[Skip to the end]

>   
>   (email exchange)
>   
>   On Sun, Feb 7, 2010 at 8:45 AM, Seth wrote:
>   
>   scott brown was on TV this week saying we had to stop spending money we don’t have
>   and are borrowing from the Chinese-that 40% of obama’s budget will have to be
>   borrowed from Chinese and paid back by our children hopefully he is reading your stuff
>   

Yes, hope to put that to rest Thursday, assuming that’s what CNBC wants me to discuss.

Hope to definitively dismiss the entire line of thought.

1. Taxation serves to regulate aggregate demand, not to collect revenue per se.
  Govt doesn’t ever have or not have dollars- it’s the score keeper
  It taxes by changing numbers down in our accounts, and doesn’t ‘get’ anything
  It spends by changing numbers up in our accounts, and doesn’t ‘have less’ of anything.
  China is not involved in this process.
  There is no operational connection between taxing and spending.

2. China gets dollars by voluntarily selling things to us, presumably because they’d rather
  have the dollars than what they sold.
  Those dollars go into their ‘checking account’ at the Fed called a ‘reserve account.’
  Treasury securities are functionally nothing more than a ‘savings account’ at the Fed
  When China buys tsy securities to earn more interest the Fed debits their reserve account
  and credits their securities account.
  The $13 trillion of US debt is best thought of as the $13 billion held in savings accounts at
  the Fed.
  When China’s or anyone else’s tsy secs mature the Fed debits their securities account and
  credits their reserve account.
  That’s all.
  Debt paid.
  This is operationally unrelated to spending and taxing.

3. The issues of concern include ‘inflation,’ but not dependence on foreign ‘investors’ and
  not solvency nor funding issues.
  All we owe China is a bank statement.


[top]

30 Responses

  1. Perhaps this will be seen as completely naive or just uninformed – it is my first post to this blog so i am prepared…

    While I am on board (and learning more everyday) with the concepts (facts) espoused here, i have one great concern about the political upheaval that making the general populace aware that “Taxation serves to regulate aggregate demand, not to collect revenue per se”.

    Since the value of a fiat currency is based on the ability of the issuing government to levy and collect taxes, what happens if a large percentage of the population, upon realizing that their government does not need tax revenues to spend, decides to stop paying their taxes ? What would the impact be of such a (albeit theoretical at this point) revolt were it widespread ?

    Assuming for a moment that there would be a relevant impact, what options would the government have to enforce payment of taxes ? Left to their own, would such “revolutionaries” be cajoled with appeals to “patriotic” duty, or would enforcement tactics have to become more heavy handed ?

    I suggest that the ongoing political rhetoric has as much to do with keeping the populace at peace with taxation, relying as it does on themes that folks relate to (i.e. balancing their checkbook), irrespective the validity of the argument.

    I have donned my flame-proof gear–fire away.

    Thanks.

  2. Taxation serves to regulate aggregate demand, not to collect revenue per se.

    But do you think that it is possible to get people to accept widely varying taxes over time. Surely they will be OK with the tax rate dropping but won’t strongly resist the rising rates.

    1. Floccina. The UK reduced Value Added Tax (a sales tax) from 17.5% to 15% about a year ago to help deal with the recession. This was announced as a temporary measure, and everyone grasped the temporary nature of this change. Moreover, today’s headlines are that this tax will rise to 20% shortly. There are no riots . . . . . . yet.

  3. don’t know details

    currently taxes vary counter cyclically anyway so until that changes there probably won’t be a lot of adjustment needed tax wise.

    and most ‘inflationary’ bouts are caused by micro issues/bottlenecks/shortages that often have micro solutions

  4. “All we owe China is a bank statement” LOL!

    Using this line during your CNBC interview = smart
    Watching Rick Santelli’s reaction = priceless.

    1. Total US Government “debt” .. 12 Trillion dollars
      China’s reserves 2.4 Trillion dollars
      Warren Mosler’s observation on China’s reserves .. pricesless..

  5. I’m more concerned that once people begin to accept the proposition that deficits don’t matter, it will be a complete free-for-all with every state in the union calling on the Feds for massive infusions of cash and any constraints on state (and federal) spending will evaporate. As it is, we have a CPI that is up 25% or so in the past decade.

    1. 25% in the last decade is a tad more than 2% a year. I can live with that, as long as the std deviation is small.

      Point taken, though. That’s why I think the longer-run rule should be something along the lines of having states that want fed help in a recession prove (according to standardized rules drawn up by CBO or whatever, wouldn’t be difficult) that the state budget would be balanced if the economy were at full employment (however defined; again, not difficult to do).

  6. Not sure if that would work in practice (what happens if the state goes 4 years without balancing their budget due to pensions, service union salaries etc), but that brings me to perhaps the bigger point. Again, let’s say the electorate becomes enchanted with the idea that deficits don’t matter. The temptation for Congress to pass hundreds/thousands of massive pork projects (yes, way more than they do now) will be irresistible. Any attempts to rein in spending (or increase taxes) will be met with howls of indignity. “Read my lips… deficits don’t matter”.

    You may counter that we’ll come up with CPI targets etc to govern this, but it is notoriously difficult if not impossible to even measure inflation and I think it will increase crony capitalism as lobbyists metastasize all over D.C. to fight for the ‘infinite’ amount of dollars now available courtesy of the deficits don’t matter party.

    1. “(what happens if the state goes 4 years without balancing their budget due to pensions, service union salaries etc)”

      The only way that would happen is if there is a recession for 4 years under my proposal, because otherwise they would have a balanced budget, and in that case they should get transfers anyway.

