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Old 10th January 2012, 03:48 AM   #1
!Kaggen
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Modern Monetary Theory-Some feedback please

My brother has introduced me to the work of Modern Monetary Theory proponent Warren Mossler recently
http://moslereconomics.com/

I have read through some of his books and essays and he appears to make sense. In fact too much sense.
However having no formal understanding of macro economics I was in need of some sceptical criticism of his ideas from those more informed than me.

Below is an essay my brother put together based on these ideas and he also asked me for some feedback.

Modern monetary theory and the global financial crisis

Introduction


Although I am not a trained economist I have had a longstanding interest in macroeconomics and have read widely on the subject over many years. For the past 10 years I am also had some responsibility for investing money on behalf of family members. This has broadened my interest to capital and financial markets. As the ongoing global financial crisis has evolved I have become increasingly aware that the broad consensus on how to conduct macroeconomic policy is seriously flawed. It failed to anticipate and prevent the global financial crisis and it has failed to provide suitable remedies.

Why there seem to be no credible solutions to the economic crisis.

Whilst trying to understand the various policy options that are available I have been troubled by what seems to me to be a serious contradiction. Why, despite operating fiat currency systems (i) , are governments required to only spend what they raise as tax revenue or borrow (via the bond market). After all, governments can and do create their own money. That is the defining feature of a fiat currency. Why are they apparently forced to borrow it?

This is a crucial issue because it is widely believed that government borrowing is both unsustainable and bad for the economy. This limits the use of one crucial policy instrument that would help restore growth, namely deficit spending. And deficit spending helped rescue the global economy from the great depression, the economic crisis which most closely resembles the current situation.

The notion that deficit spending is bad is also relevant when you consider that growth in the money supply is critical for economic growth, and there are only two ways that the money supply can grow in a fiat currency system. One is by the government spending more than it collects in taxes i.e. by running a deficit. The second is by private credit growth such as bank lending. It is this reliance on credit growth that is the fundamental problem at the moment. We are all trying to save more and reduce our debts. This includes individuals, companies, local authorities, and governments. Trying to increase credit growth under these circumstances is self-evidently doomed to fail. It explains the failure of conventional monetary policy (central bank interest rate are close to 0% but credit creation remains subdued). This failure has led central banks to use unconventional measures like quantitative easing, with limited success. All that is happening is that some private debt is being transferred onto central bank balance sheets. This has rescued banks but has not increased demand. Indeed, sensible efforts to strengthen banks by increasing regulation and increasing capital requirements are having the opposite effect and strongly limiting credit growth.

While reading a recent article in The Economist on heterodox economics(ii) I learnt of a school of thought called Modern Monetary Theory that has done much to clarify my thoughts. I have now read their key texts and followed various debates on the web between MMT advocates and their critics. While there is some opposition to their ideas I have been unable to find any fundamental flaws in their thinking. The best sources are the websites of Warren Mosler (moslereconomics.com) and Bob Mitchell (http://bilbo.economicoutlook.net/blog/). What really attracted me was their deep understanding of how reserve or central banks actually operate in a fiat currency system. This provided an insight into why government's borrow money (i.e. sell bonds). Their most important insight is that this is NOT to fund spending. Instead, they do it because it is needed to drain excess bank reserves so that they can target policy interest rates. The explanation is a bit technical so I won't go into it but it is detailed in several papers referred to on the above website. One by Stephanie Bell (2000), entitled Do Taxes and Bonds Finance Government Spending?, is particularly important (iii) . They key point is that this borrowing has nothing to do with raising money in order to fund spending. This is not needed and it is not what happens. Governments with fiat currency systems can and do spend by simply creating money.

If they have no need to borrow for the purposes of spending you might reasonably ask why do they bother to collect taxes? It is not to because they need tax revenues to fund spending. This is revealed by the fact that money collected for tax is destroyed. Indeed, if you pay taxes in the USA in cash notes they take your money and literally destroy it by shredding it. This may seem crazy until you realise that all government spending is executed by electronic transfer of money. So notes, which have negligible intrinsic value, are no longer needed. Clearly if the money collected through taxes is destroyed then it cannot be used to ‘fund’ spending.

So why bother to tax? One reason for demanding taxes is to take money introduced into the banking systems through spending back out of circulation. In other words taxes are a way of reducing the money supply. They have other purposes as well, such as influencing behaviour (sin taxes) and limiting environmental damage. It could also be argued that a tax is necessary when setting up a new fiat currency system because it gives the currency it's value. For example, if a governments prints a currency and wants to use it to pay salaries or purchase goods and services, one way to make people accept it, and thus agree to work and/or provide good and services, is to require that those same people have to pay taxes in that currency. Thus taxes are also useful in creating a demand for a fiat currency and thereby giving it value.

To recap, government's that control a fiat currency system do not need to borrow money or raise taxes to fund their spending. They can and they do simply create the money. Of course everyone else using that money does have to earn or borrow money to fund their spending. This includes individuals, businesses, states, and local authorities. It also includes countries in the Eurozone (which explains why these countries are struggling the most).

Because countries with fiat currencies can always create more money there is no risk of them defaulting on any obligations in their own currency (iv) . This is why the much feared bond investors are very happy to buy low-yielding US, UK, and Japanese government bonds despite their large deficits and huge 'debts'. The fact that Eurozone countries do not have the same power, and are forced to spend only what they raise from taxes or borrow, explains why the same bond investors are more reluctant to buy their bonds. They know there is a real risk of default. In short, when you by a US, UK, or Japan bond it is analogous to putting money in a savings account that is 100% secure. When you buy Greek, Irish, Spanish, Italian, Belgian and even French bonds it is equivalent to putting it in a dodgy bank with no deposit insurance. More worryingly these countries have subjected themselves, under pressure from Germany, to economic policies (their 'fiscal pact') which, by reducing government demand when private sector demand is collapsing, makes it more likely they will become insolvent.

Criticisms of Modern Monetary Theory

The main criticism that I have encounter when advocating MMT is that if governments run deficits there will be inflation. Usually this is accompanied by the phrase 'print money', and references to the Weimar Republic and/or Zimbabwe. Clearly, if the deficits are too large and endure for too long there will be inflation. Any action that grows the money supply much faster than the economy grows will result in some combination of consumer or asset price inflation. However, if deficits are regulated with a target inflation rate in mind then there is no reason why they should result in inflation, especially when there is excess productive capacity and high unemployment. Some retort that governments cannot be trusted to restrain themselves and reduce deficits when needed, for example once full employment is reached. This is a problem that would be nice to have (!) and easy to deal with by appropriate regulation. For example the setting of the deficit level could be devolved to independent central banks with a mandate to target a low inflation rate. Central banks would then have two tools to regulate the money supply: base interest rate and the size of the deficit. Governments would be free to decide on how to tax and spend, but would be required to adjust the overall tax and/or spending levels to meet deficit/surplus level set by the central bank.

