Category Archives: Inflation

Beijing City to Raise Minimum Wage 21%

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It’s a game of political survival.

The people want no inflation and they also want more income to keep up with rising prices.

Not totally impossible to achieve both, but requires a lot more than the traditional macro tools taught in the western universities.

Beijing city to raise minimum wage 21%
By Jamil Anderlini in Beijing and Rahul Jacob in Hong Kong
Published: December 28 2010 12:47 | Last updated: December 28 2010 12:47
 

Every province and municipality in China has announced a rise in its minimum wage this year, with increases ranging from 12 per cent to Beijing’s rise.
 

The official measure of annual consumer price inflation in China hit 5.1 per cent in November, up from 4.4 per cent in October, with food prices rising 11.7 per cent in November from a year earlier.
 

Beijing city is to raise its minimum wage 21 per cent next year, the second such rise in barely six months, amid rising inflationary pressure and growing concern over China’s widening wealth gap.
 

The increase, which will come into effect on New Year’s day, raises the statutory minimum monthly wage in the Chinese capital to Rmb1,160 ($175) and the hourly rate to Rmb6.7. It follows a 20 per cent rise in June.
 

Every province and municipality in China has announced a rise in its minimum wage this year, with increases ranging from 12 per cent to Beijing’s rise.
 

The official measure of annual consumer price inflation in China hit 5.1 per cent in November, up from 4.4 per cent in October, with food prices rising 11.7 per cent in November from a year earlier.
 

The government is worried about the disproportionate burden of rising food costs on low-income households, which spend a larger share of their income on basic necessities. It also fears that persistent price rises could stoke social unrest, as they often have in the past.
 

“While China’s living standards have dramatically risen over the past 30 years, the gap between rich and poor has sharply widened,” Yu Yongding, an influential former adviser to China’s central bank, wrote in a newspaper article last week. “With the contrast between the opulent lifestyles of the rich and the slow improvement of basic living conditions for the poor fomenting social tension, a serious backlash is brewing.”
 

Nationwide increases in minimum wages are part of the government’s plan to reduce income disparity and the Chinese economy’s heavy reliance on investment and promote greater consumption by middle- and low-income households.
 

But with many businesses already being squeezed by rising input costs, wage increases come at a difficult time and are likely to lead to higher overall inflation.
 

“In just the last three months we’ve already had to raise entry-level starting wages 60 per cent just to get people to come to a job interview,” said Jade Gray, chief executive of Gung Ho Pizza, a Beijing-based gourmet pizza delivery service. “With rising rents, the much higher cost of ingredients and now wage inflation, many businesses in the services industries are going to find it impossible not to pass on much higher costs to consumers.”
 

With its latest wage increase Beijing now has the highest minimum wage in the country, ahead of Shanghai on Rmb1,120 per month but other cities and provinces, including the manufacturing hub of Guangdong, are already eyeing further increases early in the new year.
 

The government estimates that Beijing’s minimum wage rise will benefit nearly 3m people.
 

In the separately-ruled Chinese territory of Hong Kong, legislators in November set the city’s first-ever minimum wage at HK$28 an hour. The new wage, which takes effect in May 2011, followed months of public consultation and debate amid growing concern in the city about widening income disparities.

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ECB’s Stark: Helping governments cannot and should not be a goal of these operations

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Right, as if that has anything to do with inflation, thanks

No question the state of the art is pitiful when it comes to mainstream headline awareness of monetary operations.

Roger Erickson wrote:
“€73.5 billion …. an amount the ECB will on Tuesday seek to reabsorb from the eurozone financial system to offset the inflationary impact of its action“
 

And how did that go overall? :)

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Comments on Robert J. Shiller Article

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Glenn wrote:
Warren – would you care to comment on the ny times article by Robert Shiller?
http://www.nytimes.com/2010/12/26/business/26view.html?_r=1

He’s correct on all counts, including the point that the multiplier might not be 1.

