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Majority Leader Eric Cantor (R-VA) regarding a balanced budget amendment

Posted by WARREN MOSLER on June 24th, 2011

RIP
USA
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House Majority Leader Eric Cantor (R-VA) today issued the following statement regarding House consideration of a balanced budget amendment, H.J. Res. 1, sponsored by Congressman Bob Goodlatte:

“We are being asked by the Obama Administration to approve a debt limit increase. While President Obama inherited a bad economy, his overspending and failure to enact pro-growth policies have made it worse and now our national debt is currently more than $14 trillion. House Republicans have made clear that we will not agree to raise the debt limit without real spending cuts and binding budget process reforms to ensure that we don’t continue to max out the credit card. One option to ensure that we begin to get our fiscal house in order is a balanced budget amendment to the Constitution, and I expect to schedule such a measure for the House to consider during the week of July 25th. I have no doubt that my Republican colleagues will overwhelmingly support this common sense measure and I urge Democrats to as well in order to get our fiscal house in order.”

50 Responses to “Majority Leader Eric Cantor (R-VA) regarding a balanced budget amendment”

  1. Adam Says:

    Well, it could be like the Prohibition Constitutional amendment. It was repealed because it was unworkable.

    Also if this option is truly a going to be in the Constitution it must be debated not only in Congress but in the State legislators. With all this debate, MMT could predict with certainty what the consequence of this would be.

    Reply

    roger erickson Reply:

    @Adam,

    Yes, prohibition lasted 14 years
    http://en.wikipedia.org/wiki/Prohibition#Prohibition_in_the_United_States

    and the main beneficiary was organized crime; time is even more important today

    Reply

  2. Gary Says:

    they are so determined to create next Depression. It’s are if they are following some script. It is unbelievable that they can be so stupid.

    Reply

  3. art Says:

    Recent CBO report as enabler:

    http://corker.senate.gov/public/index.cfm?p=News&ContentRecord_id=982f2bb8-43fc-4a64-bb13-bf84c7a5191c&ContentType_id=b94acc28-404a-4fc6-b143-a9e15bf92da4&Group_id=650e2033-9317-4405-a8df-47cdd1c9d515&MonthDisplay=6&YearDisplay=2011

    Reply

  4. Tom Hickey Says:

    I don’t think is will take very long for the financial sector to figure out that a balance budget amendment would mean the end of tsy issuance and their risk-free subsidized parking place. I am pretty sure too the Jan Hatzius will let Lloyd Blankfein know what the result would be in terms of sectoral balances, and we all know who really runs policy.

    But the wild card is that a balanced budget would result in a huge increase in domestic private debt unless the US became a major net exporter. The banks might salivate at the idea that they could turn workers into debt peons turning the surplus entirely over to the banks instead of partially to government as taxes. Talk about banker heaven.

    Of course, that would have its downside. If taxes were cut to the bone and a 2/3 majority instituted for increasing taxes, as the GOP also wants, along with cutting spending to the bone by eviscerating the safety net, when the day of reckoning arrived, the implosion would reverberate around the world, and there would be no wherewithal to bail out the banks. I doubt the banks would be be overly concerned with that eventually, however, figuring that they would be able to engineer a workaround at that time.

    Reply

  5. Crake Says:

    “But the wild card is that a balanced budget would result in a huge increase in domestic private debt unless the US became a major net exporter.”

    If the private sector was in deleveraging mode, wouldn’t it cut back more as is income fell with the fall in aggregate demand, a situation which, without such an amendment or CAP (as Corker proposes) , would force a further fall in demand and output, a scenario which would lead to less tax revenue, which would put the deficit back to the government sector? But since legislation would not allow that scenario to play out, it would just mean the economy would keep spiraling down to 100% unemployment?

    Reply

    Tom Hickey Reply:

    @Crake,

    The likely scenario is that consumers would try to maintain lifestyle to the degree they could be supporting it with increasing debt, the bulk of income would go to basic necessities (gas, insurance, etc.) and debt service (mortgage, car loans, credit card payments). That cannot go on forever, and so either the middle class would fall behind and the economy would contract, or there would be an enormous implosion of debt-deflation and depression. Given the appetite of the financial sector for rent and the moral hazard that exists, I would be betting on the later.

