lets bore each other to death
#81
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The deficit is beginning to increase exponentially. Why would it be in foreign governments' interests to keep buying Treasury debt? Why should they continue to treat the USD as the reserve currency of the world?
The FED will stop "bailing out" the Fed Gov when we have mass inflation. What will happen to the Fed Gov's finances then?
The FED will stop "bailing out" the Fed Gov when we have mass inflation. What will happen to the Fed Gov's finances then?
#82
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If you mean large and growing government fiscal deficits forever, I do not believe that is indefinitely sustainable. The first straw man people throw up when reviewing MMS analysis is "these people think deficits don't matter!" No "MMTer" worth listening to would ever say that.
I believe that, if you have continued deficit spending which is significantly beyond productive use, you will get high inflation which is the threat I always refer to. We seem to be in agreement there; we just disagree on the mechanisms that move inflation and interest rates.
On the other hand, if by "the system," you are referring to the USA being a currency issuer (sovereign monopoly supplier of the free-float exchange currency in which its debt is solely denominated), I can think of a lot of ways in which that could fall apart but none that I think are imminent or particularly instructive at this point.
In the late 1990s, while running a trade deficit of about 2.5% of GDP, the Net Public Balance approached zero or went positive, depending on what math you use. As an accounting identity, we saw the Net Private Sector Balance approach zero and then move in to a deficit as the private sector took on debt to maintain their lifestyle (rather than cut their own spending and reduce their standard of living).
(-2.5) + (2) = -4.5
or, for those that reject the Clinton-era surplus: (-2.5) + (0.5) = -2
Jason - I have read most all of the material presented by the participants in this discussion, even commenting on most of them. I have put my money where my keyboard is regarding currency rejections. I have presented primary source material and discussed the actual operations of the system.
If you reject any of those elements, please explain what you reject and why you reject it.
#83
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A better question might be "what will cause sustained double digit inflation?" Look at the components of inflation. There are other ways inflation can increase, particularly with volatile elements like food and energy (especially given the increasingly financialized nature of commodities), but I would assert that higher employment and wage increases will be the primary drivers.
Source 1
Source 2
Originally Posted by BLS
FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)
HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)
APPAREL (men's shirts and sweaters, women's dresses, jewelry)
TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)
MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)
RECREATION (televisions, toys, pets and pet products, sports equipment, admissions);
EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);
OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).
HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)
APPAREL (men's shirts and sweaters, women's dresses, jewelry)
TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)
MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)
RECREATION (televisions, toys, pets and pet products, sports equipment, admissions);
EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);
OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).
#84
I believe that, if you have continued deficit spending which is significantly beyond productive use, you will get high inflation which is the threat I always refer to.
We seem to be in agreement there; we just disagree on the mechanisms that move inflation and interest rates.
On the other hand, if by "the system," you are referring to the USA being a currency issuer (sovereign monopoly supplier of the free-float exchange currency in which its debt is solely denominated), I can think of a lot of ways in which that could fall apart but none that I think are imminent or particularly instructive at this point.
Why would foreign governments buy US Treasuries? Because the USA is ~25% of the world's GDP.
We are a huge market for their exports. They send us goods and services and we send them dollars (or reserves). They use those (low or no-yielding) dollars to buy US Treasuries.
As their economies develop further, they will soon realize that the US consumer becomes a smaller and smaller % of their total market. And they will realize it's not in their interest to continue to buy Treasury debt. And the US will slowly lose status as the reserve currency of the world.
And in the meantime, as I point out, the gov't has promised a retirement for everyone wherein at some point there will be only 2 workers for every retiree. What do you think will happen to those promises?
There are other ways inflation can increase, particularly with volatile elements like food and energy (especially given the increasingly financialized nature of commodities), ...
I don't believe in "cost-driven" inflation. If prices of one type of commodity goes up (e.g. energy), more money will be spent on it, and less money will be used to bid up prices of other goods, lowering prices of other goods. Supply and demand applies to money/currency too.
Explained in Page 29 to 35 here:
http://mises.org/Books/mysteryofbanking.pdf
but I would assert that higher employment and wage increases will be the primary drivers. (of inflation)
If and when the economy starts to recover, the banks will begin to lend (money which today are excess reserves). The fractional reserve system will expand the money supply and we will see mass inflation.
#85
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[Foreign governments] are loaning money to a deadbeat.
[...]
As their economies develop further, they will soon realize that the US consumer becomes a smaller and smaller % of their total market. And they will realize it's not in their interest to continue to buy Treasury debt. And the US will slowly lose status as the reserve currency of the world.
