The Center of the Universe

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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.

Why there is a deficit

Posted by WARREN MOSLER on July 26th, 2011

The main reason we have a large budget deficit is because of all the tax advantaged savings plans- pension funds, IRA’s, insurance and corporate reserve.

All of these financial assets, which compound continuously, represent unspent income.

And unless they are offset by some other agent spending that much more than his income, the dollars won’t be there to be saved in these tax advantaged entities.

And also realize this is an accounting identity, beyond dispute.
Like 1+1=2.
Like how your checkbook must balance or you made an arithmetic mistake.

It works like this:

People work to produce and sell goods and services and someone get the dollars from all those sales.
Those dollars that came from the sales are exactly the amount needed to buy those things in the first place.
If anyone doesn’t spend the dollars he gets from the sales, there isn’t enough spending for the sales to happen in the first place.

So when a large chunk of our dollars that we get paid from wages and profits go into pension funds,
and don’t get spent,
all the things for sale can’t get sold unless someone spends that much more than his income.

And if we (both residents and non residents) don’t want to- or can’t- spend more dollars than our dollar incomes by borrowing dollars to spend,
sales fall short,
so income and jobs are lost in a downward spiral,
that doesn’t end until someone finally fills that spending gap by spending more than his income
to replace the spending power lost when earned dollars go into pension funds.

That’s where the government comes in.
When those dollars piling up in pension funds cause spending to fall short,
government can spend more than its income to make up for that lost spending power, fill the spending gap, and keep everyone working and producing and selling real goods and services.

So right now the high unemployment and low sales tell us there is still a big spending gap to fill.
In the past, this spending gap might have been filled by people borrowing to spend on houses and cars and all that.
But this time around people aren’t willing or able to fill the spending gap.
The current level of government spending that exceeds taxes (deficit spending) is only partially filling the current spending gap.
It’s a big economy and pension funds and corporate reserves are huge and growing,
which means the spending gap is huge and growing
which means the amount government spends that’s more than it taxes (government deficit spending)
is still too small to fill the spending gap.

the answer is quite simple- cut taxes and/or increase government spending until output and employment is restored and the spending gap is filled.

Unfortunately our fearless leaders have a large gap between their ears, and have it all backwards, and we’re all paying the price.

And it will get a lot worse if they keep cutting the government deficit and make the spending gap wider instead of narrower.

(as always, feel free to distribute and re post)

128 Responses to “Why there is a deficit”

  1. rvm Says:

    Warren, we feel and share your pain.

    Let them do what they are doing, and sooner or later people will get rid of them.

    An army of unemployed people without much to lose will bring the CHANGE.

    Reply

  2. JohnE Says:

    I have been reading this site and consider the MMT accounting
    identities as unassailable. But why couldn’t a controlled deflation
    in prices and wages allow production and services to continue at current rates, or even grow. I also don’t dispute the fact we can never default. But isn’t the fact that the federal government can never, from an operations standpoint, never run out of money the REAL problem if you believe in limited government. e.g. I think we can afford national
    healthcare but I think it’s a terrible idea. I could even support large expenditures if they didn’t come with 5,000 pages of regulations.
    (Social Security would be the model program.) I think it is unrealistic to think the government will expand its percentage of GDP
    without an corresponding control over the minutiae of our daily lives. Bottom line, the US will never be financially bankrupt but
    that is small consolation if its citizens have been morally bankrupted. (I understand taxes rather than spending can be used to
    regulate aggregate demand but the course of history suggests that
    spending is the preferred route for modern democracies in spite
    of the current chest thumping of both parties this week trying to outdo each other in spending cuts. I also understand that with
    unemployment at 10-18% that now is not the time to withdraw support
    for aggregate demand. Frustrating for limited government types…

    Reply

    WARREN MOSLER Reply:

    the problem is the currency is a public monopoly, so savings desires can only be fulfilled by another entity spending more than his income

    if you think gov is too large you can cut it to desired size and then lower taxes to the point of full employment

    Reply

    jim Reply:

    @WARREN MOSLER,

    the problem is the currency is a public monopoly, so savings desires can only be fulfilled by another entity spending more than his income

    ______________________________________________

    That isn’t really true and
    You ignored the point he was making.

    It is possible for the government to balance the budget and at the same time for the private sector to save. “Save” is defined as aggregate private sector spending less than income (lets assume a balanced current account for simplicity)

    The result would be spiraling deflation of wages, prices and incomes. The rate of the spiraling decline would match the rate of savings. This of course would lead to less govt income also. That analysis is based on the assumption that the private sector as a whole is resolutely unwilling to spend more than its income (i.e. it is unwilling to borrow more than it saves and/or repays old debt). In other words, it appears to me unlikely that the private sector will be deterred from saving by a balanced budget and that is something that needs to be examined closely.

    If things really worked the way you say – that a balanced federal budget would force the private sector to run a deficit then some would actually find that desirable. The private sector would be back to deficit spending borrowing large quantities of money and the financial sector would be in the business of loaning large amounts of money and it would be back to business as we had come to know it before the financial crisis.

    But that is a pipe dream. It seems certain that the private sector is not going to borrow whether it is persuaded by carrot or stick. The private sector has adopted a 1930′s view of borrowing and history says that view will take decades to change.
    Net private sector borrowing in the US is today negative. And there is no reason to believe anything the govt does on the debt ceiling will be able to change that.

    The reason we would see spiraling deflation if the govt balances the budget is the money that will be saved has no place to go. It would flow into the financial sector (as loan repayments or savings) and then since there are no net borrowers it can not come back out in the form of loans to the private sector (or loans to govt). Thus incomes (both private and govt) would shrink.

    Reply

    WARREN MOSLER Reply:

    i like my story better

    and i agree that savings desires can change dynamically

    roger erickson Reply:

    @WARREN MOSLER,

    Sweet Buddha! If you have population increase, there’s increasing demand for available currency. You then have two choices. Favor obsolet stasis by bidding up the real-value of limited currency, or bid up the adaptive value of coordination while letting currency supply float per dictated by circumstance. People 1st, currency tools 2nd, remember that.

    History will decide which strategy worked. My prediction? GOODBYE FOREVER, Jim.

    Reply

    Clonal Antibody Reply:

    @JohnE,

    The problem with free markets, and limited government — which almost automatically means little or no regulation. These conditions lead to extremely unequal wealth and income distribution. The current income distribution of the US is very graphically shown in this video – The L-Curve: Income Distribution of the U.S.

    This is a result of a few human failings and that results in a Boltzmann-Gibbs type income/wealth distribution for approximately the bottom 99%, and a Pareto distribution for the remaining top 1%. Such wealth disparities cannot be avoided without substantial regulation of markets, and societal force (government)

    Reply

    ESM Reply:

    @Clonal Antibody,

    Why is unequal wealth or income a problem per se?

    Also, if you’re going to focus on some liberal concept of “fairness,” doesn’t it make more sense to look at the distribution of consumption rather than wealth or income?

    And even if you think there is more to fairness than consumption inequality, why is income even a measure at all? Certainly wealth is far more important, don’t you agree? The man-child in the oval office keeps referring to couples that make over $250K per year as millionaires. The vast majority of them are not, but there are many, many millionaires who make less than $250K per year from time to time.

    Reply

    Roger Erickson Reply:

    @ESM,

    > Why is unequal wealth or income a problem per se?

    ?? Were you born in a barn? Here’s just one example: back when our military was far more incompetent, rich people could buy officer staff positions; the approach didn’t scale

    yet we still select our politicians & policy via that same method; why?

