hoping some of you would answer one of mine:

To preface: Several posters in this thread have made the assertion that US bond rates will increase as bond purchasers begin to realize the risk associated with owning the bonds of a country that is in such a precarious financial position (Note: When I refer to bond rates I’m referring to the coupon rate which is the rate that the government pay on the bonds). Take a look at the size of the US deficit and the rates on government bonds post 1971 and you will see a clear negative correlation. Same with Japan.

My simple questions are: Why are US and Japanese bond rates so low when our deficits are so high? What is driving this negative correlation in the face of the well-accepted fact that risky countries have to increase their bond rates to attract investors?

Posted by: pj4xtrader Nov 14 2010, 05:05 PM

QUOTE(Maybe Maybe Not @ Nov 14 2010, 08:43 AM) *
QUOTE(pj4xtrader @ Nov 13 2010, 11:38 AM) *
...
What is virtuous for the individual is operationally impossible in the aggregate. As households race to save by spending less then they earn, demand declines and incomes with it. Faced with less income households consume less in efforts to save. Demand declines further, taking incomes, employment, productive capacity and eventually asset values with it. Economic downturn begins. Falling productive capacity will lead to supply shortages that drive up prices forcing households many of which, now have no income due to unemployment, to spend their savings and possibly increase their indebtedness.

While some households, for sometime, where able to save by spending less then their income, all can not.

The leakage that is aggregate savings is unsustainable unless demand is supported, either by the injection that is deficit spending, or the injection of foreign demand via net exports. Without these injections, attempts to save in the aggregate become an economic race to the bottom where all are worse off.
The idea that savings achieved by spending less than we earn necessarily leads to a decline of demand ain't necessarily so. If my income increases, I can both spend more and save more. In a healthy and expanding economy, why couldn't we see aggregate savings and aggregate spending BOTH increase? There need be no "race to save" to the extent that it damages the economy.


Only possible, on the aggregate, if there are large enough injections from the public or foreign sectors, or some combination of both (government deficits and trade surpluses).

Posted by: CarpeDinkum Nov 14 2010, 06:09 PM

QUOTE(pj4xtrader @ Nov 14 2010, 09:05 AM) *
QUOTE(Maybe Maybe Not @ Nov 14 2010, 08:43 AM) *
QUOTE(pj4xtrader @ Nov 13 2010, 11:38 AM) *
...
What is virtuous for the individual is operationally impossible in the aggregate. As households race to save by spending less then they earn, demand declines and incomes with it. Faced with less income households consume less in efforts to save. Demand declines further, taking incomes, employment, productive capacity and eventually asset values with it. Economic downturn begins. Falling productive capacity will lead to supply shortages that drive up prices forcing households many of which, now have no income due to unemployment, to spend their savings and possibly increase their indebtedness.

While some households, for sometime, where able to save by spending less then their income, all can not.

The leakage that is aggregate savings is unsustainable unless demand is supported, either by the injection that is deficit spending, or the injection of foreign demand via net exports. Without these injections, attempts to save in the aggregate become an economic race to the bottom where all are worse off.
The idea that savings achieved by spending less than we earn necessarily leads to a decline of demand ain't necessarily so. If my income increases, I can both spend more and save more. In a healthy and expanding economy, why couldn't we see aggregate savings and aggregate spending BOTH increase? There need be no "race to save" to the extent that it damages the economy.


Only possible, on the aggregate, if there are large enough injections from the public or foreign sectors, or some combination of both (government deficits and trade surpluses).


Aren't we also talking about an extreme here? Seems that even if there's a trend towards saving, not everybody would save the same amount (or percentage) and not everybody would do it at the same time. Although as I understand it, Japan experienced this as a result of their recession.


Posted by: pj4xtrader Nov 14 2010, 07:24 PM

QUOTE(CarpeDinkum @ Nov 14 2010, 01:09 PM) *
QUOTE(pj4xtrader @ Nov 14 2010, 09:05 AM) *
QUOTE(Maybe Maybe Not @ Nov 14 2010, 08:43 AM) *
QUOTE(pj4xtrader @ Nov 13 2010, 11:38 AM) *
...
What is virtuous for the individual is operationally impossible in the aggregate. As households race to save by spending less then they earn, demand declines and incomes with it. Faced with less income households consume less in efforts to save. Demand declines further, taking incomes, employment, productive capacity and eventually asset values with it. Economic downturn begins. Falling productive capacity will lead to supply shortages that drive up prices forcing households many of which, now have no income due to unemployment, to spend their savings and possibly increase their indebtedness.

While some households, for sometime, where able to save by spending less then their income, all can not.

The leakage that is aggregate savings is unsustainable unless demand is supported, either by the injection that is deficit spending, or the injection of foreign demand via net exports. Without these injections, attempts to save in the aggregate become an economic race to the bottom where all are worse off.
The idea that savings achieved by spending less than we earn necessarily leads to a decline of demand ain't necessarily so. If my income increases, I can both spend more and save more. In a healthy and expanding economy, why couldn't we see aggregate savings and aggregate spending BOTH increase? There need be no "race to save" to the extent that it damages the economy.


Only possible, on the aggregate, if there are large enough injections from the public or foreign sectors, or some combination of both (government deficits and trade surpluses).


Aren't we also talking about an extreme here? Seems that even if there's a trend towards saving, not everybody would save the same amount (or percentage) and not everybody would do it at the same time. Although as I understand it, Japan experienced this as a result of their recession.


No, were are talking private sector net savings. Mainstream economist, for the most part, call for long term increasing private sector savings (a surplus) in the aggregate
as a cure for all economic woes. My point is, whether you agree with that theory or not, they fail to realize that operationally this is only possible if one or both the other two sectors net spends (a deficit).

Posted by: akaCG Nov 14 2010, 08:00 PM

The problem with the "paradox of thrift" concept is that it treats money saved as money that has vanished, never to return again. That is false. Savings now = potential spending later. As savings accumulate, so does future potential spending. At some point (assuming prices are allowed to fall, as opposed to being propped up), each additional dollar/penny in the "mattress" becomes less attractive than some product/service that said dollar/penny can buy. And the economy begins growing again, from a solid (as opposed to artificially inflated) foundation.

Paradoxically***, it is precisely the belief in the validity of the "paradox of thrift" concept, leading as it does to policies/initiatives that either prevent outright or simply prolong the process via which the intersection point between the aforementioned "dollars/pennies in the mattress" and "dollars/pennies in the store" preference lines is reached, that results in precisely the kind of self-perpetuating downward spiral that said concept purports to help avert.

***From the point of view of believers in the validity of the "paradox of thrift" concept, that is. To those of us who aren't, the self-defeating effects of implementing it aren't paradoxical/surprising in the least. Quite predictable, really.

Posted by: pj4xtrader Nov 14 2010, 09:49 PM

QUOTE(akaCG @ Nov 14 2010, 03:00 PM) *
The problem with the "paradox of thrift" concept is that it treats money saved as money that has vanished, never to return again. That is false. Savings now = potential spending later. As savings accumulate, so does future potential spending. At some point (assuming prices are allowed to fall, as opposed to being propped up), each additional dollar/penny in the "mattress" becomes less attractive than some product/service that said dollar/penny can buy. And the economy begins growing again, from a solid (as opposed to artificially inflated) foundation.

Paradoxically***, it is precisely the belief in the validity of the "paradox of thrift" concept, leading as it does to policies/initiatives that either prevent outright or simply prolong the process via which the intersection point between the aforementioned "dollars/pennies in the mattress" and "dollars/pennies in the store" preference lines is reached, that results in precisely the kind of self-perpetuating downward spiral that said concept purports to help avert.

***From the point of view of believers in the validity of the "paradox of thrift" concept, that is. To those of us who aren't, the self-defeating effects of implementing it aren't paradoxical/surprising in the least. Quite predictable, really.


Your response does nothing to explain the so called problem. My example made no assumptions about money saved vanishing. All currency is accounted for. It simply states that the rising private sector net savings would eventually dwindle for reasons stated above.

You appear to be saying the same.

Posted by: brinn Nov 14 2010, 10:45 PM

QUOTE(akaCG @ Nov 14 2010, 03:00 PM) *
The problem with the "paradox of thrift" concept is that it treats money saved as money that has vanished, never to return again. That is false. Savings now = potential spending later. As savings accumulate, so does future potential spending. At some point (assuming prices are allowed to fall, as opposed to being propped up), each additional dollar/penny in the "mattress" becomes less attractive than some product/service that said dollar/penny can buy. And the economy begins growing again, from a solid (as opposed to artificially inflated) foundation.

Paradoxically***, it is precisely the belief in the validity of the "paradox of thrift" concept, leading as it does to policies/initiatives that either prevent outright or simply prolong the process via which the intersection point between the aforementioned "dollars/pennies in the mattress" and "dollars/pennies in the store" preference lines is reached, that results in precisely the kind of self-perpetuating downward spiral that said concept purports to help avert.

***From the point of view of believers in the validity of the "paradox of thrift" concept, that is. To those of us who aren't, the self-defeating effects of implementing it aren't paradoxical/surprising in the least. Quite predictable, really.


Paradoxically**, You are supporting the analogy while attempting to discredit it. A fact that, apparently, was not lost on pj4xtrader either.


Posted by: Gray Seal Nov 15 2010, 12:12 AM

When in grade school I was introduced to various activities. I learned games can be fun. Figuring them out was fun and seeing what would happen was interesting, win or lose. I also learned that some would purposely not play by the rules just to win. That was annoying. It ruined the experience of figuring out how to play, seeing what would happen, and seeing if I could learn a strategy which tended to win.

Anyhow, one of the games was "Monopoly". Pretty common game. I bet many others have played it. Decent game, it is. Well, there are people who cheat at Monopoly. Frequently it involves with something to do with the Bank. One of the players can act as Banker or someone not playing the game can be the Banker. The basic cheat in the game is taking money from the Bank and transferring to a player "under the table".

I am not sure about you, but I wanted to play Monopoly without cheating deciding the game.

My memories of Monopoly came back to me when I read this thread. The idea that deficits are not a bad idea is based upon having a bank which operates like a player running the bank in Monopoly. The banker sits upon an unlimited supply of money which is injected into the game. Plus, it player should want a banker who cheats! The banker should give money to whomever he wishes whenever he wishes. Does it look like the player owning Boardwalk and Park Place is being forced to mortgage those property? Best give him a banker loan or outright money so he can stay in the game. In other words, Monopoly should not be played where players interact according to the rules, the game must be managed.

Not much of the game Monopoly transfers to real world market. I do think the idea that a central bank with unlimited money comes right out of it. I do know a economic science called Keynesian has been developed base upon the principle that such a central bank/government must exist to manage an economy. I do know that Keynesian have concluded that it can work. I know they think it is OK that those doing the managing of the economy benefit by using the tools Keynesian gives them. There is a presumption that management is needed and the managers naturally have an advantage. That is just the way it goes.

Austrian economics is another economic scince which believes markets do not need to be managed. They also believe markets should be fair without giving advantage to anyone.

Frankly, I do not understand why the majority of the players of a game would choose to have a banker who cheats over a game where everyone is playing under the same rules.

Deficits are cheating. Running a deficit is a transfer of wealth. Running a deficit when you know you can not pay it back without a Monopoly banker is cheating someone, lots of someones. Look who is benefiting from the large deficits and quantitative easing. A slim majority is making out big time and the expense of all of us. Government and bankers are in the gravy now. Look at the ten richest counties in the United States. Three are around New York City and seven are around Washington DC.

Markets do not need to be managed. Deficits do matter. Giving advantage via government does matter. The central bank and government management must end. And do not play Monopoly when you know the banker is a cheat.


Posted by: brinn Nov 15 2010, 01:25 AM

QUOTE(Gray Seal)
Deficits are cheating.
No. Deficits are an artifact of any non-convertible fiat currency system. Our currency system cannot functionally exist without a deficit and it's not a matter of theory but rather one of simple accounting (i.e. debits and credits). I'm not being facetious but have you read the entire thread or are you just jumping in to add your opinion? If you haven't read the thread, try starting at page 1 and following it through. There's a bunch of interesting economic concepts being discussed and you may find it interesting. Or, if you have no interest in economics, you may not. innocent.gif

ETA: Your monopoly analogy is not bad but I don't think it applies in the manner you intended it to. It would be more apropos if the monopoly players you refer to were not individuals but rather countries. I do admit that running a non-convertible, floating exchange currency system gives the US (and any other countries that use the same system) an advantage over those countries that have commodity based currencies or that use a currency board.

Posted by: CruisingRam Nov 15 2010, 01:55 AM

QUOTE(brinn @ Nov 14 2010, 05:25 PM) *
QUOTE(Gray Seal)
Deficits are cheating.
No. Deficits are an artifact of any non-convertible fiat currency system. Our currency system cannot functionally exist without a deficit and it's not a matter of theory but rather one of simple accounting (i.e. debits and credits). I'm not being facetious but have you read the entire thread or are you just jumping in to add your opinion? If you haven't read the thread, try starting at page 1 and following it through. There's a bunch of interesting economic concepts being discussed and you may find it interesting. Or, if you have no interest in economics, you may not. innocent.gif

ETA: Your monopoly analogy is not bad but I don't think it applies in the manner you intended it to. It would be more apropos if the monopoly players you refer to were not individuals but rather countries. I do admit that running a non-convertible, floating exchange currency system gives the US (and any other countries that use the same system) an advantage over those countries that have commodity based currencies or that use a currency board.


I have to say Brinn, if I have picked up something from this debate- is that some folks on here are debating ideology, some are debating accounting, business and application- basically, if I follow, some are debating theory, others are debating application. I think it is helpful if we can seperate the two better. I think the two are not exclusive to each other and sometime complimentary

Posted by: CarpeDinkum Nov 15 2010, 02:39 AM

QUOTE(CruisingRam @ Nov 14 2010, 05:55 PM) *
I have to say Brinn, if I have picked up something from this debate- is that some folks on here are debating ideology, some are debating accounting, business and application- basically, if I follow, some are debating theory, others are debating application. I think it is helpful if we can seperate the two better. I think the two are not exclusive to each other and sometime complimentary


I keep on leaning on application. It's frequently difficult for me to tell when there's been a shift from the one to the other.

Posted by: brinn Nov 15 2010, 03:03 AM

QUOTE(CruisingRam @ Nov 14 2010, 08:55 PM) *
QUOTE(brinn @ Nov 14 2010, 05:25 PM) *
QUOTE(Gray Seal)
Deficits are cheating.
No. Deficits are an artifact of any non-convertible fiat currency system. Our currency system cannot functionally exist without a deficit and it's not a matter of theory but rather one of simple accounting (i.e. debits and credits). I'm not being facetious but have you read the entire thread or are you just jumping in to add your opinion? If you haven't read the thread, try starting at page 1 and following it through. There's a bunch of interesting economic concepts being discussed and you may find it interesting. Or, if you have no interest in economics, you may not. innocent.gif

ETA: Your monopoly analogy is not bad but I don't think it applies in the manner you intended it to. It would be more apropos if the monopoly players you refer to were not individuals but rather countries. I do admit that running a non-convertible, floating exchange currency system gives the US (and any other countries that use the same system) an advantage over those countries that have commodity based currencies or that use a currency board.


I have to say Brinn, if I have picked up something from this debate- is that some folks on here are debating ideology, some are debating accounting, business and application- basically, if I follow, some are debating theory, others are debating application. I think it is helpful if we can seperate the two better. I think the two are not exclusive to each other and sometime complimentary


Yup. I've tried to stay away from taking any political positions instead trying to frame the debate as purely an operational one (although sometimes I stray a bit). Unfortunately, because economics as a "science" has several different schools of thought, it's difficult to keep the ideology completely out. C'est la vie, eh?

Regardless, I'm glad you've found it interesting. As I said before, if only one person comes away from this thread with even a slightly altered view of deficits and the way the currency operates than I feel my time will have been well spent.

Posted by: Gray Seal Nov 15 2010, 03:58 AM

There are two ideologies presented in the thread. One is the idea that economies are best when they are managed and one which champion believes markets should be free from management. A thorough debate of the management philosophy is needed as it is...managed. The non-management model is simpler.

When brinn makes the statement "I do admit that running a non-convertible, floating exchange currency system gives the US (and any other countries that use the same system) an advantage over those countries that have commodity based currencies or that use a currency board" I reach the opposite conclusion. I see that a fiat currency run by a secret group of bankers to be disadvantageous as it permits harmful mischief geared to the advantage a minority at the expense of the majority. Hence, the cheating Monopoly banker analogy comes to my mind.

Using explanations to describe intricacies of a managed economy does nothing to confront the ideological differences between the schools of thought between a managed economy and one which is not. You must accept the premise that economies need to be managed to follow that train of thought in this thread.

I think the present troubles in the United States, the entire world really, will reveal the charade of central banking being the means to fair access to the market for all individuals. Central banking is nothing new. It has been shown to be corrupt throughout history. No one is inventing a new wheel with the Federal Reserve system nor the borrowing of money to fund warfare. The presentation has been fooling the people for a number of years and still now. The harm and advantage taken by the government and banking cronies has not been egregious enough recently to grab the people's attention. People are starting to question. The deficit is too big to cover up this time. It has built upon itself for a long time and the abuse so great since 2000.

You can talk in accounting language to balance the deficit from a limitless supply of money like a Monopoly banker but it is wrong. People know this intuitively. The complicated explanation of the inter workings of a managed economy does not mean a thing when the whole thing blows up in the near future. Bernanke and adherents have no clothes.

As a managed economy, the current Federal Reserve has probably set a record for the number of years before it failed. Clearly there are good economists and politicians gleaning from the system at a rate which has not perturbed the people. There has to be some credit given for a system which has fooled so many people for so long. So, as managed economies go, the one here in the United States is darn good.

-----------------

I can not see how one can talk of economics without being political. Economics is the language of politics. Stating your economic philosophy is stating your political view.

Posted by: CruisingRam Nov 15 2010, 05:38 AM

What alternative do you have Gray Seal? Since we have a polyglot global economy- if everyone doesn't have a managed economy, or no one has a managed economy- how do get all the others to play the old fashioned agragarian society game?

Posted by: CarpeDinkum Nov 15 2010, 05:53 AM

QUOTE(Gray Seal @ Nov 14 2010, 07:58 PM) *
I can not see how one can talk of economics without being political. Economics is the language of politics. Stating your economic philosophy is stating your political view.


My view is that politics has insinuated itself about the ankle of economics like a confused and nervous poodle. I cannot think of a less complementary relationship, unless it might be science and religion. Fortunately, one can speak of operational realities of an economy without invoking Fifi's misguided affections. Once we have that down, perhaps we can proceed towards other basic facts about US deficits that will not be tainted by association with the World's Second Oldest Profession.

From what I have seen, Politicians seem to know as much about the US economy as the media does. This is to say, very little. Just enough to get the fear vote; it's all they need.

Posted by: Gray Seal Nov 15 2010, 12:57 PM

CruisingRam, the alternative is freedom. Economics based upon the concept of freedom is the alternative the United States or any nation in the world should be striving to create or maintain. It is the clear choice that governments, the people who are in them, to do the opposite. The people are the only brake upon this. Free people can become content. Contentment can lead to forgetting about freedom. Forgetting about freedom will lose it just as much as a country which has a militarily powerful overlord. It is nicer to lose it via peaceful means rather than bullets but it is a diminishing of persons to lose freedom in both cases.

CarpeDinkum, your observation that politicians seem to know about as much about the US economy as the media does not illustrate they know nothing about economics but it says a lot about what economics they subscribe to. The predominant political and media types both are squarely in the camp of a managed economy. They do not need to worry about freedom and free markets. Politicians feel they can do what ever they want to. They are the managers and that is all the economics they need to know. If politicians play ball with the insiders, the crony capitalists, all is good. Power and wealth advantage is yours. Media has figured this out, too. Media plays ball with insiders and they themselves are crony capitalists.

You can not be a-economic with your political views. Your political views are always choosing an economic path.

Posted by: lederuvdapac Nov 15 2010, 03:16 PM

QUOTE(brinn)
As you may well know the paradox of thrift states that although an individual household engaging in savings is virtuous, if everyone in an economy decides to save that that will lead to falling demand, lower output, lower wages and unemployment which will impede the individuals ability to save. Essentially what is virtous for the individual is harmful for the group in aggregate.


There you go again brinn. How do you not catch the fallacies in your writing? If everyone decides to save. What does that mean? If everyone decides to save 100% of their income? If everyone decides to save 10% of their income (closer to the optimal rate)? Why would everyone decide to do that? And if they did, why is the act of saving seen as the cause instead of the effect?

The fact is that in a free market, there would be no situation where everyone decided to save because an increase in saving would increase the stock of loanable funds and lower interest rates, making investors and entrepreneurs want to borrow money to invest in long term projects to meet the future demand. Your argument is that if people start saving their money, that it causes short term pain. What you fail to realize is that if the market is reallocating capital and resources through a change in a consumer preferences (opting to save more and consume less) - then then that is what the market should reflect. You want to dictate what the market should say by pulling on your aggregate levers. I want the market to reflect the actual demand of consumers.

QUOTE(brinn)
You never answered my question. Do you believe in the money multiplier theory?


A myth, pure and simple. Money is just a medium of exchange, an intermediary between actual goods. Creating more money either through a multiplier effect or through thin air does not create more output. The purchasing power of money is limited by the availability of consumer goods. It does not create more production. All it does is reorganize the existing pool or savings and resources. You want to put the cart before the horse. You want consumption without the requisite production.


QUOTE(brinn)
Why are US and Japanese bond rates so low when our deficits are so high? What is driving this negative correlation in the face of the well-accepted fact that risky countries have to increase their bond rates to attract investors?


Ah, finally a good question - but one you should already know. It is because all of the borrowing is being done in the short term market. If the government went out in the long term market - the demand would definitely dry up. Bond traders might believe that the US is ok for the next 6 months, year or two years - but 30 years? Not so sure they will get a solid return with the massive debt, interest payments, and entitlements creeping up. The second reason is that the central bank is purchasing the bonds. Why would the Fed buy $600 billion in US Treasury bills if there was demand for it?


Posted by: CarpeDinkum Nov 15 2010, 05:24 PM

QUOTE(lederuvdapac @ Nov 15 2010, 07:16 AM) *
QUOTE(brinn)
As you may well know the paradox of thrift states that although an individual household engaging in savings is virtuous, if everyone in an economy decides to save that that will lead to falling demand, lower output, lower wages and unemployment which will impede the individuals ability to save. Essentially what is virtous for the individual is harmful for the group in aggregate.


There you go again brinn. How do you not catch the fallacies in your writing? If everyone decides to save. What does that mean? If everyone decides to save 100% of their income? If everyone decides to save 10% of their income (closer to the optimal rate)? Why would everyone decide to do that? And if they did, why is the act of saving seen as the cause instead of the effect?



As they did in Japan? Although I don't think it's necessary for everyone to do it; the paradox seems to use an extreme as an example. I don't know if a curve would be applied for points in between or not.

QUOTE(lederuvdapac @ Nov 15 2010, 07:16 AM) *
The fact is that in a free market, there would be no situation where everyone decided to save because an increase in saving would increase the stock of loanable funds and lower interest rates, making investors and entrepreneurs want to borrow money to invest in long term projects to meet the future demand.


??????

QUOTE(lederuvdapac @ Nov 15 2010, 07:16 AM) *
Your argument is that if people start saving their money, that it causes short term pain. What you fail to realize is that if the market is reallocating capital and resources through a change in a consumer preferences (opting to save more and consume less) - then then that is what the market should reflect. You want to dictate what the market should say by pulling on your aggregate levers. I want the market to reflect the actual demand of consumers.


I think he was more referring to sectoral balances, saying that if the private sector net saves, the other sector(s) will be net spending.

QUOTE(lederuvdapac @ Nov 15 2010, 07:16 AM) *
QUOTE(brinn)
You never answered my question. Do you believe in the money multiplier theory?


A myth, pure and simple. Money is just a medium of exchange, an intermediary between actual goods. Creating more money either through a multiplier effect or through thin air does not create more output. The purchasing power of money is limited by the availability of consumer goods. It does not create more production. All it does is reorganize the existing pool or savings and resources. You want to put the cart before the horse. You want consumption without the requisite production.


QUOTE(brinn)
Why are US and Japanese bond rates so low when our deficits are so high? What is driving this negative correlation in the face of the well-accepted fact that risky countries have to increase their bond rates to attract investors?


Ah, finally a good question - but one you should already know. It is because all of the borrowing is being done in the short term market. If the government went out in the long term market - the demand would definitely dry up. Bond traders might believe that the US is ok for the next 6 months, year or two years - but 30 years? Not so sure they will get a solid return with the massive debt, interest payments, and entitlements creeping up. The second reason is that the central bank is purchasing the bonds. Why would the Fed buy $600 billion in US Treasury bills if there was demand for it?


Is the govt really selling bonds to borrow money? Wait, no, they're buying bonds. Hmmmm.




QUOTE(Gray Seal @ Nov 15 2010, 04:57 AM) *
You can not be a-economic with your political views. Your political views are always choosing an economic path.


The embodiment of Fifi, right there, leading straight to Frankenomics. Get the torches!!!!

Posted by: CruisingRam Nov 15 2010, 07:36 PM

QUOTE(Gray Seal @ Nov 15 2010, 04:57 AM) *
CruisingRam, the alternative is freedom. Economics based upon the concept of freedom is the alternative the United States or any nation in the world should be striving to create or maintain. It is the clear choice that governments, the people who are in them, to do the opposite. The people are the only brake upon this. Free people can become content. Contentment can lead to forgetting about freedom. Forgetting about freedom will lose it just as much as a country which has a militarily powerful overlord. It is nicer to lose it via peaceful means rather than bullets but it is a diminishing of persons to lose freedom in both cases.

CarpeDinkum, your observation that politicians seem to know about as much about the US economy as the media does not illustrate they know nothing about economics but it says a lot about what economics they subscribe to. The predominant political and media types both are squarely in the camp of a managed economy. They do not need to worry about freedom and free markets. Politicians feel they can do what ever they want to. They are the managers and that is all the economics they need to know. If politicians play ball with the insiders, the crony capitalists, all is good. Power and wealth advantage is yours. Media has figured this out, too. Media plays ball with insiders and they themselves are crony capitalists.

You can not be a-economic with your political views. Your political views are always choosing an economic path.



Grey Seal- try to be more specific- you are speaking in platitudes and generalities- my question was fairly specific- I want to hear how your SPECIFIC system operationaly works. I am a manufacturer by trade, and have to deal with my own capital and investment strategies, and have to compete globally- I need specifics, not generalities.

Posted by: Gray Seal Nov 15 2010, 07:47 PM

QUOTE(CruisingRam)
What alternative do you have Gray Seal? Since we have a polyglot global economy- if everyone doesn't have a managed economy, or no one has a managed economy- how do get all the others to play the old fashioned agragarian society game?
I did answer the first question. The second one may be more specific but I do not know what is the old fashioned agragarian society game.

Posted by: CruisingRam Nov 15 2010, 08:22 PM

QUOTE(Gray Seal @ Nov 15 2010, 11:47 AM) *
QUOTE(CruisingRam)
What alternative do you have Gray Seal? Since we have a polyglot global economy- if everyone doesn't have a managed economy, or no one has a managed economy- how do get all the others to play the old fashioned agragarian society game?
I did answer the first question. The second one may be more specific but I do not know what is the old fashioned agragarian society game.




I deal with both free and not so free economies Grey Seal, I deal with regulations and such every day- most of them absolutely neccesary- and about 95% of taxes I see are absolutely neccesary for a society in order to allow folks to do business- so when folks talk regulation or taxation, I ask- what taxes, what regulation and why- those are the old boogeyman of the idiot right- now, I have heard some well thought out positions by Ron Paul, and nothing from anti-big government such as Rand Paul or Sarah Palin.

Brinn has been describing the actual operatoin of commerce, the realities of commerce, NOT theory- you can see them with your own bank account when you do foriegn commerce from America. Haven't seen a SINGLE succesful un-managed economy. Seen plenty of succesful ones.

QUOTE(Gray Seal @ Nov 15 2010, 11:47 AM) *
QUOTE(CruisingRam)
What alternative do you have Gray Seal? Since we have a polyglot global economy- if everyone doesn't have a managed economy, or no one has a managed economy- how do get all the others to play the old fashioned agragarian society game?
I did answer the first question. The second one may be more specific but I do not know what is the old fashioned agragarian society game.




I deal with both free and not so free economies Grey Seal, I deal with regulations and such every day- most of them absolutely neccesary- and about 95% of taxes I see are absolutely neccesary for a society in order to allow folks to do business- so when folks talk regulation or taxation, I ask- what taxes, what regulation and why- those are the old boogeyman of the idiot right- now, I have heard some well thought out positions by Ron Paul, and nothing from anti-big government such as Rand Paul or Sarah Palin.

Brinn has been describing the actual operatoin of commerce, the realities of commerce, NOT theory- you can see them with your own bank account when you do foriegn commerce from America. Haven't seen a SINGLE succesful un-managed economy. Seen plenty of succesful ones.

Posted by: Gray Seal Nov 15 2010, 08:45 PM

I can not suggest anything which would exceed your life experiences, CruisingRam. You and I both deal in the world of family and business and have two differing perspectives from our experiences. I deal with regulations every day and most are unnecessary with 95% of taxes being assessed arbitrarily when only 10% of taxes needed in order to allow folks to do business. I do not think we can debate life experiences. They are what they are.

Brinn is describing the actual operation of commerce today. You see it as functioning well and I see it as unfair and unable to be sustained. We both have good vantage points to see the world. *shrug* I can not see how we can debate our experiences nor or conclusions. They are what they are.

Have you read or known about unsuccessful managed economies? There are quite a few.

Do you see the economy in the United States as being successful right now? I do not. How bad do things have to be before you think it to be unsuccessful? Do you see trillions of dollars in deficits as success? Do you not see history and the rise of the United States being due to its freedoms compared to the rest of the world? Is the United States becoming better and better because freedoms are diminishing and being replaced by central management? Have things never been this good?

Posted by: Amlord Nov 15 2010, 09:15 PM

QUOTE(CarpeDinkum @ Nov 15 2010, 12:24 PM) *
QUOTE(lederuvdapac @ Nov 15 2010, 07:16 AM) *
QUOTE(brinn)
As you may well know the paradox of thrift states that although an individual household engaging in savings is virtuous, if everyone in an economy decides to save that that will lead to falling demand, lower output, lower wages and unemployment which will impede the individuals ability to save. Essentially what is virtous for the individual is harmful for the group in aggregate.


There you go again brinn. How do you not catch the fallacies in your writing? If everyone decides to save. What does that mean? If everyone decides to save 100% of their income? If everyone decides to save 10% of their income (closer to the optimal rate)? Why would everyone decide to do that? And if they did, why is the act of saving seen as the cause instead of the effect?



As they did in Japan? Although I don't think it's necessary for everyone to do it; the paradox seems to use an extreme as an example. I don't know if a curve would be applied for points in between or not.


Savings have not gone up in Japan. Savings in Japan has dropped precipitously in the last decade.

http://static.seekingalpha.com/uploads/2008/12/30/saupload_savingsratebycountry.png



QUOTE(CarpeDinkum @ Nov 15 2010, 12:24 PM) *
QUOTE(lederuvdapac @ Nov 15 2010, 07:16 AM) *
The fact is that in a free market, there would be no situation where everyone decided to save because an increase in saving would increase the stock of loanable funds and lower interest rates, making investors and entrepreneurs want to borrow money to invest in long term projects to meet the future demand.


??????


Leder is simply stating that things do not occur in a vacuum. Why is it a good thing to save money? It saves your current income (productivity) for future consumption. It is a hedge against loss of future productivity such as if you get sick or lose your job.

Why has the savings rate been so low recently? That is an easy one: interest rates are low. Interest rates have been kept artificially low by the Fed's easy money policies. Why should I save when http://www.bankrate.com/cd.aspx 0.78% on a six month CD. A 5 year CD is 2.23%. If inflation goes up at all, that is a losing proposition. It has been that way for a decade. Interest rates are too low for people to save.

Now, what if people do save? That money becomes available for investment. The situation we have right now is that the rules for lenders have been tightened so that they need more on the books relative to their loans. At the same time, the Fed is keeping interest rates low which provides a disincentive for savings.

Is it any wonder that "banks aren't lending!" and the savings rate has dropped?


QUOTE(CarpeDinkum @ Nov 15 2010, 12:24 PM) *
Is the govt really selling bonds to borrow money? Wait, no, they're buying bonds. Hmmmm.


The Fed is not the government. It is a cartel of private banks with special powers.

Posted by: CarpeDinkum Nov 15 2010, 10:16 PM

QUOTE(Amlord @ Nov 15 2010, 01:15 PM) *
QUOTE(CarpeDinkum @ Nov 15 2010, 12:24 PM) *
QUOTE(lederuvdapac @ Nov 15 2010, 07:16 AM) *
QUOTE(brinn)
As you may well know the paradox of thrift states that although an individual household engaging in savings is virtuous, if everyone in an economy decides to save that that will lead to falling demand, lower output, lower wages and unemployment which will impede the individuals ability to save. Essentially what is virtous for the individual is harmful for the group in aggregate.


There you go again brinn. How do you not catch the fallacies in your writing? If everyone decides to save. What does that mean? If everyone decides to save 100% of their income? If everyone decides to save 10% of their income (closer to the optimal rate)? Why would everyone decide to do that? And if they did, why is the act of saving seen as the cause instead of the effect?



As they did in Japan? Although I don't think it's necessary for everyone to do it; the paradox seems to use an extreme as an example. I don't know if a curve would be applied for points in between or not.


Savings have not gone up in Japan. Savings in Japan has dropped precipitously in the last decade.



The private sector is more than just the households and I think the original point was one of sectoral balances:

http://online.wsj.com/article/SB10001424052748704631504575533002339914406.html






QUOTE(Amlord @ Nov 15 2010, 01:15 PM) *
QUOTE(CarpeDinkum @ Nov 15 2010, 12:24 PM) *
QUOTE(lederuvdapac @ Nov 15 2010, 07:16 AM) *
The fact is that in a free market, there would be no situation where everyone decided to save because an increase in saving would increase the stock of loanable funds and lower interest rates, making investors and entrepreneurs want to borrow money to invest in long term projects to meet the future demand.


??????


Leder is simply stating that things do not occur in a vacuum. Why is it a good thing to save money? It saves your current income (productivity) for future consumption. It is a hedge against loss of future productivity such as if you get sick or lose your job.

Why has the savings rate been so low recently? That is an easy one: interest rates are low. Interest rates have been kept artificially low by the Fed's easy money policies. Why should I save when http://www.bankrate.com/cd.aspx 0.78% on a six month CD. A 5 year CD is 2.23%. If inflation goes up at all, that is a losing proposition. It has been that way for a decade. Interest rates are too low for people to save.

Now, what if people do save? That money becomes available for investment. The situation we have right now is that the rules for lenders have been tightened so that they need more on the books relative to their loans. At the same time, the Fed is keeping interest rates low which provides a disincentive for savings.

Is it any wonder that "banks aren't lending!" and the savings rate has dropped?



Personally, I find I don't have any money to save in the first place. I KNOW that I'm not the only one in that position.

I also understand that there are treasury securities that adjust for inflation. But there's this echo in my wallet, see...

I just understood leder's point (in a free market, as individuals save, that lowers interest rates, which piques the interest of businesses). Tight rules aside, I know I wouldn't even think of taking a loan. I would imagine that a number of businesses feel the same...

Posted by: Amlord Nov 15 2010, 10:19 PM

QUOTE(CarpeDinkum @ Nov 15 2010, 04:36 PM) *
QUOTE(Amlord @ Nov 15 2010, 01:15 PM) *
QUOTE(CarpeDinkum @ Nov 15 2010, 12:24 PM) *
QUOTE(lederuvdapac @ Nov 15 2010, 07:16 AM) *
QUOTE(brinn)
As you may well know the paradox of thrift states that although an individual household engaging in savings is virtuous, if everyone in an economy decides to save that that will lead to falling demand, lower output, lower wages and unemployment which will impede the individuals ability to save. Essentially what is virtous for the individual is harmful for the group in aggregate.


There you go again brinn. How do you not catch the fallacies in your writing? If everyone decides to save. What does that mean? If everyone decides to save 100% of their income? If everyone decides to save 10% of their income (closer to the optimal rate)? Why would everyone decide to do that? And if they did, why is the act of saving seen as the cause instead of the effect?



As they did in Japan? Although I don't think it's necessary for everyone to do it; the paradox seems to use an extreme as an example. I don't know if a curve would be applied for points in between or not.


