Updated: 7 Deadly Innocent Frauds
Posted by WARREN MOSLER on December 10th, 2009
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Seven Deadly Frauds of Economic Policy (June 17, PDF Link)
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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.-
MMT: Taxes function to regulate aggregate demand, and not to raise revenue per se.
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August 3rd, 2009 at 8:41 pm
Excellent. DO you have any plans to look for a publisher when you finish this? It would be great to have it out there, or even better to have you out there on the talk-show circuit explaining it…
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Howard Reply:
February 27th, 2011 at 12:28 pm
Yes Warren,go for it! I am going to contact the tea party patriots,GoooH and Freedomworks for you. Howard
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WARREN MOSLER Reply:
February 27th, 2011 at 5:32 pm
thanks!
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Potomac Oracle Reply:
November 23rd, 2011 at 9:14 pm
@Jim Baird, Ditto, Ditto, Ditto!!!
Warren is the most powerful weapon we have against the deficit terrorists. I’ve been using The 7DIF in one way or another in all of my comments on as many blog sites as I have time to visit. It’s startling how few understand the basics of the 1st Deadly Innocent Fraud.
Maybe the small bank he owns could do a promo booklet to show depositors how their tax money is accounted for and how deficits only matter at or about full employment, etc.
Anyway MMT is a real solution to how we think and respond to financial events in this nation.
Thanks Warren and all those who contributed to the creation of MMT.
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WARREN MOSLER Reply:
November 25th, 2011 at 8:36 am
Thanks and welcome!
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August 3rd, 2009 at 9:28 pm
Yes, ideas for the right publisher welcome!
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Potomac Oracle Reply:
January 3rd, 2012 at 7:30 pm
@Warren Mosler, You may want to check out Ellen Brown’s publisher. She had a hell of her time getting “The Web of Debt” published here because the Fed didn’t want it in circulation.
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WARREN MOSLER Reply:
January 4th, 2012 at 6:26 am
i wouldn’t publish it either. too many material errors
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Robert Bostick Reply:
January 14th, 2012 at 10:51 am
@WARREN MOSLER,
Really?
Well, I woundn’t know, not being an expert just a73 y/o someone looking for a better way to view the universe.
Thanks for the feedback.
Have you done the Diane Rhem’s Show or anything at MSNBC, King World News?
I wish you and your outstanding group of colleagues would go “real big time media” between now and June. Just getting the OWS folks to focus on facts like, “the U.S. can’t go broke”…”taxes don’t pay for anything”…”zero interest rates are good”, and being the “sole issuer of the currency” would stir the pot of political discourse enough to get the Tea Party to wonder about its harboring deficit terrorists.
Again, thanks for your brilliant insights.
WARREN MOSLER Reply:
January 16th, 2012 at 7:47 am
been trying, thanks! feel free to promote from your end!
Robert Bostick Reply:
January 15th, 2012 at 1:56 pm
@Potomac Oracle,
I know I should become thoroughly familiar with the principles of MMT but being an impetuous septuagenarian, here goes.
What constrains a sovereign currency nation from funding all of the government/public sector budgets of all of its subordinate political jurisdictions (55,000 plus here), bypassing bond markets, and issuing to these entities interest free credits/currency?
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WARREN MOSLER Reply:
January 16th, 2012 at 8:00 am
nothing operational
August 3rd, 2009 at 10:14 pm
I don’t know anything about publishers, but maybe you should talk to your good friend Steve Leisman – I think that publishers like it if you can arrange publicity ahead of time.
And I think the autobiographical tidbits definitely make it more interesting. I was actually telling my wife the other day (who I think feels like she knows you already, since I’m always talking about “What Warren said…”) that the thing about Mosler is that he has the rare ability to see the obvious, whether it’s about the advantages of catamarans or lightweight cars or the monetary system (of course, part of the trouble is that seeing the obvious doesn’t alway translate into success in a world dominated by trivialities…). So I think little digressions about your cars or your boat, in addition to adding color to the story, would help flesh out where you’re coming from.
I think that with a good editor, this could be quite a good little book, and would probably get a good amount of attention.
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Joe Baiera Reply:
December 7th, 2009 at 6:00 pm
I agree with jim about providing the public with some idea of where you come from and what qualifies you to speak about the matters at hand. I saw an interview you did on wall-street which you posted on your facebook. The person interviewing you did not mention any of your qualifications (harvard, your previous business success, your eco friendly and cost efficient yatch, ect.). I thought the interview was somewhat scattered and hard to understand which can be common when introducing new ideas to a person/interviewer who doesn’t fully understand the idea to begin with. This paired with the lack of your back round info left me feeling like the interview may not have succeeded in getting the point across or winning support. fortunately for me, you explained your ideas once to me in person using an example of buisness cards in exchange for chores (for your kids). This explanation was simple, to the point, and easy to understand and with my new understanding of your theories along with information on your background I was able to give you my full support, which you still have, but I must say I agree with Jim Baird. Good luck! show those Hawkeye’s why you should be in office and then take the nation by storm!!!
Joe
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August 4th, 2009 at 12:48 am
Really good stuff, Warren. Required reading this fall semester, for sure.
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August 4th, 2009 at 2:32 am
Outstanding! Although I’m not a believer in the “public purpose” part, the rest is eye opening (as is this whole site).
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Warren Mosler Reply:
August 4th, 2009 at 8:26 am
thanks!
the point of govt. is public purpose, and i view/criticize policy and outcomes in that light.
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Dissenting Comments Encouraged Reply:
August 5th, 2009 at 8:25 am
Public purpose?
Warren how many of your friends have you asked to put pressure on congress to have hearings on those judges that locked up children for profit? It was your suggestion after all?
Go on youtube or google video and do a search for the “century of self” A little documentary about crowd control and keeping winston from 1984 pacified. Then go watch some “prisoner” with patrick mcgoohan or “blake’s 7″ I am not necessarily against this, I don’t want 7 billion mad hungry humans looking to eat you or me for dinner.
Government is not about public purpose, it is about keeping an elite few in power to stick the boot in everyone elses faces and fear no uprising. Which makes your bid for the presidency disgusting and shows you are just jealous that Michelle Obama has a staff of 20 slaves and you don’t! LOL!
http://yro.slashdot.org/story/09/08/02/0725224/UK-Plans-To-Monitor-20000-Families-Homes-Via-CCTV
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Michael Coburn Reply:
February 26th, 2010 at 5:51 pm
So repeal the 17th amendment and quadruple the House of Representatives while insisting that high school diplomas are issued only to those who understand government and basic classical economics.
October 9th, 2009 at 1:58 pm
Warren is a very smart man, who clearly understands money better than the politicians and most economists. Last year, he helped edit a paper I wrote, that unfortunately wasn’t published. So I’ll share it with you, here:
Is It Time For a FICA Holiday?
Traditional thinking has produced an economic disaster, which the same traditional thinking cannot solve. As the U.S. and world economies slip into recession, we must remember this ultimately is a bookkeeping crisis. The housing “market” was destroyed, but not the actual houses. They still exist. Nothing real has been destroyed. Instead, we are starved for money.
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This problem should be easier to remedy than a food shortage, water shortage or wartime destruction, because a money shortage can be cured by the simple expedient of adding money – something the federal government is uniquely empowered to do.
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We propose a FICA payroll tax “holiday,” whereby the U.S. Treasury will make our Social Security and Medicare payments for us. This will add about $10 billion per week to our take-home pay, and another $10 billion to business income, both of which urgently are needed. When we eliminate this partly double, severely regressive tax, we will give consumers the income they need to make mortgage payments, to pay bills, and to do the shopping American business craves. The FICA holiday also will provide business with money for jobs and investment.
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In contrast, the “top down” approach (saving Fannie Mae, buying toxic mortgages), while necessary, does not directly address consumer/business money needs, and has had only modest effect.
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Common knowledge holds that Social Security and Medicare will face bankruptcy even with FICA. So proposed fixes invariably include benefit cuts, reducing consumer incomes, or tax increases, cutting consumer and business spending power – the opposite of what our economy requires.
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Many people fear federal deficit spending when it supports Social Security and Medicare, but not when it supports the military. Social Security spending for 2008 is approximately $600 billion, about equal to the defense budget. Ironically, both candidates for President believed Social Security will run out of money and the military will not. The $1 trillion in “stimulus” spending was authorized without increased taxes. Both candidates advocated tax cuts.
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Even during the darkest days of the Great Depression, the federal government never ran out of money. Massive government spending, before and during World War II, helped lift us from the Depression.
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In 1971 President Nixon eliminated any risk of government insolvency by ending the last vestiges of the gold standard. At the stroke of a pen, he assured that neither the government, nor any of its agencies, could run short of money. Social Security and Medicare, being two of those 400+ agencies, are immune from bankruptcy.
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If Congress authorizes the Treasury to make our Social Security and Medicare payments for us, thus allowing our take-home pay to rise, the economy will begin to recover. The elimination of FICA deductions would provide consumers and business with more than a trillion additional dollars annually, exactly what a healthy economy needs.
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Won’t this increase the federal deficit? Yes, but President Nixon’s signature guaranteed the government never will run short of money to service its debts. This act removed taxes as a necessary source of federal money. Together with federal spending, taxation became a mere tool to create optimal output and employment. Whatever deficit accomplishes that goal is the right size.
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Doesn’t a large deficit cause higher interest rates? No, interest rates are set by the Federal Reserve. The government can set rates at any level it wishes.
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Doesn’t a large federal debt create a shortage of lending funds? No, the more money the government pumps into the economy, the more lending funds are created.
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Won’t our children have to pay for the increased deficit? No, the government owes the debt and easily services a debt of any size. Our children are not the debtors. (In many cases, they even are the creditors.) Because the “right” size debt will continue to grow forever as our economy grows, it never should be reduced or paid back.
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Meanwhile, each year the increased debt will help keep output high and unemployment low, benefiting our children with additional income, goods and services.
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Won’t increasing the deficit by eliminating FICA, cause inflation? President Carter had modest deficits and high inflation. President Reagan had the highest deficits in American history and modest inflation. Contrary to popular wisdom, federal debt has not caused inflations, recessions, high interest rates or any other negative economic effects. On the contrary, large deficits have been associated with economic growth.
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In summary, we offer new thinking – an accounting fix to an accounting problem: Eliminate FICA and pay for Medicare and Social Security the same way we pay for Congress, the military, the Supreme Court and every other federal agency, by functionally folding these two agencies into the general fund. The economic crisis has presented us with the rare opportunity to accomplish two important goals: Permanently fix the seemingly intractable Social Security and Medicare problems, and energize our economy.
Rodger Malcolm Mitchell
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Michael Coburn Reply:
February 26th, 2010 at 6:10 pm
The reason for FICA taxes is to stop the rightarded from destroying Social Security. We the people must be able to claim that we take nothing from capital and we owe nothing _to_ capital. We must be able to say that it is a savings program. If that is not the case then the representatives of the rich will convince the trailer park trash that Social Security is a welfare program and thus eliminate it as some sort of support for those who were spendthrifts and wastrels and/or those who did not wisely “invest”. This has absolutely nothing to do with reality or economics or money. It has only to do with lying and deceit in the heart of every government hating fanatic.
Your idea is simply a way to put purchasing power in the hands of the _producers_ in the society. This is best done with a stimulus like the stimulus of early 2008 but on a quarterly basis. Just send out the money and have it curtailed for those with higher incomes. You accomplish the same thing without harming the Social Security system.
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October 26th, 2009 at 3:05 pm
Like the piece. This is a really nice extension of the monetary policy implementation “accounting” that we do in money markets on a day-to-day basis to help keep track of where overnight rates and so forth will trade. As we see every day on a really micro level, money cannot be destroyed and always returns to the central bank (barring taking out a lot of banknotes and burning them). The extension of reserve accounting into aggregate economy wide accounting is a pretty simple step when viewed with a money market lense.
It also makes me think a lot about the fractional reserve system and the shadow banking system. The piece works best for me when there is neither a shadow banking system or fractional reserve system (ie. full reserves). Because policymakers have outsourced credit creation to the banking and shadow system the question left for me was the extent to which QE and the Govt deficit can offset the private sector’s credit creation? (or more appropriate perhaps, the private sector’s credit destruction in this environment… of course this could later flip and we have the two working hand in hand but that’s not the question I’m raising here).
Also, I am not sure how we resolve prices using this piece, not just volumes? I appreciate the argument all that matters is volumes and that the rest is just a distribution issue, but I feel like I haven’t quite mentally closed the circle on this yet and would greatly appreciate your thoughts on this.
I also think about the regulation coming in – if banks will be required to hold larger buffers what then for the magnification of this impact via fractional reserves ?
Lastly, all this just my opinion of course, I thought the piece worked okay in an international perspective and you could see the Asian surplus dynamic which, via the FX pegs, ended up adding a lot of USD in USD banks etc but I found I had to suspend the behavioural element, ie. that there could be a run on the currency if policy gets too aggressive. Obviously this creates a big problem for the Europeans who cannot print.
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Curious Reply:
October 28th, 2009 at 8:26 pm
“Obviously this creates a big problem for the Europeans who cannot print.”
Is the ECB the lender of last resort or they don’t have one in Europe?
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warren mosler Reply:
October 29th, 2009 at 10:31 am
Yes, the ECB lends to banks as needed.
But the treaty doesn’t let them directly fund the national govts.
Nor does the ECB insure bank deposits. The National govts do that
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Postkey Reply:
March 1st, 2011 at 6:07 am
Hello,
Did you see this?
More importantly do you think that it is printing money to fund the Irish government?
“With the ECB confirming that it is the Irish Central Bank that is creating this money and that the money is not being borrowed from the ECB, what is now happening is that the Central Bank is printing its own money. This money is then being lent to the Irish banks to plug the holes opening up in their balance sheets as nervous depositors continue to withdraw their money.”
http://www.independent.ie/business/irish/were-printing-billions-just-to-save-the-banks-2507432.html
Thanks
WARREN MOSLER Reply:
March 2nd, 2011 at 5:09 pm
it’s conceptually done as agent for the ecb with ecb approval.
Curious Reply:
October 29th, 2009 at 2:09 pm
Thanks. So what’s the likely scenario in case of a bank run and ECB not willing to lend?
Return to national currency?
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Warren Mosler Reply:
October 29th, 2009 at 2:16 pm
no way to tell.
hopefully it doesn’t happen. would be a total mess.
October 26th, 2009 at 4:09 pm
Texas,
There really isn’t any such thing as a “fractional reserve system”. Loans create deposits, as a matter of accounting, and reserves adjust later. The “reserve requirement” is just a tax on banks, which (in the past, at least) required them to hold a certain amount of assets in non-interest bearing reserves. Countries like Canada have gotten along for years (and, I might add, did much better in the current financial crisis) with a 0 reserve policy.
One of my favorite statements of Warren’s on this: “It’s not some sort of special law that gives banks the power to create money; it’s just accounting.”
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October 26th, 2009 at 7:00 pm
and this is the definitive piece from ‘mandatory readings’ that goes through ‘value’:
http://www.moslereconomics.com/mandatory-readings/a-general-analytical-framework-for-the-analysis-of-currencies-and-other-commodities/
briefly, the currency itself is a public monopoly and the monopolist is always ‘price setter’ whether he knows it or not
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anon Reply:
October 26th, 2009 at 8:35 pm
A price setter if you choose to set the price – e.g. fed funds rate.
But not a price setter if you choose not to set the price – e.g. bond auction
(I know you don’t like debt issuance)
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October 27th, 2009 at 8:17 am
right.
a monopolist sets two prices.
the first is what Marshall called the ‘own rate’ which is how your product exchanges for itself. For the currency this is called the interest rate.
the second is how it exchanges for other goods and services.
the monopoly supplier sets terms of exchange. and with the govt also the creator of the nominal demand via taxes, it controls that side as well.
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October 28th, 2009 at 8:28 pm
Yes, currency is a monopoly, but it doesn’t have to be.
What serves the public purpose better? Monopoly or competition?
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October 29th, 2009 at 10:29 am
Seems the currency pretty much does have to be a public monopoly.
The public purpose is to mover real goods and services from private to public domain.
Any ideas for doing it any other way?
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Floccina Reply:
October 30th, 2009 at 9:20 am
If money were private taxes would move goods and services from the private to the public domain.
Also you could have competing public institutions. Perhaps you could break the 12 Federal reserve banks into 4 groups and allow each to make its own currency. you need carefully designed incentives.
George Selgin and Bill Woolsey have some very interesting things to say about competition in money.
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warren mosler Reply:
November 1st, 2009 at 1:10 pm
If money were private taxes would move goods and services from the private to the public domain.
*true, that’s what happens on a gold standard, for example
but it has other seriously counterproductive issues.
Also you could have competing public institutions. Perhaps you could break the 12 Federal reserve banks into 4 groups and allow each to make its own currency. you need carefully designed incentives.
*what’s to be gained by that?
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Floccina Reply:
November 2nd, 2009 at 11:01 am
what’s to be gained by that?
To reduce the effect of a collapse of one currency. Also to allow for the fed to buy more diverse assets. To give the FEDs something to measure against.
October 29th, 2009 at 2:22 pm
The government can take whatever it wants whether it’s measured in US$ or Mosler$.
Competition among private currencies could also help the economy by keeping base interest rates at 0%.
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October 30th, 2009 at 9:11 am
The problem is that many of these frauds help the politicians. In fact it helps politicians on both sides. Republicans like the fraud that SS is running out of money because the people credit Democrats for the creation of the program. The democrats like the fraud because it fools people into thinking that SS is a retirement program that they paid into and so they deserve the SS checks making it difficult to touch the program and the people like the program and give credit to the democrats. Consider that SS is far less progressive than the income tax and yet if you propose to the democrats that you eliminate the FICA tax make SS a welfare program that pays out the same amount to rich or poor those defenders of the poor will fight you tooth and nail. They love the fraud!
The politicians are like mirrors to the people if the people believe the fraud the way to get elected is to go along with the fraud.
I wonder what your take is on the argument that if you increase the base money that once banks start to lend again, you will need to gather back in the base money to avoid inflation and that is not easy. The people who make that point argue that you should rather buy assets that can be sold if inflation comes than cut FICA taxes.
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Michael Coburn Reply:
February 26th, 2010 at 6:35 pm
The Democrats (or at least the small ‘d’ democrats) know that the rich will do anything they can to eliminate the Social Security system and to make the people totally dependent upon the owners of the means of production (the rich). If the Republicans can paint the Social Security system as a welfare program then they can eliminate it. So long as the system is supported by taxes on EARNED INCOME that is refunded in old age then it cannot be characterized as a welfare program and cannot be eliminated in the same way as a gift to the “welfare queen”. We are all aware of the shuffling of the money and the taking of the SS funds to award tax cuts to the rich while showing smaller deficits. But the fact is that the funds are accounted in the budget and there can be no lying about the source of those funds. If the Republicans can move the source of those funds from the producers to the owners (from wages to rent/interest) then the Social Security system will be destroyed very quickly. And that is the real objective of every entity that wants to “privatize” the SS system.
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November 1st, 2009 at 1:08 pm
Lending is not a function of the quantity of ‘base money’
I hear you on ss but don’t think the politicians are that clever or knowledgeable
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Michael Coburn Reply:
February 26th, 2010 at 6:51 pm
The one thing that _MAY_ finally happen (due to the HCR debate) is the broadening of the Medicare tax (tax on unearned income) and at least a minimal amount of progression in it. Unlike SS, Medicare benefits are the same for all persons over 65 regardless of how much they have paid in. It is truly a welfare system, but one that everyone seems very comfortable with. In politics (real life) it is the distribution that matters as opposed to the aggregates.
Yes, I know that 2.3% of the people over 65 are not enrolled in Medicare. But all over 65 are eligible (resident for 5 years). Those without 30 quarters of wage taxes must pay $2xx in monthly premiums and with less must pay $4xx in premiums. (40 quarters is free) But all are eligible and it is a very good deal for Richy Van Big Bucks who never worked a day in his life but has diabetes and high blood pressure. A very good insurance for less than $700. The private market would be $1200.
And I think your stuff is very good stuff. But distribution is what matters to politics.
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November 1st, 2009 at 2:02 pm
What other seriously counterproductive issues do private currencies have Warren?
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November 1st, 2009 at 5:19 pm
they result in a monetary system that is inherently ‘quantity constrained’ such as the gold standard, which then blows up periodically with high unemployment and excess capacity in general
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Floccina Reply:
November 2nd, 2009 at 10:58 am
I myself do not know but, George Selgin says otherwise:
http://www.econtalk.org/archives/2008/11/selgin_on_free.html
“Falling price level if productivity positive. Less-than-zero argument. If public wants to accumulate more money and stops spending, don’t draw as many checks or pass on their bank notes, decline in the velocity of money, would be a tendency for banks to issue more money, make more loans; their demand for reserves is a function of the flow of payments through the clearing system. When flow goes down, banks can bring it back up again by lending more. Changes in velocity get offset by money stock. Theory of Free Banking, first book. Why is there a Fed at all? ”
At one point Selgin says that if people heldGearge Selgin says otherwise:
http://www.econtalk.org/archives/2008/11/selgin_on_free.html
“Falling price level if productivity positive. Less-than-zero argument. If public wants to accumulate more money and stops spending, don’t draw as many checks or pass on their bank notes, decline in the velocity of money, would be a tendency for banks to issue more money, make more loans; their demand for reserves is a function of the flow of payments through the clearing system. When flow goes down, banks can bring it back up again by lending more. Changes in velocity get offset by money stock. Theory of Free Banking, first book. Why is there a Fed at all? ”
At one point he says that if people held all there money as cash the banks could produce an infinate amount of money. all their money as cash the banks could produce an infinite amount of money. It seems to me that free banking was evolving away from gold to into a system with money backed by assets. In such a system there would be a completely flexible money supply. Banks would be constrained from inflating by competition but in the case bank failures other banks could easily make up the slack. All the money stock could not deflate at ounce. Free banks could get money into circulation by buying assets. If all asset prices could not fall relative to the currency.
But this is all academic because we are not going to see free banking any time soon.
I idea of a FICA holiday is much more reachable. It seems right if people are holding too much debt to get money in the hands of the debtors. Let them buy pay down their debts and hold on to their assets so those assets do not depreciate.
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Floccina Reply:
November 2nd, 2009 at 6:17 pm
“I idea of a FICA holiday is much more reachable. It seems right if people are holding too much debt to get money in the hands of the debtors. Let them buy pay down their debts and hold on to their assets so those assets do not depreciate.”
Should have read:
I like the idea of a FICA holiday is a much more reachable. If people are holding too much debt the goal should be to get money in the hands of the debtors. Eliminate FICA and let them pay down their debts and hold on to their assets so those assets do not depreciate.
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November 2nd, 2009 at 11:18 am
unlike our current institutional arrangements, the above seems to imply a model where lending is somehow constrained by something other than loan demand from credible borrowers?
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winterspeak Reply:
November 2nd, 2009 at 12:20 pm
I don’t get it either.
“When flow goes down, banks can bring it back up again by lending more. Changes in velocity get offset by money stock.”
He seems to assume that banks can force loans on credible borrowers. Ignores the fact that, one sentence earlier, he himself asserts that flow is going down, which to me means that people are not taking on additional debt.
I think it’s an operation-free reading of MV=PT, where you can counteract a fall in V by increasing M. He claims that this would happen operationally via loans, but I think that’s impossible. It could happen if banks just started crediting their depositor’s accounts though. So they would hike up interest rates to enrich depositors, not to generate new loans.
Weird.
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Floccina Reply:
November 2nd, 2009 at 6:04 pm
“He seems to assume that banks can force loans on credible borrowers. Ignores the fact that, one sentence earlier, he himself asserts that flow is going down, which to me means that people are not taking on additional debt.”
I am not the clearest on this but I think he also says that should the bank’s money rise in value relative to other assets (deflation) the bank would buy up assets until the banks money stops appreciating relative to the other assets.
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winterspeak Reply:
November 2nd, 2009 at 7:06 pm
In a deflationary environment (as you describe) the real debt burden on households grows as they try to increase their savings. Debt ends up being written down, which will decapitalize banks (assuming that, in this model, they are extending credit at all).
Banks will find that their equity gets written down as their currency “appreciates” and their borrowers default. To put it another way, if banks lend secured, then in deflation, they simply take over all the collateral. They are welcome to it, as prices fall to what an unlevered buyer would pay.
JKH Reply:
November 2nd, 2009 at 4:49 pm
He says free banking can exist under either a fixed or floating rate system.
He seems very clear on bank capital, but not so on bank reserves. That’s a puzzling combination.
Suggests that free banking operates almost like an automatic stabilizer – when velocity goes down, banks lend more. Hard to figure that out.
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winterspeak Reply:
November 2nd, 2009 at 5:48 pm
Yup. Unless they just hike up their own personal interest rates and start funneling cash into deposits, I don’t see how that would happen.
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November 2nd, 2009 at 12:49 pm
“What other seriously counterproductive issues do private currencies have Warren?”
Also, if creating the currency is based on profitability and not public purpose, or simply qty constrained as in a gold standard, then you can’t handle even relatively simple payments systems crises. The history of these systems has demonstrated time and time again that gold standards and purely private payments systems likely couldn’t have dealt with, say, the disruptions of Y2K or 9/11, both of which the Fed handled with relative ease.
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November 2nd, 2009 at 1:50 pm
1. non-convertible monopoly currency also blows up periodically (Zimbabwe)
2. I have yet to hear 1 rational argument why private non-convertible currency would not work.
(we had a discussion about this here http://www.moslereconomics.com/mandatory-readings/a-general-analytical-framework-for-the-analysis-of-currencies-and-other-commodities/)
3. Is there any reason why private currencies can not coexist with government issued currency? Why not let the individual choose?
Scott,
I can see lending activity stopping in a crisis as trust evaporates, but why would a payment system stop?
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Scott Fullwiler Reply:
November 2nd, 2009 at 3:16 pm
Curious .. . for the same reasons, since payment systems run throughout the day and often overnight via overdrafts. You need an entity with both the ability and the willingness (that is, essentially no concern about the entity’s own profitability . . . recognizing that in a disruption the liquidity and default risk of counterpartys can skyrocket) to lend very large sums for the system to continue on a daily basis, and even more when there is a disruption.
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Curious Reply:
November 2nd, 2009 at 9:40 pm
That makes sense. In a “trust crisis” an interbank payment system without cb would likely shut down.
Which brings up a question. Does anybody know how did the international correspondent bank system handle the recent crisis?
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winterspeak Reply:
November 2nd, 2009 at 5:53 pm
CURIOUS:
1) Zimbabwe had obligations in foreign currencies, and thus was no longer operating on a fiat, floating-fx, non-convertible, no foreign obligation regime. Therefore it was not a “non-convertible monopoly currency”. The country was also run like crap and destroyed 50% of its own output. Gold standards don’t keep people from starving to death if they destroy their own farms.
3) I am declaring winterbucks. They are a private currency of my own making. Will you please choose to swap from for $USD? (As we know that’s DOOMED!) I promise I will not print any more winterbucks after our swap. Let me know how many you want and I’ll fire up my printer.
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Curious Reply:
November 2nd, 2009 at 10:18 pm
Winterspeak,
1) It was non-convertible currency. The fact that they had foreign loans doesn’t change that.
3) You need something to give your currency value (loan will do, as discussed in the link I posted).
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winterspeak Reply:
November 3rd, 2009 at 1:44 am
Curios: Are you really being serious about Zimbabwe? Have you ever lived in a third world country?
1) Zimbabwe probably had very limited tax collection, and it was becoming worse over time. Taxes are a key element to creating demand for currency.
2) Zimbabwe was almost certainly operating on a mixed currency regime where people carried Z$ as well as other currencies, almost certainly US$. People in Zimbabwe made a decision about how much Z$ to carry vs US$
3) As Mugabe destroyed Zimbabwe’s real productive output, there was simply less stuff to buy. This could trigger hyperinflation even if the country was running a surplus.
4) As the Govt disintegrated people’s desire to hold the currency also fell to zero, thus its’ value vanished. You didn’t need the Z$ to pay your taxes, and the armed thugs you encountered preferred US$ or cigarettes. Why hold Z$?