    In either case, the finale is a spiraling down economically with increasing unemployment. Just depends on how it unfolds — the death of a thousand cuts or sudden death. There is no path to prosperity here other than through exports, i.e., US workers working to supply the rest of the world with real resources of the US, while they also work for the financial sector indirectly by paying rent. Insidious game. Anyone who falls though the cracks in this scenario is basically screwed with no safety net, and rising unemployment woud not be offset by automatic stabilizers as it is now. Back to the Thirties. Déjà vu.

    This is the direction that things are headed anyway on the present course of increasing austerity. A balanced budget amendment would only aggravate a bad condition.

    Reply

    Art Reply:

    @Crake,

    I’d expect a series of deflationary spirals rather than a straight shot to 100% unemployment (as well as a substantial increase in informal ‘employment’) as in the GD. At certain points, a much lower nominal price level would be supportive of current employment and output.

    After it happened a few times, you’d hope that policymakers would realize how badly they’d screwed up and at least partially reverse course, as happened in the early to mid 1930s (until they did it again in the late 30s!).

    Reply

    Tom Hickey Reply:

    @Art,

    The problem is that lower price level translates to lower wage level but debt is denominated nominally and remains constant. This creates a cash flow problem for indebted workers, who can’t service existing debt as wages contract — mortgages, equity loans, vehicle loans, credit card balances, etc. This sparks debt-deflation.

    This is where the spiral down comes from, as money becomes scarcer and harder to come by, effective demand dries up, and defaults and bankruptcies rise, further reducing asset values and putting more and more people underwater. Then, marginal firms get caught up in the cash flow squeeze, too, and it’s all over as layoffs increase rapidly and the unemployment rates soars. Only fiscal policy can deal with this directly, since the central bank only supplies liquidity to the financial sector — creditors rather than debtors.

    Reply

    Art Reply:

    @Tom Hickey,

    I’m aware of that, thanks. It’s why I said a series of spirals would unfold until somebody got a clue.

    In the GD, the spirals stopped as national economies delinked severely overvalued currencies from severely undervalued (in nominal terms) precious metals (i.e., gold’s real value was much higher than the 1914 parity that a new generation of central bankers in France and the US were trying to push the world back to). Did fiscal policies help? Certainly, but they required indefinite suspension of fixed exchange rate convertibility. Resetting nominal parity of gold was the most important measure for arresting deflation then, imo.

    Today, a large enough budget deficit would do largely the same thing, but that doesn’t mean anti-deflationary measures are the exclusive domain of fiscal (or monetary) policy (they’re both ‘verticals’, right?). Just that current institutional arrangements make fiscal policy the more apparent (and easily pulled, or at least you’d think!) lever.

  6. beowulf Says:

    It would never be ratified by the necessary 38 state legislatures. Its hard enough for states and local officials to balance their budgets today and that’s with $500 billion a year in federal revenue transfers (plus tens of billions more in tax subsidies for state/local taxes and bonds).

    A BBA would inevitably require state officials to come up with the money themselves just to tread water. Aside from places like South Carolina that apparently put crystal meth in the water supply, its hard to imagine state legislatures taking that deal once they do the math.

    Reply

    Good Habit Reply:

    @beowulf,
    “its hard to imagine state legislatures taking that deal once they do the math.”
    no problem at all – isn’t one of the basic qualifications for politicans the INABILTY to do math?

    Reply

    Art Reply:

    @beowulf,

    It is hard to imagine that this could be more than posturing / pandering, isn’t it? But just in case it’s more than that, I’ve come up with some BBA slogans:

    Do the Meth!
    All States Left Behind
    ‘Tis here we pledge perpetual hate, for deficits that intoxicate.
    Spend Not, Tax Not, and Handle It Your Damn Selves
    USA – 25th in Math – 1st in Meth!
    We serve the tyrant Prosperity no more.
    No State Left Untouched
    No Child Left Better Off (Well, Maybe A Few)
    To the cause of virtuous public savings, $4T dollars. To king deficit, not one cent.

    And a song:

    Austerity is an awful flop
    We like it
    It can’t stop what it’s meant to stop
    We like it
    It’s left a trail of anger and slime
    It’s filling the world with vice and crime
    But Ken and Carmen are having a time
    So in the end we’re for it!

    Several of these are Prohibition-inspired, ripped from here:
    http://answers.yahoo.com/question/index?qid=20080210163244AAew2fT
    http://www.famousquotes.com/show/1010506/

    More material to work with here:
    http://www.albany.edu/~wm731882/media_during_prohibition_final.html

    Reply

  7. Max Says:

    This is just politics. All the talk of fiscal austerity will be dropped when/if a Republican President is elected in 2012.