Another common criticism is that the exchange rate will deteriorate when governments run deficits. They key issue here is not the deficit per se but the fact that a high and persistent deficit could lead to inflation. If inflation is high and or expected to increase then, yes the currency would eventually depreciate. But, for reasons explained above, budget deficits will necessarily result in inflation, and if inflation is kept under control there is no logical reason why a deficit should lead to currency depreciation. There could be a period in which there is an expectation of inflation, which could result in some depreciation. However this would reverse when inflation stayed under control and central banks thus gained credibility. Surely if independent central banks were provided with two levers to control inflation, instead of the single one they have now, they would be more likely to succeed? For example, if they were empowered to mandate that the government run a surplus and simultaneously were to increase interest rates these two interventions would have a powerful effect on inflation.

Is the current crisis the result on relying too much on credit growth to increase the money supply?

The realisation that the money supply can grow either through deficit spending or private credit creation has provided another insight into the causes of the global financial crisis.

Take three self-evident truths.

• Firstly, the money supply needs to increase in order for the economy to grow [the alternative is for prices to decrease, which risks triggering a deflationary spiral].

• Second, the practice, since the early 80s of aiming to 'balance government budgets' has meant that the money supply has only been able to grow thought private credit creation. Note that balancing the budget means extracting all the money from the economy through taxes that the government creates by spending.

• Third, credit creation also has significant dangers. It is self-reinforcing as money created through loans is used to buy assets, which increase in value because of increase demand, leading to more credit creation etc the classic asset price bubble, and it is self-reinforcing on the way down, as asset prices fall, leading to debt defaults which further increase assets sales, which further depress asset prices culminating in insolvency and/or rescue. This was the case after the banking collapse that preceded the great depression. It led to the introduction of strict controls to limit credit creation in the banking sector. However this placed a limit on economic growth once governments had committed themselves to ' balancing their budgets'. Something had to give. What gave was banking regulation. This started in the early 80s under Reagan and culminated in the late 90s when Clinton repealed the Glass-Steagal Act, removing most remaining restrictions on banks and other financial institutions and allowing them to massively increase their leverage. It was widely argued that this relentless increase in borrowing was OK because financial markets had become increasingly sophisticated and could manage this risk using new financial instruments such as interest rate swaps and debt securitisation.

Problems began to appear in 2000 when the technology bubble collapsed. To counter a credit collapse the US central banks lowered interest rates drastically. With money so cheap markets regained confidence and started borrowing. The economy stabilised. In the complete absence of financial controls credit creation was allowed to continue, despite the fact that housing prices we're rising and developing into an obvious housing bubbles. Why was this allowed to happen? Why did those charged with running our economy not deal with this. Why was the alarm not raised? There are several reason. One is that, since the neoliberal consensus was that government deficits were bad, we became entirely dependent on credit creation for economic growth. There seemed to be no alternative. Furthermore consumer price inflation remained low. In part this was because a combination on globalisation and the emergence of China as a manufacturing powerhouse. Asset prices were increasing but it was argued, as it always in when assets bubbles, that 'this time it is different'. Another reason is that many were benefitting from housing bubble. Indeed in the absence of significant increases in real income, middle America were depend on credit expansion to maintain their standard of living. When eventually consumer prices started drifting up central banks took action and started to increase rates. As often happens when credit is tightened significantly after an asset bubble inflates the bubble started to deflate, rapidly. Thus the credit crunch began.

I would argue that it was more or less inevitable. If you rely on private credit creation in the banking system to increase the money supply then there will eventually be so much leverage that the banking system becomes increasingly unstable and will collapse even after relatively minor decreases in asset prices.

In summary one factor behind the credit bubble was a misguided obsession with 'balancing the budget', forcing a reliance on credit creation to increasing the money supply and thus accommodate growth. I would argue that adore balanced approach to expanding the money supply, which relied on both deficit spending and credit growth would have prevented this. Deficit spending increases the monetary base with creating matching debts. This makes it possible to grow the money supply and increase credit without increasing leverage. Once could think of deficit spending as replacing the way money was created in commodity currency systems such as the gold standard. When gold was purchase by the government an equivalent amount of money was created, thereby monetizing gold. After the gold standard was abandoned for fiat currencies this method of creating money was lost. If one requires balanced budgets government with fiat currency systems have no formal method to expand the money supply. I would argue that deficit spending should be thought of as the being equivalent to monetizing gold except that one is monetizing the productive output of the economy. This seems more rational because it ensures an appropriate growth in the money supply in the way that gold, which is in limited supply, cannot. That is why the gold standard was incompatible with the huge global increase in economic output that we have enjoyed for the past century.

The way forward - political deadlock in the USA has delivered the right policy!

But more important than explaining how we got here, this obsession with balancing the budget has prevented government's from countering the credit contraction by running budget deficits. We are told that it necessary to slash public spending in order to cut the deficit because of we don't the government will be forced into bankruptcy. But this is simply nonsense. It is impossible to default for the simple reason that governments with fiat currencies do not need to borrow. They can and do simply create money to meet their spending obligations.

With this insight a large number of options become available to counter the current economic crisis. Bear in mind that a key feature of the crisis is excess capacity in the economy. There is not enough demand to purchase and consume our potential output. Under these circumstances governments should be using fiscal policy to stimulate demand. They can either do this by increasing government spending or by decreasing taxes. The problem with increasing spending is that money could be used inefficiently. Also it will increase to portion of the economy in the public sector. Decreasing taxes, on the other hand, will increase demand in a more efficient way through private spending. The decision as to whether to increase government spending or decrease taxes is one for politicians and will vary between countries. However the dangerous false notion that government deficits inherently bad should be not be a constraint. Ironically the US federal government Isis running a large deficit because of political deadlock in congress is preventing the attempts to eliminate it! Republicans refuse to raise taxes and Democrats refuse to cut spending. This is a reason to rejoice as the US recovery is entirely dependent on this deficit being maintained or even increased.


A solution to the Eurozone crisis?

Increasing their deficit is not an option available to Eurozone countries because they cannot create Euros and so have to borrow them. So how can they escape the crisis? Abandoning the Euro by switching over to a new currency would be seriously disruptive and cause financial turmoil. However remaining in the Euro leaves them dependent on other countries who are demanding extreme fiscal austerity. When you view this problem from the perspective of modern monetary theory an obvious solution presents itself. In the absence of a facility to expand the supply of Euros a government could simply create its own currency to spend alongside the Euro. More than one currency can coexist in the same country. Indeed this was the norm in many countries in the past, including the USA. You may argue that this new currency will be worthless as no one would accept it. Not if the government simultaneously start requiring that certain, possibly new, taxes be paid in the new currency. This will immediately create demand for the currency and allow the government to use it. Meanwhile the Euro will continue to be used and an exchange rate will develop between it and the new currency. Greece will still have to deal with Euro-denominated debts but it will now be able to grow the money supply of the new currency to support economic growth. With growth restored and the economy functioning at full capacity it will be in the position to deal with its Euro denominated debts. It could to pay the debts in the new currency at an agreed, affordable rate. Creditors could be encourage to either accept the new currency as payment or to accept Euros with a large haircut. Once the situation has stabilised a decision could be made as to whether one or the other currency be gradually eliminated.

i. Fiat currency systems are systems in which an authority can create (by fiat) a currency without the backing of a commodity such as gold. They have become the norm since the 1970’s.
ii. http://www.economist.com/node/21542174
iii. Journal of Economic Issues, Vol. 34, No. 3 (Sep., 2000), pp. 603-620 http://www.jstor.org/pss/4227588
iv. Even countries with fiat currencies do have to earn or borrow foreign currencies to meet their foreign currency obligations. Since they cannot create the foreign currency they can default on such obligations.