It continues to be bizarre to me that people hold up Zimbabwe as an example of what happens to a currency when the Government “prints too much”. In the list of things Mugabe has done to run his country into the ground, “printing too much currency” probably doesn’t even make the top 50.
If a government disintegrates, its currency will follow, not matter how well that Government has managed the currency up until its point of disintegration.
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pebird Reply:
November 10th, 2009 at 1:54 am
Well, first of all they do currently exist. Consumption points systems (hotels, airlines, credit card usage) act in some ways as private currencies. The monopoly owners issue as many points as they wish (I guess they need to get them from somewhere first, though) based on what behaviors they wish to reward.
You can borrow points or purchase points using other currencies and there have been attempts to consolidate and create point exchanges.
The one thing private currencies do accomplish is velocity. Private currencies by design must have a short life cycle – a solid private currency will be hoarded as bad private currencies drive out good.
The history of the US is the history of state chartered banks which basically issued private money – short life cycles and periods of extreme velocity (which is uncontrollable once it starts) were its hallmarks. It was tried and didn’t work then. What is going to change now?
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November 2nd, 2009 at 6:02 pm
“2. I have yet to hear 1 rational argument why private non-convertible currency would not work.”
It would work fine. Starbucks issues a “private nonconvertable currency” when it credits your Starbucks card. (They don’t issue refunds on unused balances, so it fits.) If Starbucks set up a payments system and convinced everyone in the worl to use StarBucks, everything would be fine, since Starbucks could always honor any draft on the system.
But when you talk about “competing” systems, you are slipping convertibility in through the back door. If I have StarBucks but I don’t like how they’re handling things (Or I just hate their coffee), I might want to transfer them over to my Dunkin’ Donuts card. But if they allow me to do that (or the authorities require them to do that), they now have a fully convertible currency, with all the payment difficulties that entails. By definition, “non-convertability” MUST entail a monopoly.
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November 2nd, 2009 at 11:11 pm
Jim,
my understanding:
convertible currency means convertible by the issuer into something else at a fixed rate.
Non-convertible currency means convertible by the issuer only into itself.
You can trade both types for anything you like (including other currency).
I’m not sure if your Starbucks points are convertible currency or not.
Where does the value of your Starbucks points come from?
Do they fix the value of your points to US$ or specific amount of coffee? If not, why do you accept them?
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winterspeak Reply:
November 3rd, 2009 at 1:46 am
I accept my starbuck points because it’s a convenient way to get a cup of coffee.
I accept my frequent flier miles because sometimes, in a blue moon, I get a free flight or an upgrade.
Can’t speak for Jim.
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Deficit Terrist Reply:
November 3rd, 2009 at 2:55 pm
Winter, Mcardle was invited to a session of bloggers at the treasury, why didn’t she show? Isn’t she a friend of yours?
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November 6th, 2009 at 12:51 pm
I’ve written two diaries at Firedog Lake that owe much to Warren’s thinking in “7 Deadly Frauds.” They are: “Deficit Hawkism and National Suicide: Part One,” and “Deficit Hawkism and National Suicide: Part Two.”
I’ve been familiar with similar ideas for some time having previously read books by Robert Eisner, Rick Boettger and Francis X. Cavanaugh. I see Warren’s work as perhaps closest to Boettger, whose mid-1990s book was roundly rejected by economists. I’m glad to know that there are people writing currently who understand the dangerous myths about the deficit that both conservative Republicans and many progressive and conservative Democrats still believe in.
Btw, anyone can post diaries in the Seminal section at FiredogLake.Com”. If you go there, scroll down on the right hand side of the page until you reach the tool box and then click on Post Diary. It will bring up a page with instructions.
It would be good to have more people there writing in opposition to deficit hawkism. Perhaps Rodger Malcolm Mitchell would like to publish his article there.
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November 9th, 2009 at 8:57 am
Thanks, will check it out later today.
I met Frank at a UMKC discussion.
He had written in his book that old people’s savings fund young people’s mtgs.
I told him it was the other way around.
Young people signing for mtgs create the deposits that become the old people’s savings when the young people buy the house.
He considered it and then agreed, saying he’d never thought about it that way.
He had been in Treasury for over 30 years.
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November 21st, 2009 at 11:05 am
Warren,
Just finished reading Richard Koo’s book and was hunting around the web for some more information. Your white paper is a very interesting take and mostly (I think) supportive of what I was reading in the revised “Holy Grail of MacroEconomics”. Certainly food for thought; I have to digest and read through once or twice before I grasp all of it completely. If Sumners & the Chinese did not grasp these concepts of balance sheet recessions I think we may be in more trouble than we think. Particularly if China does grasp the concept but sees it as a way to weaken us geopolitically (this is being written on the heels of Pres. Obama’s Asia trip).
Circumstances really are auguring for a ’37 style double dip, aren’t they? Thanks for sharing your opinions, and I look forward to reading your blogposts in the future.
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December 9th, 2009 at 5:38 pm
I have been reading more on free banking because it seems that the median voter will never get the post-Keynsian system right and that is who it depends on. Consider that in 1936 the federal government had to tighten its belt in response to the median voter plunging the country back into depression.
But I noticed that in a free banking system there seems to be no difference between currency in one’s pocket and money in a demand deposit account. (That is especially clear if one’s mortgage is in the same currency as his cash and demand deposit.)
How can the Federal reserve system be made to look more like free banking in this regard? In other words if people decide to hold more cash and or pay down loans shouldn’t the Fed just print more currency and allow the banks keep it on their books like demand deposits?
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December 10th, 2009 at 11:04 am
Any thoughts from this board on Henry Liu’s recent comments on Chartalism. He seems to believe that the FX rate is a bigger constraint for non-US sovereigns than do other Chartalists:
” … But Chartalist theory is operative only in closed domestic monetary regimes.
Countries participating in free trade in a globalized system, especially in unregulated global financial and currency markets, cannot operate on Chartalist principles because of the foreign-exchange dilemma. For a country participating in globalized trade, any government printing its own currency to finance domestic needs beyond the size of its foreign-exchange reserves will soon find its currency under attack in the foreign-exchange markets, regardless of whether the currency is pegged to a fixed exchanged rate or is free-floating. The only country exempt from this rule, up to a point, is the uS because of dollar hegemony”
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Jim Baird Reply:
December 10th, 2009 at 11:35 am
What is an “attack” in a free floating system? For an exporter, such an “attack” would merely make it’s products cheaper (China has been “attacking” its own currency for years…)
Let’s say your Nowhereistan. You have a freely floating currency, and your main export product is the wool of mountain goats. George Soros twirls his mustache (Does he have one? He should.) and says, “I will bring them to their knees!” He proceeds to sell Nowhereistani rube-dollars short, halving their value. Import prices soar, but suddenly they have cornered the market in mountain goat wool. Ralph Lauren buys up the whole lot for his new line of “Mountain Coats”. Exchange floods in. The rube-dollar stabilizes.
The Soroses of the world make their money by forcing forcing governments to defend a too-high peg. How is he going to make money by attacking the nonexistent peg of Nowhereistan?
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RSJ Reply:
December 11th, 2009 at 1:56 am
“How is he going to make money by attacking the nonexistent peg of Nowhereistan?”
He sells Baht and buys dollars enough to move the currency a bit, and then he makes money by selling dollars to and buying Baht from desperate Thai businesses that are scrambling to cover their dollar debts. You don’t need to make money off the government sector when the private sector is highly levered with foreign obligations.
On the other hand, if you prevent both the government and the private sector from having unhedged foreign currency liabilities, then I don’t see how he makes money off the country, although he could still make money from trend-followers.
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Curious Reply:
December 10th, 2009 at 2:06 pm
Fiat currency is an asset, like any other.
Market price of any asset can fluctuate (higher or lower). Why call it a dilemma?
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December 10th, 2009 at 12:28 pm
Henry’s comment make no sense at all:
†… But Chartalist theory is operative only in closed domestic monetary regimes.”
There is no ‘chartalist theory’ beyond the accounting identities and operational realities (govt spends by changing numbers in bank accounts, etc.)that I know of?
If he wants to argue some policy will be inflationary that’s fine, but that’s a different issue.
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Scott Fullwiler Reply:
December 10th, 2009 at 3:36 pm
Agreed.
That’s why, though I like that “MMT” has become an acronym we can use to name ourselves and everyone knows who/what is being talked about, I am still uncomfortable calling it modern monetary “theory.”
The policy proposals are another story, of course, but the operational and accounting realities aren’t theory in the normal sense of the term.
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knapp Reply:
December 10th, 2009 at 4:15 pm
I’m not such a fan of the name “modern monetary theory” – it’s not modern (the basic idea goes back to Plato), it’s not monetary (it’s emphasis is fiscal) and it’s not a theory (for the reasons you site). Plus it’s not catchy.
In contrast, Soft Currency Economics is a brilliant name – audacious, in-your-face, witty and proud to be the antithesis of hard currency economics. What committee decided on MMT vs. Soft Currency?
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warren mosler Reply:
December 10th, 2009 at 5:28 pm
i don’t like it much either but i’ve been called worse.
i suspect it came from the book understanding modern money
Scott Fullwiler Reply:
December 11th, 2009 at 12:02 am
Good points, Knapp.
I never heard MMT until Bill started using it, and it’s caught on a bit since we really don’t have another name and Chartalism has some baggage. And though I’m not opposed to being called a Chartalist, I do think there’s a lot more to what we’re talking about than what most normally think of as Chartalism.
I agree with Warren . . .it’s probably from Randy’s book. I remember when Randy was writing the book, the original title was “Money in the Modern Era” without a subtitle. In fact, I still have a pre-published manuscript with that title . . . . virtually nothing else is changed. I remember being a bit disappointed when the title was changed . . . I thought the original was a bit better (in terms of sounding scholarly and serious). But I’m not the one trying to sell books.
winterspeak Reply:
December 10th, 2009 at 7:51 pm
SCOTT: We totally failed over at Nick’s didn’t we? At least I did, despite truly heroic efforts by you and JKH.
Nick is a gracious host nonetheless. I think we’ll need more than a better name to make any progress ; )
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Scott Fullwiler Reply:
December 11th, 2009 at 12:10 am
Hi Winterspeak,
I suppose it depends on what failure means. Perhaps Nick’s the one that failed. We understand his paradigm and worked through his exampples, but he clearly understood virtually nothing we were saying and couldn’t bring himself to see any significance to it. He was very gracious, though, to his credit, which explains why we stuck around so long.
I’m still baffled that grounding analysis in accounting is such a difficult sell, but here we sit. Had the same problem on Steve Keen’s site and we encounter it occasionally with heterodox economic historians, too. If anyone has any thoughts how to sell the importance of accounting in economic analysis, I’m all ears.
Your efforts were as much or more heroic than mine, for sure, and you fired off a few real doozies that I had to write down so I don’t forget.
winterspeak Reply:
December 11th, 2009 at 2:09 am
Scott: Well, Nick’s the university professor, teaching what’s in the text books written by the guys who are advising the white house, running the Treasury, and running the Fed. We’re no ones punching keys on the internet. There’s definitely failure somewhere in this picture, but I don’t think it’s with Nick!
Economists have a visceral hatred and disdain for accounting. If they understand it, they dismiss it as trivial. When I explain MMT to people, they begin by “that’s impossible” and then switch to “that’s trivial”.
I did not know you spent time with Steve Keen. Steve’s 90% the way to being in paradigm anyway isn’t he?
Scott Fullwiler Reply:
December 11th, 2009 at 9:16 am
Yeah, although I don’t blame Galileo for not convincing the Pope.
Keen’s got horizontal money pretty much down, at least in the sense that he understands it’s endogenous and the money multiplier model is false. Still not on board on vertical money completely, though. But the accounting was a problem philosophically for many on his site, not as much for him, though he wasn’t completely on board on that as being at least necessary even if not sufficient for analysis, either.
Jim Baird Reply:
December 11th, 2009 at 10:08 am
I think that Keen, even though he makes fun of mainstreamers for their obessession with fancy math, still has a bit of a problem with that himself (although to his credit, he actually understands fancy math far better than most “math poseur” economists, who think that 19th century mathematical techniques are hip and happening…) Accounting is just too simple – just addition and subtraction, for God’s sake! Not a derivative anywhere!
jcmccutcheon Reply:
December 11th, 2009 at 11:38 am
Can someone post links to the debates with “Nick” + Keen.
winterspeak Reply:
December 11th, 2009 at 12:31 pm
JM: The “Nick” debates are here and here:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/12/why-do-bad-banks-really-matter.html
http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/11/accounting-and-economics-and-money.html#more
http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/11/a-monetarist-theory-of-neochartalism.html#more
http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/10/what-makes-a-bank-a-central-bank/comments/page/2/#comments
knapp Reply:
December 11th, 2009 at 6:12 pm
Robert Skidelsky vs. Tim Congdon on Keynes
http://www.skidelskyr.com/site/article/what-would-keynes-say-a-dialogue-with-tim-congdon/
Congdon Keynesian-monetarism will likely frustrate readers of this blog.
Matt Franko Reply:
December 11th, 2009 at 9:09 pm
Winter you guys did a GREAT job over there. You guys planted some seeds I’m sure for both him and his readers, that’s all you can do, the truth does the rest, it just takes some time…please keep up the good work there and elsewhere if possible!!! Resp,
December 10th, 2009 at 3:09 pm
[...] No one asks, “Where is the scoreboard going to get six points?†This is explained in detail at http://www.moslereconomics.com/2009/12/10/7-deadly-innocent-frauds/ – THE WELL-KNOWN, PRO-DEFICIT POSITION Many countries – Germany, Italy, Brazil et al – [...]
December 11th, 2009 at 10:45 pm
Thanks for the links Winterspeak.
2 questions came to my mind when reading through the discussion there:
1. Scott mentioned that receivables are not money. Why not? (money = credit)
2. Why include banks in the non-public sector, when they are controlled by the government (licenses, bailouts)?
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Scott Fullwiler Reply:
December 12th, 2009 at 12:05 am
Hi Curious
Regarding 1, it depends on how you define “money.” Most, including Nick, define it as some sort of bank liability + currency. Receivables of a company are not included. MMT’ers prefer not to use the term “money.” I agree with you . . . receivables are a horizontal expansion, albeit lower on the “hierarchy” than bank loans (i.e., you can use bank liabilities to pay down receivables, but not receivables to pay down bank loans).
Regarding 2, your point is not insignificant, but we tend to think of it this way: for the govt sector to expand its liabilities, it creates assets for the non-govt sector, but for the banking sector to expand its liabilities, it creates liabilities (loans) for the non-govt sector (i.e., no net financial asset creation).
Best,
Scott
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winterspeak Reply:
December 14th, 2009 at 3:20 am
Right.
Just to add, although banks are not part of the public sector, they do occupy a special position in the private sector due to their access to reserve accounts. Sometimes you will see PK’s specify “non-Govt, non-bank” sector.
It gets tricky because the Chinese Govt, and state Govt, counts as non-Govt! And to a newbie this stuff is hard enough to understand in the first place!
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December 19th, 2009 at 9:22 am
http://www.youtube.com/view_play_list?p=AC5F06403D07A15C&search_query=money+as+debt
Money as Debt II Promises Unleashed
Bailouts, stimulus packages, debt piled upon debt, where will it all end? How did we get into a situation where there has never been more material wealth & productivity and yet everyone is in debt to bankers? And now, all of a sudden, the bankers have no money and we the taxpayers, have to rescue them by going even further into debt! Money as Debt II Explores the baffling, fraudulent and destructive arithmetic of the money system that holds us hostage to a forever growing DEBT…and how we might evolve beyond it into a new era.
http://www.moneyasdebt.net/
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December 21st, 2009 at 1:19 pm
Money “velocity” repeatedly is mentioned, but I have trouble understanding why velocity makes any difference. “Quantity” I understand, but velocity . . .???
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January 1st, 2010 at 5:16 pm
What happened to sections 2 & 3?
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January 20th, 2010 at 7:10 am
maybe it’s my MS office version but i can’t see part 2 of this excellent piece on the word document following your update link.
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January 29th, 2010 at 11:02 pm
[...] Mosler Economics Website [...]
February 9th, 2010 at 3:13 pm
“…what happens should you go to the Federal Reserve (“the Fed”) to pay your taxes…”
Aren’t taxes paid to the Treasury and not the Fed?
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February 9th, 2010 at 10:51 pm
yes, and they’d send their cash to the fed, i’ve been told.
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February 10th, 2010 at 2:47 am
OK. And does the Fed credit the Treasury’s account balance by that amount before shredding the cash?
Otherwise, why would the Treasury send it over to the Fed, instead of spending it?
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Ramanan Reply:
February 10th, 2010 at 8:10 am
These docs seem relevant
CHAPTER FIVE: Tax Collection Systems
http://www.fms.treas.gov/crm/CASHMGMTChapter5.pdf
Financial Accounting Manual for Federal Reserve Banks
http://www.federalreserve.gov/monetarypolicy/files/BSTfinaccountingmanual2009.pdf
The second link doesn’t work now – though I downloaded the file a few days back. The latter has some detailed accounting about currency notes – such as accounting expenses for printing the cash, Bureau of Engraving and Printing shipment etc!
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selise Reply:
February 10th, 2010 at 9:29 am
ramanan, for your second link, there is apparently a new doc version for this year:
http://www.federalreserve.gov/monetarypolicy/files/BSTfinaccountingmanual2010.pdf
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anon Reply:
February 10th, 2010 at 9:19 am
“does the Fed credit the Treasury’s account balance by that amount before shredding the cash?”
good catch!
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Scott Fullwiler Reply:
February 10th, 2010 at 11:43 am
Of course, that’s been Warren’s point all along . . . spending/taxing is about changing numbers on computer screens.
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anon Reply:
February 10th, 2010 at 1:01 pm
i believe his point was that cash simply “disappears”
instead it’s exchanged for a deposit
Scott Fullwiler Reply:
February 10th, 2010 at 3:37 pm
right. and a deposit is created by changing numbers on a computer spreadsheet. so, you shred the cash and change numbers on a computer. again, that’s his point.
Curious Reply:
February 11th, 2010 at 1:55 am
If my taxes don’t just get shredded, but get credited to the Treasury’s account, the Treasury will spend it.
So aggregate demand is unchanged, the only change is who is doing the spending (it is the Treasury instead of me).
Thus taxes have no effect on aggregate demand.
zanon Reply:
February 11th, 2010 at 2:25 am
No curious.
Treasury can spend irregardless of whether it gets your taxes or not.
If Treasury always spent what was taxed, deficit would be zero!
Curious Reply:
February 11th, 2010 at 7:05 pm
Yes, Treasury can spend regardless of how much it collects in taxes.
My point is that taxes don’t reduce aggregate demand, because whatever is collected in taxes gets spent by the Treasury.
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zanon Reply:
February 11th, 2010 at 7:37 pm
No Curious:
Taxation and Treasury spending are independent. If the Treasury chooses to spend less than it takes in in taxes then US runs a surplus. This happened in the Clinton years. If the Treasury chooses to spend more than it takes in in taxes then US runs a deficit. This happens most years.
Taxation reduces aggregate demand. Govt spending increases aggregate demand. Net effect is change in net financial asset position of non-Govt sector.
Curious Reply:
February 11th, 2010 at 10:51 pm
Imagine that you have $100 to spend.
But the Treasury takes $40 in taxes, so you are left with only $60 and you spend it.
But the Treasury spends the $40 that they took from you. (your taxes get credited to the Treasury’s account)
So the entire $100 gets spent either way.
zanon Reply:
February 12th, 2010 at 12:45 am
Curious:
In your example, yes that is what happens.
But suppose Treasury spends $1M. Or suppose it spends $0. The amount it spends is up to it, and has nothing to do with the amount it taxes you.
Curious Reply:
February 12th, 2010 at 2:04 pm
Zanon,
if Treasury spends $1m and collects another $40 in taxes, it will spend it too, bringing total spending to $1,000,040.
If Treasury spends 0 and collects $40 in taxes, it will spend the $40, bringing total spending to $40.
Treasury always empties its account, doesn’t it?
zanon Reply:
February 12th, 2010 at 2:13 pm
No, Treasury does not always empty its account. It spends what it spends. That is what “independent” means when I say “spending is independent of taxing”.
Curious Reply:
February 14th, 2010 at 11:23 pm
Zanon,
if there is extra money in the Treasury’s account at the Fed, I see 2 alternative scenarios:
1. Treasury can use it to repay some of its debt to the Fed, thus making the money truly to disappear.
2. Politicians come up with new programs and spend it.
Which one is more likely scenario?
zanon Reply:
February 14th, 2010 at 11:38 pm
I don’t know about “likely”.
I do know that what politicians can and do spend has no connection to what is in Treasury’s account. Just like what politicians can and do spend has no connection to what is in your personal checking account. That is what “independent” means.
I cannot help you further on this topic.
Curious Reply:
February 15th, 2010 at 3:00 pm
Does anybody know, if the Treasury has ever repaid any of its debt to the Fed (excluding refinancing)?
February 10th, 2010 at 9:58 am
Re national debt not being a burden on future generations (Fraud #2), I basically agree with Warren, but I prefer putting the arguments a different way. If anyone is interested in a different take on the “future generation” question, see my analysis here:
http://ralphanomics.blogspot.com/2010/02/is-national-debt-burden-on-future.html
It’s 800 words. Obviously I think my analysis is better than Warren’s !!!
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warren mosler Reply:
February 15th, 2010 at 8:24 am
interesting that i’ve been working on that over the weekend some on plane rides as well, adding the part about all our children will have to do is shift funds from one account to another at the fed, just like we do and our fathers did.
to your points, totally agree on the real costs being ‘paid’ by the current generation. In fact, there are many references in mainstream literature to this fact. Regarding govt deficit spending and borrowing to get the current job done- i wouldn’t put it that way. Since you assume full employment, given our current institutional arrangements deficit spending will be the same whether we do something productive or just do wasteful things. So the deficit is not the result of the current infrastructure projects, but a necessary condition for full employment of any kind given our current ‘savings desires.’
exchanging cash for another currency and an associated drop in the currency does not lower the standard of living per se unless real terms of trade are somehow altered, as in your case where china buys real goods and services from us. standard of living is all about domestic output and real terms of trade.
so unless real net exports went up- whatever that actually means- standard of living isn’t altered by currency alterations. but internal distribution of consumption is likely to change, as in my draft.
hope this helps!!!
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February 10th, 2010 at 10:42 am
The 7 deadly innocent frauds: Where are the missing chapters?
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February 10th, 2010 at 12:41 pm
Didn’t any of you see Dead Presidents? Of course the old bills go back to the Fed for shredding. :o)
http://en.wikipedia.org/wiki/Dead_Presidents
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February 10th, 2010 at 6:24 pm
How to make things complicated, by Mark Thoma:
http://moneywatch.bnet.com/economic-news/blog/maximum-utility/the-feds-exit-strategy/455/
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winterspeak Reply:
February 10th, 2010 at 7:44 pm
Honestly, the reason I think MMT languishes in obscurity is that it’s too simple. You cannot make an academic career on anything that’s simple and clear — better to ramble on about “expectations” and conjecture on how you can apply a “negative interest rate to cash” etc.
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Scott Fullwiler Reply:
February 10th, 2010 at 10:22 pm
I’ll never get those 10 minutes back I just wasted watching this. Got some things right about interest payment, many things wrong, and completely clueless about the Fed’s “normal” operations. Should have just linked him to these:
http://www.cfeps.org/pubs/wp-pdf/WP38-Fullwiler.pdf
http://www.cfeps.org/ss2008/ss08r/fulwiller/Fullwiler%20Modern%20CB%20Operations.pdf
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warren mosler Reply:
February 15th, 2010 at 8:27 am
the ‘too simple’ notion has a lot of merit. I often get the response ‘it can’t be that simple, there has to be more too it.’
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beowulf Reply:
April 23rd, 2010 at 2:26 am
the ‘too simple’ notion has a lot of merit. I often get the response ‘it can’t be that simple, there has to be more too it.’
“The process by which banks create money is so simple that the mind is repelled.”
J.K. Galbraith
http://en.wikiquote.org/wiki/John_Kenneth_Galbraith#Money_:_Whence_It_Came.2C_Where_It_Went_.281975.29
That page has a lot of great Galbraith quotes.
JKH Reply:
February 10th, 2010 at 10:35 pm
Sorry, Scott. I was going to tag it “fusion of tragedy and hilarity”, but thought I’d give him a break, for some unknown reason. It is pretty funny actually. Reminded me of Ben Stein in Ferris Bueller’s Day Off, as well as his monetary comprehension …
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Scott Fullwiler Reply:
February 10th, 2010 at 10:56 pm
He does do a pretty good Ben Stein, there, though I think Stein probably got more things right in his lecture.
When students used to look at me with no expresssion whatsoever on their faces after I asked a question, I used to say “Bueller? Bueller?” deadpanned and would always get a chuckle. Now, I’ve had to stop because most of them weren’t born when that movie came out (or close to it) and they don’t know what the hell I’m talking about. Feeling old!
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JKH Reply:
February 10th, 2010 at 11:39 pm
In that case, you must default to:
“anyone … anyone?”
It’s timeless.
P.S. let me know when the movie comes out
JKH Reply:
February 13th, 2010 at 8:15 am
discussion with David Beckworth on “exit strategy”, reserves, etc., including comments from Marshall Auerback:
http://macromarketmusings.blogspot.com/2010/02/feds-exit-strategy.html
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Scott Fullwiler Reply:
February 13th, 2010 at 9:18 am
The usual suspects. You’re armed with the facts, but that may not even work. BTW, Marshall was on FOX Biz News yesterday . . .
http://video.foxbusiness.com/#/v/4015119/greece-are-we-next-/?playlist_id=87185
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JKH Reply:
February 13th, 2010 at 9:51 am
Thx – clear articulation of the currency issuance factor there.
jcmccutcheon Reply:
February 13th, 2010 at 10:02 am
Yes that was great. This movement, if we can call it that, is picking up steam.
Ramanan Reply:
February 13th, 2010 at 10:20 am
Marshall’s thermometer analogy was good!
February 15th, 2010 at 9:19 pm
Warren
I have been studying the economy for about 4 years now and could not make sense of what was being said in the press and on the web, the logic did NOT work at all. All the fixes don’t fix the problem, it was getting to be a catch 22 for me. I watched your youtube vids and read your 7 paper—-THE LIGHTS CAME ON— I can see it all know—It all makes sense. I laughed and grinned all the way thru. It’s so simple! Thank you for the knowledge. I once belonged to a barter group and someone HAD to be positive and someone HAD to be negative in each transaction, even in Gold if you are positive the earth/nation is negative, this is a no-brainer.
Thanks again and good luck with getting the truth out.
JerryT
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February 26th, 2010 at 5:02 pm
Your presentation portrays the US government as Stalinist. That simply means that the parents get to rule over the children regardless of what the children might think about it. I don’t know how to allow the kids to tell the parent what they want and to fire the parents should the parents not comply. But your work will be attacked for this.
The “right sizing” of government and the selection of what functions should be assigned to government is the primary problem in the US today. I think people can understand the money system as you are trying to describe it, but there are many who want no government at all ans who would rather have the banks and the financiers be the source of money. We know that banks can and do create money and that this money trades on par with government created (spent into existence) money.
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February 27th, 2010 at 8:59 am
how about if the kids can vote for new parents every 2 years?
also, the currency is defined by what gov demands for tax payment, or it has to be a different commodity of some sort
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March 24th, 2010 at 8:14 am
Where are parts 2 and 3 please?
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March 28th, 2010 at 4:56 pm
Clever in a sense, but really: If our government could just create as much money as it wanted by entering numbers, it could just create enough to pay off China etc, and just “give them the money.” But creditors would consider that phony, they would say our money is worthless if we can make as much as we want. That dilutes their own dollars, esp. since they can’t make more! And so on. There are rules for the money supply. Also, Mosler seems not to get the difference between “can in technical principle” and “may do so based on rules.”