      It’s pretty standard to estimate budget stances given particular macro conditions . . . the CBO or whomever would merely have to be given the authority validate using their own models that the state’s budget would have been balanced given particular conditions. If not, then no transfer provided, or at least reduced according to how far off the full employment budget would be from balance. It would be very hard to “game the system” assuming fairly reasonable rules and procedures were in place (a not insignificant assumption, but such is policymaking).

      Warren’s responded to the “bigger point” as I would.

  7. it’s not that deficits don’t matter, it’s that deficits are ‘inflationary’ biases.

    and the voters hate inflation maybe more than they hate unemployment.

    1. Voters may hate inflation, but some of us are old enough to remember how politicians respond to inflation. Price controls, blaming “speculators” and “greedy” capitalists are the inevitable soundtrack of that movie.

      1. Jason: Your point is well taken. MMT cannot cure poor Governance. But a focus on balancing the budget cannot cure poor Governance either. Our 10% unemployment rate is hardly an example of things being run correctly.

    2. nd the voters hate inflation maybe more than they hate unemployment.

      I really question that, Warren. Rising unemployment is political poison, as we are now seeing. The polls I see indicate that it’s the economy that is the top issue, and the top issue of concern economically is unemployment. If the Dems don’t get a handle on this quickly they are toast.

      And inflation benefits debtors and a whole lot more voters are debtors than creditors. It’s the creditors (bondholders) that are driving the NAIRU doctrine that uses unemployment as a buffer against inflation by dampening wage pressure.

  8. i have one great concern about the political upheaval that making the general populace aware that “Taxation serves to regulate aggregate demand, not to collect revenue per se”.

    Good point. That is an obvious respond when learning about MMT. The answer is that according to Chartalism, the government clearly has to tax in order to give the currency it issues value in a fiat regime. Moreover, it has the power to do so, as everyone knows. Most people who hate taxes and think them unjust still pay them, and those that don’t, get to think about it awhile in the cooler.

    However, this is an opportunity to smash the faux dialectic between “small government” and “big government.” Clearly, as Warren observes, we need the right size government to accomplish what a majority of the citizens decide through democratic principles. The key here is the the decision should be an informed one. Presently, it is not.

    Once people understand how currency issuance and management works as a public utility dedicated to public purpose, then we can have an intelligent debate about the options that are open to us. Under those circumstances, I don’t foresee any big difficulties, although there will still be heated political debates among different factions.

  9. I actually think the debate will become far more heated as those who benefit from government largesse will realize they don’t have to counter (or can finesse) the ‘deficit is a problem’ argument and will push for much bigger entitlements. As we know, once the voting scales begin to tip between those who directly benefit from entitlements and those who don’t benefit in nearly the same proportion, the former voters always vote themselves bigger handouts. The founding fathers among others warned against this.

  10. I have a question for Warren and Scott,

    Now that the Fed is wrapping its collective brains around how to set interest rates by paying interest on excess reserves (one can only hope they sit and read Scott’s excellent paper on the topic) , would it require new legislation or does the Fed already have the power to allow Trsy to fund deficit spending by simply overdrafting its Fed account?
    http://www.businessweek.com/news/2010-01-26/fed-weighs-interest-on-reserves-as-new-benchmark-rate-update1-.html

    Seeing as bond sales are no longer necessary to set overnight rates, Trsy overdrafts could replace interest paid to bondholders with interest paid to the Fed–which would then forward it back to Trsy– making the worry of $300 billion this year or $700 billion in 2019 in federal debt service payments seem rather pointless.

    1. glad to pass the torch- been advocating dropping tsy’s and just paying interest on reserves for over 30 years

      🙂

  11. “When China’s or anyone else’s tsy secs mature the Fed debits their securities account and credits their reserve account.”

    Excuse me, but just crediting their reserve account (equivalent to printing money) would lead to an increase in the money supply and cause inflation, not to mention devalue the currency. Bottom line – Deficits do matter.

    1. What if there is nobody to borrow?

      Are people waiting outside a bank in a queue waiting for the Fed to increase reserves so that they can get a first come first serve treatment ?

    2. right.

      lending is not reserve constrained.

      leaving china’s funds in a reserve account has no effect on the real economy unless china decides to spend them, which they can always do any way, regardless of policy

      1. “leaving china’s funds in a reserve account has no effect on the real economy unless china decides to spend them…”

        Yes. That makes sense.

        So what happens when they do decide to spend it. Does the amount at their disposal matter then?

      2. Either exports increase if it buys US goods, or China increases its investment in the US if it buys US assets. Or may be they want to put it into fx, This goes on all the time. They sold us stuff we obviously wanted when we bought it from them. They can take the money and do with it what they want.

      3. “So what happens when they do decide to spend it. Does the amount at their disposal matter then?”

        short answer- yes.

        spending is aggregate demand.

        all spending supports prices to some degree.

        spending for real consumption can reduce real consumption available to others.

        and all in the context that exports are real costs and imports real benefits.

    3. Kunai, when China sells stuff in the US the proceeds go into deposit accounts in the commercial banking system where China banks. These demand account require corresponding reserves in the commercial banks’ accounts at the FRS to settle China’s accounts when demanded.

      Say that China uses its deposits to purchase Tys’s. This converts reserves in the FRS reflecting China’s demand balance into Tsy’s. This is just the shift of one asset form into another.

      When China decides to sell Tsy’s, then the transaction just moves corresponding reserves back to the commercial banks with whom China does business and this is reflected by credits to China deposit accounts. China can then do with its money what it wants. Where’s the printing and inflation? It’s a wash, other than interest accrued.

Leave a Reply