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Last edited by !Kaggen; 10th January 2012 at 03:56 AM. Reason: Blue yuck
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Old 10th January 2012, 05:02 AM   #2
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If this is modern monetary theory then I am not impressed. It is riddled with factual errors and bad mathematics. The essay is too large to give a detailed response so I will respond to some of the points raised:

Originally Posted by !Kaggen View Post
Whilst trying to understand the various policy options that are available I have been troubled by what seems to me to be a serious contradiction. Why, despite operating fiat currency systems (i) , are governments required to only spend what they raise as tax revenue or borrow (via the bond market). After all, governments can and do create their own money. That is the defining feature of a fiat currency. Why are they apparently forced to borrow it?
The answer to that is fractional reserve banking. Every time the government creates money (whether it be via a budget deficit or by buying back bonds) it results in an increase in bank reserves and triggers a new round of deposit expansions (money creation).

Originally Posted by !Kaggen View Post
And deficit spending helped rescue the global economy from the great depression, the economic crisis which most closely resembles the current situation.
It caused double digit inflation around the world in the 1970's and this is why governments turned to borrowing money instead of printing to finance their deficits. (Governments still print a small portion of their deficits but that is to avoid creating a credit squeeze that would otherwise happen because of their borrowing).

Originally Posted by !Kaggen View Post
The best sources are the websites of Warren Mosler (moslereconomics.com) and Bob Mitchell (http://bilbo.economicoutlook.net/blog/). What really attracted me was their deep understanding of how reserve or central banks actually operate in a fiat currency system. This provided an insight into why government's borrow money (i.e. sell bonds). Their most important insight is that this is NOT to fund spending. Instead, they do it because it is needed to drain excess bank reserves so that they can target policy interest rates.
That is laughable. Governments run deficit budgets because they can spend more money without raising taxes - ie for short term political gain. The fact that they are creating a massive debt that will have to be serviced by the next generation doesn't come into their thinking.

Originally Posted by !Kaggen View Post
Take three self-evident truths.

• Firstly, the money supply needs to increase in order for the economy to grow [the alternative is for prices to decrease, which risks triggering a deflationary spiral].
True.

Originally Posted by !Kaggen View Post
• Second, the practice, since the early 80s of aiming to 'balance government budgets' has meant that the money supply has only been able to grow thought private credit creation.
FALSE!!!! From time to time, politicians might pay lip service to balancing the budget but having less money to spend means less political power and increased taxes mean lost votes. Balanced budgets are very much the exception in this world.

Originally Posted by !Kaggen View Post
• Third, credit creation also has significant dangers. It is self-reinforcing as money created through loans is used to buy assets, which increase in value because of increase demand, leading to more credit creation etc the classic asset price bubble, and it is self-reinforcing on the way down, as asset prices fall, leading to debt defaults which further increase assets sales, which further depress asset prices culminating in insolvency and/or rescue.
This is the only part of the essay that makes any sense. Fractional reserve banking is a serious problem because of this and because it limits how much money the government can create to finance its budget deficits.

Originally Posted by !Kaggen View Post
In summary one factor behind the credit bubble was a misguided obsession with 'balancing the budget', forcing a reliance on credit creation to increasing the money supply and thus accommodate growth.
This is completely back to front. The amount of money the banks can create through credit is limited by the reserve ratio. If no new money is created then no credit expansion can take place. It is precisely because governments have been running budget deficits (and partially monetizing them) that the banks have been able to create so much credit.

The rest of the essay mostly repeats the factual errors that I have already dealt with.
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Old 10th January 2012, 06:25 AM   #3
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I thought the whole point about fiat money system is that money is not actually a physical reality. Therefore the FED can create as much of it as is wanted. It is simply a data entry on a spreadsheet. Apparently when you pay your tax in cash to the revenue they shred the notes in the back office. An electronic payment is a simple data entry which changes the figure in your account. It does not actually appear in a FED account.

Mossler compares the fiat money system to parents making a rule that their kids need coupons so that they can pay for their rooms in coupons. The kids then either have to earn or borrow coupons to stay at home. Parents don't need to keep the coupons that they get paid by their kids. They can tear them up. They just print some more when needed.In order to get people doing things for them the parents can just set the price so as to control the circulation if coupons or increase the fee to have a room. They also have the power to give sufficient work for all there kids to earn coupons and have a room.

This is the reason for tax in the economy. We need $ in order to pay tax therefore we become dependent on the government spending $ or borrowing them. The government excess spending(deficit) is what is not retrieved by taxes and circulates in the economy. If an economy must grow a deficit is required or taxes need to be reduced. Of course taxes can't be negative so the only way of growing a fiat economy is through a growing deficit.

I personally think that is the flaw of a fiat economy, but unfortunately it is the reality of the economy right now.

The issue of passing on debt is also nonsensical because it assumes goods can travel through time. No what is produced now must be consumed now and what is produced in the future will be consumed in the future.

In fact austerity measures now reduce education, technological innovation, scientific research spend now which will impact future generations.

This is the basics I think. There is more detail that I am slowly getting my head around.
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Old 10th January 2012, 06:28 AM   #4
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Originally Posted by !Kaggen View Post
I thought the whole point about fiat money system is that money is not actually a physical reality. Therefore the FED can create as much of it as is wanted. It is simply a data entry on a spreadsheet. Apparently when you pay your tax in cash to the revenue they shred the notes in the back office. An electronic payment is a simple data entry which changes the figure in your account. It does not actually appear in a FED account.

...snip....
Really? That seems incredibly wasteful to me why not send it to a bank to re-circulated?
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Old 10th January 2012, 06:28 AM   #5
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From what I gather from this article, the author seems to believe that "spending = economic growth" (ugh) and the best entity to do this isn't the hands of private individuals, but the government that has little to no accountability.

The author scares me.
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Old 10th January 2012, 06:49 AM   #6
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Originally Posted by !Kaggen View Post
Mossler compares the fiat money system to parents making a rule that their kids need coupons so that they can pay for their rooms in coupons. The kids then either have to earn or borrow coupons to stay at home. Parents don't need to keep the coupons that they get paid by their kids. They can tear them up. They just print some more when needed.In order to get people doing things for them the parents can just set the price so as to control the circulation if coupons or increase the fee to have a room. They also have the power to give sufficient work for all there kids to earn coupons and have a room.
In case you haven't noticed, there is no bank (only government) in that model so it has no relevance to the real world.
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Old 10th January 2012, 07:12 AM   #7
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Originally Posted by MarkyX View Post
From what I gather from this article, the author seems to believe that "spending = economic growth" (ugh) and the best entity to do this isn't the handle of private individuals, but the government that has little to no accountability.

