Where are we – Are you going to be in Congress, teaching at Columbia or continue Valance & moslereconomics.com?:)
About the politicians who claim “we cannot say that” and who demand more comfort. What do you think is the main reason behind that?
Is it just about fear for losing votes when not talking mainstream?
Is it a condition in exchange for support from Wall Street that’s fearing loss of bond business?
Is it fear foreign nations will sell off the dollar?
What else?
In recent presidential debates I noticed both candidates proposing some policies that are in line with MMT.
One could argue of course there is always something to find that matches with MMT.
In the first debate I heard Obama defending he prolonged tax cuts because that would enable people to spend more and thus would create jobs.
Romney all the time talks about tax cuts, not really explaining how and what.
Do you also see some signs of light?
I have the feeling there is more and more “comfort” for politicians to come out with MMT policies. More and more investors ask for it, I would say almost demand it. Do you agree?
@WARREN MOSLER, As you mentioned in your presentation: Goldman knows, Npmura knows, Morgan knows etc . I cannot assume different than that these guys whispered to their political friends already long time ago.
How about your explanation for the main reason for “we cannot say”?
@walter, i think Warren left out the defense industry ,the oil industry ,the Bush/Cheney governemt ..they all khow how to benefit from fiat systems .(maybe not as prescribed by MMT exactly but they know how to spend fiat money ) ..
Sigh. Another world leader who just doesn’t get it.
Warren, please send this man a copy of 7DIF pronto.
@MRW, I believe it means “Foreign Official” which I assume means they are the official USD financial assets of a foreign government. They are held in securities accounts at the US Fed on behalf of the foreign governments…
So when someone would say “foreign claims” it may be more descriptive to say “foreign government claims” for almost all of these balances…rsp,
NB that guy understands pretty well the meaning of the term “dollar hegemony”.
“Once the monthly inflation rate of a country exceeds 50 percent, it is officially undergoing hyperinflation. Hanke estimates that Iran is experiencing a rate of about 69.6 percent inflation at the moment. He, having studied currencies for 45 years and been responsible for stopping 10 of the world’s 57 hyperinflations, was able to uncover the disparity between the Iranian government’s official exchange rate and the black-market exchange rate.”
Despite the fact that there are a few countries and some corporations still willing to trade with Iran, the American control over the global banking/payment system appears to be efficient. If the Iranian regime is overthrown (or forced to accept a compromise) without the need to endanger the lives of American/Israeli/other Western nations citizens and Iranian civil population, this will be another powerful argument for maintaining the status quo.
Warren, you certainly didn’t hold back in the Q&A. Nicely done.
Okay, deficit spending (even in perpetuity) is fine (and desired); that is understood. But does it really follow from this (or where does it follow from) that massive debt is fine, too?
Any amount of debt may be no problem in terms of the question of default (which is inapplicable), but if we are indebted in large part to a few big entities, then I don’t see how that is not worrisome. I see mentioned around negative consequences such as skewed distribution (of costs and benefits –within a cohort– of domestic debt) or degradation of productive capacities (in the case of foreign debt/trade deficits). Are those it? I somehow feel there’s got to be more to it, but can’t quite articulate it. (I am new to this stuff.)
@WARREN MOSLER, I suspect many worry (unconsciously?) about the possibility that the owners of those huge savings balances may decide one day to go on a huge spending spree and what the negative consequences then may be.
I understand that by now you put the burden of proof on those who always use inflation as excuse not to increase the deficit.
It would be helpful though to elaborate a bit more on how MMT would deal with inflation prevention, other than watching the line of unemployed people.
After all inflation is not so simple phenomenon. It may vary strongly per asset class or even individual products and also over time and it can hit at very different pace.
Thanks Walter. I didn’t see your input before I posted mine.
The cyclical component of the budget would play a moderating role. As spending picked up employment would also increase, reducing government outlays. Revenues would also rise into surplus territory and act as a demand drain. You might get a sudden surge of inflation but it would attenuate over a relatively short period of time.
yes, seems the foreign dollar pile just gets higher, and same for most nations, as savings in general increases over time.
and if sudden spending, for any reason, starts driving up prices, it’s good to know that a fiscal adjustment will cool demand.
but with out current tax structure seems that works automatically in any case
@walter, My concern isn’t that we can’t easily pay all those bondholders, but that when we do pay them, they get richer. Seems like welfare for rich people. Why should we have to dole out cash to the rich simply to run our fiscal operations? Basically, people with enough of a surplus to spend it on financial assets are permitted to buy stock in our government and profit from it, while everyone else gets diddly. It’s a racket.
hence my 0 rate proposal…
😉
@walter, @Dan Kervick
Dan, I do not understand your point.
I refer to inflation worries and what kind of inflation control measures MMT suggests.
You talk about your worries to pay bondholders.
If you suggest that the interest on risk free govt bonds should be zero that’s one thing, but do you suggest haircuts, not paying back principal?
By the way, how risk free are those govt bonds? After all there are some self imposed restrictions in place that could create some serious havoc or not?
I think I am being theoretical and curious about the consequences of possible pathology in the debt structure. Like, in the extreme, one foreign country or one filthy rich dude holding a big claim (e.g., 100% of GDP, like you say) against your economy. Couldn’t that be a threat in any way? Couldn’t, for example, such a claimant take that money out to a shopping spree, and blow MMT’s thermostat?
Thanks, and the best of luck in your run for office.
If the rich dude goes out and buys all the output, then people would have to make and grow more. Who would have all the money to spend?
@Nihat, I think it is important to remember that this money exists in the form of bonds. Not so liquid and as a result it would be hard to just go out and spend it all. It just isn’t going to happen like that.
China as the most obvious example has to do something with the dollars they earn as a net exporter to the U.S. They can but Treasury securities, which they do as the #2 holder of Treasuries behind the Fed. They can buy American real estate, which I’m sure they must do in a meaningful way and/or invest in assets like U.S. companies which produce a downstream flow of income. Or, they can simply buy more goods and services from the U.S. which would bring those inflationary chickens home to roost.
Thanks for all the replies.
Ed, just so I know, can’t they also spend those dollars outside the US, convert them to other currency, etc?
Like I said, I don’t know much about this stuff, but won’t they cause inflationary pressure by the very act of putting their dollar reserves in chase of output?