As for no big deal, leave our kids in debt since we can all buy the stuff that’s made. – Heh, REM that money allocates *relative* buying power. And if borrowing is legitimate, the lenders want a cut back (and that is not diluted too much by increase in money supply.) So what happens is redistribution of wealth, as money must be scrounged up to pay lenders (or, we “make more” in Mosler’s glib way which dilutes the buying power and will be soon disdained by lenders as a trick.)
Really, you have to think about stuff like that.
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March 28th, 2010 at 10:51 pm
please re read, i think you missed the point?
i describe how it actually does work, not some theory or philosophy.
all tsy secs do actually get paid off when they mature with debits to securities accounts and credits to reserve accounts.
that’s all there is too it. there is no other way to do it. same as it’s always been done and always will be done.
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April 2nd, 2010 at 4:03 pm
What are securities accounts?
When I send a check for $1,000 to the Treasury to buy a bond, the Fed transfers $1,000 from my bank’s reserve account into the Treasury’s account.
When that bond matures, the Fed transfers $1,000 plus interest from the Treasury’s account into my bank’s reserve account.
Is this not how it works?
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zanon Reply:
April 2nd, 2010 at 6:11 pm
Basically yes.
When you buy Treasury security — how do you book it on your personal balance sheet? How is your purchase of security booked on Treasury’s balance sheet?
That will answer your question
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April 2nd, 2010 at 10:56 pm
Thanks Zanon.
So the securities accounts are at the Treasury, not at the Fed, correct?
If so, then in order to repay the bonds at maturity, the Treasury’s account at the Fed must first have enough money in it.
So repayment of bonds by the Treasury is not just changing entries in a spreadsheet, but it must be preceded by sufficient taxes or borrowing by the Treasury, no?
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April 3rd, 2010 at 2:04 am
Curious:
Treasury banks at the Fed just like everyone else. If you buy a Treasury, you book it as asset, Treasury holds it at liability.
In order to repay bonds at maturity, yes Treasury account must have money in it (as per current rules–if it is allowed to run overdraft like banks then this is not neccessary and it would be trivial change). Of course, when bonds were bought Treasury account was credited by that amount, so repaying bonds is just reversing operation. But Treasury cannot sell bond unless Govt first run deficit. There is no other way private sector can have money to buy them.
You can see why it is better to just do away with Treasuries entirely.
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Curious Reply:
April 3rd, 2010 at 1:35 pm
“But Treasury cannot sell bond unless Govt first run deficit.”
If the Treasury cannot borrow directly from the Fed, how do they run a deficit before borrowing from the public?
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warren mosler Reply:
April 3rd, 2010 at 6:19 pm
i don’t think that was my statement.
the fed can lend to the banking system to cover ‘cash needs’ to buy tsy secs.
in fact, before there were trillions of excess reserves, when the banks paid the tsy on settlement day the fed did repos to add the reserve balances the banks used to pay for the tsys.
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dave Reply:
November 28th, 2010 at 3:21 am
Confused. I thought banks didn’t need reserves to create credit.
WARREN MOSLER Reply:
November 28th, 2010 at 11:02 am
right, they don’t need reserves for that purpose
Curious Reply:
April 3rd, 2010 at 7:46 pm
It was Zanon’s statement, not yours. Thanks for explaining it.
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April 3rd, 2010 at 7:54 am
right.
the only purpose served by tsy secs is supporting the term structure of rates at higher levels than otherwise.
and if anyone actually wanted to do that it’s just as easy for the Fed to offer time deposits at the desired support rate.
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April 9th, 2010 at 1:41 pm
Too bad more people don’t get this simple understanding of economies run on fiat money. The Govt will never default – it only has debt denominated in its own fiat currency! Why is that so hard to understand?
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April 9th, 2010 at 2:01 pm
All these Washington shenanigans just detract from the most important task at hand – to direct the resources, esp labor, in the most productive fashion to enhance the productivity of the same. The only factor of import in the nation’s quality of life! Simple? Not quite!
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April 10th, 2010 at 11:16 am
spread the word, thanks!
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April 20th, 2010 at 7:58 am
[...] 7 Deadly Innocent Frauds, by Warren Mosler [...]
April 23rd, 2010 at 9:01 am
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April 29th, 2010 at 3:13 pm
Warren — I picked up a copy at the New Haven Tea Party. I just finished my first reading. Really interesting — I have never read a perspective so totally different than anything else out there. Very much appreciated. You’ve asked me to question my assumptions.
You state that a Federal “deficit” is not bad because a deficit is exactly equal to what private investors have invested. And I agree with that premise. But doesn’t the “deficit” also include what foreign individuals and institutions have invested? That is, a national deficit could be high, and that nation’s savings be low? (And if so, does this even matter?)
But more importantly, these “savings” account investors have with the Federal Reserve, this money lent to government (instead of being spent), well aren’t large deficits still a problem as that is money that the government has to use and not individuals and business. Isn’t there an opportunity cost problem? Doesn’t a problem exist in that the private sector far far more efficiently allocates resources than a government that inevitably picks winners and creates losers? Isn’t this the manifestation of Adam Smith’s fear/prediction of government and big business getting in bed? Isn’t this the real problem? Isn’t it a problem that social security or any other “savings” is “invested” in the government when those funds would help the economy grow if they were invested in the private sector?
Lastly, how do you square a monetary policy that dilutes current dollars with additional dollars the Fed makes up? In my experience as tax attorney, I see many many clients with phony capital gains. For instance, client buys blackacre in 1950 for 2000 dollars. Blackacre is sold in 2010 for 100,000 dollars. Good lord, there was little or not gain —- in any substantive manner from the sale. The intentional dilution of the value of a dollar is caused by government action. And worse, client will be taxes on capital gain as if all his dollars were 1950 dollars. Inflation is caused by the fed and inflation is a taking — it is a loss of purchasing power.
I am trying to reconcile a monetary policy with the framer’s intent of a limited central government that is required to give due process before any taking of property. It seems to me that by changing the scoreboard, no due process at all is given before something is taken from every body who hold dollars via inflation. And it is your argument that this is not just o.k., but you support taxing what already has been taken so thing don’t get overheated (but overheating was caused by the government in the first place, no?). You see to state that the IRS is the antidote to the fed’s inflation. Perhaps it is my ignorance, but would it just be a lot easier and a lot more efficient to get rid of both of them?
Am I thinking about this all wrong? Am I still stuck on an innocent fraud I can’t see?
Thanks again for a challenging book.
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April 29th, 2010 at 5:54 pm
thanks for your interest!
comments in CAPS:
You state that a Federal “deficit” is not bad because a deficit is exactly equal to what private investors have invested.
I DON’T USE THE WORD ‘BAD’ BUT INSTEAD SAY IT ISN’T A FINANCIAL RISK. RISKS, IF ANY, ARE INFLATION AND NOT SOLVENCY, ETC.
And I agree with that premise. But doesn’t the “deficit” also include what foreign individuals and institutions have invested?
YES, IT INCLUDES RESIDENTS AND NON RESIDENTS
That is, a national deficit could be high, and that nation’s savings be low?
RIGHT, HOLDINGS OF SAVINGS (NET DOLLAR DENOMINATED FINANCIAL ASSETS) CAN BE LOW DOMESTICALLY, AND HIGH FOR NON RESIDENTS.
(And if so, does this even matter?)
IT MATTERS FOR SOME THINGS, BUT NOT FOR GOVT’S ABILITY TO SPEND DOLLARS.
IT’S THE NON RESIDENT DESIRE TO ACCUMULATE DOLLAR SAVINGS THAT TRANSLATES INTO OUR ABILITY TO IMPORT MORE THAN WE EXPORT, WHICH IS A BENEFIT IN REAL TERMS.
But more importantly, these “savings” account investors have with the Federal Reserve, this money lent to government (instead of being spent), well aren’t large deficits still a problem as that is money that the government has to use and not individuals and business.
NO, IT TAKES NOTHING FROM THE PRIVATE SECTOR, AND THE GOVT NEVER HAS NOR DOESN’T HAVE DOLLARS. IT SPENDS BY CHANGING NUMBERS UP IN OUR ACCOUNTS, AND TAXES BY CHANGING THEM DOWN.
Isn’t there an opportunity cost problem? Doesn’t a problem exist in that the private sector far far more efficiently allocates resources than a government that inevitably picks winners and creates losers?
THE SIZE OF THE DEFICIT PER SE HAS NOTHING TO DO WITH THAT PROCESS, PROVIDED TAXES ARE SET AT THE RIGHT LEVEL TO ALLOW FULL EMPLOYMENT. IF WE ARE OVER TAXES AND WE HAVE HIGH UNEMPLOYMENT, THEN THE GOVT IS CHOKING OFF THE PRIVATE SECTOR’S ABILITY TO SPEND, ALLOCATE RESOURCES, AND KEEP ITSELF FULLY EMPLOYED.
Isn’t this the manifestation of Adam Smith’s fear/prediction of government and big business getting in bed? Isn’t this the real problem? Isn’t it a problem that social security or any other “savings” is “invested” in the government when those funds would help the economy grow if they were invested in the private sector?
THE FUNDS AVAILABLE FOR PRIVATE SECTOR ARE UNLIMITED. LOANS CREATE DEPOSITS WITHOUT NUMERICAL LIMIT. THE LIMIT IS CREDIT WORTHINESS AND DESIRED EXPENDITURES AND INVESTMENTS
Lastly, how do you square a monetary policy that dilutes current dollars with additional dollars the Fed makes up?
DEFICIT SPENDING ADDS INCOME AND SAVINGS TO THE PRIVATE SECTOR. IF THIS EXACTLY OFFSETS PRIVATE SAVINGS DESIRES, THERE IS NO INFLATION. IT’S ONLY WHEN GOVT ATTEMPTS TO FORCE MORE SPENDING ON AN ECONOMY THAT IS RUNNING OUT OF THINGS IT WANTS TO SELL. THE SIGNAL IS THAT THE GOVT HAS TO PAY MORE FOR THE SAME THING. AT THAT POINT IT’S A POLITICAL DECISION WHETHER TO KEEP DOING THIS OR BACK OFF.
In my experience as tax attorney, I see many many clients with phony capital gains. For instance, client buys blackacre in 1950 for 2000 dollars. Blackacre is sold in 2010 for 100,000 dollars. Good lord, there was little or not gain —- in any substantive manner from the sale. The intentional dilution of the value of a dollar is caused by government action. And worse, client will be taxes on capital gain as if all his dollars were 1950 dollars. Inflation is caused by the fed and inflation is a taking — it is a loss of purchasing power.
YES. THE REAL VALUE OF THE INVESTMENT DIDN’T GROW MUCH IF AT ALL. SO IT WAS A RELATIVELY POOR INVESTMENT.
A DOLLAR DOESN’T BUY WHAT IT USED TO BUY 100 YEARS AGO, BUT ALL THE DOLLARS WILL BUY A LOT MORE THIS YEAR THAN THEY BOUGHT 100 YEARS AGO. SO WE’RE ALL BETTER OFF, BUT ALL HAS BEEN RE DENOMINATED. THIS CAN BE ADJUSTED WITH OTHER POLICIES THAN HIGH UNEMPLOYMENT WHICH REDUCES REAL OUTPUT.
I am trying to reconcile a monetary policy with the framer’s intent of a limited central government that is required to give due process before any taking of property.
THE CONSTITUTION EXPLICITLY GIVES THE GOV THE RIGHT TO CHANGE THE VALUE OF THE CURRENCY
It seems to me that by changing the scoreboard, no due process at all is given before something is taken from every body who hold dollars via inflation.
AGREED.
And it is your argument that this is not just o.k., but you support taxing what already has been taken so thing don’t get overheated (but overheating was caused by the government in the first place, no?).
OVERHEATING IS CAUSED BY OVERSPENDING VS WHAT IS OFFERED FOR SALE.
You see to state that the IRS is the antidote to the fed’s inflation.
THE FED DOESN’T HAVE ANYTHING TO DO WITH INFLATION, IT’S THE TSY SPENDING.
Perhaps it is my ignorance, but would it just be a lot easier and a lot more efficient to get rid of both of them?
HOW WOULD YOU PROVISION THE GOVT?
BEST!
WARREN
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May 1st, 2010 at 1:38 pm
Warren: I’ve been reading your views a lot lately and understand most of them as you explain these clearly for non-economists. I also read the transcript of your interview on Hard Asset Investor. I still have some confusion with this issue: when govt runs a deficit is that adding to the money supply? I realize that taxes and Treasury security sales equal spending so the answer should be no? As you say, there is a “self imposed” requirement for the govt to issue debt to make up the difference between spending and taxes. In the U.S., do you know if this is by Congressional statute or regulation, and for how long has it existed? And finally, is it really possible to keep interest payments sustainable in the face of increasing government debt by the Fed keeping interest rates low? Might not it be necessary to let interest rates rise to rein in inflation or for some other reason, or might not they rise on their own, causing debt service costs to skyrocket? Thanks
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May 1st, 2010 at 6:25 pm
Warren, when is your textbook with Bill Mitchell coming out?
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May 1st, 2010 at 11:27 pm
hi, bill and randy working on text book. no idea when they will finish. already 2 years late.
yes, deficits add to the ‘money supply’ if you use ‘broad money’ which includes all tsy secs. if you use narrower monetary aggregates that don’t include tsy secs they don’t add to that definition of money supply.
last, i suspect low interest rates are deflationary, high rates inflationary. hence, japan.
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July 19th, 2010 at 2:42 pm
[...] the deregulation and lax oversight that laid the foundations for the current crisis. Certainly the plethora of innocent frauds that the Director of the National Economic Council peddles in Monday's Financial Times calls his [...]
July 20th, 2010 at 3:45 am
[...] the deregulation and lax oversight that laid the foundations for the current crisis. Certainly the plethora of innocent frauds that the Director of the National Economic Council peddles in Monday’s Financial Times calls his [...]
July 31st, 2010 at 1:49 am
Alright. I’m reading through 7DIF again, trying to grok this whole thing. Let’s take ‘em one at a time:
#1a. The government doesn’t use my tax money for anything. The IRS is just a “currency sink” to bleed off heat in the economy. All payments to the IRS die at the IRS. The money isn’t “sent” anywhere, my bank account is simply debited and my dollars die right there. They don’t go to the war, the deficit, a slush fund or any other private or govenment destination anywhere on earth or any other point in the universe be it real or abstract. The IRS takes in X Billion and pays the US Government $0.00 Billion dollars and not one damn cent. Dollars check in, but they don’t check out. It’s a literal “The Buck Stops Here” scenario, whether it’s greenback or electronic. It simply doesn’t recirculate to anywhere. Not theory, but simple verifiable fact.
1b. When the US Government spends, it just changes numbers in the appropriate spreadsheets. It didn’t get anything from the IRS, NOBODY got anything from the IRS. It doesn’t care about the IRS unless it needs to cool off the economy and destroy private sector spending power by increasing taxes (which then go into a black hole that no government or private entity or individual ever sees again).
1c. The US Government doesn’t have to GET money from anywhere in order to spend. Not from me, you, any foreign person or entity or any OTHER DOMESTIC person or entity (government or private). It doesn’t HAVE any money in the first place.
1d. When the US Government spends, it moves spending power from the Federal Reserve to the private sector. It has unlimited spending power and only wants to know what numbers to input to which spreadsheet (subject only to bogus Senate limitations that are based on the principals of a dead monetary system). It doesn’t have to GET (nor does it want) money from anywhere in order to spend. Not from me, you or anyone else.
1e. When the US Government spends, the spending power goes into the private sector where it circulates until it is sequestered by the private sector or destroyed by the IRS.
OK. That’s my take home from DIF #1. Did I get it right?
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WARREN MOSLER Reply:
August 2nd, 2010 at 10:40 pm
pretty good!
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August 1st, 2010 at 1:56 pm
Question….
from 7 deadly innocent frauds…
”
And that’s exactly how what are
called “non convertible currencies” work (no more gold standards
and very few fixed exchange rates are left), like the U.S. dollar,
Japanese yen, and British pound.”
I thought that those 3 currencies are convertible…
Could you shine some light on that passage?
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WARREN MOSLER Reply:
August 2nd, 2010 at 10:52 pm
convertible in that the govt itself guarantees conversion at fixed rate
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August 2nd, 2010 at 1:54 am
Just on choice of publishers, have you considered Princeton University Press? They are publishing John Quiggin’s Zombie Economics which has a very similar theme.
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August 8th, 2010 at 9:10 am
Warren, on 1a; can you please just admit the tax dollars are accounted for so that the deficit numbers can be reported to congress? Even if borrowing isn’t necessary, the Feds still needs to keep their books in order to determine what they need to unnecessarily borrow. I think you loose creditability when you leave out information that sets off our BS detectors! I mean that respectfully, because I really think you know what you are talking about.
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Steve Reply:
August 8th, 2010 at 9:11 am
excuse me, 1a from post #63…..
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Ramanan Reply:
August 8th, 2010 at 12:31 pm
Good point.
For example, cash is not shredded by the tax authorities. It goes to the Fed.
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Unforgiven Reply:
August 8th, 2010 at 2:40 pm
Well, one would think that it at least goes to an account at the U.S. Treasury, initially.
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Ramanan Reply:
August 8th, 2010 at 2:52 pm
Yep … the Fed takes the cash, reduces “currency in circulation” and credits the Treasury General Account.
Tom Hickey Reply:
August 8th, 2010 at 2:55 pm
What happens when you pay your tax liability is that your checking account decreases and your bank transfers the amount in reserves to the Treasury account at the Fed. If you pay in cash, the Treasury lets the Fed know and they credit the Treasury account, too. The Fed can decide what to do with the cash, either recirculate it if it is in good condition or dispose of it if it isn’t. If it costs more to sort into usable and disposable than to just dispose of it and print then it will just be disposed of. It is entirely possible that the Fed would just tell Treasury to do the shredding there, since it would be more efficient to do it that way if the notes are to be disposed of. But the cash being Federal Reserve notes, the Fed has the say in how they are handled, I would think.
The Treasury does not hold the cash it receives in a vault for later use. Compare and contrast this to a commercial bank, which takes the cash it receives from loan repayment, for example, cancels the customer’s liability and either puts the cash in its vault for recirculation or else turns it in to the Fed for a credit to its reserve account at the Fed. Pretty much the same thing happens with a check. It gets accounted for by marking up spread sheets, but the cash is handled somewhat differently in that the bank does keep vault cash to meet window demand (not for bank spending) and the Treasury doesn’t keep vault cash.
Warren’s stands in the sense in that what happens is marking up spreadsheets rather than the Treasury saving cash to spend later.
The point is that most people don’t know what happens behind the veil, so they imagine all sorts of things that aren’t true, like the Treasury really being a “treasury” full of money, or not, depending on whether the budget balance is in deficit or surplus.
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Steve Reply:
August 8th, 2010 at 7:45 pm
unforgiven says…
“#1a. The government doesn’t use my tax money for anything. The IRS is just a “currency sink” to bleed off heat in the economy. All payments to the IRS die at the IRS. The money isn’t “sent” anywhere, my bank account is simply debited and my dollars die right there. They don’t go to the war, the deficit, a slush fund or any other private or govenment destination anywhere on earth or any other point in the universe be it real or abstract. The IRS takes in X Billion and pays the US Government $0.00 Billion dollars and not one damn cent. Dollars check in, but they don’t check out. It’s a literal “The Buck Stops Here” scenario, whether it’s greenback or electronic. It simply doesn’t recirculate to anywhere. Not theory, but simple verifiable fact. ”
…and Warren agreed! I just don’t believe it’s that simple (not that I have knowledge to the contrary).
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WARREN MOSLER Reply:
August 13th, 2010 at 12:56 pm
in any case tsy secs serve to ‘offset operating factors’ as they say at the fed. if the tsy doesn’t sell the right amount to do this the fed will fine tune with open market operations.
none of this involves knowing the actual numbers of taxing, spending, or shifting of reserves to securities accounts (borrowing)
yes, congress want’s to know what the deficit is even though it doesn’t give them any information they should be using to make decisions.
imagine what they’d all do if we started reporting the trade deficits between the states!
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August 8th, 2010 at 2:53 pm
In the spirit of Marshall’s longest, I assume Treasury would accept the notes in exchange for discharging the tax liability, and then send the notes to Fed, who would redeem them in exchange for a credit to Treasury’s account at the Fed.
So the government in the actual world has been a user of the currency issued by the (deconsolidated) Fed, up until presentation of the currency by the government to the Fed.
I doubt that any notes received in this way are shredded by the Fed unless they are damaged beyond further usefulness?
Otherwise, presumably, they can remain in inventory for reuse/reissue?
Or, perhaps payment of taxes with currency is so rare that the notes are shredded as a matter of course, whatever their condition?
In any event, in a deconsolidated institutional structure, the notes while in the possession of Treasury do go somewhere – to the Fed?
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WARREN MOSLER Reply:
August 13th, 2010 at 12:58 pm
I’ve heard that they now do save some of the bills and don’t shred all of them.
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August 8th, 2010 at 3:39 pm
I love all reference to Marshall’s Longest.
http://www.federalreserve.gov/monetarypolicy/files/BSTfinaccountingmanual2010.pdf page 145 of the pdf talks of destruction of unfit notes processed by the Treasury – only. I do not think they will shred fit notes.
A further complication is the fact that someone can pay taxes in cash at a bank which holds the TT&L account. My guess is that the bank takes the cash and credits the Treasury’s account and notifies the Fed about the increase in cash holdings. If some bank customer needs cash, the bank can give the same cash notes which was used for the payment of taxes.
“Unfit and mutilated currency processed by the Treasury in Washington, D.C. is functioned through the books of the Richmond Reserve Bank. On the day of redemption, Treasury will advise the Richmond Reserve Bank by wire of the amount for each denomination, including the Bank of issue for $500-$10,000 notes. The Richmond Reserve Bank will credit the Treasury’s General Account for the total and debit notes outstanding. The Federal Reserve Banks are responsible for reimbursement to the Treasury for retirement of Federal Reserve currency. Each quarter the Treasury forwards to the Board a voucher, indicating the actual cost for services performed relative to the retirement of Federal Reserve currency during the previous quarter. Board staff calculates the pro rata amount of each Reserve Bank’s assessment based on the Bank’s share of the number of notes comprising the System’s net liability for Federal Reserve
notes outstanding on December 31 of the previous year. Reserve Bank assessment entries will be processed via Same Day Settlement by the Richmond Reserve Bank according to information reported on to the Board.”
No currency notes are destroyed unless unfit :-). Thats an ontologically correct statement.
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anon Reply:
August 8th, 2010 at 3:48 pm
“My guess is that the bank takes the cash and credits the Treasury’s account and notifies the Fed about the increase in cash holdings.”
Notification re cash not even necessary – it’s just a standard deposit of cash, to be absorbed into the bank’s cash inventory management overall?
But your example is a far more realistic one than the idea of somebody showing up at the doorstep of Treasury to pay their taxes in currency?
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Ramanan Reply:
August 8th, 2010 at 4:07 pm
Cash notification may be necessary for reserve requirement purposes. http://www.frbservices.org/files/regulations/pdf/rmm.pdf seems to suggest that.
I don’t know about the US, but in India one can pay taxes at the tax collection offices in all cities as well as at the banks. And lot of people use cash.
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Tom Hickey Reply:
August 8th, 2010 at 4:11 pm
But again, the cash doesn’t go into the Treasury’s cash vault, so I think that Warren’s point holds, which is being asserted against claims like the president’s that the government is “going bankrupt” or “running out of money.” One hyperbole against another.
anon Reply:
August 8th, 2010 at 4:17 pm
Right.
All vault cash has to be reported.
But there’s nothing special about vault cash sourced from tax payments.
(Obviously tax payments must be recorded, but not the fact that they were sourced from cash)
anon Reply:
August 8th, 2010 at 4:19 pm
Tom Hickey,
The entire global financial system is a spreadsheet.
Don’t you think people have cottoned on to the fact that their banks use computers now?
Tom Hickey Reply:
August 8th, 2010 at 7:53 pm
Anon: “The entire global financial system is a spreadsheet. Don’t you think people have cottoned on to the fact that their banks use computers now?”
No, anon, I don’t, if only judging from the kerfuffle arising in comments about the claim that “it’s just marking up spreadsheets.” But in talking to people, if find that a lot of people don’t actually get this. They think that their money is somehow “in the bank” and that the government is actually “running out of money” when the president says so.
Many people don’t have clue as to how the monetary system works. They think of money as cash and not as numbers on a spreadsheet. These people think that when government spends it does so by “printing more money.” They also think that the cash has to be there somewhere “behind the numbers” in their banks account. After all, they can walk in and demand cash. That’s why the analogies are so powerful politically.
Then there this the group that knows about reserve banking. They think that banks lend by creating money as a multiple of reserves. They think that therefore, there is “no money there in the bank” behind it. These are the same people that think the government prints notes without banking so it really isn’t money at all.
These two groups comprise most people in the country, I would estimate. Very, very few people actually know how the present system works, even many “sophisticated” people. Just ask some people, and you’ll be amazed at the answers people come up with.
Tom Hickey Reply:
August 8th, 2010 at 8:20 pm
“without banking” should read “without backing.”
Ramanan Reply:
August 9th, 2010 at 3:10 am
Anon : August 8th, 2010 at 4:17 pm
“All vault cash has to be reported.
But there’s nothing special about vault cash sourced from tax payments.”
Yes makes sense.
I had it mixed up with the Indian system where there is no TT&L. In that case, the bank has to report it and have the central bank debit its account and credit the Treasury’s account.
August 8th, 2010 at 8:18 pm
Steve, think of what happens in the Federal Reserve (Settlement) System, where this takes place. You, the taxpayer, send a check made to the US Treasury. The Treasury cashes your check. What happens next is the that your bank receives a demand for bank reserves in this amount in the FRS, which they comply with, reducing their reserves, and your bank debits your bank account.
These bank reserves are now removed from the banking system. Where do they “go”? They go nowhere. In the settlement process, the Fed credits the Treasury account at the Fed for the amount, and the Treasury adjusts its balance accordingly. The Treasury doesn’t “keep the money for later use” in some vault. Treasury spending added bank reserves held by the commercial banking system and taxation withdraws some of those reserves. The reserves that were added showed up as numbers in deposit accounts. When tax checks are cashed, those numbers are reduced correspondingly.
If you, the taxpayer, pay in cash, then the essentially the same thing happens. The cash is withdrawn from circulation. This is is what Warren means by “is shredded.” If the notes are all too used to be fit for recirculation, then they are indeed shredded.
The way that good notes that are kept get recirculated is by commercial banks getting them from the Fed in exchange for bank reserves, in order to provide for cash demanded at the cashiers’ windows. There is no different here between the recirculated cash and newly printed cash. It is as though the old cash were destroyed and new cash printed in the sense that there is no connection of the old cash with the banking system anymore. If it is used again, it becomes “new cash” without any trace of its previous history attached to it.
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Unforgiven Reply:
August 8th, 2010 at 9:37 pm
Federal Treasury spending (to fund the private sector) adds reserves to the Federal Reserve banks. Taxes are a way for the Federal Treasury to recall some of those reserves, thereby cooling the private sector economy.
I think I get it now. Never mind the 1st paragraph of my 8:56pm post.
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Tom Hickey Reply:
August 8th, 2010 at 9:58 pm
Exactly. The second part is that issuance of Treasury securities to offset the deficit with “debt” simply drains reserves that the deficit created in order to allow the Fed to hit it target rate. The Fed than adjusts the amount of reserves using open market operations (OMO) to hit the target rate (the FFR) in the overnight market.
Government adds to its budget deficit through disbursements to increase nongovernment net financial assets and cuts its deficit through taxation to decrease nongovernment net financial asset. According to Abba Lerner’s principles of functional finance, the only reason it should do either is to manage aggregate demand relative to the capacity of the supply side of the economy to absorb it, thereby stabilizing growth (investment), supporting the public’s desire to save (not spend income), and maintaining full employment along with price stability.
chiefly through targeted fiscal policy.