In fact, a 1 multiplier requires all of our demand leakages (pension/ira type contributions, insurance reserves, other corporate reserves, demand for actual cash in circulation, net foreign demand to accumulate $ financial assets, etc. etc. etc.) to be offset by enough non govt sector debt expansion to make up for those ‘savings’ desires.

Sometimes that happens. In the late 90’s the domestic sector was increasing it’s ‘borrowing to spend’ by maybe 7% of gdp per year, more than offsetting the 2% or so govt surplus as well as the foreign sector savings desires. But that was unsustainable as domestic debt is ultimately limited by income, and it all came apart not long after y2k. And a few years ago we had an ok expansion going also driven by private sector debt expansion which also proved unsustainable and came to an abrupt end when the debt turned out to be largely fraudulent mtg lending, etc.

So today, with a highly subdued lending infrastructure, including regulatory over reach by bank regulators, seems to me a balanced budget expansion approach is high risk at best. The outcome could easily be a public sector expansion more than matched by a private sector setback.

However, the larger point is why not just do the spending without a tax increase? That’s sure to increase aggregate demand, and if demand pull inflation does ensue, and unemployment gets ‘too low’ (whatever that means), etc. taxes can always then be raised to cool demand.

The answer can only be that the author either doesn’t understand actual monetary operations and the monetary system fundamentally, or is afraid to say so?

Unfortunately, the ‘headline progressives’ continue to be
THE problem, imho.

A quick read of ‘The 7 Deadly Innocent Frauds’ might help:

https://moslereconomics.com/?p=8662/

I tried to connect with him when I was running for the US Senate in CT with no response.

Also, the economy did pretty well after World War II largely helped by the Marshall plan which was, functionally, a form of govt. deficit spending. We loaned Europe about $15 billion (back when that was a lot of money) to buy stuff from us, if I recall correctly. And enough of the war time deficit spending was held by soldiers coming home and others who spent from their savings for a while.

ECONOMIC VIEW
Stimulus, Without More Debt
 

THE $858 billion tax package signed into law this month provides some stimulus for our ailing economy. With the unemployment rate at 9.8 percent, more will certainly be needed, yet further deficit spending may not be a politically viable option.
 

Instead, we are likely to see a big fight over raising the national debt ceiling, and a push to reverse the stimulus we already have.
 

In that context, here’s some good news extracted from economic theory: We don’t need to go deeper into debt to stimulate the economy more.
 

For economists, of course, this isn’t really news. It has long been known that Keynesian economic stimulus does not require deficit spending. Under certain idealized assumptions, a concept known as the “balanced-budget multiplier theorem” states that national income is raised, dollar for dollar, with any increase in government expenditure on goods and services that is matched by a tax increase.
 

The reasoning is very simple: On average, people’s pretax incomes rise because of the business directly generated by the new government expenditures. If the income increase is equal to the tax increase, people have the same disposable income before and after. So there is no reason for people, taken as a group, to change their economic behavior. But the national income has increased by the amount of government expenditure, and job opportunities have increased in proportion.
 

During the Great Depression, there was a debate about “pump priming” — about whether the government had to go into debt to stimulate the economy. John Maynard Keynes, who originated the Keynesian theory in 1936, liked to emphasize that the deficit-spending multiplier was greater than 1, because the income generated by deficit spending also induces second and third rounds of expenditure. If the government buys more goods and services and there is no tax increase, people will spend much of the income that they earned from these sales, which in turn will generate more income for others, who will spend much of it too, and so on.
 

In contrast, the balanced-budget multiplier theory says that there are no extra rounds of expenditure. You get just one round of spending — meaning that the multiplier is 1.0 — but sometimes that is enough.
 

Paul Samuelson, an economist at M.I.T., first drew national attention to the balanced-budget multiplier in 1943 , seven years after Keynes introduced his theory. The multiplier was an immediate consequence of the Keynes theory, but Keynes didn’t articulate it himself.
 