The author scares me.
I also identified this as a problem, because it naively assumes government is always looking out for the people. Of course we should be optimistic that this is the case otherwise democracy had failed.

Personally the problem I see with the whole approach is that humans will always be irrational and the only system that will really work is one that takes this into account by putting brakes on any excess irrationality.
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Old 10th January 2012, 07:14 AM   #8
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Originally Posted by psionl0 View Post
In case you haven't noticed, there is no bank (only government) in that model so it has no relevance to the real world.
The part about banks is mentioned in the analogy. Thats we're I get lost.
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Old 10th January 2012, 07:18 AM   #9
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Originally Posted by Darat View Post
Really? That seems incredibly wasteful to me why not send it to a bank to re-circulated?
Yeah that's what I thought too.
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Old 10th January 2012, 07:24 AM   #10
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I might have gotten the analogy a bit mistaken so here is the analogy from Mossler's website essay

Soft Currency Economics

Quote:
Assume a world of a parent and several children. One day the parent announces that the children may earn business cards by completing various household chores. At this point the children won’t care a bit about accumulating their parent’s business cards because the cards are virtually worthless. But when the parent also announces that any child who wants to eat and live in the house must pay the parent, say, 200 business cards each month, the cards are instantly given value and chores begin to get done. Value has been given to the business cards by requiring them to be used to fulfill a tax obligation. Taxes function to create the demand for federal expenditures of fiat money, not to raise revenue per se. In fact, a tax will create a demand for at LEAST that amount of federal spending. A balanced budget is, from inception, the MINIMUM that can be spent, without a continuous deflation. The children will likely desire to earn a few more cards than they need for the immediate tax bill, so the parent can expect to run a deficit as a matter of course. To illustrate the nature of federal debt under a fiat monetary system, the model of family currency can be taken a step further. Suppose the parent offers to pay overnight interest on the outstanding business cards (payable in more business cards). The children might want to hold on to some cards to use among themselves for convenience. Extra cards not needed overnight for inter-sibling transactions would probably be deposited with the parent. That is, the parent would have borrowed back some of the business cards from the children. The business card deposits are the national debt that the parent owes.
The reason for the borrowing is to support a minimum overnight lending rate by giving the holders of the business cards a place to earn interest. The parent might decide to pay (support) a high rate of interest to encourage saving. Conversely, a low rate may discourage saving. In any case, the amount of cards lent to the parent each night will generally equal the number of cards the parent has spent, but not taxed – the parent’s deficit. Notice that the parent is not borrowing to fund expenditures, and that offering to pay interest (funding the deficit) does not reduce the wealth (measured by the number of cards) of each child.
In the U. S., the 12 members of the Federal Open Market Committee decide on the overnight interest rate. That, along with what Congress decides to spend, tax, and borrow (that is, pay interest on the untaxed spending), determines the value of the money and, in general, regulates the economy.
Federal borrowing and taxation were once part of the process of managing the Treasury’s gold reserves. Unfortunately, discussions about monetary economics and the U. S. banking system still rely on many of therelationships observed and understood during the time when the U. S. monetary regime operated under a gold standard, a system in which arguably the government was required to tax or borrow sufficient revenue to fund government spending. Some of the old models are still useful in accurately explaining the mechanics of the banking system. Others have outlived their usefulness and have led to misleading constructs. Two such vestiges of the gold standard are the role of bank reserves (including the money multiplier) and the concept of monetization. An examination of the workings of the market for bank reserves reveals the essential concepts. (Additional monetary history and a more detailed explanation is provided in the appendix.
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Old 10th January 2012, 07:24 AM   #11
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Originally Posted by !Kaggen View Post
As the ongoing global financial crisis has evolved I have become increasingly aware that the broad consensus on how to conduct macroeconomic policy is seriously flawed. It failed to anticipate and prevent the global financial crisis and it has failed to provide suitable remedies.
This is one of the few things your brother got right.

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Whilst trying to understand the various policy options that are available I have been troubled by what seems to me to be a serious contradiction. Why, despite operating fiat currency systems (i) , are governments required to only spend what they raise as tax revenue or borrow (via the bond market). After all, governments can and do create their own money. That is the defining feature of a fiat currency. Why are they apparently forced to borrow it?
The majority of the money used to buy US government bonds is conjured into existence either by the Federal Reserve System, or a foreign central bank. The interest earned by the Fed is remitted back to the US Treasury, less the Fed's operating expenses which were around $2B last year. The interest earned by foreign bankers who hold our debt is a big expense, and banker kickbacks might be a reason why a nation which can print it's own currency decides to borrow trillions (at interest) from say, the Bank of China. Another reason is that, absent the silly notion of "central bank independence", the American people might begin to wonder why we need the Federal Reserve, at all.

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This is a crucial issue because it is widely believed that government borrowing is both unsustainable and bad for the economy. This limits the use of one crucial policy instrument that would help restore growth, namely deficit spending. And deficit spending helped rescue the global economy from the great depression, the economic crisis which most closely resembles the current situation.
Deficit spending is merely a scheme to confiscate wealth, as the dapper young Alan Greenspan observed in 1966 before the riches of unlimited money bought his silence, and later his complicity. The idea that government deficit spending is good for the economy stems from the false premise that government spending is good for the economy, which is a political, not a monetary notion held by collectivists and those of a similar ideology.

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The notion that deficit spending is bad is also relevant when you consider that growth in the money supply is critical for economic growth, and there are only two ways that the money supply can grow in a fiat currency system. One is by the government spending more than it collects in taxes i.e. by running a deficit. The second is by private credit growth such as bank lending. It is this reliance on credit growth that is the fundamental problem at the moment.
No. The fundamental problem at the moment is that politicians in the employ of bankers have conspired to saddle their constituents with trillions in illegitimate debts, the servicing of which is forcing budget constraints in the name of "austerity". But, it is a false austerity, in the sense that the debts were not legitimate in the first place, and so should not be serviced at all and cancelled instead.

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We are all trying to save more and reduce our debts. This includes individuals, companies, local authorities, and governments. Trying to increase credit growth under these circumstances is self-evidently doomed to fail. It explains the failure of conventional monetary policy (central bank interest rate are close to 0% but credit creation remains subdued). This failure has led central banks to use unconventional measures like quantitative easing, with limited success.
Quantitative easing put a bid of "counterfeit" money under US Treasuries, and in so doing resulted in a massive, regressive, transfer of wealth to asset holders, particularly bond holders. It succeeded only in making the select few rich, richer.

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What really attracted me was their deep understanding of how reserve or central banks actually operate in a fiat currency system. This provided an insight into why government's borrow money (i.e. sell bonds). Their most important insight is that this is NOT to fund spending. Instead, they do it because it is needed to drain excess bank reserves so that they can target policy interest rates.
First of all, it's important to remember that most of the money the government borrows is lent by foreign central banks who swap their own fiat currencies for US dollars, and then they buy US debt with it. So even if the Federal Reserve System isn't responsible for directly creating all of the principal out of the ether, it plays a big role. It's the foreign central banks who debase their own respective currencies to pay the principal for the majority of US debt, and then they acquire tribute from the US taxpayer in the form of interest paid. When you understand that "seigniorage" is just another form of regressive taxation, you will understand that the rate of seigniorage is managed just as the rates of any conventional forms of taxation are managed, to loot the taxpayers to the largest extent possible. It is fair to say, however, that if the government did away with conventional taxation entirely, then the result would be a sharp rise in both asset and consumer prices as the deficits would have to be financed entirely by the seigniorage tax. At that point the relationship between the supply of money and prices would be apparent to everyone, which is not desirable for the establishment, and so you have high rates of conventional taxation as well.