    General answer is that no system can sum group intelligence to optimize group policy … if the prominent bookkeeping system is arbitrarily concentrated in few hands. That only leads to random selection statistics, expressed as whatever the rich bookies vote for.

    It’s rather analogous to directing all your resources to a favorite child, to the neglect of the other kids. Such families rarely turn out well.

    WARREN MOSLER Reply:

    the key word their is arbitrarily

    it’s the part of wealth distribution that results from arbitrary institutional structure, or worse, like tsy secs that don’t need to exist.

    ESM Reply:

    @ESM,

    “?? Were you born in a barn?”

    LOL. That’s a really “rich” insult coming from somebody arguing for forced wealth redistribution based on the idea that wealth is not positively correlated with wisdom or ability.

    Tom Hickey Reply:

    @ESM,

    Effects of inequality

    It’s clear that anyone who think that extreme inequality doesn’t matter hasn’t traveled much outside the developed world. The effect is horrendous. To put it simply, greater equality results in greater national prosperity.

    ESM Reply:

    @ESM,

    @Tom H:

    You are very much confusing correlation with causality.

    Also, things are probably much more complex than simple inequality measures. Extreme poverty may cause societal problems, so I can see that having a floor on poverty makes sense (aside from the moral justification). But I don’t see how capping wealth accumulation makes any sense.

    Tom Hickey Reply:

    @ESM,

    The reason to cap wealth accumulation is neither only economic (prosperity) or moral (rectitude,fairness) but has a strong political component (freedom-justice-community) as well. The practical reason is that historically wealth concentration at the top concentrates political power at the top and undermines democracy as vested interest use their power to influence the political process. History shows that extreme wealth inequality leads to plutocratic oligarchy, just as concentration of military power at the top leads to tyranny. Modern liberal democracies have been relatively successful in separating military power from political power, but not wealth, thus there is a ruling elite served the establishment of both political parties in the US.

    ESM Reply:

    @ESM,

    @Tom H:

    Hmmm. You’re worried about financial power being translated into political power, and so advocate curbing financial power. How about we curb political power instead? That’s a more efficient solution, no?

    Gary Reply:

    @ESM,

    If you let wealth translate into political power – you get centralized state ruled by oligarchy. If you do not allow it – you will get something like medieval Europe: decentralized feudal estates – and disintegration of centralized state. That is even worse.

    Tom Hickey Reply:

    @ESM,

    How would you do that without curbing financial power? It cannot be accomplished by making government smaller. As long a government is in place, there is a power structure, and as long as there is a power structure there is politics, and wherever there is politics, there are vested interests that skew the process. This is the challenge of liberal democracy, and it has not yet dealt with financial power and plutocratic oligarchy.

    The US has been a plutocratic oligarchy since its inception, when Hamilton prevailed over the populists, Pennsylvania democrats, and Southern agriculturists in favor the Northern bankers represented by Robert Morris, who put up the $ for the American Revolution. Washington, himself a Southern agriculturist, sided with Hamilton against Jefferson and Madison. The differences were political in addition to financial and economic and eventually culminated in the Civil War. This war is now in the process of being refought in the US on essentially the same disagreements. Glenn Beck correctly portrayed the Tea Party as essentially Jeffersonian and his rhetoric is not as crazy as it sounds if it is viewed in historical context. The problem is that the Tea Party as identified the problem as government, when the problem lies with who controls government and why.

    Anyway, I am interested in your solution to this as yet intractable problem that remains a challenge to liberal democracy and the polity? I think this is the major issue the US and world are facing today.

    Greg Marquez Reply:

    @ESM,
    I’d say that income inequality is a sign that there may be something amiss in the free market. One of features of a free market that people forget is that it is supposed to result in very small profits, i.e. the least amount of profit possible to stay in business.

    When you see profits above that minimum level it means that

    - Someone has a natural monopoly, actors, athletes, models, artists (Not people who produce intellectual products since once produced they can be easily copied by others.) also people who own particular pieces of real estate that are not replaceable, e.g. Times Square etc. and to a certain extent oil wells, gold mines etc.

    Or…

    That someone has a government enforced monopoly. Patents, copyrights, are all government enforced monopolies. Without the government enforcement of its monopoly you could buy an exact replica of an Apple ipad for maybe 1/4th the price. But also dairy price supports etc.

    Or… that someone can tell the future or has correctly guessed the future.

    Or… that people are cheating on the free market system by hiding pricing information, (e.g. Goldman Sachs urging that Australian firm to buy housing derivatives(?) while Goldman Sachs was trying to get its own money out of that market, or credit card companies unilaterally changing the date due on their billing so they could charge delinquent fees and up interest rates. )

    Or… People who are receiving some kind of special treatment from the government that:
    -Gives them an in effect monopoly on sales e.g. Microsoft at the beginning, insurance companies in states where people are required to purchase insurance of one kind or another,
    - Government regulations which limit competition: legal bar associations, laws prohibiting hospitals from having doctors as employees etc.
    - Government subsidy of business expenses, e.g. “green” power generating facilities, laws limiting liability for negligence, laws limiting punitive damages, Wall Street bailouts, etc.

    Or…People who are out and out stealing or committing fraud with or without the aid of law enforcement, e.g. Bernie Madoff, or American Corrective Counseling Services (Here’s the link for the unfamiliar http://goo.gl/NQb36 ) drug dealers, thieves, etc.

    So… unless you’re Tiger Woods or Jed Clampett it seems that your extra ordinary wealth was the product of government intervention in the marketplace on your behalf, gambling or outright thievery.

    I think that’s what makes income disparity a possible problem.

    WARREN MOSLER Reply:

    income distribution is largely a function of institutional structure

    ESM Reply:

    @ESM,

    “So… unless you’re Tiger Woods or Jed Clampett it seems that your extra ordinary wealth was the product of government intervention in the marketplace on your behalf, gambling or outright thievery.”

    There is a big difference between government intervention after the fact and an institutional structure (“rules” if you will) which were set up ahead of time to provide proper incentives and to promote growth.

    We may need a government in order to enforce contracts and protect property rights (including intellectual propery, e.g. through copyrights, trademarks, and patents), but that is not the same thing as having the government intervene arbitrarily to pick winners and losers.

    Yes, J. K. Rowling has benefited enormously from institutional structure. But that does not mean she has received billions of dollars of income unfairly. You had/have the same opportunity to produce intellectual property of great value too.

    And I don’t really see any difference between Tiger Woods and J. K. Rowling in that regard. Tiger is quite fortunate that society has evolved in such a way as to place tremendous value on being able to hit a small, dimpled ball really straight and really far with a club.

    I think it is best for the government not to get involved in such moral questions about whether it is fair that somebody was born talented or hard-working or creative and really deserves to earn multiples of the average income from their productivity. It’s too complicated and too fraught. At the same silly reductionist level, none of us have “earned” the high standard of living we are currently enjoying relative to our cave man ancestors.

    Tom Hickey Reply:

    @ESM,

    Uh, I don’t think that the problem of political influence through wealth stems too much from either Tiger Woods or J. R. Rowling, who is British.

    I am talking about the top 0.1%, and the oligarchs that control industrial and financial capital. You know, the people represented by the national chamber of commerce that disingenuously claims that it represent “small businesses.” Funny that local chambers of commerce that do represent what people ordinarily think of small businesses are now distancing themselves from the national chamber.

    beowulf Reply:

    @Greg Marquez,

    >i>One of features of a free market that people forget is that it is supposed to result in very small profits, i.e. the least amount of profit possible to stay in business.
    When you see profits above that minimum level it means that… Its time for a Lerner Index tax, which, oddly enough, would target cost-push inflation as surely as the Market Anti-Inflation Plan proposed by one Abba Lerner.