Economists embraced this multiplier because it seemed to offer a solution to a looming problem: a possible repeat of the Great Depression after wartime stimulus was withdrawn, and when new rounds of deficit spending might be impossible because of the federal government’s huge, war-induced debt.
 

It turns out that this worry was unfounded. The Depression did not return after the war. But in the early 1940s, economists justifiably saw the possibility as their biggest concern. Their discussions have been mostly forgotten because they didn’t have much relevance for public policy — until now, that is, when we again have a huge federal debt and a vulnerable economy.
 

Of course, the balanced-budget theorem is only as good as its assumptions. Other possible repercussions could make its multiplier something other than 1.0. The number could be less, for example, if people cut consumption because of psychological reactions to higher taxes. Alternatively, it could be greater if income-earning people who are taxed more cut their consumption less than newly employed people increase their spending. We can’t be sure what will happen.
 

Researchers haven’t pinned down the deficit-spending multiplier either, even though that has been the focus of their efforts. In fact, a recent survey article on the effects of government stimulus by Alan Auerbach at the University of California, Berkeley, and two of his colleagues has found that “the range of mainstream estimates for multiplier effects is almost embarrassingly large.” Last month, a Congressional Budget Office study revealed similar uncertainty. The trouble comes in estimating how people will react in generating those subsequent rounds of spending.
 

But the balanced-budget multiplier is simpler to judge: If the government spends the money directly on goods and services, that activity goes directly into national income. And with a balanced budget, there is no clear reason to expect further repercussions. People have jobs again: end of story.
 

What kind of jobs? Building highways and improving our schools are just two examples — as cited in 1944 by Henry Wallich, an enthusiast of balanced-budget stimulus who would later become a Yale economist and a Federal Reserve Board governor.
 

AT present, however, political problems could make it hard to use the balanced-budget multiplier to reduce unemployment. People are bound to notice that the benefits of the plan go disproportionately to the minority who are unemployed, while most of the costs are borne by the majority who are working. There is also exaggerated sensitivity to “earmarks,” government expenditures that benefit one group more than another.
 

Another problem is that pursuing balanced-budget stimulus requires raising taxes. And, as we all know, today’s voters are extremely sensitive to the very words “tax increase.”
 

But voters are likely to accept higher taxes eventually, as they have done repeatedly in the past. It would be a mistake to consider the present atmosphere as unchangeable. It’s conceivable that an effective case will be made in the future for a new stimulus package, if more people come to understand that a few years of higher taxes and government expenditures could fix our weak economy and provide benefits like better highways and schools — without increasing the national debt.

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ECB’s Stark: Helping Governments Cannot and Should Not be a Goal of These Operations

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The Fed is conducting it’s QE to lower the risk free term structure of rates for the further purpose of supporting lending in the economy in general.

The ECB is buying member nation debt in the marketplace specifically to help member nations fund the deficits and avoid default.

What the ECB is doing for Greece, Portugal, and Ireland is more analogous to what the Fed did a couple of years ago when it bought corporate debt (commercial paper) from the likes of GE and GM to keep them afloat.

In fact, the ECB can’t ‘expand into US Federal Reserve-style“quantitative easing” ‘ even if it wanted to, because there are no euro equivalents of US Treasury securities. (Not that the Fed’s QE does anything of substance for the US economy, inflation, or the dollar.) About the closest the ECB could come to a ‘Fed style QE’ would be to receive fixed in euribor swap market, which is not even a consideration, as their issue is the solvency of their member nations and not the risk free term structure of rates in general.

Meanwhile, as previously discussed, as long as the ECB keeps buying, it all muddles through.

ECB Increases Intervention in Bond Markets
 

The European Central Bank increased its intervention in government bond markets last week, indicating that the euro’s monetary guardian remained wary of an escalation of the eurozone debt crisis.
 

Purchases under the ECB’s securities market programme rose to €1.1 billion ($1.4 billion) from €603 million in the previous week, according to figures released on Monday.
 