    Reply

    Gary Reply:

    @Max,

    not if that President is elected on the austerity program.

    Reply

  8. Tom Says:

    I’m currently having a brain fart…I saw this response from a discussion with someone regarding treasuries when another mentioned that the money isnt backed by gold anymore. I’d like to jump into the convo, but one of you better informed folks would help me out a lot by giving some bullet points to fire back at this in some way. Thanks. Plus it would probably help me brush up on my debating skills too :)

    “No it’s not. Our dollars are still backed, but now by debt and thus by the Treasuries and not by physical gold. When we print money the govt must also issue an equal amount of treasuries to back those dollars or it will create inflation (just like if we issued dollars in excess of our gold). The rules of economics haven’t changed. Just the backing item of the currency.

    The problem with having debt as a backing is that it is required to issue more debt each year in order to cover the interest on the debts. Also since we’re the reserve currency of the world it is required that we have more dollars going out of the US than in. This leads to trade deficits and thus more debts. We can’t effectively go bankrupt because we issue our own currency, but the value of that currency will continuously decline as long as we spend more than we take in (which is required by being the reserve currency of the world).

    We will never really go bankrupt as a nation, but the longer we continue with this sort of debt backed money the more likely we are to have serious economic issues.”

    Reply

    Art Reply:

    @Tom,

    If you insist…better than literally banging your head against the wall I suppose. :) Hopefully some of the experts here will correct anything I’ve gotten wrong.

    “No it’s not. Our dollars are still backed, but now by debt and thus by the Treasuries and not by physical gold.”

    The only liability associated with a dollar today is that the USG (or Fed) will extinguish some liability of the dollar holder upon receiving it from them. You can use dollars to buy stuff, including Treasuries, but they’re not convertible upon demand into anything.

    “When we print money the govt must also issue an equal amount of treasuries to back those dollars”

    Wrong and wrong. Not sure where they got this idea (and of course “printing” is a quaint term, but not how it works). Govt spends by crediting accounts (technically debiting in accounting jargon, but crediting is more intuitive to people). It issues Treasuries *in exchange for dollars* to (1) support the central bank’s interest rate targeting activities, (2) to meet USD holders’ demands for interest-bearing equivalents, (3) to provide credit markets with top-quality collateral, and (4) to provide financial markets with a (mostly) risk-free benchmark. If spending exceeds revenues, there’s net creation of dollars, which again, can subsequently be *exchanged for* Treasuries. But the way they describe it, if I receive a new dollar, I can also demand an equivalent Treasury and hold on to them both. Huh???

    The Fed only creates net new financial assets under certain circumstances, and only recently (via interest on reserves) as part of its normal operations.

    In neither of those cases is a dollar “printed” and matched one-for-one with a new Treasury security.

    “or it will create inflation (just like if we issued dollars in excess of our gold).”

    As implied above, USDs and Treasuries are essentially the same thing. One is an interest-bearing liability (technically of the Treasury), the other a non-interest bearing liability (technically of the Fed). Those technicalities don’t matter a whole lot. As noted above, USD can be used to satisfy liabilities to both Treasury (eg, taxes) and Fed (eg, repos, swaps etc). And USDs can be easily obtained in exchange for Treasuries (and on a technical note, sometimes a liability to the Fed is in Treasuries).

    So this person is arguing, without realizing it, for a gold standard analogue where for every ounce of bullion entering the monetary system, two dollars of high-powered or base money, each defined as one ounce of gold, be created. So the system is twice as inflationary – gasp! – as they realize! (Or not…).

    The way things actually work today is that the non-govt sector swaps one type of asset for the other as it desires. For all intents and purposes (other than covering the Fed’s operating expenses), any financial asset held by the Fed is out of circulation (I believe there are some technical / operational wrinkles to that, but they’re largely irrelevant afaik).

    “The problem with having debt as a backing is that it is required to issue more debt each year in order to cover the interest on the debts.”

    This is the Minsky ‘Ponzi unit’ argument. Doesn’t really apply to an entity that is the monopoly supplier of what its debt service is denominated in. Of course, there is still an inflation constraint.

    Under a gold standard (which I assume this person would be in favor of), gold mines ran continuous deficits of gold. They had to do this to support a growing financial economy. That’s all that budget deficits (and certain Fed operations) are doing today.