Savings have not gone up in Japan. Savings in Japan has dropped precipitously in the last decade.



The private sector is more than just the households and I think the original point was one of sectoral balances:

http://online.wsj.com/article/SB10001424052748704631504575533002339914406.html

In regards to the paradox of thrift, is it a benefit for companies to save their returns? Should a business reinvest in itself or give them out as dividends or should it save its profits? Since a business in an entity that should earn money for its owners, there is no virtue in saving the money within the business as is happening in Japan. Thus the paradox of thrift does not apply if a business saves its profits since that is not a virtue.

Of course, Japan's economy has been in a deflationary spiral which means that simply holding money has the effect of gain since the money is worth more goods in the future.

Posted by: akaCG Nov 15 2010, 10:24 PM

QUOTE(pj4xtrader @ Nov 14 2010, 04:49 PM) *
QUOTE(akaCG @ Nov 14 2010, 03:00 PM) *
The problem with the "paradox of thrift" concept is that it treats money saved as money that has vanished, never to return again. That is false. Savings now = potential spending later. As savings accumulate, so does future potential spending. At some point (assuming prices are allowed to fall, as opposed to being propped up), each additional dollar/penny in the "mattress" becomes less attractive than some product/service that said dollar/penny can buy. And the economy begins growing again, from a solid (as opposed to artificially inflated) foundation.

Paradoxically***, it is precisely the belief in the validity of the "paradox of thrift" concept, leading as it does to policies/initiatives that either prevent outright or simply prolong the process via which the intersection point between the aforementioned "dollars/pennies in the mattress" and "dollars/pennies in the store" preference lines is reached, that results in precisely the kind of self-perpetuating downward spiral that said concept purports to help avert.

***From the point of view of believers in the validity of the "paradox of thrift" concept, that is. To those of us who aren't, the self-defeating effects of implementing it aren't paradoxical/surprising in the least. Quite predictable, really.


Your response does nothing to explain the so called problem. My example made no assumptions about money saved vanishing. All currency is accounted for. It simply states that the rising private sector net savings would eventually dwindle for reasons stated above.

You appear to be saying the same.

What the "paradox of thrift" concept is saying is that saving may well be a "virtue" at the individual level but that it's a "sin" at the aggregate level, and that it's the government's job to address this "sin surplus" ("too much" aggregate saving) by issuing brand-new-fiat-currency-backed "indulgences" (e.g. targeted tax credits) that it then induces/forces more and more individuals to "purchase" (e.g. by hiring an additional worker, installing solar panels, turning in one's "clunker" for a new car, buying American, etc., in order to get said credit), until said aggregate "sin surplus" is (in the government's opinion) extinguished.

What I, on the other hand, am saying (trying to, anyway) is this:

1.
Saving is a "virtue" at both the individual and aggregate levels.

2.
Increasing savings, at both the individual and aggregate levels, equate to a growing "virtue surplus".

3.
The "paradox of thrift" model turns things on their head by viewing said "virtue surplus" as a "sin surplus", and recommends that the government jump in and induce/force enough of the "sinners" to see the "error" of their ways and start behaving in accordance with what government thinks will lead to a state of aggregate "salvation".

4.
The price mechanism in a free market, on the other hand, views said "virtue surplus" as exactly what it is: a "virtue surplus". Which it rewards, as virtue should be, by increasing its value via lower prices. It doesn't view the savers as the ones who strayed from a "virtuous" path, but prices. Savers get "rewarded", prices get "punished".

That is a big difference.

The "paradox of thrift" model leads to policies that substitute the government's judgement of what the optimal level of aggregate savings should be for that of the individual savers whose savings compose said aggregate. And, given the government's bias toward short-term "feel good" "solutions that seek to preserve/increase its popularity/power, the end result is an ever growing chasm between price levels and true value, a chasm that requires an ever growing amount of fiat money creation to plug.

What I'm saying, in the end, is that looking at things purely from an "operational" standpoint, tweaking/turning concepts/models upside down/inside out to see what things might look like from a different angle and such can certainly be interesting/intellectually stimulating/etc.. Nothing wrong with that. No harm done.

But if one's goal is for such theoretical experimentation to yield valuable insights, then the standard becomes "OK. What would happen to real life flesh and blood human beings if we implemented this model?".

An analogy:

"Operationally", within the confines of verbal and written (both prose and poetry) communication, one may use the words "sunset" and "sunrise" to one's heart's content. One can even say/write something like "Every sunrise is matched by a sunset. Aaaah, the world is in such beautiful balance!". Fine and dandy. No harm done. But, if one were to ever try to implement (i.e. use it "functionally") the "sunrise/sunset" model in real life, such as in planning a trip to the moon, ... TROUBLE! For the very simple reason that that's not how things work ... functionally.

To summarize:

"Operationally", it may not matter whether a socio/economico/political (after all, as another poster has remarked, there's no divorcing economics from politics) model views the government as the credit/token dispensing parent and citizens as its credit/token receiving children. But once one implements such a model in the real world ... TROUBLE!


Posted by: CarpeDinkum Nov 15 2010, 10:45 PM

QUOTE(akaCG @ Nov 15 2010, 02:24 PM) *
QUOTE(pj4xtrader @ Nov 14 2010, 04:49 PM) *
QUOTE(akaCG @ Nov 14 2010, 03:00 PM) *
The problem with the "paradox of thrift" concept is that it treats money saved as money that has vanished, never to return again. That is false. Savings now = potential spending later. As savings accumulate, so does future potential spending. At some point (assuming prices are allowed to fall, as opposed to being propped up), each additional dollar/penny in the "mattress" becomes less attractive than some product/service that said dollar/penny can buy. And the economy begins growing again, from a solid (as opposed to artificially inflated) foundation.

Paradoxically***, it is precisely the belief in the validity of the "paradox of thrift" concept, leading as it does to policies/initiatives that either prevent outright or simply prolong the process via which the intersection point between the aforementioned "dollars/pennies in the mattress" and "dollars/pennies in the store" preference lines is reached, that results in precisely the kind of self-perpetuating downward spiral that said concept purports to help avert.

***From the point of view of believers in the validity of the "paradox of thrift" concept, that is. To those of us who aren't, the self-defeating effects of implementing it aren't paradoxical/surprising in the least. Quite predictable, really.


Your response does nothing to explain the so called problem. My example made no assumptions about money saved vanishing. All currency is accounted for. It simply states that the rising private sector net savings would eventually dwindle for reasons stated above.

You appear to be saying the same.

What the "paradox of thrift" concept is saying is that saving may well be a "virtue" at the individual level but that it's a "sin" at the aggregate level, and that it's the government's job to address this "sin surplus" ("too much" aggregate saving) by issuing brand-new-fiat-currency-backed "indulgences" (e.g. targeted tax credits) that it then induces/forces more and more individuals to "purchase" (e.g. by hiring an additional worker, installing solar panels, turning in one's "clunker" for a new car, buying American, etc., in order to get said credit), until said aggregate "sin surplus" is (in the government's opinion) extinguished.

What I, on the other hand, am saying (trying to, anyway) is this:

1.
Saving is a "virtue" at both the individual and aggregate levels.

2.
Increasing savings, at both the individual and aggregate levels, equate to a growing "virtue surplus".

3.
The "paradox of thrift" model turns things on their head by viewing said "virtue surplus" as a "sin surplus", and recommends that the government jump in and induce/force enough of the "sinners" to see the "error" of their ways and start behaving in accordance with what government thinks will lead to a state of aggregate "salvation".

4.
The price mechanism in a free market, on the other hand, views said "virtue surplus" as exactly what it is: a "virtue surplus". Which it rewards, as virtue should be, by increasing its value via lower prices. It doesn't view the savers as the ones who strayed from a "virtuous" path, but prices. Savers get "rewarded", prices get "punished".

That is a big difference.

The "paradox of thrift" model leads to policies that substitute the government's judgement of what the optimal level of aggregate savings should be for that of the individual savers whose savings compose said aggregate. And, given the government's bias toward short-term "feel good" "solutions that seek to preserve/increase its popularity/power, the end result is an ever growing chasm between price levels and true value, a chasm that requires an ever growing amount of fiat money creation to plug.

What I'm saying, in the end, is that looking at things purely from an "operational" standpoint, tweaking/turning concepts/models upside down/inside out to see what things might look like from a different angle and such can certainly be interesting/intellectually stimulating/etc.. Nothing wrong with that. No harm done.

But if one's goal is for such theoretical experimentation to yield valuable insights, then the standard becomes "OK. What would happen to real life flesh and blood human beings if we implemented this model?".

An analogy:

"Operationally", within the confines of verbal and written (both prose and poetry) communication, one may use the words "sunset" and "sunrise" to one's heart's content. One can even say/write something like "Every sunrise is matched by a sunset. Aaaah, the world is in such beautiful balance!". Fine and dandy. No harm done. But, if one were to ever try to implement (i.e. use it "functionally") the "sunrise/sunset" model in real life, such as in planning a trip to the moon, ... TROUBLE! For the very simple reason that that's not how things work ... functionally.

To summarize:

"Operationally", it may not matter whether a socio/economico/political (after all, as another poster has remarked, there's no divorcing economics from politics) model views the government as the credit/token dispensing parent and citizens as its credit/token receiving children. But once one implements such a model in the real world ... TROUBLE!


Agree or disagree, it doesn't really speak to the original point of sector balances. To say something is operationally true or not doesn't automatically cast it in to one or the other political morass. Indeed, if you must look at the thing through politically colored glasses, you really can't tell the truth about it to begin with.


Posted by: pj4xtrader Nov 15 2010, 11:41 PM

QUOTE
...

What the "paradox of thrift" concept is saying is that saving may well be a "virtue" at the individual level but that it's a "sin" at the aggregate level, and that it's the government's job to address this "sin surplus" ("too much" aggregate saving) by issuing brand-new-fiat-currency-backed "indulgences" (e.g. targeted tax credits) that it then induces/forces more and more individuals to "purchase" (e.g. by hiring an additional worker, installing solar panels, turning in one's "clunker" for a new car, buying American, etc., in order to get said credit), until said aggregate "sin surplus" is (in the government's opinion) extinguished.

What I, on the other hand, am saying (trying to, anyway) is this:

1.
Saving is a "virtue" at both the individual and aggregate levels.

2.
Increasing savings, at both the individual and aggregate levels, equate to a growing "virtue surplus".

3.
The "paradox of thrift" model turns things on their head by viewing said "virtue surplus" as a "sin surplus", and recommends that the government jump in and induce/force enough of the "sinners" to see the "error" of their ways and start behaving in accordance with what government thinks will lead to a state of aggregate "salvation".

4.
The price mechanism in a free market, on the other hand, views said "virtue surplus" as exactly what it is: a "virtue surplus". Which it rewards, as virtue should be, by increasing its value via lower prices. It doesn't view the savers as the ones who strayed from a "virtuous" path, but prices. Savers get "rewarded", prices get "punished".

That is a big difference.

The "paradox of thrift" model leads to policies that substitute the government's judgement of what the optimal level of aggregate savings should be for that of the individual savers whose savings compose said aggregate. And, given the government's bias toward short-term "feel good" "solutions that seek to preserve/increase its popularity/power, the end result is an ever growing chasm between price levels and true value, a chasm that requires an ever growing amount of fiat money creation to plug.

What I'm saying, in the end, is that looking at things purely from an "operational" standpoint, tweaking/turning concepts/models upside down/inside out to see what things might look like from a different angle and such can certainly be interesting/intellectually stimulating/etc.. Nothing wrong with that. No harm done.

But if one's goal is for such theoretical experimentation to yield valuable insights, then the standard becomes "OK. What would happen to real life flesh and blood human beings if we implemented this model?".

An analogy:

"Operationally", within the confines of verbal and written (both prose and poetry) communication, one may use the words "sunset" and "sunrise" to one's heart's content. One can even say/write something like "Every sunrise is matched by a sunset. Aaaah, the world is in such beautiful balance!". Fine and dandy. No harm done. But, if one were to ever try to implement (i.e. use it "functionally") the "sunrise/sunset" model in real life, such as in planning a trip to the moon, ... TROUBLE! For the very simple reason that that's not how things work ... functionally.

To summarize:

"Operationally", it may not matter whether a socio/economico/political (after all, as another poster has remarked, there's no divorcing economics from politics) model views the government as the credit/token dispensing parent and citizens as its credit/token receiving children. But once one implements such a model in the real world ... TROUBLE!


akaCG,

It would appear that you and I are coming to the point of infinite regress. You make assumptions, and then respond to them as if they were mine. First you describe the model with the words, "Operationally" and then "Theoretical". You misrepresent my position and, all the while, miss the point of my post, as CarpeDinkum has tried to point out.

I did not once say that it is, as you put it, A "Sin" for individuals to save. I do not claim that it is a "Sin" for the private sector to net save. The model serves to make clear that those who call for private sector net savings, need realize that it is only sustainable if the public sector or foreign sector or some combination of both are in deficit.

The model makes no recommendations, it only makes clear the fallacy of composition. It dose not state what is "good" or "bad", only what is imposible.

Posted by: brinn Nov 15 2010, 11:59 PM

Gray Seal,

What if you could have all the benefits of a sovereign fiat currency AND have the freedom and transparency you desire while simultaneously being able to hold the politicians feet to the fire should thay not act in accordance with the will of the people? Understanding the way the system works in no way, shape or form limits the political choices of those that employ the system. You can have as much transparency and freedom as you desire and you get the added benefit of understanding the operational realities of the system!

QUOTE(Leader)
There you go again brinn. How do you not catch the fallacies in your writing? If everyone decides to save. What does that mean? If everyone decides to save 100% of their income? If everyone decides to save 10% of their income (closer to the optimal rate)? Why would everyone decide to do that? And if they did, why is the act of saving seen as the cause instead of the effect?
The reason I don’t catch fallacies in my writing is the very same reason that you don’t catch obvious fallacies in your writing… The answer: We both believe what we are saying is true. I’ve been working very hard to explain my positions clearly and articulately as well as sourcing my comments. With all due respect Leder, it appears you’ve become content claiming that hypothetical thought experiments are invalid because they aren’t occurring today in the real world and that I’m wrong merely because you insist that it must be so.

QUOTE(Leder)
The fact is that in a free market, there would be no situation where everyone decided to save because an increase in saving would increase the stock of loanable funds and lower interest rates, making investors and entrepreneurs want to borrow money to invest in long term projects to meet the future demand.
Thttp://research.stlouisfed.org/fred2/graph/?s%5b1%5d%5bid%5d=PSAVERT The US personal savings rate has been increasing since the Summer of 2005, peaking at 8.2% in May of 2009 and settling in at 5.5 to 6.0% over the past year. http://research.stlouisfed.org/fred2/series/BUSLOANS?cid=100 has completely dried up as commercial and industrial loans outstanding have dropped nearly 25% in the last few years. According to the Theory of Loanable Funds there should be a much greater level of loanable funds in the system due to the increased savings rate and therefore rates should drop and investors and entrepreneurs should be chomping at the bit to take advantage of the best interest rates in history. Unfortunately reality has not cooperated. Despite the presence of additional savings (that should be available as loanable funds according to the theory), there is NO demand for loans. That’s why the government is attempting to lower rates further via this ridiculous quantitative easing. They are trying to spur loan demand but the businesses and consumers will have none of it despite the low rates and the abundance of “loanable funds”. Despite what the textbooks may tell you savings does not equal investment. You, yourself are putting the cart before the horse. Are you telling me that you and your family and the families of other’s on this board aren’t buying because of a lack of production? Are you telling me that all that needs to be done to eliminate this recession is for the local grocer to put more lettuce on the shelves and the car dealer to produce more vehicles to put on the lot? Of course not. The recession is not driven by a lack of productivity but rather by a lack of demand. As I’ve said many times before, household balance sheets are loaded with debt and asset values are low. Regardless of how much anyone produces, this recession won’t lift until some of that debt is paid down.

For a thought experiment that illustrates the fallacy of Loanable Funds Theory, I excerpt from an article by Andy Harless, a Harvard Ph.d. economist specializing in macroeconomics, entitled http://www.beezernotes.com/wordpress/?p=3165

What does it mean to save? It could mean “to set aside part of one’s income for the future.” Only, that definition is deceptive, because it implies a positive act of “setting aside.” There can be positive acts – purchasing a certificate of deposit, for example – that represent the commitment to save, but the act of saving is itself entirely passive. If you get paid in cash and put all the cash in a box without spending it, your are saving. It is no different if you get paid in cash and put all the cash in your wallet without spending it. Like “to rest” or “to fast,” the verb “to save” is defined not by what you do but by what you don’t do. “To save” means “to receive income and not to spend it….”

Classic macroeconomics assumes that, when everything is said and done, savings equals investment.

“To take a simple example, suppose you’re a freelance software developer, and a company pays you to develop some custom software for long-term use. From the company’s point of view, that’s investment. As soon as they pay you, they’ve made an investment, and you have saved the exact amount of the investment they just made. Savings equal investment.

And what happens when you spend the money? To take another simple example, let’s say you spend some of it on a haircut. You are taking money out of savings, so your savings are reduced by the cost of the haircut. But the payment is income for the barber, and all income is initially saved, so the barber is putting into savings the same amount that you are taking out. Total net savings are unchanged, and since there was no investment involved, net investment is unchanged.

The Loanable Funds story tends to give the impression that saving determines the amount of investment. (It’s not the only possible interpretation, but when I hear the story, I tend to think, “Savers decide how much to save, and that is the amount that can be invested.”) In the immediate time frame, however, it is the other way around: investment determines the amount of savings. In general, saving occurs whenever someone receives income. Net saving occurs whenever someone receives income that is not offset by the payer’s dis-saving. That can (and will) happen only when the payer is investing.

In the slightly-longer-than-immediate time frame, people make decisions about how much to save, but it is still investment that makes that saving possible. Suppose, for example, that all investment were to stop for an entire year. Suppose everyone completes or cancels any investment plans by the end of 2009 and nobody makes any new investments in 2010 – no new houses or factories built, no new equipment or software created, no net purchases of foreign securities, and so on. (Because inventories are a form of investment, you also have to imagine – and I’m being a bit tricky here – that manufacturers start 2010 with inventories at some kind of maximum and refuse to produce anything new except to replenish those inventories.) In that case, there can be no net saving in 2010. People will receive income, presumably, but only as the result of dis-saving by others, so the most net saving that can happen is zero.

And just as the decision not to invest can prevent net saving from taking place, so the decision to invest can force people, collectively, to save. Consider the converse thought experiment, where everyone resolves not to save in 2010. “Any income I get in 2010,” everyone says, “I’m going to spend before the end of the year.” Then someone comes along and decides to build a factory (financed, let’s say, with money that the builder was holding in a safe at the beginning of the year). So the builder hires construction workers to build the factory, and the workers now have income, which they have resolved to spend before the end of the year. So they spend it. Now someone else has income, which they have resolved to spend. When they spend it, yet someone else has income, which they have resolved to spend. And so on. The money keeps getting passed around like a hot potato. Or like a game of musical chairs. At the end of the year, someone will have the money and will not yet have spent it. Someone will have unspent income. Someone will have saved.


QUOTE(brinn)
Why are US and Japanese bond rates so low when our deficits are so high? What is driving this negative correlation in the face of the well-accepted fact that risky countries have to increase their bond rates to attract investors?

QUOTE(Leder)
Ah, finally a good question - but one you should already know. It is because all of the borrowing is being done in the short term market. If the government went out in the long term market - the demand would definitely dry up. Bond traders might believe that the US is ok for the next 6 months, year or two years - but 30 years? Not so sure they will get a solid return with the massive debt, interest payments, and entitlements creeping up.
OK so let’s go back to reality and see if your hypothesis is supported by the data. Following your logic I’m assuming we’ll see a nice steady increase in the yield on the 30 yr bond from 1977, when our deficit was $719 billion, to 2010, when our deficit is $13.7 Trillion. The facts; In December of 1977 the 30 year bond had a yield of 7.94%. As of today, our 30 year yield is 4.38% with a coupon of 4.25%. By your logic, 30 year bond purchasers are more confident now than ever before! What gives??? Can you give me a clearer explanation that accounts for the actual data?

QUOTE(Leder)
The second reason is that the central bank is purchasing the bonds. Why would the Fed buy $600 billion in US Treasury bills if there was demand for it?
Are you referring to QE here? If so, I’m sure you realize that these bonds that were purchased were already held by the private sector thus it was more accurately a repurchase of bonds and not a purchase of an initial issuance. If you aren’t referring to QE can you provide me with a reference that shows that the Fed bought $600 billion in bonds from itself?

QUOTE(Amlord)
Why has the savings rate been so low recently? That is an easy one: interest rates are low.
In point of fact, savings rates have been increasing despite the low interest rates. See my link to the St. Louis Fed above for the data.

QUOTE(Amlord)
Now, what if people do save? That money becomes available for investment. The situation we have right now is that the rules for lenders have been tightened so that they need more on the books relative to their loans. At the same time, the Fed is keeping interest rates low which provides a disincentive for savings.

Is it any wonder that "banks aren't lending!" and the savings rate has dropped?
The simple fact is that banks aren't lending because there is no demand for loans. As I said, I'm an exec. at a relatively small local bank with more than $.5 billion in assets. I deal with commercial lending and loan funding all day, every day. I can assure you that the desire and the ability to lend is present but the demand is not. We don't need savings or checking accounts to make loans. If our reserve position is inadequate we can borrow reserves from any number of different sources including other banks and or the government. Additionally, you appear to be somewhat confused on another point. Rules for lenders have tightened as we now need to keep higher capital ratios but as you probably know, deposit accounts, like saving and checking accounts, are liabilities to a bank. If someone makes a deposit to a savings account, Liabilities (deposits) are credited and assets (Cash) are credited and offset to zero. No additional capital is created. Taking in savings accounts give us no additional capacity to lend and ONLY serve to lower the bank's cost of funds provided that interbank rates are higher than the rates the bank is paying on savings.

The theory of loanable funds is a gold standard relic and no longer applies to how modern banks function.


Posted by: Gray Seal Nov 16 2010, 01:44 PM

QUOTE(brinn)
Gray Seal,

What if you could have all the benefits of a sovereign fiat currency AND have the freedom and transparency you desire while simultaneously being able to hold the politicians feet to the fire should thay not act in accordance with the will of the people? Understanding the way the system works in no way, shape or form limits the political choices of those that employ the system. You can have as much transparency and freedom as you desire and you get the added benefit of understanding the operational realities of the system!
The will of the people must be restricted to protect inalienable rights of individuals. Political choices must be limited to prevent abuse by the state. Your hypothetical is not hypothetical but our reality! I understand the operational realities of the system and I reject them.

So I ask you, brinn, what if you could have the benefits of a sovereign fiat currency not subject to manipulation by a secret board of bankers, where politicians are not allowed to transgress from their limited areas of governance while respecting the civil rights, property rights, and freedoms guaranteed to them? You would understand the system works because the state can in no way, shape, or form diminish human's inalienable rights. You can have as much transparency and freedom as you desire and you get the benefit of a economic system which respects and enhances the freedoms we all wish to enjoy?

Posted by: Mrs. Pigpen Nov 16 2010, 03:53 PM

QUOTE(Belshazzar @ Nov 11 2010, 06:56 PM) *
QUOTE(Amlord @ Nov 11 2010, 05:06 PM) *
This is the Keynesian model and has proven to be inadequate in the current economic recession and malaise. Public spending cannot prop up private demand. Of course, the government is a source of demand for the private sector, but it does not drive the larger private sector. For the most part, the government does not drive long term job creation since its demand is not predictable since it is subject to the political winds.


That could be a good argument for shifting the focus of Keynesian-style economics from simply creating demand to investing in technology and R&D. As ARPAnet was adapted for civilian use, it opened up an entirely new sector of the economy, resulting in long-term job creation. Of course, you can also argue that new technology tends to create bubbles (the dot-com bubble in this case) that adversely affect the economy. And spending money on increased R&D favors the educated classes more immediately and doesn't have the initial visibility of tax cuts or a public works program, probably making it political suicide.


Those projects are funded by defense money (DARPA-Defense Advanced Research Project Agency), so it isn't political suicide to fund them (except for those opposed to any increases in any areas of Defense spending, for any reason).

I'm still lost about the premise of this thread. I read brinn's http://www.beezernotes.com/wordpress/?p=3165, and it was interesting, but the overall idea (debt is good, savings bad...one to one relationship with consumption and production) is lost with me. Take the person who purchased a house in Las Vegas in 2000 for 500,000 dollars (most of which was borrowed from the bank). At the time, this purchase was an investment...perhaps 100K principle was paid on the house, the amount owed was 400K and payments made subsequently that covered mostly the interest). Now, that house is worth 190,000 and rather than having an investment the person owes over 200,000 and their 100,000 initial investment has effectively ceased to exist. This person owes more than that investment is worth. That person obviously won't be making a lot of extra purchases to stimulate consumption/production via spending, but they can't. If printing money and expanding the debt by making funds available could fix it, Iceland would still have a laudable economy rather than a collapsed one. Wouldn't it?

I'm kind of reminded of the stock investment arguments that happened for years before the dot com bubble mentioned above. Investment gurus were claiming it was a "new paradigm" and fundamentals no longer mattered...and Buffet was deemed an "anachronistic thinker" who knew nothing because he was buying bonds....and they were right, until the dot coms imploded and a 100K investment went to 2K nearly overnight.

Posted by: CarpeDinkum Nov 16 2010, 05:32 PM

QUOTE(Mrs. Pigpen @ Nov 16 2010, 07:53 AM) *
QUOTE(Belshazzar @ Nov 11 2010, 06:56 PM) *
QUOTE(Amlord @ Nov 11 2010, 05:06 PM) *
This is the Keynesian model and has proven to be inadequate in the current economic recession and malaise. Public spending cannot prop up private demand. Of course, the government is a source of demand for the private sector, but it does not drive the larger private sector. For the most part, the government does not drive long term job creation since its demand is not predictable since it is subject to the political winds.


That could be a good argument for shifting the focus of Keynesian-style economics from simply creating demand to investing in technology and R&D. As ARPAnet was adapted for civilian use, it opened up an entirely new sector of the economy, resulting in long-term job creation. Of course, you can also argue that new technology tends to create bubbles (the dot-com bubble in this case) that adversely affect the economy. And spending money on increased R&D favors the educated classes more immediately and doesn't have the initial visibility of tax cuts or a public works program, probably making it political suicide.


Those projects are fielded by defense money (DARPA-Defense Advanced Research Project Agency), so it isn't political suicide to fund them (except for those opposed to any increases in any areas of Defense spending, for any reason).

I'm still lost about the premise of this thread. I read brinn's http://www.beezernotes.com/wordpress/?p=3165, and it was interesting, but the overall idea (debt is good, savings bad...one to one relationship with consumption and production) is lost with me. Take the person who purchased a house in Las Vegas in 2000 for 500,000 dollars (most of which was borrowed from the bank). At the time, this purchase was an investment...perhaps 100K principle was paid on the house, the amount owed was 400K and payments made subsequently that covered mostly the interest). Now, that house is worth 190,000 and rather than having an investment the person owes over 200,000 and their 100,000 initial investment has effectively ceased to exist. This person owes more than that investment is worth. That person obviously won't be making a lot of extra purchases to stimulate consumption/production via spending, but they can't. If printing money and expanding the debt by making funds available could fix it, Iceland would still have a laudable economy rather than a collapsed one. Wouldn't it?

I'm kind of reminded of the stock investment arguments that happened for years before the dot com bubble mentioned above. Investment gurus were claiming it was a "new paradigm" and fundamentals no longer mattered...and Buffet was deemed an "anachronistic thinker" who knew nothing because he was buying bonds....and they were right, until the dot coms imploded and a 100K investment went to 2K nearly overnight.



Mrs. Pigpen -

The premise is mainly about how deficits do and don't work in our economy. It's not so much that debt is good or savings bad; those labels might be reversed depending on what the actual the flow between sectors (public, private, foreign) needs to be in a given situation. Knowing this would help facilitate reasonable growth, give us effective tools to not only deal with bubbles and recessions (unlike qe) and perhaps even avoid them in the first place.

Posted by: Ted Nov 16 2010, 05:59 PM

QUOTE(CarpeDinkum @ Nov 16 2010, 12:32 PM) *
QUOTE(Mrs. Pigpen @ Nov 16 2010, 07:53 AM) *
QUOTE(Belshazzar @ Nov 11 2010, 06:56 PM) *
QUOTE(Amlord @ Nov 11 2010, 05:06 PM) *
This is the Keynesian model and has proven to be inadequate in the current economic recession and malaise. Public spending cannot prop up private demand. Of course, the government is a source of demand for the private sector, but it does not drive the larger private sector. For the most part, the government does not drive long term job creation since its demand is not predictable since it is subject to the political winds.


That could be a good argument for shifting the focus of Keynesian-style economics from simply creating demand to investing in technology and R&D. As ARPAnet was adapted for civilian use, it opened up an entirely new sector of the economy, resulting in long-term job creation. Of course, you can also argue that new technology tends to create bubbles (the dot-com bubble in this case) that adversely affect the economy. And spending money on increased R&D favors the educated classes more immediately and doesn't have the initial visibility of tax cuts or a public works program, probably making it political suicide.


Those projects are fielded by defense money (DARPA-Defense Advanced Research Project Agency), so it isn't political suicide to fund them (except for those opposed to any increases in any areas of Defense spending, for any reason).

I'm still lost about the premise of this thread. I read brinn's http://www.beezernotes.com/wordpress/?p=3165, and it was interesting, but the overall idea (debt is good, savings bad...one to one relationship with consumption and production) is lost with me. Take the person who purchased a house in Las Vegas in 2000 for 500,000 dollars (most of which was borrowed from the bank). At the time, this purchase was an investment...perhaps 100K principle was paid on the house, the amount owed was 400K and payments made subsequently that covered mostly the interest). Now, that house is worth 190,000 and rather than having an investment the person owes over 200,000 and their 100,000 initial investment has effectively ceased to exist. This person owes more than that investment is worth. That person obviously won't be making a lot of extra purchases to stimulate consumption/production via spending, but they can't. If printing money and expanding the debt by making funds available could fix it, Iceland would still have a laudable economy rather than a collapsed one. Wouldn't it?

I'm kind of reminded of the stock investment arguments that happened for years before the dot com bubble mentioned above. Investment gurus were claiming it was a "new paradigm" and fundamentals no longer mattered...and Buffet was deemed an "anachronistic thinker" who knew nothing because he was buying bonds....and they were right, until the dot coms imploded and a 100K investment went to 2K nearly overnight.



Mrs. Pigpen -

The premise is mainly about how deficits do and don't work in our economy. It's not so much that debt is good or savings bad; those labels might be reversed depending on what the actual the flow between sectors (public, private, foreign) needs to be in a given situation. Knowing this would help facilitate reasonable growth, give us effective tools to not only deal with bubbles and recessions (unlike qe) and perhaps even avoid them in the first place.

I guess we could say that a deficit might be “worth it” if it generated enough economic activity so that the economy recovered quickly and the debt could be retired quickly.

This has not been the case with the stimulus and the other measures taken by this administration through the Congress.

And it gets worse because some of the programs passed like the healthcare Bill promise to raise the deficit significantly in the years to come…

Posted by: brinn Nov 16 2010, 08:15 PM

QUOTE(Mrs. Pigpen")
I'm still lost about the premise of this thread. I read brinn's link, and it was interesting, but the overall idea (debt is good, savings bad...one to one relationship with consumption and production) is lost with me.
Have you read the thread from the very beginning? If not take a moment and do as I believe the premise of the thread and the rationale behind that premise will become clearer. The recent discussion about the paradox of thrift and the theory of loanable funds is really a tangent that we have somehow pursued but the meat of the thread is well before that. If you want to read a couple of very useful links you can take a look at the following: http://pragcap.com/mmt-101 by Cullen Roche. Also check out the links he has at the end of the article for additional reading. I would highly recommend the link to Warren Mosler's "Seven Deadly Innocent Frauds" which is a great read.

QUOTE(Mrs. P)
If printing money and expanding the debt by making funds available could fix it, Iceland would still have a laudable economy rather than a collapsed one. Wouldn't it?
It would of had Iceland's debt been in Kronor, but a large chunk of Iceland's debt was denominated in a foreign currency (the british pound). Because the debt was in pounds, the Icelandic government would have to sell real assets to get the pounds to pay the debt, thus the reductions in the value of the Kronor relative to the pound was only making the debt more onerous. If the debt had been denominated in Kronor, than the repayment would have been in Kronor and the reduction in the value of the Kronor would have been meaningless. Essentially, the people of Iceland would have had to sacrifice large chunks of their export revenue while simultaneously limiting imports in order to succesfully service a loan like this in a foreign currency.

Maybe pj4xtrader can explain it more clearly as this is clearly his area of expertise.

Regadless, try reading the links and let me know if you have any questions.

QUOTE(Gray Seal)
So I ask you, brinn, what if you could have the benefits of a sovereign fiat currency not subject to manipulation by a secret board of bankers, where politicians are not allowed to transgress from their limited areas of governance while respecting the civil rights, property rights, and freedoms guaranteed to them? You would understand the system works because the state can in no way, shape, or form diminish human's inalienable rights. You can have as much transparency and freedom as you desire and you get the benefit of a economic system which respects and enhances the freedoms we all wish to enjoy?
I'd say "fantastic!" because the operational ability to achieve this is already in place, all we would need to do is enact the political reforms. Again, understanding how the curency works in no way limits the political choices that can be made.

QUOTE(Ted)
I guess we could say that a deficit might be “worth it” if it generated enough economic activity so that the economy recovered quickly and the debt could be retired quickly.

This has not been the case with the stimulus and the other measures taken by this administration through the Congress.

And it gets worse because some of the programs passed like the healthcare Bill promise to raise the deficit significantly in the years to come…
Yes Ted! You're beginning to see my point (although the "debt" would only need to be retired if the economy was generating inflation). The deficit will always be with us as it is a feature of the system we choose to employ. Without government running a cumulative deficit, there would be no currency to spend. The manner in which we employ the tools that our currency system provides us with is truly the important part. We can spend on special interests and we can provide corporate welfare and we can spend on things that generate no economic benefits. Or we can spend on things that create value for the citizens of the US and have a beneficial effect. The trick is determining which is which and getting most to agree!

Posted by: Gray Seal Nov 16 2010, 10:18 PM

Here is a http://www.lewrockwell.com/blog/lewrw/archives/69910.html with a fictional conversation between Bernanke and a China representative. It explores why deficits being corrected by making currency is not perceived as being a good thing depending on ones point of view.

Posted by: brinn Nov 16 2010, 11:03 PM

QUOTE(Gray Seal @ Nov 16 2010, 05:18 PM) *
Here is a http://www.lewrockwell.com/blog/lewrw/archives/69910.html with a fictional conversation between Bernanke and a China representative. It explores why deficits being corrected by making currency is not perceived as being a good thing depending on ones point of view.
Amusing, watch Lew as he clearly demonstrates that he has no idea what QE does by fashioning a conversation in which China and Ben Bernanke misrepresent the functioning of QE. Now I'm sure that neither Lew nor Ben understand monetary operations but I still wonder if China does.

As I've stated before, QE does not add any new assets to the system. It is an asset swap. All it does is change the maturities of debt currently held from long to short. It is actually likely deflationary as it takes an interest earning asset (a bond) held by the private sector and exchanges it for a non-interest earning asset (bank reserves).

Here is a brief and simple description of a QE transaction from http://pragcap.com/mechanics-qe-transaction:

Some people want you to believe that the Fed just injected the economy and stock market full of money that will now result in an economic boom and much higher prices in most assets. That’s simply not true. Here’s the actual mechanics behind QE.

Before we begin, it’s important that investors understand exactly what “cash” is. “Cash” is simply a very liquid liability of the U.S. government. You can call it “cash”, Federal Reserve notes, whatever. But it is a liability of the U.S. government. Just like a 13 week treasury bill. What is the major distinction between “cash” and bills? Just the duration and amount of interest the two pay. Think of one like a checking account and the other like a savings account.

This is a crucial point that I think a lot of us are having trouble wrapping our heads around. In school we are taught that “cash” is its own unique asset class. But that’s not really true. “Cash” as it sits in your bank account is really just a very very liquid government liability. What is the difference between your checking and savings account? Do you classify them both as “cash”? Do you consider your savings accounts a slightly less liquid interest bearing form of the same thing a checking account is?

What is a treasury note account? It is a savings account with the government. So now you have to ask yourself why you think cash is so much different than a treasury note? What is the difference between your ETrade cash earning 0.1% and that t note earning 0.2%? NOTHING except the interest rate and the duration. You can’t use your 13 week bill to pay your taxes tomorrow, but that doesn’t mean it isn’t a slightly less liquid form of the exact same thing that we all refer to as “cash”. They are both govt liabilities and assets of yours.