I think I understand practical mitigating factors (like Rodney explained), but since MMT is said to be a theory, I am asking a theoretical question: what is the difference between money that a sovereign government can create at will, and money that was so created and stashed away by another party? As far as I can tell, if such a stash became too big, it could compete with the government’s spending power.
correct, and if spending is at the limits of output any private sector increase need be met with a net public sector decrease
You can’t convert to another currency. You can only exchange for another currency.
And you can only do that if there is somebody willing to go in the other direction.
That is a vital distinction.
” but won’t they cause inflationary pressure by the very act of putting their dollar reserves in chase of output?”
They will cause quantity expansion and boom times if they do that – which makes it very easy to tax or back off on spending elsewhere to take some heat out of the system.
You could even encourage more domestic saving.
The policy tools exist to deal with the situation once you realise that all you are trying to do in the monetary economy is maintain the monetary circulation around the system at a particular volume and speed.
Neil,
Yep, exchange, it is, with a willing counterpart. Bad word choice on my part.
I think I see your point re: policy tools. I visualize all this as a flow control issue, too. To me, huge savings held by single parties are like dams, which if unleashed can do a lot of damage (drowning a lot of micro-people even if macro-balance reestablishes in time).
You have to remember though that if a dam is allowed to burst those that rely on the lake don’t have any drinking water.
It is very important not to assess the external sector as though it can act independently without creating a feedback situation. The external sector consists of economies just like yours subject to the same constraints and impacts.
Try listening to this (I trust you listened to the video above, esp the Q&A.). Pick it up at 1:30:00. it’s Warren for half an hour. http://radioornot.com/site/?p=5485:
Exports are real costs and imports are real benefits. Clearly these exporters only want the currency which we print. Warren does not get the signs right. The issuer of the currency is the debtor and the recipient is the creditor for the recipient has given up real goods and services in return for nothing. Money is merely an ingenious way to secure payment in advance.
“there are 15 or so trillion of savings account balances at the Fed. Why care?”
That is pure wisdom. Since we shouldn’t care, and since we need a better buffer stock then UE, let’s have the Bureau of Engraving and Printing offer to hire all unemployed seeking to work (at Warren’s $8/hr wage, of course) and make our primary industry the literal printing of tax credits, for these foolish yet generous nations will surely continue to send the US all the real benefits while expecting the US to incur no real costs.
See my comment to the previous post
This is a serious flaw in the reasoning I believe, repeated again during the seminar.
Also: the size of public debt denominated in domestic currency is irrelevant from the solvency point of view but the size of the stock of net savings especially in the hands of foreign entities may reduce the room for manoeuvrings if inflation starts creeping up in the future or if a foreign government tries destabilising the global financial system.
In order to prevent these savings from becoming an inflationary overhang (as in the case of the former Soviet Bloc countries circa 1990) real interest rates cannot be too negative. Even worse, if the inflation accelerates the bonds yield curve becomes steeper amplifying capital losses incurred by the existing bond holders (unless the CB intervenes). If foreign debt holders decide to change their portfolio allocation between different currencies anticipating the losses, exchange rates can wobble dramatically leading to the repetition of the 1997 Asian crisis – but with the American dollar as a numerator not as a denominator. (Domestic debt holders may do the same but they can be subjected to capital controls policies more easily).
The chance of the instability developing would depend precisely on the size of the stock of debt held by the foreign entities. The same applies to the political leverage given to unfriendly foreign governments interested in replacing the current global order or blackmailing the American government.
The positive feedback loop can be:
accelerating inflation -> loses on bonds -> a futile attempt to get rid of the financial assets denominated in the particular currency -> severe fall in the exchange rate -> inflation accelerating even faster due to cost-push effects
The initial acceleration of inflation may be a result of rising commodity prices (as in the 1970s), not necessarily hitting the full utilisation of productive capacities barrier.
We cannot just say that the Govt can stay away because the currency is fully floating so nothing will happen. A significant and sustained fall in exchange rates would dramatically affect the productive economy and the political stability of the country – as seen in Iran.
The political choice left would be very narrow and probably include only severe fiscal repression of domestic demand in the US to halt the inflationary processes on their tracks.
We would be back to square one I am afraid but the global financial system would be de-dollarised and unpredictable political consequences would follow.
So I am sorry but for me the size still does matter – not because of the primary effects (the “Govt has to borrow from China” or “has run out of money” – what is not true) but because of the secondary effects which are ignored in the analysis but which can be severe.
“A significant and sustained fall in exchange rates would dramatically affect the productive economy ”
Depends how long it takes for that to happen. Capital controls can slow that down over decades if required allowing the substitution effects to take place.
And again you are missing a central mechanism in the MMT prescription. ZIRP and no bonds ensures that all foreign entities have to save with entities in the private sector. And private sector entities can ultimately go bankrupt – which then eliminates the excess savings liabilities. Foreign entities then take the loss as domestic entities are usually insured.
The sign on the door is very clear. If you wish to fund excess imports then your savings are insecure and there is no guarantee you will get back the same value of real goods you gave up. On your head be it.
I find it most amusing that people spend so much time on ‘slippery slope’ fallacies rather than the real cost to a domestic economy today of billions of lost man days of output caused by low circulation of funds in an economy. That is *guaranteed* to generate an hysteresis effect in the real circuit of under investment in the future.
Meltdown is very unlikely in an economy that is running at maximum capacity and is investing sensibly in its future.
Crippling an economy due to fear of something that has a low probability of happening is stupid economics and stupid politics.
The idea of football is to keep the ball in the field of play. We have a special procedure called a ‘throw in’ to get the ball back into play. You don’t refuse to play football because you’re frightened of throw-ins.
@Neil Wilson,
Absolutely true but inapplicable to our current political environment.
The whole point of having the USD as the global reserve currency is that politicians / people / entrepreneurs believe that there will be no strict capital controls in the US ever. The second tenet is that private property rights are guaranteed with rather insignificant exceptions.
It is not just about pricing oil in USD. It is about having enormous political influence especially when Eurozone is ailing. Whose are major international banks? I gave an example with the sanctions crippling Iran. Is the current situation rational / optimal from a purely economic point of view? Of course it is not rational or rather it is as rational as the fact that I am paid probably 5-10 times more than a guy doing exactly the same job in India and 2 times more than a guy in Poland. It is optimal but only for me not for the guy living in Poland (that’s why I live in Australia).
When people advocate a system with ZIRP and no bonds I fully agree that there is no reason this won’t work. It is likely such a system would lead to better allocation of resources than the current one (and full utilisation of labour). But if someone asks what the consequences of president Romney running a much higher budget deficits in the current framework for several years would be – I am saying this may lead to an instability of the current system which is overstretched anyway. This is the main reason MMT failed to get traction. Because it is based on political wishful thinking.