The acceleration highlights how the ECB has been forced into action to prevent governments’ borrowing costs spinning out of control, even though it sees the main responsibility for restoring investor confidence in Europe’s 12-year-old monetary union as lying with political leaders.
 

The previous week’s figures had pointed to a lull in the ECB’s intervention. The rise came in spite of thin trading before the Christmas and new year holidays.
 

The ECB argues its action is aimed simply at correcting malfunctioning markets – and will not be allowed to expand into US Federal Reserve-style“quantitative easing” to support the economy.
 

“Helping governments cannot and should not be a goal of these operations,” Jürgen Stark, an ECB executive and one of its governing council’s more hawkish members, told the German newspaper Stuttgarter Zeitung at the weekend.
 

The latest increase could add to the discomfort of ECB policymakers, however, if it encourages expectations that the ECB will become more aggressive.
 

Because of the increased risks it is bearing, the ECB said this month it would double to €10.76 billion its subscribed capital, which would allow it to increase provisions against losses.
 

The announcement triggered speculation that the ECB was preparing to accelerate its bond purchases. However, Mr Stark said the increase had “nothing to do with the current situation but dates from analysis that we started in 2009”.
 

The ECB began buying bonds in May, at the height of this year’s eurozone crisis. After weekly purchases of €10 bilion or more, the programme was scaled down, with the weekly figures sometimes falling to zero.
 

But in early December the programme was reactivated – although still not up to its initial scale.
 

The ECB does not give precise details but recent purchases are thought to have been concentrated on Portuguese and Irish bonds, where financial market tensions have been focused.
 

Total purchases since the programme started in May have reached €73.5 billion – an amount the ECB will on Tuesday seek to reabsorb from the eurozone financial system to offset the inflationary impact of its action.

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Pre Christmas update

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The good news is the US budget deficit still looks to be plenty large to support modest top line growth.

And as the deficit continuously adds to incomes and savings, the financial burdens ratios continue to fall, and the stage is set for a ‘borrow to spend’, ‘get a job buy a car’, ‘it’s cheaper to own than to rent’ good old fashioned credit expansion.

But most all of that good news may already be discounted by the higher term structure of interest rates and the latest stock market rally.

And there are troubling near term and medium term risks out there that don’t seem at all priced in.

The rise in crude prices is particularly troubling.

Net demand isn’t up, and Saudi production remains relatively low.

So the Saudis are supporting higher prices for another reason. Maybe it’s the wiki leaks, or maybe they just had a bad night in London.

No way to tell, but they are hiking prices, and there’s no way to tell when they will stop.

Crude prices are already up enough to be a substantial tax on US consumers that has probably more than offset whatever aggregate demand might have been added by the latest tax package.

Might explain the weaker than expected holiday retail sales?

Congress will soon have a deficit terrorist majority, with many pledged to a balanced budget amendment.

And the world seems to be leaning towards fiscal tightening pretty much everywhere.

The unemployment benefits program has been extended but benefits still expire after 99 weeks, and less in many states.

Net state spending continues to decline as state and local govs continue to reduce their deficits and capital expenditures.

Catchup in the funding of unfunded pension liabilities will continue to be a drag on demand.

A federal pay freeze has been proposed.

The Fed’s 0 rate policy and qe continue to reduce net interest income earned by the economy.

Bank regulators continue to impose policies that work against small bank lending.

Seems some income has likely been accelerated into this quarter from next year over prior concerns of taxes rising, distorting q4 earnings to the upside and maybe lowering q1 earnings a bit?

Euro zone muddles through with very weak domestic demand, and curves perhaps flattening as markets start to believe the ECB will fund it all indefinitely?

China slows as a result of fighting inflation?

Same with Brazil?

Maybe India as well?

Commodity price slump with demand flattening?

Fed low forever?

Stocks in a long term trading range like Japan?

US term structure of interest rates gradually flattens to Japan like levels?