    The paper by Seißer proposes a profit tax, τ(q), equal to the Lerner indexas a means of improving economic efficiency. Since the Lerner index, (price-marginal cost)/price, is generally decreasing in output, firms will have an incentive to increase output to reduce their profits tax and this can reduce the deadweight burden of monopoly. As a regulatory devise a profits tax has the advantage of requiring rather limited intervention and preserving the profit motive. There is a further advantage that if firms were induced to produce at the competitive equilibrium no tax would actually be imposed or collected.
    http://webcache.googleusercontent.com/search?q=cache:FKiuKiT5R6IJ:www.economics-ejournal.org/economics/discussionpapers/2008-28/comment.2008-11-17.1499202788/at_download/file

    Clonal Antibody Reply:

    @ESM,

    Equality, equity and fairness are values that are universally shared by Americans, and these values are enshrined in our constitution. Slavery was abolished primarily because people saw the injustice.

    A recent publication by Dan Ariely and Mike Norton highlights this.

    Perform the following thought experiment. Remove yourself for a moment from your present socioeconomic circumstances and imagine that you are to be replaced randomly into society at any class level.

    Now, before you know your particular place in society you are told that it is within your powers to redistribute the wealth of that society in any way that you choose. What distribution would you choose? This famous thought experiment is the basis of political philosopher John Rawls, as outlined in his highly influential 1971 work, “A Theory Of Justice,” in which he argues that the lowest class should be made as well off as possible. But this of course assumes that we all come to the same conclusion when we perform the thought experiment ourselves. To test this, Mike Norton and I recently conducted a study in which we asked Americans to first guess at the distribution of wealth in the United States, and then we asked them to perform the thought experiment and lay out what they think would be the ideal distribution of wealth if they were to enter society and be placed randomly in a class.

    Survey Graphs

    As you can see from the figure, participants rather badly estimated the current state of wealth disparity! Furthermore, they offered an ideal wealth distribution (under a “veil of ignorance”) that was even more different (and more equal) relative to the current state of affairs.

    What this tells me is that Americans don’t understand the extent of disparity in the US, and that they (we) desire a more equitable society. It is also interesting to note that the differences between people who make more money and less money, republicans and democrats, men and women — were relatively small in magnitude, and that in general people who fall into these different categories seem to agree about the ideal wealth distribution under the veil of ignorance.

    American’s estimation of inequality existing in the US was less inequality than any other country in the world, and their ideal inequality was close to a gini coefficient of 1 (perfect equality)

    In actual fact, US ranks in the worst quintile of inequality distribution, as measured by the gini coefficient.

    ESM Reply:

    @ESM,

    @Clonal:

    “Equality, equity and fairness are values that are universally shared by Americans, and these values are enshrined in our constitution. Slavery was abolished primarily because people saw the injustice.”

    You must be new to this. Disputes about fairness and equality between liberals and conservatives are on a deeper plane. The concept of equality enshrined in the Consitution is based on negative rights and is quite clearly a “conservative” document. Liberals are the ones who want the Constitution to be a “living document” so that they can twist it to match their present day moral values without actually going through the (admittedly difficult) legitimate amendment process.

    “American’s estimation of inequality existing in the US was less inequality than any other country in the world, and their ideal inequality was close to a gini coefficient of 1 (perfect equality)”

    Ok, let’s look at this logically. Americans were asked (1) what they thought US society was like in terms of wealth distribution, and they thought it was X (meaning pretty equal). They were also asked (2) what they thought an ideal society would be like, and they thought also X.

    For convenience I have ordered the questions, but the order in which the questions were put doesn’t matter. The important thing is that (1) is an observational question and (2) is a very abstract question. For that reason, I would put much more stock in the answer to question (1) than to question (2). Furthermore, I would think that the respondents’ answer to (1) would inform their answer to (2) (even if the questions were asked in reverse order).

    So, given that Americans basically got the wrong answer to question (1), I don’t think their answer to question (2) is particularly meaningful. But if we can draw any conclusions from the answers at all, it is this:

    Americans think US society is X, and therefore they think an ideal society should be X. If US society is actually Y (which is approximately NOT X), then they really think that an ideal society should be Y. Americans’ conception of an ideal society is close to what US society is like now, at least insofar as standard of living equality is concerned.

    My general take is the following. Americans see that poor people in the US still live a relatively good life, and they see that the vast majority of people have standards of living similar to their own. Couple this with the fact that people are probably wrongly conflating equality before the law with wealth equality, and in day-to-day life, US society looks pretty equal to them.

    The fact that 1,000 people might have unfathomable amounts of wealth doesn’t affect most Americans because they don’t see it. It is abstract. And much to their credit, Americans don’t get jealous about the abstract. I think MMT tells us that having fabulously rich people who don’t spend doesn’t actually hurt not-rich people. Most wealth just consists of numbers in a computer after all. It’s only the distribution of real resources that matters.

    That’s why we should look at consumption inequality, and if one wants to remedy that, you can think about a luxury tax.

    Tom Hickey Reply:

    @ESM,

    ESM: “My general take is the following. Americans see that poor people in the US still live a relatively good life, and they see that the vast majority of people have standards of living similar to their own.”

    My general take is the following. Americans see imagine that poor people in the US still live a relatively good life, and they see imagine that the vast majority of people have standards of living similar to their own.

    Get out much?

    Tom Hickey Reply:

    @ESM,

    Oops. Both instances of “see” before “imagine” above should have strikethroughs. This blog format apparently doesn’t accept that HTML.

    Tom Hickey Reply:

    @ESM,

    GOP Rep. to poor: ‘Drop out of the country club’

    ESM Reply:

    @ESM,

    “GOP Rep. to poor: ‘Drop out of the country club’”

    That is an outrageously misleading headline and shame on you for propagating it.

    He didn’t say “poor,” he said “overextended and broke.”

    His analogy was perfectly appropriate, since he thinks of the Federal government as some spendthrift living beyond his means. Not that I agree with him of course…

    Tom Hickey Reply:

    @ESM,

    ESM, there are a lot of people that lost their jobs and are now “overextended and broke.” They were formerly middle class. They are now living below the poverty level and some of them are homeless to boot. Most of these people did not belong to country clubs in the first place, because they were not upper middle class (top 10 to 20% of earners).

    ESM Reply:

    @ESM,

    @Tom H:

    He’s referring to the Federal Government. The analogy is to people like Donald Trump, who by the way has been overextended and broke several times in his life, but never poor.

    Clonal Antibody Reply:

    @JohnE,

    Also, deflationary conditions that you outline, lead to an increase in the shift of assets from the less well endowed to the really wealthy. A deflationary spiral is the end stage of a monopoly game, where all players except one are out of the game.

    Reply

    WARREN MOSLER Reply:

    this time all assets and incomes go towards 0. only those betting on collapse will win, if they can collect on their bets

    Reply

    PaulJ Reply:

    @JohnE,

    Controlled deflation…

    Lets see, you borrowed $80,000 to buy a $100,000 house ten years ago.

    Now, your wages have declined by say 20% and the value of your house has declined to say $80,000.

    But your mortgage is still around $79,000…

    Your equity investment has nearly disappeared, and over the next ten years you will become upside-down and likely unable to make your payments because your wages are now down 40%.

    Seems un-sustainable to me.

    Reply

  3. Dave Says:

    Sometimes when I am depressed, I read Warren Mosler and Bill Mitchell, and then I feel (a little) better.