Would the system recover after an exchange rate collapse? The economy itself in the absence of political shocks would eventually recover as shown in Argentina, Russia or Iceland. The time constant describing the adaptation (substitution) process can be several months, maybe a year or two. I am not saying that this would be a total economic disaster with people starving to death on the streets of NYC. But my point is different. Too much time has been wasted on deliberations about idealised economic models based on “ceteris paribus”- type reasoning. Such a scenario would lead to a major political instability. I am thinking of a scenario may lead to a political collapse similar to the collapse of the USSR. Please imagine a 50% or 75% loss of real value of the savings (not hyperinflation but an one-off adjustment) in the country where so many people own assault weapons. How long did it take to clean up in Russia? Over 10 years but the long-term effects of the collapse are still visible.
There is one little point of difference. I was so happy when USSR disintegrated – I couldn’t believe my own eyes. Soviet Union was our greatest enemy in the second half of the 20th century (I’m looking from the Polish not Australian perspective). I grew up in a family persecuted by the communists. When the last Soviet (Russian) soldier occupying Poland left (almost) everyone celebrated. The difference is that if the American state lost its dominant global position I would be on the receiving side. Of course some other people would celebrate. There might be several billion people who would celebrate but I would not be among them.
A few years ago I thought that a stable multi-polar world would emerge. I dug deeper and from what I’ve found this seems increasingly unlikely. One overlord will be replaced by another overlord.
Crippling an economy due to fear of something that has a low probability of happening is stupid economics and stupid politics.
it’s called an insurance, and it’s always stupid to take one if you are not going to need it.
nor will a fall in fx rates keep the domestic economy from full employment
and full employment is strongly correlated with max levels of real output
Warren,
I agree with the idea of full employment policies such as JG but we must not ignore the consequences of rise/fall in investment in fixed capital and rise/fall in productivity related to the former.
When the last factory is closed employing all the people in services sector will only generate fake output, still accounted for in GDP.
One little change in the pricing system structure and the illusion of postindustrial wealth is gone… Just compare the relative prices of computers, cars and houses 50 years ago and now. There is nothing preventing similar adjustments in the future. The same applies to the measures of “wealth”. Just look at the shares of Google – what did happen yesterday?
if services are ‘fake output’ what you presumably call ‘real output’ is down to 10% or so of reported gdp?
what is the problem with services?
and real investment goes to where it can ‘buy low/sell high’ with real goods and services.
the currency value per se is of little consequence.
“When the last factory is closed employing all the people in services sector will only generate fake output, ”
Are the police fake output? The Military? How about the Judiciary or the politicians? Local Government? Health care and education?
We are moving towards a robotic future where the output of the factories will be generated by machine with little or no human labour requirements.
If we want to continue with a Work = Income = Resources distribution model we’re going to need an awful lot more ‘fake output’.
Warren,
There is no problem with the services as long as productive capacities in the manufacturing sector are not destroyed.
“real investment goes to where it can ‘buy low/sell high’ with real goods and services” – absolutely true. This is exactly what is distorted as a consequence of the supposedly “idiotic” Chinese policy of sending cargo below their true costs as a consequence of the policy of hoarding American currency by the Central Bank.
“the currency value per se is of little consequence” – no this is not true as services cannot be imported but microprocessors, solar panels and other increasingly sophisticated stuff imported from China can and are imported. Also – the Chinese do much more than just setting the exchange rate, they manage where the investment goes.
One may say – so what? Let’s imagine that the Chinese started building a seafood processing factory on Diaoyu and the Japanese are asking their old allay what the American Navy is going to do about it. The executives of Apple Inc and a few American corporations would receive emails telling them that unless the Americans back off, the supply of critical components manufactured in Mainland China will dry off due to “environmental constraints” as some of the workers got sick inhaling toxic solvents. Apple Inc would be ruined as Samsung would not suffer any supply problems. Switching to another supplier would take too long. You may say that I have invented that story. But this is almost exactly the scenario with rare earth minerals in the previous iteration of the game. Would Apple Inc. be able to lobby the American officials to back off? I don’t know. Certainly in a few years time when the dependency on Chinese manufacturing grows and skills loss in the US deepens, such a scenario seems more likely.
Australia has progressed much further along this line. Recently I dealt with one “engineer” (a graduate of a “good” Australian university) who did not know how to connect a relay switch to a circuit so that power would be switched on or off. He thought a relay is like a transformer. 20 years ago people who graduated from a technical high school in Poland would not have a problem with that. I can compare the level of idiocy of some people educated in the current “system” with the good level of skills presented by the migrants from Mainland China. They have no issues with relays or transistors or digital logic circuits or processors or anything else.
You may say that this is irrelevant as the US has its Silicon Valley, still a magnet to young professionals and entrepreneurs or that Australia can source engineers from China and India or even Eastern Europe. Wait a few more years.
Neil Wilson,
“We are moving towards a robotic future where the output of the factories will be generated by machine with little or no human labour requirements.”
Yes I agree. A future when all the machines will be designed, owned and operated by the Germans (Ja! Naturlich!), Japanese, Chinese and maybe Koreans.
There is a very good model of the process I am talking about – the de-industrialisation of India and simultaneous industrialisation of the Great Britain in the early 19th century during the first Industrial Revolution. Just google for “de-industrialisation in India” and you’ll get a big list of scholar articles trying to answer what and why really happened then. It is so ironic to me that the successors of those who benefited so much from the first Industrial Revolution (the British) of from the second and third (the Americans) effectively lost understanding of these processes.
I am not defending old dirty industry like steelworks. I am talking precisely about new industries. Whenever I look for the components of the systems I build I get dirt-cheap Chinese / Taiwanese modules. I am fully aware of how advanced home-grown (not “stolen” from the US) are Chinese systems in the area of my current professional interest. I can say – I am happy that they’re doing that well. They are smart and hard working – they deserve that. I am unhappy however that the inevitable political consequences of the looming technological supremacy of the Asian countries over the West are going to transform the global political landscape – unless a dramatic change in the attitude occurs. I am sorry to say that the change I am thinking about will never occur under people like Barack Obama fretting about the government running out of money.
It is precisely the active policy of the governments of the countries I mentioned what nudges the market mechanism of investment allocation towards high-tech manufacturing while market mechanism allocates Western investment into “services” such as Facebook, banking, high-frequency trading or growing real estate or commodity bubbles.
