SORRY, BUT THAT’S NOT THE ‘REASON’ FOR GOVT. ‘BORROWING’ WITH A NON CONVERTIBLE CURRENCY.

the reflationary effect of government spending is cancelled out by the deflationary effect of the private sector NOT spending.

THAT’S NOT AT ALL WHAT I WAS GETTING AT.

Put another way, the increase in the private sector’s net financial assets (psnfa) does not induce extra spending: this extra psnfa RESULTS from the interest rate rise.

AGAIN, NOT MY POINT AT ALL.

Alternatively, to the extent that the private sector has idle bank balances (i.e. to the extent that the private sector has ALREADY decided not to spend $Y over X years), the result of govt borrowing would then be to increase the velocity of circulation of money: the net result WOULD be reflationary (i.e. boost demand). But in this case, the private sector (or at least the private sector individuals who lend to govt) are relatively indifferent to size of their net financial assets. I.e. the reflationary effect comes from the above increased velocity, not from increased psnfa.

THE ISSUING OF TSY SECS IS NOT A CONSTRAINT ON SPENDING.

UNDER A GOLD STANDARD IT IS A CONSTRAINT ON CONVERSION WHICH IS THE POINT OF GOVT SECURITIES UNDER THOSE CIRCUMSTANCES.

Just to emphasise the importance of velocity, this fell 72% in New York between Oct 1929 and March 1932 according to an article entitled “You can print money, but not confidence” in The Times, by William Rees-Mogg.

THAT GOLD STANDARD WASN’T SUSPENDED UNTIL 1933/1934.

When the UK govt decided to borrow and spend earlier this year, this was rubbished by the German finance minister on the grounds that “borrow and spend” has no effect. I sympathise with the latter view.

I DON’T. HE WAS ENTIRELY WRONG.

Because of the uncertain effects of borrow and spend, I’d be happier (as I pointed out in earlier posts above) if governments which wanted to reflate just spent (with no corresponding borrowing or tax increase).

THAT DOESN’T MAKE ANY DIFFERENCE. NOTE THE BUILD UP OF THE FED’S BALANCE SHEET HAS HAD NO FURTHER EFFECT, AS INDICATED ELSEWHERE ON THIS SITE.

I.e. I prefer good old Mugabwe style money printing, but done in a more controlled fashion than Mugabwe. There is no doubting the effect of Mugabwe style money printing: look at Zimbabwe.

THAT AMOUNT OF DEFICIT SPENDING WOULD BE INFLATIONARY WHETHER SECURITIES WERE SOLD OR NOT. LIKE THE GREAT LATIN AMERICAN INFLATIONS, AND TURKEY’S YEARS OF INFLATION.

SORRY, BUT YOU’VE COMPLETELY MISSED THAT POINT

To the extent that government borrows $Y for X years because it induces the private sector to abstain from spending $Y over X years because of a small interest rate rise, the reflationary effect of government spending is cancelled out by the deflationary effect of the private sector NOT spending. Put another way, the increase in the private sector’s net financial assets (psnfa) does not induce extra spending: this extra psnfa RESULTS from the interest rate rise.

Alternatively, to the extent that the private sector has idle bank balances (i.e. to the extent that the private sector has ALREADY decided not to spend $Y over X years), the result of govt borrowing would then be to increase the velocity of circulation of money: the net result WOULD be reflationary (i.e. boost demand). But in this case, the private sector (or at least the private sector individuals who lend to govt) are relatively indifferent to size of their net financial assets. I.e. the reflationary effect comes from the above increased velocity, not from increased psnfa.

Just to emphasise the importance of velocity, this fell 72% in New York between Oct 1929 and March 1932 according to an article entitled “You can print money, but not confidence” in The Times, by William Rees-Mogg.

When the UK govt decided to borrow and spend earlier this year, this was rubbished by the German finance minister on the grounds that “borrow and spend” has no effect. I sympathise with the latter view. Because of the uncertain effects of borrow and spend, I’d be happier (as I pointed out in earlier posts above) if governments which wanted to reflate just spent (with no corresponding borrowing or tax increase). I.e. I prefer good old Mugabwe style money printing, but done in a more controlled fashion than Mugabwe. There is no doubting the effect of Mugabwe style money printing: look at Zimbabwe.

In contrast, in democracies, governments just don’t have significant dictatorial economic powers. Democratic governments are essentially glorified conglomerates which provide a variety of goods and services. Payment for these services happens to be called “tax”. But the name “tax” is irrelevant. One could equally well call the payments that citizens make to other large conglomerates a “tax” (e.g. payment for food at large supermarket chain).

IF YOU DON’T UNDERSTAND THE DIFFERENCE BETWEEN A TAX OBLIGATION VS A RETAIL PURCHASE WE HAVE NOTHING FURTHER TO DISCUSS. OTHERS MAKE THIS SAME POINT, BY THE WAY, GOING SO FAR AS TO SAY TAX PAYMENT IS VOLUNTARY BECAUSE IT’S VOTED ON BY THE ELECTORATE. AGAIN, THAT COMPLETELY MISSES THE POINT OF LOGIC.

THIS COMPLETELY MISSES THE POINT AS WELL:

2. Tax is not necessarily paid in fiat money.

In the UK (and perhaps other countries) citizens do not absolutely have to pay taxes in the local fiat money. They can pay, if they want, by giving the tax authorities a house, plot of land, or lump of gold.

THESE PAYMENTS ARE VALUED AT CURRENT MARKET PRICES IN THE GOING UNIT OF ACCOUNT, AND THEREFORE ARE NOT FUNCTIONALLY DIFFERENT THAN PAYING IN THE LOCAL CURRENCY.

IT WOULD MAKE A DIFFERENCE IF TAXES WERE DENOMINATED IN FIXED AMOUNTS OF GOLD OR ANY OTHER SUBSTANCE OR SERVICE. THIS WOULD INCLUDE THE GOLD STANDARD OR OTHER FIXED EXCHANGE RATE REGIMES.

I HAVE DISCUSSED THIS POINT MANY TIMES WITH SCHOLARS, BANKERS, ECONOMISTS, AND MANY OTHERS WHO HAVE IMMEDIATELY SEEN THE ERROR OF THEIR WAYS AND MOVED ON. HOPE YOU ARE ONE OF THEM!

But if Warren wants me to paste these 2,000 words, or part of them onto his site with a view to continuing the discussion on his site, I’m happy to do that.

I agree to agree. the lower rates contributed but weren’t what initiated the fall in investment.

in this case i’d say it was the discovery of the sub prime fraud against a backdrop of a falling budget deficit.

SCOTT: Good point re: Japan.

what we have seen is a collapse in investment as rates were cut from 5.25 to 0. Maybe a couple of hundred $billion of interest income has been removed from the non govt sectors.

Looks to me the lower incomes are a stronger force than any difference in the propensity to consume differences between borrowers and savers?