Relatively weak demand gradually brings on alternatives to over priced crude?

Merry Christmas!!!

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Data Recap from Karim

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Karim writes:

The overall income numbers held up well for November despite the weak payroll number; momentum building for consumer spending; capex staged solid rebound

  • Personal income up 0.3%
  • Real disposable income (after inflation and taxes) up 0.2%
  • Personal spending up 0.3% and up 3.8% last 3mths annualized
  • Core PCE deflator 0.1% and 0.8% y/y
  • Capital goods orders ex-aircraft and defense rebound 2.6%; prior month revised from -4.5% to -3.6%
  • Initial claims drop 3k to 420k

Belgian Business Confidence survey chart attached-Considered a very good proxy for Euro-wide economic activity.

Interesting that unlike wobble after sovereign debt pressures picked up in May, activity has surged higher in Q4 (data just released was for December).

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China Frets About Spreading EU Debt Woes

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Yes, they want to support the euro with their fx reserves to support their exports to that region, but there is no equivalent of US Treasury securities that they can hold.

It’s as if they could only buy US state municipal debt, and not Treasury secs, Fed deposits, and other direct obligations of the US govt with their dollars.

So the only way they can support exports to the euro zone is to take the credit risk of the available investments.

Now add to that their inflation problems.

The traditional export model is to suppress domestic demand with some type of tight fiscal policy, and then conduct fx purchases of the currency of the target export zone.

The euro zone does the tight fiscal but can’t do the fx buying, so the policy fails as the currency rises to the point net exports don’t increase.

China does the fx buying, but has also recently used state lending and deficit spending to increase domestic demand, which increases domestic prices/inflation, including labor, which works to weaken the currency and retard net exports.

So China fighting inflation and the euro zone fighting insolvency both look to keep aggregate demand down for 2011.

And I don’t see the deficit terrorists about to take their seats in the US Congress doing anything to increase aggregate demand either.

So all that and the Fed still failing to make much headway on either of its dual mandates, 30 year 0 coupon tsy’s at about 4.75% (and libor + as well) look like a pretty good place for a pension fund to get some duration and lay low, at least until there’s some visibility from the new US Congress.

China Frets About Spreading EU Debt Woes

By Langi Chiang

December 21 (Reuters) — China urged European authorities to back their tough talk with action on Tuesday by showing they can contain the euro zone’s simmering debt problems and pull the bloc out of its crisis soon.

China, which has invested an undisclosed portion of its $2.65 trillion reserves in the euro, said it backed steps taken by European authorities so far to tackle the region’s debt problems, but made clear it would like to see the measures having more effect.

“We are very concerned about whether the European debt crisis can be controlled,” Chinese Commerce Minister Chen Deming said at a trade dialogue between China and the European Union.

“We want to see if the EU is able to control sovereign debt risks and whether consensus can be translated into real action to enable Europe to emerge from the financial crisis soon and in a good shape,” he said.

Concerns that Europe’s debt problems will spread beyond euro zone’s periphery to engulf bigger economies such as Spain and Italy have weighed on global financial markets this year and taken a toll on the euro.

In part to protect its investments, China has repeatedly expressed its support for the single currency.

In October, Premier Wen Jiabao promised to buy Greek government bonds once Greece returned to debt markets, in a show of support for the country whose debt burden pushed the euro zone into a crisis and required an international bailout.

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Municipal Budget Cuts May Reduce U.S. GDP, Goldman Sachs Says

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The aspect that’s most relevant is the state deficit spending, including their capital accounts as well as operating accounts.

From what I’ve read, for this year they will have higher deficits than they will have next year, so that’s a negative for gdp.

If the simply tax less and spend less that means the population has that much more to spend than otherwise, and may or may not spend it, so that channel will reduce spending by the amount of the tax reduction the population doesn’t spend.

And increases in pension fund contributions by the states reduces spending that adds to gdp as well.