It is delusional to rely on free-market resource allocation mechanism when you are playing soccer and all the other teams play rugby combined with kick-boxing.
It is not enough to provide work for everyone and close the aggregate demand gap caused by saving/private debt de-leveraging/capital account deficit. This is economics for kids I am afraid. I lived in a country where everyone had a job and the government was busy building the heaviest possible industry – and everyone dreamt about moving as far away as possible from the system of social justice and progress.
Real economics starts when you are able to combine the in-depth knowledge of the demand side and the supply side. Otherwise it is a blind trying to convince a deaf to do something together.
if it did happen, seems it would be a one time shift and not ‘inflation’?
@WARREN MOSLER, I didn’t say “inflation”. A one time shift would be enough to inflict a serious damage to American position in the world (USD no more a “reserve currency”) and may lead to a dramatic rearrangement of the pricing system, reducing the profits extracted by international corporations.
In the end the vacuum would be filled by other corporations – owned directly by the BRIC states or indirectly by Russian / Chinese oligarchs who act as agents for these states.
details of what you mean by ‘serious damage’?
it went from about 85 to over 150 vs the euro without what I’d call ‘serious damage’?
isn’t the problem that in practice there is no such thing as a one time adjustment, especially if too big, and that through the political process this adjustment will almost always bring inflation?
history says the oppposite? mexico 1994, russia 1998, se asian crisis, etc? large one time adjustments and then sort of stable since?
@WARREN MOSLER,
Think about the price of oil in USD going from $90 to $300 because the Saudis demand payments in gold or Yuan and refuse accepting dollars, when the Americans lose political influence in the region (Iran brandishing nukes, other countries to follow) and USD goes from the denominator to the numerator.
Impossible? Who was talking about the disintegration of USSR in 1981? It just took 10 years…
Will the economy eventually recover? Probably – if the political stability is not affected.
if it goes to 300 it’s either because they hiked the price or demand finally out stripped their capacity
recognizing the difference between a one time shift and inflation i don’t see any loss of ability to make adjustments
@y, @y Actually, Warren does offer an explanation in passing. It does not require either stupidity or irrationality because there are sectional interests (e.g. the interests of exporters).
@WARREN MOSLER, maybe their exporters do exactly what the Standing Committee wants them to do? I agree that the central authorities have very little control over the regions but the policy of the Central Bank in regards to setting exchange rates is determined only by the top leadership and their advisers.
So what if export-led growth aided their policy of rapid industrialisation? NB this policy may change in the next stage.
Mr. Mosler, awesome video! Thanks for all the information..
Would it be fair to say that the primary cause for the recession/depression here in the US as well as across the Euro area is due to mismanagement of fiscal policy? That if we had simply cut taxes or ramped up spending enough we wouldn’t be facing this situation? (assuming the Euro’s still had their own currencies)
Stephanie makes the point that running surpluses has always led to recessions, do you agree that it is that simple of an explanation? Clinton running the surplus led to massive borrowing and unsustainable private debt, so (along with deregulation of derivatives and government incentivizing of borrowing) we ended up with the housing bubble?
Warren,
As far as I understand the event was at Columbia Law School and the moderator, Thomas Edsall, is from Columbia Journalism School, who was previously at Huffington Post.
Has there been any reaction from the economic faculty at Columbia, people like Joseph Stiglitz and Robert Mundell, on your presentation?
Except under extraordinary/catastrophic scenarios, they can convert the virtual stuff (keystrokes, I figure) we send them into real stuff, can they not?
Only if they have tanks and are prepared to invade. Otherwise it is with the permission of the currency issuer.
There is no guarantee that the keystrokes are worth anything, and if you implement ZIRP and no bonds then those keystrokes will have to be stoed with private sector entities – and they can go bankrupt.
No guarantees – and stop worrying about catastrophic scenarios. The general idea is to avoid catastrophes.
I had no such worries in that question. On the contrary, I meant: under stable/normal operating conditions (no tanks or invasions), they can spend our keystrokes to do imports of their own (from us or not, who cares). And, unless what they are exporting is some non-renewable essential matter, I don’t see how they got nothing, or lost something. On the contrary, can’t we say that they had us provide employment to their people?
Anyway, I think I understand why Warren says what he says. He is trying to make “a” point, not “all” calculations analyses that can be made.
There is no guarantee that the keystrokes are worth anything
there is an implicit guarantee that they are worth something, or there wouldn’t be any international trade.
they are tax credits
yes,they could buy things from us with their dollars and take them home.
but they don’t, and even if they did try to do that, they can buy only from willing sellers
and are subject to a number of US policy choices to limit their ability to import from the US
yes they are tax credits, which means they’ll be worth more than 0 but nothing else.
and whatever policies are introduced to limit imports, that would lower the exchange rate all things equal.
so what do you think will happen to USD held abroad if the US banned exports to any country? that would severe the link between the pieces of paper and the fact they are tax credits in the US (assuming you can’t use them to pay taxes in another country, just a thought experiment)
why should we care what happens to the US dollars held abroad’s purchasing power, apart from if it went down the risk of exporting when we don’t want to goes down?
why should we care what happens to the US dollars held abroad’s purchasing power, apart from if it went down the risk of exporting when we don’t want to goes down?
my point is that if US dollars are held abroad it’s not only because they represent a tax credit.
and that there is an implicit guarantee that those dollars will keep their value in the short term at least, or else Americans wouldn’t be able to import and their standard of living will decrease.
on balance we import a lot more than we export. the statement used the extreme case to make the point
Warren, why are you giving this presentation to a bunch of law students…why don’t you have a debate with the mainstream economists at the university and also with those at Harvard , MIT and Chicago. Those are the people you need to convince.
@Fin,
Because they’d eat his lunch. All they’d have to do is recite Keynes word for word, either out of Volumes 27 and 28 of The Collected Writings or just repeat his objections to Abba Lerner. This is low hanging fruit.
Keynes jibbed at Lerner’s logical policy development of his own macroeconomics. In a letter to James Meade in April 1943, Keynes noted that Lerner had written that, once the national debt built up big enough, it would no longer be necessary to borrow to enhance purchasing power—that the interest on existing debt would provide the necessary injection. (In effect, the government would be printing money.) “His argument,” Keynes wrote, “is impeccable. But heaven help anyone who tries to put it across [to] the plain man at this stage of the evolution of our ideas” (cited in Colander, 1984, p. 1574). And much later, at a seminar at Boston University in 1972, Lerner recalled putting the matter to Keynes in Washington in 1946, at the time of Bretton Woods: “Mr. Keynes, why don’t we forget all this business of fiscal policy, public debt, and all those things and have some printing presses?” To which Keynes replied: “It’s the art of statesmanship to tell lies, but they must be plausible lies” (ibid.). (Kenneth Arrow heard a somewhat different version from Paul Baran, who remembers Keynes’s reply as, “Mr. Lerner, how many times do I have to remind you that you cannot run a government on transparent humbug?”)