    Reply

  4. JohnE Says:

    Ultimate question: MMT perfectly describes our current system.
    Is it the best system from a theoretical standpoint or is there
    a better way to organize what entities issue currency and how
    capital is organized and deployed, that also is conducive to
    limited government and minimizes TBTF financial industry/ avoiding
    “financialization” of the economy. Or does our current system just need
    tweaked?

    Reply

    Ralph Musgrave Reply:

    @JohnE,
    John E, You ask “is there a better way to organize what entities issue currency”. Personally I think only a government / central bank should issue currency, rather than private banks. I.e. I believe in full reserve banking rather than fractional reserve banking. So did Milton Friedman, Thomas Jefferson and Abraham Lincoln. For details, seehere.

    Reply

    WARREN MOSLER Reply:

    member banks are public private partnerships, publicly regulated to serve public purpose. as such they are designated agents of govt

    Reply

    Tom Hickey Reply:

    @WARREN MOSLER,

    Right, and they need to operate as such, instead of claiming the mantel of private firms. See Warren’s proposals for banking and the financial sector in Proposals in the nav bar at the top.

    WARREN MOSLER Reply:

    there are alternatives. there are political choices

    Reply

  5. HarPe Says:

    @JohnE:

    On healthcare – Sweden has nationalised healthcare, yet total outlays on healthcare are slightly lower and projected expenditures for the coming 20 years are lower than in the US. The risk is shared, so that no one is left without care. If you want “more” than that, you can contact an insurance company and get even better coverage. A person i know has a deal that covers -all- her medical expenditures and it’s rather cheap, but you don’t get those deals anymore.

    On organisation – Limited government and TBTF financial industry are both “separate” from the economy. They’re matters of law and public policy. MMT is just an understanding of how the current system works. MMT is not an ideology. MMT does not tell you if small or big government is “right” or “better” for the economy. It’s “pure” and “clean” from propaganda in that sense.
    So you could have a very limited government that understands MMT and applies this knowledge to it’s management of the economy.

    MMT really just tells you how the current system works and what we could do to improve it’s market outcomes, instead of making them worse like we are now.

    Reply

    WARREN MOSLER Reply:

    most like my healthcare proposal

    Reply

    Roger Erickson Reply:

    @HarPe,

    there are infinite, indirect options to tuning complex systems;

    example: last time I looked, a few years ago, the entire health-improvement-r&d budget of all 29 institutes in the NIH had a sum budget ~$30 billion/yr.

    In contrast, the food industry alone had an advertising budget ~$85 billion/yr.

    Implication? Healthcare, as we define it, is not even the most significant influence on the direct financial costs of our health burdens (not to mention lost time & productivity). No amount of r&d on diabetes reversal would be as effective as just increasing the barriers to selling so much Sugar Frosted Flakes, yada yada to the public.

    FDA etc protect us somewhat from our own organic chemists & physicians, but we need more self-review among citizens to protect us from our own food-product snake-oil salespeople.

    Reply

    Tom Hickey Reply:

    @Roger Erickson,

    And much of this begins in childhood. It’s pretty much the same as pushing drugs on kids, creating bad habits and ruining their lives. But just as Prohibition didn’t work and the War on Drugs hasn’t either, I don’t laws working directly either, although there could be regulation about content that would reduce the problem, as well as more health education in early years. Hygiene education helped reduce the incidence of germ-borne diseases, and sex education reduces the incidence of STD.

    Reply

    WARREN MOSLER Reply:

    and people have a right to eat junk, just like they have a right to elect congressmen pledged to balancing the budget.

    Reply

    roger erickson Reply:

    @WARREN MOSLER,

    Wasn’t saying to outlaw habits, only to require adequate prevention in the form of an informed electorate. FDA, for example, doesn’t outlaw any chemicals, it only says you can’t market them inappropriately or overzealously.

    Informed electorates can explore all the options they want … history as shown that they just make corrective adaptations better/faster/leaner.

  6. anon Says:

    You’re arguing that these savings plans are the problem at the margin that contributes to excess demand for net financial assets. That has to be offset by deficits.

    But what’s your case for why this constitutes the marginal problem?

    What are the relative numbers?

    By numbers I means such as the following:

    a) What proportion does constitute out of net saving for the HOUSEHOLD sector?

    b) What proportion does this constitute out of total investment?

    Both these numbers should be large to argue that this is the problem at the margin.

    You say these plans are offset by higher government deficits.

    Why not say they are offset by lower current account deficits?

    Why is the government deficit the marginal effect and not the current account deficit?

    Reply

    Robert Kelly Reply:

    @anon,
    We could import less and export more. Obama has mentioned this a few times. Do you see it happening any time soon?
    Tax cuts could start tomorrow ie, eliminate FICA withholding.

    Reply

    WARREN MOSLER Reply:

    yes, that’s why i say dollar savings by residents and non residents

    Reply

    WARREN MOSLER Reply:

    i recall i wrote savings by residents and non residents? no time to check sorry… if not, an oversight

    Reply

    Ramanan Reply:

    @anon,

    “Why not say they are offset by lower current account deficits?”

    I believe the MMTERS do say that but one reply you could get is something like “There is no reason why a nation can consume everything it produces plus all the stuff foreigners want to sell to us” .. Right Warren ?

    Reply

    WARREN MOSLER Reply:

    si!

    Reply

    anon Reply:

    the premise of the post is that tax advantaged savings plans etc. are the marginal reason for government deficits

    but foreign savers are not the main contributors (if much at all) to those pensions plans

    i.e. the following is not very relevant to the question:

    “And if we (both residents and non residents) don’t want to- or can’t- spend more dollars than our dollar incomes by borrowing dollars to spend, sales fall short”

    Because the savers considered in this case are (nearly) all domestic private sector

    hence my point that both the government deficit and the current account deficit are potential adjustment outlets in looking at what might have happened without such tax advantaged saving

    Reply

    anon Reply:

    i.e.

    to the degree that, because of tax advantaged saving, private sector cuts back on domestic spending, government offsets that with domestic spending, deficit, and net financial assets

    to the degree that, because of tax advantaged saving, the private sector cuts back on spending through current account, foreign saving adjusts down

    but government doesn’t need to adjust for the current account effect – the decline in foreign saving requires no response

    Reply

    Ramanan Reply:

    @anon,

    “to the degree that, because of tax advantaged saving, private sector cuts back on domestic spending, government offsets that with domestic spending, deficit, and net financial assets”

    yes I too think that is the premise of the post.

    “to the degree that, because of tax advantaged saving, the private sector cuts back on spending through current account, foreign saving adjusts down”

    Yes, if by foreign saving you mean saving of foreigners.

    “but government doesn’t need to adjust for the current account effect – the decline in foreign saving requires no response”

    hmmm … the causality between the three balances operates in both directions and operates via (changes in) demand at home versus demand abroad, assuming no changes in import propensities.

    For example, a fiscal expansion leads to an increase in domestic demand and higher net saving but also leads to an increase in the current account deficit. A fiscal contraction abroad leads to less exports (less imports for them) and hence higher current account deficit and consequently a higher fiscal deficit in the domestic economy.

    Thats a Keynesian way of putting it .. MMTers tend to describe foreign sector dynamics by talking of foreigners’ “net saving desire”.

    Back to your point .. you are arguing that the government has no job of accommodating the satisfaction the “net saving desire” of foreigners ?

    Ramanan Reply:

    Sorry should clarify my opinions… an decrease in demand abroad created by a fiscal contraction .. and an increase in domestic demand created by fiscal expansion… (demand abroad can increase in spite of fiscal contraction, for example by private sector deficit spending).

    anon Reply:

    The private sector’s marginal propensity to import is greater than the government sector’s marginal propensity to import. (I know that’s not a standard concept, but it seems like a reasonable comparitive in this case.)