[...]
As their economies develop further, they will soon realize that the US consumer becomes a smaller and smaller % of their total market. And they will realize it's not in their interest to continue to buy Treasury debt. And the US will slowly lose status as the reserve currency of the world.
If you reject that position, please explain why you reject it or please explain why you support your counter position. For example, if instead, you believe that the US Treasury bond market is used to fund government spending, please explain why.
This is the fork in the road.
No hard feelings, but there is no real point in (you and I) continuing the discussion until you address that element.
#86
If you mean large and growing government fiscal deficits forever, I do not believe that is indefinitely sustainable. The first straw man people throw up when reviewing MMS analysis is "these people think deficits don't matter!" No "MMTer" worth listening to would ever say that.
Communicating the difference between public and private debt
So my question to readers is - what is a good, succinct way for politicians to communicate that (1.) public debt is different from private debt, (2.) it is not fiscally responsible to cut public debt during downturns, and (3.) we can run deficits from now until the Sun burns out and everything would be just fine, so long as their magnitude is manageable over long periods.
If so, then it would seem to me that suddenly it's a "define twilight" problem. You said that deficits can continue, but can't be "large and growing." Kuehn says that they can continue, "so long as their magnitude is manageable over long periods." Call me pedantic, but I need something a little more exact than those terms.
Given the political entanglements involved in government spending (entitlements, mission creep, outright lies about funding for things like Social Security), how do we define what is economically "manageable" and implement it?
#87
Do you reject the position that the US Treasury bond market is only a monetery tool used by the Federal Reserve to adjust interest rates?
If you reject that position, please explain why you reject it or please explain why you support your counter position. For example, if instead, you believe that the US Treasury bond market is used to fund government spending, please explain why.
If you reject that position, please explain why you reject it or please explain why you support your counter position. For example, if instead, you believe that the US Treasury bond market is used to fund government spending, please explain why.
----------
However, I've started reading the Roche paper, and right away I disagree with several of the principles laid out on page 1:
Originally Posted by Roche paper
Functional Finance is an economic theory based on the following principles:
The government is an entity created by the people and for the people. It exists to further the prosperity of the private sector - NOT to benefit at its expense. If this entity is allowed to exist for its own benefit or becomes corrupted by a concentration of power, it will become susceptible to dissolution via the populace's rejection of that government.
The government is an entity created by the people and for the people. It exists to further the prosperity of the private sector - NOT to benefit at its expense. If this entity is allowed to exist for its own benefit or becomes corrupted by a concentration of power, it will become susceptible to dissolution via the populace's rejection of that government.
The Logic of Political Survival
Here is a terrific interview of the author:
http://www.econtalk.org/archives/_fe...o_de_mesquita/
Here is another great explanation of the dynamics of democracies:
Democracy: The God that Failed
http://mises.org/misesreview_detail.aspx?control=199
Also, the nature of psychopaths which comprise 0.8% of the population, is that they have a knack for rising to positions of power:
Political Ponerology (A Science on the Nature of Evil Adjusted for Political Purposes)
http://www.amazon.com/review/R1V2SNE...R1V2SNE18FU6XG
and
Snakes in Suits: When Psychopaths Go to Work
Originally Posted by Roche paper
Governments should be actively involved in regulating and helping build the infrastructure within which the private sector can generate economic growth. The economy is a complex dynamical system with irrational participants. It cannot be expected to regulate itself or behave rationally at all times. Therefore, some level of government intervention and involvement is not only beneficial, but necessary.
I reject central planning based on Mises' theory of Human Action, and on Hayek's essay "The Use of Knowledge in Society"
http://en.wikipedia.org/wiki/The_Use...dge_in_Society
a centrally planned market could never match the efficiency of the open market because any individual knows only a small fraction of all which is known collectively. A decentralized economy thus complements the dispersed nature of information spread throughout society
The free market works because no one committee can make decisions for all individuals in said market, because said committee cannot have all the knowledge spread out among all individuals. And all centralized power is prone to corruption.
The free market is like a self-optimizing chaotic system. It is impossible to make a bunch of one-size-fits-all rules that will lead to a more optimal solution. The free market doesn't produce optimal results for every individual at all times, but central planning only makes things worse. That a committee can, is called The Fatal Conceit.
http://en.wikipedia.org/wiki/The_Fatal_Conceit
If MMT is dependent on the first 2 assumptions, then IMO it's dead in the water.