    As for interest expense, as above, (1) new dollars are not issued 1:1 with new Treasuries, and (2) Treasury securities are issued in response to demand arising from central bank operations and financial markets. In theory, there’s no difference between $1000 in hand today and a promised stream of future dollars from a Treasury security, so from a finance perspective, the argument is a non-starter.

    However, it’s possible that excessively easy fiscal and/or monetary operations could lead to interest rates overwhelming a sovereign budget. Somewhat chewy stuff, you might want to read / suggest this paper by Scott Fullwiler: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1722986

    “Also since we’re the reserve currency of the world it is required that we have more dollars going out of the US than in.”

    We could run surpluses with ROW if we wanted to. ROW wouldn’t like it very much.

    “This leads to trade deficits and thus more debts.”

    Trade deficits arise *because* the USD is a global reserve currency?? It allows us to run greater deficits than we might otherwise. It doesn’t dictate it though. And it doesn’t necessitate the creation of more debt (see above). See Warren’s DIF #5. http://moslereconomics.com/mandatory-readings/the-innocent-fraud-of-the-trade-deficit-whos-funding-whom/

    “We can’t effectively go bankrupt because we issue our own currency, but the value of that currency will continuously decline as long as we spend more than we take in (which is required by being the reserve currency of the world).”

    Wow. This is one hell of an assertion. The world certainly tends to enjoy when we issue enough (but not an excessive amount of) USDs. Doesn’t mean that we always will. Did this person sleep through all of the 1990s?

    “We will never really go bankrupt as a nation, but the longer we continue with this sort of debt backed money the more likely we are to have serious economic issues.”

    Is this person a gold std fan or an AMI / Kucinich type? Either way, they have some serious misconceptions. If you need more bullets, let us know.

    Reply

    Jim Baird Reply:

    @Art,

    NIce writeup, Art.

    One more thing about the original comment: it seems to be afflicted with the old “exponential interest” canard that neglects the circular nature of interest payments and sees an inevitable crash since “there isn’t enough money to pay back both the principal and interest”. I’m always surprised at how many people believe this…

    Reply

    Clonal Antibody Reply:

    @Jim Baird,

    It does not matter that the interests are recirculated. Look at it from double entry accounting. When you borrow $1, you have a liability of $1, and the bank has an asset of $1. Now you have to pay back the dollar plus the $1 interest. Where will the $1 interest come from? There is only you and the bank in the system, and the $1 created when you borrowed the dollar.

    Just answer the question within the parameters stated.

    WARREN MOSLER Reply:

    the bank shareholders spend their interest income

    Clonal Antibody Reply:

    @Warren Mosler,

    Yes you are quite correct.

    But the point I was trying to make was that the amount of interest that can be serviced this way is limited by the nominal growth rate of the economy, and the proviso that all the interest be spent, and none saved. Further, if the interest rate exceeds the growth rate – savings rate, then the horizontal money is unable to allow for debt service, and that is where the need for government deficit spending comes in.

    Further, the interest rate in this case, would not be the FED rate, but rather the average rate paid by Main Street. See my discussion at New Arthurian Economics http://newarthurianeconomics.blogspot.com/2011/06/twenty-cent-trends.html — the discussion is still incomplete, but your comments would be welcome.

    WARREN MOSLER Reply:

    No time to get to it now, but any unspent income has that same effect as unspent interest income.

    Clonal Antibody Reply:

    @Warren Mosler,

    Yes any unspent income has the same effect as unspent interest.

    However, the key thing in my argument is that if the interest rate is higher than the growth rate, the difference has to be made up with deficit spending on part of the government, and that deficit goes to pay the rent seeker, so both the growth and the deficit is going to Wall St. and not to Main St. This I believe has been the case since 1979.

    See Some Fiscal Arithmetic from slackwire on growth and interest. http://slackwire.blogspot.com/2011/06/some-fiscal-arithmetic.html He states the case for government debt, but from the MMT perspective government borrowing is non sequitur, since the government is the sole creator of money and does not have to borrow.

    And if instead of government debt, we substitute private debt, we get the same results. Private debt has a higher interest than the fed rate. See also the discussion at http://newarthurianeconomics.blogspot.com/2011/06/twenty-cent-trends.html

    WARREN MOSLER Reply:

    only if the difference doesn’t get spent.

    yes, some govt spending goes to interest to rentiers, etc.

    hence my 0 rate proposal

    PZ Reply:

    @Clonal Antibody

    We have two monetary systems simultaneously. Government system that creates money by deficit spending, and private banking system that creates credit, or promises to pay.