    So if the private sector saves more as a result of tax advantaged plans, it will cut back somewhat on imports.

    At the same time, government deficits that attempt to satisfy that private sector saving demand will also reverse some of those imports, but to a lesser degree than was lost.

    pretty marginal stuff

    anon Reply:

    “you are arguing that the government has no job of accommodating the satisfaction the “net saving desire” of foreigners ?”

    arguing that the satisfaction function is mostly indirect rather than direct in the case of foreigners

    government mostly satisfies the net saving desire of foreigners by filling the gap for net saving desire of the private sector that has effectively been excacerbated by the current account deficit

    i.e. it is mostly the private sector that is directly satisfying the saving desire of foreigners, and the government that is satisfying the private sector directly, which means the foreign sector only indirectly

    this is because not much government spending is directly part of the current account deficit

    another way of saying it – the private sector has a net saving demand which is “net net” of the net saving demand the foreign sector imposes on the private sector bilaterally (i.e. most of the current account deficit)

    another way – divide the net saving demand of the private sector as the sum of two bilateral net saving demands on the “non-private sector” – most of the current account deficit, which is a negative net saving demand, and the bilateral position with the government, which is a huge net saving demand because it nets out most of the current account deficit

    thinking out loud here – hope that works

    anon Reply:

    and the fact that a bunch of government bonds end up being held by the foreign sector is not indicative of the origin of who is actually driving the different pieces of net saving origination – that’s just shuffling financial assets around

    i.e. the fact that a bunch of bonds are held by foreigners obviously doesn’t mean the government is deficit spending via the current account to the same degree

    Ramanan Reply:

    @anon,

    Agree with you in general but I take the extreme-looking stand on this:

    “i.e. it is mostly the private sector that is directly satisfying the saving desire of foreigners, and the government that is satisfying the private sector directly, which means the foreign sector only indirectly”

    IMNSHO, its not the saving desire of foreigners – it is the weakness of the domestic private production sector compared to that of the foreign sector.

    WARREN MOSLER Reply:

    at full employment a decline in non resident savings desires might trigger domestic demand reduction policy

    Ramanan Reply:

    @anon,

    “At the same time, government deficits that attempt to satisfy that private sector saving demand will also reverse some of those imports, but to a lesser degree than was lost.”

    Agree. There are two ways the government can “attempt”.

    The first is to keep the fiscal stance unchanged but let the budget balance increase due to the decrease in propensity to consume. While this will reduce imports for some time and then increase it and not bring it back to the original level, this happens due to a reduction in domestic demand.

    The other way is to relax fiscal policy to bring back the income at a higher level (original level), but that will lead to same trade imbalance as before.

    anon Reply:

    @Ramanan,

    wouldn’t disagree much

    i’m using “saving desire” there mostly in the sense of ex post accounting identity; i.e. CA surplus = “saving desire”

    Reply

    Neil Wilson Reply:

    @Ramanan,

    Domestic weakness brought about by persistently subsidising foreign imports via interest payments?

    Monetary policy driven approaches pay people not to spend their money.

    Reply

    Ramanan Reply:

    @Neil Wilson,

    What is this subsidy you talk about – seen you using it in some comments here and elsewhere, but couldn’t figure out. Why is it a subsidy ?

    Neil Wilson Reply:

    @Neil Wilson,

    Interest is paid by the government unnecessarily on bonds. Therefore it is a government subsidy to the recipients.

    Remove the subsidy and there is a portfolio rebalancing. The interest rate paid on financial assets is a factor in the currency exchange rate.

    If you remove the interest subsidy from foreign holders then they need greater profits from their goods to deliver an equivalent return. And that’s before any exchange rate moves are taken into account.

    For a net importing nation that is not creating sufficient financial assets to offset this leakage to imports it is equivalent to paying a subsidy on imports, or viewing it another way paying foreigners not to spend their money on exports.

    Both of which favour imported goods over domestic goods. And that would seem to lead to a decline in domestic production over time.

    If you’re a net importing nation, you’ll probably become more of a net importing nation unless you remove this subsidy and start funding the leakage.

    Ramanan Reply:

    @Neil Wilson,

    “viewing it another way paying foreigners not to spend their money on exports.”

    Thats similar to viewing offering interest bearing instruments as an alternative to non-interest bearing currency in order to reduce consumption. While interest rates have an effect on consumption, that effect acts via demand. Consumption mainly depends on income.

    So at present the PBC is holding its dollar reserves as short term T-bills as opposed to longer term securities purely out of volition. So low interest rates in the US wouldn’t really induce the Chinese to import more from the US.

    Now coming back to paying interest on bonds, I think it is not the most practical idea. For example, consider a situation .. closed economy … in which the domestic private sector is on a huge spending spree and is in deficit. In order to drain demand, increasing taxes or reducing spending is not the best thing to do. It’s impossible to fine tune like this. A coordinated approach between the central bank and the government is the best way to achieve a better demand management. In addition, the government needs to control demand via other methods such as incomes policy, regulation, wage controls etc.

    And interest rate adjustments do work, especially in borrowing for house purchases and office spaces. Of course, this claim may be dismissed by claiming that interest rate increase may not necessarily reduce borrowing, but the central bank has to act, because it has to proved that if the central bank keeps quiet, borrowing won’t rise.

    Zero interest rate is not the most wonderful discovery after fire and wheel.

    We live in a world of free trade and it is a backward step to declare foreigners can’t be paid interest. It also makes it unclear why they will accept an importer’s currency.

    MMT starts with a world where there is no IMF/GATT/WTO, whether the MMTers realize it or not.

    Only the central banks of highly industrialized implement monetary policy without worrying too much about the balance of payments.

    A closely related point is the general thing I keep seeing where it is said that if one foreigner sells a local currency security, some other foreigner has to purchase it and that the banking system is just a broker to this deal. However, the banking sector is much higher than what is ascribed. Its acting as a dealer in cross-currency transactions and has to cover its position.

    That is not the main point of my comment. If debt/gdp ratios don’t matter, then whats the harm in paying interest to foreigners ? Doesn’t that induce them to sell more and let the importer enjoy the benefits ?

    Neil Wilson Reply:

    @Ramanan

    “If debt/gdp ratios don’t matter, then whats the harm in paying interest to foreigners ?”

    There is no harm in paying interest to foreigners if, and only if, that doesn’t reduce the amount paid into the domestic economy to maintain aggregate demand.

    The problem with the current neo-classical balanced setup is that money paid as interest on bonds can’t then be spent on anything else – for all the false reasons we know and love.

    A net importing economy can only enjoy the benefits of imports if it moves to defeat the strategy of the net exporter by offsetting the financial assets hoarded by the exporter with sufficient newly created financial assets.

    WARREN MOSLER Reply:

    the only possible harm from paying interest to foreigners would be if they spent it buying US goods and services.

    which is possible, but they net never do.

    Ramanan Reply:

    @Neil Wilson,

    “A net importing economy can only enjoy the benefits of imports if it moves to defeat the strategy of the net exporter by offsetting the financial assets hoarded by the exporter with sufficient newly created financial assets.”

    I think I understand what you are saying, but then in that neoclassical setup, the problem is with imports itself. So the current account of the balance of payments has items for both “trade in goods and services” and “income” – the latter consists of interest payments, dividend payments etc to foreigners. But if you have trouble with the latter, you should have trouble with the former as well.