Keynes, like most people who think about government and serve it, was of two minds; Lerner of one. When confronted by the implications of his own reasoning, Keynes is said to have remarked, “I am no Keynesian.” The quip is perhaps apocryphal, but se non e vero, e ben trovato. As Lerner himself put it later in “Keynesianism: Alive, If Not So Well” (1978), Keynes was timid: “He did not carry his conclusions all the way.”
@Clonal Antibody,
Keynes praised Lerner for reaching the conclusion but not the plausibility which if you continue reading your own post, the Colander paper, or either of thereto very large volumes I referenced, which you won’t, you’ll start to understand. Also read Adam Smith. Feel free to distribute.
understand what?
not
@WARREN MOSLER, only original Keynes can prove neoclassical wrong bit PK has rejected (unknowingly for some ) his mathematical proof. You’d be smoked. All they’d have to do is take Keynes’s position against you. Lerner was a good as at you, but do some homework, Warren.
what is keynes position ‘against me’?
and nc theory isn’t ‘wrong’ for the most part, just inapplicable, best I can tell.
@WARREN MOSLER, that’s one of the truest things you’ve said
@Macros am, and make no mistake I know you’re a good man. Stop being sloppy and careless with this, and don’t rely on those canards. You want a fighting chance, rely on the masters. Do it like a Fabian would.
fighting chance for what?
I’m already too old to die young…
I don’t fully understand, why imports are real benefits and exports are real costs. Would you agree to the assertion, that “to have financial assets” is a real benefit and to be indebted and not to know, how to pay your bills for the next days is a real cost?
@Ben,
When Warren says “real” benefit or cost he means real in the economic sense. Financial assets are not real assets. Your labor, your car, your home, our roads and highways are real assets. Your 401-k, your savings account and all the paper US dollars in existence are financial assets – not real assets.
Exports are real costs because real labor, capital and material had to be consumed to create the output which was then shipped off to someone else who got the real benefit for a bunch of paper. Yes you may find comfort in all that paper/fiat currency, but it is not a real benefit in the economic sense.
@Adam1, My point is, that the division between the real sector and the financial sector is “in reality” not as clear as it might seem at a first glance. When I have sleepless nights, because I don’t know how to repay my debts, then I think my sleepless nights are a real cost, even though my debts belong to the financial sphere in the economic sense.
If it would be true, that imports are real benefits and exports are real costs, than China and Germany are acting foolishly. But before I believe this, I rather believe that the idea that imports are real benefits and exports are real costs is somehow flawed.
@Ben, Please read my comments, I am arguing that the policy of running trade surpluses nudges firms in a surplus country (Germany, China) towards higher investment in productive capacities (real capital). At the same time countries running trade deficits (USA, Australia) while enjoying temporarily higher level of consumption, de-industrialise. At some point of time countries previously running a trade surplus will stop doing that, demanding a balanced trade. Since productive capacities in the former trade deficit country are severely constrained and real capital cannot be easily replenished (as it requires the pre-existence of some real capital such as machineries to make other machineries) and retardation of skills of the workforce, a previously-rich country has to export agricultural products or raw materials while the previously-poor surplus country enjoys better terms of trade.
@Ben,
I think you are confusing the outcomes of poor policy choices with real economic costs and benefits.
When you say, “When I have sleepless nights, because I don’t know how to repay my debts, then I think my sleepless nights are a real cost, even though my debts belong to the financial sphere in the economic sense” my assumption is you’re referring to falling real wages for average workers in large trade deficit nations say like the US. That is the outcome of policy!
Currently the US runs a trade deficit of somewhere between $400 and $500 Billion per year. That is output produced by other nations that they could just have easily kept or diverted to other domestic activities but instead they shipped it to the US where the US was able to consume for the price of fiat money that is only valuable in for consuming goods denominated in US dollars.
Now this large trade deficit also represents a huge demand leakage for the US which needs to be offset by something – for the most it is offset by the US Federal Deficit, but for the past 30 or so years the US government has NOT had a policy of full employment. Yes the FED has an employment mandate, but the reality is that the FED is ill equipped with ensuring full employment. On top of lacking any policy to insure full employment, many policies have been put in place to actively work against wage gains by average workers. While the trade deficit aides and abets this it is not the cause – it is policy choices that cause this.
For example, in the late 1990’s the US had a short period of time where it was fully employed with unemployment dropping to 4% or lower. It also consumed HUGE amount of imports! It produced enough to employ just about everyone who wanted a job AND it consumed vast amounts of goods and services produced by other nations. How was that not an economic benefit? (Note: the problem with this time period is that the economic driver of was driven by increasing private sector indebtedness – again another policy choice).
There is NOTHING operationally that prevents the US from maintaining a policy of full employment and consuming everything we can produce and whatever foreigners are willing to send us for US Dollars. What prevents us from doing this consistently is policy and those that make the policy.
do you think there is any chance at all – any at all – that US bond yields could spike to very high levels at some point in the (post-QE) future, as a result of fears over “unsustainable government debt” or inflation?
I’m still trying to get my head around this basic thing.
– Yes the Treasury could just keep on crediting accounts regardless – but Congress might not let them (“money printing”, “hyperinflation”, etc).
– Yes the Fed could control yields – but it might not want to in future, and Congress might not want to make it (“independence”, “the market”, “money printing”, “hyperinflation”, etc, etc).
So long as we have a central bank who’s primary mission is to ensure the safety and soundness of the US payment system which underpins the US banking and financial sector the FED will always indirectly fund US Treasury bond auctions. It can’t do one without doing the other.
If the FED or Congress tried to prevent it we would have a repeat of the Volker years as Warren described in the video. If continued long enough it would risk CAUSING a financial meltdown, hence it wont be voluntarily tied again (one would hope).
Warren I watched the whole thing twice and have given it great thought……..here are my findings
The first part would be better if you would hit on the “interest” part of the equation and why everybody just cannot barrow from the FED at 0%……..
The second part seemed boring and makes me happy I never went to college…….