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To recap, government's that control a fiat currency system do not need to borrow money or raise taxes to fund their spending. They can and they do simply create the money. Of course everyone else using that money does have to earn or borrow money to fund their spending. This includes individuals, businesses, states, and local authorities. It also includes countries in the Eurozone (which explains why these countries are struggling the most).
Unfortunately, "simply creating the money" is merely a regressive tax, and so creating more money is raising taxes. If you want to understand why this is true, then start by understanding who the victims of counterfeiting are, and the scope. Central banking is to counterfeiting as taxation is to theft.

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The main criticism that I have encounter when advocating MMT is that if governments run deficits there will be inflation. Usually this is accompanied by the phrase 'print money', and references to the Weimar Republic and/or Zimbabwe. Clearly, if the deficits are too large and endure for too long there will be inflation. Any action that grows the money supply much faster than the economy grows will result in some combination of consumer or asset price inflation. However, if deficits are regulated with a target inflation rate in mind then there is no reason why they should result in inflation, especially when there is excess productive capacity and high unemployment.
The problem with your rebuttal to this strawman criticism, is that your definition of "inflation" is wholly inadequate. In fact, according to the Austrian definition, whenever the government or a central bank emits money, that is inflation. The distinction is important because the mainstream definition obscures the fact that inflation is just a regressive tax which is offset and thus disguised by real economic growth. The money "printers" literally siphon the growth in real wealth into their coffers, and more. This leaves us with perpetually rising prices, when, absent monetary debasement, we would have perpetually lower prices and a more equitable and progressive distribution of wealth.

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Take three self-evident truths.

• Firstly, the money supply needs to increase in order for the economy to grow [the alternative is for prices to decrease, which risks triggering a deflationary spiral].
You use the term "self-evident" a lot, unfortunately what is evident to you is completely ridiculous to me. Please prove that we need the seigniorage tax or else we face the economic armageddon (oh no!) of a "deflationary spiral". Note the last quarter of the 19th century when we observed higher growth and lower nominal prices. Granted, such periods in history are exceedingly rare, because seigniorage is a very lucrative tax, and very few people understand its consequences (or, the benefits of its absence, as it were).

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• Second, the practice, since the early 80s of aiming to 'balance government budgets' has meant that the money supply has only been able to grow thought private credit creation. Note that balancing the budget means extracting all the money from the economy through taxes that the government creates by spending.

This is, to say the least, ridiculous. There has been no earnest effort to balance government budgets in the US.

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• Third, credit creation also has significant dangers. It is self-reinforcing as money created through loans is used to buy assets, which increase in value because of increase demand, leading to more credit creation etc the classic asset price bubble, and it is self-reinforcing on the way down, as asset prices fall, leading to debt defaults which further increase assets sales, which further depress asset prices culminating in insolvency and/or rescue. This was the case after the banking collapse that preceded the great depression.
This is more or less true. Of course, we need to understand the difference between legitimate, and illegitimate credit creation, both in terms of fiat money, and in terms of fractional reserve banking, before we can hope to avoid the "dangers" of credit creation.

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In summary one factor behind the credit bubble was a misguided obsession with 'balancing the budget', forcing a reliance on credit creation to increasing the money supply and thus accommodate growth.
Balancing the budget is only "misguided" if you ignore the deleterious effects of running perpetual government deficits. It also ignores the size and the role of government in the economy (I don't want a government to command 100% of my income and control 100% of my life, whether or not the budget is balanced! Your summary combines a naive collectivist ideology with ignorance of the real causes of the "debt crises", namely, the fundamental nature of our monetary and banking system - the existence of fiat money and fractional reserve banking.

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I would argue that adore balanced approach to expanding the money supply, which relied on both deficit spending and credit growth would have prevented this. Deficit spending increases the monetary base with creating matching debts. This makes it possible to grow the money supply and increase credit without increasing leverage.
Once again, deficit spending is simply a scheme for the confiscation of wealth. Nothing more, nothing less. Funding deficits by printing money is a regressive tax. You could simply raise the capital gains rate by a commensurate amount and turn a regressive tax increase into a progressive one, either having all of the bad consequences of a tax increase by a government that is already way out of control.

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Once could think of deficit spending as replacing the way money was created in commodity currency systems such as the gold standard. When gold was purchase by the government an equivalent amount of money was created, thereby monetizing gold. After the gold standard was abandoned for fiat currencies this method of creating money was lost. If one requires balanced budgets government with fiat currency systems have no formal method to expand the money supply. I would argue that deficit spending should be thought of as the being equivalent to monetizing gold except that one is monetizing the productive output of the economy. This seems more rational because it ensures an appropriate growth in the money supply in the way that gold, which is in limited supply, cannot. That is why the gold standard was incompatible with the huge global increase in economic output that we have enjoyed for the past century.
As far as I know there is no law (other than that pesky US Constitution) that would prevent the US Treasury from simply using fiat money to monetize its deficits, without the Federal Reserve. That is the method. The method is very simple, it's just not done. I already offered some brief speculation above as to why. The limited supply of gold is a feature, not a bug. It ensures that in order to spend, one must first produce something in exchange for gold, or produce gold itself from the depths of a mine. The gold standard is certainly not incompatible with the boundless prosperity that occurs with the production of real wealth, it was, however, incompatible with the statist utopia, and the confiscation of the wealth of US citizens.

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The way forward - political deadlock in the USA has delivered the right policy!
You're among a very few people who I've seen exclaim that the status quo is working. I can't really express how stupendously wrong you are.

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But more important than explaining how we got here, this obsession with balancing the budget has prevented government's from countering the credit contraction by running budget deficits. We are told that it necessary to slash public spending in order to cut the deficit because of we don't the government will be forced into bankruptcy. But this is simply nonsense. It is impossible to default for the simple reason that governments with fiat currencies do not need to borrow. They can and do simply create money to meet their spending obligations.
Except, money creation is regressive taxation. It is, despite your ignorance of economics, not without serious consequences. More accurately, we can either slash public spending in order to pay foreign bankers interest on illegitimate debt, or we can raise taxes regressively to pay foreign bankers interest on illegitimate debt. Notice the false dilemma?