    Neil Wilson Reply:

    @Ramanan,

    I would expect a currency area that accommodates foreign exporters hoarding instincts by increasing the issue of financial assets to move towards a balance in trade over time.

    Unless the hoarding is a result of government action, in which case the increased financial assets will end up in the foreign country’s central bank vault as they fight to keep their currency from rising too high.

    So switching to an MMT type system will either balance the trade in a free floating system, or would allow you to enjoy the real benefits of imports if foreign governments are intervening to prop up their exporters (which they need because they don’t have enough domestic demand at home).

    Ramanan Reply:

    @Neil Wilson,

    What am saying is that you can’t love one item “balance on trade and goods” and dislike the other (“income”) in the current account. Either you love both or dislike both.

    “I would expect a currency area that accommodates foreign exporters hoarding instincts by increasing the issue of financial assets to move towards a balance in trade over time.”

    There is just so much causality involved in the things you are describing. Foreigners are free to buy other assets by the way. So the Chinese can purchase Agency Debt as well in the US.

    “So switching to an MMT type system will either balance the trade in a free floating system, or would allow you to enjoy the real benefits of imports if foreign governments are intervening to prop up their exporters (which they need because they don’t have enough domestic demand at home).”

    Don’t think there is an automatic mechanism for trade to balance. Milton Friedman logic.

    Plus, if a nation can be said to enjoy the benefits of imports without worrying about exports, why worry about paying interest on the liabilities incurred ?

    Neil Wilson Reply:

    @Ramanan,

    “There is just so much causality involved in the things you are describing”

    Yes there is. As John Harvey says “it’s complicated”. And this is his research area.

    Which is why I hate the ‘interest rates down, currency down, Sterling crisis’ line I hear so much. It ain’t that straightforward.

    “Plus, if a nation can be said to enjoy the benefits of imports without worrying about exports, why worry about paying interest on the liabilities incurred ?”

    You worry about interest if you’re running a neo-classical model because it is an extra drain on a system that has a ‘debt ceiling’ (whether legislatively or due to excessive whittling about ‘financial crowding out’).

    Once you’re accommodating the leakage with financial asset creation, the point is largely moot. Then you’re back to Functional Finance and setting the interest rate at the level that best encourages domestic investment.

    My point here, (if there is one at all :), is that issuing interest paying bonds under a neo-classical model is a really, really stupid idea.

    Ramanan Reply:

    @Neil Wilson,

    “You worry about interest if you’re running a neo-classical model because it is an extra drain on a system that has a ‘debt ceiling’ (whether legislatively or due to excessive whittling about ‘financial crowding out’).”

    The debt ceiling is unique to the United States.

    “Once you’re accommodating the leakage with financial asset creation, the point is largely moot. Then you’re back to Functional Finance and setting the interest rate at the level that best encourages domestic investment.”

    No bonds or yes bonds ? Which world ?

    “My point here, (if there is one at all :), is that issuing interest paying bonds under a neo-classical model is a really, really stupid idea.”

    Which bonds? Government bonds? You mean government shouldn’t issue bonds. In that case, foreigners will still get paid interest/dividends etc because they are still free to purchase other securities.

    Of the $22.7T securities held by foreigners, about $5T is Treasury securities. (Lines 28, 36 here http://bea.gov/newsreleases/international/intinv/2011/pdf/intinv10.pdf). There’s a lot in the rest.

    WARREN MOSLER Reply:

    ok.

    Reply

  7. RebelEconomist Says:

    Just visiting via today’s link from Naked Capitalism (although looking at your pictures I wish I was visiting in person!).

    You say: “All of these financial assets, which compound continuously, represent unspent income”

    I don’t think so. They represent income loaned to someone else, almost certainly for spending – otherwise such investments would not earn a return (greater than money).

    Income would only be “unspent” if it was being hoarded as money, which might be a problem if money’s store of value function began to interfere with its medium of exchange function (ie a liquidity trap). But that could be dealt with if the Fed supplies more money, which of course it does by buying assets. If, as is typical, these assets are government bonds, the system would be doing what you want anyway.

    Reply

    WARREN MOSLER Reply:

    if someone else borrows to spend in sufficient size there would be no spending gap and hence no federal deficit (without serious inflation)

    remember, it’s a loans create deposits world. a dollar in your account is a dollar borrowed by someone else (calling govt deficit spending ‘borrowing’ for the moment to make this point)

    right, which makes my point. if it wasn’t for the govt. spending more than its income the funds wouldn’t even be there if private deficit spending was insufficient.

    Reply

    RebelEconomist Reply:

    @WARREN MOSLER,

    Thanks Warren, but I am afraid that your answer does not relate to the point you make in your first two paragraphs.

    Pension funds etc DO represent income “spent” (“passed on” would be more correct, since the money involved continues to exist), because their investments depend on someone wanting the money contributed to the fund for some productive purpose. To the extent that money is channelled to pension funds etc rather than being hoarded, no government borrowing is needed.

    I agree that loans create deposits, but this has nothing to do with banks (they are not in the list in your opening paragraph).

    Reply

    anon Reply:

    “Pension funds etc DO represent income “spent””

    Not necessarily.

    New pension plan contributions can move into existing financial assets, sold by those who sit on the money, with knock-on “paradox of thrift” consequences – simply reflecting too much attempted saving, and not enough expenditure.

    WARREN MOSLER Reply:

    yes, if there is no desire to accumulate net financial assets there is no need for a govt deficit.

    however, the problem is the tax advantages (and other things) cause us to desire to net save financial assets, and that spending gap can only be filled by govt.

    Neil Wilson Reply:

    @RebelEconomist,

    You’re assuming that pension funds do something useful with the money.

    Pension funds buy shares with the money from the secondary markets. They don’t generally invest in primary markets.

    Therefore the the buck moves to what those people in the secondary markets are selling the shares for.

    And so on until you find the entities that are actually hoarding the currency or buying government bonds with it on the primary auction.

    RebelEconomist Reply:

    ,

    I don’t see that. A tax advantage is just one aspect of the return on offer to saving in a pension fund, along with business productivity etc. That subsidy can come from current taxation rather than being borrowed. You have not given a mechanistic reason why a subsidy should mean that the government needs to provide net financial assets.

    If you dislike government subsidies for saving in pension funds etc, better to just say so directly.

    WARREN MOSLER Reply:

    check out the chapter in the 7 deadly innocent frauds on this and let me know?

    RebelEconomist Reply:

    Neil Wilson

    Why wouldn’t a pension fund do something useful with the money? I hope mine does! Primary market investments might include IPOs or venture capital.

    It is possible that a pension fund investing in existing assets may be at the start of a chain leading to a money hoarder, but not inevitable.

    Anyway, as I wrote initially, if the central bank does see a rise in demand for base money, they can easily (pardon the pun!) accommodate that demand by creating more money. And, although I wrote that central banks “typically” buy government debt, on second thoughts, I’m not so sure. Most central banks (eg the ECB, BoE etc) actually buy bank debt (ie reverse repo), and so none of this need involve the government at all.

    WARREN MOSLER Reply:

    without someone’s deficit spending the pension fund wouldn’t have most of its dollars to begin with.

    Neil Wilson Reply:

    @RebelEconomist,

    Because they don’t. That would be ‘risky’.

    Now it may be different stateside, but research here in the UK shows that pension funds are mostly invested in secondary market – second hand shares, corporate bonds and 12% directly in government bonds.

    http://www.financeforthefuture.com/MakingPensionsWork.pdf

    And that means that the tax relief on the pension funds is essentially a Job Guarantee scheme for insurance salesmen. We’d all be better off if people spent the money today and the currency issuer provided a better state pension (perhaps even an earnings related one) directly.