The third part did not convince me that we don’t have a petro dollar, that people in Africa are not buried in foreign debt and that they would be more likely to be piling up bodies than rocks…..
You do a very good job of theorizing how a utopian fiat currency should work however MMT seems kind of “smug” with all the too bad for them then talk. Maybe after the New World Order takes over MMT will have a place but for now………My research shows this cannot last no matter how we change the numbers on the spread sheets……
Sorry…….
I watched this the other day. Its Neil Tyson talking about why people believe in UFO’s. Sounds rather reminiscent of the economic and political debates we have been hearing. The first part is about the human condition of “argument from ignorance” second part is the unreliability of human observations.
GDP is normally seen as indicator of wealth. Every country tries to grow its GDP.
From demand sources point of view GDP is defined as GDP = Y = C+I+G+(X-M)
If net exports, (X-M), are real costs then GDP is not the correct indicator for real wealth is it?
I think the US should not try to reach full employment, because this would maximize the real cost of the nation and labour is a real cost. Rather, the US Government should print money, and buy all the goods and services American people want to consume from foreigners and then allocate them to the domestic people.
No American has to work, and in real terms this strategy would maximize the wealth of the US.
@Ben,
So basically 100% unemployment?
So who would be taxed to keep the demand for dollar? Foreigners?
Would need a strong army for that, and since you want to keep everybody unemployed, foreigners would have to be serving in it…
@Gary, You are right. But maybe 95% unemployment should be possible. We tax 5% of the American people. They should do some work for foreigners, to earn the Dollars so that they can pay their taxes. 😉
@Ben,
Sorry, but your utopia makes no sense. At least make it plausible
make sure to read the 7 deadly innocent frauds on this website thanks
The US should try to maximize real wealth.
real wealth = real benefits – real costs
imports are real benfits, exports are real costs
labor is a real cost
In order to maximize real wealth the US should try to maximize imports and to minimize exports.
If the other nations try to do the same, it can’t work, but fortunately Germany and China don’t know that imports are real benfits and exports are real costs, rather thinking the opposite is true. So the US can import as much as Germany and China are willing and able to sell them for Dollars.
Furthermore the US can maximize real wealth by minimizing the domestic use of real resources. Admittedly this would lead to a reduction of domestic income, but the US Government can provide the Dollars so that the Americans can buy the desired goods from foreigners.
You can only obtain imports in excess of your exports to the extent that other countries desire to save in financial assets denominated in your currency.
The essence of MMTs suggested policy is that it says to those wishing to save in financial assets that they will have to get their return from the private sector. The government will only offer storage and then only to licensed entities.
So what are the domestic private sector financial entities doing that will deliver an attractive return to the foreign saver?
You can only obtain imports in excess of your exports to the extent that other countries desire to save in financial assets denominated in your currency.
how many times do we need to say that this is false and that most countries finance their trade deficits in foreign currency?
Yeah, I think, while expounding MMT, it is imperative to be mindful of the reserve currency status of the dollar. As far as I understand, MMT is the same and would work for any sovereign country equally well as long as the domestic economies are concerned. It gets hairy, however, when international trade, or global economy is considered. On that scale, it doesn’t strike me as a theory that still works equally well or smoothly for all, but as one that illuminates the absence of an external sovereign power taxing the countries.
mmt doesn’t ‘work’ it ‘describes’
and it does just fine with international trade thank you
“how many times do we need to say that this is false and that most countries finance their trade deficits in foreign currency?”
And how many more times do I have to point out that is irrelevant.
Particularly when the OP was talking about the US.
“It gets hairy, however, when international trade, or global economy is considered. ”
It doesn’t at all. You just have to pay attention to the transactions and bear in mind that the size of your ‘currency area’ is not necessarily the same size as your country. It could have a wider or narrower influence depending upon the power of the currency issuer.
you can point it out as many times as you like, it will remain more than relevant to those countries that must finance their trade deficit in foreign currency, including the Euro members.
the private sector funds any euro trade deficit.
same in most nations
You just have to pay attention to the transactions and bear in mind that the size of your ‘currency area’ is not necessarily the same size as your country. It could have a wider or narrower influence depending upon the power of the currency issuer.
Neil, do we need MMT to say this? IMHO, the theory is not particularly useful to an arena of players that are not subjects of a common sovereign. Perhaps, it is inapplicable by definition.
“Neil, do we need MMT to say this?”
It does. It is describes all the monetary systems and how much policy space they may or may not have based on the policy configuration of that monetary system.
Classical economics, AFAICS, only describes what happens in a barter economy with fixed exchange.
MMT describes the behaviour of money in monetary economies and how that relates to the real economy. That’s what it tries to achieve.
MMT is a theory of money in a modern context. The name says it all really.
Neil, okay, thanks. I think I am sensing your drift.
except it’s true. the us, australia, uk, etc. run trade deficits and don’t use external debt, for example
except it’s false. the us, australia, uk, etc. are only a handful of countries. most countries finance their trade deficits in foreign currencies. that’s a fact.
name a few, thanks
seems most borrowing of fx by govs seems to go to reserves for currency support,
which I wouldn’t do, and not to directly pay for imports?
if you think along that line then MMT should stop making a point about governments not being indebted in foreign currencies, since they can always default. actually, it should promote the idea, since that gives government a good excuse to default.
the foreign saver is mainly foreign govs who buy dollars to support their exporters even at 0 rates
By foreign govs are you meaning foreign government sectors, ie largely the foreign central banks.
Because of course a foreign central bank has no need and no incentive to recycle foreign savings – since it is more effective for it to use its own money instead. That’s another blind spot in the classical economic description.
non-sequitur
There are established processes for private entities to go bankrupt that are agreed and importantly *known about up front*.
We’ve already been through the nonsense of debtors’ prisons with private entities and private contracts.
There are no established agreed processes for governments to go bankrupt. In particular the division of losses between creditors and debtors is not defined.
Without an established bankruptcy procedure, the state must avoid going into debt in something it doesn’t control if it wants to remain in control
@Ben,
This does make sense, but net importing works if
1. Government spends enough to cover resulting unemployment
2. Foreign sector cannot blackmail (I am sure US does not net import weapons and food, also watch the military presence near oil fields)
3. Foreign sector wants to net save in local currency
This is my thinking, so I may be missing something
Because the goal isn’t to maximize real wealth. The goal is to maximize real happiness. And I don’t think the government is smart enough to do this by making more economic decisions for their citizens in the aggregate. The best way to do this is to increase economic freedom and let individuals decide how much to work and spend and where to work and spend.