When you own a t note you really just traded your “cash” for a slightly less liquid form of the same exact thing. If the Fed buys those t notes from you they give you back your cash minus the interest rate. That’s all there is to it. No change in the money supply. No change in anything except the rate of interest you were earning. If the government removes t notes then all they’re doing is altering the term structure of their liabilities. They’re not changing the AMOUNT of liabilities.




Posted by: CarpeDinkum Nov 17 2010, 05:26 AM

So Brinn, if reserves aren't loanable and deposits aren't more loanable capital, WHERE does the loanable money come from? I was looking through PragCap and haven't run across this yet. If you have a pointer to an explanation that's as easy to understand as the QE link, please shoot it to us!

Posted by: Gray Seal Nov 17 2010, 06:31 PM

QUOTE(Mrs. Pigpen)
I'm still lost about the premise of this thread. I read brinn's link, and it was interesting, but the overall idea (debt is good, savings bad...one to one relationship with consumption and production) is lost with me. Take the person who purchased a house in Las Vegas in 2000 for 500,000 dollars (most of which was borrowed from the bank). At the time, this purchase was an investment...perhaps 100K principle was paid on the house, the amount owed was 400K and payments made subsequently that covered mostly the interest). Now, that house is worth 190,000 and rather than having an investment the person owes over 200,000 and their 100,000 initial investment has effectively ceased to exist. This person owes more than that investment is worth. That person obviously won't be making a lot of extra purchases to stimulate consumption/production via spending, but they can't. If printing money and expanding the debt by making funds available could fix it, Iceland would still have a laudable economy rather than a collapsed one. Wouldn't it?

I believe that your intuition is operating against the subjective information being put forth. The subjective information provided is a jumble to me. If you have good intuition depend on it. The logic threads supporting the idea that deficits are no big deal are lengthly with some poor premises. The premises are the vital means to making sense of the differences between managed economy versus unmanaged economy.

There is the premise that central planning is necessary. Should a central bank be in charge of money supply? Deficits do not matter if you have the ability to produce more money. If bad things happen when central banks manipulate money I would say the premise that central planning is necessary may be wrong.

The quantitative easing is not printing money out but it is providing bank reserves which are just as good as money. It is like having soup for dinner. When you have soup it does not matter if you have unexpected dinner guest as you can add as much water to the soup as needed to feed everyone. Central banks give government the ability to add water to the soup. Printing money or increasing reserves...is there really any difference as to how either would dilute the value of money in the long run? (In the short run government and banks make out like bandits. The long term correction to the value of money because of the short term gains is spread over everyone.)

I believe the intuitive instinct that diluting the value of money is unfair is a good instinct which should not be dismissed by a complicated subjective argument. Simple answers are usually truer than complicated ones.


---------------------------------------------

QUOTE(CruisingRam)
Brinn has been describing the actual operatoin of commerce, the realities of commerce, NOT theory- you can see them with your own bank account when you do foriegn commerce from America. Haven't seen a SINGLE succesful un-managed economy. Seen plenty of succesful ones.

The logic of this argument is that is if a societal machinery has not existed it can never exist. There is also a hint of the presumption that mankind has reached a zenith of societal evolution.

I hope this is not the zenith and for myself I see no reason to believe we have reached it. As to the logic that new societal reorganizations can never happen, history gives voluminous examples to disprove this. The viewpoint you put forth is that humanity is at a good place and the status quo should be maintained as there can not be a better way.

Ideas should not be dismissed because they are different from what you know. Ideas should be measured on their merit. Freedom is a idea which has much merit. Humanity should always be trying new ideas, discarding the poor ones and adapting the good ones. Freedom of various degrees has been successful when tried. Why not consider more freedom? Because it has not been tried before is not a good argument. Being new is a reason it will be difficult to initiate but it does not mean new is a bad idea.

Posted by: CruisingRam Nov 17 2010, 06:48 PM

Grey Seal- do you have an example of a large and complex global economy without strong central planning is succesful? I am not saying there isn't one in human history, I am just saying I am not aware of one being succesful. I would like to see one country that is succesful in modern pretext as far as thier economy goes without a strong federal level of control.

Posted by: Gray Seal Nov 17 2010, 06:54 PM

Nice timing, CruisingRam ! I was giving you an answer to your question in the edit of my immediate previous post to yours at the same time you were posting. -har- Seems our minds are in unison to some degree today.

Posted by: CruisingRam Nov 17 2010, 07:50 PM

QUOTE(Gray Seal @ Nov 17 2010, 10:54 AM) *
Nice timing, CruisingRam ! I was giving you an answer to your question in the edit of my immediate previous post to yours at the same time you were posting. -har- Seems our minds are in unison to some degree today.



The problem is (responding to your edited post) is that you can't experiment with the lives of nearly half a billion people on a large scale with a "good idea"- not finding out if it is really a good idea until it affects negatively hundreds of millions of people. Progress NEVER comes in big jumps, it comes in partially slow steps. We have modern homes today with high energy values, but we still also have homes that are horribly inefficient that are 100 years old.

We really can't risk our entire economy without some proof that libertarian-austrian ideas will work- what Brinn is describing is not philosophy as much as describing how the current system works. Brinn's operation definitions and austrian schools of economics are not mutually exclusive- transparency can be achieved with political reforms. However, it also takes a great deal of economic education on a large scale for our entire society, just as a society is more and more free the higher the general education of the society- I believe Thomas Jefferson wrote on this at lenght- and the complexity of our economy makes even the smartest and best educated in this country feel a bit ignorant, we can only see-understand the portion of the economy we personally view and deal with. I deal in manufacturing and importing on a daily basis, so I can grasp that portion of Brinn's explanations and posts, but the commodities trading has me scratching my head and re-reading the links provided.

Now, in political circles, you get folks that espouse really crazy theories like Reaganomcs that have no basis in any reality whatsoever, and that hinders any kind of reform you are talking about as well.

Posted by: Gray Seal Nov 17 2010, 09:52 PM

We experiment on a large scale with the people of the United States all the time. Is the healthcare bill large scale? Is the bailout of the banks a large scale change? Was the expansion of the commerce clause a large scale change in the 30s? Is the conflict in the middle east where the United States is the aggressor a large scale change? Was giving women voting rights a large scale change? Is same sex marriage a large scale change? Is gays in the military a large scale change? So many examples.

We have kicked out the central bank in the United States several times. It is not that new of an idea.

If you look at the list of possible large scale changes you will see some have proven to be good and some which have been not so good. Change is not always good but better is only possible through change. We are still in the process of recognizing and reversing some of our poor changes...

If proof is mandatory to try something different nothing would ever change.

We seem to be willing to risk our economy with bail-outs and stimulus of extreme levels. These are unproven ideas which are drastic. These were done on the basis of theory. I suppose 'large scale', 'theory', and 'experiment' are in the eyes of the beholder. The fear of change argument seems to be empty signifying nothing other than lack of a true argument.

You trust Keynesian economics over Austrian economics because it dominates. At one point the modern world was predominantly mercantilism. Would you have been clammering to keep it in that day? There has to be a better argument for Keynesian than "that is what we got so we better stick to it" when so many signs point to unfair wealth distribution along with crippled markets and blatant corruption via central planning and central banking. There has to be a better argument against Austrian than "we do not have it so we do not want it".


Posted by: Hobbes Nov 17 2010, 11:28 PM

QUOTE(brinn @ Nov 14 2010, 07:25 PM) *
QUOTE(Gray Seal)
Deficits are cheating.
No. Deficits are an artifact of any non-convertible fiat currency system.


No, deficits are the result of government spending money it doesn't have. Can you have a deficit with a different currency system? Of course you can. (see Greece) That rules out the above explanation.

We will now resume the originally scheduled program. smile.gif

Posted by: brinn Nov 18 2010, 01:20 AM

QUOTE(Hobbes @ Nov 17 2010, 06:28 PM) *
QUOTE(brinn @ Nov 14 2010, 07:25 PM) *
QUOTE(Gray Seal)
Deficits are cheating.
No. Deficits are an artifact of any non-convertible fiat currency system.


No, deficits are the result of government spending money it doesn't have. Can you have a deficit with a different currency system? Of course you can. (see Greece) That rules out the above explanation.

We will now resume the originally scheduled program. smile.gif

You're right! Deficits certainly aren't exclusive to fiat currency systems but you've still got the causality backwards in a non-convertible, floating rate system. Government cannot spend money it doesn't have because it can create money at will. In other words, it will always have money to spend. Deficits (in this system) are more accurately described as government not collecting all the money it has spent. mrsparkle.gif

QUOTE(Gray Seal)
I believe that your intuition is operating against the subjective information being put forth. The subjective information provided is a jumble to me. If you have good intuition depend on it.
Yes Gray Seal, depend on that very same intuition that told people for centuries that the earth was flat and that the universe revolved around the earth. It's unfortunate that complex systems and phenomena are sometimes ...well....complex. I've tried to simplify as much as possible but you go right ahead and keep relying upon your intuition as that is your right. It is obvious that, as you told Cruising Ram in previous post, "I can not suggest anything which would exceed your life experiences".

QUOTE(Carpe)
So Brinn, if reserves aren't loanable and deposits aren't more loanable capital, WHERE does the loanable money come from? I was looking through PragCap and haven't run across this yet. If you have a pointer to an explanation that's as easy to understand as the QE link, please shoot it to us!
Check out the Appendix of Mosler's http://www.gate.net/~mosler/frame001.htm titled "The U.S. Banking System". It's lengthy but very descriptive. In effect, banks do rely on reserves for lending but the availability of reserves is assured (via the interbank market or, ultimately, via the Fed's discount window) thus, for a bank, reserve psoitions do not limit the banks ability to lend as the bank can make the loan and acquire the necessary reserves after the fact.


Posted by: pj4xtrader Nov 18 2010, 02:05 AM

QUOTE(Hobbes @ Nov 17 2010, 06:28 PM) *
QUOTE(brinn @ Nov 14 2010, 07:25 PM) *
QUOTE(Gray Seal)
Deficits are cheating.
No. Deficits are an artifact of any non-convertible fiat currency system.


No, deficits are the result of government spending money it doesn't have. Can you have a deficit with a different currency system? Of course you can. (see Greece) That rules out the above explanation.

We will now resume the originally scheduled program. smile.gif


Our government does not ever have or not have dollars. Taxing and government spending are inverse actions. I think it's obvious to most that government spending creates dollars, what seems to elude most is that taxing un-creates dollars. While ones intuition may tell them that it isn't right for the government to spend dollars it does not have, logic should show that form inception, it would have been irrational to demand that the goverment first have dollars that it had not yet created (spend into existence). What was reality upon inception still holds true today.

Posted by: CruisingRam Nov 18 2010, 04:20 AM

QUOTE(Gray Seal @ Nov 17 2010, 01:52 PM) *
We experiment on a large scale with the people of the United States all the time. Is the healthcare bill large scale? Is the bailout of the banks a large scale change? Was the expansion of the commerce clause a large scale change in the 30s? Is the conflict in the middle east where the United States is the aggressor a large scale change? Was giving women voting rights a large scale change? Is same sex marriage a large scale change? Is gays in the military a large scale change? So many examples.

We have kicked out the central bank in the United States several times. It is not that new of an idea.

If you look at the list of possible large scale changes you will see some have proven to be good and some which have been not so good. Change is not always good but better is only possible through change. We are still in the process of recognizing and reversing some of our poor changes...

If proof is mandatory to try something different nothing would ever change.

We seem to be willing to risk our economy with bail-outs and stimulus of extreme levels. These are unproven ideas which are drastic. These were done on the basis of theory. I suppose 'large scale', 'theory', and 'experiment' are in the eyes of the beholder. The fear of change argument seems to be empty signifying nothing other than lack of a true argument.

You trust Keynesian economics over Austrian economics because it dominates. At one point the modern world was predominantly mercantilism. Would you have been clammering to keep it in that day? There has to be a better argument for Keynesian than "that is what we got so we better stick to it" when so many signs point to unfair wealth distribution along with crippled markets and blatant corruption via central planning and central banking. There has to be a better argument against Austrian than "we do not have it so we do not want it".




Quite false my friend- health care and the other things you are talking about are not experimental at all- they are tried and true all over the world- ESPECIALLY health care- we are the only western economy with the polyglot abortion of a system we have today- most have some sort of universal health care that is proven to be quite a bit better system than we have here in the US. Every western government in the world participated in the bailouts- and, on top of that, it isn't the first time, even in this country- the S&L in the 80s was a direct result of an experimentation with with deregulation followed by a tried and true bailout rolleyes.gif (please note the sarcasm in the last statement thumbsup.gif )

Posted by: lederuvdapac Nov 18 2010, 04:13 PM

QUOTE(brinn)
Again, to summarize: What is virtuous for the individual becomes harmful for all when more and more people attempt to engage in the virtuous behavior.


Up is down. Black is white. Freedom is slavery. It takes a special kind of sophistry to make someone believe that a virtuous action is harmful in the aggregate.

QUOTE(brinn)
I’ve been working very hard to explain my positions clearly and articulately as well as sourcing my comments. With all due respect Leder, it appears you’ve become content claiming that hypothetical thought experiments are invalid because they aren’t occurring today in the real world and that I’m wrong merely because you insist that it must be so.


Brinn, you are incorrect because your hypothetical thought experiments rely on models and aggregates that do not reflect the real true intentions and motivations of actual human beings. Your economic theories are predicated on dictating what markets should look like. When you see a drop in aggregate demand, you oddly believe that by pulling on the stimulus lever you increase can increase demand and get the economy going again. But you completely ignore why aggregate demand has fallen and you completely ignore the idea that stimulating demand is meaningless unless you get specific into what demand is actually being stimulated. As I already mentioned, we have a glut of houses on the market. Too many homes, not enough buyers at the current price. Under these conditions, and rational economist would say - well, if supply is larger than demand, then prices must fall. But no! You are trying to tell me that the very thing that would fix the housing market (lower prices) is the problem! You want to increase demand artificially by inflating the currency to prop up prices beyond what the market has deemed sustainable.

That is why your explanations makes no sense. Instead of looking at the market and considering the implications of what the data is showing you - you want to do something to reflect what you think the economy should look like. In doing so, you will only create more economic distortions and set up an even larger economic collapse.

QUOTE(brinn)
The US personal savings rate has been increasing since the Summer of 2005, peaking at 8.2% in May of 2009 and settling in at 5.5 to 6.0% over the past year.


The savings rate has steadily decreased for decades, even going into the negative in the mid-2000s. And when people do the right thing and save their money, the government swoops in and destroys the good they do by going deeper into debt.

QUOTE(brinn)
Loan demand has completely dried up as commercial and industrial loans outstanding have dropped nearly 25% in the last few years. According to the Theory of Loanable Funds there should be a much greater level of loanable funds in the system due to the increased savings rate and therefore rates should drop and investors and entrepreneurs should be chomping at the bit to take advantage of the best interest rates in history.


Not if there is an entity that is offering risk free investments! The banks can borrow from the Fed at 0% and then turn around and buy short term Treasury bonds that pay interest. They also take the money and speculate in the stock market, bidding up prices. Furthermore, the Fed sets interest rates, not the market. The rate has been at 0% for two years now. Why in hell would banks make loans to individuals or businesses when they can increase their balance sheets by borrowing free money and making a hefty profit on it by loaning to the federal government?

QUOTE(brinn)
That’s why the government is attempting to lower rates further via this ridiculous quantitative easing.


If there is no demand for loans, as your theory suggests, then why is that something that should be fixed??? If consumers change their preferences, then the market should reflect that new economic reality.

QUOTE(brinn)
Despite what the textbooks may tell you savings does not equal investment. You, yourself are putting the cart before the horse. Are you telling me that you and your family and the families of other’s on this board aren’t buying because of a lack of production?


You are confused. My demand comes from my productivity i.e. my labor. The more productive my labor, the more I am compensated with wages, the more I am able to demand. If I am not productive, if I sit on the couch all day and play video games, I am unable to demand goods and services. It is only when I get a job and be productive, that my productivity is compensated with wages allowing me to demand goods. If you increase demand without increasing the supply of goods and services, you are just bidding of the price of the existing supply of resources.

QUOTE(brinn)
The recession is not driven by a lack of productivity but rather by a lack of demand. As I’ve said many times before, household balance sheets are loaded with debt and asset values are low. Regardless of how much anyone produces, this recession won’t lift until some of that debt is paid down.


You're right, but you don't want to let them! You want the government to go deeper into debt for everyone else instead of allowing people to clean off their balance sheets and set themselves up for a more financially stable future. The recession is driven not by a lack of demand or a lack of productivity - it is driven by the malinvestments and overinvestments during the boom period. Those malinvestments need to be cleaned up. Labor and capital need to be reallocated to where they are more productive. The phony economy in the past decade needs to be forgotten. The way to grow out of the recession is to allow this process to happen as quickly as possible and then for markets to grow the way they always do - through investment, entrepreneurship and production.

Finally, your article by Andy Harless is troublesome. He seems to be equating wages with investment. I do not know anyone else who does this. If you're a freelance software developer and you are getting paid to do a job, your productivity is being compensated with wages.

QUOTE(brinn)
By your logic, 30 year bond purchasers are more confident now than ever before! What gives??? Can you give me a clearer explanation that accounts for the actual data?


The false assumption that you make is that investors believe the same economic theory that I do, instead of the one that you do. If most investors believe that government stimulus and quantitative easing will actually work, then it might take longer for them to realize their error and correct it. By the time bond yields rise, it will already be too late.

QUOTE(brinn)
Are you referring to QE here? If so, I’m sure you realize that these bonds that were purchased were already held by the private sector thus it was more accurately a repurchase of bonds and not a purchase of an initial issuance. If you aren’t referring to QE can you provide me with a reference that shows that the Fed bought $600 billion in bonds from itself?


lol and why do you think the private sector (Goldman Sachs) bought these bonds? Because the Fed announced its plan ahead of time, so the banks buy up the bonds and then sell them to the Fed at a nice profit. It is an absolute racket.


Posted by: Gray Seal Nov 18 2010, 05:39 PM

QUOTE(CruisingRam)
health care and the other things you are talking about are not experimental at all- they are tried and true all over the world
I did mention the healthcare bill, the one which is some 2400 odd pages. I know there is universal healthcare in many places. Where exactly did we copy our 2400 page bill from them? I do not think our experiment looks anything like any of those other examples of healthcare delivery anyplace else in the world. Our healthcare bill is a grand complicated experiment totally unproven. That was my point. If you truly do not like unproven experiments you would not pick and choose which ones you protest. A protest against any sort of unproven change would be universal if you actually believed in that idea. As it is, the fear of change argument is empty.

I do think you have reasons for your preferences but logic should tell you that unproven change is not really one of them. Some how Austrian economics has been demonized to you.

Posted by: Amlord Nov 18 2010, 10:09 PM

QUOTE(pj4xtrader @ Nov 17 2010, 09:05 PM) *
Our government does not ever have or not have dollars. Taxing and government spending are inverse actions. I think it's obvious to most that government spending creates dollars, what seems to elude most is that taxing un-creates dollars. While ones intuition may tell them that it isn't right for the government to spend dollars it does not have, logic should show that form inception, it would have been irrational to demand that the goverment first have dollars that it had not yet created (spend into existence). What was reality upon inception still holds true today.


Shall we call our current banking system the world's biggest Ponzi scheme? As long as outsiders keep pumping money into the system, the system works. As soon as the scheme gets big enough and the amount of new debt needed exceeds the number of suckers investors, the whole thing falls like a house of cards.

Posted by: brinn Nov 19 2010, 02:15 AM

First you say:

QUOTE(Leder)
Why would the Fed buy $600 billion in US Treasury bills if there was demand for it?
indicating that the lack of demand for the debt is the reason that fed has to purchase its own debt. When I point out that QE is a repurchase of privately held debt you change your tune...

Next you say:
QUOTE(Leder)
lol and why do you think the private sector (Goldman Sachs) bought these bonds? Because the Fed announced its plan ahead of time, so the banks buy up the bonds and then sell them to the Fed at a nice profit. It is an absolute racket.


But hold on, you just told me that the government had to buy the debt because there was no demand! Now you tell me that really, there was plenty of demand because everyone knew that the government was going to buy back the debt. What is it Leder? Is it a lack of demand as you say first, or is it a free lunch which would certainly lead to massive demand? You can't have it both ways.

You're getting lost in your own arguments because you don't understand how the bond market functions nor do you understand what QE actually is or does (or if you do understand, you haven't articulated it particularly well). You're more concerned with rebutting me rather than making sure that your arguments are grounded in reality or, at the very least, logically consistent.

QUOTE(Leder)
Not if there is an entity that is offering risk free investments! The banks can borrow from the Fed at 0% and then turn around and buy short term Treasury bonds that pay interest. They also take the money and speculate in the stock market, bidding up prices. Furthermore, the Fed sets interest rates, not the market. The rate has been at 0% for two years now. Why in hell would banks make loans to individuals or businesses when they can increase their balance sheets by borrowing free money and making a hefty profit on it by loaning to the federal government?
Check your facts. Banks cannot borrow from the fed at 0%. As of today http://www.bloomberg.com/markets/rates-bonds/key-rates/ lists the Fed Funds rate at 0.19% and the 3 and 6 month bonds at a coupon of 0.00% with yields of 0.13% and 0.18% respectively. Tough to make money that way. Regardless of this fact, I want to make sure that I understand that your contention is that loan demand is present but banks are not lending because of arbitrage opportunities in the bond market. Is that your hypothesis?

QUOTE(Leder)
The false assumption that you make is that investors believe the same economic theory that I do, instead of the one that you do. If most investors believe that government stimulus and quantitative easing will actually work, then it might take longer for them to realize their error and correct it. By the time bond yields rise, it will already be too late.
I made no assumptions. I simply asked you to explain the decline in bond rates given the increasing deficit. Your explanation appears to be that bond prices will rise as deficits rise and the US economy becomes more risky, unless people think otherwise, in which case the opposite could happen, but don't worry because eventually my prediction will be proved correct (even if it hasn't been right for the last 30 years). To me, it doesn't sound like your theory has much predictive use and, in that respect, it is very similar to much of mainstream economics. The nice thing about my "theory" is that it doesn't require everyone to believe the same thing in order to be of any predictive use. I can tell you how the bond market functions and can assure you that rates will stay low because "Borrowers" have no other options for a risk free return. The Fed could dictate bond rates if it so desired.

As a matter of fact the Fed could stop issuing bonds completely, pay a small rate of interest on reserves, and nothing would change. I sincerely hope that Rand Paul and other members of Congress decide to vote against raising the debt ceiling. Once the national debt hits the ceiling they would stop selling bonds but continue to spend as they always have and then we could watch everyone's amazement as, low and behold, nothing happens!






Posted by: pj4xtrader Nov 19 2010, 02:31 AM

QUOTE(Amlord @ Nov 18 2010, 05:09 PM) *
QUOTE(pj4xtrader @ Nov 17 2010, 09:05 PM) *
Our government does not ever have or not have dollars. Taxing and government spending are inverse actions. I think it's obvious to most that government spending creates dollars, what seems to elude most is that taxing un-creates dollars. While ones intuition may tell them that it isn't right for the government to spend dollars it does not have, logic should show that form inception, it would have been irrational to demand that the goverment first have dollars that it had not yet created (spend into existence). What was reality upon inception still holds true today.


Shall we call our current banking system the world's biggest Ponzi scheme? As long as outsiders keep pumping money into the system, the system works. As soon as the scheme gets big enough and the amount of new debt needed exceeds the number of suckers investors, the whole thing falls like a house of cards.


My intentions are to help people better understand the operations of our monetary and fiscal system as it is constructed. You have the right to call it anything you please, but the facts remain.

Posted by: Hobbes Nov 19 2010, 03:28 AM

QUOTE(brinn @ Nov 17 2010, 07:20 PM) *
QUOTE(Hobbes @ Nov 17 2010, 06:28 PM) *
QUOTE(brinn @ Nov 14 2010, 07:25 PM) *
QUOTE(Gray Seal)
Deficits are cheating.
No. Deficits are an artifact of any non-convertible fiat currency system.


No, deficits are the result of government spending money it doesn't have. Can you have a deficit with a different currency system? Of course you can. (see Greece) That rules out the above explanation.

We will now resume the originally scheduled program. smile.gif

You're right! Deficits certainly aren't exclusive to fiat currency systems but you've still got the causality backwards in a non-convertible, floating rate system. Government cannot spend money it doesn't have because it can create money at will. In other words, it will always have money to spend. Deficits (in this system) are more accurately described as government not collecting all the money it has spent. mrsparkle.gif


I think we need to define two different types of deficits here. One is government spending more than its revenue, and making up the difference with loans (bonds), and the other is government spending more than its revenue, and making up the difference, shall we say...the old fashioned way, by printing it! I think most people infer the former when speaking of the deficit, but we've certainly been doing the latter recently too...but the former is far more prevalent

It is worth nothing that in both of those cases the deficit is still caused by the government spending more than it takes in in revenue. The difference is in how it makes up that difference.

Posted by: CruisingRam Nov 19 2010, 05:37 AM

QUOTE(Hobbes @ Nov 18 2010, 07:28 PM) *
I think we need to define two different types of deficits here. One is government spending more than its revenue, and making up the difference with loans (bonds), and the other is government spending more than its revenue, and making up the difference, shall we say...the old fashioned way, by printing it! I think most people infer the former when speaking of the deficit, but we've certainly been doing the latter recently too...but the former is far more prevalent

It is worth nothing that in both of those cases the deficit is still caused by the government spending more than it takes in in revenue. The difference is in how it makes up that difference.



Actually Hobbes, I believe the printing money kind of deficit is kind of what drives our economy and makes us a world leader- and it much larger than the bond market- but I could be mistaken. Most of our money is outside the country- again, great for us in that case. How much of our debt IS in bonds?

QUOTE(Gray Seal @ Nov 18 2010, 09:39 AM) *
QUOTE(CruisingRam)
health care and the other things you are talking about are not experimental at all- they are tried and true all over the world
I did mention the healthcare bill, the one which is some 2400 odd pages. I know there is universal healthcare in many places. Where exactly did we copy our 2400 page bill from them? I do not think our experiment looks anything like any of those other examples of healthcare delivery anyplace else in the world. Our healthcare bill is a grand complicated experiment totally unproven. That was my point. If you truly do not like unproven experiments you would not pick and choose which ones you protest. A protest against any sort of unproven change would be universal if you actually believed in that idea. As it is, the fear of change argument is empty.

I do think you have reasons for your preferences but logic should tell you that unproven change is not really one of them. Some how Austrian economics has been demonized to you.




Actually- Macroeconomics in general whether Kenysian or Austrian, I don't go overboard in "believing" any of them- some parts of both can describe this economy or that, found that they can't predict crap. The key to economic success is being able to anticipate boom and bust cycles correctly so you can buy high and sell low. That is what capitalists do, and the professors and academics try to describe it after the fact, but if they were good at it really, they would be rich too rolleyes.gif

I like Brinn's presentation of defining what I am seeing in my personal business dealings- that is all. I don't think Brinn is advocating anything but Austrian economics, just taking it to another level when trying to describe the global reality of managed economies. Might be something different on the horizon, but it ain't happening now.

I see your point on healthcare as well- our system still sucks, got tens of millions covered, which is nice, but still needs to go completely universal or completely free market.

Posted by: Belshazzar Nov 19 2010, 06:38 AM

QUOTE(CruisingRam @ Nov 19 2010, 12:37 AM) *
Actually- Macroeconomics in general whether Kenysian or Austrian, I don't go overboard in "believing" any of them- some parts of both can describe this economy or that, found that they can't predict crap. The key to economic success is being able to anticipate boom and bust cycles correctly so you can buy high and sell low. That is what capitalists do, and the professors and academics try to describe it after the fact, but if they were good at it really, they would be rich too rolleyes.gif


Ahem, http://www.fullerthaler.com/ can actually cut it in the real marketplace. By the way, CR, there are more macroeconomic theories than just Keynesian and Austrian.

Anyway, I thought I'd jump into this Austrian love-in over here and just mention that, for the benefit of those watching this rousing battle of wits, the Austrian School is not mainstream for a reason. The Austrian School is based on a priori, or deductive, reasoning. It eschews empirical data for the most part. This is not true of other economic schools, which do use statistical and mathematical models. Austrian economics, however, is based on deriving knowledge from first principles as in http://praxeology.net/praxeo.htm. This requires assumptions that are essentially unquestionable, making it something of an economic theology, an intellectual snake-oil.

I will now step into my flame-retardant suit and await the wrath of the Austrians. thumbsup.gif

Posted by: CarpeDinkum Nov 19 2010, 07:45 AM

QUOTE(Belshazzar @ Nov 18 2010, 10:38 PM) *
QUOTE(CruisingRam @ Nov 19 2010, 12:37 AM) *
Actually- Macroeconomics in general whether Kenysian or Austrian, I don't go overboard in "believing" any of them- some parts of both can describe this economy or that, found that they can't predict crap. The key to economic success is being able to anticipate boom and bust cycles correctly so you can buy high and sell low. That is what capitalists do, and the professors and academics try to describe it after the fact, but if they were good at it really, they would be rich too rolleyes.gif


Ahem, http://www.fullerthaler.com/ can actually cut it in the real marketplace. By the way, CR, there are more macroeconomic theories than just Keynesian and Austrian.

Anyway, I thought I'd jump into this Austrian love-in over here and just mention that, for the benefit of those watching this rousing battle of wits, the Austrian School is not mainstream for a reason. The Austrian School is based on a priori, or deductive, reasoning. It eschews empirical data for the most part. This is not true of other economic schools, which do use statistical and mathematical models. Austrian economics, however, is based on deriving knowledge from first principles as in http://praxeology.net/praxeo.htm. This requires assumptions that are essentially unquestionable, making it something of an economic theology, an intellectual snake-oil.

I will now step into my flame-retardant suit and await the wrath of the Austrians. thumbsup.gif


I've always felt that politics, economics and religion had quite a bit in common.

Posted by: CruisingRam Nov 19 2010, 07:54 AM

QUOTE(Belshazzar @ Nov 18 2010, 10:38 PM) *
QUOTE(CruisingRam @ Nov 19 2010, 12:37 AM) *
Actually- Macroeconomics in general whether Kenysian or Austrian, I don't go overboard in "believing" any of them- some parts of both can describe this economy or that, found that they can't predict crap. The key to economic success is being able to anticipate boom and bust cycles correctly so you can buy high and sell low. That is what capitalists do, and the professors and academics try to describe it after the fact, but if they were good at it really, they would be rich too rolleyes.gif


Ahem, http://www.fullerthaler.com/ can actually cut it in the real marketplace. By the way, CR, there are more macroeconomic theories than just Keynesian and Austrian.

Anyway, I thought I'd jump into this Austrian love-in over here and just mention that, for the benefit of those watching this rousing battle of wits, the Austrian School is not mainstream for a reason. The Austrian School is based on a priori, or deductive, reasoning. It eschews empirical data for the most part. This is not true of other economic schools, which do use statistical and mathematical models. Austrian economics, however, is based on deriving knowledge from first principles as in http://praxeology.net/praxeo.htm. This requires assumptions that are essentially unquestionable, making it something of an economic theology, an intellectual snake-oil.

I will now step into my flame-retardant suit and await the wrath of the Austrians. thumbsup.gif


I couldn't agree more- I pick and choose when I see stuff being used and being applied. Heck- you can gather the info you posted right off wiki for that matter. more than anything, I try to find a common language that explains what the circle of people I deal with are using and doing.

Posted by: lederuvdapac Nov 19 2010, 02:42 PM

QUOTE(brinn)
indicating that the lack of demand for the debt is the reason that fed has to purchase its own debt. When I point out that QE is a repurchase of privately held debt you change your tune...


Are you honestly arguing that there is no difference between Goldman Sachs holding government bonds because they know the Fed is going to purchase them at a premium price and GS buying government bonds because they believe it to be a good investment?

QUOTE(brinn)
But hold on, you just told me that the government had to buy the debt because there was no demand!


Which is ipso facto correct. If the demand for US bonds was real and tangible, then you wouldn't need the Fed to swoop in and purchase them.

QUOTE(brinn)
Now you tell me that really, there was plenty of demand because everyone knew that the government was going to buy back the debt. What is it Leder? Is it a lack of demand as you say first, or is it a free lunch which would certainly lead to massive demand? You can't have it both ways.


There is no both ways. There is a racket, thats all. The government announces its plans ahead of time that it is going to purchase $600 billion worth of bonds. This is what causes a temporary boost in demand as firms look to make record profits off of this organized crime scam. The demand isn't real, it is artificial.

QUOTE(brinn)
You're getting lost in your own arguments because you don't understand how the bond market functions nor do you understand what QE actually is or does (or if you do understand, you haven't articulated it particularly well).


I am not lost. Not in the slightest. What you seem to be confused about is demand as an indicator of actual investment and demand as a response to a government/central bank policy.

QUOTE(brinn)
Check your facts. Banks cannot borrow from the fed at 0%. As of today Bloomberg lists the Fed Funds rate at 0.19% and the 3 and 6 month bonds at a coupon of 0.00% with yields of 0.13% and 0.18% respectively. Tough to make money that way. Regardless of this fact, I want to make sure that I understand that your contention is that loan demand is present but banks are not lending because of arbitrage opportunities in the bond market. Is that your hypothesis?


Here you go: http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aMEI6iAtOxeI

QUOTE
Rather than providing money to businesses and consumers, U.S. commercial banks are increasingly using the cash available at interest rates set by the Federal Reserve that are next to zero and lending it back to the government. Since June, the biggest banks bought about $127 billion of Treasuries and agency-related debt, compared with $47 billion in the first half, according to the central bank. Commercial and industrial loans outstanding have fallen by about $68.5 billion this year, central bank data show.

[...]
Lenders are on pace this year to buy the most Treasury and agency debt since the Fed began tracking the data in 1950, adding $186.2 billion of the securities through Oct. 20 and bringing the total to $1.62 trillion. At the same time, commercial and industrial loans fell by 5.3 percent to $1.23 trillion, Fed data show.

“The Fed may find that banks remain unwilling to move out of government-backed securities as readily as it might be hoped,” said Jeffrey Caughron, an associate partner in Oklahoma City at Baker Group LP, which advises community banks on investing $25 billion of assets. “Banks are in the unenviable position of having to wait until the animal spirits creep back into the economy.”


QUOTE(brinn)
Your explanation appears to be that bond prices will rise as deficits rise and the US economy becomes more risky, unless people think otherwise, in which case the opposite could happen, but don't worry because eventually my prediction will be proved correct (even if it hasn't been right for the last 30 years).


Something that cannot go on forever, won't. I am sure in the mid-2000s there were plenty of people out there who thought a fall in home prices (something that hadn't happened since the Great Depression) was impossible. They were proven wrong. The US is in the midst of a giant debt bubble that will eventually burst.

QUOTE(Belshazzar)
Anyway, I thought I'd jump into this Austrian love-in over here and just mention that, for the benefit of those watching this rousing battle of wits, the Austrian School is not mainstream for a reason. The Austrian School is based on a priori, or deductive, reasoning. It eschews empirical data for the most part. This is not true of other economic schools, which do use statistical and mathematical models. Austrian economics, however, is based on deriving knowledge from first principles as in praxeology. This requires assumptions that are essentially unquestionable, making it something of an economic theology, an intellectual snake-oil.


Prepare for FLAMES. But seriously, this is just incorrect. Austrians do not eschew empirical data - they just recognize what empiricism does and does not tell you. Mainstream economists like to create fantastic models based upon their own assumptions and then they plug data in that reinforces those assumptions. They look at statistics and try to ascertain predictive power based upon what is essentially economic history. They look at aggregates and make determinations on economic well-being based on arbitrary standards. Empiricism has its place in economics - but only as a tool of historical data. The reason is that the experiments that take place in the natural sciences cannot compare to the experiments in economics. There is no control group for one. But most importantly, humans are not like electrons. They act, they act purposefully, they reason, they change their mind, they are unpredictable - when given the same set of circumstances they can commit to opposite actions. This is why begin the study of economics on the individual level. They use a priori knowledge to determine that humans act and that they act with purpose - Is this theological? Intellectual snake-oil? If so, then please refute the following statement. Humans act. It is impossible. Because any possible refutation would require you to act whether it was typing, speaking, or thinking. And because people act, we can know a priori that people act with purpose. If there was no purpose, then one wouldn't act. Humans act to either relieve some sort of dissatisfaction (or on the flip side) to achieve some sort of satisfaction. The only states where action is impossible are death and nirvana. These axioms are held true and are irrefutable. Without using a priori knowledge, it is impossible to know whether the economic data we are observing is "caused" by the things we think they are or whether they are are just coincidentally related or correlated.