Debt issuance is purely a monetary operation having to do with interest rate setting. It is not a fiscal operation because a government running a fiat currency does not need to finance itself with borrowing.
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Unforgiven Reply:
August 8th, 2010 at 11:30 pm
And I’ll understand that after I read it about 50 times!
The Treasury says to the Reserve Banks, here’s too much money in the form of digits. Wow, the economy is getting too hot!! Let’s increase taxes (take actively circulated money away and neutralize it) and offer interest (take inactive money (reserves) away and sequester it for X days or months). The FRB’s can have it back at the FFR if they want it so badly?
Steve Reply:
August 8th, 2010 at 10:55 pm
Tom, I’m not hung up on the physical cash thing. I’m hung up on how the previous post made it sound like my taxes go into a black hole (electronic or cash). But you said the Treasury account gets credited; which to my very primitive economic mind contradicts what Warren says. …I’m really not worried about the deficit, or spending money we don’t have, etc,,,,. I’m just trying to understand the process well enough to preach it; and I’m not there yet. ..I’m also trying to square what happens when government securities come to term. Does the debt disappear, or is it rolled over to a new security? …why can’t the Fed just make it all magically go away with its computer. Would it really hurt anything to retire 10 trillion dollars of debt by exchanging saving account numbers for checking account numbers?
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Scott Fullwiler Reply:
August 8th, 2010 at 11:42 pm
Steve,
While I can certainly understand your point regarding “destroying cash,” and you’re definitely not the first to make this point, I don’t think it contradicts Warren’s argument at all.
Warren has been very, very focused like a laser all along on the fact that what really matters is that all government spending/taxation is manipulating numbers on a spreadsheet–the physical cash doesn’t matter.
His point about “they put it in a shredder” is to again point out that the physical “money” doesn’t matter. Yes, the Tsy’s account at the Fed would be credited if someone were to pay their taxes in cash and the money were shredded, but from Warren’s perspective this is simply the changing numbers on a spreadsheet that doesn’t constrain/enable the federal govt whatsoever aside from the federal govt’s own self-imposed constraints (such as not allowing the Tsy to run overdrafts at the Fed).
Also, when Tsy’s mature, new Tsy’s are issued in their place, except for when the govt is running a surplus. Overall, whenever the Tsy’s account is drawn down–whether due to spending or due to settling a maturing Tsy–beyond what can be called in from tax and loan accounts it holds at the banks, the Tsy must issue new Tsy’s as long as it is not legally allowed to run an overdraft at the Fed.
And, no, it wouldn’t really “hurt” to change savings accounts to checking accounts, but legally yet again the Tsy can’t overdraw its own account.
In short, Warren frequently abstracts from the details of the self-imposed constraints probably because, well, they’re SELF-IMPOSED. It obviously doesn’t sit well with some that he does this, but that’s the way Warren’s been explaining all this for many years and I suspect that won’t change much. In public settings, questions on these “constraints” inevitably arise and I have seen Warren on more than one occasion respond with an analogy of a person with his shoes tied together complaining that he can’t run.
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Unforgiven Reply:
August 9th, 2010 at 12:27 am
Steve -
I agree that 7DIF could use a rework on this point, as it’s generating a lot of questions. It’s tough to get past what we were taught, so maybe it can only go so far before it DOES generate questions (but generating questions can teach too).
Here’s how I see it: The “digits” that the Treasury funds the FRB’s with came from nothing; they just made it up. There can’t “deficit” of what didn’t exist to begin with.
So, the Treasury says to the FRB’s (and therefore the private sector), you now have 400b “digits”. This technically creates a “deficit” of 400b digits at the Treasury, but the Treasury has no “digits” to begin with. The numbers created when you pay your taxes are just an accounting convienience for the Treasury, to ensure that they pulled that many “digits” out of the private sector in order to control the economy. The taxes aren’t important, it’s the removal of private sector stimulus that’s important.
That’s not to say you don’t have a good point. As I said, I think the 7DIF needs a rework on this. It certainly left me with a WTF…
Tom Hickey Reply:
August 9th, 2010 at 1:16 am
Unforgiven, it’s not quite correct to say that the Treasury “funds” the FRB’s. Congress appropriates funds for disbursement IAW its constitutional prerogative, and Treasury disburses the funds as called for as the executive branch makes the deals, e.g., by sending out checks or more likely directly crediting deposit accounts. These have to clear in the interbank settlement system, in the US, the FRS. The Fed not the Treasury provides reserves, to the Treasury has to get the necessary reserves for settlement from the Fed.
Since Treasury is prohibited by law from running overdrafts at the Fed, it issues Treasury securities equal to the amount to be disbursed. The Fed cannot legally buy these directly (“monetize” the disbursements), so it has to sell them at auction to primary dealers who then sell them to others. This auction sale switches the tsy’s for reserves that the Fed credits to the Treasury reserve account for settlement of its disbursements in the interbank market.
This makes it seem as though the reserves are removed from the system through borrowing from those who purchase the tsy’s, but these funds just get injected back into the system immediately through the Treasury disbursements that necessitated the tsy’s as an offset. So it’s a wash at the macro level, with the funds that Treasury disburses being saved at interest in the form of tsy’s. What actually happens monetarily is that the excess reserves resulting from Treasury disbursements get drained from the interbank market and stored (sequestered) in tsy’s, allowing the Fed to hit its target rate.
When the tsy’s mature, then they are converted to back to reserves, and the debt is rolled over, further sequestering them. The only way that reserves once created through Treasury disbursement “disappear” is by withdrawing them from the system through taxation. Congress does this though the budget, and the Treasury/Fed carry out this policy, as they do with disbursements, only in the opposite direction.
Tom Hickey Reply:
August 9th, 2010 at 12:00 am
Steve, Warren’s point in saying that the cash paid in taxes gets shredded is that after the taxpayers’ accounts are credited and their tax liabilities wiped out, then the cash has served it purpose. It does neither gets saved in a vault for future spending nor is it used to pay back debts, as many presume. Government funds itself with currency issuance, not taxes or borrowing, in a fiat system.
How do maturing tsy’s get paid off? The reserves that were used to purchase the tsy securities just get credited back to a deposit account or bank reserve account, and the debt “just disappears” because it never actually existed as debt. It’s just savings being transferred back to a demand deposit.
For example, suppose you have some funds at an interest rate that is less than a CD, you can put the money into. You therefore move the funds into the CD. Then when the CD’s time period expires, you either roll it over, or put it somewhere you can do better, or just return the funds to your deposit account for use. You could chose to do this with tsy’s instead of CD’s. It’s just moving things around that are already there. Think of tsy’s as CD’s and reserves as deposits. These are just changes in asset composition, the economic difference being in liquidity and interest.
Bond issuance is unnecessary. It’s a hold-over from the gold standard days. Interest on government bonds constitutes a subsidy to bond holders. The Fed could accomplish the same thing by paying interest on excess reserves directly. But that would break the illusion.
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Tom Hickey Reply:
August 9th, 2010 at 12:30 am
Steve, understanding this depends on understanding something of national accounting. At the macro (aggregated) level, government deficits increase nongovernment net financial assets (initially in deposit accounts). Treasury issuance, which is legally required to offset the deficit, just transfers that amount from deposit accounts (aggregated) to savings (aggregated) in the form of tsy’s. Because it is a $-4-$ offset, the numbers are (~) equal. Thus, the national “debt” as accumulated budget deficits is the national (dollar) savings of nongovernment.
While the funds that Treasury disburses circulate at the micro level, at the macro level, the same amount gets saved as Tsy’s due to the offset requirement. This is not obvious at the level of the economy, where the disbursed funds go every which way, but it is obvious at the level of what happens in the Federal Reserve System comprising FRS accounts of the Treasury, foreign governments, and commercial banks, in terms of the aggregates. The reserves that Treasury introduces get saved as tsy’s issued in offset. This also increases the net financial assets added to nongovernment through the interest paid on the tsy’s.
What should be the subject of discussion instead of the national “debt” (really savings) and rising deficits (creation of net financial assets that increase effective demand) is the unsustainable level of private indebtedness that financial austerity will only exacerbate, possibly provoking a debt deflation and resulting depression. People are concerned about the wrong thing — an ideologically manufactured pseudo-problem instead of the real financial problem facing us regarding private debt, which portends dire economic consequences if not dealt with properly.
August 8th, 2010 at 8:56 pm
I wasn’t so concerned about what happened to the printed money. I was more wondering what happened to the funds. It’s just hard to wrap my mind around the concept that my 2 grand gets destroyed (electronically or otherwise) like so many kilos of siezed drugs.
I will admit to buying in to the “reserve banking” thing. I also thought that part of the appeal of pushing credit cards was that they could count your credit limit as a deposit in a twisted sort of way, then lend out multiples of that.
There’s just so much disinformation out there, it’s hellish trying to pick through it.
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Tom Hickey Reply:
August 8th, 2010 at 9:21 pm
Now you get what running a government budgetary surplus implies. The tax money gets flushed, no new funds are created, and the private sector runs a deficit unless exports rise to add the funds that increased taxes or reduced spending withdraw. When the private sector runs a deficit, then either demand falls and there is a pull-back, reducing incomes, or else people go into debt/sell assets/draw down savings to maintain their lifestyle.
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Unforgiven Reply:
August 8th, 2010 at 10:10 pm
I didn’t get it before you said it, but I was still reeling.
So, where could I check out a debunking of the “banks lending out multiples” story without running into a bunch of nonsense? Explainations geared to the layperson are best, of course…..
Thanks Tom!
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Tom Hickey Reply:
August 8th, 2010 at 10:27 pm
You might have a look at Bill MItchell, Money multiplier and other myths and Lending is capital- not reserve-constrained.
Scott Fullwiler Reply:
August 8th, 2010 at 11:46 pm
I also explained this here: http://neweconomicperspectives.blogspot.com/2009/06/dont-fear-rise-in-feds-reserve-balances.html
August 9th, 2010 at 10:08 pm
Tom, Scott, Unforgiven, thanks for the information, I really appreciate the time you put into it.
So to summarize. We need to drop the deficit number and focus on inflation as a measure of a well functioning fiscal policy. …and we need creative big government spending that encourages the efficient use of resources through public/private efforts to create things we need; like…. next gen nuclear energy, battery technology, crime free communities, and services in those communities that appear to be too dumb to provide it for themselves. OR… a big freaking tax cut so I can afford a new hot tub and a hot girl friend! ;-)
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Unforgiven Reply:
August 9th, 2010 at 10:38 pm
Oooohh. There’s something to control inflation; tax “girlfriend income”. Or at least use it as a leading indicator of impending economic collapse.
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Tom Hickey Reply:
August 9th, 2010 at 11:34 pm
Well, more or less. :)
The idea is that the absolute amount of the budget deficit or the national debt is meaningless in itself. So are the oft-quoted ratios, like debt to GDP. These things have to be considered relative to other conditions to have economic meaning.
Did you see the film Amadeus, about the life of Mozart? In one funny scene, the king, prejudiced against the young Mozart by the court musicians who are jealous of him, criticizes a piece that Mozart had just written. Mozart asks the king to be specific. The king, not knowing all that much about music, fishes for an answer and blurts out, “There are too many notes.” Mozart answers, “Your Majesty, there are exactly the right number of notes.”
This is instructive about what is happening today when people claim that the deficit is “too big” or the the debt to GDP ratio is growing too rapidly. It’s just uninformed. There is always a “right-sized” deficit/surplus relative to the sectoral balances. In extreme situations, the fight size of the deficit may be very large indeed, as it was when the US was fighting WWII. Should we have been concerned then that the deficit was getting “too big”? Obviously not. Should we be concerned now, when the US is greatly underperforming at great cost in foregone opportunity and huge degradation of resources, especially human resources, when something could be done to correct this?
Instead being concerned with bogeymen, or appealing to “the confidence fairy” (h/t Paul Krugman), MMT looks at the economy through the macro lens of sectoral balances and the accounting identities that pertain. For example, it is an indisputable accounting identity that the budget balance, domestic balance and external (trade) balance sum to zero. This means that they cannot all be in surplus or all in deficit simultaneously; there are inevitable offsets to maintain balance among the sectors. The relation among the sectors has economic consequences affecting real resources and real people. This is usually overlooked in the uninformed discussion that are now taking place based on ideology and associated myths that have no empirical warrant.
In the end, numbers are just numbers unless connected with data, and data are descriptive of real conditions involving real people and real resources. Economic policy is ultimately about real people and real resources, not numbers, although many “experts” don’t seem to put this into their calculations about, e.g., “efficiency.” MMT informs about the economic policy options based on consequences of stock-flow macro models, guided by accounting identities and operational realities, as models of real consequences.
What MMT adds to the debate is, first, operational reality, so that debate is fact-based rather than myth-based, as it now largely is. Secondly, it shows how to achieve sustainable effective demand through income consistent with the desire to save and growth through investment, so that the economy is operating at full capacity and full employment along with price stability. Thirdly, it shows how to maintain this with constant adjustment for changing conditions, chiefly though fiscal policy.
MMT is not monolithic, however, and there are different ways to achieve the same objective, e.g., lowering taxes and increasing government disbursements both add to nongovernment net financial assets, which supports effective demand when it lags. For example, some might counsel a payroll tax holiday now in order to support the desire to repair middle class balance sheets in what Richard Koo has called a balance sheet recession. Others might favor more disbursements aimed at the bottom, where they will surely be spent immediately, directly affecting lagging demand. These are political choices involving policy differences, but the options are based on MMT.
What options are chosen based on anticipated consequences involves choice. Monetary policy is set by the politically independent Fed board of governors, and fiscal policy by Congress with the approval of the president. Voters get to elect the president, senators, and congressional representatives, but policy specifics are left to the discretion of politicians, who are however accountable at elections.
What a country needs is an educated electorate that stays up to date on events, conditions and issues, so that political debate can be well-informed and deliberative. Different people have ideological views ranging across the political spectrum. Rather than focusing on ideologically based assumptions that do not have strong empirical support, it would seem more intelligent and practical to use knowledge that is grounded in operational reality instead of myths that are not consistent with it.
There are practical policy options for different political persuasions within MMT, but since MMT is Post Keynesian, they tend to be supportive of government action in extreme situations like the present global financial crisis, which not over. Highly ideological people might have to get over it if they are to accept MMT, but the arguments for doing so is strong because they are operationally based.
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Rodger Malcolm Mitchell Reply:
August 28th, 2010 at 4:59 pm
Tom, this is an outstanding response. You should enter it as a post on your own blog. Send it to the media and to your political representatives.
Rodger Malcolm Mitchell
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August 10th, 2010 at 10:16 am
But ideology is much more familiar and (therefore) powerful in the world as a whole. Both for those who depend on it as a tool AND for the masses who end up being the “toolbox” for those in the trade of concentrating spending power as they see fit.
So in the end it’s a question about distribution of latent spending power (wealth) and active spending power.
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Tom Hickey Reply:
August 10th, 2010 at 11:32 am
In the end it is a question of the allocation of real resources. The question is whether real resources, which were initially part of the commons, should be allocated on the basis of wealth/income or on the basis of effectiveness and efficiency in balancing a global economy. This is a political choice, but not a simple one, since wars have been fought over how it should be made.
At the moment, the balance is toward the former, the top quintile having most of the wealth and income and doing most of the spending, enjoying the fruit of most of leisure as well. Some people think that this is as it should be based on meritocracy, others see it as unsustainable imbalance and unfair to boot, since the game is tilted by wealth toward wealth.
This is the dialectic of social, political and economic history, and the historical trend has been toward increasing egalitarian societies. The question now is which direction globalization will take. While the existing Western “free market” capitalistic model dominated by neoliberal and neoconservative ideology is predominant now, it is far from certain that this will end up being the prevailing paradigm. Indeed, we are discussing alternatives to it here.
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August 12th, 2010 at 1:53 am
Hey, maybe instead of a property tax, we could tax ideology! It would be based on projected influence and gross receipts (never take a cut of the net). If you’re talking fact, no tax at all. We’ll pilot on political theory; that should help to cut deficit terrorisim right there!
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September 13th, 2010 at 5:09 pm
[...] [...]
September 16th, 2010 at 7:47 pm
[...] Institute are big proponents. It just describes and is not ideological. Here is a good primer. The Center of the Universe Blog Archive Updated: 7 Deadly Innocent Frauds It took me months to understand. I am just testing it out here today. Obviously there are already [...]
September 27th, 2010 at 8:11 am
Stipulating that your assertion of how taxes are used to control aggregate demand, is there any evidence that this technique does in fact have the intended controlling effect?
Question: If the government doesn’t tax because it needs the money to
spend, why tax at all?
Answer: The federal government taxes to regulate what economists call
“aggregate demand” which is a fancy word for “spending power.” In short, that means that if the economy is “too hot,” then raising taxes will cool it down, and if it’s “too cold,” likewise, cutting taxes will warm it up. Taxes aren’t about getting money to spend, they are about regulating our spending power to make sure we don’t have too much and cause inflation, or too little which causes unemployment and recessions.
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September 27th, 2010 at 10:17 am
s/b Stipulating that taxes are used to control aggregate demand …
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September 27th, 2010 at 1:09 pm
William A. Niskanen, the chairman of the libertarian Cato Institute says: “judging by the last twenty-five years (plenty of time for a fair test), a tax cut of 1 percent of the GDP increases the rate of spending growth by about 0.15 percent of the GDP a year. A comparable tax hike reduces spending growth by the same amount” (http://www.theatlantic.com/magazine/archive/2006/06/stoking-the-beast/4862/2/)
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September 27th, 2010 at 1:15 pm
s/b William A. Niskanen, the chairman of the libertarian Cato Institute says: “judging by the last twenty-five years (plenty of time for a fair test), a tax cut of 1 percent of the GDP increases the rate of [government] spending growth by about 0.15 percent of the GDP a year. A comparable tax hike reduces [government] spending growth by the same amount” (http://www.theatlantic.com/magazine/archive/2006/06/stoking-the-beast/4862/2/)
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September 27th, 2010 at 1:22 pm
“In conformity with economic theory, the spending effect was larger when the tax change was legislated to have a permanent effect on tax liabilities.” The effect of tax changes on consumer spending, Steindel, Charles, Current Issues in Economics and Finance, December 1 2001 http://www.allbusiness.com/marketing/market-research/884096-1.html
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September 27th, 2010 at 1:26 pm
“Again looking at 1981 to 2005, Niskanen then asked at what level taxes neither increase nor decrease spending. The answer: about 19 percent of the GDP. In other words, taxation above that level shrinks government, and taxation below it makes government grow.” http://www.theatlantic.com/magazine/archive/2006/06/stoking-the-beast/4862/2/
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September 27th, 2010 at 2:17 pm
What would be the effect of setting government spending at 19% of GDP (Niskanen’s number) and eliminating tax collection entirely?
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warren mosler Reply:
September 28th, 2010 at 8:52 am
with no federal or state taxes it’s instant hyperinflation
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Alexander Doty Reply:
October 1st, 2010 at 5:48 am
Inflation is only possible if an increase in the monetary base is permitted to accommodate excess aggregate demand by means of an increase in prices. Why should we assume that the central bank would accommodate an excess of aggregate demand through an expansion of the monetary base? A constant level of optimal public spending and a concomitant expansion of the monetary base for this purpose would limit the growth of the monetary base to the rate of public spending. Why should this be inflationary?
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Alexander Doty Reply:
October 1st, 2010 at 2:10 pm
To the extent that the rate of public spending and concomitant expansion of the monetary base is excessive, the central bank may compensate by reducing the monetary base with the issue of debt.
WARREN MOSLER Reply:
October 3rd, 2010 at 8:24 am
issuing debt is just a ‘reserve drain’ to support interest rates. you have a lot of catching up to do- please start with ‘soft currency economics’ under ‘mandatory readings’ on this website
Alexander Doty Reply:
October 2nd, 2010 at 2:26 pm
Here’s how it works:
1. The Treasury sells one-year obligations to fund the public sector fiscal budget – this is accomplished in 52 equal tranches over the course of the fiscal year.
2. The Treasury begins to retire the one year obligations at the end of the fiscal year – this is accomplished in 52 equal tranches over the course of the following fiscal year.
3. The net result is that there is a permanent revolving debt equal to the public sector budget and the monetary base is increased steadily by the amount of interest paid on the debt.
4. The level of Treasury borrowing can be adjusted to exceed or fall short of the public sector budget according to whether economic stimulus or dampening is targeted. The size of the permanent revolving debt in relation to the size of the economy will increase during stimulus periods and decrease during dampening periods. The net result will be that one cycle cancels the other over time.
WARREN MOSLER Reply:
October 3rd, 2010 at 8:34 am
the level of tsy borrowing has nothing to do with aggregate demand. there is no channel
WARREN MOSLER Reply:
October 3rd, 2010 at 8:11 am
there is no channel from the ‘monetary base’ to aggregate demand. See the Fed’s Seth Carpenter’s paper on this site.
September 27th, 2010 at 2:21 pm
Stipulating that taxes are used to control aggregate demand, is there any evidence that this technique does in fact have the intended controlling effect?
Question: If the government doesn’t tax because it needs the money to
spend, why tax at all?
Answer: The federal government taxes to regulate what economists call
“aggregate demand” which is a fancy word for “spending power.” In short, that means that if the economy is “too hot,” then raising taxes will cool it down, and if it’s “too cold,” likewise, cutting taxes will warm it up. Taxes aren’t about getting money to spend, they are about regulating our spending power to make sure we don’t have too much and cause inflation, or too little which causes unemployment and recessions.
“In conformity with economic theory, the spending effect was larger when the tax change was legislated to have a permanent effect on tax liabilities.” The effect of tax changes on consumer spending, Steindel, Charles, Current Issues in Economics and Finance, December 1 2001 http://www.allbusiness.com/marketing/market-research/884096-1.html
William A. Niskanen, the chairman of the libertarian Cato Institute says: “judging by the last twenty-five years (plenty of time for a fair test), a tax cut of 1 percent of the GDP increases the rate of [government] spending growth by about 0.15 percent of the GDP a year. A comparable tax hike reduces [government] spending growth by the same amount…Again looking at 1981 to 2005, Niskanen then asked at what level taxes neither increase nor decrease spending. The answer: about 19 percent of the GDP. In other words, taxation above that level shrinks government, and taxation below it makes government grow.” (http://www.theatlantic.com/magazine/archive/2006/06/stoking-the-beast/4862/2/)
What would be the effect of setting government spending at 19% of GDP (Niskanen’s number) and eliminating tax collection entirely?
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zanon Reply:
September 28th, 2010 at 10:03 am
Niskanen is total crap. I expect the moron cato institute to connect a bunch of dots on a chart and declare “a tax cut of 1% of GDP increase the rate of Govt spending by about 0.15 percent GDP”. There are perhaps one or two other factors that happen in planet over past 25 years that impact rate of govt spending
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Alexander Doty Reply:
October 1st, 2010 at 2:32 pm
You are correct in pointing out that correlation is not the same as causality.
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September 28th, 2010 at 8:53 am
all evidence confirms taxes reduce aggregate demand.
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September 30th, 2010 at 7:22 am
“At some point while I was at Bankers, the Fed raised the discount rate. Our trading manager, Alan Rogers, said he hoped the Fed didn’t just give the banks the money. He said the money supply was too high and the Fed needed to take some of it away.”
When the discount target rate is raised by the Fed, it uses open market operations to reduce base money and not to increase it.
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September 30th, 2010 at 7:27 am
s/b When the Fed funds target rate is raised by the Fed, it use sopen market operations to reduce base money and not to increase it.
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WARREN MOSLER Reply:
September 30th, 2010 at 9:07 am
actually, the fed used to keep the banks net borrowed for a small amount, and so all it had to do when it changed its target rate was change the rate it charged the banking system for the needed funds. quantity didn’t change at all.
today, with excess reserves in place, all it needs to do to hike rates is raise the rate it pays on reserves.
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September 30th, 2010 at 7:27 am
s/b When the Fed funds target rate is raised by the Fed, it uses open market operations to reduce base money and not to increase it.
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September 30th, 2010 at 7:32 am
thanks- a misprint I need to fix!
michael is on it!
it was about raising reserve requirements, not the discount rate.
much appreciated!!!!!!!!!!!!!!!!!!
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September 30th, 2010 at 9:56 am
“Question: If the government doesn’t tax because it needs the money to
spend, why tax at all?
Answer: The federal government taxes to regulate what economists call
“aggregate demand” which is a fancy word for “spending power.” In short, that means that if the economy is “too hot,” then raising taxes will cool it down, and if it’s “too cold,” likewise, cutting taxes will warm it up. Taxes aren’t about getting money to spend, they are about regulating our spending power to make sure we don’t have too much and cause inflation, or too little which causes unemployment and recessions.”
Stipulating that the given reason for taxes is correct, is this not a terribly inefficient way of regulating aggregate demand given the enormous coast of complying with and enforcing a tax collection system? Is control of aggregate demand something we want to be doing? Presumably when demand exceeds supply, a need is revealed which is an opportunity for an entrepreneur.
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WARREN MOSLER Reply:
September 30th, 2010 at 10:03 pm
depends.
a federal real estate tax, for example, would have extremely low compliance costs and could be altered reasonably quiclkly
to your demand/supply issue, remember the currency is a public monopoly.
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September 30th, 2010 at 10:03 am
“the value of the dollar was only as good as the federal government’s ability to enforce tax collection”
Why should this be so? The value of the dollar derives only from demand from the currency to pay for dollar-denominated goods and services. It is not clear to me how it is more or less demanded in proportion to the federal government’s ability to enforce tax collection. If the underlying problem is the threat of inflation caused by an excess of demand over supply, then the problem is not tax collection nor is the solution to dampen demand. The problem is a paucity of supply and the solution is to increase supply.
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WARREN MOSLER Reply:
September 30th, 2010 at 10:04 pm
sounds like you need to read the 7 deadly innocent frauds or some of the ‘mandatory readings’ on this website, thanks!
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September 30th, 2010 at 10:05 am
s/b “the value of the dollar was only as good as the federal government’s ability to enforce tax collection”
Why should this be so? The value of the dollar derives only from demand for the currency to pay for dollar-denominated goods and services. It is not clear to me how it is more or less demanded in proportion to the federal government’s ability to enforce tax collection. If the underlying problem is the threat of inflation caused by an excess of demand over supply, then the problem is not an excess of demand nor is the solution to dampen demand. The problem is a paucity of supply and the solution is to increase supply.
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October 5th, 2010 at 4:15 am
I have read all of your writings and find them quite interesting. This explains my plethora of comments. However, your responses are unclear to me. My question boils down to the following: why not raise funds required for public spending exclusively through short-term debt and do away once and for all with the distortion of the economy which comes with taxes?
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WARREN MOSLER Reply:
October 5th, 2010 at 7:55 am
in the first instance, tax liabilities create a nominal demand for units of the currency which then allows govt to then spend it’s otherwise worthless currency.
govt borrowing is best thought of as following spending and functions as interest rate support but does not alter the economy’s net financial assets.
so from inception, without taxes there would be no spending and nothing for govt to borrow
see ‘soft currency economics’ on this website.
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October 6th, 2010 at 4:51 am
I have read repeatedly in your writings the assertion that the rationale for taxes is to create a need for currency which is the only means available for paying them. What is the proof for this assertion? None of your writings or references go beyond the assertion and it is a very important part of your argument in favor of taxes.
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Tom Hickey Reply:
October 6th, 2010 at 9:55 am
Alexander, the theory of state money based on taxation was not developed by Warren. It is called Chartalism. Modern Chartalism goes back to G. F. Knapp, writing in the 1920′s. MMT is a form of Chartalism, or as some say, Neo-Chartalism. For a summary, see the Wikipedia article.
http://en.wikipedia.org/wiki/Chartalism
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WARREN MOSLER Reply:
October 6th, 2010 at 5:55 pm
odd question,
how to prove the assertion that if govt demand you pay them in its currency you then need to get units of that currency to comply
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Alexander Doty Reply:
October 7th, 2010 at 6:01 am
My question is not as you state it. Ostensibly, the original reason for taxes was to gather resources for the sovereign and, later, the state. Long after taxes came fiat currency, originally backed by something of reputed value, namely gold. Later still, 1971 for the USD, came fiat currency backed only by the good faith and credit of the state. What is the evidence that taxes payable in fiat currency are necessary for the public’s acceptance of the same fiat currency for all other purposes? As I say, this assertion appears to be central to your reasoning and, therefore, is an important question.
