‘no one saw this coming’ : understanding financial crises through accounting models
Posted by WARREN MOSLER on July 13th, 2009
Objections to deficit spending-
1. Deficits now mean higher taxes later.
Response — Taxes function to regulate aggregate demand, not raise revenue per se.
Taxes will go up ‘later’ only if aggregate demand is ‘too high’ later which means unemployment becomes ‘too low.’
that is exactly the point of deficits today- to bring down unemployment and excess capacity
So what that statement actually says is that deficits ‘work’ and will bring down unemployment and close the output gap, hopefully to the point that taxes need be raised to cool things down.
2. How will the govt pay back all that debt?
Response — When treasury securities mature the BOE debits the holders security account and credits his transactions account.
End of story.
3. The currency will go down.
Response — maybe, maybe not, but in any case the level of the currency does not alter the real wealth of the nation. It is only an internal distributional issue and those issues can be addressed with other domestic policies.
4. We need to wait for the lower interest rates and quantitative easing to work.
Response — It is working- policy makers have it backwards- it reduces aggregate demand
Quantitative easing increases the BOE’s balances sheet as it buys securities.
It removes higher yielding securities from the private sector and replaces them with lower yielding balances at the BOE,
this reduces non government incomes and accumulations of net financial assets, and thereby reduces aggregate demand.
Lower rates reduces savers incomes more than borrowers as borrowing rates remain high due to credit concerns.
Banks net interest margins increase adding to bank earnings which have a 0 marginal propensity to consume.
Therefore lower rates reduce aggregate demand.
5. What can be done?
Response — Immediate suspension of VAT at least until aggregate demand is restored to desired levels.
However, income tax receipts will ‘automatically’ increase as GDP recovers which will ‘automatically’ moderate aggregate demand.
Keep the BOE rate at 0 to keep costs of production and investment low and thereby help control prices and promote supply to areas of demand. (removing VAT also keeps prices lower than otherwise.)
Use taxes to moderate demand when excess demand becomes a problem, not to raise revenue per se.
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July 13th, 2009 at 11:37 am
Warren says: “Taxes will go up ‘later’ only if aggregate demand is ‘too high’ later “which means unemployment becomes ‘too low.’”
Warren, perhaps chinese officials want western aggregate demand to go down, for perhaps things like oil, while they increase their aggregate demand, so thier citizens can have lots of fun driving cheaply. Western leaders may go along with this to keep global peace and sacrifice thier own citizens standard of living to appease the 1 billion chinese and 1 billion indians.
Warren says: “that is exactly the point of deficits today- to bring down unemployment and excess capacity”
Warren, my retired friends in florida who have lots of dollars and euros saved don’t want to compete for resources with younger working people. I think ideally they want younger working families to have as little as possible. Sadly for the younger people, these older retired people are very strong and dedicated voters and campaign contributers.
Warren says: “Response — maybe, maybe not, but in any case the level of the currency does not alter the real wealth of the nation. It is only an internal distributional issue and those issues can be addressed with other domestic policies.”
Warren Buffet said we were selling off the farm and eating our own seedcorn to maintain our standard of living in the west, he is much richer than you Warren, and I don’t think he lost 30% last year either, so he probably understands capital markets a little better than you. You say maybe or maybe not in regards to our purchasing power, but I already went to several foreign countries and they would not take my US dollars or allow me to bank in their countries being a USA citizen. You are not being objective regarding this very real concern that is happening right now! I am terrified that all my years of college education and hard work entitles me to little more resources in this world than a shopping machine princess living off the welfare tit. I thought Russia proved socialism doesn’t work long term?
Warren says: Response — Immediate suspension of VAT at least until aggregate demand is restored to desired levels.”
I see older retirees who think aggregate demand is still too high, they want it to go much lower! Who is the wizard of oz that controls aggregate demand levels? A few poltical cronies who are influence by lobbyists?
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jcmccutcheon Reply:
July 13th, 2009 at 1:35 pm
If the asian export countries wanted to consume more than us, then why are they trying to support their exporters by not allowing their currencies to appreciate?
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Dissenting Comments Encouraged Reply:
July 13th, 2009 at 6:08 pm
Because they haven’t completely hollowed us out yet, some parasites completely consume the host, not live in mutual harmony with it. Why leave your opponent weakened and bloody to perhaps rise again in the future like a phoenix from the ashes when you can completely destroy him and remove all chance of retaliation?
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July 13th, 2009 at 12:43 pm
lol
Was just going to send you the link to this paper. Interesting that so many of the good guys are mentioned.
Best,
Mike
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July 13th, 2009 at 8:09 pm
WOW!!!!!
Money Monopoly
Marshall Auerback says California is challenging the federal monopoly on money creation:
Schwarznegger to Obama: Watch and Learn, by Marshall Auerback: According to the San Diego Union-Tribune, Republicans and Democrats alike embraced legislation last Friday that would make California IOUs legal tender for all taxes, fees and other payments owed to the state.
http://economistsview.typepad.com/economistsview/2009/07/money-monopoly.html
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