Posted by: akaCG Nov 19 2010, 03:57 PM

QUOTE(Belshazzar @ Nov 19 2010, 01:38 AM) *
QUOTE(CruisingRam @ Nov 19 2010, 12:37 AM) *

... The key to economic success is being able to anticipate boom and bust cycles correctly so you can buy high and sell low. That is what capitalists do, and the professors and academics try to describe it after the fact, but if they were good at it really, they would be rich too rolleyes.gif

Ahem, http://www.fullerthaler.com/ can actually cut it in the real marketplace. ...
...

Er, ...

The two "behavioral finance" mutual funds managed by Fuller-Thaler under the auspices of J.P.Morgan have been underperforming against their corresponding indices pretty consistently over the past 10 years:

http://www.jpmorganfunds.com/cm/Satellite?UserFriendlyURL=performance_ratings&pagename=jpmfVanityWrapper&cusip=904504842

http://www.jpmorganfunds.com/cm/Satellite?UserFriendlyURL=fundoverview&pagename=jpmfVanityWrapper&cusip=904504206

QUOTE(Belshazzar @ Nov 19 2010, 01:38 AM) *
...
Anyway, I thought I'd jump into this Austrian love-in over here and just mention that, for the benefit of those watching this rousing battle of wits, the Austrian School is not mainstream for a reason. The Austrian School is based on a priori, or deductive, reasoning. It eschews empirical data for the most part. This is not true of other economic schools, which do use statistical and mathematical models. Austrian economics, however, is based on deriving knowledge from first principles as in http://praxeology.net/praxeo.htm. This requires assumptions that are essentially unquestionable, making it something of an economic theology, an intellectual snake-oil.
...

Actually, it looks as if the "Austrians" were closer to the truth than the mainstream economics "empiricists", who've been molesting one econometric model after another in their quest for their equivalent of E=mc^2 while assuming away the inconvenient difficulties inherent in how real flesh and blood humans, individually and in groups, make decisions. The history of mainstream economics is littered with examples of what happens when hubristic assumptions get mauled by the "unknown unknowns" 800 pound gorilla.


Posted by: Belshazzar Nov 19 2010, 04:31 PM

QUOTE(lederuvdapac @ Nov 19 2010, 09:42 AM) *
Prepare for FLAMES. But seriously, this is just incorrect. Austrians do not eschew empirical data - they just recognize what empiricism does and does not tell you. Mainstream economists like to create fantastic models based upon their own assumptions and then they plug data in that reinforces those assumptions. They look at statistics and try to ascertain predictive power based upon what is essentially economic history. They look at aggregates and make determinations on economic well-being based on arbitrary standards. Empiricism has its place in economics - but only as a tool of historical data. The reason is that the experiments that take place in the natural sciences cannot compare to the experiments in economics. There is no control group for one. But most importantly, humans are not like electrons. They act, they act purposefully, they reason, they change their mind, they are unpredictable - when given the same set of circumstances they can commit to opposite actions. This is why begin the study of economics on the individual level. They use a priori knowledge to determine that humans act and that they act with purpose - Is this theological? Intellectual snake-oil? If so, then please refute the following statement. Humans act. It is impossible. Because any possible refutation would require you to act whether it was typing, speaking, or thinking. And because people act, we can know a priori that people act with purpose. If there was no purpose, then one wouldn't act. Humans act to either relieve some sort of dissatisfaction (or on the flip side) to achieve some sort of satisfaction. The only states where action is impossible are death and nirvana. These axioms are held true and are irrefutable. Without using a priori knowledge, it is impossible to know whether the economic data we are observing is "caused" by the things we think they are or whether they are are just coincidentally related or correlated.


Leder, your explanation is not news to me -- I have read the early Austrians (though it's been quite a while). Your explanation, however, is a good summary of the fundamentals of the Austrian School. I believe you're paraphrasing Rothbard's Praxeology here? (Correct me if I'm wrong on this.)

In any case, the problem with the Austrian School is that it is fundamentally flawed on a philosophical level. We don't even have to get into economic theory at all to debate the validity of the Austrians. I could go on at length about this, but we should save this for its own thread (which I presume will be appearing on ad.gif post-haste thumbsup.gif ). The short of it is, where praxeology isn't dead wrong, it's http://en.wikipedia.org/wiki/Not_even_wrong. And that is death to any idea trying to claim scientific legitimacy.

The fundamental axiom of action is mere wordplay. Individual human beings act, therefore "we can know a priori that they act with purpose." This can be applied to just about anything -- a dog acts, therefore we can know a priori that it acts with purpose; a tornado acts, therefore we can know a priori that it acts with purpose. This is, of course, absurd prima facie (I don't expect to find economic analyses of tornado decision-making anytime soon).

Because, overall, Austrian economics rejects empiricism as the basis (note I did not say rejects empiricism entirely, but it might as well have FWIW) of its thought, it runs counter to not only all other economic schools, but science itself. This is because its basic philosophy shows a complete misunderstanding of empiricism, the scientific process, and statistics. For example, the rejection of using an empirical model because macroeconomics lacks a means of using a control group means that, if Austrian economics is correct, all historical sciences are wrong including paleontology, cosmology, archaeology, etc. The rejection of empiricism because "humans are not electrons" means, if Austrian economics is correct, all other social sciences are wrong. We must throw psychology, sociology, statistics, anthropology, etc. into the dustbin along with paleontology et al. These are the heights of absurdity to which Austrian economics reaches if we are to consider the implications of its basic assumptions. It is a self-contained logical system using unquestionable assumptions that amounts to an economic version of theology.

In any case, I bring this up mainly because this thread has become brinn v. Austrians. It's been an interesting read, though. We can split this off into a new thread about the validity of the Austrian school if anyone wants to debate further as I fully expect to receive harsh criticism on this post.

I would also like to see some non-Austrians challenge brinn as Hobbes has done. I think I might re-read this thread and give it a try, but I can't make any promises on that. I really don't know anything about functional finance, so I have no doubt brinn would mop the floor with me.

ETA: I will not reply to any responses to this post in this specific thread to try to keep it on-topic.

Posted by: lederuvdapac Nov 19 2010, 05:45 PM

QUOTE(Belshazzar)
And that is death to any idea trying to claim scientific legitimacy.


You seem to be criticizing the wrong school of thought. The only ones who claim scientific legitimacy are the mainstream economists in the neo-classical and neo-keynesian traditions. They try to mirror the natural sciences and its the Austrians who criticize them for trying to do so.

QUOTE(Belshazzar)
The fundamental axiom of action is mere wordplay. Individual human beings act, therefore "we can know a priori that they act with purpose." This can be applied to just about anything -- a dog acts, therefore we can know a priori that it acts with purpose; a tornado acts, therefore we can know a priori that it acts with purpose. This is, of course, absurd prima facie (I don't expect to find economic analyses of tornado decision-making anytime soon).


Its absurd because you create a strawman and knock it down. Dogs and animals do not act purposefully. They do not reason, they do not make utility decisions. They react based on instinct and learned behavior. Humans have consciousness, animals and tornadoes do not.

QUOTE(Belshazzar)
Because, overall, Austrian economics rejects empiricism as the basis (note I did not say rejects empiricism entirely, but it might as well have FWIW) of its thought, it runs counter to not only all other economic schools, but science itself.


No, it rejects the misuse of empiricism.

QUOTE(Belshazzar)
For example, the rejection of using an empirical model because macroeconomics lacks a means of using a control group means that, if Austrian economics is correct, all historical sciences are wrong including paleontology, cosmology, archaeology, etc.


Complete nonsense. You are comparing apples and oranges. What the Austrians criticize is when the models show that WITH the stimulus that unemployment won't go over 8% and that WITHOUT the stimulus unemployment will go much higher. That when the official model put out by the economic team of the President turns out to be laughably wrong that maybe it isn't just that the models need some tweaking, but that the assumptions that form the very basis of the model need to be questioned.

QUOTE(Belshazzar)
In any case, I bring this up mainly because this thread has become brinn v. Austrians.


I am the only proclaimed Austrian adherent to my knowledge. Although akaCG appears to have knowledge and/or sympathies.


Posted by: Hobbes Nov 19 2010, 06:05 PM

QUOTE(CruisingRam @ Nov 18 2010, 11:37 PM) *
Actually Hobbes, I believe the printing money kind of deficit is kind of what drives our economy and makes us a world leader- and it much larger than the bond market- but I could be mistaken. Most of our money is outside the country- again, great for us in that case. How much of our debt IS in bonds?


ALL of it. If they had printed the money, it wouldn't be debt. And this is MUCH bigger than the printing money thing...that is something that they started doing only recently, and which you keep hearing about how they're going to 'sop up'. Further, as I pointed out many posts ago, that has NOTHING to do with the deficit...it is done by the Fed.

QUOTE
QUOTE(Belshazzar)

For example, the rejection of using an empirical model because macroeconomics lacks a means of using a control group means that, if Austrian economics is correct, all historical sciences are wrong including paleontology, cosmology, archaeology, etc.


Complete nonsense. You are comparing apples and oranges. What the Austrians criticize is when the models show that WITH the stimulus that unemployment won't go over 8% and that WITHOUT the stimulus unemployment will go much higher. That when the official model put out by the economic team of the President turns out to be laughably wrong that maybe it isn't just that the models need some tweaking, but that the assumptions that form the very basis of the model need to be questioned.


Here's the problem economics (as well as most of the social sciences) face...what they are studying is impossible to control, and it has far more factors interacting than they could possibly contain in a model, or even really understand to begin with. Which doesn't mean that models, or empiricism, is the wrong approach. But it DOES mean that such approaches need to be understood within the confines of their limitations in the very situations they seek to explain. These would come in the form of the assumptions, as Leder points out--something that is usually given short shrift, as every just looks at the output, not understanding the limited range of conditions in which that is likely to be valid.

Posted by: Belshazzar Nov 19 2010, 07:04 PM

QUOTE(Hobbes @ Nov 19 2010, 01:05 PM) *
Here's the problem economics (as well as most of the social sciences) face...what they are studying is impossible to control, and it has far more factors interacting than they could possibly contain in a model, or even really understand to begin with. Which doesn't mean that models, or empiricism, is the wrong approach. But it DOES mean that such approaches need to be understood within the confines of their limitations in the very situations they seek to explain. These would come in the form of the assumptions, as Leder points out--something that is usually given short shrift, as every just looks at the output, not understanding the limited range of conditions in which that is likely to be valid.


Assumptions are not given short shrift in any model -- that makes no sense as models rely on assumptions. Deduction can follow from these assumptions successfully. However, the validity of both the assumption and the deduction need to be empirically verified, preferably repeatedly. This is how science works. As you correctly point out, economic is frought with confounding factors. What is the solution to this? Continuously test and revise models, of course!

One last word on Austrian economics (because no one seems to have gotten my point): First, criticizing the misuse of empirical models is a good thing, but does anyone honestly think only Austrians have the capacity for this? Second, the criticism of mainstream economics by Austrians should not be rejected out of hand. But successfully showing a certain model to be incorrect does not magically make yours valid. The Austrians (at least the strict ones, especially those who use praxeology) then decide to replace empirical models with "self-evident assumptions" and theories deduced from said assumptions. As Mises wrote: "its statements and propositions are not derived from experience... They are not subject to verification or falsification on the ground of experience and facts." Thus, empirical data (facts for us common folk) cannot be used to falsify Austrian economics, only logical errors in the process of deduction can be found. Remind you of anything? The Austrians then claim to reject the scientific nature of other economic schools, yet they also claim that they can make accurate predictions about the economy while maintaining that their own theories are not subject to falsification! The absurdity is astounding.

Posted by: lederuvdapac Nov 19 2010, 07:52 PM

QUOTE(Belshazzar @ Nov 19 2010, 03:04 PM) *
The Austrians (at least the strict ones, especially those who use praxeology) then decide to replace empirical models with "self-evident assumptions" and theories deduced from said assumptions. As Mises wrote: "its statements and propositions are not derived from experience... They are not subject to verification or falsification on the ground of experience and facts." Thus, empirical data (facts for us common folk) cannot be used to falsify Austrian economics, only logical errors in the process of deduction can be found. Remind you of anything? The Austrians then claim to reject the scientific nature of other economic schools, yet they also claim that they can make accurate predictions about the economy while maintaining that their own theories are not subject to falsification! The absurdity is astounding.



It is because you fail to understand what they are saying. Logical errors can only be refuted logically - how can it be true any other way? I will give you a simple example that illustrates my point exactly: the minimum wage. Now even mainstream neoclassical textbooks - if you open to the first or second chapter you learn about how a price floor (the minimum wage) creates unemployment because the government sets the price above the market (or equilibrium) price, causing marginal labor costs to increase and the propensity to hire to decrease. The logic of this is sound. If you increase the cost of labor, you decrease the demand.

Now you, the empiricist, might come along and say AHA! A study by academics in California show that a town raised the minimum wage and it didn't result in [aggregate] unemployment! The idea that minimum wage causes unemployment is a myth!

But that is not what the data shows. The empirical data cannot refute a logical truth. All it can say is that given these exact economic circumstances, and given these exact economic actors, and given this exact time frame, such and such occurred. Perhaps the macroeconomy was in a boom period. Perhaps the town itself was experiencing a revival due to lower taxes elsewhere, bringing in more businesses and more consumers for low-skilled services. Perhaps long term projects that were meant to take advantage of the pre-wage increase environment just opened up. The point: there are any number of economic factors and circumstances that can occur to make the real life situation of raising of them minimum wage, not result in more unemployment. However, this does nothing to refute the economic law that an increase in the cost of labor decreases the demand and puts downward pressure on employment. You can't just isolate two factors, look at then separate from the real economy and then declare an economic law refuted.

The strict empiricist would look at the new study and make a hasty judgment because that is what the data says. A more astute economist would recognize that the empirical data does not refute a logical truth, it only provides evidence for a given event at a given time.

Posted by: Hobbes Nov 19 2010, 08:18 PM

QUOTE(Belshazzar @ Nov 19 2010, 01:04 PM) *
Assumptions are not given short shrift in any model -- that makes no sense as models rely on assumptions. Deduction can follow from these assumptions successfully. However, the validity of both the assumption and the deduction need to be empirically verified, preferably repeatedly. This is how science works. As you correctly point out, economic is frought with confounding factors. What is the solution to this? Continuously test and revise models, of course!


Assumptions are quite frequently given short shrift. Although I was speaking primarily for those that look at the output (who almost never pay the slightest attention to the assumptions, or even know what they are), this happens frequently within the scientific community as well. This is most especially true with the modeling of very complex systems, because the limiting factors (the assumptions) probably aren't fully understood to begin with. Plus, detailing even all the known ones would pretty much render the model useless in any real world situation, detracting from the incentive to put them all out there to begin with. However, at least a listing of the factors considered would help others evaluate the results. That's really the part that's missing. We get a result out of a black box, and not much attempt is made to evaluate its validity.

Posted by: Belshazzar Nov 19 2010, 09:05 PM

I've opened a separate thread for Austrian economics:
http://www.americasdebate.com/forums/index.php?showtopic=20392&pid=313286&st=0&#entry313286

Posted by: CarpeDinkum Nov 20 2010, 01:42 AM

QUOTE(lederuvdapac @ Nov 19 2010, 11:52 AM) *
QUOTE(Belshazzar @ Nov 19 2010, 03:04 PM) *
The Austrians (at least the strict ones, especially those who use praxeology) then decide to replace empirical models with "self-evident assumptions" and theories deduced from said assumptions. As Mises wrote: "its statements and propositions are not derived from experience... They are not subject to verification or falsification on the ground of experience and facts." Thus, empirical data (facts for us common folk) cannot be used to falsify Austrian economics, only logical errors in the process of deduction can be found. Remind you of anything? The Austrians then claim to reject the scientific nature of other economic schools, yet they also claim that they can make accurate predictions about the economy while maintaining that their own theories are not subject to falsification! The absurdity is astounding.



It is because you fail to understand what they are saying. Logical errors can only be refuted logically - how can it be true any other way? I will give you a simple example that illustrates my point exactly: the minimum wage. Now even mainstream neoclassical textbooks - if you open to the first or second chapter you learn about how a price floor (the minimum wage) creates unemployment because the government sets the price above the market (or equilibrium) price, causing marginal labor costs to increase and the propensity to hire to decrease. The logic of this is sound. If you increase the cost of labor, you decrease the demand.



But there are more factors than the price of labor; the logic would only prevail if all other costs and efficiencies were fixed. So the logic is heir to the same problem. Isolation.

Posted by: brinn Nov 20 2010, 02:14 AM

QUOTE(Leder)
Now even mainstream neoclassical textbooks - if you open to the first or second chapter you learn about how a price floor (the minimum wage) creates unemployment because the government sets the price above the market (or equilibrium) price, causing marginal labor costs to increase and the propensity to hire to decrease. The logic of this is sound. If you increase the cost of labor, you decrease the demand.
Even this logical assumption can be questioned as a price floor need not result in unemployment. The government, as the monopoly supplier of currency, can purchase anything denominated in the currency of issue. How does your model encompass an entity that has unlimited spending power, an entity that could literally absorb all unemployment via payment of a minimum wage? Increase the minimum wage (cost of labor) and the government could still purchase all unemployed labor. The existence of a market participant with unlimited purchasing power calls your base assumption into question.

QUOTE(Leder)
Are you honestly arguing that there is no difference between Goldman Sachs holding government bonds because they know the Fed is going to purchase them at a premium price and GS buying government bonds because they believe it to be a good investment?
Yup. To the government there is no difference as a bond sale is a bond sale is a bond sale. Artificial demand is just as useless as real demand or no demand. As I’ve stated many times, bond sales are not required to fund spending and only serve as a reserve drain. As I’ve said before, the government could get out of the bond game completely without any discernible effect. The only thing that would need to be done is to allow the fed to run an overdraft balance.

We've been on this tangent for a while now and I'm going to try to swing the debate back to the initial question. I want to take things step by step and see where we can agree and where we disagree.

1st point: Government spends by marking up and marking down accounts in, what is effectively, a large spreadsheet. Agree or disagree?


Posted by: CarpeDinkum Nov 20 2010, 02:28 AM

QUOTE(brinn @ Nov 19 2010, 06:14 PM) *
We've been on this tangent for a while now and I'm going to try to swing the debate back to the initial question. I want to take things step by step and see where we can agree and where we disagree.

1st point: Government spends by marking up and marking down accounts in, what is effectively, a large spreadsheet. Agree or disagree?



You beat me to it, Brinn.

Agree.

Posted by: Belshazzar Nov 20 2010, 04:51 AM

Brinn, riddle me this:
1. One of the problems with Hoover's http://en.wikipedia.org/wiki/Reconstruction_Finance_Corporation and the current bailout is that they tend to dump money into banks, which then accumulate excess reserves because of unwillingness to lend. So the end result is just pushing money around. How do you fix that?
2. When banks start lending again, how do you keep bad investment such as the ones that caused the bubble and bust in the first place from happening again? China's stimulus is reinflating its housing bubble, but they're trying to control this by increasing down payments and thinking of introducing a new property tax. Is this regulation enough to keep money from overvalued assets and prevent further distortion of prices?
3. Keynes advocated a surplus during booms and spending during busts. Isn't functional finance Keynesian? (Correct me if I'm wrong on that.) If so, persistent deficits would be self-contradictory in this theory. The point of the surplus was as to curb excessive growth and as a "rainy day fund" to help pay for deficits during busts. Obviously, persistent deficits aren't consistent with Keynes' conception of how the business cycle should be handled.
4. I mentioned this before, but I don't think it was addressed: Taxpayers have to pay interest on the debt. The larger the debt gets, the larger the interest gets. Can't paying down the debt be a stimulus in that it reduces tax burden?
5. What do you think of http://en.wikipedia.org/wiki/Steve_Keen? He claims that a debt-to-GDP ratio that is too high will cause deflation and then recession. http://www.debunkingeconomics.com/FinancialInstability.htm his page on models he produced based on Hyman Minsky's financial instability hypothesis.

Posted by: Hobbes Nov 20 2010, 06:26 AM

QUOTE(brinn @ Nov 19 2010, 08:14 PM) *
1st point: Government spends by marking up and marking down accounts in, what is effectively, a large spreadsheet. Agree or disagree?


Disagree. That is just the ledger. The government eventually spends the same way anyone else does...with an outlay of money.

Posted by: CarpeDinkum Nov 20 2010, 07:56 AM

QUOTE(Hobbes @ Nov 19 2010, 10:26 PM) *
QUOTE(brinn @ Nov 19 2010, 08:14 PM) *
1st point: Government spends by marking up and marking down accounts in, what is effectively, a large spreadsheet. Agree or disagree?


Disagree. That is just the ledger. The government eventually spends the same way anyone else does...with an outlay of money.


So you think the digits and the rags are different from one another? I suppose you can't take the digits and stuff them under your mattress....

Posted by: Hobbes Nov 20 2010, 02:40 PM

QUOTE(CarpeDinkum @ Nov 20 2010, 01:56 AM) *
QUOTE(Hobbes @ Nov 19 2010, 10:26 PM) *
QUOTE(brinn @ Nov 19 2010, 08:14 PM) *
1st point: Government spends by marking up and marking down accounts in, what is effectively, a large spreadsheet. Agree or disagree?


Disagree. That is just the ledger. The government eventually spends the same way anyone else does...with an outlay of money.


So you think the digits and the rags are different from one another? I suppose you can't take the digits and stuff them under your mattress....


Yes, exactly. Conversely, putting a number in the ledger doesn't make the rags automatically appear...again, it is just the accounting of the rags.

Posted by: CarpeDinkum Nov 20 2010, 03:26 PM

QUOTE(Hobbes @ Nov 20 2010, 06:40 AM) *
QUOTE(CarpeDinkum @ Nov 20 2010, 01:56 AM) *
QUOTE(Hobbes @ Nov 19 2010, 10:26 PM) *
QUOTE(brinn @ Nov 19 2010, 08:14 PM) *
1st point: Government spends by marking up and marking down accounts in, what is effectively, a large spreadsheet. Agree or disagree?


Disagree. That is just the ledger. The government eventually spends the same way anyone else does...with an outlay of money.


So you think the digits and the rags are different from one another? I suppose you can't take the digits and stuff them under your mattress....


Yes, exactly. Conversely, putting a number in the ledger doesn't make the rags automatically appear...again, it is just the accounting of the rags.


So, the gov sends you a check or credits your bank account for one reason or the other (SS payment, tax refund, etc.). You bank account gets increased by the amount of the check or credit. You use it to pay off a credit card online or by sending a check. So far, no rags.

In any case, whatever the private sector eventually does with the digits afterwards is beyond the scope of the statement. Do you have some evidence that the statement is, by and large, incorrect?

Posted by: pj4xtrader Nov 20 2010, 04:48 PM

QUOTE(Hobbes @ Nov 20 2010, 01:26 AM) *
QUOTE(brinn @ Nov 19 2010, 08:14 PM) *
1st point: Government spends by marking up and marking down accounts in, what is effectively, a large spreadsheet. Agree or disagree?


Disagree. That is just the ledger. The government eventually spends the same way anyone else does...with an outlay of money.


There is no functional difference between the credits on the ledger and an outlay of DOLLARS. When the government spends by marking up a firms account, this creates "demand deposit" that are always convertible to physical DOLLARS upon demand with little to no more cost of production. Demand deposits for the most part circulate from account to account on the "spreadsheet" (banking system) without being converted, as the lion's share of payments within the system are now electronic or made via bank check, shifting demand deposits from one account to another, and although these deposits are not physical DOLLARS, they are DOLLARS.

Physical DOLLARS are created and distributed upon request, when a check is cashed or DOLLARS are withdrawn from a demand account to facilitate transactions out side of the baking system. The bank debits the corresponding account and credits is own, and then makes the disbursement of physical DOLLARS from it's own buffer stock of DOLLARS, or if it's buffer stock is insufficient and/or it does not desire to draw down it's buffer stock, the physical DOLLARS will be ordered from the Treasury in exchange for the demand deposits.

Effectively there is no difference between the government creating and disbursing physical DOLLARS or marking the DOLLARS up in ones account.

Posted by: brinn Nov 20 2010, 04:54 PM

QUOTE(Belshazzar)
1. One of the problems with Hoover's Reconstruction Finance Corporation and the current bailout is that they tend to dump money into banks, which then accumulate excess reserves because of unwillingness to lend. So the end result is just pushing money around. How do you fix that?
And the real kicker is that the excess reserves give the banks no additional ability to lend! Bank can always lend if there are credit worthy customers looking for loans and the spread between the banks cost of funds and the loan rate is attractive. So how do you fix that? You can't using those particular tools. What we are experiencing is a balance sheet recession caused by loose money policy and the malinvestment that began with Greenspan. When one's balance sheet is overly leveraged (e.g. my house is worth $250,000 and my mortgage is $350,000) this typically results in private entities increased desire to save and to pay down debt. Earnings are routed to saving and debt reduction rather than consumption and demand is lowered further. This represents the beginning of a deflationary spiral. I don't think any of this is counterintuitive or outside of the typical analysis of the situation that we find ourselves in.

So my answer would be; Stop dumping money into banks and attack the root of the problem which is Main Sreet's massive debt overhang. Abandon the QE approach (which is useless just look at Japan's experience with QE) and stop trying to force the banks to lend to customers who have no desire for additional debt! I would suggest a very large tax decrease including an indefinite suspension of FICA taxes. Couple this with targeted spending designed to lower unemployement levels (massive infrastructure spending possibly?) and you are providing Main St. with what immediately amounts to at least a 15% increase in take home pay which would be used to eliminate some of the debt overhang and speed up the process of Main Street deleveraging.

QUOTE(Belshazzar)
2. When banks start lending again, how do you keep bad investment such as the ones that caused the bubble and bust in the first place from happening again? China's stimulus is reinflating its housing bubble, but they're trying to control this by increasing down payments and thinking of introducing a new property tax. Is this regulation enough to keep money from overvalued assets and prevent further distortion of prices?
Reasonable levels of regulation (much like you cite) and management of rates and inflation through use of monetary policy and taxation levels should minimize future bubbles although I'm not certain that they will ever be completely eliminated.

QUOTE(Belshazzar)
3. Keynes advocated a surplus during booms and spending during busts. Isn't functional finance Keynesian? (Correct me if I'm wrong on that.) If so, persistent deficits would be self-contradictory in this theory. The point of the surplus was as to curb excessive growth and as a "rainy day fund" to help pay for deficits during busts. Obviously, persistent deficits aren't consistent with Keynes' conception of how the business cycle should be handled.
MMT (also known as chartalism or functional finance) is more appropriately classified as a "Post-Keynsian" school and, although it does use Keynes as a base it expands his arguments in certain cases and discards or disproves them in others. The use of supluses is one area that Keynes was (mostly) incorrect.

QUOTE(Belshazzar)
4. I mentioned this before, but I don't think it was addressed: Taxpayers have to pay interest on the debt. The larger the debt gets, the larger the interest gets. Can't paying down the debt be a stimulus in that it reduces tax burden?
Government pays the interest on the debt. Taxpayers can only fund the interest if we assume that taxpayers fund the government. One of the fundamental tenets of MMT is that taxation is not required to fund government spending but only serves as a liquidity drain. Taxation destroys private sector assets and thus can be used to control aggregate demand. You seem to be well versed in general economics and well read. If you have some time and wish to learn more about MMT please read http://moslereconomics.com/mandatory-readings/soft-currency-economics/ by Warren Mosler. It's a relatively short read that is slightly more dense than Mosler's http://moslereconomics.com/2009/12/10/7-deadly-innocent-frauds/ which is a more basic primer on MMT.

QUOTE(Belshazzar)
5. What do you think of Steve Keen? He claims that a debt-to-GDP ratio that is too high will cause deflation and then recession. Here's his page on models he produced based on Hyman Minsky's financial instability hypothesis.
I haven't read enough of his theories to make any claims as to the validity of his particular paradigm but he appears to be on the right track (at the very least he realizes that classical economics is near useless). The following is an excerpt from Keen's Debtwatch blog from an article entitled http://www.debtdeflation.com/blogs/2009/09/27/it%E2%80%99s-hard-being-a-bear-part-sixgood-alternative-theory/. In the article he states:

So there is no coherent neoclassical theory that can take solace from the success of the government stimulus packages, should they avert a deep recession and cause a sustained recovery without a rise in the private debt to GDP ratio.[2] If there is to be a winner in this debate, it has to be a non-neoclassical school of thought.

There is such a school of thought which has developed in Post Keynesian literature recently. Known as Chartalism, it argues that the government can and should maintain deficits to ensure full employment.

Chartalism rejects neoclassical economics, as I do. However it takes a very different approach to analyzing the monetary system, putting the emphasis upon government money creation whereas I focus upon private credit creation. It is therefore in one sense a rival approach to the “Circuitist” School which I see myself as part of. But it could also be that both groups are right, as in the parable of the blind men and the elephant: we’ve got hold of the same animal, but since one of us has a leg and the other a trunk, we think we’re holding on to vastly different creatures
.

That said, I do have numerous issues with the Chartalist approach, but I haven’t studied its literature closely enough yet to write a critique. [3] I also could have distorted their arguments if I had attempted a summary of their views. So what I decided instead to do is to ask a leading Chartalist, Professor Bill Mitchell from the University of Newcastle, to write a précis of the Chartalist argument (Bill also has a blog on this approach to economics).

This précis follows. I emphasise in closing my own comments that, if there is a genuine recovery not involving rising private debt to GDP levels, then Chartalism is the only theory left standing. Neoclassical economics is dead.


It appears that Keen's theories and MMT are, at this point, slightly wary cousins who have not had enough contact with each other to fully embrace or disown the other.

QUOTE(Hobbes)
Yes, exactly. Conversely, putting a number in the ledger doesn't make the rags automatically appear...again, it is just the accounting of the rags.
Is there truly a diference? If you have direct deposit of social security into you account does the government have to go to their vault to get the $450 out or do they simply credit the banks reserve account and the bank in turn credits the individual recipients account? The $450 that is deposited via the crediting of the account is just as "spendable" as if the government would have printed up $450 in physical dollars and walked them to your doorstep, no? I'm hope I'm not coming off as sarcastic or snarky with these questions. I'm sincerely trying to understand your objection more clearly so that we can move forward in a logical and understandable fashion. Can you explain more fully the difference you see between electronic debits and credits and the physical bills?


Posted by: Hobbes Nov 20 2010, 06:05 PM

QUOTE(CarpeDinkum @ Nov 20 2010, 09:26 AM) *
So, the gov sends you a check or credits your bank account for one reason or the other (SS payment, tax refund, etc.). You bank account gets increased by the amount of the check or credit. You use it to pay off a credit card online or by sending a check. So far, no rags.

In any case, whatever the private sector eventually does with the digits afterwards is beyond the scope of the statement. Do you have some evidence that the statement is, by and large, incorrect?


Absolutely. Note that my bank account has nothing to do with the government's ledger...the two are separate. So, the government can push numbers around on its ledger all it wants, but it doesn't generate a transfer onto someone else's ledger. Assuming it is just pushing digits around ignores the need to actually have the funds available, which is incorrect. The digits are NOT the funds, they are just the accounting for them. So, the statement is not just by and large incorrect, it is fundamantally incorrect.

Posted by: pj4xtrader Nov 20 2010, 06:49 PM

QUOTE(Hobbes @ Nov 20 2010, 01:05 PM) *
QUOTE(CarpeDinkum @ Nov 20 2010, 09:26 AM) *
So, the gov sends you a check or credits your bank account for one reason or the other (SS payment, tax refund, etc.). You bank account gets increased by the amount of the check or credit. You use it to pay off a credit card online or by sending a check. So far, no rags.

In any case, whatever the private sector eventually does with the digits afterwards is beyond the scope of the statement. Do you have some evidence that the statement is, by and large, incorrect?


Absolutely. Note that my bank account has nothing to do with the government's ledger...the two are separate. So, the government can push numbers around on its ledger all it wants, but it doesn't generate a transfer onto someone else's ledger. Assuming it is just pushing digits around ignores the need to actually have the funds available, which is incorrect. The digits are NOT the funds, they are just the accounting for them. So, the statement is not just by and large incorrect, it is fundamantally incorrect.


Your bank account has a lot to do with the governments ledger. Local banks have accounts with commercial banks who have accounts with Fed member banks who have reserve account with the Fed. When you deposit a government check, the check clears when the Fed credits (marks up) a member banks account, the member bank credits either your commercial banks account, who then credits your account if it is held with a commercial bank, or the commercial bank credits a local bank who then credits your account.

I repeat,

There is no functional difference between the credits on the ledger and an outlay of DOLLARS. When the government spends by marking up a firms account, this creates "demand deposit" that are always convertible to physical DOLLARS upon demand with little to no more cost of production. Demand deposits for the most part circulate from account to account on the "spreadsheet" (banking system) without being converted, as the lion's share of payments within the system are now electronic or made via bank check, shifting demand deposits from one account to another, and although these deposits are not physical DOLLARS, they are DOLLARS.

Physical DOLLARS are created and distributed upon request, when a check is cashed or DOLLARS are withdrawn from a demand account to facilitate transactions out side of the baking system. The bank debits the corresponding account and credits is own, and then makes the disbursement of physical DOLLARS from it's own buffer stock of DOLLARS, or if it's buffer stock is insufficient and/or it does not desire to draw down it's buffer stock, the physical DOLLARS will be ordered from the Treasury in exchange for the demand deposits.

Effectively there is no difference between the government creating and disbursing physical DOLLARS or marking the DOLLARS up in ones account.

Are you saying that this incorrect? If you are, please state how it is incorrect.

Posted by: Hobbes Nov 20 2010, 07:49 PM

QUOTE(pj4xtrader @ Nov 20 2010, 12:49 PM) *
Your bank account has a lot to do with the governments ledger.


No, it doesn't. They are two completely separate entities.

QUOTE
Local banks have accounts with commercial banks who have accounts with Fed member banks who have reserve account with the Fed. When you deposit a government check, the check clears when the Fed credits (marks up) a member banks account, the member bank credits either your commercial banks account, who then credits your account if it is held with a commercial bank, or the commercial bank credits a local bank who then credits your account.


None of which has anything to do with the fact that my bank account (money I have) is completely separate from the government's accounts (money they have). Unless you're saying we all have access to Treasury funds whenever we want? If so, PLEASE tell us all how!

QUOTE
I repeat,

There is no functional difference between the credits on the ledger and an outlay of DOLLARS.


You can repeat it all you want, but it is wrong. There is a HUGE functional difference. One just requires someone to open up a ledger, and put a number in it. Any number they want. The other requires funds to actually be available. The government can put whatever number they want in the 'tax receipts received' box...but that doesn't make it true. The ledger is just the accounting. What is being said is akin to saying a company doesn't need to actually make any products, they could just mark up whatever they want in their ledger, and call it good.

QUOTE
When the government spends by marking up a firms account, this creates "demand deposit" that are always convertible to physical DOLLARS upon demand with little to no more cost of production. Demand deposits for the most part circulate from account to account on the "spreadsheet" (banking system) without being converted, as the lion's share of payments within the system are now electronic or made via bank check, shifting demand deposits from one account to another, and although these deposits are not physical DOLLARS, they are DOLLARS.


I don't care if they are physical dollars or not. And we do we keep intermixing the Fed and the Treasury in this discussion, when those two are also completely separate? What we're talking about here has nothing to do with the Fed. It is also missing the difference between our banking system as a whole, and the Fed...although it would be irrelevant to the discussion even if that weren't true.
QUOTE
Physical DOLLARS are created and distributed upon request, when a check is cashed or DOLLARS are withdrawn from a demand account to facilitate transactions out side of the baking system. The bank debits the corresponding account and credits is own, and then makes the disbursement of physical DOLLARS from it's own buffer stock of DOLLARS, or if it's buffer stock is insufficient and/or it does not desire to draw down it's buffer stock, the physical DOLLARS will be ordered from the Treasury in exchange for the demand deposits.


See above.

QUOTE
Effectively there is no difference between the government creating and disbursing physical DOLLARS or marking the DOLLARS up in ones account.


You're missing the point in between, where one has to actually have the funds in order to mark up the account.
QUOTE
Are you saying that this incorrect? If you are, please state how it is incorrect.


See above.

Posted by: brinn Nov 20 2010, 09:42 PM

Hobbes,

No one will argue with you that when the government needs to collect funds from the private sector, the funds must be available to take. If you have no money in your account and you want to pay your fed taxes you won't be able to. No disagreement here. However, when the funds travel in the opposite direction, like a direct deposit of social security, the government simply credits your account with the funds. Can we agree on this?