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With this insight a large number of options become available to counter the current economic crisis. Bear in mind that a key feature of the crisis is excess capacity in the economy. There is not enough demand to purchase and consume our potential output. Under these circumstances governments should be using fiscal policy to stimulate demand. They can either do this by increasing government spending or by decreasing taxes. The problem with increasing spending is that money could be used inefficiently. Also it will increase to portion of the economy in the public sector. Decreasing taxes, on the other hand, will increase demand in a more efficient way through private spending. The decision as to whether to increase government spending or decrease taxes is one for politicians and will vary between countries. However the dangerous false notion that government deficits inherently bad should be not be a constraint. Ironically the US federal government Isis running a large deficit because of political deadlock in congress is preventing the attempts to eliminate it! Republicans refuse to raise taxes and Democrats refuse to cut spending. This is a reason to rejoice as the US recovery is entirely dependent on this deficit being maintained or even increased.
The reason why deficit spending is bad, is the reason you alluded to, which is that government spending is inefficient (which is a nice way of putting theft, rape, looting, and murder), and the private sector is a lot less "inefficient". Rejoice! The can is being kicked further down the road. Anyone other than I notice that we're right back at the silly debt ceiling, again? I wonder if they will raise it again with all of the same drama as the last time. One can only hope, Kim Kardashian is boring.

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A solution to the Eurozone crisis
...

The only solution to a crisis of illegitimate debts, is the cancellation of illegitimate debts, and the imprisonment of the parties responsible. But thanks for a thoughtful post.
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Old 10th January 2012, 08:26 AM   #12
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There's a lot of stuff in this post and I don't have time to address it all right now, but I'll tackle a few of the errors I see.

Originally Posted by !Kaggen View Post
Whilst trying to understand the various policy options that are available I have been troubled by what seems to me to be a serious contradiction. Why, despite operating fiat currency systems (i) , are governments required to only spend what they raise as tax revenue or borrow (via the bond market). After all, governments can and do create their own money. That is the defining feature of a fiat currency. Why are they apparently forced to borrow it?
It's actually the Central Bank (the Federal Reserve System in the case of the US) that creates money, not the "government." You can consider the central bank to be part of the government, but it's useful to think of it as a semi-independent branch of the government which can't simply be told to print money at the whim of the president or congress. They have a mandate to control inflation and achieve full employment, not to balance the budget or pay for government spending programs, which is why they don't just print money willy-nilly to fund the budget. If they did, inflation would indeed get out of control eventually. I agree, however, that a little inflation would actually be a good thing when there's high unemployment and a collapsing real estate market and wave of mortgage defaults.


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If they have no need to borrow for the purposes of spending you might reasonably ask why do they bother to collect taxes? It is not to because they need tax revenues to fund spending. This is revealed by the fact that money collected for tax is destroyed. Indeed, if you pay taxes in the USA in cash notes they take your money and literally destroy it by shredding it. This may seem crazy until you realise that all government spending is executed by electronic transfer of money. So notes, which have negligible intrinsic value, are no longer needed. Clearly if the money collected through taxes is destroyed then it cannot be used to ‘fund’ spending.
This part is simply wrong. While the physical bills may be destroyed if they are worn out, the money that they represent does not go away. It is credited to an account of the government and exists as digital money or they print new bills as replacements. If they didn't do this, the bills would wear out. Also, there are newer bills that are more resistant to counterfeiting which are replacing the old kind. And taxes and sometimes borrowing really is necessary to pay for government programs, because funding it entirely with inflation would indeed lead to a Weimar-like situation. You can only get away with a small amount of seigniorage at normal times, and probably a bit more at times like this (by quantitative easing) without driving inflation too high for comfort and possibly creating a self-reinforcing inflation cycle. At most this can only pay for a small fraction of the total budget. So taxes and/or debt have to make up the rest.
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Old 10th January 2012, 08:34 AM   #13
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Originally Posted by !Kaggen View Post
I might have gotten the analogy a bit mistaken so here is the analogy from Mossler's website essay

Soft Currency Economics
That still has no relevance to the real world - it's a nationalized banking model.

If you want to make the model more realistic then suppose that (because of fears of loss or theft or something) one of the children holds the business cards for the others. He would be able to lend cards to anyone who is short of their room rent and, by charging interest, make a nice profit. If the children and the parents are willing to accept liability transfers from the banker-child instead of using the cards themselves then the banker-child can create virtual business cards at will and lend them at a profit.

As long as he keeps enough actual business cards on hand for those occasions when other children need them, he becomes the business card creator instead of the parents. If the parents make up more business cards then the banker-child can create more virtual business cards.

As you can see, the parents would not have all that much control over how many cards (real or virtual) there are and it wouldn't be long before the other children (and possibly the parents too) are heavily in debt to the banker-child.
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Old 10th January 2012, 08:36 AM   #14
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Originally Posted by !Kaggen View Post
My brother has introduced me to the work of Modern Monetary Theory proponent Warren Mossler recently
http://moslereconomics.com/

I have read through some of his books and essays and he appears to make sense.

(blah blah blah)

Modern monetary theory and the global financial crisis

Introduction


Although I am not a trained economist I have had a longstanding interest
(blah blah blah)

Why there seem to be no credible solutions to the economic crisis.

(blah blah blah)

Criticisms of Modern Monetary Theory

(blah blah blah)
For the record, this is how much I had energy to read of the OP.
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Old 10th January 2012, 08:45 AM   #15
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Originally Posted by !Kaggen View Post
I thought the whole point about fiat money system is that money is not actually a physical reality. Therefore the FED can create as much of it as is wanted. It is simply a data entry on a spreadsheet.
The point of a fiat money system is not to have government be able to create free money for itself; it’s to allow for easily expanding/contracting the money supply according to the needs of the economy. While the Fed “can” create as much money as they want there is still a more or less “correct” amount to create.

While there can be debate at times about what this correct value is, no matter where you stand you want to ensure that day to day operations of the Fed are designed to get the money supply right instead of acting as a piggy bank for Government operations.
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Old 10th January 2012, 09:00 AM   #16
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Originally Posted by psionl0 View Post
That still has no relevance to the real world - it's a nationalized banking model.

If you want to make the model more realistic then suppose that (because of fears of loss or theft or something) one of the children holds the business cards for the others. He would be able to lend cards to anyone who is short of their room rent and, by charging interest, make a nice profit. If the children and the parents are willing to accept liability transfers from the banker-child instead of using the cards themselves then the banker-child can create virtual business cards at will and lend them at a profit.

As long as he keeps enough actual business cards on hand for those occasions when other children need them, he becomes the business card creator instead of the parents. If the parents make up more business cards then the banker-child can create more virtual business cards.

As you can see, the parents would not have all that much control over how many cards (real or virtual) there are and it wouldn't be long before the other children (and possibly the parents too) are heavily in debt to the banker-child.
I see what you mean.

However what about the fact that the parents insist the banker child pays tax in business cards it issued.

Surely this will control the amount of virtual cards the banker child may issue?
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Old 10th January 2012, 09:17 AM   #17
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Originally Posted by !Kaggen View Post
However what about the fact that the parents insist the banker child pays tax in business cards it issued.
Does the government insist that you pay your taxes with cash?
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Old 10th January 2012, 09:19 AM   #18
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Originally Posted by !Kaggen View Post
I see what you mean.

However what about the fact that the parents insist the banker child pays tax in business cards it issued.