Municipal Cuts May Reduce GDP, Goldman Sachs Says

By Simone Baribeau

December 20 (Bloomberg) — Lower state and local spending,
which accounts for 12 percent of the national economy, may
reduce U.S. gross domestic product growth by about half a
percentage point next year, Goldman Sachs Group Inc. said.

Municipal budgets will likely increase by no more than 1
percent in 2011 after adjusting for inflation as local
governments receive less state aid and home-price declines put a
drag on property-tax collections, the bank said in a note to
clients. That is about 2 percentage points less than average.

“State and local governments will continue to face
substantial budget pressures for the time being,” wrote Andrew
Tilton, a New York-based economist, in the Dec. 17 note.
“Factors including, but not limited to, the lagged effect of
lower house prices will limit the growth of spending.”

Housing prices have fallen almost 30 percent since their
height in April 2006, according to the Case-Shiller 20-city
index. States, which will lose most federal stimulus funds next
year, are faced with closing $134 billion in budget gaps in
fiscal 2012, according to a Dec. 16 report of the Washington-
based Center on Budget and Policy Priorities. State tax
collections are 12 percent below pre-recession levels, the
report said.

Borrowing Costs

Municipal employment, which has fallen by about 2 percent
since late 2008 — compared with more than 5 percent in the
private sector — is likely to fall “a bit further” before
stabilizing in 2011, Goldman Sachs said. Large layoffs may be
avoided if localities raise real estate taxes to offset declines
in assessed property values, it said.

Municipalities are also likely to face higher borrowing
costs because of the potential end of the taxable Build America
Bonds program, which offers a 35 percent federal subsidy on
interest payments. Expiration of the program may cut the pool of
investors as borrowers revert to traditional tax-exempt issues,
boosting yields, Goldman Sachs said.

The Build America Bonds program wasn’t part of the $858
billion tax-cut plan the Senate passed last week. John Mica, the
Florida Representative who will head the House Transportation
and Infrastructure Committee next session, said last week he
planned to introduce a “reincarnation” of the program in 2011.

Goldman Sachs researchers boosted their economic growth
forecasts for 2011 and 2012 after Congress signed the tax plan.
The economy will grow 3.4 percent in 2011 and 3.8 percent in
2012, compared with previous estimates of 2.7 percent and 3.6
percent, the report said.

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china inflation – ft article

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Sounds like the ‘managing expectations’ they teach at the western universities.

Inflation is under control, says Chinese regulator

By Jamil Anderlini

December 17 (FT) — “The recent inflation is completely different from the periods of very high inflation that China has encountered in the past,” Mr Liu, chairman of the China Banking Regulatory Commission, said on Friday.

“There is overcapacity for most industrial goods in the Chinese market and it’s impossible for upstream inflation to be transmitted downstream.”

The relatively sanguine assessment also partly explains why Beijing appears set to grant Chinese banks a lending quota next year that is roughly the same as this year’s, or even slightly higher, even though the economy is already awash with liquidity.

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post boat ride recap and a reader’s questions answered

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After my brief recap is my response to a very good and typical inquiry I thought I’d pass along.

Meanwhile, the tax cuts were extended, and perhaps a bit of restriction removed, eliminating that source of risk of a sharp contraction that could have happened otherwise.

With the 2%, 1 year reduction in FICA taxes for individuals, arguably traceable to my efforts, there was some consideration of declaring victory and moving on, but I’m feeling more the opposite.

First, it’s tiny and at the macro level the propensity to spend of the recipients is trivial.

And it probably doesn’t even offset the drag from prices for imported crude and products.

And it may just be an interim step in letting the next Congress ‘pay for it’ with Social Security cuts.

The large increase in ‘spending cutters’ are about to take their seats in Washington, with many pledged to kick things off with a $250 billion spending cut, and then balance the Federal budget, along with what could be a majority ready to pass the doomsday bill for a balanced budget amendment to the US constitution.

And a President who seems to think that’s all a good idea as well.