Posted by: Hobbes Nov 20 2010, 09:59 PM

QUOTE(brinn @ Nov 20 2010, 03:42 PM) *
Hobbes,

No one will argue with you that when the government needs to collect funds from the private sector, the funds must be available to take. If you have no money in your account and you want to pay your fed taxes you won't be able to. No disagreement here. However, when the funds travel in the opposite direction, like a direct deposit of social security, the government simply credits your account with the funds. Can we agree on this?


That depends on whether or not we're still stipulating that the funds need to be available in that direction as well. I don't believe the government is not any different in this regard, although they do have ways in which to make the funds available that other entities do not. I'm gathering this is where the disagreement is. So why don't you step through it from your perspective. Because I'm not seeing how that credit occurs without funds available. That's why they issue bonds (Treasury notes).

Posted by: pj4xtrader Nov 20 2010, 10:48 PM

QUOTE(Hobbes)
No, it doesn't. They are two completely separate entities.

They are two separate entities that are both a part of the consolidated Banking system (the "spreadsheet" as brinn stated in his question)

QUOTE(Hobbes)
None of which has anything to do with the fact that my bank account (money I have) is completely separate from the government's accounts (money they have). Unless you're saying we all have access to Treasury funds whenever we want? If so, PLEASE tell us all how!

Your response argues against assumption that I never made. Your account is dollars that you have, but the government never has or doesn't have dollars. We obviously don't have access to Treasury funds, but the Treasury is the government and they create dollars when they spend.

QUOTE(Hobbes)
You can repeat it all you want, but it is wrong. There is a HUGE functional difference. One just requires someone to open up a ledger, and put a number in it. Any number they want. The other requires funds to actually be available. The government can put whatever number they want in the 'tax receipts received' box...but that doesn't make it true. The ledger is just the accounting. What is being said is akin to saying a company doesn't need to actually make any products, they could just mark up whatever they want in their ledger, and call it good.

You introduced the word "ledger", I only used it to try to relate in your terms. Brinn's "spreadsheet" reference is meant to relate to the governments interactions with non government balance sheets.

QUOTE(Hobbes)
I don't care if they are physical dollars or not. And we do we keep intermixing the Fed and the Treasury in this discussion, when those two are also completely separate? What we're talking about here has nothing to do with the Fed. It is also missing the difference between our banking system as a whole, and the Fed...although it would be irrelevant to the discussion even if that weren't true.

Treasury's transactions are facilitated by the Fed, this being the case, it serves the discussion well to consider the Fed as part of the consolidated government.

QUOTE(Hobbes)
You're missing the point in between, where one has to actually have the funds in order to mark up the account.

Are saying that the government has to first, create dollars so that it has them, deposit them at the Fed, and then spend them by marking up accounts?





Posted by: CarpeDinkum Nov 20 2010, 10:50 PM

QUOTE(Hobbes @ Nov 20 2010, 01:59 PM) *
QUOTE(brinn @ Nov 20 2010, 03:42 PM) *
Hobbes,

No one will argue with you that when the government needs to collect funds from the private sector, the funds must be available to take. If you have no money in your account and you want to pay your fed taxes you won't be able to. No disagreement here. However, when the funds travel in the opposite direction, like a direct deposit of social security, the government simply credits your account with the funds. Can we agree on this?


That depends on whether or not we're still stipulating that the funds need to be available in that direction as well. I don't believe the government is not any different in this regard, although they do have ways in which to make the funds available that other entities do not. I'm gathering this is where the disagreement is. So why don't you step through it from your perspective. Because I'm not seeing how that credit occurs without funds available. That's why they issue bonds (Treasury notes).


"1st point: Government spends by marking up and marking down accounts in, what is effectively, a large spreadsheet. Agree or disagree?"

This presumes that the gov has the funds to begin with and that the funds are specifically not physical paper dollars.

It sounds like you're asking how the funds came to be there in the first place. That is a different question. If you get a direct deposit from the SSA, you can be sure it's real (assuming they didn't slip a digit and overpay you).

Posted by: Hobbes Nov 21 2010, 12:58 AM

QUOTE(pj4xtrader @ Nov 20 2010, 04:48 PM) *
Are saying that the government has to first, create dollars so that it has them, deposit them at the Fed, and then spend them by marking up accounts?


No. The Fed is NOT involved in government spending, at least not in the manner being discussed here. The Treasury handles all government spending, and collections. I am also saying that they do NOT first create the dollars. I am saying that they first COLLECT the dollars. Could they, if they preferred, create them? Yes. Is that what they do the vast majority of the time? No. Am I concerned, given our level of debt, that that will change, and they will be forced to create rather than collect? Yes.

Maybe that is where our discussion should have started long ago. What does the Treasury do? Conversely, what does the Fed do?

Posted by: Belshazzar Nov 21 2010, 01:59 AM

QUOTE(brinn @ Nov 20 2010, 11:54 AM) *
So my answer would be; Stop dumping money into banks and attack the root of the problem which is Main Sreet's massive debt overhang. Abandon the QE approach (which is useless just look at Japan's experience with QE) and stop trying to force the banks to lend to customers who have no desire for additional debt! I would suggest a very large tax decrease including an indefinite suspension of FICA taxes. Couple this with targeted spending designed to lower unemployement levels (massive infrastructure spending possibly?) and you are providing Main St. with what immediately amounts to at least a 15% increase in take home pay which would be used to eliminate some of the debt overhang and speed up the process of Main Street deleveraging.


Much of the problem is that the good investors have to pay for the bad. Good investments waiting to be made are not going to get through because of the unwillingness to lend. However, I agree that it seems futile and impractical to try to get banks that are unwilling to lend to lend especially when people don't want that additional debt. Your suggestion of raising employment and giving tax breaks seems much more practical, especially with low inflation like we have now. One thing I wish Obama had done was to reform and stick to his green jobs plan. That, I think, would have gone a long way in killing two birds with one stone -- job creation and combating AGW.

What do you think is the place of investing in science and high tech R&D in terms of the possibility of creating long-term employment?

QUOTE
MMT (also known as chartalism or functional finance) is more appropriately classified as a "Post-Keynsian" school and, although it does use Keynes as a base it expands his arguments in certain cases and discards or disproves them in others. The use of supluses is one area that Keynes was (mostly) incorrect.


What's the MMT view on Keynes' surplus idea?

QUOTE
Government pays the interest on the debt. Taxpayers can only fund the interest if we assume that taxpayers fund the government. One of the fundamental tenets of MMT is that taxation is not required to fund government spending but only serves as a liquidity drain. Taxation destroys private sector assets and thus can be used to control aggregate demand. You seem to be well versed in general economics and well read. If you have some time and wish to learn more about MMT please read http://moslereconomics.com/mandatory-readings/soft-currency-economics/ by Warren Mosler. It's a relatively short read that is slightly more dense than Mosler's http://moslereconomics.com/2009/12/10/7-deadly-innocent-frauds/ which is a more basic primer on MMT.


Hey, don't give me too much credit now. laugh.gif I never took anything beyond econ 101, but since 2008, I've been reading up on economic history to try to get a handle on what was going on. I still feel like I know hardly anything, though. I've started flipping through Mosler.

I framed my question wrong in the sense of MMT. As I understand it, the vast majority of "dollars" (2/3 I think, but I'm not sure on that number) overseas and domestically are not paper but just numbers on a ledger. In light of that, MMT seems to be a more accurate reflection of gov't taxing and spending -- our economy is more digital than it is paper these days.

I'll try to rephrase the question in the context of MMT then. At what point do we have to stop borrowing? How much can the debt accumulate before interest will put a massive burden on the deficit and hyper-inflation occurs? And if interest rates go up unexpectedly, how can we handle that?

I also noticed some of the pages you linked to were written by some of the guys at http://seekingalpha.com/ -- they're a good resource for cutting through a lot of the malarkey that passes for news these days. I came across http://seekingalpha.com/article/237851-should-ireland-default-and-devalue?source=dashboard_macro-view article on there today. Is defaulting and devaluing a feasible alternative to the "debt-go-round"?

Posted by: brinn Nov 21 2010, 05:45 PM

QUOTE(Belshazzar)
What do you think is the place of investing in science and high tech R&D in terms of the possibility of creating long-term employment?
I think that most spending geared toward R&D (specifically R&D towards energy independence) is useful as it currently has the benefit of supporting the economy in the short term via the injection of cash and increases in employment, and it also has much farther reaching benefits based upon the actual benefits of any technologies that are actually developed.

QUOTE(Belshazzar)
What's the MMT view on Keynes' surplus idea?
MMT would point out that the government can NEVER achieve a cumulative surplus. A balanced position would theoretically be possible but this would imply that all privately held wealth would need to be transferred to the government. See the following analogy to understand the concept better;

Imagine the economy is a household which is comprised of you (the parent) and your kids. You the parent are analogous to “government” and the kids comprise the non-government or private sector. As the government you decree that you will offer 100 of your business cards per week to the kids if they agree to tend the garden on a weekly basis.

Naturally, the kids resist as they have no use for worthless business cards so you create demand for your “currency” (the business cards) by establishing a tax that can only be extinguished by remitting them. You declare that the kids will need to pay you 100 business cards per week to remain living in your household.

Immediately, by imposing a tax obligation in the currency of issue (the business cards) you have created a demand for the currency and created the conditions to allow you to transfer private resources (the kid’s labor) to the public sector (your garden). However, also note that you must spend the 100 cards each week before the kids can pay the tax of 100 cards. This illustrates that government spending must precede taxation and that taxation is not a revenue source for the government (i.e. taxing or taking your business cards from your kids does not allow you to spend your cards in the first place). You are the monopoly issuer of your cards and you are never financially constrained in your business cards (the currency).

This arrangement is analogous to a fiat currency like the US dollar. You can then extend this analogy and begin to track your currency transactions via a spreadsheet. This eliminates the need to “print” more business cards. Your spreadsheet represents “bank entries” which record all the outflows (spending) and inflows (taxation). If you make an error and add an extra zero to your spending one week, you wouldn’t have to “print” 900 new cards but your kids would be better off by 900 cards because it would show up as a deposit in their account.

Under the conditions above, the household budget would be balanced each week: You spend 100 cards and the kids pay you 100 cards to extinguish their tax liability. Note that the kids will be unable to accumulate any cards (that is, save) because they can only get access to the volume of cards that you make available via spending.

If you want to teach your kids to save you will either need to increase the business card wage for their labor while leaving your tax unchanged, ask them to do more labor each week and thus increase their wages while leaving your tax unchanged or keep paying them the same amount for the same labor and lower your tax. Let say you provide them with 120 cards per week as wages (government spending) but keep the tax at only 100 cards. Your budget will now be running a deficit of 20 cards per week but the kids can now save 20 cards per week because your spending (the government spending) has provided the “finance” for the savings. As the weeks go by the kids could accumulate more and more savings (numbers in the spreadsheet would increase) and you would soon see that the non-government saving over time is the exact record of the cumulative deficits being run by you (the government). Same as the US economy.


So a position of CUMULATIVE surplus is never possible but what of temporary annual budget surpluses? Keynes argued that surpluses were desirable when the economy was healthy but MMT argues that surpluses are not necessarily desireable when the economy is healthy. An expanding economy requires an expanding supply of curency thus deficit spending is necessary as this is the mechanism that supplies the additional currency. Annual surpluses (which literally destroy net assets from the private sector) should only be used to put the brakes on an economy that overheating. That's the MMT position in a nutshell.

QUOTE(Belshazzar)
I'll try to rephrase the question in the context of MMT then. At what point do we have to stop borrowing? How much can the debt accumulate before interest will put a massive burden on the deficit and hyper-inflation occurs? And if interest rates go up unexpectedly, how can we handle that?
These are all simple and direct questions that require lengthy answers. I'll try to answer them simply but the whole purpose of this thread has been to provide the answers to these questions. Continue to flip through Mosler and then come back and re-read the thread from the beginning and hopefully many of these simple answers I'm about to give will become clearer.

QUOTE
At what point do we have to stop borrowing?
There is no such point. The US can make ANY size interest payment as we are the sovereign issuer of the dollar.

QUOTE
How much can the debt accumulate before interest will put a massive burden on the deficit and hyper-inflation occurs?
See the previous answer. If private entities (both foreign and domestic) begin to shift their preference from savings (acquiring bonds) to consumption than the increased velocity and demand could begin to increase inflation as unemployment is lowered and the economy begins to reach full capacity. This would need to be met by a combination of increasing tax rates, lowered government spending, and rate adjustments designed to limit demand. Additionally, we could stop selling bonds completely but that's a different tangent. Again, that's the reader's digest version.

QUOTE
And if interest rates go up unexpectedly, how can we handle that?
Stop selling bonds and continue to pay an overnight interest rate on bank reserves. Bond sales are a liquidity drain and are primarily used to help the fed hit their target rate. The fed could discontinue bond sales and only pay an overnight rate on reserves and still maintain control over their target rate.

QUOTE(Belshazzar)
I also noticed some of the pages you linked to were written by some of the guys at Seeking Alpha -- they're a good resource for cutting through a lot of the malarkey that passes for news these days. I came across this article on there today. Is defaulting and devaluing a feasible alternative to the "debt-go-round"?
Definitely. Either that or the European Central Bank will need to continue to buy Irish bonds thus effectively funding them. Being part of a currency union has stripped Ireland of her ability to float her currency down and increase exports through currency revaluation. The currency union is a faulty construct and likely will not last.

QUOTE(Hobbes)
Maybe that is where our discussion should have started long ago. What does the Treasury do? Conversely, what does the Fed do?


I was going to craft my own response but I’ve decided that I likely couldn’t be more thorough than a small excerpt published by Mosler, Galbraith & Wray. The segment is entitled “General Principles of Federal Budget Accounting” and it follows in italics. It is still somewhat lengthy but hopefully worth the read:

Even though some principles of accounting are universal, federal budget accounting has never followed and should not follow the exact procedures adopted by households or business firms. There are several reasons why this is true.

First, the government’s interest is the public interest. The government is there to provide for the general welfare, and there is no correlation between this interest and a position of surplus or deficit, nor of indebtedness, in the government’s books.

Second, the government is sovereign. This fact gives to government authority that households and firms do not have. In particular, government has the power to tax and to issue money. The power to tax means that government does not need to sell products, and the power to issue currency means that it can make purchases by emitting IOUs. No private firm can require that markets buy its products or its debt. Indeed taxation creates a demand for public spending, in order to make available the currency required to pay the taxes. No private firm can generate demand for its output in this way. Neither of these statements is controversial; both are matters of fact. Nor should they be construed to imply that government should raise taxes or spend without limit. However, they do imply that federal budgeting is different from private budgeting, and should be considered in its proper, public context.

While it is common to regard government tax revenue as income, this income is not comparable to that of firms or households. Government can choose to exact greater tax revenues by imposing new taxes or raising tax rates. No firm can do this; even firms with market power know that consumers will find substitutes if prices are raised too much. Moreover firms, households, and even state and local governments require income or borrowings in order to spend. The federal government’s spending is not constrained by revenues or borrowing. This is, again, a fact, completely non-controversial, but very poorly understood.

The federal government spends by cutting checks or, what is functionally the same thing, by directly crediting private bank accounts. This is a matter of typing numbers into a machine. That is all federal spending is. Unlike private firms, the federal government maintains no stock of cash-on-hand and no credit balance at the bank. It doesn’t need to do so. There are surely limits of wisdom and prudence on federal spending, as well as numerous checks, balances, and self-imposed constraints, but there is no operational limit. The federal government can, and does, spend what it wants.

Tax receipts debit bank accounts. So does borrowing from the public. These are operationally distinct from spending. There is no operational procedure through which federal government “uses” tax receipts or borrowings for its spending. If, perchance, one chooses to pay taxes in cash, the Treasury simply issues a receipt and shreds the cash. It has no need for the income in order to spend. This is why it is a mistake to look at federal tax receipts as an equivalent concept to income of households or firms.

As we discuss below, federal government spending has exceeded tax revenues, with only brief exceptions, since the founding. There is no evidence, nor any economic theory, behind the proposition that federal government spending ever needs to match federal government tax receipts over any period, short or long. The deficit per unit time is the difference between taxing and spending over that time. To repeat, the taxing on the one hand and the spending on the other are operationally independent. Any reasonable observer should conclude that federal government spending is not, and need not be, dependent on, constrained by (or even related to) tax revenues in the way that the spending of households or firms is related to their incomes.

The difference between microeconomic and macroeconomic accounting is also pertinent. An individual household or firm has a balance sheet that consists of its assets and liabilities. The spending of that household or firm is constrained, in a fairly concrete sense, by its income and by its balance sheet or by its ability to sell assets or to borrow against them. It is meaningful to say that its ability to deficit-spend is constrained: a household must get the approval of a bank before spending can exceed income, and therefore its borrowing is subject to banking norms. But if we take households or firms as a whole, the situation is different. The private sector’s ability to deficit-spend, 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. This surplus is called saving claims against the deficit sector. 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.

Posted by: Hobbes Nov 22 2010, 05:00 AM

QUOTE(brinn @ Nov 21 2010, 11:45 AM) *
First, the government’s interest is the public interest. The government is there to provide for the general welfare, and there is no correlation between this interest and a position of surplus or deficit, nor of indebtedness, in the government’s books.


But there is. Carrying excess debt is NOT in the public's interest.


QUOTE
No private firm can require that markets buy its products or its debt. Indeed taxation creates a demand for public spending, in order to make available the currency required to pay the taxes. No private firm can generate demand for its output in this way. Neither of these statements is controversial; both are matters of fact. Nor should they be construed to imply that government should raise taxes or spend without limit. However, they do imply that federal budgeting is different from private budgeting, and should be considered in its proper, public context.


Different maybe, but not as different as the discussion here has stated they are. FWIW...monopoly firms have many of the same powers listed here.

QUOTE
While it is common to regard government tax revenue as income, this income is not comparable to that of firms or households. Government can choose to exact greater tax revenues by imposing new taxes or raising tax rates. No firm can do this; even firms with market power know that consumers will find substitutes if prices are raised too much. Moreover firms, households, and even state and local governments require income or borrowings in order to spend. The federal government’s spending is not constrained by revenues or borrowing. This is, again, a fact, completely non-controversial, but very poorly understood.


Incorrect. Firms can raise prices just as government can raise taxes. In both cases the likely result is not always what was desired, or even necessarily advantageous. The federal government's spending IS constrained by revenues and borrowing, so it is NOT a fact. If it were a fact, why on earth does it not spend an essentially infinite amount? Why does it not provide us with a tax credit so that we can all just stop working, and live off the government's largess?

QUOTE
The federal government spends by cutting checks or, what is functionally the same thing, by directly crediting private bank accounts. This is a matter of typing numbers into a machine. That is all federal spending is. Unlike private firms, the federal government maintains no stock of cash-on-hand and no credit balance at the bank. It doesn’t need to do so. There are surely limits of wisdom and prudence on federal spending, as well as numerous checks, balances, and self-imposed constraints, but there is no operational limit. The federal government can, and does, spend what it wants.


This is how ALL firms spend, and they DO need the cash available. If they didn't...why do they issue bonds? Again, why not just credit us all with sufficient funds to live happily ever after? Why collect taxes?

QUOTE
Tax receipts debit bank accounts. So does borrowing from the public. These are operationally distinct from spending. There is no operational procedure through which federal government “uses” tax receipts or borrowings for its spending. If, perchance, one chooses to pay taxes in cash, the Treasury simply issues a receipt and shreds the cash. It has no need for the income in order to spend. This is why it is a mistake to look at federal tax receipts as an equivalent concept to income of households or firms.


Incorect. It tallies its receipts and expenditures to determine how much it is in deficit, which in turn indicates how much it needs to take in from bonds.

QUOTE
As we discuss below, federal government spending has exceeded tax revenues, with only brief exceptions, since the founding. There is no evidence, nor any economic theory, behind the proposition that federal government spending ever needs to match federal government tax receipts over any period, short or long.


Yes there is. Rome is perhaps the best example. Their expenditures eventually exceeded their income sufficiently to essentially bring down their government.

QUOTE
The deficit per unit time is the difference between taxing and spending over that time.


This is contradictory to the previous points, for under those there is no deficit.

QUOTE
To repeat, the taxing on the one hand and the spending on the other are operationally independent. Any reasonable observer should conclude that federal government spending is not, and need not be, dependent on, constrained by (or even related to) tax revenues in the way that the spending of households or firms is related to their incomes.


This is probably true. The question, though, is one of degree.

T
QUOTE
he difference between microeconomic and macroeconomic accounting is also pertinent. An individual household or firm has a balance sheet that consists of its assets and liabilities. The spending of that household or firm is constrained, in a fairly concrete sense, by its income and by its balance sheet or by its ability to sell assets or to borrow against them. It is meaningful to say that its ability to deficit-spend is constrained: a household must get the approval of a bank before spending can exceed income, and therefore its borrowing is subject to banking norms. But if we take households or firms as a whole, the situation is different. The private sector’s ability to deficit-spend, 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. This surplus is called saving claims against the deficit sector. 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.[/i]


Contradictory again. Within the system as described here, there are no deficits, nor is there any need for those to be counterbalanced anywhere.

Also, I'm not sure any of this clears up the apparent confusion over the roles of the Fed and the Treasury.

Posted by: pj4xtrader Nov 22 2010, 05:05 AM

QUOTE(Hobbes)
No. The Fed is NOT involved in government spending, at least not in the manner being discussed here. The Treasury handles all government spending, and collections.

When the government "spends", the Treasury disburses checks or credits bank accounts. Settlement involves transferring reserves from the Treasury’s account at the Fed to the recipient’s bank. This is operational fact.

QUOTE(Hobbes)
I am also saying that they do NOT first create the dollars. I am saying that they first COLLECT the dollars.

Your statement does not hold up to analysis. It is obvious that from the inception of "state money", government spending must precede taxation. The government being the monopoly supplier of that which it excepts as payment of taxes, can not collect first, that which only it can create. Upon inception, if the government has not yet spent, the private sector can not possess the "state money" necessary to pay taxes or purchase government bonds for that matter. It is also worth noting that the government can only collect more than it spends (run a surplus), following periods that it has collected less than it spent (ran a deficit), and it can only collect in surplus, to the penny, the amount the it previously spent and did not collect during the periods of deficit.

Posted by: Hobbes Nov 22 2010, 05:30 AM

QUOTE(pj4xtrader @ Nov 21 2010, 11:05 PM) *
QUOTE(Hobbes)
No. The Fed is NOT involved in government spending, at least not in the manner being discussed here. The Treasury handles all government spending, and collections.

When the government "spends", the Treasury disburses checks or credits bank accounts. Settlement involves transferring reserves from the Treasury’s account at the Fed to the recipient’s bank. This is operational fact.


Is is also irrelevant to my statement. This would be akin to saying Chase Bank is involved in my spending just because that is where my bank account is. Operational fact, but functional irrelevant.

QUOTE(Hobbes)
Your statement does not hold up to analysis. It is obvious that from the inception of "state money", government spending must precede taxation. The government being the monopoly supplier of that which it excepts as payment of taxes, can not collect first, that which only it can create. Upon inception, if the government has not yet spent, the private sector can not possess the "state money" necessary to pay taxes or purchase government bonds for that matter. It is also worth noting that the government can only collect more than it spends (run a surplus), following periods that it has collected less than it spent (ran a deficit), and it can only collect in surplus, to the penny, the amount the it previously spent and did not collect during the periods of deficit.


But it does. Money can, and does, get distributed all the time, without the government spending anything. This occurs through loans from the bank, which then get disbursed into the economy, which is then used to pay taxes. Taxes could be paid if the government spent nothing. So it is not only not obvious, it is obviously false. Consider the following scenario: what would happen if the government were to change currency. Would that only get distributed via government spending? No.

Posted by: Belshazzar Nov 22 2010, 05:41 AM

QUOTE(brinn @ Nov 21 2010, 12:45 PM) *
MMT would point out that the government can NEVER achieve a cumulative surplus. A balanced position would theoretically be possible but this would imply that all privately held wealth would need to be transferred to the government. See the following analogy to understand the concept better;


This makes sense, but only if you start with fiat currency. Since the US was on the gold standard until 1933, that means we had currency already in existence so the government could tax without spending first while this wouldn't be possible if we had started off with a fiat currency. Although I imagine that the amount of money in our current economy is so much greater than it was in 1933 that even if we taxed all money out of existence, the resulting surplus would not be that large. Or is my chain of logic off here?

Posted by: CarpeDinkum Nov 22 2010, 06:05 AM

It looks like teminology is getting in the way here. It's being applied both loosely and specifically and we're getting some uncertainty in the dialog as a result. Debt and deficit. Public and public sector. Money and credits. It's goobering all over the road like a set of Blizzaks at 90 mph.

Posted by: lederuvdapac Nov 22 2010, 03:14 PM

QUOTE(brinn)
Yup. To the government there is no difference as a bond sale is a bond sale is a bond sale. Artificial demand is just as useless as real demand or no demand. As I’ve stated many times, bond sales are not required to fund spending and only serve as a reserve drain. As I’ve said before, the government could get out of the bond game completely without any discernible effect. The only thing that would need to be done is to allow the fed to run an overdraft balance.


To the government...

To the government it may not matter - but to the market it matters a whole lot. You try to draw a discernible difference between the Fed buying treasuries directly from the Treasury and the Fed buying treasuries from private holders. But you know damn well that the only reason that they do that is to create a smokescreen. And you also know that the *only* reason that firms like Goldman Sachs are holding these bonds is directly because the Fed announced they were going to go ahead with QE2.

I am delineating between actual demand and government induced or artificial demand. If I run a lemonade stand and I am unable to run it at a profit because nobody is willing to purchase my lemonade at $5 a cup - then a government subsidy which allows me to drop the $price per cup to $0.50 does not make my lemonade in demand, it creates artificial demand due to the subsidy. This is exactly what is happening. The Fed wants to create demand for Treasuries so it announces that it is buying them up, which causes firms to buy them! If the Fed wasn't going ahead with QE2, they wouldn't buy them - that is the point.

EDITED to Add:

One thing you don't seem to get is that although the Fed government could pay off any sovereign debts it holds, you make it seem like there are no consequences to these actions. That debt monetization, while not technically a default, is a de facto admittance of default. The Fed could print $100 trillion bills and hand it out to everyone, but that would be disastrous. Just because they can doesn't mean they should and just because they can doesn't mean that the problems of debt go away. The government could pay off all debts but it would effectively destroy the economy.

Posted by: CarpeDinkum Nov 22 2010, 05:41 PM

QUOTE(lederuvdapac @ Nov 22 2010, 07:14 AM) *
QUOTE(brinn)
Yup. To the government there is no difference as a bond sale is a bond sale is a bond sale. Artificial demand is just as useless as real demand or no demand. As I’ve stated many times, bond sales are not required to fund spending and only serve as a reserve drain. As I’ve said before, the government could get out of the bond game completely without any discernible effect. The only thing that would need to be done is to allow the fed to run an overdraft balance.


To the government...

To the government it may not matter - but to the market it matters a whole lot. You try to draw a discernible difference between the Fed buying treasuries directly from the Treasury and the Fed buying treasuries from private holders. But you know damn well that the only reason that they do that is to create a smokescreen. And you also know that the *only* reason that firms like Goldman Sachs are holding these bonds is directly because the Fed announced they were going to go ahead with QE2.

I am delineating between actual demand and government induced or artificial demand. If I run a lemonade stand and I am unable to run it at a profit because nobody is willing to purchase my lemonade at $5 a cup - then a government subsidy which allows me to drop the $price per cup to $0.50 does not make my lemonade in demand, it creates artificial demand due to the subsidy. This is exactly what is happening. The Fed wants to create demand for Treasuries so it announces that it is buying them up, which causes firms to buy them! If the Fed wasn't going ahead with QE2, they wouldn't buy them - that is the point.

EDITED to Add:
One thing you don't seem to get is that although the Fed government could pay off any sovereign debts it holds, you make it seem like there are no consequences to these actions. That debt monetization, while not technically a default, is a de facto admittance of default. The Fed could print $100 trillion bills and hand it out to everyone, but that would be disastrous. Just because they can doesn't mean they should and just because they can doesn't mean that the problems of debt go away. The government could pay off all debts but it would effectively destroy the economy.



I don't think anyone is saying that the gov't can spend without limit (in reference to handing out $100 trillion bills). It's more a matter of how much, how long and how it gets spent (which targets in the private sector) to get the desired effect.

Paying off soverign debts is different matter. We're talking about Treasuries as "the soverign debt" right?




Posted by: brinn Nov 22 2010, 06:00 PM

QUOTE(Leder)
To the government...

To the government it may not matter - but to the market it matters a whole lot. You try to draw a discernible difference between the Fed buying treasuries directly from the Treasury and the Fed buying treasuries from private holders. But you know damn well that the only reason that they do that is to create a smokescreen. And you also know that the *only* reason that firms like Goldman Sachs are holding these bonds is directly because the Fed announced they were going to go ahead with QE2.

I am delineating between actual demand and government induced or artificial demand. If I run a lemonade stand and I am unable to run it at a profit because nobody is willing to purchase my lemonade at $5 a cup - then a government subsidy which allows me to drop the $price per cup to $0.50 does not make my lemonade in demand, it creates artificial demand due to the subsidy. This is exactly what is happening. The Fed wants to create demand for Treasuries so it announces that it is buying them up, which causes firms to buy them! If the Fed wasn't going ahead with QE2, they wouldn't buy them - that is the point.
Since government is, ostensibly, the one who guarantees the bonds, pays the interest on the bonds, and "needs" the money from bond sales, I would say your admission that it may not matter to them is progress. If the government doesn't need the proceeds from bond sales to fund itself, than who cares what the market wants? To the "market", interest on a bond is a fully guaranteed free lunch! So what if we take that free lunch away. In other words, what the government believes matters is paramount. The market does not drive the governments need for funds as they do not need the markets funds to function. Theoretically, taxation rates could provide the liquidity drain that is neccesary to regulate demand and inflation and the target rate can be maintained via paying interest on reserves.

When you state the following:
QUOTE(Leder)
the Fed government could pay off any sovereign debts it holds, you make it seem like there are no consequences to these actions. That debt monetization, while not technically a default, is a de facto admittance of default. The Fed could print $100 trillion bills and hand it out to everyone, but that would be disastrous. Just because they can doesn't mean they should
You are conceding the argument. You understand and admit that the US is sovereign in the dollar and that it can spend without income. You know and admit that the government does not need tax money nor bond proceeds to spend. You understand and admit that bankruptcy isn't a real issue. You know and admit that inflation is the only constraint, yet you are unable to make the next intellectual step and consider that, if the government does not need income to spend, then effectively controlling inflation becomes the ONLY true concern. If you understand that the quantity of money in relation to the quantity of goods largely determines inflation levels, than the only logical question is how can control of inflation be managed in a system where government spending isn't revenue constrained. I submit that management of rates via paying interest on bank reserves and control of the money supply via taxation are those methods. Just as our government is free to CREATE money ex nihilo it can DESTROY money at will via taxation.

You stance is similar to a pre-Copernican astronomer inventing more complex and elaborate models for the planets to rotate upon because you are unwilling to accept the counter-intutive, yet accurate, observation that the planets don't revolve around the earth but rather the sun.

Posted by: CarpeDinkum Nov 22 2010, 06:21 PM

Brinn -


Am I correct in thinking that if the Chinese decided to redeem their bonds and keep the money in their demand account, that doesn't add reserves to the banking system?

If they then spent that money into the private sector, say, buying up a certain type of housing (student, etc.) it could cause localized inflation (an asset bubble).


Posted by: lederuvdapac Nov 22 2010, 07:59 PM

QUOTE(brinn)
If the government doesn't need the proceeds from bond sales to fund itself, than who cares what the market wants?


Your argumentation style is baffling. You go from explaining to appearing to make a point without plainly stating what your position is. But for the most part, your argument is nonsense. You are quick to point out the "magic" of a fiat currency system which in essence makes all government expenditure an issue of simple accounting. You completely disregard the consequences of what you are saying and the effect it has on the economy as a whole.

Who cares what the market wants? This is where you go from making an intelligent argument to complete nonsense in the realm of James Galbraith. You are arguing that because the government has the printing press, that it doesn't matter how the government finances its spending. This is where you have the problem in explaining what they could do with and what they should do. Of course it matters what the market thinks because it has to do with confidence in he government's currency. If the market loses faith in the government's ability to maintain a dollar of relative value as well as pay off its debts, it will result in hyperinflation. Nobody will want to hold dollars and will prefer to own competing currencies and real assets. You pass this off as well, the government just needs to control inflation. But you don't understand, once that happens, it is already too late. Once inflation rears its ugly head, you can't just contract the money supply without causing a collapse in the banking system as banks lose their liquidity, firms go bankrupt, and massive unemployment. Furthermore, the only way you can contract inflationary pressure is by raising interest rates which will make the burden of paying the interest on the national debt astronomical.

This is why you between a rock and a hard place. You spend all your time explaining that the government could just print money but you brush off the very consequences of it.

QUOTE(brinn)
I submit that management of rates via paying interest on bank reserves and control of the money supply via taxation are those methods. Just as our government is free to CREATE money ex nihilo it can DESTROY money at will via taxation.


What makes you so sure the government or the central bankers or whoever will be able to contract the money supply in time or at all? These are the same people who couldn't see the housing bubble and the biggest recession since the Great Depression mere months before it all occurred. This is exactly what I am talking about here. If we do get to a point where inflation pops up, it isn't so simple as just contracting the money supply. Contraction means recession and contraction means the economy goes in a tailspin. The reason you don't see this is because you think the inflation will create economic growth and the contraction will take place in a booming economy that can weather the change. What you fail to consider and which would be your worse nightmare is if we get inflation while there is high unemployment and low growth. In this stagflation, the central bankers will have to make a choice - either we can contract the money supply and raise interest rates, bankrupting everyone who was bailed out the first time around -or- we can continue printing money, which will destroy the value of the dollar and possible lead to hyperinflation.

QUOTE(brinn)
You stance is similar to a pre-Copernican astronomer inventing more complex and elaborate models for the planets to rotate upon because you are unwilling to accept the counter-intutive, yet accurate, observation that the planets don't revolve around the earth but rather the sun.


Says the guy who believes in the magical properties of the printing press to produce economic growth.

Posted by: pj4xtrader Nov 22 2010, 08:54 PM

QUOTE(Hobbes)
But it does. Money can, and does, get distributed all the time, without the government spending anything. This occurs through loans from the bank, which then get disbursed into the economy, which is then used to pay taxes. Taxes could be paid if the government spent nothing. So it is not only not obvious, it is obviously false. Consider the following scenario: what would happen if the government were to change currency. Would that only get distributed via government spending? No.

It is becoming clear that you don't fully understand the functions of monetary and fiscal policy and their interactions with the banking system. So rather then responding with a jargon laden description that will likely lead to us continuing to talk past each other. Perhaps by considering your above statement we can put this part of the discussion to rest.

You state that banks can, through bank loans, create the money, without any involvement of the government, that is accepted in payment of taxes. This is effectively the same as claiming that banks are monetarily sovereign.

Can we at least agree that this is incorrect and that banks, in fact, are not monetarily sovereign and can not readily create that which they along with the rest of private sector need to pay taxes?



Posted by: brinn Nov 22 2010, 11:26 PM

QUOTE(Hobbes)
The federal government's spending IS constrained by revenues and borrowing, so it is NOT a fact. If it were a fact, why on earth does it not spend an essentially infinite amount? Why does it not provide us with a tax credit so that we can all just stop working, and live off the government's largess?
We’ve gone over this before. The answer to why the government doesn’t print an infinite amount is clearly inflation. The answer to why the government doesn’t provide us with a tax credit large enough so that we can stop working is because taxes are required to create demand for currency. If the government eliminated taxes then the demand for the dollar would lose a crucial mooring point.

QUOTE(Hobbes)
QUOTE(Mosler)
Unlike private firms, the federal government maintains no stock of cash-on-hand and no credit balance at the bank.
This is how ALL firms spend, and they DO need the cash available. If they didn't...why do they issue bonds? Again, why not just credit us all with sufficient funds to live happily ever after? Why collect taxes?
Clearly you must admit that firms must have available funds to spend before spending, no? Does the government need to cash on hand to spend? I thought Leder already admitted that the US government has the ability to print money. Do you disagree?