Surely this will control the amount of virtual cards the banker child may issue?
In the case of the central bank, you want them independent of government so their decisions on how much money to create is only driven by how much money the economy needs rather than how much money is needed to make payroll next week or how much money that bridge will cost.

The latter two are classic examples of why borrowing is used by both business and government. There is a time value to money. If you keep it around doing nothing you are being wasteful, likewise if you put off spending on something that can turn a profit you are being wasteful. The banking system exists to connect these two dots, IOW to get money from the people who would otherwise need to horde piles of cash to meet their cash flow or savings requirements and get it to people who can use it for something profitable right now. These principles don’t change just because it’s government borrowing or spending.

The first role, managing the money supply, needs to sit with people whose primary and perhaps only responsibility is to manage the money supply. This is why the Fed is kept separate from day to day functions of government and why day to day functions of government rely on borrowing and taxation to meet funding and cash flow. The Fed actually does turn a profit on it’s operations, and when it does the excess is turned back over to the treasury, but it’s only a fraction of what’s needed to run the government.
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Old 10th January 2012, 09:23 AM   #19
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Originally Posted by Tippit View Post
The only solution to a crisis of illegitimate debts, is the cancellation of illegitimate debts, and the imprisonment of the parties responsible.
The person most responsible for a debt (legitimate or otherwise) is the borrower.

I know you are referring to the fiscally irresponsible politicians (that you didn't vote for) but your argument could easily be extended to individuals. The last thing we need is authorities saving individuals from themselves.
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Old 10th January 2012, 09:25 AM   #20
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Originally Posted by psionl0 View Post
Does the government insist that you pay your taxes with cash?
hmm

but surely it knows how much $ it has put into the economy and how much virtual $ the banks have?

Would it not know if the bank paid tax in virtual $?
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Old 10th January 2012, 09:43 AM   #21
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Originally Posted by !Kaggen View Post
hmm

but surely it knows how much $ it has put into the economy and how much virtual $ the banks have?

Would it not know if the bank paid tax in virtual $?
Yes, yes and yes.

I must admit that I'm not exactly sure of how the money gets from the taxpayer to the government. If the government has accounts with the private banks then taxes can be paid by having the bank transfer its liability from the taxpayer to the government. More likely, tax payments get transferred to the treasury via the fed which involves the movement of bank reserves (the "real" $).

It must be remembered that tax payments are only a fraction of the total financial transactions in an economy which might not be the case in the household example.
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Old 10th January 2012, 10:28 AM   #22
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Originally Posted by MarkyX View Post
From what I gather from this article, the author seems to believe that "spending = economic growth" (ugh) and the best entity to do this isn't the hands of private individuals, but the government that has little to no accountability.

The author scares me.
I am sorry, but I may be missing, how have "private individual" have more accountability that the government ? Or do i misread you ?
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Old 10th January 2012, 01:51 PM   #23
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Originally Posted by Aepervius View Post
I am sorry, but I may be missing, how have "private individual" have more accountability that the government ? Or do i misread you ?
Private individuals, unlike governments, cannot legally plunder you and use the proceeds to bailout large banks. Private individuals are held accountable to the rest of us through the justice system, unlike governments, which are only held accountable through what is sometimes merely a facade of representative democracy. In this case, as is currently, governments are not held accountable in any meaningful sense, until war and/or economic collapse ultimately do.
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Old 10th January 2012, 02:00 PM   #24
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Originally Posted by !Kaggen View Post
I also identified this as a problem, because it naively assumes government is always looking out for the people. Of course we should be optimistic that this is the case otherwise democracy had failed.
On the contrary, we should be pessimistic that this is the case, and seek to limit the scope of damage.

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Personally the problem I see with the whole approach is that humans will always be irrational and the only system that will really work is one that takes this into account by putting brakes on any excess irrationality.

Who prevents the irrational behavior (or rational criminal behavior) of the central planners, or are they somehow magically exempt from the dark side of human nature?
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Old 10th January 2012, 03:56 PM   #25
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Originally Posted by Aepervius View Post
I am sorry, but I may be missing, how have "private individual" have more accountability that the government ? Or do i misread you ?
Take a look at Obama. He throws money away into some projects but got little to return on his "investments", and he is constantly taking in debt to the point where Bush looks like a fiscal conservative. Instead of cutting expenses, he increases them despite no increased revenue.

Yet he is still president.

Now imagine if Obama was a CEO of a public corporation and did the same thing (no increased revenue, increased spending, taking on more debt, and getting no return on his executive decisions). How long do you think Obama would remain a CEO of a company? I would be surprised if it was over a year, and I highly doubt he would reach the four year mark.
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Old 10th January 2012, 06:00 PM   #26
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The reason governments borrow money rather than just printing it is because merely printing without any promise/need to pay it back undermines the confidence in that currency.
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Old 10th January 2012, 06:06 PM   #27
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Originally Posted by Sceptic-PK View Post
The reason governments borrow money rather than just printing it is because merely printing without any promise/need to pay it back undermines the confidence in that currency.
And yet, as I pointed out, most of the principal used to finance US government debt was financed by foreign central banks debasing foreign currencies, which affects mostly people in foreign countries, but it affects us to the extent that foreign central banks receive interest payments from our Treasury.
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Old 10th January 2012, 06:26 PM   #28
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Originally Posted by Tippit View Post
And yet, as I pointed out, most of the principal used to finance US government debt was financed by foreign central banks debasing foreign currencies, which affects mostly people in foreign countries, but it affects us to the extent that foreign central banks receive interest payments from our Treasury.
Isn’t most of the principal used to finance US government debt from private bond holders & US institutions?
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Old 10th January 2012, 06:44 PM   #29
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Originally Posted by Sceptic-PK View Post
The reason governments borrow money rather than just printing it is because merely printing without any promise/need to pay it back undermines the confidence in that currency.
... while a massive government debt fills everybody with confidence.
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Old 10th January 2012, 06:53 PM   #30
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Originally Posted by psionl0 View Post
... while a massive government debt fills everybody with confidence.
Governments shouldn’t be immune to the rules of borrowing.
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Old 10th January 2012, 07:52 PM   #31
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Originally Posted by Sceptic-PK View Post
Governments shouldn’t be immune to the rules of borrowing.


Just to be sure we are on the same page, tell me, is governments printing money without a need to pay it back highly inflationary? (You know, with all that deposit expansion and stuff).
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Old 10th January 2012, 08:04 PM   #32
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Sorry, what I meant was that governments shouldn’t be immune to the rules concerning living beyond its means. I would be curious to see how a system worked when governments printed money to fulfil fiscal needs, but I suspect there are good reasons why the advanced world doesn’t do this.

I disagree though that governments borrow money because of fractional lending.
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Old 10th January 2012, 08:26 PM   #33
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Originally Posted by Sceptic-PK View Post
Isn’t most of the principal used to finance US government debt from private bond holders & US institutions?
Yes, but the distinction between "private bond holders" and "US institutions" is an important one. Private bond holders implies mom and pop, who paid for bonds with their life savings. US institutions represent the largest banks who have a cozy relationship with the central bank, and are able to obtain essentially free money from the Fed to invest in government obligations. So the taxpayer pays twice, first from the debasement of currency required to generate the principal, and second from the interest service of the debt. This is a good threshold for deciding what constitutes legitimate versus illegitimate debt for the purposes of cancellation, and debt forgiveness.