WARREN MOSLER Reply:
October 7th, 2010 at 10:46 am
it’s a point of logic 100% supported by evidence
Alexander Doty Reply:
October 7th, 2010 at 6:05 am
Yes, I have read about Chartalism and MMT. In the referenced Wikipedia article on Chartalism, it is the following statement which seems to me to be unsupported: “The demand to hold and acquire this government issued currency is driven by taxes levied by the state – which typically can only be paid in the state-issued fiat currency.”
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WARREN MOSLER Reply:
October 7th, 2010 at 10:47 am
read ‘the 7 deadly innocent frauds of economic policy’ on this website asap thanks
Tom Hickey Reply:
October 7th, 2010 at 11:24 am
Alexander, MMT is based on the Chartalist theory of money. This debate has been going on in monetary theory for some time, and there is ongoing disagreement. MMT’ers have picked the side with which they agree, with good reasons and considerable evidence, they think. Since this is a disputed question, you could call it an assumption. Different economic schools assume different theories of money based the rationale they judge most rational.
If you are interested in this debate, then you should research the literature and come to your own informed conclusions. The principal theories are state theory (Chartalism, Knapp), credit theory (Innes), utility theory (Mises). commodity theory (Classical), quantity theory (Hume) and real bills theory (Smith).
beowulf Reply:
October 8th, 2010 at 3:08 pm
What is the evidence that taxes payable in fiat currency are necessary for the public’s acceptance of the same fiat currency for all other purposes?
During the Civil War, The Legal Tender Act of 1862 “authorized the issue of $150 million in Treasury notes, known as Greenbacks. In contrast to Confederate paper, however, Congress required citizens, banks, and governments to accept Greenbacks as legal tender for public and private debts, except for interest on federal bonds and customs duties”.
http://www.taxanalysts.com/museum/1861-1865.htm
The obligation for citizens to pay State taxes in US Notes and the obligation for the States to accept those notes for tax payments anchored US Notes as legal tender. However, Tsy would have had a better handle on inflation, and kept US Notes at par with gold dollars, if it could have drained US Notes out of the economy by accepting them for payment customs duties (a large fraction of federal revenue). As is typical in wartime, inflation was high, but not disastrously so because Tsy was able to reduce inflationary pressure with a number of new taxes, including the US’s first income tax. As it happens, both Congress and Tsy preferred a federal real estate tax but constitutional issues lead them to follow the example of Britain’s income tax system.
Lincoln’s government did about as competent a job managing public finance as anyone in that era could have. Davis’s Confederate Government could not have done a worse job. The CSA didn’t require citizens or state tax collectors to accept their newly printed currency as legal tender, and the Confederate Treasury barely even collected national taxes. Without an effective tax regime (either state or national) to anchor the CSA currency and drain money to reduce its inflationary pressure, the results were inevitable (Q. did South’s basketcase economy result from or cause its military setbacks?)–
Ironically, the Confederate decision to turn to paper money in lieu of a system of internal taxation abetted the most odious, regressive form of de facto taxation southern society endured: runaway inflation, appearing in the wake of military reversals in 1862, and topping 9,000 percent by war’s end.
(quoting same article as above– a fascinating read).
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WARREN MOSLER Reply:
October 10th, 2010 at 8:45 am
I never did see how ‘legal tender’ laws had anything to do with it.
All that’s needed is the currency be the only thing accepted for payment of taxes.
The Confederate currency did manage to keep 1 million men in the field for maybe 5 years without being ‘backed’ by anything.
It was needed by the states to pay taxes, though compliance was spotty.
The real tax was the real resources taken from the private sector- food, people, etc.
Real taxes are paid when the govt spends which is the actual transfer of real goods and services.
Like the UMKC Buckaroo which is a fully functioning currency the Professor Mat Forstater created and manages.
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beowulf Reply:
October 10th, 2010 at 9:24 pm
I never did see how ‘legal tender’ laws had anything to do with it.
All that’s needed is the currency be the only thing accepted for payment of taxes.
You’re right, my point was even if the US Government didn’t accept currency for the payment of taxes (and apparently US Notes were accepted by Tsy for payment of all taxes except for customs duties), Congress could still require state and local governments to accept them for their own taxes by declaring US Notes legal tender. Of course, passing a law and enforcing it are two different things.
http://books.google.com/books?id=khU9AAAAYAAJ&pg=PA219
WARREN MOSLER Reply:
October 11th, 2010 at 9:37 am
yes, taxes by any taxing authority are sufficient to impart value to a currency
October 8th, 2010 at 4:08 am
I am indeed interested in this debate. The referenced Wikipedia article on Chartalism states: “Warren Mosler, L. Randall Wray and Bill Mitchell are largely responsible for reviving the idea of Chartalism as an explanation of money creation; Wray refers to this revived formulation as Neo-Chartalism.” and “(Febrero 2009) argues that modern money draws its value from its ability to cancel (private) bank debt, particularly as legal tender, rather than to pay government taxes.” So there is at least one other person, a professor at the University of Castilla in this case authoring “Three difficulties with Neo-Chartalism”, who objects to the following assertion: “The demand to hold and acquire this government issued currency is driven by taxes levied by the state – which typically can only be paid in the state-issued fiat currency.” Febrero answers: “Apart from being unrealistic (Mehrling, 2000, p. 401) we find a counter-example for this logic in today’s Europe.” and “Note the following sentence in Wray (1998, p. 167): “Indeed, because taxes could be paid using bank money, the public would no longer need to obtain fiat money (except, perhaps, for illegal transactions and vending machines)”. In the European case, it is not that taxes “could be paid using bank money” but that taxes are paid using bank money because it is the money injected into the economic system to monetize public spending.” Warren Mosler’s response to my question about evidences is the following: “it’s a point of logic 100% supported by evidence” and “read ‘the 7 deadly innocent frauds of economic policy.’” There is no evidence I can find relating to my question in “The Seven Deadly Innocent Frauds.” I would be interested to know what is the evidence referenced by Warren Mosler.
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Matt Franko Reply:
October 8th, 2010 at 7:32 am
Alexander,
“taxes are paid using bank money because it is the money injected into the economic system to monetize public spending”
The author here seems to be refering to the source of initial balances to settle govt securtites issuance as the “owner” of the “money”…ie becasue a dealer bank of course is involved in settlement of govt securities issues then the author views this as “bank money”…that is not how one would define a currency sovereign imo.
Im not sure who you are quoting (quotes are not closed in your post), but I think Wray may be refering to actual privately issued bank notes vs in the US Federal Reserve notes in his hypothetical. A situtation of competing or co-existing currencies within the same country.
The quote reads like the author thinks the banking entity involved in settlement of govt securities issues can be considered the sovereign? This is incorrect if so imo.
Resp,
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Tom Hickey Reply:
October 8th, 2010 at 9:39 am
The quote reads like the author thinks the banking entity involved in settlement of govt securities issues can be considered the sovereign? This is incorrect if so imo.
Maybe we could call commercial banks that are government chartered public/private entities “franchises” from the sovereign. They get to use the sovereign’s unit of account to lend, thereby creating deposits that function as money, but they cannot affect net financial assets as the sovereign can because the deposits they create are offset by loans, so commercial banking in aggregate nets to zero. However, banking can be a profitable franchise if run prudently, and it can also provide a public service by acting as an agent for government, performing services that government would otherwise have to provide directly, e.g., through a national bank.
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WARREN MOSLER Reply:
October 10th, 2010 at 8:35 am
It’s about ‘sectors’ with regards to net financial assets.
A bank’s balance sheet has assets and liabilities, which are mainly loans and deposits.
Banks assets are considered private sector, non govt. assets because there is a private sector equity investment.
And more to your point, the banks create loans which are non govt liabilities, and deposits which are non govt assets.
The same is true with ‘pure’ govt lending as well. The private sector winds up with assets, the proceeds of the loan, and liabilities, the promise to pay it back.
So lending from banks or govts does not create/destroy net financial assets the way govt spending and taxing does.
However, when state owned banks lend funds that they don’t expect to enforce collection and repayment is likely to be ignored, then the private sector has the funds, assets, and the liabilities are functionally not there. In that case state lending does, functionally, create net financial assets.
anon Reply:
October 8th, 2010 at 7:35 am
That particular paper has been examined and discredited multiple times on this blog and others.
The author shows he knows nothing about Chartalism by attempting to frame Europe in that context. Bill Mitchell has devoted numerous blogs to pointing out the fundamental error of doing so. Chartalism is a description of money under a single sovereign currency issuer. There is no such single sovereign for the Euro zone – there is no supranational fiscal authority that corresponds to the ECB. That is the fundamental problem with the EZ monetary and fiscal system. Mosler has also written about it and proposed the fix of the ECB assuming in part such a fiscal authority role by crediting national bank accounts at the ECB on a pro-rata basis. The actual fix so far has been a sort of supranational insurance fund whereby the EZ as a whole backs the fiscal survival of its weaker members through ECB direct market intervention plus a separate rescue fund. But these sorts of fixes are necessary because Europe has been set up under a single monetary authority along with national deficit constraints that effectively usurp the true Chartalist potential of national governments.
Erroneous:
http://www.ucm.es/info/ec/ecocri/eus/Febrero.pdf
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WARREN MOSLER Reply:
October 8th, 2010 at 7:40 am
never heard of febrero and he’s wrong. so is mehrling, on many things. and wray makes my point.
you can put anything you want on wikipedia. it’s not an authority on anything. the fact that you use it as such shows your level of scholarship.
all currencies that had runaway inflation had extremely large amounts of bank debt that clearly didn’t give the currency value or stop ‘inflation.’
and they all issued govt bonds which also necessarily did nothing to reduce aggregate demand.
Treasury secs serve to ‘offset operating factors’ at the fed and don’t alter net financial assets (monetary aggregate). This is a matter of accounting, an identity.
read ‘soft currency economics’
Japan had the world’s largest ‘quantitative easing’ policy that resulted in maybe 30T yen in excess reserves which did nothing for lending or the economy or in any way alter the price level or weaken the currency.
All fed research shows QE does nothing apart from adjusting the term structure of rate including the latest paper by Seth Carpenter on this website.
There is no quantity channel.
tsy secs do alter the term structure of rates.
The question is whether the term structure of rates alters the level of the currency.
The bank of england’s research concluded the evidence is inconclusive not long ago.
Same with all central bank research on the subject.
You can try trading currencies based on interest rate policies.
good luck!
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October 8th, 2010 at 4:01 pm
It is interesting to me that in a firestorm of replies to my question none answer it: what is the evidence for the assertion that taxes payable in fiat currency are necessary for the public’s acceptance of the same fiat currency for all other purposes? The account of the Lincoln era points to a moment in time when the USD became legal tender but I fail to see how its use for payment of taxes was more significant than its use for settlement of private debts.
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Tom Hickey Reply:
October 8th, 2010 at 4:31 pm
Alexander, what would constitute the proof of a theory. A theory is an explanation. theories are disconfirmed by counter-instances. There are no counter-instance disconfirming the state theory of money as far as I can see.
Conversely, just because a theory has not been disconfirmed does not entail that it is confirmed. Only theories that don’t fit the facts are ruled out.
The various theories of money are attempts to explain a historical phenomenon in which controlled experiments are not possible and even facts are in dispute. It is possible that different explanations fit the facts. It is also possible that some combination of the present theories will turn out to be the optimal explanation, or that all of them will be disconfirmed and replaced by a better explanation.
If economics were a hard science and the facts were agreed upon, then it might be possible to construct a theory that all experts would agree is optimal. That is just not the case, so you are barking up the wrong tree looking for a “proof” where one doesn’t exist.
The question is which explanation has the best rationale backing it up and the best factual evidence that experts agree upon. To decide this, one has to select criteria, and then the criteria for determining the right criteria comes into play, and one is caught in a reductio. This is why I never argue this stuff with Austrians. The foregone conclusion it that it will end in stalemate at fundamental assumptions.
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Alexander Doty Reply:
October 9th, 2010 at 1:58 am
Thank you for your excellent reply, Tom Hickey, with which I agree wholeheartedly. The assertion that taxes are necessary for public acceptance of fiat currency is a theory. You have stated my question better than I stated it. However, Warren Mosler must answer for his assertion that this theory is supported by evidence unless he can point to such evidence. Surely a theory not supported by evidence is not a basis for action. As for logic as proof, it seems illogical to me that a vast world economy transacting in USD would rest upon the foundation of the currency’s acceptance for US tax purposes. Fiat currency is accepted because it is legal tender for settlement of all debts, public and private.
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Tom Hickey Reply:
October 9th, 2010 at 11:35 am
Wray deals with evidence in Understanding Modern Money, chapter 3.
The Chartalist claim is not that taxation is the only reason that people accept state money as a medium of exchange. The other theories of money all offer good reasons for doing so, and there are probably others. I don’t think that anyone denies that money has utility, for instance, and that utility is a factor in the use of money.
What Chartalism posits is that taxation is causal in the acceptance of state money. Everyone in the state that pays taxes, which is just about everyone, needs to obtain state money to do so if the state accepts only its own liabilities at its payment offices.
Other factors involved in acceptance of money as a medium of exchange are not causal in that they do not create a necessity for its acceptance, only a convenience.
What happens according to the Chartalist view is that the necessity to obtain state money for the payment of taxes gets the game going and other factors kick in to support the use of state money as the relatively exclusive medium of exchange. For example, casinos may require the use their chips as monetary tokens instead of the currency for which the chips are exchangeable on exiting.
WARREN MOSLER Reply:
October 10th, 2010 at 8:50 am
See my ‘turning litter into money’ post on this site as well.
creating a currency via taxation can readily be demonstrated in that simple controlled experiment.
in fact the UMKC buckaroo was created in that fashion and has been functioning for over 10 years, just like every other fiat currency in the world.
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Matt Franko Reply:
October 8th, 2010 at 4:40 pm
Alexander,
If you dont pay your taxes you go to jail, if you dont pay your debts you go to court? (no more debtors prisons these days unfortunately for bankers)
Resp,
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WARREN MOSLER Reply:
October 10th, 2010 at 8:53 am
actually, private debt is a bet the currency is going to go down in value. it’s an avenue for ‘negative demand’
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WARREN MOSLER Reply:
October 10th, 2010 at 8:47 am
the use for settlement of private transactions always follows the need to use the currency to pay taxes. and when tax collection ceases the use for settlement of private debts subsequently ceases.
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October 9th, 2010 at 2:16 am
Another element of this theory which seems questionable to me is the following: reclaiming fiat currency via taxation is essential to maintaining its value in exchange. What is the evidence for this assertion? Clearly, an excess of fiat currency depresses its value: supply exceeds demand. Warren Mosler asserts that taxation is necessary for dampening aggregate demand. It seems to me that taxation may be sufficient for dampening aggregate demand but that it is not necessary for doing so. The alternative is to limit the extent of fiat currency issued. In this, I think that perhaps Warren Mosler and I agree. There is plenty of evidence supporting the theory that an excess of fiat currency depresses its value. I see no evidence supporting the theory that reclaiming fiat currency via taxation is essential to maintaining its value.
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Tom Hickey Reply:
October 9th, 2010 at 11:17 am
Taxation reduces the amount just as does not issuing in the first place. What you are missing is flow effects that affect demand (sales).
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Alexander Doty Reply:
October 9th, 2010 at 2:04 pm
The flow effect to which you refer, I take it, is the stimulation of demand represented by spending for the public sector (i.e., government spending). This can be funded by short-term public debt as long as the size of the public sector (government) budget is not excessive in relation to the total economy. As this public debt comes due, it can be replaced with renewed public sector debt, thus funding the public sector budget with effectively permanent public sector debt. As money is created to extinguish old public sector debt, it is reclaimed by the issue of new public debt. The only net increase of base money in this system is interest on the public debt and growth in the size of public debt in proportion to growth in the size of the total economy. Base money in this system thereby grows at the rate of the economy plus the interest rate on public borrowing. This growth of base money supports growth in aggregate demand. Does this address your point about flow effects that affect demand?
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Tom Hickey Reply:
October 9th, 2010 at 2:47 pm
This can be funded by short-term public debt as long as the size of the public sector (government) budget is not excessive in relation to the total economy.
What is the criterion for excessive?
Government never “pays off” its debt. It just “rolls it over.” But even this is a misunderstanding because a monetarily sovereign that is the monopoly issuer of a nonconvertible floating rate currency cannot be indebted in its own currency. That is just a nonsense. There is no national “debt.” It is rather nongovernment savings of net financial assets in the form of tsy’s. Tsy’s only represent debt under a convertible fixed rate system like the gold standard and they are a holdover from those days. Presently, they are obsolete operationally and could just be eliminated if Congress wised up.
What happens operationally is that numbers get switched on the Fed’s spreadsheet from demand deposit accounts (bank reserves) to time deposit accounts (tsy’s) and back, with more interest paid on the time deposits. This not a fiscal operation and does not require new funding to be appropriated. The interest payments are funded by currency issuance, but this does not come from revenue or borrowing, since neither funding from revenue nor financing with debt make operational sense under the present monetary regime.
What happens is that when Congress approves a budgetary deficit, private bank accounts get credited, bank reserves increase for settlement in the interbank market, and tsy’s are issued to drain the excess reserves to allow the Fed to hit its overnight rate. Tsy issuance just sterilizes the excess reserves in time deposit accounts at the Fed, removing the excess reserves. Sales and redemption of tsy’s just return the reserves to the interbank market. The Fed uses OMO to smooth this out to hit its target rate.
Meanwhile, the private bank accounts that Treasury has credited begin to spend the new deposits down, creating a flow in the economy. What happens at the macro level is that these funds flow through the economy, while at the same time are saved as tsy’s by people wishing to save. The saving is funded by the increase in demand deposits, so it’s a wash.
If it is a wash, why do it? What is important is the flow of these newly created net financial assets throughout the economy, creating demand and providing space for the desire to save and delever.
WARREN MOSLER Reply:
October 10th, 2010 at 9:02 am
no, it just shows you haven’t gotten into the ‘mandatory readings’
the post is too convoluted for comment.
October 9th, 2010 at 4:50 am
The ostensible father of Chartalism, GF Knapp, mentions tax as a basis for the value of fiat currency only once in his State Theory of Money:
“Instead of perpetually insisting on the defects of autogenic money, just think a little of its services. It frees us from our debts, and a man who gets rid of his debts does not need to spend time considering whether his means of payment were material or not. First and foremost it frees us from our debts towards the State, for the State, when emitting it,acknowledges that, in receiving, it will accept this means of payment. The greater the part played by the taxes, the more important is this fact to the tax-payer.” Knapp 1926 p52
This part of Knapp’s writing seems to have been taken to mean that fiat currency will not be accepted by the public unless there is a demand for the fiat currency to settle tax obligations. My reading of this excerpt is that, to the extent that taxes are a significant part of debts which must be settled by the public, the fact that they may be settled with state-issued fiat currency increases its usefulness. In the absence of taxes, they are equally useful as legal tender for the settlement of private debts.
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Tom Hickey Reply:
October 9th, 2010 at 11:19 am
The point is that taxation makes state money a necessity in that society. No other theory of money accounts for necessity. Money is just a convenience. Necessity is useful in establishing causality.
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Alexander Doty Reply:
October 9th, 2010 at 2:50 pm
I fully embrace LR Wray’s proposal for public service employment as outlined here: http://www.worldacademy.org/forum/how-implement-true-full-employment-randall-wray
However, I note that there is no evidence offered which supports the theory that taxation is a cause of public acceptance of fiat currency. Wray states in the referenced article: “The State defines money as that which it accepts at public pay offices (mainly, in payment of taxes). Taxes create a demand for money, just as our buckaroo tax creates a demand for buckaroos, while spending by the Treasury provides the supply.”
My question is whether, in the absence of taxes, the public would accept State fiat currency as legal tender for the settlement of all debts, public and private. I believe that the answer is affirmative. There is plenty of evidence for this in economies where taxes are very low or non-existent.
Warren Mosler’s concern is inflation. There is plenty of evidence that funding public expenditure by expansion of the monetary base causes inflation. However, the alternative to taxes and expansion of the monetary base is public debt. Funding public spending by means of debt becomes a problem when public spending becomes excessive in relation to the size of the total economy. I believe that public sector spending limited to twenty percent of the total economy is feasible in the manner I have outlined above.
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WARREN MOSLER Reply:
October 10th, 2010 at 9:06 am
there is no evidence of a non convertible currency that wasn’t required for some kind of tax payment having value. nor can theory or logic support your contention.
“My question is whether, in the absence of taxes, the public would accept State fiat currency as legal tender for the settlement of all debts, public and private. I believe that the answer is affirmative. There is plenty of evidence for this in economies where taxes are very low or non-existent.”
ESM Reply:
October 11th, 2010 at 1:29 pm
I run into this a lot — that people believe money has value simply because everybody has agreed to accept that it has value. It is a theory that is not entirely without merit, but I think that such a faith-based system could not remain a stable system in the long term.
In Ithaca, NY (where Cornell is), there is something called the Ithaca HOURS which is such a fiat currency that exists in the absence of explicit taxation. It probably only works to some extent because it represents a very small fraction of total transactions and savings (so nobody is holding enough of them at any one time that he would be worried about the risk of it becoming worthless).
Of course, one (perhaps I) could argue that gold is such a faith-based system. Gold has little industrial use, and its value appears to stem primarily form its scarcity and its history of having value. Not much to go on there in my opinion, but it seems to work.
If I was worried about the fiat currency system collapsing, I certainly wouldn’t buy gold though. I would buy canned food, since at least if it lost value relative to other goods and services, canned food would retain some value to me as a form of sustenance. Guns and ammo should retain some value too I guess.
WARREN MOSLER Reply:
October 12th, 2010 at 10:26 am
LETS systems like Ithaca dollars work only because unemployed people are willing to take a chance selling their labor in the hopes someone will sell them theirs.
If they’re wrong worst case they fixed someone’s door hinge for nothing, or something like that.
Tom Hickey Reply:
October 11th, 2010 at 2:40 pm
people believe money has value simply because everybody has agreed to accept that it has value
Right. “People will lose faith in the currency” is the main argument for hyperinflation and currency collapse.
October 10th, 2010 at 2:02 pm
Tom Hickey – I am aware of the theory from which come your comment on my statement: This can be funded by short-term public debt as long as the size of the public sector (government) budget is not excessive in relation to the total economy. The ideas you express are largely a summary of Warren Mosler’s writing on the subject of public debt. Please explain precisely and concisely what you and Warren Mosler propose.
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Tom Hickey Reply:
October 10th, 2010 at 3:26 pm
What I propose is no-bonds and consolidating the Treasury and Fed, letting Congress manage the economy using fiscal policy by relying on Abba Lerner’s principles of functional finance updated, along with economic analysis based on operational reality as described by MMT through national accounting identities, the sectoral balance approach, and stock-flow consistent macro models, with the goal of achieving optimal capacity utilization/full employment together with price stability. Congress should also adopt a Minskian approach to horizontal money creation and the use of leverage to prevent financial instability arising due to the financial cycle. I would also qualify functional finance to target taxation and regulation toward disincentivizing economic rent and incentivizing sustainable productive investment. Congress should also eliminate subsidies, privilege, and favors, and commit all public expenditure and investment to public purpose, investing in vital resources where the private sector is either unable or unwilling to do so. The budgetary process must be viewed in terms of a comprehensive strategy for achieving national objectives coordinated by the national goal of national and global peace and prosperity in a sustainable fashion.
I think that Warren has pretty well set forth what he proposes under “Proposals” in the menu bar at the top of the page, and much more specifically than I do in this brief post.
I would also be interested in hearing what others propose.
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Alexander Doty Reply:
October 11th, 2010 at 3:23 am
Let us take your proposals one at a time. No bonds, I take it, means no public debt. Is this correct?
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WARREN MOSLER Reply:
October 11th, 2010 at 9:40 am
it means deficit spending remains as reserve balances.
read ’0 is the natural rate of interest’ on this website before responding, thanks
beowulf Reply:
October 11th, 2010 at 12:05 pm
Congress should also eliminate subsidies, privilege, and favors, and commit all public expenditure and investment to public purpose, investing in vital resources where the private sector is either unable or unwilling to do so
Tom Hickey, agree with everything you say. The biggest step towards eliminating (or at least reducing) “subsidies, privileges, and favors” would be zeroing out the $1.2 trillion in tax expenditures and recycling the revenue to working and middle class families with a negative income tax. Direct spending for any program could then be judged on the basis, should the money go to, say, “cash for clunkers”… or be added to the negative income tax credit instead?
However, one tax expenditure worth adding is something that Michael Hudson and his colleagues have suggested Latvia use to reform its tax code, a 100% income tax credit for all site value taxes paid (the 100 percentage could be reduced as the economy approaches full employment as a sort of an inside out tax increase) . State legislatures would then be nuts not to switch as much of state and local tax burden to property taxes on land (but not improvements) taxes as possible, since their citizens would be reimbursed on the federal side anyway. Most recent data is for 2008 (which probably isn’t any higher this year because of the economy):
Revenue from taxes, the largest share of state and local government revenue, rose 3.7 percent to $1.3 trillion. Sales and gross receipts made up the largest share of tax revenue ($448.7 billion), followed by property taxes ($409.7 billion) and individual income tax revenue ($304.6 billion)
http://www.census.gov/newsroom/releases/archives/governments/cb10-108.html
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WARREN MOSLER Reply:
October 11th, 2010 at 9:34 am
Under current institutional arrangements, the tsy can do what’s call ‘funding the debt’ with nothing longer than 3 month bills no matter how large the deficit spending which I propose as an interim step.
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October 10th, 2010 at 3:41 pm
Alexander: There is plenty of evidence that funding public expenditure by expansion of the monetary base causes inflation.
?
http://www.wisebread.com/oh-noes-inflation
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Matt Franko Reply:
October 10th, 2010 at 9:05 pm
Yeah Tom,
It’s only been over two years since this hockey stick formation was exhibited in WRESBAL initially due to forex currency swaps between the Fed and the ROW and btw ever since prices have COLLAPSED! But these mainstream idiots are so slow on the uptake that they still havent grasped the fact that stock measures of “money” are meaningless.
Hello Monetarists: This is a Twelve… thousand… percent… increase… in… reserve… balances… and.. prices… have… collapsed!…….. hello.. McFly… Buy a dog and name it “Clue” and then you will have one.
The mainstream is indeed stubborn. Tom, keep up the good fight, I’m picking up a push back in progress against MMT out there.
Resp,
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WARREN MOSLER Reply:
October 11th, 2010 at 9:36 am
yes, push back status, progress!!!
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Alexander Doty Reply:
October 11th, 2010 at 3:21 am
One such example is the inflation in Argentina in 1990 and the subsequent economic collapse.
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WARREN MOSLER Reply:
October 11th, 2010 at 9:38 am
no it isn’t
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October 11th, 2010 at 4:27 pm
I get the feeling that I have stumbled onto a cult. Alas, I had hoped to have a serious discussion. Tom Hickey was engaging for a while. Warren Mosler is so sure of himself that it scares me. I’d love to continue with a productive discussion.
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Tom Hickey Reply:
October 11th, 2010 at 5:36 pm
Alexander, one could say that all ideologies are the basis for various cults. There is no universally accepted economic paradigm like there is in hard sciences. Different theories compete.
The way to engage in a productive discussion here is to find out first what going on. To do this, go through the mandatory readings, digest them, and then pose questions/objections based on that understanding.
Warren and many of the people here happen to be familiar with operations, and what’s happening here flows from that understanding and the implications of it. If you think that someone is wrong about monetary and fiscal operations, then make a case for it. If you disagree with the implications drawn from application of operational rules, them make a case for that. To get traction here, you have to demonstrate that you have a grasp of operations first.