The reason that bonds are issued are to provide a reserve drain to allow the fed to maintain control of the fed funds rate. We've been through this before, on page 1 of this thread. Let me refresh your memory:

QUOTE(brinn)
QUOTE(Hobbes)
That's why the bonds are issued, because the government doesn't have the money. If the funds were there...why do they need to keep issuing bonds?
Incorrect. Bond proceeds fund nothing but rather serve as a reserve drain and allow the fed to maintain control over short term rates. Let me explain.

As you know, banks have to maintain a reserve ratio that is set by the Fed. The reserve ratio limits the amount of deposits that that the bank can lend. For example, if the reserve ratio is set at 10% the banks must maintain 10% of all (not actually all deposits but I’m simplifying for understandability) their deposits on hand. So, for example, a bank has $100 dollars in deposits. If the reserve ratio is 10% the bank must maintain 10% of $100 or $10 in reserves and can lend out $90.

Because deposit and loan levels are changing from day-to-day and minute-to-minute, the calculation of the amount that a bank needs to legally hold for a reserve is a moving target. In effect, the government solved this problem by allowing banks to calculate their reserve requirement based upon a date that had already passed. For example, the bank would calculate the amount of deposits it had on Monday’s date and that would be the reserve requirement for Wednesday. This effectively creates a two day lag as the bank knows two days in advance what the legal reserve requirement should be.

In reality, banks don’t pay much attention to the legal reserve requirement when making loans as banks know they can borrow the money to increase their reserve position should they lend out too much or should deposit levels drop precipitously. As long as the interest rate the bank charges on loans is higher than the rate they have to pay when borrowing money, it makes sense to make every loan that they can. In effect, bank lending decisions are affected by the price of reserves, not by reserve positions. If the spread between the rate of return a bank can get from making a loan and the interbank rate is wide enough, even a bank deficient in reserves will make the loan and cover the cash needed by purchasing (borrowing) money in the funds market. This fact is clearly demonstrated by many large banks when they consistently purchase (borrow) more money than their entire level of required reserves.

So where does the money that banks borrow come from? The first place they can get the money from is other banks that have excess deposits but not enough loans. Going back to our first example, if a bank has $100 in deposits it can legally lend $90 of the money assuming a 10% reserve requirement. If it lends anything less than $90 it will have excess reserves. Banks don’t like to have excess reserves as the excess money does not earn anything for the bank. So instead of letting the excess reserve do nothing, banks will lend these funds to other banks who need cash to meet their legal reserve requirement. The rate that banks charge each other on these loans is strangely called the Fed Funds Rate but it's less confusing to think of this as the interbank rate. When you think logically about this rate you will soon realize that if the banking system as a whole does not have enough reserves to meet legal requirements than, regardless of how the reserves are divvied up via interbank loans, at least one bank will fail to meet the reserve requirement. Given this reality, the interbank loan rate would be bid up to infinity as the banks who don’t hold enough reserves bid against each other to attract money from the banks who have excess reserves knowing that at least one bank will be left short. The opposite is also true. If there are excess reserves in the banking system as a whole the rate offered will be pushed to zero as the banks with excess reserves will continue to offer their excess reserves at lower and lower rates in an effort to make even the smallest return on their excess reserves (which would otherwise earn 0%).

Now, with a rudimentary understanding of how bank reserves work we can begin to talk about Bonds. If the government spends money by buying hammers from the private sector, than the account of the company who made those hammers will increase by the price of the hammers. This also means that the bank that holds that company’s account now has more reserves as its deposit balances have increased. If, through a combination of high government spending, high savings rates (increases deposits and thus reserves) and/or low loan demand, the banking system ends up with reserves in excess of required reserves we now know that the interbank rate will be driven to zero. In order for the Fed to be able to spend AND maintain control over the short term interest rate the fed will need to drain the excess reserves to maintain the funds rate above zero. They do this by draining the liquidity (excess reserves) from the system via sales of T-bills. The sale of t-bills gives the bank a place to park excess reserves and sets a minimum rate for interbank loans. If a bank holds excess reserves the lowest rate that it will be willing to accept if it lends the excess to another bank is the rate that the government will pay on a T-Bill as the bank knows that if it doesn’t lend the funds to another bank in the interbank market it can just place those funds with the government and earn the T-Bill rate.

Voila, the Fed now has the ability to spend any amount without having to worry about the banks having excess reserves and thus driving the interbank rate to zero. The government can now spend any amount while still maintaining a positive overnight lending rate (known as the target rate). So, if the government wants to lower liquidity (reserves) it can either increase taxes (thus lowering bank reserves) or it can sell T-bills. If it wants to add liquidity to the system it can spend (run a deficit) or buy T-bills from the private sector (thus giving the private sector money in exchange for their existing T-bill savings). The mechanism works both ways.

I know this is a long post and I hope you stuck with me through this as I've attempted to make it as simple and understable as possible. To summarize, if the central bank (the fed in the US) has a positive target for the overnight lending rate, it formerly needed to provide an interest-bearing alternative to, what were then, non-interest-bearing bank reserve accounts. This was typically done by offering securities for sale in the open market to drain the excess reserves. Central Bank officials and traders recognize this as "offsetting operating factors" since the sales are intended to offset the impact of fiscal policy that would cause the Fed funds rate to move away from the Fed’s target rate. In nations like the US, Japan, and others, where interest was not paid directly on central bank reserves, the penalty for deficit spending and not issuing securities was not (apart from various self-imposed constraints) bounced government checks but a zero percent interbank rate, as is the case in Japan today. The overnight lending rate is the most important benchmark interest rate for many other important rates, including banks’ prime rates, mortgage rates, and consumer loan rates, and therefore the interbank rate (known as the Fed Funds rate) serves as the base rate of interest in the economy.

It is also interesting to note that the fed began paying interest on reserves in 2008 thus bonds don't even effectively serve the purpose of establishing an overnight rate anymore as the interest rate on reserves accomplishes the same thing.


THAT is why the government needs to sell Bonds (or at the very least, offer interest on reserves which would substitute for bond sales).


QUOTE(Carpe)
Am I correct in thinking that if the Chinese decided to redeem their bonds and keep the money in their demand account, that doesn't add reserves to the banking system?
Absolutely Correct.

QUOTE(Carpe)
If they then spent that money into the private sector, say, buying up a certain type of housing (student, etc.) it could cause localized inflation (an asset bubble).
Depending upon the level of spending it could cause widespread inflation and bubbles. The government would need to increase taxation levels and interest rates to drain liquidity. If we still insist on selling bonds we could drain the liquidity via bond sales. Keep in mind that China needs to maintain a large horde of dollars to maintain their dollar peg.

QUOTE(Belshazzar)
This makes sense, but only if you start with fiat currency. Since the US was on the gold standard until 1933, that means we had currency already in existence so the government could tax without spending first while this wouldn't be possible if we had started off with a fiat currency. Although I imagine that the amount of money in our current economy is so much greater than it was in 1933 that even if we taxed all money out of existence, the resulting surplus would not be that large. Or is my chain of logic off here?
Interesting thought! I'd have to think more about the accounting behind this but I'm sure that you're correct. If it didn't net to exactly zero it would be close enough to not matter in any material way.

Posted by: CarpeDinkum Nov 23 2010, 01:55 AM

QUOTE(brinn @ Nov 22 2010, 03:26 PM) *
QUOTE(Carpe)
Am I correct in thinking that if the Chinese decided to redeem their bonds and keep the money in their demand account, that doesn't add reserves to the banking system?
Absolutely Correct.

QUOTE(Carpe)
If they then spent that money into the private sector, say, buying up a certain type of housing (student, etc.) it could cause localized inflation (an asset bubble).


QUOTE(Brinn)
Depending upon the level of spending it could cause widespread inflation and bubbles. The government would need to increase taxation levels and interest rates to drain liquidity. If we still insist on selling bonds we could drain the liquidity via bond sales. Keep in mind that China needs to maintain a large horde of dollars to maintain their dollar peg.



Didn't know that about the peg. Now, it seems that we would have to focus the taxation a bit more to avoid affecting the economy as a whole and restrict what the Chinese (or foreigners) could do with their money. If they were plunking down cash, would raising taxes really affect them that much? So we might need a focused solution for a specific problem, where a lot of money is chasing a particular market.


Posted by: brinn Nov 23 2010, 02:03 AM

QUOTE(Leder)
Your argumentation style is baffling. You go from explaining to appearing to make a point without plainly stating what your position is. But for the most part, your argument is nonsense. You are quick to point out the "magic" of a fiat currency system which in essence makes all government expenditure an issue of simple accounting. You completely disregard the consequences of what you are saying and the effect it has on the economy as a whole.
Not true. This whole thread has been about the consequences of the deficit. You simply don't understand it because you are much too invested in a rigid belief in Austrian economics. I'm not surprised that you perceive the accounting as magic as most economic schools are not that concerned about making sure that the real world accounting matches the theories. People who don't understand how things work often perceive them as "magic".

QUOTE(Leder)
Who cares what the market wants? This is where you go from making an intelligent argument to complete nonsense in the realm of James Galbraith.
Well, I'm encouraged that you gave me credit up to that point!

QUOTE(Leder)
You are arguing that because the government has the printing press, that it doesn't matter how the government finances its spending.
True. Not only does it not matter HOW the government finances it's spending but I can assure you that it doesn't even REQUIRE financing at all.

QUOTE(Leder)
This is where you have the problem in explaining what they could do with and what they should do.
No, I've made my points about what I think the government should do. Need I show you a few quotes from this thread? What it should do can only be understood once we know what it can do. When you block your ears and refuse to contemplate what it CAN do because you only understand what it HAS done in the past you limit your perception.

QUOTE(Leder)
Of course it matters what the market thinks because it has to do with confidence in he government's currency. If the market loses faith in the government's ability to maintain a dollar of relative value as well as pay off its debts, it will result in hyperinflation.
So long as US dollars are the only acceptable form of payment for US taxes, and collection of taxes can be enforced by the government, the dollar will be used as the currency.

QUOTE(Leder)
Nobody will want to hold dollars and will prefer to own competing currencies and real assets. You pass this off as well, the government just needs to control inflation. But you don't understand, once that happens, it is already too late. Once inflation rears its ugly head, you can't just contract the money supply without causing a collapse in the banking system as banks lose their liquidity, firms go bankrupt, and massive unemployment.
Hmmm...Sounds like what the US recently experienced minus the whole "inflation" part!

QUOTE(Leder)
Furthermore, the only way you can contract inflationary pressure is by raising interest rates which will make the burden of paying the interest on the national debt astronomical.
So it's all monetary policy with you and no fiscal policy, eh? Only interest rates can reduce inflation but not a contraction in the actual money supply. That's an interesting (and very odd) theory you have there.

QUOTE(Leder)
This is why you between a rock and a hard place. You spend all your time explaining that the government could just print money but you brush off the very consequences of it.
Once again, this whole thread has been me addressing the real consequences while you fabricate consequences that are non-existent. But don't worry Leder, eventually the market is going to figure out that the US and Japanese deficits are really much, much too large and risky and then the bond vigilantes will wake up and drive our bond rates sky high! It hasn't happened in the 40 years since the US went non-convertible but give 'em a few more years to figure this whole bond/deficit/rate thing out and then we'll see the true consequences of the Defict! I just hope you're not disappointed if I don't hold my breath.

QUOTE
What makes you so sure the government or the central bankers or whoever will be able to contract the money supply in time or at all? These are the same people who couldn't see the housing bubble and the biggest recession since the Great Depression mere months before it all occurred. This is exactly what I am talking about here.
As you'll note, I've already stated that this is a risk (is anyone reading what I'm actually writing?!?!?!). Back on November 7th I wrote:
QUOTE(Brinn)
As long as the US economy remains productive, and as long as we do not borrow in a foreign currency, and as long as we have the political will to drain liquidity once the output gap shrinks, we'll be fine. Of course, the last requirement in the list is the one we need to worry about most as politicians have shown a tendency to do what is best for them rather than what is best for the country but if the operational realities of the monetary system were more widely understood it wouldn't be difficult to hold politician's feet to the fire if inflation began to increase. Besides, inflation is a long way off and won't become possible until the outgap gap shrinks considerably. Only spending above and beyond the economy's capacity to produce more goods and services is inflationary.

If we do get to a point where inflation pops up, it isn't so simple as just contracting the money supply. Contraction means recession and contraction means the economy goes in a tailspin. The reason you don't see this is because you think the inflation will create economic growth and the contraction will take place in a booming economy that can weather the change. What you fail to consider and which would be your worse nightmare is if we get inflation while there is high unemployment and low growth. In this stagflation, the central bankers will have to make a choice - either we can contract the money supply and raise interest rates, bankrupting everyone who was bailed out the first time around -or- we can continue printing money, which will destroy the value of the dollar and possible lead to hyperinflation.


QUOTE(Leder)
Contraction means recession and contraction means the economy goes in a tailspin. The reason you don't see this is because you think the inflation will create economic growth and the contraction will take place in a booming economy that can weather the change. What you fail to consider and which would be your worse nightmare is if we get inflation while there is high unemployment and low growth. In this stagflation, the central bankers will have to make a choice - either we can contract the money supply and raise interest rates, bankrupting everyone who was bailed out the first time around -or- we can continue printing money, which will destroy the value of the dollar and possible lead to hyperinflation.
You seem to be saying that there is no such thing as moderate or measured growth. Does your though process only allow for hyper-inflation or recession and depression?

P.S.
Just saw Ireland in the news today. How are those austerity measures working out?


Posted by: Hobbes Nov 23 2010, 05:14 PM

QUOTE(pj4xtrader @ Nov 22 2010, 02:54 PM) *
You state that banks can, through bank loans, create the money, without any involvement of the government, that is accepted in payment of taxes. This is effectively the same as claiming that banks are monetarily sovereign.


Of course we can agree....that is NOT what I said at all. I never said they created the money, only distributed it. The statement was made earlier that the ONLY way money could be distributed was through government spending. That is false. Given that much of the rest of the fiat currency argument rests on this, then the entire argument is essentially false as well. An argument based on a falsehood is false.

Posted by: CruisingRam Nov 23 2010, 05:29 PM

QUOTE(Hobbes @ Nov 23 2010, 09:14 AM) *
QUOTE(pj4xtrader @ Nov 22 2010, 02:54 PM) *
You state that banks can, through bank loans, create the money, without any involvement of the government, that is accepted in payment of taxes. This is effectively the same as claiming that banks are monetarily sovereign.


Of course we can agree....that is NOT what I said at all. I never said they created the money, only distributed it. The statement was made earlier that the ONLY way money could be distributed was through government spending. That is false. Given that much of the rest of the fiat currency argument rests on this, then the entire argument is essentially false as well. An argument based on a falsehood is false.




To clarify- how do you define "government spending" vs "distribution" and what is by far the majority of distribution of that fiat money?

Posted by: Hobbes Nov 23 2010, 06:05 PM

QUOTE(CruisingRam @ Nov 23 2010, 11:29 AM) *
To clarify- how do you define "government spending" vs "distribution" and what is by far the majority of distribution of that fiat money?


How does the government spend anything when someone takes a loan out from a bank? They don't. Yet money is distributed. As for the other question...not sure, but irrelevant to argument. I'm guessing you'd say government spending? Why? How do you think the Fed injected the $2 Trillion its trying to mop up? They certainly didn't 'spend' it. It is the Fed that controls money supply, not the Treasury...one of the many things we seem to keep talking around in this debate. The roles of the Fed and the Treasury keep getting interchanged, as exemplified by:

QUOTE
The reason that bonds are issued are to provide a reserve drain to allow the fed to maintain control of the fed funds rate. We've been through this before, on page 1 of this thread. Let me refresh your memory:


The Fed doesn't issue the bonds, Treasury does. Hence the entire following explanation of the process is wrong.

Posted by: pj4xtrader Nov 23 2010, 06:10 PM

QUOTE(Hobbes @ Nov 23 2010, 12:14 PM) *
QUOTE(pj4xtrader @ Nov 22 2010, 02:54 PM) *
You state that banks can, through bank loans, create the money, without any involvement of the government, that is accepted in payment of taxes. This is effectively the same as claiming that banks are monetarily sovereign.


Of course we can agree....that is NOT what I said at all. I never said they created the money, only distributed it. The statement was made earlier that the ONLY way money could be distributed was through government spending. That is false. Given that much of the rest of the fiat currency argument rests on this, then the entire argument is essentially false as well. An argument based on a falsehood is false.

My statement was as follows:
QUOTE(pj4xtrader)
Your statement does not hold up to analysis. It is obvious that from the inception of "state money", government spending must precede taxation. The government being the monopoly supplier of that which it excepts as payment of taxes, can not collect first, that which only it can create. Upon inception, if the government has not yet spent, the private sector can not possess the "state money" necessary to pay taxes or purchase government bonds for that matter. It is also worth noting that the government can only collect more than it spends (run a surplus), following periods that it has collected less than it spent (ran a deficit), and it can only collect in surplus, to the penny, the amount the it previously spent and did not collect during the periods of deficit.

As you can see I never used the word "distributed", as it is not relevant to my point. But since you insist on focusing on the distribution, rather than the creation, can we agree that "state money" must first be created before it can be distributed? Or, will you continue to argue the banks can distribute "state money" without the government first creating it.

Posted by: Hobbes Nov 23 2010, 06:23 PM

QUOTE(pj4xtrader @ Nov 23 2010, 12:10 PM) *
My statement:
QUOTE(pj4xtrader)
Your statement does not hold up to analysis. It is obvious that from the inception of "state money", government spending must precede taxation. The government being the monopoly supplier of that which it excepts as payment of taxes, can not collect first, that which only it can create. Upon inception, if the government has not yet spent, the private sector can not possess the "state money" necessary to pay taxes or purchase government bonds for that matter. It is also worth noting that the government can only collect more than it spends (run a surplus), following periods that it has collected less than it spent (ran a deficit), and it can only collect in surplus, to the penny, the amount the it previously spent and did not collect during the periods of deficit.

As you can see I never used the word "distributed", as it is not relevant to my point. But since you insist on focusing on the distribution, rather than the creation, can we agree that "state money" must first be created before it can be distributed? Or, will you continue to argue the banks can distribute "state money" without the government first creating it.


It doesn't make any difference whether the word distribution was ever used. The statement says that "government spending MUST precede taxation". That statement is FALSE. I was only providing a few examples that demonstrated that.

QUOTE
can we agree that "state money" must first be created before it can be distributed


I can agree. You and most especially Brinn, however, have been arguing the money never needs to be created at all...it is just entries in ledgers that allow spending to take place, with no money ever needing to be created---one of the many contradictions in this argument, none of which ever seem to get addressed. Also, again, who creates it is irrelevant to the discussion we are having, as that discussion was on means of distribution (see above).

QUOTE(Brinn)
I thought Leder already admitted that the US government has the ability to print money. Do you disagree?


No, I don't disagree. Do you agree that its only necessary to print the cash to have it available...something that wouldnt' be necessary under the argument you have presented, as everything was all just digital transactions, and no backing was ever necessary?

Posted by: pj4xtrader Nov 23 2010, 07:31 PM

QUOTE(Hobbes)
It doesn't make any difference whether the word distribution was ever used. The statement says that "government spending MUST precede taxation". That statement is FALSE. I was only providing a few examples that demonstrated that.

In your examples, like the one below you focus on the distribution and ignore the creation.
QUOTE(Hobbes)
Money can, and does, get distributed all the time, without the government spending anything. This occurs through loans from the bank, which then get disbursed into the economy, which is then used to pay taxes.

How did this money that can retire tax obligations come into existence? Do you believe it is possible for banks to distribute something that has not yet been created? Can Wal Mart also distribute products that have not been created?

QUOTE(Hobbes)
I can agree. You and most especially Brinn, however, have been arguing the money never needs to be created at all...it is just entries in ledgers that allow spending to take place, with no money ever needing to be created---one of the many contradictions in this argument, none of which ever seem to get addressed. Also, again, who creates it is irrelevant to the discussion we are having, as that discussion was on means of distribution (see above).

No, we have stated that the government creates (when it spends) "state money" by crediting bank accounts. As I have said before the word "ledger" was your word. We argue that when the government spends money, the government creates money. Above, you admit that I never spoke of distribution, yet you say the discussion is about distribution. We have always been talking money creation, you seem to be the only one that reads into our remarks, that money never needs to be created.



Posted by: Hobbes Nov 23 2010, 07:47 PM

QUOTE(pj4xtrader @ Nov 23 2010, 01:31 PM) *
QUOTE(Hobbes)
It doesn't make any difference whether the word distribution was ever used. The statement says that "government spending MUST precede taxation". That statement is FALSE. I was only providing a few examples that demonstrated that.

In your examples, like the one below you focus on the distribution and ignore the creation.
QUOTE(Hobbes)
Money can, and does, get distributed all the time, without the government spending anything. This occurs through loans from the bank, which then get disbursed into the economy, which is then used to pay taxes.

How did this money that can retire tax obligations come into existence? Do you believe it is possible for banks to distribute something that has not yet been created? Can Wal Mart also distribute products that have not been created?


Where it was created is irrelevant to the argument. The only relevant point is whether or not there are ways for it to be distributed that do not involve government spending. There are, hence the statement is false...and the argument based on that false statement is also then false.

QUOTE
Above, you admit that I never spoke of distribution, yet you say the discussion is about distribution. We have always been talking money creation, you seem to be the only one that reads into our remarks, that money never needs to be created.


No, we have NOT been talking about creation. What good is money created that is never distributed? It is ONLY relevant when it is DISTRIBUTED. Further, the statement made about spending needing to precede taxation has to do with distribution, not created. If the government doesn't distribute it, how does anyone have it to pay taxes with?

Posted by: Belshazzar Nov 23 2010, 08:24 PM

Hobbes, I think the problem is that you are applying the Chartalism model to situations where it doesn't apply. Simply put, if we have, say, a barter economy and the state decides to only accept taxes in a fiat currency from now on, then government spending must precede taxation because there is no currency. The only case where this wouldn't be true is if someone was counterfeiting the currency, which would be illegal anyway. So it doesn't make any sense that the government could tax something that doesn't exist.

My problem with this is -- how accurately can it be applied to the real US economy? I think there are some problems that I've noted, like the fact that we started off on the gold standard, for example. Right now, spending does not have to precede taxation because there is already so much currency in existence. But say we tax all of it out of existence. That will create demand for currency to pay taxes in and then spending will have to precede taxation (and it would ruin the economy, but I'm just using an extreme example to make the point). I don't see a legal means by which taxes can be paid in a currency that does not exist! Like I said, though, the rub is in how much it applies to our current situation. We could, in theory, keep taxing without spending, but at some point there will be too little currency left for the economy to run on. I think the discussion would be easier to understand if instead of "Spending must precede taxation," we said "When a fiat currency is first instituted, spending must precede taxation."

Posted by: pj4xtrader Nov 23 2010, 09:10 PM

QUOTE(Hobbes)
No, we have NOT been talking about creation. What good is money created that is never distributed? It is ONLY relevant when it is DISTRIBUTED. Further, the statement made about spending needing to precede taxation has to do with distribution, not created. If the government doesn't distribute it, how does anyone have it to pay taxes with?

Your are arguing my position for me (refer to the bold portion of your statement). The government creates and distributes money by spending. Without the Monopoly supplier there can be no supply.

If you can not except this, then I am afraid we have reached the point of infinite regress.

QUOTE(Belshazzar @ Nov 23 2010, 03:24 PM) *
Hobbes, I think the problem is that you are applying the Chartalism model to situations where it doesn't apply. Simply put, if we have, say, a barter economy and the state decides to only accept taxes in a fiat currency from now on, then government spending must precede taxation because there is no currency. The only case where this wouldn't be true is if someone was counterfeiting the currency, which would be illegal anyway. So it doesn't make any sense that the government could tax something that doesn't exist.

My problem with this is -- how accurately can it be applied to the real US economy? I think there are some problems that I've noted, like the fact that we started off on the gold standard, for example. Right now, spending does not have to precede taxation because there is already so much currency in existence. But say we tax all of it out of existence. That will create demand for currency to pay taxes in and then spending will have to precede taxation (and it would ruin the economy, but I'm just using an extreme example to make the point). I don't see a legal means by which taxes can be paid in a currency that does not exist! Like I said, though, the rub is in how much it applies to our current situation. We could, in theory, keep taxing without spending, but at some point there will be too little currency left for the economy to run on. I think the discussion would be easier to understand if instead of "Spending must precede taxation," we said "When a fiat currency is first instituted, spending must precede taxation."

Well put Belshazzar.

I will only add that it must accurately apply to our current situation. For example, Microsoft announced today that they will buy back all outstanding copies of Windows software. The fact that the would be able to collect copies of Windows software from parties other than them self, does not change the fact that all copies originated for the sole creator, Microsoft.

Posted by: Hobbes Nov 23 2010, 09:30 PM

QUOTE(Belshazzar @ Nov 23 2010, 02:24 PM) *
Hobbes, I think the problem is that you are applying the Chartalism model to situations where it doesn't apply. Simply put, if we have, say, a barter economy and the state decides to only accept taxes in a fiat currency from now on, then government spending must precede taxation because there is no currency. The only case where this wouldn't be true is if someone was counterfeiting the currency, which would be illegal anyway. So it doesn't make any sense that the government could tax something that doesn't exist.


No, government spending does NOT need to precede taxation in that example (or any other). Currency could be distributed (and is currently) through banks. Besides, keep in mind that the model presented here NEVER distributes cash anyway--it's all ledger entries and digital transactions. So, government spending in that model still doesn't provide any cash. Which makes the argument all the more baseless.

QUOTE
That will create demand for currency to pay taxes in and then spending will have to precede taxation (and it would ruin the economy, but I'm just using an extreme example to make the point).


People don't conduct transactions in dollars because they need that to pay taxes with. That has never been what drives financial transactions. We could conduct all transactions using brightly colored shells, and just exchange those for whatever dollar value they were worth and pay taxes with that. Taxation isn't what drives demand for dollars...it is their convenience, and the soundness of their financial backing. How many times has anyone here ever been paid something (in dollars) and immediately thought 'Whew, glad I have that money to pay taxes with!". No one. It is not what creates the demand. It might add to the demand, but it does not create it. Suppose the government decided today that it would only accept hundred dollar bills as payment for taxes. Would all transactions not involving hundred dollar bills cease? No. Business would continue as normal, and people would get what they needed to pay taxes when they needed to pay them. Besides, remember that the argument was presented that taxes aren't paid with cash, anyway...they are paid with digital transactions. Once again the argument contradicts itself. Further, the argument has also been that the government needs no cash in order to conduct its transactions....so why would there be a demand for a useless currency?

QUOTE(pj4xtrader)
The government creates and distributes money by spending. Without the Monopoly supplier there can be no supply.

If you can not except this, then I am afraid we have reached the point of infinite regress.


I do not accept it because it is not true, as I have pointed out. If it is required that I accept a falsehood as truth in order to have a debate, then the debate itself is rather pointless, is it not?

FWIW, you are still confusing 'creation' with 'distribution' in your statement here. There are ways for the government to distribute cash without spending. Further, as I indicated above, the argument was that the government didn't actually use cash when spending anyway--it just made ledger entries and transactions were all performed digitally. So, government spending in this model STILL doesn't distribute any cash.

Posted by: Belshazzar Nov 23 2010, 09:46 PM

QUOTE(Hobbes @ Nov 23 2010, 04:30 PM) *
QUOTE(Belshazzar @ Nov 23 2010, 02:24 PM) *
Hobbes, I think the problem is that you are applying the Chartalism model to situations where it doesn't apply. Simply put, if we have, say, a barter economy and the state decides to only accept taxes in a fiat currency from now on, then government spending must precede taxation because there is no currency. The only case where this wouldn't be true is if someone was counterfeiting the currency, which would be illegal anyway. So it doesn't make any sense that the government could tax something that doesn't exist.


No, government spending does NOT need to precede taxation in that example (or any other). Currency could be distributed (and is currently) through banks. Besides, keep in mind that the model presented here NEVER distributes cash anyway--it's all ledger entries and digital transactions. So, government spending in that model still doesn't provide any cash.

What happens when countries change currency? Do they just wait patiently while government spending provides enough cash to conduct business with? NO. They distribute it through other means, allowing exchanges. In fact, that is the only way it could possibly work.


The minting process is, I assume, something of a separate issue. Where do the banks (originally) get the currency if it is not issued and minted by the government, which gives them permission to distribute it? If they are getting it from somewhere else and distributing without the permission of the government, that's counterfeiting.

I don't think the model says that it is all ledger entries. One of the other posters could explain how minting fits into this better than I could. But I mentioned before that most dollars that have been distributed actually are not printed. I will try to get an actual stat on that.

QUOTE
QUOTE
That will create demand for currency to pay taxes in and then spending will have to precede taxation (and it would ruin the economy, but I'm just using an extreme example to make the point).


People don't conduct transactions in dollars because they need that to pay taxes with. That has never been what drives financial transactions. We could conduct all transactions using brightly colored shells, and just exchange those for whatever dollar value they were worth and pay taxes with that. Taxation isn't what drives demand for dollars...it is their convenience, and the soundness of their financial backing. How many times has anyone here ever been paid something (in dollars) and immediately thought 'Whew, glad I have that money to pay taxes with!". No one. It is not what creates the demand.


If you have to pay taxes in a currency that doesn't exist and you can't counterfeit it, I can't see how there wouldn't be demand for that currency. I agree that currency is arbitrary. There are alternate forms of currency in the US like frequent flyer miles or gift cards. But you can't use those to pay taxes. You have to trade them in for dollars, which is what you said. Your argument is self-defeating. If there are no dollars with which to pay taxes, there will be a demand for dollars.

Posted by: akaCG Nov 23 2010, 09:51 PM

Came across the following earlier today. Struck me as a pretty good start to what is intended to be a multi-part, clear and concise, step-by-step unraveling of the "functional finance"/"MMT"/"Chartalism"/"Neo-Chartalism"/Etc. argument(s):

http://conant.economicpolicyjournal.com/2010/10/refutation-of-mosler-economics-and.html

I don't have time to offer any additional comments of my own at the moment, I'm afraid. Just wanted to make sure to share it, for I believe it makes a good addition to the discussion.

Posted by: Belshazzar Nov 23 2010, 09:56 PM

QUOTE(akaCG @ Nov 23 2010, 04:51 PM) *
Came across the following earlier today. Struck me as a pretty good start to what is intended to be a multi-part, clear and concise, step-by-step unraveling of the "functional finance"/"MMT"/"Chartalism"/"Neo-Chartalism"/Etc. argument(s):

http://conant.economicpolicyjournal.com/2010/10/refutation-of-mosler-economics-and.html

I don't have time to offer any additional comments of my own at the moment, I'm afraid. Just wanted to make sure to share it, for I believe it makes a good addition to the discussion.


Here's a quote from the link that asks an important question I don't think has been addressed yet:
QUOTE
Mosler misses this because he never stops to examine where the wealth that the government comes to control by creating new money actually came from in the first place. It's odd that he misses it because his next (flawed) analogy implicitly acknowledges it, even if Mosler does not:
What they all seem to miss is the difference between spending your own currency that only you create, and spending a currency someone else creates. To properly use this common federal government/household analogy in a meaningful way,
we next look at an example of a “currency” created by a household.

The story begins with parents creating coupons they then use to pay their children for doing various household chores. Additionally, to “drive the model,” the parents require the children to pay them a tax of 10 coupons a week to avoid punishment. This closely replicates taxation in the real economy, where we have to pay our taxes or face penalties.

The coupons are now the new household currency. Think of the parents as “spending” these coupons to purchase “services” (chores) from their children. With this new household currency, the parents, like the federal government, are now the issuer of their own currency. And now you can see how a household with its own currency is indeed very much like a government with its own currency.

Let’s begin by asking some questions about how this new household currency works. Do the parents have to somehow get coupons from their children before they can pay their coupons to their children to do chores? Of course not! In fact, the parents must first spend their coupons by paying their children to do household chores, to be able to collect the payment of 10 coupons a week from their children. How else can the children get the coupons they owe to their parents?
Mosler has the last question exactly backwards. The proper question to examine in a study of monetary economics is not, "How do real goods and services obtain their monetary value?" but rather, "How does money obtain its value in terms of real goods and services?" Notice, again, the simple creation of the coupons in this example does not result in the generation of completed chores. It is the effort of the children themselves in doing the chores which the parents force the children to bid away for coupons lest they pay a penalty, which the parents are ultimately taxing with their coupon scheme. Without the children producing chores, the parents would not have the chores completed and they would be forced to produce chores themselves.

Posted by: Hobbes Nov 23 2010, 10:17 PM

QUOTE(Belshazzar @ Nov 23 2010, 03:46 PM) *
The minting process is, I assume, something of a separate issue. Where do the banks (originally) get the currency if it is not issued and minted by the government, which gives them permission to distribute it?


The question isn't where do they get it from. The question is if there are ways for them to get it that don't require government spending. There are, hence the statement is false....hence the argument based on that statement is false.

QUOTE
If you have to pay taxes in a currency that doesn't exist and you can't counterfeit it, I can't see how there wouldn't be demand for that currency.


There would be demand for it because of its financial backing and convenience. Why do foreign entities hoard dollars? They don't have to pay any U.S. taxes, so that clearly isn't what creates the demand.

Posted by: CarpeDinkum Nov 24 2010, 02:32 AM

QUOTE(akaCG @ Nov 23 2010, 01:51 PM) *
Came across the following earlier today. Struck me as a pretty good start to what is intended to be a multi-part, clear and concise, step-by-step unraveling of the "functional finance"/"MMT"/"Chartalism"/"Neo-Chartalism"/Etc. argument(s):

http://conant.economicpolicyjournal.com/2010/10/refutation-of-mosler-economics-and.html

I don't have time to offer any additional comments of my own at the moment, I'm afraid. Just wanted to make sure to share it, for I believe it makes a good addition to the discussion.



It's a trainwreck. He's taking analogies meant for a layperson and extending them beyond their intended purpose; of course they're going to break under those conditions.

His definition of solvency?

"Mosler's explanation is true only if the term "solvency" is defined as "able to make good all liabilities in terms of a fiat currency with infinite potential supply" rather than the way the term is normally used to mean "able to make good all liabilities in terms of real goods and services promised."

When I work for someone, they normally don't pay me in goods and services. Can you find a definition of the word "solvency" that mentions (even in passing) barter?

If you like his stuff, by all means enjoy. I don't think it adds much in the way of value to this discussion.

Posted by: pj4xtrader Nov 24 2010, 03:05 AM

QUOTE(Belshazzar @ Nov 23 2010, 04:56 PM) *
QUOTE(akaCG @ Nov 23 2010, 04:51 PM) *
Came across the following earlier today. Struck me as a pretty good start to what is intended to be a multi-part, clear and concise, step-by-step unraveling of the "functional finance"/"MMT"/"Chartalism"/"Neo-Chartalism"/Etc. argument(s):

http://conant.economicpolicyjournal.com/2010/10/refutation-of-mosler-economics-and.html

I don't have time to offer any additional comments of my own at the moment, I'm afraid. Just wanted to make sure to share it, for I believe it makes a good addition to the discussion.


Here's a quote from the link that asks an important question I don't think has been addressed yet:
QUOTE
Mosler misses this because he never stops to examine where the wealth that the government comes to control by creating new money actually came from in the first place. It's odd that he misses it because his next (flawed) analogy implicitly acknowledges it, even if Mosler does not:
What they all seem to miss is the difference between spending your own currency that only you create, and spending a currency someone else creates. To properly use this common federal government/household analogy in a meaningful way,
we next look at an example of a “currency” created by a household.

The story begins with parents creating coupons they then use to pay their children for doing various household chores. Additionally, to “drive the model,” the parents require the children to pay them a tax of 10 coupons a week to avoid punishment. This closely replicates taxation in the real economy, where we have to pay our taxes or face penalties.

The coupons are now the new household currency. Think of the parents as “spending” these coupons to purchase “services” (chores) from their children. With this new household currency, the parents, like the federal government, are now the issuer of their own currency. And now you can see how a household with its own currency is indeed very much like a government with its own currency.

Let’s begin by asking some questions about how this new household currency works. Do the parents have to somehow get coupons from their children before they can pay their coupons to their children to do chores? Of course not! In fact, the parents must first spend their coupons by paying their children to do household chores, to be able to collect the payment of 10 coupons a week from their children. How else can the children get the coupons they owe to their parents?
Mosler has the last question exactly backwards. The proper question to examine in a study of monetary economics is not, "How do real goods and services obtain their monetary value?" but rather, "How does money obtain its value in terms of real goods and services?" Notice, again, the simple creation of the coupons in this example does not result in the generation of completed chores. It is the effort of the children themselves in doing the chores which the parents force the children to bid away for coupons lest they pay a penalty, which the parents are ultimately taxing with their coupon scheme. Without the children producing chores, the parents would not have the chores completed and they would be forced to produce chores themselves.