    Pension Funds do not appear to drive productive investment. It is very likely they are part of the hoarding problem – particularly if they are invested in commodities.

    anon Reply:

    It’s a matter of simple supply and demand, and the paradox of thrift. MMT refers to the latter as excess demand for net savings. Same thing in terms of flow of funds.

    There’s obviously no necessary 1:1 correspondence between intended actual investment and desired saving. Excess saving defaults into either excess inventory at the macro level or offsetting disssaving without investment at the micro level.

    And there’s obviously no necessary 1:1 correspondence between pension fund saving and actual investment, particularly given the propensity of pension funds to invest in widely marketable financial assets.

    If tax incentives are sucking in saving, its more probable that will become excess saving. Not inevitable, but more probable. That’s the point about pension funds.

    So that excess saving can be sucked up without causing macro stalling by government spending and deficits.

    BTW, loans creates deposits translates to investment creates saving at the more macro level.

    WARREN MOSLER Reply:

    savings is the accounting record of investment

    RebelEconomist Reply:

    @Warren,

    No can do I’m afraid. My laptop / dongle connection won’t download the pdf. I will have a look when I get back to base.

    RebelEconomist Reply:

    @Neil Wilson,

    I can believe that the pension fund industry is not very efficient, but I don’t think it contributes to hoarding money.

    RebelEconomist Reply:

    @Anon,

    I can believe that subsidies might produce too much saving in some sense.

    I would have thought that saving and investment were jointly determined.

    WARREN MOSLER Reply:

    right, govt savings incentives cause sagging employment that’s supported by the deficit spending of which equals total net savings of dollar financial assets of which ‘some’ winds up in pension funds.

    Neil Wilson Reply:

    @RebelEconomist,

    The government gives tax relief and 12% is then invested in government bonds.

    That’s prima facie hoarding that has helped you reach the debt ceiling that bit quicker.

    anon Reply:

    @RebelEconomist,

    “I would have thought that saving and investment were jointly determined.”

    Yes. But not saving and intended investment. Paradox of thrift induces unintended inventory investment (direct collapse of income in the case of services).

    RebelEconomist Reply:

    @WARREN MOSLER,

    I had a look at your Seven Deadly Innocent Frauds paper – I presume you meant number 6. If I am not mistaken, you are making the Keynesian argument that saving depresses aggregate demand and hence does not generate more investment in absolute terms (even if it does as a proportion of aggregate demand). I am keeping an open mind about this, since in the debate between Krugman and Fama, I could see reasonable points on both sides – I wish these people would have a scientific debate to try to settle their differences instead of hurling insults at each other. I can certainly agree with you though that the financial industry creams off a lot of savings. I won’t write any more in case you are no longer following the comments on this point, but, if you do read this, thanks for the discussion.

    Reply

    WARREN MOSLER Reply:

    Thanks for your participation!

  8. Greg Says:

    Do savings in financial assets not get lent to someone else because they would like to spend them? In many cases this may be the government which is fine, but if I invest in corporate bonds or mortgage bonds through my pension or 401k, that money is lent to a company or individual and subsequently spent. I don’t see what creates the gap you’re referring to.

    Reply

    jim Reply:

    @Greg,

    Do savings in financial assets not get lent to someone else because they would like to spend them?

    _____________________________________________

    Yes in a normal functioning economy that is how it works. And usually there is more borrowing than saving and thus growth in net income.

    But these are different times. For the first time since the great depression US private sector borrowing is negative. This is a chart of the history of US private sector borrowing for the last 60 years:

    http://tinyurl.com/4x9zcgu

    There is no evidence I can see that balancing the federal budget will change the current borrowing habits of the private sector any more than when Hoover tried it 80 years ago.

    Reply

    WARREN MOSLER Reply:

    backwards, guys. loans create the deposits.

    Reply

    PaulJ Reply:

    @jim,

    I feel a need to bring out my swimming pool analogy…

    To fill a swimming pool you must get water from an outside source, say a hose (the Treasury). Using that source is deficit spending.

    To fill your pool from a bankers pool you may borrow water but you must return it at some time in the future with interest (extra water). This is credit.

    To keep your pool filled you must constantly borrow since you are constantly making payments plus interest in water to the bank.

    If a lot of people want to fill their pool from the bankers pool, the bankers pool will be kept full by the government (the Fed) – as long as people want to borrow water the banker will never run out and neither will they.

    If you stop borrowing your pool will eventually be empty. What happened to your water (wealth)?

    Deficit spending is the only way you can accumulate water (wealth).

    Reply

    Mario Reply:

    @PaulJ,

    nice one. I like that.

    jim Reply:

    @PaulJ,

    That would have been a useful analogy several years ago, but today the private sector as a whole is not borrowing. There is more repayment of loans than there is borrowing. The amount the private sector owes is not growing larger.

    Here is a simplified explanation:

    http://www.beezernotes.com/wordpress/?p=4202

    PaulJ Reply:

    @PaulJ, @Jim…

    My analogy is just a long-winded way of saying that although growth may be fueled by credit, balance sheets in the aggregate can only be expanded through direct government spending.

    Since credit for the rest of us (not rich) at this point is not an option, the only way to increase aggregate demand is for the government (through the Treasury) to deficit spend, without strings attached.

    Attaching unnecessary constraints on said money printing like requiring an equal amount of Treasuries to be issued signals (incorrectly) to the public that this money must be repaid with future taxes or surpluses.

    Using the peoples money for public purpose must never be considered as debt.

    WARREN MOSLER Reply:

    you’re talking about net financial assets of residents and non residents combined
    they come from govt deficit spending
    see ‘soft currency economics’ at this website

    WARREN MOSLER Reply:

    loans create their own deposits. it’s called ‘horizontal credit expansion’

    if they dont borrow to spend, at the macro level the ‘savings’ isn’t there

    Reply

    Peter D Reply:

    @WARREN MOSLER,

    Warren, I am trying to understand how loans create deposits applies here.
    The criticism of your post that I am seeing here and over at Cullen’s site is that while people agree with you that savings desires cause depressed AD, the pension plans that you mention are NOT to blame for that. The money that goes into pension plans ultimately spend the money.
    Can you explain in a bit more detail what “loans create deposits” have to do with that criticism? Am I missing something bloody obvious?

    Reply

    WARREN MOSLER Reply:

    first, the dollars that go into pension funds are best thought of as coming from some agent spending more than his income.

    second, it’s not the pension funds per se, it’s the tax advantage that increases desires not to spend income

    Peter D Reply:

    @WM,

    “second, it’s not the pension funds per se, it’s the tax advantage that increases desires not to spend income”

    I don’t see how this matters – OK, I am not spending, but I am giving my money to the pension fund which in turn gives this money to somebody else and it ultimately gets spent. What the difference?

    Seems to me that the only way to save in dollars without triggering spending or investment is either to hoard them or to save in Tsys. All the rest is either going to be spent or invested.

    WARREN MOSLER Reply:

    if you haven’t spent your income how did you get it?

    it means someone had to go into debt for you to get paid.

    it could be someone borrowing to spend, or your business sitting on unsold inventory that they borrowed against to pay you.

    you can’t have unspent income in the first place if some entity didn’t spend more than his income

    beowulf Reply:

    @Warren Mosler,
    “first, the dollars that go into pension funds are best thought of as coming from some agent spending more than his income.”
    I’m sorry do you mean the pension fund is spending more its income, or the investor is spending more [less?] than his income? And I see Peter’s point, would putting money into a mutual fund have the same reserve/Ag Demand drain effect as putting money into Treasuries (apart from management fees)?