You are correct that most of the US debt is held domestically. But according to the wiki on public debt, roughly a third of the outstanding debt is held by foreigners, and my point was that most of this approximately $4.5T in debt is not held by the foreign public, as a destination for legitimate savings, it's held by foreign central banks and foreign money center banks, who created the principal out of the ether. Why should the US taxpayer pay tribute to foreign bankers who used what is essentially counterfeit money to obtain US government bonds? Why should the Greek, Icelandic, Italian, Irish, or any other taxpayer be forced to do the same? This is the heart of the issue surrounding the global debt crisis, and it is why debt forgiveness (cancellation) is the only true, moral, and economically sound solution.
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Last edited by Tippit; 10th January 2012 at 08:27 PM.
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Old 10th January 2012, 08:31 PM   #34
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Originally Posted by Sceptic-PK View Post
I disagree though that governments borrow money because of fractional lending.
It is clever of you to anticipate where I was going with that question but you haven't answered the question I asked.
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Old 10th January 2012, 08:40 PM   #35
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Originally Posted by Tippit View Post
Yes, but the distinction between "private bond holders" and "US institutions" is an important one. Private bond holders implies mom and pop, who paid for bonds with their life savings. US institutions represent the largest banks who have a cozy relationship with the central bank, and are able to obtain essentially free money from the Fed to invest in government obligations. So the taxpayer pays twice, first from the debasement of currency required to generate the principal, and second from the interest service of the debt. This is a good threshold for deciding what constitutes legitimate versus illegitimate debt for the purposes of cancellation, and debt forgiveness.
How is the currency debased when borrowing money, since borrowing merely transfers money from one owner to the next, and doesn’t create new money?

Originally Posted by Tippit View Post
You are correct that most of the US debt is held domestically. But according to the wiki on public debt, roughly a third of the outstanding debt is held by foreigners, and my point was that most of this approximately $4.5T in debt is not held by the foreign public, as a destination for legitimate savings, it's held by foreign central banks and foreign money center banks, who created the principal out of the ether. Why should the US taxpayer pay tribute to foreign bankers who used what is essentially counterfeit money to obtain US government bonds? Why should the Greek, Icelandic, Italian, Irish, or any other taxpayer be forced to do the same? This is the heart of the issue surrounding the global debt crisis, and it is why debt forgiveness (cancellation) is the only true, moral, and economically sound solution.
The reason they should pay it is because that money, created from the ether or not, was spent by the US government on, you know, things.

Originally Posted by psionl0 View Post
It is clever of you to anticipate where I was going with that question but you haven't answered the question I asked.
Sorry, I thought it was rhetorical. Yes, printing money without the need to pay it back is inflationary.

I’m a huge fan of PBS:

http://www.pbs.org/newshour/business...nment-bor.html
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Old 10th January 2012, 09:16 PM   #36
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Originally Posted by Sceptic-PK View Post
Sorry, I thought it was rhetorical. Yes, printing money without the need to pay it back is inflationary.

I’m a huge fan of PBS:

http://www.pbs.org/newshour/business...nment-bor.html
That article doesn't address deposit expansion either.

So the question still remains:
1. If the government prints money (without the need to pay it back) will this result in deposit expansion?
2. If so, does this mean that the inflation rate is higher than it otherwise would have been?
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Old 10th January 2012, 09:30 PM   #37
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I would guess that the answer to both questions is Yes. Assuming of course, that people wish to borrow the newly-created money (which they don’t always, depending on various factors).
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Old 10th January 2012, 09:40 PM   #38
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Originally Posted by Sceptic-PK View Post
I would guess that the answer to both questions is Yes. Assuming of course, that people wish to borrow the newly-created money (which they don’t always, depending on various factors).
Good answer. Thank you for being honest with me.
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Old 11th January 2012, 02:25 AM   #39
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Originally Posted by Sceptic-PK View Post
How is the currency debased when borrowing money, since borrowing merely transfers money from one owner to the next, and doesn’t create new money?
It's the foreign central banks and money center banks that debase their own currencies in order to acquire US government debt. From the US politician's standpoint, it's a good thing. From the US taxpayer who has to service the interest, and the foreigners who have their local currencies debased in order to finance US budget deficits, not so good.

Quote:

The reason they should pay it is because that money, created from the ether or not, was spent by the US government on, you know, things.
I'm all in favor of paying the interest and principal on sovereign debt which was funded by actual savings, from actual earnings, despite my problem with politicians and borrowing. The Fed, foreign central banks, and Wall Street should have all their debt simply cancelled, as far as I'm concerned, with no bailouts, other than perhaps for depositors. Let the institutions fail as they should fail, jail the executives, and spare taxpayers the misery and economic armageddon of paying this monstrosity down.
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Old 11th January 2012, 03:16 AM   #40
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Originally Posted by !Kaggen View Post
I thought the whole point about fiat money system is that money is not actually a physical reality. Therefore the FED can create as much of it as is wanted. It is simply a data entry on a spreadsheet. Apparently when you pay your tax in cash to the revenue they shred the notes in the back office. An electronic payment is a simple data entry which changes the figure in your account. It does not actually appear in a FED account.

Mossler compares the fiat money system to parents making a rule that their kids need coupons so that they can pay for their rooms in coupons. The kids then either have to earn or borrow coupons to stay at home. Parents don't need to keep the coupons that they get paid by their kids. They can tear them up. They just print some more when needed.In order to get people doing things for them the parents can just set the price so as to control the circulation if coupons or increase the fee to have a room. They also have the power to give sufficient work for all there kids to earn coupons and have a room.

This is the reason for tax in the economy. We need $ in order to pay tax therefore we become dependent on the government spending $ or borrowing them. The government excess spending(deficit) is what is not retrieved by taxes and circulates in the economy. If an economy must grow a deficit is required or taxes need to be reduced. Of course taxes can't be negative so the only way of growing a fiat economy is through a growing deficit.

I personally think that is the flaw of a fiat economy, but unfortunately it is the reality of the economy right now.

The issue of passing on debt is also nonsensical because it assumes goods can travel through time. No what is produced now must be consumed now and what is produced in the future will be consumed in the future.

In fact austerity measures now reduce education, technological innovation, scientific research spend now which will impact future generations.

This is the basics I think. There is more detail that I am slowly getting my head around.
This needs a lot of patience to be answered. I rather recommend you to choose a good school of economics and get a degree instead.

Starting with "what is money?", "time value of money" and similar notions would be nice as it would potentially diminish the chalk-screetching sound reaction your paragraph has caused in me. For other delights like "this is the reason for tax in the economy", no school is needed but an atom of common sense.

But, what I am doing in this sub-forum, anyway? There's no one of randi.org's where so many people had shown greater ability to debate the need of inventing the wheel and the optionality of it to be of some round shape while they ruminate (full meaning) if people go because they want to or they better do exist just because itineraries had provided them with the possibility of going. Bad example: it's still too much reasonable.
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