Belshazzar, what is the question? He offers no real argument at all.
QUOTE
Mosler misses this because he never stops to examine where the wealth that the government comes to control by creating new money actually came from in the first place. It's odd that he misses it because his next (flawed) analogy implicitly acknowledges it, even if Mosler does not:

I think it is clear, the wealth the government comes to control comes from the non government (the children in Mosler's model), a fact that is not lost on Mosler.
QUOTE
Mosler has the last question exactly backwards. The proper question to examine in a study of monetary economics is not, "How do real goods and services obtain their monetary value?" but rather, "How does money obtain its value in terms of real goods and services?"

These questions are six of one, and a half dozen of the other. It is like saying: It's not how many apples I can get in exchange for six oranges, but rather how many oranges I can get for six apples.
QUOTE
Notice, again, the simple creation of the coupons in this example does not result in the generation of completed chores. It is the effort of the children themselves in doing the chores which the parents force the children to bid away for coupons lest they pay a penalty, which the parents are ultimately taxing with their coupon scheme. Without the children producing chores, the parents would not have the chores completed and they would be forced to produce chores themselves.

More simple word play. Mosler never said the simple creation of coupons would result in the generation of completed chores. Mosler does claim that it is the children's tax obligation payable only in coupons, that creates the demand for coupons, that drives the children to offer their labor in exchange for what they need to pay taxes. It sounds like this gentlemen agrees.

Posted by: CarpeDinkum Nov 24 2010, 03:23 AM

QUOTE(Belshazzar @ Nov 23 2010, 01:56 PM) *
Here's a quote from the link that asks an important question I don't think has been addressed yet:
QUOTE
Mosler misses this because he never stops to examine where the wealth that the government comes to control by creating new money actually came from in the first place. It's odd that he misses it because his next (flawed) analogy implicitly acknowledges it, even if Mosler does not:
What they all seem to miss is the difference between spending your own currency that only you create, and spending a currency someone else creates. To properly use this common federal government/household analogy in a meaningful way,
we next look at an example of a “currency” created by a household.

The story begins with parents creating coupons they then use to pay their children for doing various household chores. Additionally, to “drive the model,” the parents require the children to pay them a tax of 10 coupons a week to avoid punishment. This closely replicates taxation in the real economy, where we have to pay our taxes or face penalties.

The coupons are now the new household currency. Think of the parents as “spending” these coupons to purchase “services” (chores) from their children. With this new household currency, the parents, like the federal government, are now the issuer of their own currency. And now you can see how a household with its own currency is indeed very much like a government with its own currency.

Let’s begin by asking some questions about how this new household currency works. Do the parents have to somehow get coupons from their children before they can pay their coupons to their children to do chores? Of course not! In fact, the parents must first spend their coupons by paying their children to do household chores, to be able to collect the payment of 10 coupons a week from their children. How else can the children get the coupons they owe to their parents?
Mosler has the last question exactly backwards. The proper question to examine in a study of monetary economics is not, "How do real goods and services obtain their monetary value?" but rather, "How does money obtain its value in terms of real goods and services?" Notice, again, the simple creation of the coupons in this example does not result in the generation of completed chores. It is the effort of the children themselves in doing the chores which the parents force the children to bid away for coupons lest they pay a penalty, which the parents are ultimately taxing with their coupon scheme. Without the children producing chores, the parents would not have the chores completed and they would be forced to produce chores themselves.



I'm not sure what point the fellow is trying to make here.

Posted by: Belshazzar Nov 24 2010, 03:48 AM

QUOTE(Hobbes @ Nov 23 2010, 05:17 PM) *
QUOTE(Belshazzar @ Nov 23 2010, 03:46 PM) *
The minting process is, I assume, something of a separate issue. Where do the banks (originally) get the currency if it is not issued and minted by the government, which gives them permission to distribute it?


The question isn't where do they get it from. The question is if there are ways for them to get it that don't require government spending. There are, hence the statement is false....hence the argument based on that statement is false.


Where do they get a currency that doesn't exist? The gov't has to issue the credit or the bills at some point.

QUOTE
QUOTE
If you have to pay taxes in a currency that doesn't exist and you can't counterfeit it, I can't see how there wouldn't be demand for that currency.


There would be demand for it because of its financial backing and convenience. Why do foreign entities hoard dollars? They don't have to pay any U.S. taxes, so that clearly isn't what creates the demand.


Usually so they can buy US goods or for speculative reasons (buy low, sell high). When the gov't first issues the currency, it isn't issuing it to foreign nations, it's issuing it to its own nation. If you tax all dollars in the US out of existence, even if foreign entities still hold on to them, that will create demand for dollars in the US so people can pay taxes.

QUOTE(pj4xtrader @ Nov 23 2010, 10:05 PM) *
QUOTE
Notice, again, the simple creation of the coupons in this example does not result in the generation of completed chores. It is the effort of the children themselves in doing the chores which the parents force the children to bid away for coupons lest they pay a penalty, which the parents are ultimately taxing with their coupon scheme. Without the children producing chores, the parents would not have the chores completed and they would be forced to produce chores themselves.

More simple word play. Mosler never said the simple creation of coupons would result in the generation of completed chores. Mosler does claim that it is the children's tax obligation payable only in coupons, that creates the demand for coupons, that drives the children to offer their labor in exchange for what they need to pay taxes. It sounds like this gentlemen agrees.


Got it, I was just hung up on the wording of that part, I guess.

Posted by: pj4xtrader Nov 24 2010, 03:49 AM

QUOTE(Hobbes)
The question isn't where do they get it from. The question is if there are ways for them to get it that don't require government spending. There are, hence the statement is false....hence the argument based on that statement is false.

Perhaps you can be so kind as to provide in explanation.


Posted by: Hobbes Nov 24 2010, 04:24 AM

QUOTE(pj4xtrader @ Nov 23 2010, 09:49 PM) *
QUOTE(Hobbes)
The question isn't where do they get it from. The question is if there are ways for them to get it that don't require government spending. There are, hence the statement is false....hence the argument based on that statement is false.

Perhaps you can be so kind as to provide in explanation.


When the Fed pumps money into the economy through reduced interest rates, thereby encouraging borrowing. No spending occurs, yet money is released. When currency is exchanged, no spending occurs, either...yet dollars are released into the economy.

QUOTE
Where do they get a currency that doesn't exist? The gov't has to issue the credit or the bills at some point.


Again, we're not talking about issuing the currency. We are talking about distributing the currency. Again, even in the model presented here, currency is not distributed even through spending, as it has been stated those are mere ledger transactions, and that all disbursement is digital and not currency. Either way, the argument is wrong, or at least hugely contradictory. But running round and round this same tree is getting us nowhere.

QUOTE
Usually so they can buy US goods or for speculative reasons (buy low, sell high). When the gov't first issues the currency, it isn't issuing it to foreign nations, it's issuing it to its own nation. If you tax all dollars in the US out of existence, even if foreign entities still hold on to them, that will create demand for dollars in the US so people can pay taxes.


Sigh. Same tree again. I don't care what might happen if they taxed all U.S. dollars out of existence, as it is completely irrelevant. The statement has been that taxation is what creates demand for dollars. If that were true, then there would be no demand for dollars from people who do not pay U.S. taxes. Yet there is, hence THE STATEMENT IS FALSE. Financial security and convenience is what creates demand for dollars. We could conduct our economy using Cheerios if it were more secure or convenient. The government would then be glad to exchange those for dollars, else they wouldn't collect taxes at all.

Also, again, if all transactions are conducted digitally, then the currency is completely irrelevant to begin with. This model would be much more aptly named the Contradictions Model, because it is full of them.

Posted by: CarpeDinkum Nov 24 2010, 05:33 AM

QUOTE(Hobbes @ Nov 23 2010, 08:24 PM) *
Financial security and convenience is what creates demand for dollars. We could conduct our economy using Cheerios if it were more secure or convenient. The government would then be glad to exchange those for dollars, else they wouldn't collect taxes at all.


I understand that the IRS typically would value any such (recorded or discovered) exchange of goods and services for Cheerios, value them in dollars and request that you present them with a return or they will present you with a bill. If you don't pay up or get it dismissed somehow, you'd end generally end up with a lien against your property (which would have to be sold for dollars to satisfy the bill). Should it come to their attention, that is.

Financial security, convenience and taxes. I think the info I have seen indicates that prior to the currency becoming established, it's taxes that make it necessary to have in the first place. The other two would tend to come later. Paying the army with it might speed things along....

Posted by: brinn Nov 24 2010, 05:54 AM

QUOTE(Hobbes)
When the Fed pumps money into the economy through reduced interest rates, thereby encouraging borrowing. No spending occurs, yet money is released.
How do bank loans create money Hobbes? Last I checked EVERY loan is offset by a payable to the bank which nets to zero. No new net assets are added to the system through bank lending.

QUOTE(Hobbes)
When currency is exchanged, no spending occurs, either...yet dollars are released into the economy.
Explain this to me and please be very specific. How does currency exchange release new dollars into the economy?


Posted by: pj4xtrader Nov 24 2010, 06:46 AM

Hobbes, I am starting to think that you are arguing for the sake of argument.

QUOTE(Hobbes)
When the Fed pumps money into the economy through reduced interest rates, thereby encouraging borrowing. No spending occurs, yet money is released. When currency is exchanged, no spending occurs, either...yet dollars are released into the economy.

Can you please make the connection between these functions and the actual provision of dollars. Maybe you can provide some data or an example of the process, instead of insisting we take your word for it.

QUOTE(Hobbes)
Again, we're not talking about issuing the currency. We are talking about distributing the currency. Again, even in the model presented here, currency is not distributed even through spending, as it has been stated those are mere ledger transactions, and that all disbursement is digital and not currency. Either way, the argument is wrong, or at least hugely contradictory. But running round and round this same tree is getting us nowhere.

Can we get past the word "ledger", I remind you that you were the one who used the term first. By the way, we our still waiting on a clear explanation, of the process of currency distribution without issuance.

QUOTE(Hobbes)
Sigh. Same tree again. I don't care what might happen if they taxed all U.S. dollars out of existence, as it is completely irrelevant. The statement has been that taxation is what creates demand for dollars. If that were true, then there would be no demand for dollars from people who do not pay U.S. taxes. Yet there is, hence THE STATEMENT IS FALSE.

People who don't pay US taxes want dollars because they understand, even if you don't, that people who do pay US taxes will offer up their goods and services in exchange for dollars.

QUOTE(Hobbes)
Financial security and convenience is what creates demand for dollars. We could conduct our economy using Cheerios if it were more secure or convenient. The government would then be glad to exchange those for dollars, else they wouldn't collect taxes at all.

This may be your best one yet, albeit total nonsense. I can argue that, in fact most people want and use dollars because, for as long as they can remember, going back to their childhood, they could exchange them for the things they wanted and needed. Although, for many this true, it is still a shallow and empty argument. " Financial security and convenience", surely you can do better than this, I think we are all a bit beyond the, "Financial security and convenience" argument.

And why would the government exchange dollars for Cheerios, besides the fact that you say so? How does this further their purpose? If Cheerios are the currency why have dollars at all? Can't the government use Cheerios? Why not skip the dollars for Cheerios exchange altogether? Why would we want the dollars? Is it for taxes? Are you saying that people will exchange Cheerios for dollars so that they can pay taxes? It sounds to me like even in your Cheerios economy, taxes are creating a demand for dollars.

Does this mean you concede, that taxes create demand for dollars?

Posted by: brinn Nov 24 2010, 06:06 PM

QUOTE(Hobbes)
You and most especially Brinn, however, have been arguing the money never needs to be created at all...it is just entries in ledgers that allow spending to take place, with no money ever needing to be created---one of the many contradictions in this argument, none of which ever seem to get addressed.
Let me address this than. Money, which can take many forms including printed currency notes needs to be created by the issuing agent. This is typically known as "high powered money". With a mix of currency and electonic records of cash (bank accounts) in the economy, the government can, and does, spend mostly by issuing electronic credits to accounts. This is NOT to say that the government can not also spend by distribution of a paper "check" (like a social security check) or even through hand delivery of freshly minted currency notes delivered by a government agent directly into your hand. The point is, that regardless of the method chosen the government has the ability to create these things (currency notes, electronic deposits and checks) from nothing. Do you agree?

QUOTE(Hobbes)
QUOTE(brinn)
The reason that bonds are issued are to provide a reserve drain to allow the fed to maintain control of the fed funds rate. We've been through this before, on page 1 of this thread. Let me refresh your memory:


The Fed doesn't issue the bonds, Treasury does. Hence the entire following explanation of the process is wrong.
Surely your joking Hobbes. Can refutations based solely upon punctuational errors and spelling mistakes be far behind?!?!? Back on page 1 of this thread I made the following comment
QUOTE(brinn)
For my purposes I am simplifying things by consolidating Central Bank and Treasury operations and referring to them as the Fed. The distinction between the two makes no difference to my arguments.
The distinction between the two is meaningless as the fed essentially tells treasury what to do and treasury does it. However, If you prefer, let's try this so that you can get past semantic arguments and start addressing concepts;

To answer your question regarding the purpose of bonds sales:

QUOTE(brinn)
Incorrect. Bond proceeds fund nothing but rather serve as a reserve drain and allow the fed and/or Treasury to maintain control over short term rates. Let me explain.

As you know, banks have to maintain a reserve ratio that is set by the fed and/or treasury. The reserve ratio limits the amount of deposits that that the bank can lend. For example, if the reserve ratio is set at 10% the banks must maintain 10% of all (not actually all deposits but I’m simplifying for understandability) their deposits on hand. So, for example, a bank has $100 dollars in deposits. If the reserve ratio is 10% the bank must maintain 10% of $100 or $10 in reserves and can lend out $90.

Because deposit and loan levels are changing from day-to-day and minute-to-minute, the calculation of the amount that a bank needs to legally hold for a reserve is a moving target. In effect, the government solved this problem by allowing banks to calculate their reserve requirement based upon a date that had already passed. For example, the bank would calculate the amount of deposits it had on Monday’s date and that would be the reserve requirement for Wednesday. This effectively creates a two day lag as the bank knows two days in advance what the legal reserve requirement should be.

In reality, banks don’t pay much attention to the legal reserve requirement when making loans as banks know they can borrow the money to increase their reserve position should they lend out too much or should deposit levels drop precipitously. As long as the interest rate the bank charges on loans is higher than the rate they have to pay when borrowing money, it makes sense to make every loan that they can. In effect, bank lending decisions are affected by the price of reserves, not by reserve positions. If the spread between the rate of return a bank can get from making a loan and the interbank rate is wide enough, even a bank deficient in reserves will make the loan and cover the cash needed by purchasing (borrowing) money in the funds market. This fact is clearly demonstrated by many large banks when they consistently purchase (borrow) more money than their entire level of required reserves.

So where does the money that banks borrow come from? The first place they can get the money from is other banks that have excess deposits but not enough loans. Going back to our first example, if a bank has $100 in deposits it can legally lend $90 of the money assuming a 10% reserve requirement. If it lends anything less than $90 it will have excess reserves. Banks don’t like to have excess reserves as the excess money does not earn anything for the bank. So instead of letting the excess reserve do nothing, banks will lend these funds to other banks who need cash to meet their legal reserve requirement. The rate that banks charge each other on these loans is strangely called the Fed Funds Rate but it's less confusing to think of this as the interbank rate. When you think logically about this rate you will soon realize that if the banking system as a whole does not have enough reserves to meet legal requirements than, regardless of how the reserves are divvied up via interbank loans, at least one bank will fail to meet the reserve requirement. Given this reality, the interbank loan rate would be bid up to infinity as the banks who don’t hold enough reserves bid against each other to attract money from the banks who have excess reserves knowing that at least one bank will be left short. The opposite is also true. If there are excess reserves in the banking system as a whole the rate offered will be pushed to zero as the banks with excess reserves will continue to offer their excess reserves at lower and lower rates in an effort to make even the smallest return on their excess reserves (which would otherwise earn 0%).

Now, with a rudimentary understanding of how bank reserves work we can begin to talk about Bonds. If the government spends money by buying hammers from the private sector, than the account of the company who made those hammers will increase by the price of the hammers. This also means that the bank that holds that company’s account now has more reserves as its deposit balances have increased. If, through a combination of high government spending, high savings rates (increases deposits and thus reserves) and/or low loan demand, the banking system ends up with reserves in excess of required reserves we now know that the interbank rate will be driven to zero. In order for the fed and/or treasury to be able to spend AND maintain control over the short term interest rate the fed and/or treasury will need to drain the excess reserves to maintain the funds rate above zero. They do this by draining the liquidity (excess reserves) from the system via sales of T-bills. The sale of t-bills gives the bank a place to park excess reserves and sets a minimum rate for interbank loans. If a bank holds excess reserves the lowest rate that it will be willing to accept if it lends the excess to another bank is the rate that the government will pay on a T-Bill as the bank knows that if it doesn’t lend the funds to another bank in the interbank market it can just place those funds with the government and earn the T-Bill rate.

Voila, the fed and/or treasury now has the ability to spend any amount without having to worry about the banks having excess reserves and thus driving the interbank rate to zero. The government can now spend any amount while still maintaining a positive overnight lending rate (known as the target rate). So, if the government wants to lower liquidity (reserves) it can either increase taxes (thus lowering bank reserves) or it can sell T-bills. If it wants to add liquidity to the system it can spend (run a deficit) or buy T-bills from the private sector (thus giving the private sector money in exchange for their existing T-bill savings). The mechanism works both ways.

I know this is a long post and I hope you stuck with me through this as I've attempted to make it as simple and understable as possible. To summarize, if the central bank has a positive target for the overnight lending rate, it formerly needed to provide an interest-bearing alternative to, what were then, non-interest-bearing bank reserve accounts. This was typically done by offering securities for sale in the open market to drain the excess reserves. Central Bank officials and traders recognize this as "offsetting operating factors" since the sales are intended to offset the impact of fiscal policy that would cause the Fed funds rate to move away from the Fed’s target rate. In nations like the US, Japan, and others, where interest was not paid directly on central bank reserves, the penalty for deficit spending and not issuing securities was not (apart from various self-imposed constraints) bounced government checks but a zero percent interbank rate, as is the case in Japan today. The overnight lending rate is the most important benchmark interest rate for many other important rates, including banks’ prime rates, mortgage rates, and consumer loan rates, and therefore the interbank rate (known as the Fed Funds rate) serves as the base rate of interest in the economy.

It is also interesting to note that the fed and/or treasury began paying interest on reserves in 2008 thus bonds don't even effectively serve the purpose of establishing an overnight rate anymore as the interest rate on reserves accomplishes the same thing.
I hope this change of terminology makes this much clearer.

Posted by: Hobbes Nov 24 2010, 07:00 PM

QUOTE(pj4xtrader @ Nov 24 2010, 12:46 AM) *
Hobbes, I am starting to think that you are arguing for the sake of argument.


I never argue just for the sake of argument, unless I stipulate so at the beginning.

QUOTE
QUOTE(Hobbes)
When the Fed pumps money into the economy through reduced interest rates, thereby encouraging borrowing. No spending occurs, yet money is released. When currency is exchanged, no spending occurs, either...yet dollars are released into the economy.

Can you please make the connection between these functions and the actual provision of dollars. Maybe you can provide some data or an example of the process, instead of insisting we take your word for it.


Not my word...Brinn's. Please refer to his lengthy treatise on this earlier in this very thread, regarding bank reserves.

QUOTE
QUOTE(Hobbes)
Again, we're not talking about issuing the currency. We are talking about distributing the currency. Again, even in the model presented here, currency is not distributed even through spending, as it has been stated those are mere ledger transactions, and that all disbursement is digital and not currency. Either way, the argument is wrong, or at least hugely contradictory. But running round and round this same tree is getting us nowhere.

Can we get past the word "ledger", I remind you that you were the one who used the term first. By the way, we our still waiting on a clear explanation, of the process of currency distribution without issuance.


You can remind me all you want, that doesn't make it fact. I am NOT the one who introduced the term. And, no, we are not waiting on a clear explanation of the process of currency distribution without issuance. To be blunt, how many freakin times do I need to say that. What I have said is that there can be, and is, currency distribtution without spending

.
QUOTE(Hobbes)
Sigh. Same tree again. I don't care what might happen if they taxed all U.S. dollars out of existence, as it is completely irrelevant. The statement has been that taxation is what creates demand for dollars. If that were true, then there would be no demand for dollars from people who do not pay U.S. taxes. Yet there is, hence THE STATEMENT IS FALSE.

QUOTE
People who don't pay US taxes want dollars because they understand, even if you don't, that people who do pay US taxes will offer up their goods and services in exchange for dollars.


First, I am curious what you feel the condescending phrases are adding to the debate? Generally, it is my impression that all they do is detract from one's argument, relegating it to the status of children yelling at each other.

Back to the argument....Why then do people flood to the dollar in times of financial crisis? Does the demand for taxation suddenly become higher? NO. Let me be extremely blunt again. Taxation is NOT the sole reason people acquire dollars. Foreigners acquire dollars because of the backing of the U.S. government, NOT because of the backing of its people. If your argument hinges on that, then your argument is incorrect, and you need to come up with a new one that is not based on a flawed premise.
QUOTE(Hobbes)
Financial security and convenience is what creates demand for dollars. We could conduct our economy using Cheerios if it were more secure or convenient. The government would then be glad to exchange those for dollars, else they wouldn't collect taxes at all.

QUOTE
This may be your best one yet, albeit total nonsense. I can argue that, in fact most people want and use dollars because, for as long as they can remember, going back to their childhood, they could exchange them for the things they wanted and needed. Although, for many this true, it is still a shallow and empty argument. " Financial security and convenience", surely you can do better than this, I think we are all a bit beyond the, "Financial security and convenience" argument.


No, actually this is your best one yet. You simultaneously agree that my argument is true, then state that we are beyond it. A debate that is beyond truth is not one worth participating in.

QUOTE
Does this mean you concede, that taxes create demand for dollars?

The argument is not that taxes don't create demand for dollars. The argument is that taxes are not the ONLY thing that creates demand for dollars. So, no, I definitely do not concede, as the argument is still false.

QUOTE(brinn)
For my purposes I am simplifying things by consolidating Central Bank and Treasury operations and referring to them as the Fed. The distinction between the two makes no difference to my arguments.


This is the root of the problem, as I think it makes a tremendous amount of difference to the arguments.

QUOTE
The distinction between the two is meaningless as the fed essentially tells treasury what to do and treasury does it.


I would buy the previous argument if sufficient evidence were provided for this statement, and then perhaps we could all be in violent agreement again! smile.gif I am no fan of the power the Fed exercises (Zeitgeist), so I don't necessarily disagree with you on this, but I would really like to see some evidence for it, not just for purposes of this debate, but for general knowledge.


Posted by: pj4xtrader Nov 24 2010, 09:47 PM

Hobbes,

First, I have to say that I do not mean to be condescending, I agree that it adds nothing to the debate. So, I apologize if that is how i came off. I desperately want us to get past this back and forth, so that we can get back to the actual topic of the thread.

QUOTE(Hobbes)
Back to the argument....Why then do people flood to the dollar in times of financial crisis? Does the demand for taxation suddenly become higher? NO. Let me be extremely blunt again. Taxation is NOT the sole reason people acquire dollars. Foreigners acquire dollars because of the backing of the U.S. government, NOT because of the backing of its people. If your argument hinges on that, then your argument is incorrect, and you need to come up with a new one that is not based on a flawed premise.

What you describe is a secondary demand that would not exist without the primary demand. It is no different then a commodity trader's demand for a barrel of oil. The trader's demand would not exist, if not for the market demand for oil usage. I argue that it is, the backing of the people and their need to pay taxes that underpins the dollars position as the worlds reserve currency. This confidence was built by America's long standing as the worlds most productive economy. I think you would agree that the people have far more to offer (goods and services) than the government, in exchange for those dollars.

Perhaps, it would serve better to get your explanations to these matters:

1)What happens when the government spends?

2)How do dollars get into the system?

3)What is the Fed's role in money creation and distribution, if any?

4)How do the dollars that are needed to pay taxes come to exist?

5)Can the Government run a continuous surplus? If so please explain?

Maybe this will help us get on with this discussion.

Posted by: Hobbes Nov 25 2010, 12:38 AM

QUOTE
First, I have to say that I do not mean to be condescending, I agree that it adds nothing to the debate. So, I apologize if that is how i came off. I desperately want us to get past this back and forth, so that we can get back to the actual topic of the thread.


Fair enough. It occurred to me after posting this that we all agreed at the beginning that inflation is the worry, regardless of how one views monetary policy or the deficit. Given that, and the topic of the thread...what exactly is it that we are debating?

QUOTE
I think you would agree that the people have far more to offer (goods and services) than the government, in exchange for those dollars.


I would...but that is NOT why they buy the dollars. They do that because of their faith in our government. This is a most important distinction, because it ties in with agreement cited above regarding inflation. Once inflation becomes a worry, especially if it is due to a structural deficit problem which will just lead to more inflation, then foreign traders will NOT flock to the dollar, in fact just the opposite will happen. Note that this will occur despite the fact that the dollar is still required for taxation purposes in the U.S.

Perhaps, it would serve better to get your explanations to these matters:

1)What happens when the government spends?

They spend. I'm not sure what you're getting at, but I suspect it has to do with the below, which makes it a redundant question.

2)How do dollars get into the system?

There are a variety of ways. Government spending is but one of them, and I'm not even sure I'd agree it is the primary one. Go back to my still unanswered question of what happens when a country, say the U.S., changes currency. Does the entire economy just stop while everyone waits for government spending to infuse more money into the economy? No. The government exchanges the old currency for the new one. Finally, and probably most importantly, through lending. Banks are able to lend out far more than the cash they have on hand, so when the Fed relaxes interest rates, it encourages banks to lend, which puts more money out into the economy.
3)What is the Fed's role in money creation and distribution, if any?

See above.

4)How do the dollars that are needed to pay taxes come to exist?

See above.
5)Can the Government run a continuous surplus? If so please explain?

Could they? Yes. Nothing to explain...they would do it the same way anyone else would do it--by spending less than what they take it. Whether or not that is a good thing is another debate entirely, but absolutely they could.

Posted by: CarpeDinkum Nov 25 2010, 07:13 AM

QUOTE(Hobbes @ Nov 24 2010, 04:38 PM) *
QUOTE
First, I have to say that I do not mean to be condescending, I agree that it adds nothing to the debate. So, I apologize if that is how i came off. I desperately want us to get past this back and forth, so that we can get back to the actual topic of the thread.


Fair enough. It occurred to me after posting this that we all agreed at the beginning that inflation is the worry, regardless of how one views monetary policy or the deficit. Given that, and the topic of the thread...what exactly is it that we are debating?



5)Can the Government run a continuous surplus? If so please explain?

QUOTE(Hobbes)
Could they? Yes. Nothing to explain...they would do it the same way anyone else would do it--by spending less than what they take it. Whether or not that is a good thing is another debate entirely, but absolutely they could.


The original question being "What do you see as the negative economic effects of persistent deficits?", calls in to question what the effect of a surplus would be AND what the effect of a deficit would be. Whether one or the other would be good or bad depends on how much and under what circumstances. Discussing the extremes of either would seem to be of little use at this point.


Posted by: brinn Nov 25 2010, 03:17 PM

QUOTE(Hobbes)
QUOTE(brinn)
For my purposes I am simplifying things by consolidating Central Bank and Treasury operations and referring to them as the Fed. The distinction between the two makes no difference to my arguments.


This is the root of the problem, as I think it makes a tremendous amount of difference to the arguments.
I respect this view Hobbes but can you tell me specifically why you feel it makes a difference to the argument? I could certainly provide you with another "treatise" on the relationship between fed and treasury operations but I'm concerned that after investing the time and effort you will respond by dismissing it with a response equivalent to "No, that's wrong" or "No, that's not what I was referring to". The general position you seem to have taken is one of mere opposition where you latch on to one specific or semantic detail of the argument and then go on to claim that the broad argument is completely invalidated based upon this detail. You don't state alternative hypotheses but rather seem satisfied to claim that the MMT view is incorrect or false with no further discussion of the details of why you believe this to be the case.

Can you please elaborate as to why you believe my description of the purpose of bond operations is incorrect? Can you provide me with something more specific than "I believe the distinction between Fed and treasury operations is important."? Perhaps if you explain why you believe the differentiation to be important, we can move past the semantic arguments and begin discussing the broader concepts.

P.S.
Hope you all have a great Thanksgiving day!


Posted by: pj4xtrader Nov 25 2010, 04:36 PM

QUOTE(brinn @ Nov 25 2010, 10:17 AM) *
QUOTE(Hobbes)
QUOTE(brinn)
For my purposes I am simplifying things by consolidating Central Bank and Treasury operations and referring to them as the Fed. The distinction between the two makes no difference to my arguments.


This is the root of the problem, as I think it makes a tremendous amount of difference to the arguments.
I respect this view Hobbes but can you tell me specifically why you feel it makes a difference to the argument? I could certainly provide you with another "treatise" on the relationship between fed and treasury operations but I'm concerned that after investing the time and effort you will respond by dismissing it with a response equivalent to "No, that's wrong" or "No, that's not what I was referring to". The general position you seem to have taken is one of mere opposition where you latch on to one specific or semantic detail of the argument and then go on to claim that the broad argument is completely invalidated based upon this detail. You don't state alternative hypotheses but rather seem satisfied to claim that the MMT view is incorrect or false with no further discussion of the details of why you believe this to be the case.

Can you please elaborate as to why you believe my description of the purpose of bond operations is incorrect? Can you provide me with something more specific than "I believe the distinction between Fed and treasury operations is important."? Perhaps if you explain why you believe the differentiation to be important, we can move past the semantic arguments and begin discussing the broader concepts.

P.S.
Hope you all have a great Thanksgiving day!

Thank you Brinn, you have stated my frustrations better than I have been able to. Brinn and I have have worked to build on our positions, while attempting to make clear why we challenge others. Leder, akaCG and most every one else, have also consistently offered alternative hypotheses when challenging ones position. You seem to be above this, you are not even will to answer my questions. You simply state that they are "irrelevant" or "redundant", without stating why. Why not humor us, what may seem irrelevant to you, may be the source of someones confusion, sometimes repetition is the best way to learn. Help us to understand what you understand. I promise that I will not respond to your argument with a simple, "False" or "Incorrect", with no reason as to why. I will not focus on a specific term that I think is misused, and say that the whole position must then be invalid.

P.S.
Happy thanksgiving to all.

Posted by: Ted Dec 2 2010, 07:05 PM

QUOTE
Brinn
Let me address this than. Money, which can take many forms including printed currency notes needs to be created by the issuing agent. This is typically known as "high powered money". With a mix of currency and electonic records of cash (bank accounts) in the economy, the government can, and does, spend mostly by issuing electronic credits to accounts. This is NOT to say that the government can not also spend by distribution of a paper "check" (like a social security check) or even through hand delivery of freshly minted currency notes delivered by a government agent directly into your hand. The point is, that regardless of the method chosen the government has the ability to create these things (currency notes, electronic deposits and checks) from nothing. Do you agree?


The government cannot “create” money. They can borrow money by selling securities and then spend the borrowed money. The government does this continuously. Deficit spending is borrowing more money than you have coming in and results in an additional interest debt on the yearly Budget.

The Fed can increase liquidity by lowering the http://ttp://en.wikipedia.org/wiki/Discount_window
http://en.wikipedia.org/wiki/Discount_window


Which is the rate big banks pay for (usually short term) money. This effects the “Prime Rate” and interest rates in general.

Posted by: brinn Dec 3 2010, 11:58 AM

QUOTE(Ted @ Dec 2 2010, 02:05 PM) *
QUOTE
Brinn
Let me address this than. Money, which can take many forms including printed currency notes needs to be created by the issuing agent. This is typically known as "high powered money". With a mix of currency and electonic records of cash (bank accounts) in the economy, the government can, and does, spend mostly by issuing electronic credits to accounts. This is NOT to say that the government can not also spend by distribution of a paper "check" (like a social security check) or even through hand delivery of freshly minted currency notes delivered by a government agent directly into your hand. The point is, that regardless of the method chosen the government has the ability to create these things (currency notes, electronic deposits and checks) from nothing. Do you agree?


The government cannot “create” money. They can borrow money by selling securities and then spend the borrowed money. The government does this continuously. Deficit spending is borrowing more money than you have coming in and results in an additional interest debt on the yearly Budget.

The Fed can increase liquidity by lowering the http://ttp://en.wikipedia.org/wiki/Discount_window
http://en.wikipedia.org/wiki/Discount_window


Which is the rate big banks pay for (usually short term) money. This effects the “Prime Rate” and interest rates in general.

The government disagrees. I quote Ben Bernanke in his Remarks before the National Economists Club in Washington, D.C. on November 21, 2002:
But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

The discount rate has nothing to do with it. Rate tageting is monetary policy and clearly I'm referring to fiscal policy.

Posted by: CarpeDinkum Dec 4 2010, 03:31 AM

QUOTE(Ted @ Dec 2 2010, 02:05 PM) *
The government cannot “create” money. They can borrow money by selling securities and then spend the borrowed money. The government does this continuously. Deficit spending is borrowing more money than you have coming in and results in an additional interest debt on the yearly Budget.

The Fed can increase liquidity by lowering the http://ttp://en.wikipedia.org/wiki/Discount_window
http://en.wikipedia.org/wiki/Discount_window


Which is the rate big banks pay for (usually short term) money. This effects the “Prime Rate” and interest rates in general.


QUOTE(Brinn)
The government disagrees. I quote Ben Bernanke in his Remarks before the National Economists Club in Washington, D.C. on November 21, 2002:
But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

The discount rate has nothing to do with it. Rate tageting is monetary policy and clearly I'm referring to fiscal policy.


So Brinn, you're saying that the US doesn't "borrow" money; rather that we offer interest via US treasuries as a way of controlling interest rates. You're saying that we're not ASKING (China, Japan, Lower Slobovia, et. al.) to buy our treasuries?



Posted by: brinn Dec 4 2010, 04:09 AM

QUOTE(CarpeDinkum @ Dec 3 2010, 10:31 PM) *
QUOTE(Ted @ Dec 2 2010, 02:05 PM) *
The government cannot “create” money. They can borrow money by selling securities and then spend the borrowed money. The government does this continuously. Deficit spending is borrowing more money than you have coming in and results in an additional interest debt on the yearly Budget.

The Fed can increase liquidity by lowering the http://ttp://en.wikipedia.org/wiki/Discount_window
http://en.wikipedia.org/wiki/Discount_window


Which is the rate big banks pay for (usually short term) money. This effects the “Prime Rate” and interest rates in general.


QUOTE(Brinn)
The government disagrees. I quote Ben Bernanke in his Remarks before the National Economists Club in Washington, D.C. on November 21, 2002:
But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

The discount rate has nothing to do with it. Rate tageting is monetary policy and clearly I'm referring to fiscal policy.


So Brinn, you're saying that the US doesn't "borrow" money; rather that we offer interest via US treasuries as a way of controlling interest rates. You're saying that we're not ASKING (China, Japan, Lower Slobovia, et. al.) to buy our treasuries?


We have a winner! The rate paid on short term treasuries sets the floor for the overnight rate. Additionally, the purpose of borrowing is interest rate support and not funding. By issuing government securities, the government offers banks an opportunity to exchange non-interest bearing reserves for interest bearing securities. If all banks would rather earn zero interest on their assets than accept interest payments from the government, the refusal to accept interest becomes a benefit for the government as the government spends money and the banking system essentially lends the money at zero interest by refusing to accept interest on the new deposits which the government spending created. Instead, the banking system is content to leave the money in a non-interest bearing account at the Fed. The money is held at the Fed either way - it has no other existence. If the money is left as excess reserves it sits in an non-interest bearing account at the Fed. If the money is loaned to the government by purchasing government securities it again is held at the government's account at the Fed.

Posted by: CarpeDinkum Dec 4 2010, 05:31 AM

QUOTE(brinn @ Dec 3 2010, 08:09 PM) *
QUOTE(CarpeDinkum @ Dec 3 2010, 10:31 PM) *

So Brinn, you're saying that the US doesn't "borrow" money; rather that we offer interest via US treasuries as a way of controlling interest rates. You're saying that we're not ASKING (China, Japan, Lower Slobovia, et. al.) to buy our treasuries?