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October 11th, 2010 at 7:17 pm
Thanks for setting me straight, Tom, but I think I’ll pass.
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November 9th, 2010 at 1:45 pm
Page 61:
“Domestic credit creation is funding foreign savings. Assume you live in the US and decide to buy a car made in the China. You go to a US bank, get accepted for a loan, and spend the dollars on the car. So where do things then stand? You exchanged the borrowed dollars for the car, the Chinese car company has a deposit at the bank, and the bank has a loan to you and a deposit belonging to the Chinese car company on their books. sells the dollars to the Chinese government, the Chinese government buys US bonds (has a deposit at the Fed), the Chinese government provides the Chinese car company yuan (the Chinese government does not need to get yuan to spend them) to pay employees, and the Fed provides funding to the bank.”
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November 17th, 2010 at 3:58 pm
US Government Deficits/Surpluses
1.The US government cannot have a solvency (liquidity) problem. They can “print” any money they choose to spend. They cannot “run out of money”.
2.The US government can choose to spend as much or as little as it wishes.
a.The resulting surplus or deficit will have an impact on GDP and aggregate demand.
b.Spending policy, the way in which government spending is distributed in the economy, will have an impact on behavior and therefore create a feedback loop.
3.Taxes are a social policy determined method to perminantly reduce aggregate demand.
a.The resulting surplus or deficit will have an impact on GDP and aggregate demand.
b.Tax policy, the method to determine whose aggregate demand will be reduced, will have an impact on behavior and therefore create a feedback loop.
4.The selling of government bonds is a market determined method to temporarily reduce aggregate demand.
a.An entity’s “savings” in a US government bond temporarily reduces the demand for goods until the maturity of that bond.
b.The net impact to aggregate demand is dependent on the relationship of the rate of interest on the bond and the change of inflation over the life of the bond.
i.If inflation is higher than the interest on the bond then the principal and interest will buy fewer goods at maturity and if inflation is lower than the coupon then the principal and interest will buy more goods.
Your thoughts?
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WARREN MOSLER Reply:
November 17th, 2010 at 6:56 pm
spending and taxing influence gdp, etc. but not the resulting deficit per se.
selling govt bonds doesn’t serve reduce aggregate demand, but to influence interest rates.
and interest rates may or may not do much for aggregate demand (I think not for the most part, etc. see other posts on this).
not sure where 4b came from?
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Martin Reply:
November 18th, 2010 at 12:30 pm
When I say “resulting surplus or deficit” I mean the net of spending minus tax receipts. So the net of the two impacts GDP, etc. The way each is written influences how and who it impacts. Correct?
Example: If the government decided to issue bonds at such a high interest rate that all government spending, excluding what was needed to pay taxes, was used to buy those bonds, there would be no demand for any other goods (since no one would have any money to buy those goods). Every dollar that is sent to the government, in exchange for those bonds, is shredded (the bank account is lowered without any other bank account being increased) and the opposite occurs when the bonds mature. It looks just like taxation and spending, but the decision to do so is voluntary by the holder of the dollar.
Since the interest rate was set so high, the owners of the bonds would have huge ammounts of dollars after the bonds mature, which would allow them to buy everything in the store (the economy) plus more. If there isn’t more, then you would have inflation as too many dollars chase not enough goods (high aggregate demand).
Does that make it clearer?
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Tom Hickey Reply:
December 8th, 2010 at 2:22 pm
Martin, since nongovernment net financial assets created by the the deficit (currency issuance) must by law be offset with tsys (debt issuance), all deficit expenditure is immediately transferred to tsys at the macro level. Conceptually, the government must issue the tsys and the Fed must auction them off before the Fed can put the reserves in the Treasury account. (This is “conceptually.” How it actually occurs is somewhat different in practice. See here.) But principle is that deficit expenditure creates nongovernment net financial assets that are saved a tsys. The “national debt” is the accounting record of cumulative saving of nongovernment NFA in tsys. The impact of the deficit expenditure on the economy is through the flow it creates.
Martin Reply:
December 9th, 2010 at 2:06 pm
Help me out with the law that currency issuance must be offset with debt issuance. Could you link the law? To facilitate growth the government could have a balanced budget and increase money supply by GDP or could run a deficit equal to the gowth of GDP, correct?
Martin Reply:
December 8th, 2010 at 1:41 pm
When I say “resulting surplus or deficit” I mean the net of spending minus tax receipts. So the net of the two impacts GDP, etc. The way each is written influences how and who it impacts. Correct?
Example: If the government decided to issue bonds at such a high interest rate that all government spending, excluding what was needed to pay taxes, was used to buy those bonds, there would be no demand for any other goods (since no one would have any money to buy those goods). Every dollar that is sent to the government, in exchange for those bonds, is shredded (the bank account is lowered without any other bank account being increased) and the opposite occurs when the bonds mature. It looks just like taxation and spending, but the decision to do so is voluntary by the holder of the dollar.
Since the interest rate was set so high, the owners of the bonds would have huge ammounts of dollars after the bonds mature, which would allow them to buy everything in the store (the economy) plus more. If there isn’t more, then you would have inflation as too many dollars chase not enough goods (high aggregate demand).
Does that make it clearer?
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Tom Hickey Reply:
December 8th, 2010 at 2:28 pm
“If there isn’t more, then you would have inflation as too many dollars chase not enough goods (high aggregate demand).”
Payment of bond interest is fiscal and increases net financial assets, thereby potentially increasing effective demand if the interest is not saved. According to the principles of functional finance, to reduce effective demand outpacing the capacity of the economy to produce, the government should increase taxes , thereby withdrawing some of the nongovernment net financial assets it has created through deficit expenditure.
Martin Reply:
December 9th, 2010 at 12:59 pm
Thank you.
To restate your conclusion, an increase in net financial assets will result in either higer taxes, higher prices or an increase in national debt (savings) unless the capacity of production increases.
So you agree that any deficit spending that goes to non productive uses results in the decrease of future purchasing power (i.e. if I pay someone to dig a hole and someone else to fill it the resulting increase in net financial assets results in a decrease in purchaing power. If I raise taxes then I determine politically who gets less and if I don’t then higher prices forces it on everyone).
WARREN MOSLER Reply:
December 18th, 2010 at 8:37 am
higher prices only if the govt spends on a quantity basis rather than a price basis.
see http://www.moslereconomics.com/mandatory-readings/a-general-analytical-framework-for-the-analysis-of-currencies-and-other-commodities/
November 17th, 2010 at 4:00 pm
US Trade Deficits
1.Trade deficits with nations who have exchangeable currencies should result in relative changes to the exchange rate between the two currencies.
a.Assuming locals who produce goods in one nation are paid in local currency and the firm who employes them is paid in a foreign currency there should be a demand for local currency and a supply of foreign currency, which implies a higer price for local currency relative to foreign currency.
b.Long term deificits self correct as price signals decrease demand for imports (decrease in purchasing power of the deficit nations).
2.Trade deficits with nations who have currencies pegged to a non local currency should result in a misallocation of aggregate demand.
a.Locals who produce goods in one nation are paid in local currency and the firm who employes them is paid in a foreign currency, but that firm is obligated to exchange to local currency at a fixed rate by the local government (which they must do to get local currency to pay employees, so even if they think they are not getting enough for their foreign currency, they have little choice).
i.The local surplus government will end up with foreign currency with which they can buy foreign government bonds (temporary decrease in foreign aggregate demand), they can buy foreign assets (aggregate demand resulting in local asset inflation), they can exchange for other currencies (decreases the foreign currency relative to a second currency, decreasing purchasing power) or they can buy foreign currency priced commodities (producer price inflation in foreign currency).
ii.The local government will manage local aggregate demand through local currency tax policy, local currency debt issuance and the fixed exchange rate between the foreign currency and the local pegged currency.
b.Long term deficits exist only if the local currency purchasing power remains cheap relative to foreign currency purchasing power.
i.A policy to buy goods for more than they are worth and sell them for less than they are worth (maintaining a fixed exchange rate at a lower level than one should) can be used to maintain GDP growth and lower levels of unemployement than would be possible without the currency intervention.
ii.The resulting local inflation pressures (due to an exaggerated aggregate local demand) can be offset with tax and debt policies.
iii.The impact on purchasing power in the foreign currency can be managed through purchases of foreign government bonds (deferring aggregate demand) and managed purchases of foreign currency priced commodities (buying into weak global demand, putting a floor on raw materials).
3.By pegging a currency to the US dollar, the impact is to include the net foreign supply (foreign production minus foreign consumption) in the US supply.
a.Since a local economy can consume everything they produce, assuming the government does not tax away aggregate demand, foreign production results in a substitute to local production, assuming both local and foreign production can grow to fulfil any local demand.
i.To maintain a currency peg, a single entity must control the foreign currency. Therefore one can look at the seller of the foreign goods as a single entity (just like every 7-11 sells slurpies, we don’t expect each store to buy their own raw materials). In this case the foreign government sells a good in the US and temporarily decreases US aggregate demand by buying government bonds.
ii.To increase aggregate demand (stimulating growth) the US government can increase spending (deficits increase savings). If that demand is met by foreign supply (because the price does not adjust) the increase in production capabilities is met in the foreign nation. If production capabilities are not local then the GDP growth does not occur (or is muted as sales services and transportation are the only beneficiaries). In addition, if the expectation is that demand will be met by foreign supply, then there is no investment in production facilities in the US economy.
b.To maintain local GDP growth and employement, the local nation must maintain an exchange rate that undervalues the local currency, which works like a negative tax.
i.If a US state paid manufacturers a negative sales tax (or waived property taxes) to produce goods that were sold outside the state, it would attract local production at the expense of production in other states (see auto manaufactuing in the US).
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WARREN MOSLER Reply:
November 17th, 2010 at 6:59 pm
not the way i’d say most of that
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Martin Reply:
November 18th, 2010 at 12:31 pm
Is it incorrect? If so, pleae give me some ideas where and how. Thank you.
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Tom Hickey Reply:
December 8th, 2010 at 2:37 pm
The problem is that we don’t have across the board floating rates. China pegs to the dollar so there is not a corresponding adjustment, for example. Within the EZ, there are disproportionate flows among EZ countries that are no longer addressed by the exchange rate since all the EZ countries share the same currency.
This is creating severe imbalances in the global economy that would in principle be corrected by floating exchange rates. MMT has ad hoc solutions for these imbalances that are regularly discussed on this and other MMT blogs, but the more efficient way would be to have international trade actually based on floating rates instead of artificially imposed ones that inevitably result in imbalances due to inefficiencies.
Martin Reply:
December 9th, 2010 at 1:38 pm
Tom, you are starting to agree with me more than you think. What is failing is not the inability of the US government to spend, it is that price signals are being lost (primarily through foreign governments pegging to the dollar). MMT works, but the impact on local productive output due to a foreign government maximizing its local labor utilization by holding US dollars (utilized to buy commodities or US government bonds) is creating stress on US dollar prices. The end result has to be a decrease in purchasing power, either through politial means (taxation) or price (inflation).
WARREN MOSLER Reply:
December 18th, 2010 at 8:48 am
two things.
while the purchasing power of an individual dollar may be lower (prices higher) don’t forget about the purchasing power of all the dollars which is the GDP or some similar type of macro measurement.
So while ‘a’ dollar purchases a lot less than 100 years ago, all the dollars are purchasing a lot more real goods and services this year vs 100 years ago.
November 17th, 2010 at 4:02 pm
Defined Benefit Pension Plans
1.A defined benefit pension plan (an annuity) issued by a government that has a fiat currency is exactly like the purchase of a government bond.
a.US social security is regressive therefore the price at which the ammunity is purchased in dependant on the size of the annuity one is purchasing. One dollar of future benefits is not the same for every purchaser.
b.If you assume no default, then the value of the annuity is based on the discount rate and not the rate at which a bond would be purchased in the market.
i.If the discount rate is higher than the market yield then you are increasing net aggregate demand, if it is lower than you are decreasing net aggregate demand (relative to a privatized account of US government bonds).
2.A defined benefit pension plan (an annuity) issued by a government agency that does not have the ability to create money has a value that is dependant on assumptions.
a.If you assume no default, yet have a discount rate higher than the default risk free rate (US Treasury debt) then you must take risk to provide the return necessary to meet the annuity obligations.
i.If the risk taking results in higher than expected returns (greater than the discount rate) there is an incentive to increase the value of the annuity (see the increase in benefits provided in California in 1999 and nationally after 9/11). Given the political nature of the benefits, this risk is very high.
ii.If the risk taking results in lower than expected returns (less than the discount rate) state and local taxpayers must accept a lower level of services or higher taxes.
iii.Because of the asymmetric returns for the taxpayer, it makes no sense to offer defined benefit plans.
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Tom Hickey Reply:
December 8th, 2010 at 2:44 pm
As currency issuer, the federal government is not operationally constrained, as currency users the states are. Their approach to pension plans must differ accordingly. The federal government does not need to tax or borrow to fund itself, the states do. If this were realized, then it would make sense to federalize a great many state programs since the federal government has a capacity that the states do not and many services are not only socially necessary (economically effective) but also economically efficient.
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Martin Reply:
December 9th, 2010 at 1:44 pm
Okay, if you federalize you have two choices. First, you could turn it into social security, which pays out a return related to CPI which should have some relationship to US government bond prices. This would significantly decrease the value of the retirement account. Second, you could increase spending to “make the pension whole”, which would add to price presures (in the future), Since these pensions have been built using relatively high expected returns.
I agree that states should not use the same structure, the question is which of the two solutions above do you choose.
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Tom Hickey Reply:
December 18th, 2010 at 6:40 pm
The choices that are made in the present should with a view to increasing availability of real resources in the future to avoid problems in the future. Funding is never a problem operationally for a government issuing a fiat currency, which can inject and withdraw funds at will in a targeted fashion. Availability of real resources is the contraint.
November 17th, 2010 at 4:04 pm
China and the US
“Domestic credit creation is funding foreign savings. Assume you live in the US and decide to buy a car made in the China. You go to a US bank, get accepted for a loan, and spend the dollars on the car. So where do things then stand? You exchanged the borrowed dollars for the car, the Chinese car company has a deposit at the bank, and the bank has a loan to you and a deposit belonging to the Chinese car company on their books.”
You need to update this as it is not accurate:
“Domestic credit creation is funding foreign savings. Assume you live in the US and decide to buy a car made in the China. You go to a US bank, get accepted for a loan, and spend the dollars on the car. So where do things then stand? You exchanged the borrowed dollars for the car, the Chinese car company sells the dollars to the Chinese government, the Chinese government buys US bonds (has a deposit at the Fed), the Chinese government provides the Chinese car company yuan (the Chinese government does not need to get yuan to spend them) to pay employees, and the Fed provides funding to the bank.”
Unfortunately we have not increased aggregate demand, the bank loan is offset by the purchase of US bonds. The demand that used to exist was met by foreign workers, therefore the GDP and employment in the US is not improved, in fact, since the expectation may be that future demand for cars will be met by foreign supply, a US car company may not invest in production facilities to make future cars, which decreases employment in design, engineering and construction in the US.
The goal of the Chinese government is to increase employment, primarily for social reasons. The last thing any government wants is a huge population of employed citizens, especially one where there is a great deal of political control, socially and economically, throughout the country. Therefore the Chinese have an incentive to undervalue the output when sold to foreign markets. Yes, this means that the Chinese citizens are not consuming all they produce and are poorer than they should be. Do you think the Chinese government cares if their citizens are poor? No, they care that they can control the country, preferably through economic means, but they will use military means if that fails.
Since there is a finite amount of employment (supply) needed to meet existing demand, excess employment in a US dollar pegged nation must result in excess unemployment someplace else in the US dollar universe.
If and when we decide not to sell more bonds to the Chinese, because we need the demand, the result will most likely be asset inflation or commodity price inflation rather than economic growth.
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WARREN MOSLER Reply:
November 17th, 2010 at 7:02 pm
you missed the point of the chapter and the book.
yes, buying a foreign car does not add to US domestic demand, jobs, or output.
that’s a good thing. we get a car without having to work to produce it.
and that means for a given amount of govt. spending we can have taxes that much lower so we can buy both all we can produce domestically at full employment plus whatever the rest of the world wants to sell us.
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Martin Reply:
November 18th, 2010 at 12:53 pm
That implies that “at full employment” everyone is producing something that some other person wants to buy.
I know cars are a bad example, but useful. There is a finite demand for cars at a certain price. If the demand is filled by China, then all those employees in the US need to find new jobs producing something else. If there is no expectation that any production of goods will take place in the US rather it will take place in China (subsitute Mich. for US and Tenn. for China for the auto industry) all the supporting building and services that support those employees have to either move (possible in the US, not with regards to China) to the new production location, or they have to be retrained and hired by someone else who can meet some new, undefined demand (see Google).
The cost of losing production facilities and the switching costs are expensive and depend on finding some new demand (assuming everything else is in equilibrium) or some people have to accept lower purchasing power.
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WARREN MOSLER Reply:
December 3rd, 2010 at 7:34 am
Sorry, this somehow got lost in the pile of comments i get to comment on. Let me know if I’ve missed others.
“That implies that “at full employment” everyone is producing something that some other person wants to buy.”
Some are producing public goods and services and paid by govt. so they are not being sold in the market place. The rest are producing private goods and services that are being sold to willing buyers.
“I know cars are a bad example, but useful. There is a finite demand for cars at a certain price.
OK
If the demand is filled by China, then all those employees in the US need to find new jobs producing something else.
OK
If there is no expectation that any production of goods will take place in the US rather it will take place in China (subsitute Mich. for US and Tenn. for China for the auto industry) all the supporting building and services that support those employees have to either move (possible in the US, not with regards to China) to the new production location, or they have to be retrained and hired by someone else who can meet some new, undefined demand (see Google).”
OK and agreed.
“The cost of losing production facilities and the switching costs are expensive and depend on finding some new demand (assuming everything else is in equilibrium) or some people have to accept lower purchasing power.”
Agreed.
But the benefit exceeds the cost, as we get to consume the same number of cars that now come from China, plus whatever goods and services the Americans who used to be producing cars can now produce.
The problem is we don’t understand our monetary system that always allows us to keep everyone willing and able to work employed and producing real output.
Martin Reply:
December 7th, 2010 at 9:10 pm
No, I understand and in principal I believe we agree.
“But the benefit exceeds the cost, as we get to consume the same number of cars that now come from China, plus whatever goods and services the Americans who used to be producing cars can now produce.”
So the key driver are the goods and services the Americans who used to be producing cars now produce. What if they produce nothing? What if these people now collect unemployement or are hired by the government to dig holes and then fill them? What if the actual value generated to other citizens is zero, or in some cases negative because they displace an employee at a private firm that used to do the same job?
I am not a smart guy so I always push something to the extreme and see if it makes sense. No one works. The government pays us all to do nothing. We then buy goods from someone offshore to meet our demands, which they sell to us in exchange for the dollars we get from the government. The offshore folks buy government bonds and everyone is happy. Now this is great, we don’t work and we get goods, I understand that. But there is also no investment, no R&D, no development unless it is paid for by the government (and then you have decrease the payments to people not to work otherwise they have no incentive). It looks alot like the Soviet Union before the wall came down. You fall behind in all sorts of ways even if you live well. You also know that at some point in time the sellers of goods will decide to stop taking government IOUs in exchange for goods. Then we will have to produce our own goods and services but may not have the infrastructure, know how or ability to do so. Then life is no fun at all. No, our children don’t have to “pay off” the debt and they get to enjoy all they produce, but it may not be of the same quality that we enjoyed. In other words, the value is lower (a decrease in purchasing power). On top of that those government IOUs may turn into cash which wants to buy assets, so you get inflation. This is exactly what did happen to the Soviets over time.
For the benefits to exceed the cost those displaced have to find employment that produces value to our society larger than the payment being made to them, regardless if it is private or public otherwise the end result is a long term decrease in purchasing power for society as a whole. Most commenly manifested as inflation which harms those without assets moreso than those with assets.
I don’t think we disagree on the process, I think we disagree in the result that everyone “willing and able to work employed and producing real output”. I think there is a real risk that they produce no real output if we allow the production facilites (more importantly the knowhow and skills) needed to produce real output be moved to another nation who uses our monetary system to do so. If the exchange rate floated then the movement of those facilities would adjust the purchasing power impact to today rather than into the future.
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Martin Reply:
December 7th, 2010 at 9:14 pm
And there are a couple more comments I posted in this chain as well that you have not responded to. I do understand that you are busy and do not expect a response to everything, so I appreciate any opportunity to interact as I believe the framework you have laid out is very effective in understanding monetary policy.
I would be happy to take this to a different forum if that makes it easier on you. As you wish.
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Tom Hickey Reply:
December 7th, 2010 at 9:33 pm
Martin, imports are a benefit at full employment. Otherwise, the importing nation is exporting jobs, as your example notes, so that the real terms of trade may be even or negative considering the output gap. The point of MMT is that a monetarily sovereign government issuing a nonconvertible floating rate currency like the US can run full employment with price stability using the principles of functional finance. In fact, it is imbecilic not to do so, because falling short of full employment implies an output gap that represents foregone opportunity. Therefore, MMT concludes that the government should run full employment along with price stability and not be concerned with the level of imports. If there is a CAD and the private sector wishes to save, too, then the government just runs an offsetting deficit. If inflation should threaten, then taxes are raised to withdraw enough nongovernment net financial assets to cool the economy without leading to unemployment.
Warren may have a different answer for you, but that is how I understand it.
WARREN MOSLER Reply:
December 8th, 2010 at 12:41 am
close enough! except that raising taxes in response to ‘inflation’ should be modified to ‘inflation from excess demand’ thanks.
WARREN MOSLER Reply:
December 8th, 2010 at 12:39 am
sorry again. please repeat and I’ll now see them, as I’ve fairly recently gotten access to all comments as they come in, thanks
Martin Reply:
December 8th, 2010 at 2:02 pm
Tom, I can’t reply directly so I have replied to my own post.
I understand what you are saying, but it only makes sense if the “full employement” produces a product or service that increases either value or productivity (i.e. increases output). In other words, if you have an output gap and you pay people to do nothing you have not closed the output gap. Instead you have increased the dollars in the system and caused inflation unless you issue bonds or increase taxes.
I view the issue from the side of prices. For a business in China to get a new customer they must sell it to the consumer at a lower price than the US business (let’s assume rate sensitive consumers). The consumer is better off. They get the good and have more money left over. In a perfect world, the Chinese business would sell the dollar to buy Yuan so they could pay their employees and suppliers and use the rest to pay capital. This transaction, repeated many times, would shift the price of the Yuan and the dollar such that the Chinese business could no longer sell cheaper and they would lose the customer to the US business that now can. The consumer is back to where they were and all is good. That does not occur today as the Chinese government breaks the price relationship between thier nonconvertable floating rate currency (the Yuan) and ours. They end up with a store of future inflation (US government bonds) and full employement. We end up with goods, unemployment and a future decrease in purchasing power. Now if we can find new jobs for the unemployed that increase output, we win. If we cannot, we lose.
Neil Wilson Reply:
December 8th, 2010 at 2:37 pm
Instead you have increased the dollars in the system and caused inflation unless you issue bonds or increase taxes.
Your fatal assumption is in those words.
If people have no dollars to spend then they cannot give buying signals to the market. Therefore the market does not produce goods for them however much they may want them.
If people are given dollars to spend then those buying signals hit the market. At that point the market, in aggregate, can do two things: it can either price adjust to eliminate the extra demand, or it can quantity adjust to service the extra demand.
The reason that classical economics doesn’t talk about quantity adjustment is because in their models apparently just assume it away along with unemployment.
If the economy is not at full output, it can turn those extra dollars into extra goods and services. If the external sector wants more dollars, they can supply more imported goods.
So you get a whole bunch of transactions that otherwise wouldn’t have occurred, but you don’t get an inflation.
Tom Hickey Reply:
December 8th, 2010 at 2:58 pm
“Now if we can find new jobs for the unemployed that increase output, we win. If we cannot, we lose.”
Yes, but that doesn’t necessarily mean that it has to be one to one in job and product. For example, the state funds a job guarantee that puts everyone willing to work busy doing something productive, such as happened in the CCC, WPA, TVA, etc, during GD1. That deficit expenditure increases the flow of NFA “on the way” through to its being saved as tsys, as Congress requires in the $-4-$ debt offset. This increases nominal aggregate demand, and business responds to increasing demand with increased investment. GDP rises.
There is no problem with importing goods from Asia as long as the government realizes it has the ability to create simultaneous full employment in the US and that it can do so without either endangering its finances or generating inflation, the two bogeymen now preventing this.
Martin Reply:
December 9th, 2010 at 1:57 pm
Neil,
Sorry, I can trade other assets or my goods and services for other goods and services, the only thing I need dollars for is to pay my taxes. Also, I am talking about an increase in money, not a scarcity or money.
Second, the reason that quantity adjustment is not considered (imediately) is because if I am running at full capacity at my car factory I cannot produce additional goods without building additional facilities, this takes time. The imediate response is an increase in price, the resulting response is an increase in capacity. This is true also for services, in a full capacity world as I have to hire a new employee and to lure them from the current job I have to pay them more.
In GD1 the wage paid to people for the CCC, WPA, TVA, etc was $7,000 per year in 2008 dollars. They produced results that had value above that payment therefore national wealth increased. Remember, Katrina increased GDP becuase of all the goods and services that were needed to rebuild. The net worth of our nation decreased.
The full employment has to be productive (increase output) otherwise it just increases prices.
Peter D Reply:
December 20th, 2010 at 5:54 pm
Tom Hickey: “There is no problem with importing goods from Asia as long as the government realizes it has the ability to create simultaneous full employment in the US and that it can do so without either endangering its finances or generating inflation, the two bogeymen now preventing this.”
But isn’t there a concern as to what is the quality of this full employment? Like Martin, I’d like to take it to the logical extreme: all US workers employed in govt programs via Job Guarantee or in services, all the “productive” stuff overseas. This is a not a healthy society, I believe. Isn’t there more to cost-benefit analysis than just getting stuff for money?
WARREN MOSLER Reply:
December 20th, 2010 at 7:44 pm
for me the job guarantee has a ‘target level’ of maybe 3% of the work force. So if the pool is larger than that it means that for the size govt. in place taxes need to be cut, or govt expanded, depending on one’s politics
Tom Hickey Reply:
December 20th, 2010 at 8:14 pm
Peter D., the reason that the US is declining is that financialization is replacing productive investment, i.e, finance capital is crowding out industrial capital. So I would tax away economic rent in order to disincentivize rent-seeking and incentivize productive investment.
WARREN MOSLER Reply:
December 22nd, 2010 at 2:39 pm
in real terms people are working in the financial sector which has no value added to real output, rather than working in the real sector
it’s a massive brain drain and a total waste of human endeavor
Peter D Reply:
December 20th, 2010 at 11:02 pm
Warren: Why 3%? Isn’t the size of the program dependent on a lot of things that could go wrong with the economy and demand a large size? Weren’t Roosevelt public works larger, for example? Also, by saying the govt needs to expand, isn’t it already expanded de facto by employing the people under JG?
Tom: agree. Is your an example of what you refer to as “principles of functional finance”?
WARREN MOSLER Reply:
December 22nd, 2010 at 2:40 pm
for me the JG target should be maybe 3%, meaning that if it’s larger than that taxes should be cut and/or govt spending increased.
and yes, the unemployed and those in the JG are in the public sector.
Tom Hickey Reply:
December 20th, 2010 at 11:39 pm
Peter D, it’s not functional finance but the application of the tax aspect of functional finance. The principles of funcional finance only specify when to use taxation, not what kind of taxation to sue. IAW functional finance, taxation should be targeted for maximum effect in withdrawing nongovernment NFA.
It is well known that taxation is a disincentive and therefore when it is used this needs to be taken into account . In my view the way to target taxation is toward incentivizing growth, since taxation is only necessary when production is not able to meet demand, and growth based on production rather than financialization increases both supply and income from production.