#88
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Real GDP can be broken down as follows:
Expenditure
Y = Real output
C = Household consumption of final goods and services
I = Private investment on housing and capital equipment
G = Government investment and spending on goods and services
X = Exports
M = Imports
Y = C + I + G + X – M
Income
Y = Real income
C = Consumption
S = Savings
T = Taxation net of transfers
Y = C + S + T
Stated another way:
C + I + G + X – M = Y = C + S + T
After a little algebraic rearrangement, you get:
(S – I) + (T – G) = (X – M)
(Net Private Sector Savings) + (Net Government Savings) = (Current Account)
See attached graph for a visual representation of how this has worked historically. Note the drastic reduction of the government sector deficit starting around 1992 and the effect on the private sector's net surplus.
Call me pedantic, but I need something a little more exact than those terms.
Given the political entanglements involved in government spending (entitlements, mission creep, outright lies about funding for things like Social Security), how do we define what is economically "manageable" and implement it?
Given the political entanglements involved in government spending (entitlements, mission creep, outright lies about funding for things like Social Security), how do we define what is economically "manageable" and implement it?
I have not pushed as far in to the prescriptive elements of "MMT" oriented economists because they span the political spectrum from right to left.
I would argue the references to Functional Finance are really more influences on the prescriptive aspect. The actual analysis of the operational realities of the monetary system (e.g. how the US Treasury bond market works, the difference between a currency user and a currency issuer, etc) is not at all reliant on those elements.
Last edited by Scrappy Jack; 10-21-2011 at 02:18 PM. Reason: Forgot to include the attachment
#90
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- US Treasury bond auctions are a monetary tool used by the Federal Reserve to control (or HEAVILY influence) Treasury bond interest rates
- US Treasury bond auctions do not fund government spending
- US Treasury bond yields are only very marginally affected by market influences and primarily only further out on the yield curve
- Only the US government can create net new US dollars (other than counterfeiters) which are free-float exchange (not pegged to a commodity like gold or another currency)
- Because there is no commodity link or currency peg, the USA can never run out of dollars
- Because the USA can never run out of dollars, the USA can never be forced in to bankruptcy like a country like Greece or a city like Harrisburg
- Inflation, not bankruptcy, is the threat facing a currency issuer like the USA
- Because of the current account deficit, either the US public sector or the US private sector can net save (surplus) but not both at the same time
If US Treasury yields are almost entirely controlled by the Federal Reserve and if Treasury bond auctions do not fund government spending, your scenario below does not play out.
The scenario by which the Fed Gov goes insolvent is this:
- politicians are incapable of cutting spending, and increase it <- the past few months has proven this incapacity
- deficit widens and debt increases exponentially
- foreign purchasers of Treasury debt start to realize they're loaning money to a deadbeat (this lowers the Fed Gov's credit rating)
- Treasury debt interest rates rise
- the % of the Fed Gov budget that goes to paying interest on the debt, increases, further increasing the deficit
- the FED buys more Treasury debt which makes inflation increase
- repeat, until we get mass (not hyper) inflation, at which point the FED stops inflating
- the deficit widens, nobody will lend to the Fed Gov but at very high interest rates, and the Fed Gov is teetering on insolvency. It either needs to make drastic spending cuts, or partially default, or both
- politicians are incapable of cutting spending, and increase it <- the past few months has proven this incapacity
- deficit widens and debt increases exponentially
- foreign purchasers of Treasury debt start to realize they're loaning money to a deadbeat (this lowers the Fed Gov's credit rating)
- Treasury debt interest rates rise
- the % of the Fed Gov budget that goes to paying interest on the debt, increases, further increasing the deficit
- the FED buys more Treasury debt which makes inflation increase
- repeat, until we get mass (not hyper) inflation, at which point the FED stops inflating
- the deficit widens, nobody will lend to the Fed Gov but at very high interest rates, and the Fed Gov is teetering on insolvency. It either needs to make drastic spending cuts, or partially default, or both
#92
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As consumers faced reduced debt burdens, their discretionary income should pick up which should translate in to increased demand for goods and services which - I would argue and research seems to support - is the primary driver for increased hiring. Reduced unemployment should also translate in to increasing tax receipts and lower welfare payouts (i.e. fewer people on foodstamps, unemployment insurance, Medicaid, etc).
You would need some sort of mechanism to reduce the deficit (but not elminate it unless we return to sustained trade surpluses) as unemployment dropped and you approached much higher productive capacity or you would see sustained higher core inflation. That sustained higher core inflation would cause the Federal Reserve to raise interest rates which could cause a slowing effect.
If, on the other hand, the government increased the deficit by propping up various favored corporations or trying to pick winners and losers in the marketplace (e.g. ethanol subsidies, unsecured loans to solar panel and electric car producers, etc) you could end up stretching out the recession and "wasting" the deficit on malinvestment.