We have a winner! The rate paid on short term treasuries sets the floor for the overnight rate. Additionally, the purpose of borrowing is interest rate support and not funding. By issuing government securities, the government offers banks an opportunity to exchange non-interest bearing reserves for interest bearing securities. If all banks would rather earn zero interest on their assets than accept interest payments from the government, the refusal to accept interest becomes a benefit for the government as the government spends money and the banking system essentially lends the money at zero interest by refusing to accept interest on the new deposits which the government spending created. Instead, the banking system is content to leave the money in a non-interest bearing account at the Fed. The money is held at the Fed either way - it has no other existence. If the money is left as excess reserves it sits in an non-interest bearing account at the Fed. If the money is loaned to the government by purchasing government securities it again is held at the government's account at the Fed.


So, is the money really "loaned" in the common sense (i.e. like States, businesses or individuals get a loan)? Are we paying them interest because in a sense, we DON"T want their money (we want to drain liquidity)?


Posted by: Maybe Maybe Not Dec 5 2010, 12:44 PM

brinn,

http://www.americasdebate.com/forums/index.php?s=&showtopic=20318&view=findpost&p=312551, I proposed a description and explanation of "money" - basically, I said money is a mere representation, or measure, of value, and not a thing of value in and of itself. You agreed with the explanation in principle, but warned:

QUOTE(brinn @ Nov 10 2010, 01:18 PM) *
I think you may be thinking about this above the level of accounting which is where we may be talking past each other. The sectoral balances approach is concerned with the exchange of dollars (not value, but dollars) between the three sectors of an economy.
I propose a warning to you that not everything about government deficits and debt is merely a matter of accounting.

Government spends a lot of money providing actual goods and services (the military, healthcare, roads and bridges, law enforcement, education, etc.), and paying actual salaries and pensions - things of value. Government spending that results in large and persistent deficits and debt is not wholly a matter of accounting for the dollars in the system.

Where is the government getting the value it distributes? Can the government persistently distribute more value than it takes in? Or should we not worry about that?

Posted by: brinn Dec 5 2010, 04:01 PM

QUOTE(Maybe Maybe Not @ Dec 5 2010, 07:44 AM) *
brinn,

http://www.americasdebate.com/forums/index.php?s=&showtopic=20318&view=findpost&p=312551, I proposed a description and explanation of "money" - basically, I said money is a mere representation, or measure, of value, and not a thing of value in and of itself. You agreed with the explanation in principle, but warned:
QUOTE(brinn @ Nov 10 2010, 01:18 PM) *
I think you may be thinking about this above the level of accounting which is where we may be talking past each other. The sectoral balances approach is concerned with the exchange of dollars (not value, but dollars) between the three sectors of an economy.
I propose a warning to you that not everything about government deficits and debt is merely a matter of accounting.

Government spends a lot of money providing actual goods and services (the military, healthcare, roads and bridges, law enforcement, education, etc.), and paying actual salaries and pensions - things of value. Government spending that results in large and persistent deficits and debt is not wholly a matter of accounting for the dollars in the system.

Where is the government getting the value it distributes? Can the government persistently distribute more value than it takes in? Or should we not worry about that?


The relation between the users of the currency and the issuer of the currency is very different from the relation of user to user. When the government pays a contractor to construct a road, the government is not bartering with the contractor. The government is not trading a good or service for another good or service but is supplying something completely different, currency. Although the currency has no inherent value like a bushel of wheat or a barrel of oil, there is demand for the currency and it does hold "value'. The reason the contractor wants the dollars is because he knows that he can exchange those dollars with others for items that he needs or wants. But this seems to avoid the question. Why would others want the dollars when they could just as easily use seashells or some other token as placeholder of value?

Ultimately, the reason dollars have value is because they are the ONLY medium of exchange that can extinguish tax liabilities. That is essentially why dollars or any other free floating, non-convertible currency has "value". You cannot pay your tax bill with a bushel of wheat, a barrel of oil, a bar of gold or silver, a handful of Euros, several gems, or a wallet full of Yen. The demand for dollars is created solely by the ability of the government to enforce payment of taxes in the currency of issue. As long as the govenment can enforce taxation in the currency of issue, there will be demand for the currency. At the most basic level, Leder is correct when he states that the value of the dollar is mantained via government force.

Can the government persistently distribute more value than it takes in? Simple and clear answer...No. Because the government has the ability to create the dollars it exchanges with the private sector for value, the government can purchase ANYTHING that is for sale in the denominated currency. However, once the amount of currency distributed begins to exceed the ability of the private sector to create additional value, inflation will ensue.

Have you ever wondered why the inflation rate is the lowest its been in 5 decades despite all the stimulus and quatitative easing? Does this not run contrary to prevailing wisdom? The reason that inflation is low is that there is no velocity of money. People are saving and not spending. Unemployment is at 9% - 10%. This represents productive capacity that is idle. This is the output gap. If the government spends (or reduces taxes) and all that spending is saved, than the expanding monetary base will not result in inflation. Once velocity increases and demand improves, firms will begin to absorb some of the idle labor in order to increase capacity. The increased capacity offsets much of the increased monetary base and inflation will not be appreciable. However, once spending increases beyond the ability of the private sector to produce more goods and services (i.e. once the output gap shrinks), than additional increases to the monetary base will be inflationary. Everyone who understands that a growing economy requires a growing currency supply to avoid deflation should understand this concept clearly.

Maybe, Maybe Not,

Up to this point you obviously don't agree with much of anything that I'm saying. What would it take for you to change your mind? To open the door of doubt just a crack? What could get you to say, "maybe there is room to look at things differently"?

Posted by: Maybe Maybe Not Dec 5 2010, 04:38 PM

QUOTE(brinn @ Dec 5 2010, 11:01 AM) *
The relation between the users of the currency and the issuer of the currency is very different from the relation of user to user. When the government pays a contractor to construct a road, the government is not bartering with the contractor. The government is not trading a good or service for another good or service but is supplying something completely different, currency.
This is simply untrue.

In the road construction example you provide, the government is exchanging value, not just currency, with the contractor. The government is "spending" value it has collected from the taxpayers, and the contractor in return provides something of value to the taxpayers. The fact that the government to some extent controls the currency does not mean that the government's actions never involve value but only currency.



QUOTE(brinn @ Dec 5 2010, 11:01 AM) *
Although the currency has no inherent value like a bushel of wheat or a barrel of oil, there is demand for the currency and it does hold "value'. The reason the contractor wants the dollars is because he knows that he can exchange those dollars with others for items that he needs or wants. But this seems to avoid the question. Why would others want the dollars when they could just as easily use seashells or some other token as placeholder of value?
Not a difficult question at all - they want the exchanges of value to take place in a trusted and convenient measure. But the fact that the measure is trusted and convenient, and that it's the government's job to some extent to regulate the currency so that it remains trusted and convenient, does not mean government never takes part in an exchange of value. It clearly DOES take part in many such transactions.



QUOTE(brinn @ Dec 5 2010, 11:01 AM) *
Ultimately, the reason dollars have value is because they are the ONLY medium of exchange that can extinguish tax liabilities.
Again, this is simply untrue. Dollars "have value" because they are a trusted and convenient measure (or representation) of value. Tax liabilities are themselves simply the measure of value the government takes from citizens in order to do what government does.

We don't have to have dollars because tax liabilities are measured in dollars - we have to have dollars because they are the measure of the value we owe to the government. Theoretically, I could offer that value to the government in the form of wheat or services, but that would be very inconvenient unless everyone needed wheat or everyone needed the services I happen to be good at providing and there was some way for the government to distribute that wheat or those services.



QUOTE(brinn @ Dec 5 2010, 11:01 AM) *
Can the government persistently distribute more value than it takes in? Simple and clear answer...No. Because the government has the ability to create the dollars it exchanges with the private sector for value, the government can purchase ANYTHING that is for sale in the denominated currency. However, once the amount of currency distributed begins to exceed the ability of the private sector to create additional value, inflation will ensue.
So there IS a reason to question large and persistent deficits and debt?



QUOTE(brinn @ Dec 5 2010, 11:01 AM) *
Maybe, Maybe Not,

Up to this point you obviously don't agree with much of anything that I'm saying. What would it take for you to change your mind? To open the door of doubt just a crack? What could get you to say, "maybe there is room to look at things differently"?
I think it's sort of odd for you to conclude that because I'm asking questions and challenging your positions in this thread, I'm NOT trying to look at things differently.

The question of the thread is "What's so Bad about the Deficit?!?!"
What's so bad about it is that it can reflect a government that is attempting to distribute more value than it is taking in. To continue to do so at high levels for any length of time is unsustainable. There may very well be the need for deficits and debt from time to time for the very reasons you have been talking about. But I'm not so confident that the government is not just using its responsibility for maintaining a stable, trusted, and convenient currency system to cook the books, thereby hiding a looming economic disaster ... but still getting re-elected.

Posted by: brinn Dec 5 2010, 05:07 PM

QUOTE(MMN)
This is simply untrue.

In the road construction example you provide, the government is exchanging value, not just currency, with the contractor. The government is "spending" value it has collected from the taxpayers, and the contractor in return provides something of value to the taxpayers. The fact that the government to some extent controls the currency does not mean that the government's actions never involve value but only currency.
Let's just say that building this road cost ten dollars. The government, feeling a little tricky on this day, decides that instead of using money from its "account" at the fed, will just print up a new crisp ten dollar currency note to pay the bill. Does this note have value even though it was just created ex nihilo?

QUOTE(MMN)
QUOTE(brinn)
Ultimately, the reason dollars have value is because they are the ONLY medium of exchange that can extinguish tax liabilities.Again, this is simply untrue. Dollars "have value" because they are a trusted and convenient measure (or representation) of value. Tax liabilities are themselves simply the measure of value the government takes from citizens in order to do what government does.


We don't have to have dollars because tax liabilities are measured in dollars - we have to have dollars because they are the measure of the value we owe to the government. Theoretically, I could offer that value to the government in the form of wheat or services, but that would be very inconvenient unless everyone needed wheat or everyone needed the services I happen to be good at providing and there was some way for the government to distribute that wheat or those services.


Incorrect. Trust and convenience have nothing to do with fiat money having value. You NEED DOLLARS because that is the ONLY thing that can extinguish tax liabilities. You, everyone, already offers wheat and services to the government and in exchange the government gives dollars. If you offer the government wheat or services to extinguish taxes they will REFUSE and tell you to get DOLLARS. The government doesn't accept wheat for payment of taxes. Note: The caps are for emphasis only and should not be construed as shouting.

Let me offer a simple analogy: I take over your country. You are now a citizen of my country and I impose a tax on you to be settled in my currency which happens to be the "brinn". Nobody has any brinns as only I can create them. How do you pay the tax bill?

QUOTE(MMN)
So there IS a reason to question large and persistent deficits and debt?
Yes! Absolutely positively! But context is needed to understand what is large (persistent deficits are a foregone conclusion though. the nature of double entry accounting requires that someone runs a deficit if another is to save or run a surplus).

As I've stated several times, inflation is the ultimate bogey. Not default (impossible), but inflation. The government can debase the currency, but understanding that the deficit is necessary for private sector savings to exist and understanding how to use the size of the deficit to provide the greatest benefit for the citizens of the US is ultimately the goal of the thread.

Posted by: Maybe Maybe Not Dec 5 2010, 07:14 PM

QUOTE(brinn @ Dec 5 2010, 12:07 PM) *
QUOTE(MMN)
This is simply untrue.

In the road construction example you provide, the government is exchanging value, not just currency, with the contractor. The government is "spending" value it has collected from the taxpayers, and the contractor in return provides something of value to the taxpayers. The fact that the government to some extent controls the currency does not mean that the government's actions never involve value but only currency.
Let's just say that building this road cost ten dollars. The government, feeling a little tricky on this day, decides that instead of using money from its "account" at the fed, will just print up a new crisp ten dollar currency note to pay the bill. Does this note have value even though it was just created ex nihilo?
With a system of currency regulated and maintained by the government, the government should never allow itself to "feel a little tricky." That's exactly the problem. Getting "tricky" is what destroys trust in the currency, and trust is a must.

Just because you can contemplate government doing something it should not do, and because what you contemplate is not only possible but actually HAPPENS, does not mean that all is well when it DOES happen.




QUOTE(brinn @ Dec 5 2010, 12:07 PM) *
QUOTE(MMN)
QUOTE(brinn)
Ultimately, the reason dollars have value is because they are the ONLY medium of exchange that can extinguish tax liabilities.Again, this is simply untrue. Dollars "have value" because they are a trusted and convenient measure (or representation) of value. Tax liabilities are themselves simply the measure of value the government takes from citizens in order to do what government does.
We don't have to have dollars because tax liabilities are measured in dollars - we have to have dollars because they are the measure of the value we owe to the government. Theoretically, I could offer that value to the government in the form of wheat or services, but that would be very inconvenient unless everyone needed wheat or everyone needed the services I happen to be good at providing and there was some way for the government to distribute that wheat or those services.
Incorrect. Trust and convenience have nothing to do with fiat money having value. You NEED DOLLARS because that is the ONLY thing that can extinguish tax liabilities. You, everyone, already offers wheat and services to the government and in exchange the government gives dollars. If you offer the government wheat or services to extinguish taxes they will REFUSE and tell you to get DOLLARS. The government doesn't accept wheat for payment of taxes. Note: The caps are for emphasis only and should not be construed as shouting.

Let me offer a simple analogy: I take over your country. You are now a citizen of my country and I impose a tax on you to be settled in my currency which happens to be the "brinn". Nobody has any brinns as only I can create them. How do you pay the tax bill?
There's a saying (from Zen Buddhism, I believe) about religious texts being "a finger, pointing at the moon." Zen warns us never to mistake the finger for the moon. (That saying always reminds me of "missing the forest for the trees." Or seeing a road sign and trying to get to your destination by climbing up the sign.) It's the same thing as my previous analogy about claiming we can't bake a cake because we're out of "teaspoons." You're claiming we can bake as many cakes as we want, even if we're out of flour, because we've got TONS of teaspoons!

If you took over a country, and told all the residents you demand "brinns," but you know thy don't have any ... what do expect in response to your demands?

(I have no issue with your use of caps here. It seems an appropriate use for emphasis.)



QUOTE(brinn @ Dec 5 2010, 12:07 PM) *
QUOTE(MMN)
So there IS a reason to question large and persistent deficits and debt?
Yes! Absolutely positively! But context is needed to understand what is large (persistent deficits are a foregone conclusion though. the nature of double entry accounting requires that someone runs a deficit if another is to save or run a surplus).

As I've stated several times, inflation is the ultimate bogey. Not default (impossible), but inflation. The government can debase the currency, but understanding that the deficit is necessary for private sector savings to exist and understanding how to use the size of the deficit to provide the greatest benefit for the citizens of the US is ultimately the goal of the thread.
So what do you think about the size and persistence of the federal budget deficit and national debt? Is it reasonable and explainable in terms of "teaspoons"? Or are we in danger of running out of flour and all we have are pretend "cakes"? What level of deficit or debt would make you wonder?

Posted by: brinn Dec 5 2010, 08:58 PM

QUOTE(MMN)
This is simply untrue.

In the road construction example you provide, the government is exchanging value, not just currency, with the contractor. The government is "spending" value it has collected from the taxpayers, and the contractor in return provides something of value to the taxpayers.
The fact that the government to some extent controls the currency does not mean that the government's actions never involve value but only currency.

You make the statement I bolded above. You specifically state that the statement I made was "simply untrue". You then go on to explain that that the government is not merely providing the contractor with "currency" but rather value. In response I provide an example where the government creates currency out of thin air and satisfies it debt to the private sector. You then move the goalposts and state that
QUOTE(MMN)
With a system of currency regulated and maintained by the government, the government should never allow itself to "feel a little tricky." That's exactly the problem. Getting "tricky" is what destroys trust in the currency, and trust is a must.

Just because you can contemplate government doing something it should not do, and because what you contemplate is not only possible but actually HAPPENS, does not mean that all is well when it DOES happen.
So here you concede that it DOES occur but that it maybe Shouldn't occur. This makes your statement above, that the government can't create currency/value from nothing, untrue. It's very frustrating to debate someone who merely moves the goalposts when an argument is effectively countered. You wouldn't allow another debater to get away with this tactic so why engage in it yourself?

So, at this point, I assume you recognize that the government CAN do what I claimed it can do but you want to debate the wisdom of doing this. Is this accurate?

QUOTE(MMN)
QUOTE(brinn)
QUOTE(MMN)
QUOTE(brinn)
Ultimately, the reason dollars have value is because they are the ONLY medium of exchange that can extinguish tax liabilities.
Again, this is simply untrue. Dollars "have value" because they are a trusted and convenient measure (or representation) of value. Tax liabilities are themselves simply the measure of value the government takes from citizens in order to do what government does.

We don't have to have dollars because tax liabilities are measured in dollars - we have to have dollars because they are the measure of the value we owe to the government. Theoretically, I could offer that value to the government in the form of wheat or services, but that would be very inconvenient unless everyone needed wheat or everyone needed the services I happen to be good at providing and there was some way for the government to distribute that wheat or those services.


Incorrect. Trust and convenience have nothing to do with fiat money having value. You NEED DOLLARS because that is the ONLY thing that can extinguish tax liabilities. You, everyone, already offers wheat and services to the government and in exchange the government gives dollars. If you offer the government wheat or services to extinguish taxes they will REFUSE and tell you to get DOLLARS. The government doesn't accept wheat for payment of taxes. Note: The caps are for emphasis only and should not be construed as shouting.

Let me offer a simple analogy: I take over your country. You are now a citizen of my country and I impose a tax on you to be settled in my currency which happens to be the "brinn". Nobody has any brinns as only I can create them. How do you pay the tax bill?


There's a saying (from Zen Buddhism, I believe) about religious texts being "a finger, pointing at the moon." Zen warns us never to mistake the finger for the moon. (That saying always reminds me of "missing the forest for the trees." Or seeing a road sign and trying to get to your destination by climbing up the sign.) It's the same thing as my previous analogy about claiming we can't bake a cake because we're out of "teaspoons." You're claiming we can bake as many cakes as we want, even if we're out of flour, because we've got TONS of teaspoons!

If you took over a country, and told all the residents you demand "brinns," but you know thy don't have any ... what do expect in response to your demands?
I'm not sure how your response answers my very simple question. Are you seriously asking me because you can't think of a way for them to obtain the currency of issue? I'll ask directly one more time but clarify a little and make it simpler in hopes that you make an attempt to answer. I take over your country. You are now a citizen of my country and I impose a tax on you to be settled in my currency which happens to be the "brinn". Nobody has any brinns as only I can create them. I announce that in one months time I will be collecting taxes. I have job openings (some in the military other in public service etc...) and would like some of your grain that you've grown and harvested. Now, how do you pay the tax bill?

QUOTE(MMN)
So what do you think about the size and persistence of the federal budget deficit and national debt? Is it reasonable and explainable in terms of "teaspoons"? Or are we in danger of running out of flour and all we have are pretend "cakes"? What level of deficit or debt would make you wonder?
With an unemployment rate nearing 10% and a huge output gap we are nowhere near running out of flour. The deficit could be expanded (via targeted spending designed to increase jobs or lower tax rates, or both) and it will NOT be inflationary due to the output gap. When inflation begins to set in and unemployment is much, much lower, then can we begin to worry about cutting spending and increasing taxes to drain liquidity.

Posted by: Maybe Maybe Not Dec 5 2010, 10:34 PM

QUOTE(brinn @ Dec 5 2010, 03:58 PM) *
So here you concede that it DOES occur but that it maybe Shouldn't occur. This makes your statement above, that the government can't create currency/value from nothing, untrue. It's very frustrating to debate someone who merely moves the goalposts when an argument is effectively countered.
...
So, at this point, I assume you recognize that the government CAN do what I claimed it can do but you want to debate the wisdom of doing this. Is this accurate?
Since the question for debate is what is "bad" about deficits ... Yes - I'd like to debate whether what the government CAN do (what is IS, in fact, DOING) is a "bad" or a "good" or a "neutral" thing.

Seems to me you've spent a lot of time and energy showing that the government CAN do that which everyone already KNOWS they are doing ... but when I address the question YOU posed for debate, you object and claim I'm "moving the goalposts." (Please tell me the point of this thread was not merely to showcase the depth of your knowledge of sectoral balances or other arcane financial and economic issues.)

Posted by: brinn Dec 6 2010, 02:01 AM

QUOTE(Maybe Maybe Not @ Dec 5 2010, 05:34 PM) *
QUOTE(brinn @ Dec 5 2010, 03:58 PM) *
So here you concede that it DOES occur but that it maybe Shouldn't occur. This makes your statement above, that the government can't create currency/value from nothing, untrue. It's very frustrating to debate someone who merely moves the goalposts when an argument is effectively countered.
...
So, at this point, I assume you recognize that the government CAN do what I claimed it can do but you want to debate the wisdom of doing this. Is this accurate?
Since the question for debate is what is "bad" about deficits ... Yes - I'd like to debate whether what the government CAN do (what is IS, in fact, DOING) is a "bad" or a "good" or a "neutral" thing.

Seems to me you've spent a lot of time and energy showing that the government CAN do that which everyone already KNOWS they are doing ... but when I address the question YOU posed for debate, you object and claim I'm "moving the goalposts." (Please tell me the point of this thread was not merely to showcase the depth of your knowledge of sectoral balances or other arcane financial and economic issues.)
I'm sure you understand the mechanics of a debate, particularly a debate about something as complex as the deficit and macroeconomics. Occasionally a debater will attempt to discuss a tangential point in order to establish a chain of logic that supports the main point. Much like you did on page 2 of this very thread where you asked a tangential question in response to a point I was attempting to establish. I quote the exchange below:

QUOTE(MMN)
QUOTE(brinn)
When China sells goods to the US, the dollars that they receive in exchange are held in the US at a US reserve bank. This is a crucial point; the dollars never leave the US banking system. Once the Chinese have these dollars they can buy US dollar denominated goods and services, sell the currency to a willing buyer for another currency, hold the currency in the reserve account (earning 0%) or buy a treasury note or bill which will give them a small interest return on their deposit.

Even though the "dollars" remain in the U.S., held at a U.S. reserve bank, do the Chinese not expect that a certain value adheres to those dollars? I mean, we can't just decide the dollars they "have" are worth less than they were when the Chinese obtained them and expect no protest? Can we?


Please note that your question was answered directly and politely without a reprimand to remind you to stay on topic.

Now, back to the point at hand; I make a statement which you claim is "simply untrue". I show you that my point is in fact true. You acknowledge that it is true and then try to tell me that although it is true, it is not wise. I ask you another question designed to demonstrate that a second related point that you have claimed is the absolute truth is not, in fact, true. You dodge the question by attempting to turn the question around and ask me to answer it. I clarify and ask you the same question a second time. You once again dodge the question by changing the subject.

Here I ask you a third time and ask you politely to please answer my question: I take over your country. You are now a citizen of my country and I impose a tax on you to be settled in my currency which happens to be the "brinn". Nobody has any brinns as only I can create them. I announce that in one months time I will be collecting taxes. I have job openings (some in the military other in public service etc...) and would like some of your grain that you've grown and harvested. Now, how do you pay the tax bill?






Posted by: Maybe Maybe Not Dec 6 2010, 10:50 AM

QUOTE(brinn @ Dec 5 2010, 09:01 PM) *
Now, back to the point at hand; I make a statement which you claim is "simply untrue". I show you that my point is in fact true. You acknowledge that it is true and then try to tell me that although it is true, it is not wise.
In the road construction contractor situation it is untrue that the government is not exchanging value for value. The government uses dollars (as a measure of the value they have received from taxpayers) to pay for something of value (roads) for the community.

You then speculated that the government "COULD" just print up the money to pay for the road - you described this scenario as the government "getting tricky" - and I agreed. I did not therefore agree that it is "true" that government payment for goods and services is generally and appropriately seen as merely the supplying of currency for exchanges between others.

The government is both the regulator of the currency AND the direct payor for goods and services. The former should not be used as a ruse to pretend to be doing the latter. That is the problem. When the government pays for goods and services or pays salaries and pensions, it has to be trusted to be providing real value - not just empty teaspoons.



QUOTE(brinn @ Dec 5 2010, 09:01 PM) *
Here I ask you a third time and ask you politely to please answer my question: I take over your country. You are now a citizen of my country and I impose a tax on you to be settled in my currency which happens to be the "brinn". Nobody has any brinns as only I can create them. I announce that in one months time I will be collecting taxes. I have job openings (some in the military other in public service etc...) and would like some of your grain that you've grown and harvested. Now, how do you pay the tax bill?
And I will answer you as I answered you before:

If you took over a country, and told all the residents you demand "brinns," but you know they don't have any ... what do you expect in response to your demands? In addition to the jobs you offer (presumably paying wages in "brinns"), have you also exchanged the existing currency for a standard amount of brinn? (Otherwise, your demand for taxes paid in brinn is merely a demand for the populace to leave their current occupations and take the government-paid jobs.)

Money, no matter the name or denomination, is merely a representation of value. Substituting one currency for another is merely changing teaspoons to milliliters.

In your take-over scenario, you don't want or need brinn from your new subjects - you can print all the brinn you desire. What you're really after is value - something to "pay back" the value you used up in subjugating them, plus a little extra as a reward, of course - brinn are merely the measure of the value you are taking.



QUOTE(brinn @ Dec 5 2010, 03:58 PM) *
QUOTE(MMN)
So what do you think about the size and persistence of the federal budget deficit and national debt? Is it reasonable and explainable in terms of "teaspoons"? Or are we in danger of running out of flour and all we have are pretend "cakes"? What level of deficit or debt would make you wonder?
With an unemployment rate nearing 10% and a huge output gap we are nowhere near running out of flour. The deficit could be expanded (via targeted spending designed to increase jobs or lower tax rates, or both) and it will NOT be inflationary due to the output gap. When inflation begins to set in and unemployment is much, much lower, then can we begin to worry about cutting spending and increasing taxes to drain liquidity.
Inflation isn't the only concern, although it's a big one. A strong and growing economy depends on so much more than simply a non-inflationary currency scheme.

A strong economy depends upon trust that the currency system is stable and fair, and on the freedom and willingness of people and corporations to take part in that economy - engaging in the innumerable transactions that are necessary for market forces to have their beneficial effects. When it begins to be suspected that the currency isn't stable or fair, people are less willing to part with their value via a currency that may not be a valid measure of that value.

But they are also suspicious when it (at least) appears that someone is cheating. The government continually and egregiously taking our value (in the form of taxes) and wasting it, or giving us value based on borrowed value we know we will one day have to part with to pay back, or simply pretending (as it seems to me you are) they already have all the value they need and these deficits and debts are mere accounting fictions has also resulted in susipcion of the fairness and stability of the system. These actions are rightfully viewed as "cheating," and the people are rightfully suspicious.



QUOTE(brinn @ Dec 5 2010, 09:01 PM) *
Please note that your question was answered directly and politely without a reprimand to remind you to stay on topic.
I wasn't reprimanding you for going off topic. I was pointing out that the tangential points necessary to a certain chain of logic seem to me to have been well established in this thread, and I was now following them to the conclusions which are at issue in this thread (rather than "moving the goal posts," as you accused me of doing).

Posted by: brinn Dec 6 2010, 12:10 PM

QUOTE(MMN)
If you took over a country, and told all the residents you demand "brinns," but you know they don't have any ... what do you expect in response to your demands? In addition to the jobs you offer (presumably paying wages in "brinns"), have you also exchanged the existing currency for a standard amount of brinn? (Otherwise, your demand for taxes paid in brinn is merely a demand for the populace to leave their current occupations and take the government-paid jobs.)
Thank you for your response.

I have not exchanged the existing currency for my new fiat currency. I think your existing currency is merely worthless pieces of paper.

So yes, I have forced many out of their existing jobs and into my military and government employ. And what about that wheat of yours that I want? Will you part with your wheat or other goods that you produce for a few brinns? Or would you rather spend the rest of your life in my tax evader's prison?

Note to MMN: The above was a question I would ask you to answer. It is not rhetorical.

Posted by: Maybe Maybe Not Dec 6 2010, 11:51 PM

QUOTE(brinn @ Dec 6 2010, 07:10 AM) *
I have not exchanged the existing currency for my new fiat currency. I think your existing currency is merely worthless pieces of paper.
Huh?

Why WOULDN'T you exchange the existing currency for your preferrred currency?? I mean, we all know and agree that currency is merely a representation and measure of value? Right?

And it's the VALUE we're all after, right?

It would be a foolish conqueror indeed who mistakes the measure for the value.




QUOTE(brinn @ Dec 6 2010, 07:10 AM) *
So yes, I have forced many out of their existing jobs and into my military and government employ.
Who is left to raise the goats, make the rugs, grow the wheat, build the houses, keep the books, and sell the groceries once you have forced the people into your employ (to be paid in the currency you prefer)?



QUOTE(brinn @ Dec 6 2010, 07:10 AM) *
And what about that wheat of yours that I want? Will you part with your wheat or other goods that you produce for a few brinns? Or would you rather spend the rest of your life in my tax evader's prison?
People in prison aren't very productive, generally speaking.

Are you a wise conqueror? Or are you a foolish conqueror?

Posted by: Ted Dec 7 2010, 12:40 AM

QUOTE(brinn @ Dec 3 2010, 06:58 AM) *
QUOTE(Ted @ Dec 2 2010, 02:05 PM) *
QUOTE
Brinn
Let me address this than. Money, which can take many forms including printed currency notes needs to be created by the issuing agent. This is typically known as "high powered money". With a mix of currency and electonic records of cash (bank accounts) in the economy, the government can, and does, spend mostly by issuing electronic credits to accounts. This is NOT to say that the government can not also spend by distribution of a paper "check" (like a social security check) or even through hand delivery of freshly minted currency notes delivered by a government agent directly into your hand. The point is, that regardless of the method chosen the government has the ability to create these things (currency notes, electronic deposits and checks) from nothing. Do you agree?


The government cannot “create” money. They can borrow money by selling securities and then spend the borrowed money. The government does this continuously. Deficit spending is borrowing more money than you have coming in and results in an additional interest debt on the yearly Budget.

The Fed can increase liquidity by lowering the http://ttp://en.wikipedia.org/wiki/Discount_window
http://en.wikipedia.org/wiki/Discount_window


Which is the rate big banks pay for (usually short term) money. This effects the “Prime Rate” and interest rates in general.

The government disagrees. I quote Ben Bernanke in his Remarks before the National Economists Club in Washington, D.C. on November 21, 2002:
But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

The discount rate has nothing to do with it. Rate tageting is monetary policy and clearly I'm referring to fiscal policy.



What you are referring to was the Fed discussing a plan to forestall deflation.

See - http://www.lesjones.com/2009/10/20/inflation-or-deflation-the-man-with-the-dollar-printing-press-says-inflation/

And if the Fed does buy US debt it debases the value of the dollar which is equivalent to paying interest on the money…

QUOTE
Monetization and the inner sanctum of government finance
are quite often mentioned in such arcane, highly specialized language that few people – including other economists- understand what the writer is trying to convey. To simplify the terms, monetization amounts to nothing more than printing money. It works the following manner: when the federal government can’t seem to find domestic or foreign buyers for its debt issue, usually because the interest rate is not high enough to attract lenders – a particularly acute dilemma in a low-interest-rate environment, the Federal Reserve Bank buys this debt and issues a check to the government. The government spends this money and in turn debases all the currency outstanding.

http://www.e-goldprospecting.com/html/debt_monetization__the_road_to.html



There is no free lunch and never will be.

Posted by: brinn Dec 7 2010, 01:53 AM

QUOTE(MMN)
QUOTE(brinn)
I have not exchanged the existing currency for my new fiat currency. I think your existing currency is merely worthless pieces of paper.
Huh?

Why WOULDN'T you exchange the existing currency for your preferrred currency??
A very good question and i intend to demonstrate the answer if you'll answer my questions.

QUOTE(MMN)
I mean, we all know and agree that currency is merely a representation and measure of value? Right?
Yes.

QUOTE(MMN)
And it's the VALUE we're all after, right?
Yes, amongst other things.

QUOTE(MMN)
It would be a foolish conqueror indeed who mistakes the measure for the value.
Let us assume I'm a foolish conqueror then.

QUOTE(MMN)
QUOTE(brinn)
So yes, I have forced many out of their existing jobs and into my military and government employ.
Who is left to raise the goats, make the rugs, grow the wheat, build the houses, keep the books, and sell the groceries once you have forced the people into your employ (to be paid in the currency you prefer)?
I don't know! Remember, I'm not a very wise conqueror. You're a goat farmer who has yet to take a job in my employ. What do YOU do?

QUOTE(MMN)
QUOTE(brinn)
And what about that wheat of yours that I want? Will you part with your wheat or other goods that you produce for a few brinns? Or would you rather spend the rest of your life in my tax evader's prison?
People in prison aren't very productive, generally speaking.
An excellent observation but you have still not answered my question.

QUOTE(MMN)
Are you a wise conqueror? Or are you a foolish conqueror?
You think I'm a foolish conqueror and I think I'm a wise conqueror.

Now I've answered you're questions and, once again, you have failed to answer mine.

You are a goat farmer. What do YOU do?

You have a silo full of grain but no brinns. What do you do?

Ted,

On Dec 2 2010 at 02:05 PM you wrote:
QUOTE
The government cannot “create” money.

I believe I have put the lie to that statement. Regardless of whether Bernanke was discussing forestalling inflation or discussing the price of tea in China, the fact is, he clearly stated that the government can do EXACTLY WHAT YOU CLAIMED IT CANNOT DO. I think you realize this fact as well.

Posted by: Maybe Maybe Not Dec 7 2010, 11:08 AM

QUOTE(brinn @ Dec 6 2010, 08:53 PM) *
Let us assume I'm a foolish conqueror then.
Very well. In that case, you might not be very interested in (or even capable of) maintaining a functional economy. I suppose even a wise conqueror might not care about the economy if his only intention is to take his spoils and return home rather than to rule.

In these cases, we might see very different behavior than we would hope to see from a ruler or ruling class whose intention is to maintain a stable and vibrant economy.

That being said, I'm willing to continue discussing the analogy in hopes of better understanding your position.



QUOTE(brinn @ Dec 6 2010, 08:53 PM) *
QUOTE(MMN)
Who is left to raise the goats, make the rugs, grow the wheat, build the houses, keep the books, and sell the groceries once you have forced the people into your employ (to be paid in the currency you prefer)?
I don't know! Remember, I'm not a very wise conqueror. You're a goat farmer who has yet to take a job in my employ. What do YOU do?
Are you offering me brinn for my goats and my wheat? If so, and if my community (from whom I previously bought tools, vegetables, and clothing, and who own the land I rent) is forced into the same deal and is therefore accepting brinn as the new currency, I accept your brinn for my goats and wheat. And I pay your tax in brinn.

Or, if I see that I will get more brinn by joining your army than I can get by selling you and my neighbors goats and wheat, and am able to use that brinn to get meat and bread in addition to tools, vegetables, clothing and shelter, I join your army.



QUOTE(brinn @ Dec 6 2010, 08:53 PM) *
Or would you rather spend the rest of your life in my tax evader's prison?
QUOTE(MMN)
People in prison aren't very productive, generally speaking.
An excellent observation but you have still not answered my question.
No. I'd rather accept your brinn via sale of my goods and services (whether they be goats and wheat on the one hand, or military service on the other) than go to prison.



I hope I have answered all the questions you posed. What I see in your analogy is the forced substitution of one currency for another. What I don't yet see is how that substitution is analogous to government deficits or debts, or an evaluation of the effect on the economy.


Posted by: Hobbes Dec 7 2010, 02:05 PM

QUOTE(brinn @ Dec 6 2010, 06:10 AM) *
QUOTE(MMN)
If you took over a country, and told all the residents you demand "brinns," but you know they don't have any ... what do you expect in response to your demands? In addition to the jobs you offer (presumably paying wages in "brinns"), have you also exchanged the existing currency for a standard amount of brinn? (Otherwise, your demand for taxes paid in brinn is merely a demand for the populace to leave their current occupations and take the government-paid jobs.)
Thank you for your response.

I have not exchanged the existing currency for my new fiat currency. I think your existing currency is merely worthless pieces of paper.


Then your government will fail, and the question becomes moot. First, you cannot get enough money out into the economy to pay taxes. Second, there will be a revolt, and you will be overthrown, making brinns worthless pieces of paper. If MMT is based on this, then MMT is a worthless theory. Can you name a single example in modern times where the currency was switched, but not exchanged?

QUOTE(MMN)
Who is left to raise the goats, make the rugs, grow the wheat, build the houses, keep the books, and sell the groceries once you have forced the people into your employ (to be paid in the currency you prefer)?


No one. Since only those with government jobs have any currency, and they won't have that for a few weeks to a few months, apparently most commerce ceases, and the vast majority of the population dies of starvation. Which might be why no one does this, and the premise of the question is false.

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