Trade deficits and surpluses are neither good nor bad if they arise naturally, from billions of individual economic decisions made freely by individuals to increase their own happiness.
Around the world, it is very common for governments to put a thumb on the scale which creates a suboptimal trade environment for their citizens. The reason this happens is that the decisions makers in those governments have more pressing concerns than the welfare of their own people (their main concern is usually the preservation of their own power)
Although trade is not a zero-sum game, there are many instances where citizens of a free country can benefit from suboptimal economic conditions in an unfree country. The most glaring example is when an unfree country subsidizes an export industry. It’s pretty clear that the citizens of the free country benefit from that subsidy when they buy the resulting imports, or products made from those imports.
If the US-Government tries to fight deflation by abolishing all taxes, would this lead to hyperinflation because nobody would accept the Dollar when nobody has to pay taxes?
Yes, the dollar would go to zero value rather quickly, unless of course people believed it was just a temporary tax holiday.
There are examples of this in the past, although usually it has happened because the currency issuer / taxing authority is destroyed in a war or a revolution.
@ESM, So it makes a difference if the government spends 500 billion and taxes are zero, or the government spends 700 billion and tax revenues are 200 billion regarding the value of the currency?
I am not so sure, if people are aware that they are accepting the Dollar, because they can pay their taxes with the Dollars. Maybe this is only important to start the system?
“So it makes a difference if the government spends 500 billion and taxes are zero, or the government spends 700 billion and tax revenues are 200 billion regarding the value of the currency?”
Yes, it makes all the difference in the world, assuming of course you’re talking about a recurring process (e.g. annual spending and taxing). In the latter case, if savings desire is greater than $500MM/yr, then there will be deflation (i.e. an appreciating currency) until the desire to save a more expensive currency declines; if it is lower than $500MM/yr, then there will be inflation (i.e. a depreciating currency) until the desire to save a cheaper currency increases.
In the former case, the savings desire will collapse to zero because there is no fundamental demand for the currency. I suppose that cash might be floored by some sort of commodity value (i.e. the value of the paper or the metal used in the currency) or collector’s value, but certainly in its electronic form, demand for currency will go to zero because there is no fundamental need for it.
As Neil alludes to, there might be some inertia in the system because not everybody will realize that the currency should be worthless at the same time (which of course makes it not worthless in the very short term), but I think the process should be mostly complete within a year or two, unless the government goes out of its way to hide the fact that it is not backing the currency (in which case it can last as long as a Bernie Madoff-like ponzi scheme).
i) I agree that unless this condition is assumed, there will be little difference.
ii) This assumption is unnecessary; taxes create recurring demand for the currency from some in the private sector, which then creates demand from everybody, whether they pay taxes or not. I suppose that how keenly you feel the effect that taxes have on demand depends upon how you invest and pay taxes. People who have a regular job and pay withholding taxes and end up getting a rebate on April 15th are not going to see the point. Self-employed people like me, who try to maintain as little cash earning 0% as possible and then have to scramble to sell assets to pay the estimated tax bill every quarter, understand the effect of taxes on currency demand rather well.
taxes create a net nominal demand that can ultimatelyl only be satisfied by the govt of issue, which is necessarily price setter, hence value
you can only sell your assets in order to pay your taxes to someone who has saved the dollars you need. so my point is in aggregate, not on an individual basis.
do we collectively net save only in order to pay future taxes?
directly or indirectly, whether we know it or not, yes
@Ben, ….we collectively net save only in order to pay future taxes..
As long as bank money was not state money, was there no desire to save bank money?
it’s a financial asset denominated in the currency of a state
Seems to me, that there is not much practical difference if one needs Dollar to pay taxes or one needs Dollar to repay a dollar denominated loan regarding the demand for Dollar.
To initiate the demand for Dollar you have to tax, but when the system is running and loans are granted in Dollar, you can be sure that there is a demand for Dollar without taxing.
Therefore I see no difference if the government fights deflation with spending 500 billion and zero taxes or with spending 700 billion and taxing 200 billion regarding the value of the currency.
Seems to me, that there is not much practical difference if one needs Dollar to pay taxes or one needs Dollar to repay a dollar denominated loan regarding the demand for Dollar.
and if one needs oil and can only buy it in dollars
Anybody could support the dollar at a positive value, the Saudis especially, if they decided to exchange real goods and services for dollars. I don’t see why anybody would do this, however, except the US government (although the US government has an easier way to support value, which is to impose a tax).
Saudi Arabia is simply one more entity which will note the decreasing demand/value for the dollar and raise prices accordingly. Eventually, they will stop denominating oil in dollars because it will be impractical, but there is little material difference between a price of $1MM/barrel that is growing at an exponential rate and the dollar being completely worthless.
sellers of oil will take any currency you have if it trades in the fx markets, which they all do
it’s not about ‘needing’ the dollars,
value is about what you have to do to get them.
zillions of turkish lira were continually needed to make loan payments while the inflation rate was 100%
@WARREN MOSLER, The real question is not what you have to do to get the dollars but rather what are you willing and able to do, to avoid the adverse consequences, if you don’t pay your debts.
In the case of taxes, maybe the debtor tries to avoid to go to prison.
In the case of bank loans and sound banking: The debtor tries to avoid to lose collateral.
If there are no adverse consequences debts are worthless notwithstanding how much debts there are.
the question at hand is the value of a dollar, right?
the value is what you have to do to get it from the issuer, right?
same as any monopoly?
@WARREN MOSLER, In my opinion the (minimum) value of the dollar consists in the desire to avoid punishment by not paying taxes.
The price of the dollar is what you have to do, to get the dollar.
To use the parents example: Your children have to pay 10 coupons to avoid ban on watching TV. They can get 10 coupons for mowing the lawn.
The minimum value of the coupons is the desire of the children to watch TV. The price that they have to pay for the coupons is to mow the lawn. If there is no desire to watch TV the system won’t work.
ok
and if they want to watch tv the value the coupons will exchange at in the private sector is the value implied by the work needed to otherwise be done mowing
“the value is what you have to do to get it from the issuer, right?
same as any monopoly?”
As Ben recognizes, this is not quite right. There are two components to value: a bid and an ask. The two can be very far apart, and in the case of an intangible like a unit of fiat currency, the bid can easily be zero.