    Government does not really borrow, it creates assets. Government ‘debt’ is not really a debt but stock of issued assets.

    Therefore it is hard to see there would be any fundamental problem here. People do not have unlimited life spans, if there is sufficient inheritance taxes money hording could be kept at desired levels.

    Tom Reply:

    @Art,

    Thanks a lot. Great info from everyone.

    Reply

    Crake Reply:

    @Art,

    On “Under a gold standard (which I assume this person would be in favor of), gold mines ran continuous deficits of gold.”

    What is exactly meant by “gold mines ran continuous deficits of gold”?

    Reply

    Neil Wilson Reply:

    @Crake,

    If you take gold out of a gold mine, the gold mine has less gold in it than before.

    Therefore over time the gold mine runs a permanent deficit of gold – until eventually it runs out.

    Nobody puts gold back into a gold mine.

    Crake Reply:

    @Crake,

    Thanks. I was thinking it was along the lines of that but I do not see an analogy between that and current debt critics. How would that arguement go?

    art Reply:

    @Crake,

    “Thanks. I was thinking it was along the lines of that but I do not see an analogy between that and current debt critics. How would that arguement go?”

    More of a deficit argument. Main implication is against balanced budget proponents. Mines ran perpetual ‘deficits’ of bullion in order to make the gold std work. As long as budget deficits are now playing (most of) the money-supplying role that gold mines once did, sovereign govts need to do the same under most circumstances. If anything *should* be buried, it’s balanced budget amendments. :)

    Clonal Antibody Reply:

    @Crake,

    More than the gold mines producing the “deficit,” it was the boom/bust cycles, and periodic debt jubilees in the form of bankruptcies. Where bankruptcies were not allowed, you had phenomenon like bonded labor, slavery and debt slavery.

    The dynamics of a free market economy are such that wealth always accumulates in fewer hands, through a combination of zero sum games and rent seeking.

    Clonal Antibody Reply:

    PZ,

    What you say is part of the point. Without a large tax on large inheritances, and large taxes on high incomes – and that is the situation today – we get huge wealth disparities.

    There are two culprits in this modern capitalistic society, that we can point a finger to. The first is rent seeking behavior on large saved wealth. This leads to increasing wealth disparity by the Pareto mechanism, and this can lead to inter-generational wealth accumulation. The second mechanism is through free market zero sum game exchanges (Win-Lose exchanges.) this leads to income and wealth disparities by means of the Boltzmann-Gibbs type statistical energy exchange model.

    See among other papers – An analytic treatment of the Gibbs-Pareto behavior in wealth distribution – http://econpapers.repec.org/paper/arxpapers/cond-mat_2f0409329.htm

    Reply

    WARREN MOSLER Reply:

    the major culprit is the belief that we need savings to have $ for investment. see the 7dif on this website

    followed closely by aberrations from my proposals for the tsy, fdic, banking, tsy on this website

    and by allowing insured pensions to own stocks

    etc.

    Tom Hickey Reply:

    @Tom,

    Just to add something simple to Art’s excellent points:

    “When we print money the govt must also issue an equal amount of treasuries to back those dollars or it will create inflation”

    The Treasury is required to issue Treasury securities to cover deficit expenditure since Treasury is prohibited from running an overdraft at the Fed, i.e., the Fed cannot simply credit the Treasury reserve account for settlement of Treasury payments.

    Reply

    Art Reply:

    @Tom Hickey,

    Thanks, good point. Other Tom, we do this out of choice (based on severely misguided mainstream theory) rather than necessity (http://neweconomicperspectives.blogspot.com/2009/11/memo-to-congress-dont-increase.html), but it makes the points about Fed operations, including Scott’s piece that I linked, all the more relevant.

    P.S. From Wray’s piece: “Like almost everything else Alan Greenspan did, the Social Security commission was a monumental failure and its actions were completely unnecessary.” The world sure is a nicer place with Randy in it. :)

    Reply

    beowulf Reply:

    @Tom Hickey,

    Right, Federal Reserve notes are Fed liabilities that must be backed by an asset (Treasuries or as I never fail to point out… something else). :o)

    Reply

    Tom Hickey Reply:

    @beowulf,

    Right, as since this occurs within government it is essentially an accounting fiction required to balance the books. It doesn’t make any substantial difference whether the “asset” entered is a token (tsy, platinum coin) or just an entry. The procedure is the same. I call it “ledgedemain.”