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I suppose I would say that I would place a low probability on deficits as a percentage of GDP continually growing larger, but I generally accept that predicting outcomes a quarter out is difficult. Reasonable accuracy a year out is very difficult.
Useful accuracy in predictions through the foreseeable future? Probably as useful as the economic models that predicted the Clinton near-balanced budget would produce surpluses through 2025.
#95
Just look at the incentive system and the near-universal belief in Keynesianism (gov't spending is good, more is better).
The masses *want* more gov't spending bec they each want their dole outs. Even the Tea Partiers aren't willing to give up their SS/Medicare.
Politicians can promise more by increasing deficit spending. They get votes in exchange for promises. More inflation.
Even if they didn't increase it, just look at the fact I keep repeating:
The Medicare/SS system will have 2 workers for every retiree. Unsustainable. Something's gotta give. We'll get broken promises. Aka default.
The masses *want* more gov't spending bec they each want their dole outs. Even the Tea Partiers aren't willing to give up their SS/Medicare.
Politicians can promise more by increasing deficit spending. They get votes in exchange for promises. More inflation.
Even if they didn't increase it, just look at the fact I keep repeating:
The Medicare/SS system will have 2 workers for every retiree. Unsustainable. Something's gotta give. We'll get broken promises. Aka default.
#96
Just look at the incentive system and the near-universal belief in Keynesianism (gov't spending is good, more is better).
The masses *want* more gov't spending bec they each want their dole outs. Even the Tea Partiers aren't willing to give up their SS/Medicare.
Politicians can promise more by increasing deficit spending. They get votes in exchange for promises. More inflation.
Even if they didn't increase it, just look at the fact I keep repeating:
The Medicare/SS system will have 2 workers for every retiree. Unsustainable. Something's gotta give. We'll get broken promises. Aka default.
The masses *want* more gov't spending bec they each want their dole outs. Even the Tea Partiers aren't willing to give up their SS/Medicare.
Politicians can promise more by increasing deficit spending. They get votes in exchange for promises. More inflation.
Even if they didn't increase it, just look at the fact I keep repeating:
The Medicare/SS system will have 2 workers for every retiree. Unsustainable. Something's gotta give. We'll get broken promises. Aka default.
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I am also not sure that there is a direct causation between increasing deficit spending and inflation. Look at the USA over the past 3-4 years or Japan over the past 20. I believe it is more nuanced than that.
I would think if you polled the average voter between 30 and 50 years old, they would tell you they are not planning on receiving Social Security or Medicare or they expect to recieve a "reduced benefit" (however that is defined). See Gearhead's post for just one example. If, instead, those people were told they would have to wait a few more years to receive their benefit, I expect that would be plenty palatable to most voters.
#98
Are you arguing that money printing isn't inflationary?
#99
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Originally Posted by Scrappy Jack
I am also not sure that there is a direct causation between increasing deficit spending and inflation. Look at the USA over the past 3-4 years or Japan over the past 20. I believe it is more nuanced than that.
I am saying that I do not believe there is a direct causal link between the fiscal deficit and inflation. That is, I believe you can have an increasing deficit and face deflation and you can have a shrinking deficit and face inflation. I believe the correlation is quite low although I have not yet run the actual numbers.
For example, I believe (but don't have the data set handy) that the average fiscal deficit was higher in the 1980s than it was in the 1990s and average core inflation was higher in the 1980s than in the 1990s. That is, higher deficit with higher inflation. But, the average fiscal deficit was higher in the 2000s than it was in the 1990s and inflation was lower. Higher deficit and lower inflation.
I am not trying to be a pain here, but I am also not sure what you mean by "money printing" since all government spending is "money printing" (or "keystroking" if you prefer). I want to make sure we are discussing things in the same context. If you are asking if I think government spending without limit or in excess of productive capacity is inflationary, my answer is yes.
#100
For anyone who is working through this MMT stuff like me, I recommend doing the following.
Read Warren Mosler's Soft Currency Economics.
Then read it again.
Then read a couple critiques from Bob Murphy (because they are critiques, but also because they contain some instructive examples that make MMT clearer).
The Upside-Down World of MMT
Aren't Deficits Another Name for Saving? Nope.
Read Warren Mosler's Soft Currency Economics.
Then read it again.
Then read a couple critiques from Bob Murphy (because they are critiques, but also because they contain some instructive examples that make MMT clearer).
The Upside-Down World of MMT
Aren't Deficits Another Name for Saving? Nope.