    Of course, the glaring political point is how Congress would rather walk a mile to give a tax credit instead of 10 feet to levy a tax (even a worthwhile Pigou tax). If Congress’s intent was to increase desire not to spend, Robert Frank’s consumption surtax is far more efficient than a grab bag of retirement accounts (but where’s the management fees in THAT?). Likewise, instead of a host of poorly designed tax breaks to encourage alternative fuels, just raise the gas tax. In any event, the revenue from the new taxes (plus the zeroed out tax credits) could be used to cut other taxes.

    WARREN MOSLER Reply:

    no, someone else is spending more than his income, either in the private sector or govt., resident or non resident.

    otherwise where does your unspent income come from?

    Clonal Antibody Reply:

    @Warren Mosler,

    Warren, you stated

    no, someone else is spending more than his income, either in the private sector or govt., resident or non resident.

    otherwise where does your unspent income come from?

    This is a critical part to understanding the dynamics of money flow under the modern money paradigm. And this is where many people fail to understand why saving money means that either somebody else has to be endebted, or that the government has to run a deficit.

    Is there a visual flow chart from the point of an individual in the system, that makes this absolutely explicit somewhere? That would be very helpful for many people.

    Also, it appears from your choice of words, that this endebtedness or deficit has to occur prior to my choice to save or not save. This also is very important to understand the modern money paradigm.

    Correct me if I am wrong in my understanding of what you just said. Government initially creates money without having any tax revenues. Thus in a manner of speaking it has “borrowed” that money. Further individuals in society may obtain money, either by being paid by the government, or borrowing money from banks. These people who now have money, can spend that money to obtain goods and services from other individuals for that money, and the money spreads out. The bank debt is canceled on repayment, and the government debt is canceled on receipt of taxes.

    Thus my decision to save means that somebody prior to me in the chain will be unable to repay his debt, or the government will have a lower tax revenue, and thus will be in “deficit.” It cannot be somebody subsequent to me, because I have not spent my income, and have saved a part of my income. Government tax revenue will lower, subsequent to my action of saving.

    WARREN MOSLER Reply:

    perfect!!!

    Geoff Reply:

    @Peter D,

    When you suggest that saving money in a pension fund will ultimately be spent elsewhere, you are basically saying that savings precede investment. You are committing Warren’s innocent fraud #6! In fact, investment precedes savings.

    Of course, I admit was also confused about this and re-read Warren’s chapter #6 yesterday to get myself straight.

    Clonal Antibody Reply:

    @Warren Mosler,

    You said “perfect!”

    One of the things I had stated was that all government spending begins with a government IOU – in other words, all government spending is government debt.

    Can it therefore be stated that this is a “legal fact” and not just an “operational fact?” If I assume this , then the congress, by passing the budget, and authorizing the spending, has already asked the government to issue debt in an equal amount.

    Further, any taxation related laws cannot with any great degree of reliability predict the exact amount of revenue that will be received by the Treasury from the public. In other words, government revenues depend upon the economic activities of the public, and the desire to net save monetary assets on its part.

    Thus when the 14th amendment says “The government debt shall not be questioned” it could well be arguing that any expenditure duly authorized by the Congress, cannot be limited by a debt ceiling. The very act of authorizing the spending in the budget makes a debt ceiling moot.

    Do you think that this line of thinking would be considered to be valid by constitutional legal authorities?

    WARREN MOSLER Reply:

    yes, dollars can be thought of as iou’s in that the govt owes you the right to use them for tax payment

    that’s what liabilities are. dollars are gov liabilities

    very possibly if it were argued that way

    Tom Hickey Reply:

    @Peter D,

    Clonal Antibody: “Thus when the 14th amendment says “The government debt shall not be questioned” it could well be arguing that any expenditure duly authorized by the Congress, cannot be limited by a debt ceiling. The very act of authorizing the spending in the budget makes a debt ceiling moot.”

    This seems to be an implication of Perry v. US (1935), but Beowulf can comment on that.

    beowulf Reply:

    @Tom Hickey,
    I yield my time to the 42nd President of the United States.

    Former President Bill Clinton says that he would invoke the so-called constitutional option to raise the nation’s debt ceiling “without hesitation, and force the courts to stop me” in order to prevent a default, should Congress and the President fail to achieve agreement before the August 2 deadline.

    Sharply criticizing Congressional Republicans in an exclusive Monday evening interview with The National Memo, Clinton said, “I think the Constitution is clear and I think this idea that the Congress gets to vote twice on whether to pay for [expenditures] it has appropriated is crazy.”

    Lifting the debt ceiling “is necessary to pay for appropriations already made,” he added, “so you can’t say, ‘Well, we won the last election and we didn’t vote for some of that stuff, so we’re going to throw the whole country’s credit into arrears.”
    http://www.nationalmemo.com/article/exclusive-former-president-bill-clinton-says-he-would-use-constitutional-option-raise-debt

  9. lebed Says:

    The Chinese general save more than they spend. There are no huge pension funds in China, the government runs a current account surplus.
    So where is their downward spiral?

    Reply

    WARREN MOSLER Reply:

    they run a large budget deficit and their state owned bank lending is, for all practical purposes, deficit spending as well.

    the Chinese miracle is all about massive deficit spending

    Reply

    hamish Reply:

    @WARREN MOSLER,
    Warren, do you think the Chinese will continue to confound the expectations of a lot of Western experts due to this?

    I can remember at the time of the GFC plent of opinion said the Chinese economy would collapse due to the drop off in western demand for their exports. This didn’t happen due to their massive stimulus effort, and I see a lot of similar talk still coming out in the press, ie. empty cities, roads to nowhere being built, therefore they must have a crash soon. But if I read what you are saying correctly, they can keep doing these things as long as they like, provided adequate physical resources exist.

    Reply

    WARREN MOSLER Reply:

    they can keep going financially by continuing their deficit spending/state lending.

    but they problem is their inflation is a political problem, and so they’ve been fighting it by cutting back on deficit spending and lending.

    July and August should be telling and so far there are only modest signs of further slowing, but it’s still early

    PZ Reply:

    @lebed,

    Even before stimulus packages China had a system of fixed, undervalued exchange rate. Their Central Bank would buy foreign currencies on the market, and emit domestic currency in return, so that it would be in essence running a budget deficit.

    Reply

    WARREN MOSLER Reply:

    yes, suppressed private sector demand which might be as low as 35% of GDP to drive exports and public sector demand/investment

    Reply

  10. TyJessup Says:

    [This post seems a few weeks after the party. Blame StumbleUpon]

    All of the arguments being made here have been very confusing to me, and I think the core issue is that everybody is assuming some kind of weird zero-sum, wealth-based system of value creation. Hasn’t anyone here heard of gains from trade?

    Also, OP assumes perfect competition, which is OK, I guess, but he incorrectly characterizes it as only covering the accounting costs of production:
    “Those dollars that came from the sales are exactly the amount needed to buy those things in the first place.”

    Instead, one should consider /economic/ costs as well, that is, the opportunity costs of the producer’s time. This ensures that markets pay for people rather than just for goods. Whether those people spend all of their money immediately or smooth their consumption via saving is an important decision but not something that’s going to throw the economy out of whack.

    So, in summary: ya’ll be mad trippin’. There are arguments for government spending, but these are way off the mark.

    Reply

    WARREN MOSLER Reply:

    agreed!
    in fact, trade, both between residents and non residents, is fundamentally enormously beneficial.

    see the chapter on trade in ‘the 7 deadly innocent frauds’ on this website (free online) and let me know what you think.

    Reply

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