  9. beowulf Says:

    “Our dollars are still backed, but now by debt and thus by the Treasuries and not by physical gold.”

    That’s not quite accurate. If you took a 1 oz gold coin (which have a $50 denomination) down to your bank, as legal tender they’ll deposit the coin into your account at face value. 30 seconds after you leave, one hopes the bank clerk will put $50 of her own cash in the till and pocket the coin.

    Of course, the Coinage Act provides a more public purpose-minded arbitrage opportunity. if the Secretary ordered the Mint to produce jumbo (in denomination, not size!) platinum coins, the Fed would credit Mint Public Enterprise Fund with the face value of the coin. The Secretary can sweep the proceeds (ex production cost) from the off-budget PEF to the Tsy General Fund whenever he likes.

    Reply

  10. Clonal Antibody Says:

    A Balanced budget will make it impossible for FIRE to collect rent payments. In the macroeconomics identity, savings include interest on private debt. The only reason that FIRE has it so good is because of government deficit spending. The financial industry will come collapsing faster than a house of cards, if the government would stop running deficits.

    Reply

    Art Reply:

    @Clonal Antibody,

    Just the financial industry?

    Reply

    Clonal Antibody Reply:

    @Art,

    The point I was trying to make, is that in MMT, there is horizontal money creation by the commercial banks, and vertical money creation by the Government. By definition, when giving a loan, they create only the money for the loan, while the borrower is supposed to pay back the loan plus interest. Where is that money supposed to come from?

    The only possibility is from vertical money creation (in other words government deficits) If there are no deficits, we are back to the boom/bust cycles – which result in debt jubilees, and/or banking system collapses.

    There are two special cases where this does not have tobe so, but they are not operational in the current economic scenario.

    Reply

    Art Reply:

    @Clonal Antibody,

    No problem with that, and I’m a card-carrying member of FIRE (why does that acronym make me think of the Village People?).

    But are you arguing for its collapse, because it does collect rents arising from budget deficits?

    First, its industries are pretty competitive business, which is one way to manage rent-seeking.

    Second, don’t you think you’d need come sort of contingency plan for filling its intermediary functions? If so, what would you replace it with?

    Clonal Antibody Reply:

    @Art

    I am saying is that the rent seeking activity is responsible for the boom/bust cycles, because of the inability of the “money as debt” system to come up with the money for the interest.

    This has historically resulted in 7-14 year boom/bust cycles. I believe that running government deficits lengthens the periodicity of the boom/bust cycles, bit does not eliminate them.

    The rent seeking shifts wealth up the pyramid, and at some point, the economy is unable to meet the rent, and a collapse will happen. This primarily happens because of the inability of the available resources to produce growth. Growth is the poison that is needed to feed the rent seeking beast. Pure money growth without real economic growth just means the enrichment of the few at the expense of the many.

    A free market economy, even in the absence of rent seeking, and in the absence of state intervention (and only the state has the legitimacy to regulate and intervene) inexorably leads to a skewed wealth distribution. This is as close to a mathematical certainty as there can be.

    Art Reply:

    @Clonal Antibody,

    “the rent seeking activity is responsible for the boom/bust cycles, because of the inability of the “money as debt” system to come up with the money for the interest.”

    Why not? The gold standard (when working optimally, which was rare, but theoretically it was capable) did. And why is money = debt? I have a tiny bit right here. Looking at it doesn’t make me feel the least bit levered. I can pay taxes with it, but that doesn’t mean the USG is levered up either. In fact, the more money I have, the less levered I feel. How is it debt? Because of the private credit / Fed nexus?

    Isn’t this a question of flow and stock distribution rather than having anything to do with the form of money? The question being, for example, “What’s the most just way to distribute additions to the economy’s financial stock without undermining real performance and capacity?” It doesn’t really matter what you put after “money as ____,” or (as far as I’ve thought about it), whether money is endo- or exogenous, you’re still going to have this problem.

    “This has historically resulted in 7-14 year boom/bust cycles.”

    Hmmm. Demographics and other long-cycle phenomenon seem like better explanatory variables for boom and bust than “money as debt.”