Rent-seeking is non-productive and parasitical on the productive economy, and so it should be disincentivized in order to increase productive growth. By disincentivizing rent-seeking through targeted taxation, productive investment is incentivized indirectly. In general, I do not favor taxing income, consumption, or production when there are alternatives that do not affect growth directly. Economic rent is a logical alternative.
Peter D Reply:
December 24th, 2010 at 3:23 am
Warren: “in real terms people are working in the financial sector which has no value added to real output, rather than working in the real sector
it’s a massive brain drain and a total waste of human endeavor”
Agree (and myself guilty as charged – an engineer working in finance). Therefore while it does look like imports are always benefits and exports costs, it is not true if it means that all people who know how to make stuff are overseas while we here are only enjoying the fruits of their labor. It seems to me, a lot of stuff probably could be outsourced without skill- and brain-drain, but some we should prefer to keep here regardless of the facts that it seems a benefit to pay USD for real products.
WARREN MOSLER Reply:
December 24th, 2010 at 5:00 pm
from a purely economic point of view, economics is the reverse of religion. it’s better to receive than to give.
having people make stuff for us to consume is a sign of economic success.
the problem can come when they decide not to and we have to figure out how to make stuff for ourselves.
but in reality that’s not what I see happening. I see us importing labor content more than intellectual content, and supplying intellectual content here domestically. Or at least that’s what I want to see…
Tom Hickey Reply:
December 24th, 2010 at 11:29 am
Peter D: It seems to me, a lot of stuff probably could be outsourced without skill- and brain-drain, but some we should prefer to keep here regardless of the facts that it seems a benefit to pay USD for real products.
I think we should be looking at the global economy as a closed system and asking what the issues are and what will make this system work more efficiently and effectively in light of the vast asymmetries.
As I see it, the major problems we face economically are over-supply and under-demand, as well as unsustainability owing to externalities. There is also the problem of financial instability involved with credit extension, which Minsky and others have examined in depth.
Over-supply and under-demand should be pretty simple to fix through better distribution. The externality problem can be addressed through price reflecting true cost. Financial instability can be reduced, e.g., through incentivizing prudent lending practices and disincentivizing imprudent ones.
Market solutions are generally more efficient where there is actual competition. However, in the age of giant corporations that dominant markets, transcend national boundaries, subvert the political process, and suborn officials. These entities are monopolistic and anti-competitive, and need to be broken up. The growing transnational influence of multinationals is one of the chief issues that the world will have to deal with both economically and geopolitically. Otherwise, liberal democracy is at risk. Therefore, market solutions must be tempered with government controls. In addition, government must be proactive where the private sector is either unable or unwilling to do so, e.g., in providing public goods.
There also needs to be an operational approach to the global financial system that is not based on mercantilism but rather on everyone doing well. Because of asymmetries, this can only happen through cooperation and coordination instead of relying chiefly on competition.
Moreover, the world faces a problem with the allocation and use of real resources, especially energy. Economic growth, necessary to provide for the needs of growing population, is energy constrained. Those contraints are becoming tighter and threaten to constrict necessary growth.
The challenge of the 21st century is making the transition to an effectively and efficiently functioning global economy smoothly in the face of national interest and asymmetry, especially controlling externality and achieving sustainability. Otherwise the road to globalization will lead to conflict.
Underlying all this an operational approach to money, banking and finance that is capable of meeting the capital/income requirements of a global economy in order to balance supply and demand through a harmonious relationship of productive investment and income. Presently, global finance seems to be part of the problem instead of part of the solution.
November 17th, 2010 at 4:54 pm
Re: a federal real estate tax, for example, would have extremely low compliance costs and could be altered reasonably quiclkly
Yes, but real estate taxes basically mean that I rent my property from the State rather than actually own it, since non-compliance would presumably entail re-possession.
And that is the worst thing about fiat money: that it is “fiat,” precisely. It is an instance of coercion by the State, a form of violence, if you will.
Reply
WARREN MOSLER Reply:
November 17th, 2010 at 7:06 pm
Yes, taxes are necessarily coercive.
Reply
Tom Hickey Reply:
December 8th, 2010 at 2:49 pm
Robert, all state money, whether convertible or nonconvertible, is backed by taxes (coercion). Everyone has to pay their taxes in the state’s money, exchanging the state’s liability for one’s liability to the state.
Reply
November 25th, 2010 at 1:32 pm
[...] It is not their fault. There are few easy to understand descriptions of MMT. Warren Moslers 7 Deadly Innocent Frauds is very good, but even this doesn’t give the whole vision in a few [...]
November 28th, 2010 at 9:01 am
[...] title is Seven Deadly Frauds of Economic Policy, by Warren Mosler. Frankly, I’m not too crazy about the title. Sounds a bit dull. But I [...]
November 29th, 2010 at 12:24 pm
[...] It’s the deadly innocent fraud, ‘We need savings to have money for investment’ as outlined in non technical language in my book. [...]
March 9th, 2011 at 11:10 am
Its all fraud
Reply
March 10th, 2011 at 1:26 pm
It appears that there is a major flaw concerning your concept of utilizing the Government as Employer of Last Resort: Illegal Immigrants.
Under such a construct as ELP Foreigners would swamp the US in ever greater numbers without a strict regime for controlling illegal immigration and parsing non-Citizens from the Government support programs.
The employment environment cannot be controlled or supported by regimes such as ELP without tight immigration controls.
Full employment would never be achievable without restricting access to the US labor market to US Citizens.
Reply
beowulf Reply:
March 10th, 2011 at 2:45 pm
Foreign citizens (political refugees excepted) aren’t eligible for public assistance until they’ve been a legal resident at least 5 years. If the government can determine (google E-Verify) if a food stamp applicant is here legally, it can determine if an ELR applicant is.
Reply
WARREN MOSLER Reply:
March 10th, 2011 at 9:23 pm
or, if mexico does it first, they’ll be building a wall to keep our unemployed out
Reply
beowulf Reply:
March 11th, 2011 at 11:48 am
Now that actually makes a lot of sense Warren. The US could couple tougher immigration enforcement with assisting Mexico with setting up their own ELR system. And yes, the first project could be building out the border fence from San Diego to Brownsville (Congress ordering a 900 mile fence, much of it “invisible”, built on a 2000 mile is not even a half measure).
Reply
Tom Hickey Reply:
March 11th, 2011 at 3:35 pm
Or we could add free flow of persons to free markets, free trade, and free capital flow. The US is crazy not to have begun doing this in order to integrate North and South America into a super United States of America as Europe is now doing over there. Over here we have only two major languages to deal with and a couple of minor ones population-wise, and a lot less political baggage than the Europeans. In fact, this is such a no-brainer it is inevitable eventually.
March 27th, 2011 at 11:11 pm
Huh?
Reply
April 25th, 2011 at 9:11 am
[...] Warren Mosler:Seven Deadly Frauds of Economic Policy [...]
May 7th, 2011 at 11:08 pm
[...] Princess Royal needs to read the Seven Deadly Frauds of Economic Policy and circulate it among her editor friends. The economic suffering going in the UK and elsewhere is [...]
May 21st, 2011 at 11:29 am
Warren,
Any chance of getting an autographed copy of the book if ordered from your link above?
Reply
WARREN MOSLER Reply:
May 23rd, 2011 at 10:26 pm
yes!
Reply
June 8th, 2011 at 1:35 pm
The trade deficit is an unsustainable imbalance that takes away jobs and output.
Facts:
Imports are real benefits and exports are real costs. Trade deficits directly improve our standard of living. Jobs are lost because taxes are too high for a given level of government spending, not because of imports.
Reply
June 14th, 2011 at 2:03 pm
Should the USA balance its federal budget? Why or why not?…
Can’t answer this question without accurately defining terms & context. “Data is meaningless without context.” Walter Shewhart Terms: Definition of a “budget” for a fiat currency issuer? Answ: real goods, services, & population capabilities [fiat …
June 15th, 2011 at 4:58 pm
information on the great depression…
The Center of the Universe » Blog Archive » Updated: 7 Deadly Innocent Frauds…
July 20th, 2011 at 6:39 am
[...] 7 Deadly Innocent Frauds of Economic Policy http://moslereconomics.com/2009/12/10/7-deadly-innocent-frauds/ [...]
July 22nd, 2011 at 11:15 am
[...] Please read Warren Mosler’s book, The 7 Deadly Innocent Frauds of Economic Policy, with forward by James K. Galbraith. — [...]
July 24th, 2011 at 5:37 am
Noni…
Howdy! Quick question that’s entirely off topic. Do you know how to make your site mobile friendly? My blog looks weird when viewing from my apple iphone. I’m trying to find a template or plugin that might be able to fix this problem. If you have any…
August 3rd, 2011 at 11:51 pm
Is the PDF of the “7 Deadly Innocent Frauds” from the provided link different from the book? Is the content different? More robust/detailed?
Reply
WARREN MOSLER Reply:
August 4th, 2011 at 5:48 pm
should be the same, typos and all. getting it fixed
Reply
netbacker Reply:
August 4th, 2011 at 8:06 pm
@WARREN MOSLER,
Don’t know if this is the right place to post this question,
So based on MMT, the Interest Expense on the Debt Outstanding (http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm) is not actually paid out to any entity, but is an accounting entry that reduces the currency created by that amount? So in 2011 its been reduced by
Fiscal Year Total $412,517,504,466.06
Reply
WARREN MOSLER Reply:
August 5th, 2011 at 4:22 pm
interest is paid via the fed crediting a member bank’s reserve account at the fed. it ‘creates’ that deposit.
August 25th, 2011 at 2:44 am
“all our children will have to do is shift funds from one account to another at the fed, just like we do and our fathers did.”
Can this be understood with the governments accounts or does it require faith the system works differently to the accounts?
Is MMT something based in accounting or is it based in ‘in reality it works very differently’ to the way you think it works.
Why do MMTers talk about simple accounting and operational realities? The simple accounts so not support MMT because these simple accounts (the ones required by law) say there are no funds in an account at the fed to return funds to the bondholders. The simple accounts say when the government deficit spent it created true debt for the bank owning bondholders, whereas immediately prior to deficit spending the simple accounts say the banks had an iou and the government had an iou. After spending the government no longer has an iou.
Several MMT’ers have told me these simple accounts are a charade. Others say MMT just works differently to the simple accounts and the insiders know this.
So has MMT got anything to do with simple accounts or does it just require faith? I can believe it works differently to anything the government can tell me. I am though hopelessly frustrated by talk of simple accounting and operational realities.
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WARREN MOSLER Reply:
August 25th, 2011 at 3:26 am
It’s not about faith.
And the accounting with all the laws does support mmt
Reply
Andrew Reply:
August 25th, 2011 at 4:24 am
@WARREN MOSLER,
So why are there are the funds in accounts at the fed associated with bond holders? So that the debt to bond holders is ended from funds in these accounts? How did the funds get into those accounts?
I was assuming you were saying these accounts had funds only because bond holder funds were not channeled to the government for deficit spending contrary to the legal accounting. Does the legal version of deficit spending begin with the TT and L entries or am i missing the vital piece of information i need?
Reply
WARREN MOSLER Reply:
August 25th, 2011 at 3:52 pm
First, accounting is after the fact record keeping. It’s not ‘the dollars’
And ‘legally’ is the will of the Congress, which makes its own rules and orders the spending and taxing.
And I agree and feature the constraints Congress imposes on itself vs actual operational restrictions.
So give that why does any of the above matter for the point under discussion?
August 25th, 2011 at 5:42 pm
1. How can accounting be after the fact record keeping when before the fact of spending the feds have to have sold bonds and have entries in the TT and L accounts? And you agree this is so in point 3
2. Yes congress can change the law or not follow the law. You agree it follows the law today
3. You agree congress imposes constaints upon itself
Why does it matter? Because firstly with current spending and over time, inflation has been posative. Secondly you appear to be saying the debt is not a problem because it can be printed? where this implies that you are not concerned for future inflation because you are suggesting that unlike today when congress is constrained in the future it need not be – or you are actually saying they can monetize like they do today……when inflation has been positive.
Part of the problem here is the way you describe MMT to so many audiences where other MMTers are saying you dumb it down for those people – as for example you say when taxes are paid and you leave the room they place the money in the shredder as per a radio show. Whereas a few days ago you were saying the money is not shredded by the treasury but you think it goes to the federal reserve banks.
My point overall is that i am trying to work out what MMT actually is from an accounting perspective.
For example when you say:
““all our children will have to do is shift funds from one account to another at the fed, just like we do and our fathers did.”” Do you have some accounts for that please?
Reply
Matt Franko Reply:
August 25th, 2011 at 8:45 pm
@Andrew,
Here is how US Treasury does the transaction:
“If the tender is accepted, we will debit and deliver the awarded securities to the Federal Reserve funds and securities account of either the institution or a custodian.”
http://www.treasurydirect.gov/instit/auctfund/work/taapslink/taapslink.htm
Resp,
Reply
WARREN MOSLER Reply:
August 25th, 2011 at 8:53 pm
Congress follows it’s own laws and changes them at will as well
They are not an inherent constraint. That’s all I’m saying
Having to add balances to an account before spending is a congressionally imposed record keeping requirement
I always say deficit spending presents no solvency issue, that the issue is inflation
What have you been reading?
Reply
Andrew Reply:
August 26th, 2011 at 1:50 am
@WARREN MOSLER,
My education in MMT has come mainly from a few sites where MMTers are posting like prag cap and billy blogg. I began your book but it does not seem to be written for somebody who wants to analyse the system or use MMT to further understand our financial system? The topic of our financial system interests me. But i just cannot work out what MMT is. For example it is not supposed to be a theory. Conversations in MMT seem circular and end at spending resulting in inflation when more or less constantly we already have inflation.
@Frank, I was referring to the apparent ease in which the bonds are going to be redeemed or interest is to be paid in the future where funding is said to not be a problem. And specifically it appeared warren was saying the funds were already in an account at the fed.
I was not referring to where the money goes when the bonds are bought.
Reply
Matt Franko Reply:
August 26th, 2011 at 7:34 am
@Andrew, It is a Theory in the true scientific sense.
http://www.nebscience.org/theory.html
“As used in science, “theory” does not mean the same thing as it does in everyday life. A theory is not a guess, hunch, hypothesis, or speculation. It is much more full-blown.”
At redemption, the process works in reverse; the balances are just transferred from the holders Securities account at the Fed to a Funds account at the Fed. So yes the balances are already “there”.
Andrew, it looks to me like you are operating in a paradigm that is at least 2,000 years old (most are, many highly “educated”), background:
http://mikenormaneconomics.blogspot.com/2011/04/who-did-roman-government-get-this-money.html
I’m pretty sure that this jar with the 52,000 coins had to be in the possession of some sort Roman finance official or tax collector; consider this large 52,000 coin jar our modern day TGA (Treasury General Account) in Britannia. When the tax collector went out to the shire to collect poll tax and then pay the Legion, he would collect the taxes in the morning and make payroll for the Legion in the afternoon. Perhaps he would take a smaller bowl with him to temporarily hold the denarius as he collected them until he paid them back out that same afternoon; consider this bowl as a TTL account today. He may have even taken a few handfuls of coins from the jar with him to have some extra denarius in case tax deposits in the bowl came up short to make payroll from the revenues alone; these handfuls of coins pre-placed in a bowl would be today considered maintaining a positive balance in the TTLs, the 52,000 coins in the large jar back at his home compound would represent a non-zero balance in the TGA.
Now if you were a 12 year old boy back then, and your father took you one day to tag along while he paid his poll tax, you would see a bunch of shire-folk showing up in the morning to pay their tax, and the Roman tax collector would put them in the bowl, then if your Father and you stayed around to socialize until afternoon, you would see soldiers start to show up and get paid out of the denarius that were earlier in the day placed in the bowl.
Not knowing any better, when you went home and told your friends about what you witnessed that day, you may tell them that the Romans “got the money” from the peasants and then they paid their soldiers with the money, implying that the Romans couldnt make payroll without the peasants money; but that was certainly NOT what was going on.
So Andrew, when you use a phrase like “How did the funds get into those accounts?” you are still operating in this 2 millenium old at least paradigm with coins and bowls and jars. It’s like you’re saying “How did the denarius get in the bowl?”
We dont have coins and jars today, we do it all on computers. There is no “physicality” to what we do today; it is all abstract and on integrated computer information systems operated under govt law/regulations. So you cannot say “Where does something come from?” or some such thing; it is completely inapplicable to the specifics of today’s monetary arrangements.
I hope this helps you perhaps see a way out of your current paradigm you have been conditioned to operate within.
Resp,
Luigi Reply:
August 26th, 2011 at 7:43 am
@Matt Franko,
Matt can you help me? Where can I find an official document about FED that does a repo before Treasury auction?
(I know it’s off topic)
Matt Franko Reply:
August 26th, 2011 at 8:01 am
@Andrew, I dont think one exists. I have read descriptions of monetary operations by Profs Fullwiler and Kelton I believe that to me suggest that if settlement balances are not available to settle the Treasury auctions, than as usual, the Fed will perhaps do a repo to provide the settlement balances to settle the auction, but that is as close as Ive come to an official document that describes/authorizes the process.
I would not think that the Fed providing settlement balances to (in this case) settle a Treasury auction is functionally any different then the Fed providing settlement balances to settle any type of transaction. So this may be just “business as usual” for the Fed and doesnt really require any unique documentation to describe a repo done to specifically settle a Treasury auction…. Resp,
WARREN MOSLER Reply:
August 27th, 2011 at 10:29 pm
some of the older text books used to explain how the fed ‘offset operating factors’
Mario Reply:
August 26th, 2011 at 1:35 pm
@Andrew,
Conversations in MMT seem circular and end at spending resulting in inflation when more or less constantly we already have inflation.
yes that’s b/c the issue with spending is inflation. And although much has gone on with spending cuts and talk of the debt, etc. the government is still spending so we haven’t seen what exactly would happen to inflation with a balanced budget yet plus there are other factors with inflation like commodity prices.
Just b/c we have a positive CPI reading doesn’t exactly mean we “have inflation” either.
I’d like to respond to your questions about the bookkeeping and accounting but I don’t seem to be following the relevance of TT&L accounts and bond holders as you keep on stating them. I may be misunderstanding you or missing something, but I am failing to see the material relevance to your question. I’d like to understand better if at all possible. Thanks!
Luigi Reply:
August 26th, 2011 at 3:42 pm
@Matt Franko,
Thanks a lot, It was simple and logical, I was exploring FED site, but it has no sense, because if I understand “loans create deposits”, can’t be in another way and a repos I think is obvious.
WARREN MOSLER Reply:
August 27th, 2011 at 10:24 pm
have you gone through the ‘mandatory readings’ on this website?
August 26th, 2011 at 8:23 am
Frank
There is nothing particularly abstract about the book keeping just because it is on a computer. The bank of England has been using reserve balances since 1878.
Apparently MMT is based on bookkeeping and operational realities in a system constrained voluntarily by law.
And in the context of that i asked a simple question which should have a simple answer.
Is your answer created by your belief the accounts do not exist or something else? Your belief can of course be true.
But what am i supposed to believe before i am to be able to understand what MMT is?
Reply
Matt Franko Reply:
August 26th, 2011 at 8:46 am
@Andrew, Sometimes answers are not simple. It’s hard for me to explain, but “accounts” are not “real” if you can see that. Accounts are abstract. The balances in “accounts” dont “come from somewhere”; if you can see that…
The Romans used coins and jars which are NOT abstract instead of “accounts” as back then information technology was virtually non-existent; you may be “trapped” in this non-abstract paradigm that you have been conditioned to think within and are having a hard time getting out of it. Resp,
Reply
WARREN MOSLER Reply:
August 27th, 2011 at 10:31 pm
mmt explains things. it’s isn’t ‘based on’ anything
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August 26th, 2011 at 9:54 am
Matt
Sorry about calling you Frank.
An account is not particularly abstract. It just means a written line of book keeping. How much do you know about computers? They only do what they are instructed to do by humans including errors they produce.
It makes no difference if you are writing the account or a computer writes the account.
Reply
beowulf Reply:
August 26th, 2011 at 12:40 pm
@Andrew,
OK, we can all agree then:
“a sovereign government that issues its own currency is neither revenue constrained nor computer constrained”.
Any sort of financial accounting is by definition “abstract” regardless of whether the accounts are kept on paper, computer or abacus (“nor abacus restrained”). There hasn’t been a non-abstract system of accounting since Noah loaded his Ark (and there are some who argue the story shouldn’t be taken literally).
Reply
August 26th, 2011 at 1:33 pm
@beowulf,
Money is abstract so accounts must be abstract. however a line of accounting is not so abstract that we cannot see what that means in human terms.
According to the US bureau of debt they look after the debt accounting. And according to MMT, MMT is based in accounting and operational realities. The government is constrained by choice and must have values in the accounts before it spends.
Transmogrifying that to say these values have no meaning to humans is distorting reality
All this talk of a government not having to be constrained in how it spends is irrelevant and meaningless in the context of the operational framework described by MMT which is based in laws everybody agrees are not broken
Reply
Mario Reply:
August 26th, 2011 at 1:51 pm
@Andrew,
I’m not sure I’m understanding you exactly…so bear with me on this and tell me if I’m off or not and why/how/where/etc.
okay so you’re basically saying that the operational realities MMT describes is negated b/c congress puts restraints on itself and its accounting practices that are not necessary?
MMT as I see it would agree with you! The whole point of MMT is to PROVE that these said congressional restraints ARE UNNECESSARY and we do that by discussing the actual operational realities. Once more people realize what is reality and what is unnecessary then HOPEFULLY we’ll get some policy changes to reflect operational reality.
Reply
Andrew Reply:
August 26th, 2011 at 2:37 pm
@Mario,
I assumed operational realities meant things like the way the system operates. where the law helps to describe some of those realities. But you are saying operational realities is a thing i need to have faith about, grasp, understand and come to believe. Warren said no faith was required.
More or less everybody knows the government can just print up the currency if it wants. So i just cannot grasp the big deal of that being endlessly repeated.
I thought MMT was just a description of modern money when i began this journey.
I am just bewildered. Bill Mitchell says the tax money goes nowhere while he is describing the accounts. The whole thing is just incomprehensible to me that he can say that.
What is this MMT thing about ‘just accounts’ and accounts are abstract to the point they have no human meaning at all.
Reply
Mario Reply:
August 26th, 2011 at 2:57 pm
@Andrew,
“But you are saying operational realities is a thing i need to have faith about, grasp, understand and come to believe. Warren said no faith was required.”
Well I guess you could say that is true from your perspective since you don’t work at the Fed or the Treasury and so you can’t literally go and see their computer spreadsheets and mark ups.
But the fallacy you are entering into is that you can’t do that now either so you already have faith in a system you have no evidence exists. The only evidence you have is arcane laws based on a system that no longer exists and is therefore no longer relevant. I mean by your definitions and statements, wouldn’t it be impossible to even have federal deficits?
I sympathize with your anxieties but until you can literally see those spreadsheets, I don’t think it’s ever going to go away. Maybe you can get an internship at the Fed or something and ask some of the operational guys there? I do recall there being an NPR recording from All Things Considered where they go to the NY Fed and talk to the operations guys and they explained ex nihlio operations first hand, etc.
And so to quote from the great (greatest?) play on earth…Hamlet, Act 1, Scene 5, lines 917-920:
HORATIO
O day and night, but this is wondrous strange!
HAMLET
And therefore as a stranger give it welcome.
There are more things in heaven and earth, Horatio,
Than are dreamt of in your philosophy.
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Matt Franko Reply:
August 26th, 2011 at 2:27 pm
@Andrew,
“must have values in the accounts before it spends.”
In my Roman tale, if the tax collector who was doing the taxes in the morning and the payroll in the afternoon ran out of coins in his bowl (think TTL) before payroll was done, he would #1 be embarrassed and hope word did not reach his superiors, #2 he would quickly travel back to his home compound and reach down into his 52,000 coin “TGA” jar and grab a few handfuls of coins and then quickly return to the shire and put them in the bowl and then complete the payroll.
Today (with our IT) we could simply run a negative balance in the bowl (TTL) instead of traveling all over the shire to obtain coins from a jar (TGA) to then put in the bowl (TTL).
There were no real constraints on this process then and there are no real contraints now (other than morons in govt today vs depraved in govt back then).
Hope this helps…. Resp,
Reply
WARREN MOSLER Reply:
August 27th, 2011 at 10:37 pm
mmt explains accounting and operational realities
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August 26th, 2011 at 3:18 pm
Matt, If the treasury could have a 200b overdraft it would make little difference economically. 200B is a small amount of money that would not have to be part of the debt carrying interest.
Governments have already been monetizing about 7% of their debt per annum and in all my adult lifetime we have had inflation. Many working people become significantly poorer via inflation where mainly it is the rich who do well from it. Today we have inflation with little sign of it going away. Prior to 2007 making money from inflation was a way of life for many of us – all at the expense of the poor or the renting classes.
Anyway BB is arguing for more government spending.
Reply
Mario Reply:
August 26th, 2011 at 3:48 pm
@Andrew,
I wouldn’t say they become significantly poorer at all. It’s in these deflationary cycles where real poverty reels its ugly head.
Typically inflation means activity and that means more people are riding the wave and that includes poor people. Deflation is just the opposite and that means the bottom literally falls out for those at the bottom. Not good at all.
The drop in general wealth you seem to be referring to in our country I think can more attributed to large scale wealth re-distributions from the middle classes to the rentier classes. It’s been slow but steady for a good 20 years now and the erosion is becoming far more visible nowadays in retrospect. Inflation is more the innocent bystander or better yet the scape goat for the real criminals at work in our economy. And frankly, our inflation is not that bad…it’s actually a sign of how strong and resilient our economy really is, even in the face of all this insanity.
Reply
August 26th, 2011 at 3:42 pm
Mario
I cant quite follow what you are saying. Warren said it required no faith. You are saying that if i have faith i would know it works differently and the guys at the fed could show me. Ie they are the experts in MMT? Are you saying that? Most MMTers are saying the feds are fools i think, BB being number one clown
But you are saying you dont need faith because you already know. If you can explain how you know it might move this along a bit.
But when you talk about out of nothing money are you talking about legal out of nothing or illegal? Are you saying i need faith the feds operate an illegal operation? I dont think you can be saying that, but I cant follow you as i said.
Deficit spending impossible? Why? The government attracts savings from the public and spends them and the saving pubic get a newly issued safe alternative form of saving and the opportunity to earn more savings from government spending to enable the government to spend more money.
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Mario Reply:
August 26th, 2011 at 4:49 pm
@Andrew,
I am sorry to confuse you and your mind. ;)
You are saying that if i have faith i would know it works differently and the guys at the fed could show me.
first off no one is asking you to believe anything. I don’t care if you believe in MMT or not. As Warren said, faith has NOTHING to do with any of this. Your faith will not “reveal” anything to you about MMT. This is not church and God does not reign here eternally. I don’t even know how faith is a part of this really…but I THINK I understand why you are talking about faith as I will show below.
What I am saying about you going to the Fed to see for yourself is attempting to address your faith concern as I see it. I haven’t been the Fed and I haven’t seen them mark up spreadsheets, so based on that fact, I guess you could say that I don’t “KNOW” for a FACT that they are doing things that way operationally speaking. So in that sense you could say that I do have “faith” that is what’s happening. So therein lies the “faith” issue I THINK you are struggling with so much, which is why I suggested you go to the Fed and see if you can literally watch them do it yourself. At the same time however I am sure that airplanes are flying in the air right now even though I can’t see them with my eyes or hear them or sense them in anyway…but still I KNOW (or better yet…”I am sure”) that they are there doing that. So can you call that faith or what? I don’t care what you call, it’s basically the same thing.