And my nagging feeling that a 0 interest rate policy is highly deflationary, meaning that for a given size govt we need even lower taxes than otherwise, remains.

Lastly, for this post, China has been a first half/second half story, with much of their economic year front loaded into the first half, and they have apparently capped state sponsored lending, which could mean a relatively weak first half, or worse.

The euro zone is forecasting lower growth for next year as austerity bites and the ECB’s job becomes more problematic, as slower growth will slow the ‘fiscal improvement.’

And the recent extreme absurdity of the ECB raising more capital serves to highlight the risk of having incompetents in control.

Reader’s Questions:

I continue to review your book. A question or thought I come back to a lot lately is what is the long term implication of national debt.


– Should the federal deficit and associated payments be taken completely out of the budget discussion?

Yes, especially in conjunction with a permanent 0 interest rate policy and the tsy selling nothing longer than 3 mo bills.

That seems to be what is implied on page 32, when you state that “Nor is the financing of deficit spending of any consequence”. I take that whole section to mean that in any year the ability to consume output is not impacted by prior consumption and spending rather it is impacted by the current economic environment and ability to pay, and that payment on the national debt is not an issue (just moving money from one account to another).

Right. And potential consumption is always what goods and services we are physically capable of producing.

I understand that, but does value (rather than money) get added to the economic system when the transfers are made?

Yes, what’s called ‘nominal value’ is added- net financial assets such as tsy bonds, reserves at the fed, and cash are equal to the deficit spending.

Does it have any impact on inflation or taxation?

Not the deficit per se. Govt spending can drive up/support prices if the spending is on a ‘quantity basis’ vs a price constrained basis.

For example, if the govt offers a job to anyone willing and able to work that pays $8/hour and leave the wage at that level it won’t drive up wages.

But if it decides to hire, say, 5 million people and pay what it takes to get them to work it can drive up wages.

The first example is spending on a ‘price rule’ that says $8 max

The second is spending on a quantity rule that says we pay what it takes to get 5 million workers.

I guess the simple question is if we ran deficits every year forever would pricing or wages be impacted and if so how?

The spending and taxing will have the impact. The deficit is the difference between the two and equal to new savings of financial assets added to the economy. If the deficit spending matches ‘savings desires’ that means the spending and taxing are ‘in balance’ with regards to over all pricing pressures.

Is there a national security concern by having foreign governments having huge deposits in our currency? What if China, or whoever, just started selling their positions in dollars purposely to drive down the dollar’s value, accepting the risk that it would have on its own economy?

There is the risk that China might do that.

But also note that we are currently trying to force China to adjust its currency upward, which is a downward adjustment of the dollar. So at the current time driving the dollar down is actually a national policy objective, albeit one I don’t agree with.

Also, the level of one’s currency doesn’t alter the real wealth of the nation. With imports always real benefits and exports always real costs, the challenge is to optimize ‘real terms of trade’ which means get the most imports for any given level of exports. Here, again, we are going the wrong way as a nation, attempting to increase exports to proactively get our trade gap lower.

I guess what I am trying to reconcile is that if everything has a consequence, I don’t understand what consequence deficit spending has on the long term.

It allows available savings to be added to the economy.

For a given size of govt, there is a level of taxes which keeps the real economy in balance.

Over taxing is evidenced by unemployment/excess capacity, and under taxing is evidenced by excess spending that’s causing inflation.

My assumption, based on history is that there is no consequence. My hunch is that the deficit spending is what pushes the economy along

Yes, though I like to say it’s about removing the restriction of over taxation that allows the economy to move on it’s ‘natural’ course of some sort, of course massively influenced by the rest of our institutional structure.

and supports increases in pricing, which translates into inflation. Even at 2% per year after 100 years prices would be whatever 2% compounded annually over 100 years amounts to. And, in essence that is of no consequence.

Right, while ‘a’ dollar buys less than it used, all ‘the’ dollars are buying a lot more that’s being consumed. That is, real GDP is far higher than 100 years ago.

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