    “The rent seeking shifts wealth up the pyramid,”

    Right, it’s a distribution question. However, (1) the makeup at the top of the pyramid is fairly dynamic, at least in the US (though who knows going forward?). And I’d be the first to admit that it has extracted huge rents in the last 30 years, but the FIRE sector isn’t a closed club (though I wish it would evict more of its members from time to time). And (2) it’s perfectly feasible to recapture and redistribute rents, regardless of what kind of monetary system you do it in. So in the end, isn’t this more about regulatory and other policies rather than ‘money as anything’?

    A good policy mix will ensure that there’s plenty of turnover in the skewed end of the distribution, and that rents are fairly recaptured and redistributed. You know, Rubinomics. HA HA HA!!!! (Apologies to everyone…except Bob…)

    Clonal Antibody Reply:

    @Art

    Debt money is not the vertical money created by the government, but rather the horizontal money created by the banks. See the Keen Mitchell debates

    You also said – “In fact, the more money I have, the less levered I feel. How is it debt?”

    If your money is borrowed money, you had better feel leveraged. However, that is besides the point. We are talking about the money in the economy – money, exogenous to the banking industry — in other words money created by the government, or money created endogenously, or money created by the banks.

    As a matter of principle, over the whole economy, taxes cannot be paid by endogenous money, since they are counterbalanced claims minus the interest claim by the banks. The taxes can only be paid by the dollars spent into existence by the government. Once you understand the double-entry nature of macro accounting, the system is very easy to understand.

    Interest can only be paid via two mechanisms. Economic growth, and/or deficit spending by the government.

    As long as there is growth in the economy, interest payment is possible, as long as the growth rate is a bit greater than the interest rate (actual rates paid by the main street borrowers, and not the FED rate.- and that bit depends upon how the benefits of growth are distributed between the “rentiers” and the “workers” aka capital and labor) However, historically, economies have always run out of resources to keep growing exponentially. This is true whether we have a gold standard economy, or a fiat currency economy, but in the fiat currency MMT model, the Monopoly(TM) game lasts a little bit longer (In the Monopoly(TM) game, the Bank(TM) keeps distributing money to the players — but the game still ultimately ends when all the property is owned by a single player.) As an aside, our growth rates fell below the interest rates in 1979 — the start of the great ballooning deficits, and the Ponzi scheme bubbles.

    There are two mechanisms for money transfer up the pyramid, and two ways to attenuate those mechanisms. The first one is an artifact of the free market, otherwise known as the zero sum game, the wealth characterized by the Boltzmann-Gibbs distribution. The second is the act of rent seeking, that is characterized by the Pareto distribution.

    The way to attenuate the Pareto distribution is high estate taxes, and the Botzmann-Gibbs distribution is high income tax brackets. Both of these were operative in America’s golden age (1948~1977,) when real inroads into inequality were made.

    Art Reply:

    @Clonal Antibody,

    Oh, Steve Keen’s stuff. Got it.

    Link didn’t take: http://mmtwiki.org/wiki/MMT_debates#Steve_Keen_.E2.80.94_Bill_Mitchell

    WARREN MOSLER Reply:

    the bank earns the interest and the shareholders presumably spend it.

    if they don’t it’s the same problem as any unspent income. nothing special about interest income

    see ‘soft currency economics on this website

  11. Dan w Says:

    Side note: I called “on point” on NPR last week to challenge the guest viz his talk of US default, etc. The guy who manages the phone calls told me I don’t know anything about money, and that of course the debt crisis is just that and that the US could certainly default. He would not put my call on the air. The obstacles to getting the message out are everywhere.

    Reply

    Art Reply:

    @Dan w,

    Situational ethics say that sometimes it’s OK to lie. Next time tell the screener that you have a chronic illness and are worried about Medicare going bankrupt before you retire (NPR can’t afford a delay system, right???). Then hit the guest with an MMT-inspired question.

    Maybe we need an MMT equivalent of “Baba-booey”? Any suggestions?

    Reply

  12. PG Says:

    “Whom the gods would destroy, they first make mad.” It seems a prophetic sentence as it was written by the Greek Euripides, author of tragedies, some 2400 years ago.

    As things are quite interconnected today, and most probably one cannot avoid the spillovers of the play between the gods and the mad, maybe one should think of putting at work a shadow life support system.

    Can I suggest WM for Governor of the Shadow Central Bank? ;-)

    Reply

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