Most MMTers are saying the feds are fools i think, BB being number one clown
Per Warren’s comments, the operations guys at the Fed and Treasury know how this stuff works, b/c that’s what they do every day. They just don’t talk about it b/c of the ridicule and huge stigma it seems to bring up these days and they could likely lose their jobs. It’s never a good thing when you know more than your boss…or better yet…when you call out your boss in front of everyone. The guys at the top like BB and Geithner and crowd are clearly the clowns running around doing their song and dance and so their motives and agendas must be considered when interpreting their statements, etc. In others words you can’t trust them (faith again?) and what they say simply b/c they say so many patently false things or they contradict themselves depending on the political pressures of the day. I think this is pretty much old hat information considering the trends in the media and politics and finance these days. The lack of trust in their words and information directly relates to your concept of faith again as I see it. The difference between you and me seems to be that you want to trust what they say and what they tell you regardless of the facts about how things actually work. Listen that’s fine with me. Do whatever you want. I am okay with that and it’s all good with me. Faith-based economics need not apply. ;)
But when you talk about out of nothing money are you talking about legal out of nothing or illegal?
legal. It’s how the economy works. Ex nihlio operations, etc.
Are you saying i need faith the feds operate an illegal operation?
no. all money has always just been “created” out of thin air. Back in the day it was the magic of a government stamp on a coin that “made” money. Today it’s the Federal Reserve Note printing or an electronic transaction from the Fed to banks and then to those banking clients, etc. It’s the way currency creation works the world over. What’s illegal is when someone else does it, not the government. So you can conclude that in a sense the government is using force and coercion upon you to live and function in this society. I know it’s tough to swallow but I think we can all get over that sooner than later and make the most out of things today. It really can work out in the greatest favor of all concerned if we just thought about it a bit more and observed alot more. ;)
Deficit spending impossible? Why?
I don’t know. You tell me. I was thinking that your whole line of argument is that there needs to be an already existing figure on the accounting spreadsheet before a transaction can ever occur. So by your logic then, if all the dollars are “used up,” according to the accounting spreadsheet then there’s no more money and nothing more for us to spend right? Until we get more money from the TT&L or from bonds (and update our books accordingly) THEN we can spend again (whew that was a close one!). And if for some wild reason we don’t get any more tax payments or bond holders for that day or week or month or year (and we’re already at the zero line on the books) then we’re at a spending standstill. Right? That’s what you are arguing for when you say that accounting ledgers aren’t abstract and they aren’t “after the fact” no? I think you may be starting to see that accounting ledgers ARE after the fact and are not what’s really IN CONTROL. Accounting ledgers don’t make money or transactions. Money/transactions make accounting ledgers. You see?
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Matt Franko Reply:
August 26th, 2011 at 8:59 pm
@Mario, I was talking to an acquaintance who is a mental health professional about paradigm shifts.
He brought up some experiments that have been done with rat mazes. He said that if you put some cheese at the end of a very convoluted, difficult, physically challenging path, the rat will eventually find it. If you keep putting the cheese at the end of this path, the rat always finds it and if you keep doing it, the rat will be conditioned to always travel this arduous route to get the cheese.
Then if you open up a much simpler route for the rat to follow that is much easier and quicker, without modifying the original path, the rat will never discover that new simpler path you have opened up and will just keep on travelling the more difficult route.
So apparently brains can operate under the “if it aint broke dont fix it” type of approach indefinitely if brains are conditioned to believe just one approach exists and is always successful…. Resp,
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Andrew Reply:
August 27th, 2011 at 2:18 am
@Mario,
Mario
A few people i know who seem reasonably clued up have told me to ignore the accounts – they say it does not work that way and the insiders know that.
I was wondering however if there was a more technically orientated explanation that i could work thru for myself and it is clear now to me that it does not exist.
However there are other ways of knowing and that can come from looking at the bond markets for example.
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Matt Franko Reply:
August 27th, 2011 at 2:14 pm
@Andrew, Try this…Prof Kelton uses T account analysis to show how the different accounts are affected by Govt spending including bond sales:
http://neweconomicperspectives.blogspot.com/2010/11/yes-government-bonds-add-to-private.html
Good luck Andrew…
Resp,
WARREN MOSLER Reply:
August 27th, 2011 at 10:47 pm
also in soft currency economics, full employment and price stability, and a general framework, all under ‘mandatory readings’ on this website
Mario Reply:
August 27th, 2011 at 8:33 pm
@Andrew,
here’s the post Scott mentioned as well Andrew:
http://moslereconomics.com/2010/08/30/mmt-and-fedtreasury-operations/
A few people i know who seem reasonably clued up have told me to ignore the accounts – they say it does not work that way and the insiders know that.
so is that to say that we are all now in agreement on that front or disagreement? It sounds like agreement no?
Cheers!
August 27th, 2011 at 3:44 pm
FYI, I explained what “operational realities” means to MMT’ers in my piece on this topic in the mandatory readings.
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August 28th, 2011 at 1:06 am
I appreciate the responses everyone.
If you search thru the internet available quotes from central bankers you will find from about 1960 at least that many central bankers were very bemused or frustrated with the mainstream conceptualisation of the “bank lending channel”. Pretty obviously they thought mainstream ideas were ridiculous. Charles Goodhart who was on the monetary policy commitee of the bank of England was scaving about the money multiplier and also says that any economist who attempts to explain economics with reference to central bank operations is condemed to be cast into outer darkness. The bank of england and other central banks regard money in their countries as being endogenous. Pretty clearly in the USA monetary policy has been aimed to reduce short and long term interest rates and has been very successful at that.
So that is about 95% of MMT as far as i can see.
And due to the nature of money creation if the money creator possesses their money it is not money, so it is by definition true that all government spending creates money. However as far as i know all the countries having credible monetary policies do have accounts and legal constraints on spending – which of course can be abandoned instantly if necessary.
The fact is the current system has been able to create constant inflation for decades on end. If i think of the future and what you guys can offer the world i just see you offer nothing at all that is not already known at places like the bank of England which is now managing to create 5% inflation per annum while having the lowest bond yields for a hundred years or something like that.
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Neil Wilson Reply:
August 28th, 2011 at 3:03 am
@Andrew,
The Bank of England is not creating 5% inflation. Get under the numbers and you’ll see that government cuts and tax rises are causing RPI at 5%.
With the rest caused by commodity demand in other parts of the world.
Very low inflation is another neo-classical myth. That generally doesn’t affect working people – who would traditionally find their real purchasing power unaffected by inflation since they would demand, and get, higher nominal wages.
(Not so at the moment with weak union power).
Very low inflation helps those with a lot of financial assets maintain the value of those assets and the rent extractions they represent.
There’s not really any evidence that 2% inflation is economically any better than 7%.
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John O'Connell Reply:
September 22nd, 2011 at 2:25 pm
@Neil Wilson,
“Very low inflation helps those with a lot of financial assets maintain the value of those assets and the rent extractions they represent.
There’s not really any evidence that 2% inflation is economically any better than 7%.”
Perhaps, for the economy as a whole. However, for individuals, we necessarily go through various stages of life. When we’re young, we work and accumulate financial assets. When we’re old, we retire and are expected to survive on what we have saved during our working lives. Inflation during our working years may not hurt us, if our wages keep up and progressive tax brackets are indexed, but in retirement inflation erodes the value of our savings and reduces our standard of living. This happens to the middle classes more so than to the very rich, who (besides being able to “afford” it) probably have expert financial advisors to find them the loopholes and advantages to enable them to “beat” inflation. The middle classes may be able to buy a few shares of BAC, but they don’t get the preferential treatment that Warren Buffet gets for his BAC investment.
So, I dispute the notion that low inflation disproportionately helps those with a lot of financial assets. They’ll prosper under any conditions, and those with no savings get an indexed income from the government, but those in the middle are very much more harmed by 7% inflation than 2%, and more by 2% than 0%.
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WARREN MOSLER Reply:
August 28th, 2011 at 6:10 am
Yes, I know Charles Goodhart quite well. Yes, he’s one of the best on actual monetary operations. After discussing the ‘taxes drive money’ aspects with him he did his prescient papers on the euro zone way back, contrasting the C and M approaches where I recall I was referenced.
We certainly don’t agree on everything- he continues to believe interest rates ‘work’ in the mainstream mode’ for example, based on his perception of the propensities to consume. But we completely agree on things like there is no channel for qe to work apart from psychological effects. In fact, he suggested the UK stop issuing tsy’s rather than issue them and have the BOE buy them.
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Andrew Reply:
August 29th, 2011 at 1:26 am
@WARREN MOSLER,
This month Goodhart said the BOE should be ready to try more QE at a later point because the correlations between benefits and QE are sufficiently convincing that it would be wrong not to try it.
http://www.reuters.com/video/2011/08/01/more-uk-qe-should-be-back-on-agenda-good?videoId=217782769
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WARREN MOSLER Reply:
August 29th, 2011 at 7:44 am
yes, he probably thinks the portfolio shifting by people who don’t know how it works provides some kind of benefit via the currency weakening, or something like that.
August 30th, 2011 at 1:22 am
if people are inclined to hold bonds and the government is buying bonds then it must reduce interest rates. Also it is a beginning step as outlined by Bernanke that a government with a printing press can always create inflation where he argued for years he would be much more creative than the Japanese were. The nature of our situation at the moment is that there are a very large number of depressed asset prices out there, where if you have absolute confidance in government to continue to create inflation it seems a reasonable thing to make certain purchases. You cant really say that is just psychological. Only when the market loses faith with government does it begin to be overwhelmed by ideas the government cannot create inflation because logically it knows the government can create inflation and seems determined to do it. The next phases of QE if they come will be to buy more illiquid types of assets. Trichet as also said that if necessary they will lend directly and bypass the banks. No QE in Europe of course. But it is all about intention. Mortgage rates in Europe are much lower than in the USA.
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September 4th, 2011 at 4:28 pm
I have begun reading 7 deadly sins again.
My reading of the current USA situation is that a huge amount of savings wealth in the form of US treasuries is being gauranteed by the people of the USA.
Deficit spending by the USA community is unsecured loan creation where the treasury loan asset is guaranteed by the community of the USA and sold inside and outside the community.
As Pete Stark would say the community has wealth because of the loans.
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WARREN MOSLER Reply:
September 5th, 2011 at 11:10 pm
Pretty good! Keep reading!
(And that’s nominal wealth, not real wealth)
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Andrew Reply:
September 5th, 2011 at 11:58 pm
@WARREN MOSLER,
Are we agreeing the community has a liability and an asset? Where the moneyness of the asset only exists because the community guarantees it?
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September 7th, 2011 at 8:08 pm
[...] money is created out of thin air, like points on a scoreboard, as Warren Mosler likes to [...]
September 21st, 2011 at 9:11 am
Warren, in the chapter about Social Security you say:
You seem to be making two assumptions that don’t look quite right to me. First, you assume the government will issue extra treasury bonds to cover for the extra deficit. But this would only happen until the government stops paying for the SS benefits. Second, you assume the amount of total stocks outstanding will not change. But I think if SS were privatized along the lines described in your book, companies are probably going to issue extra shares and reinvest the money into the economy.
So I think your critique that it is all a wash at the macro level might only hold in the very short run.
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WARREN MOSLER Reply:
September 21st, 2011 at 9:26 am
if the govt ‘would have’ been collecting the $100 forever they additional reserves will be $100 forever from where they would have been otherwise, right?
companies issue to reinvest to support sales, etc. so if this plan doesn’t alter aggregate demand i don’t see the influence from that source?
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MamMoTh Reply:
September 21st, 2011 at 10:10 am
@WARREN MOSLER,
if the govt ‘would have’ been collecting the $100 forever they additional reserves will be $100 forever from where they would have been otherwise, right?
no idea what you are trying to say.
companies issue to reinvest to support sales, etc. so if this plan doesn’t alter aggregate demand i don’t see the influence from that source?
aggregate demand might rise because of the wealth effect of stocks rising. also, companies can issue to increase market share, takeover another company, etc.
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WARREN MOSLER Reply:
September 21st, 2011 at 12:07 pm
the program is the gov stops taxing you 100 and you buy stocks with it.
that means there’s 100 more in reserve accounts that otherwise would have been debited for tax payment.
so the tsy offers 100 more in tsy secs than otherwise
the next year the same happens
etc.
so the tsy issues as many more tsy secs as whatever the tax would have been otherwise.
issuing doesn’t increase market share. market share is measured in sales as a % of total sales in that market
yes, stocks might rise some and there might be some wealth effect, but with earnings not rising from this program i wouldn’t bet on it happening from this program.
MamMoTh Reply:
September 21st, 2011 at 3:15 pm
Warren,
The program also stops government SS spending eventually. At that point, no more reserves will be added and no extra bonds will be necessary, so the amount of bonds will eventually decrease (all things equal).
Issuing doesn’t increase market share of course, but issuing can finance an expansion (more stores, takeover of competition) to increase market share.
I am not saying the extra money channelled to stocks will be absorbed by new issues of stocks, but assuming the amount of stocks will remain constant does seem unrealistic to me.
September 23rd, 2011 at 11:09 am
Once it is recognized that federal spending is not constrained by a requirement to raise the money by taxes or borrowing, what would prevent all federal employees from going on strike and demanding that their wages be increased by x (take your pick) %?
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WARREN MOSLER Reply:
September 25th, 2011 at 7:03 am
the same thing that prevents them from doing it now?
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Bill Martz Reply:
September 26th, 2011 at 11:09 am
@WARREN MOSLER,
The beliefs with regard to the federal deficit and federal debt create something of a line in the sand that to some extent controls how much we spend. If I understand MMT correctly, and I only just came across MMT, some types of federal expenditures are good and some are not; therefore, the battle in Congress will be over how to classify any given expenditure. But to a lot of people, it will look like Congress has carte blanche. I think federal employees will be able to exploit that perhaps more easily than any other group. But if Congress cannot rein them in, it will have little ability to restrain other interest groups. Chanting “The deficit, the deficit!” is a lot easier than explaining why a certain expenditure will be inflationary and another won’t be. In short, to me, MMT looks great in theory but darned hard to implement successfully in practice.
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Peter D Reply:
September 26th, 2011 at 11:54 am
@Bill Martz,
Bill, I’ve seen dozens of comments like yours. The idea that understanding something better means only bad exploitation of such knowledge which is not counterbalanced by good exploitation of such knowledge is very myopic. It is the same idea that makes people afraid of progress (see Luddites, for example.) By your logic people should be still riding horse-driven carts, because “cars are too dangerous and how on earth you explain all that complicated shifting gears, pressing gas and breaks – holy mess! people would never get it!”
So, you believe that what prevent federal workers from going on strike now is the fear of govt deficits? Seriously?
WARREN MOSLER Reply:
September 26th, 2011 at 2:00 pm
could be, but mmt is how it actually works
Bill Martz Reply:
September 26th, 2011 at 3:08 pm
@Bill Martz,
I am trying to see how MMT would be implemented. Right now the leverage for not spending is that threat that it will drive up the deficit. If federal employees went on strike, the threat of what their demands would do to the deifict is an argument that would be used against them. It’s a simple argument that resonates with voters.
With MMT you can’t use the threat of increasing the deficit. What do you say to get support for resisting a wage-increase demand? Or for any spending proposal, how do you explain or make the case that it will be inflationary rather than being helpful to the economy?
WARREN MOSLER Reply:
September 26th, 2011 at 3:21 pm
the population often seems more concerned about inflation than unemployment.
even now they criticize the Fed for being too easy.
i think that fear should be sufficient
Bill Martz Reply:
September 26th, 2011 at 4:14 pm
@Bill Martz,
Thank you, Warren and Peter.
I will continue studying MMT. The logic seems, as they say, intuitively obvious to the casual observer; yet, the battle over the deficit rages on.
November 20th, 2011 at 10:11 am
Warren,
What’s going to happen as the baby boom generation goes into retirement and becomes as large a dissaver as they have been a saver for the past 20 years or so?
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WARREN MOSLER Reply:
November 20th, 2011 at 1:12 pm
depends how much spending power they have.
older people tend to nominally save more than younger people.
but of course, and ironically, in real terms non working people are entirely consuming vs saving,
and only working people are contributing to real savings even if they are nominally dissaving in a big way.
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John O'Connell Reply:
November 21st, 2011 at 12:09 pm
@WARREN MOSLER,
Well, “non-working” people can still have some income, from SS and investments, but not only are they typically “entirely consuming” vs saving, in the traditional retirement planning scenario they will be spending their lifetime accumulated savings at a rate of 4% a year, or so. So they will be spending more than their incomes. (That was what I meant by “dissaving”).
There are a lot of baby boomers, and they have saved up a lot of money over a lot of years. And, as you note, those who are “almost retired” are the ones currently saving the most of all the workers.
When they retire, could they drive the domestic private savings rate below zero?
Could they also offset the trade deficit, and drive the total non-government dollar savings rate below zero?
Even if domestic private savings doesn’t go negative, it would be less than it is now, and on a downward trend, I would think. Does that not also imply a downward trend in the optimal, full employment budget deficit? And in actual budget deficits, due to automatic stabilizers?
And if all that is true, will it be as big a deal as the effects of the baby boom generation have been on everything else during their lifetimes?
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WARREN MOSLER Reply:
November 21st, 2011 at 3:05 pm
right, but from what i’ve read nominal savings goes up on average for older people who are only consuming, and down for younger people working for a living.
you are referring to the modigliani life cycle theory, and i’m referring to the studies that refuted it, with m agreeing he was wrong.
the irony was though wrong in nominal terms, m was right in real terms and never seemed to realize it.
from Wiki:
Background
In the early 1950s,Franco Modigliani and his student Richard Brumberg developed a theory based on the observation that people make decisions regarding how much they want to spend at each stage of their lives which in turn depends on the resources available to them over their entire lives.They had observed that individuals build up assets at the initial stages of their working lives. Later on,after retirement,they make use of their stock of assets.The working people save up for their post-retirement lives and alter their consumption patterns according to their needs at different stages of their lives.This theory has important predictions for the economy as a whole,that the aggregate saving of a country is dependent on the rate of growth of national income,not its level,and that the stock of wealth in an economy has a relation with the length of the retirement span.Though there were many challenges to the to the theory of consumption in its initial years,in the recent past its relevance in economic thinking has been acknowledged.
Theory and Evidence
The findings of many economists bring out a problem in the life-cycle model.It was found out that the elderly do not dissave as quickly as has been said in the model.There are two explanations for the aforementioned behaviour of the elderly.
The first explanation is that the retired individuals are cautious about unpredictable expenses.The additional saving that arises due to this behaviour is called precautionary saving.Precautionary saving may be made for the probable event of living longer than expected and hence having to provide for a longer than the planned span of retirement.Another rational reason is possibility of ill-health and huge medical expenses.These probable events make the elderly save more.
The second explanation is that the elderly may save more in order to leave bequests to their children.This will discourage dissaving at the expected rate.
Overall research on the retired section of the society show that the life-cycle model cannot completely explain consumer behaviour.Providing for retirement is an important reason for dissaving.However precautionary saving and bequests are also important.
John O'Connell Reply:
November 22nd, 2011 at 10:56 am
@Warren,
Never heard of Modigliani, it just made sense to me that with far less income and similar consumption retirees would be saving less, and in many cases, living off their accumulated savings.
I know studies based only on age, without regard to employment status, show that older people have higher incomes and more assets.
What is the difference between nominal and real, in this context? We’re talking about saving as a percentage of nominal income, right? Current nominal income, not compared to some past number that needs inflation-adjusting?
John O'Connell Reply:
November 22nd, 2011 at 11:03 am
@Warren,
Oh, wait, it makes sense if you are saying that the nominal lifetime accumulated savings (i.e., net worth) of retirees continues to rise even after retirement? As asset values rise with inflation, creating mythical capital gains income. And Modigliani could still be right “in real terms” if they spend all their real current cash income plus some of the mythical capital gains.
But, is that the meaning of “savings” that counts in the equation?
WARREN MOSLER Reply:
November 23rd, 2011 at 2:32 pm
depends on which equation.
M is right in real terms because in real terms only people working can be contributing to real investment
December 6th, 2011 at 2:32 am
Most of the 7 made sense, but #5 about the trade deficit not causing unemployment was a complete travesty. What is so hard to understand about that? When the economy is outsourced, there is less economic activity here and more overseas. Money flows overseas. Businesses that were once here, employing people, do not employ people here. Do you want a long list of businesses that have gone under because of free trade and the trade deficit? It happened in most every state. I just read of an instance where be singling a factory from Wisconsin to China. The data is all there. Look at the graphs. When you look at the graphs it will show you that high trade deficits lead to high unemployment, leading to high budget deficits and recessions. True in the 70s and 80s and true today. How can anyone misread the data so badly as to not see that high trade deficits do not lead to high unemployment? This occurs almost by the definition of a high trade deficit.
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Hugo Heden Reply:
December 6th, 2011 at 10:33 am
@cleisthenes,
Yeah, that’s the conventional view you’re expressing there. But as Warren notes (with my emphasis):
I’ve heard it all, and it’s all total nonsense. We are
benefiting IMMENSELY from the trade deficit. The rest of
the world has been sending us hundreds of billions of dollars
worth of real goods and services in excess of what we send to
them. They get to produce and export, and we get to import
and consume. Is this an unsustainable imbalance that we need
to fix? Why would we want to end it? As long as they want to
send us goods and services without demanding any goods and
services in return, why should we not be able to take them?
There is no reason, apart from a complete misunderstanding of
our monetary system by our leaders that has turned a massive
real benefit into a nightmare of domestic unemployment.
Recall from the previous innocent frauds, the U.S. can
ALWAYS support domestic output and sustain domestic full
employment with fiscal policy (tax cuts and/or govt. spending),
even when China, or any other nation, decides to send us real
goods and services that displace our industries previously
doing that work. All we have to do is keep American spending
power high enough to be able to buy BOTH what foreigners
want to sell us AND all the goods and services that we can
produce ourselves at full employment levels. Yes, jobs may be
lost in one or more industries. But with the right fiscal policy,
there will always be sufficient domestic spending power to be
able to employ those willing and able to work, producing other
goods and services for our private and public consumption. In
fact, up until recently, unemployment remained relatively low
even as our trade deficit went ever higher.
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Hugo Heden Reply:
December 6th, 2011 at 10:36 am
@Hugo Heden, (well I managed to format that pretty ugly, but it’s on page 61)
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January 31st, 2012 at 6:41 am
We want italian version!
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WARREN MOSLER Reply:
January 31st, 2012 at 8:30 am
google translate?
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April 25th, 2012 at 10:28 am
I think there are many other factors a lot of governments aren’t talking about. e.g. that the dollar and mostly all other currencies are FIAT and no longer run on the gold standard – this creates a very bad space to be in if you’re the government that has sold off gold iou’s and people start claiming them.
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WARREN MOSLER Reply:
April 25th, 2012 at 11:46 am
don’t forget to read the 7 deadly innocent frauds on this website
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May 8th, 2012 at 10:35 am
Warren,
What do you think of the idea of an “MMT Amendment” to the US Constitution?
“Congress shall make no law restricting the issuance of debt by the United States.
The President shall cause US Treasury debt to be issued or redeemed as necessary to facilitate control of the interest rate, but without regard to the level of spending or taxation.
In order to promote the general welfare, the President shall, from time to time, and at his sole discretion, authorize the disbursement of funds to the governments of the several States, in proportion to their populations as determined in the most recent census. The Congress shall place no restrictions on the use of such funds by the States.
Any portions of existing laws that contradict portions of this amendment are nullified, but other portions of such laws shall remain in effect until acted upon by the Congress.
This amendment shall remain in force only so long as the United States is monetarily sovereign.”
I don’t think it is a necessary condition for MMT-inspired policies to be pursued, although it would streamline the process. Mostly I think that to the extent that it got publicity, it would generate opportunities for wider public discussion of the 7 DIF.
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WARREN MOSLER Reply:
May 8th, 2012 at 4:33 pm
i would think you need the wider public discussion first before congress introduces an amendment
;)
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June 24th, 2012 at 1:28 pm
Fatal flaw? I’m having trouble getting past your assertion that “The US government is the issuer of the US dollar.” The currency we use has printed on it “Federal Reserve Note” not “U.S. Treasury Note.”
My understanding is that the Federal Reserve is a private corporation, not an agency of the U.S. government. So, just as the states don’t issue their own currency, and Greece doesn’t issue euros, neither does the U.S. control it’s currency. The Federal Reserve does.
Am I misinformed here or has this detail been overlooked?
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WARREN MOSLER Reply:
June 24th, 2012 at 4:55 pm
The Fed is for all practical purposes an agent of Congress. The people are appointed by the president and confirmed by congress, all profits go to the tsy, etc. just like any other federal agency.
what are called private shareholders, functionally, are nothing more than bondholders who get a fixed 6% return on relatively small investments with no say whatsoever in an fed matters. i’m a fed shareholder though my bank and i assure you they’ve never consulted with us on anything…
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Tom Hickey Reply:
June 24th, 2012 at 5:09 pm
@Jeff,
Jeff, all the FRN in my wallet have “The United States of America” emblazoned much larger than Federal Reserve Note, and they are all signed by a US secretary of the Treasury rather than the Fed chair.
This is part of the conspiracy going on since 1913 to defraud the US public about the true situation, that the Federal Reserve is really a private bank masquerading as the US Government in cahoots with the government? Really?
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July 10th, 2012 at 5:16 pm
I read your book and you make some good points. However, I feel like you are downplaying the indirect effect of government spending and taxation.
As you state taxation is to offset inflation. Obviously the bigger the deficit the more inflation. The government isn’t literally printing money but by handing more out and taxing less they are increasing supply and causing inflation.
This has caused an increase in the cost of living. The more they spend and don’t tax to offset inflation the higher the cost of living. It seems to me if you have the tax holiday you suggest it will just cause more inflation. Am I missing something?
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WARREN MOSLER Reply:
July 10th, 2012 at 7:54 pm
correct in general. taxation creates goods and services/unemployment offered for sale in exchange for the currency, and gov spending buys the stuff its taxation caused to be offered for sale.
however, as monopolist/price setter, ‘price’ is a function of prices paid by gov when it spends/collateral demanded when it lends
as described in the 7dif. maybe go back and re read that part?
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July 10th, 2012 at 5:42 pm
After some thought I realized that not all deficit spending leads to inflation. I believe though that much of it does. While I agree social security is not in danger as you say, wouldn’t less people paying it and more collecting it lead to inflation?
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WARREN MOSLER Reply:
July 10th, 2012 at 7:51 pm
Yes, if spending by seniors got ‘too high’ and started driving up prices.
there’s additional discussion of this in ‘the 7dif’ on this website
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July 10th, 2012 at 11:20 pm
Well I went and researched more about economics and now I think I understand why deficit spending doesn’t necessarily increase inflation. I’m thinking it is due to the equation of exchange:
MV = Py
Just because we increase M (money supply) it doesn’t mean we naturally increase P (price of goods/services). Increasing M can increase y (production of goods/services).
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WARREN MOSLER Reply:
July 10th, 2012 at 11:25 pm
not to mention economies of scale as output increases
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Tom Hickey Reply:
July 10th, 2012 at 11:39 pm
@Doug Smith,
Yes, firms expand and contract production (supply) relative to changes in effective demand. As long as supply increases to accomodate rising demand due to more funding, there is no tendency to inflation although it doesn’t mean that prices won’t change — just that the price level will not rise continuously, getting so far ahead of real wages as to result in wage pressure. The usual dynamic is asset price rise due to looser credit and more leverage, then goods prices rise, and then wages. Then the monetary authority raises interest rates to contract the economy and increase the buffer stock of unemployed to reduce wage pressure. The key is really wages.
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September 27th, 2012 at 12:28 am
Hello! I know this is somewhat off topic but I was wondering if you knew where I could get a captcha plugin for my comment form?
I’m using the same blog platform as yours and I’m having problems finding one?
Thanks a lot!
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October 15th, 2012 at 9:01 am
[...] you or anyone who has read an MMT book like the Seven Deadly Innocent Frauds knows, budget deficits and debt are not real problems. Recessions cause deficits, not the other [...]
November 28th, 2012 at 12:53 am
[...] But getting back to eliminating the positive foreign sector balance through greater exports, the Government can neither do this for the private sector, nor maintain control over such a process once it starts. And, in any case, a change like this isn’t beneficial in terms of adding to the real wealth of Americans, since even though imports cost money, they increase real benefits/wealth, as opposed to financial wealth. But that’s a story for another time. [...]