I have long advocated keeping some part of one’s savings in canned tuna fish. That way, if the bid goes to zero, you can always eat it.
the value is what you have to do to get it from the issuer, right? same as any monopoly?
this would be right if there were only vertical transactions, like with the Buckaroos, but it’s not clear what it means in a market economy where most transactions take place at the horizontal level.
how hard it is to get the money from the issuer is only part of the picture. if there is a JG that pays someone 10$ an hour to perform the same task in an expensive big city like NY or in much cheaper small town, then the value of 1$ will be different in terms of the goods and services it can purchase at the local level, but it will be as hard or as easy to earn 1$ in both places.
yes, what it can buy in different place differs for lots of reasons. but the ‘source of value’ remains as stated.
“… but when the system is running and loans are granted in Dollar, you can be sure that there is a demand for Dollar without taxing.”
This is part of the reason there is inertia in the system. But without the recurring tax, or at least the expectation of future taxes, the demand for the dollar will decline and its value will fall, and the price of real assets will rise in dollar terms. This makes it easier to pay back the loans and/or less costly to default on them. So demand for dollars to pay back loans will decrease, which further depresses the value. It’s a death spiral. It takes time, but any value above zero is unstable. It could last a while of course if there are people who believe the government will support the value, e.g. by starting to tax again or by exchanging real goods and services or assets for the dollar. But if the government were simply to collapse, like the Confederacy during the US Civil War, then demand for its currency would as well.
1. pretty much the same thing. and the first is more expedient
2. they could have, as it could not be obtained other than by local work
3. Davidson’s actually. Unc used to be the reason people used ‘money’ but with soft currency economics it became the/a reason to save.
@WARREN MOSLER, 1. and 2. there could be a small but important difference: The Africans know that they can buy goods only available for them with the European currency.
Example: The government needs 10 l barley. It pays 10 Dollar for 10 l barley.
It taxes A with 10 Dollar. If A sells 10 l barley to the government, it would be the same as if the government had confiscated the barley from A.
If A has 10 bananas that B wants to buy than B could sell 10 l barley to the government and than buy 10 bananas from A.
A could choose to sell 10 l barley to the government or to sell 10 bananas to B.
If A has nothing, that B wants to buy than he has to sell the barley to the government.
My point is: the government could only tax and issue its currency, when A has something that B wants to buy. And Tschernevas example makes it not fully clear, if the Africans accept the European currency because of the tax, or because of the tax and the possibility to buy goods only available for them with that currency.
I might add that even when A had something that B wants to buy the government can in the long run only tax and issue its currency when it gives a good reason, why it taxes A and not B.
in any case it’s about what the govt wants, which is generally labor as in this case.
so by putting a hut tax in place payable in something only the govt can provide,
the govt can provision itself as desired by offering to buy what it wants with its otherwise worthless currency
Let’s go back to the parents example:
If the parents don’t provide enough food for their children, the children might prefer to live by their grandparents and the value of the coupons is zero.
If the parents don’t be fair with their children, the children rebel and the value of the coupons is zero.
The ability of the government to tax is not independent, how it treats the population.
Furthermore,it seems to me, that the vertical side of money is the consequence of the existence of different pay communities, whose members want to make transactions with each other, governments decision, that granting loans and checking creditworthiness should be done by the private sector, and the implementation of a lender of last resort.
Someone who pays taxes in US-Dollar belongs to the pay community of the US.
A customer of J.P.Morgan belongs to the pay community of J.P.Morgan.
Someone who pays taxes in Yen belongs to the pay community of Japan.
A customer of the Deutsche Bank belongs to the pay community of the Deutsche Bank.
Imagine that all the nations in the world join in the US, so that everybody pays its taxes in US-Dollar. Further imagine that the US Government absorbs the worlds private banking sector. In this case the consolidated government and banking system would act as a super-clearinghouse for all credits and debts in the world.
There would exist (with some exceptions) only one pay community and only one currency. There would be no need for vertical money. We have not to care about reserves, the federal funds rate, deposit insurance, clearing at par and so on. Analyzing such a monetary system is much easier and could bring some enlightenment for the understanding of the real monetary system.
@WARREN MOSLER, I just read, that you had the same discussion several times. I agree that it is not easy to get bank money accepted. But I can see no infinite regression. The borrower has to redeem the loan later, or he will lose collateral and this is the point, where the regression stops.
Not meaning to start a polemic the terms of which I may or may not understand (*), but I recently came across a certain Bernard Lietaer (100 minutes on youtube); he appears to be calling our government-issued money bank-debt money anyways. Given that all govt spending beyond tax collections goes by law to create treasury securities that pay interest, he may have a point.
(*) I don’t know, I felt like being defensive; there may already be such a polemic as Lietaer appears dismissive of otherwise-praiseworthy (his characterization) efforts of chartalists at UMKC.
I heard him a while ago as well and he had quite a bit right!
‘bank money’ is always denominated in some currency that’s already accepted.
notice that no one borrows confederate dollars from banks any more, because they can’t buy anything with it.
“‘bank money’ is always denominated in some currency that’s already accepted.”
Isn’t it slightly more than that – in that it is *pegged* to some currency that is already accepted.
That’s how it can be swapped one for one – it is actually converted as opposed to exchanged.
i like to say it leverages an existing currency
like gold futures leverage gold
Because English is not my first language, it could be, that I misunderstand something.
Means ‘to lend money’ the same as ‘to grant a loan’?
Can anybody define the term ‘money thing’ without using the word ‘thing’? Thank you.
yes
financial asset used in exchange?
i never use the term.
If the government absorbs the banking sector, where is the inside money and where is the outside money?
A society can have two types of creditor and debtor relations. Relations between members of the society and relations between members and the society as a whole.
If you do a job as a judge than you work in favour of the whole society. The whole society is indebted to you, because you do this job, so you get a credit on your account.
If you are driving too fast, than you are endangering other members of the society, so you are indebted to the whole society. Your debt is cancelled by debiting your account.
When A buys something from B. The account of A is debited (he is the debtor) and the account of B gets a credit (he is the creditor). (See Mitchell Innes: What is money)
Creditor and debtor relation between the society as a whole and the members of the society are mostly settled by the government and its institutions.
So in a given society we have different creditor and debtor relations expressed in a money of account, that also measures the ‘value’ of goods, sevices, real assets, ‘injuries’ infringements of law and so on
So we need no outside money and the private sector of the society net saves in order to pay future debts and not only taxes.
i did not say there is no outside money necessary
@WARREN MOSLER, Is a financial crisis characterised by the inability of the private sector to pay its taxes?
not the financial crisis per se, but unemployment which is the evidence the govt isn’t spending enough to cover tax liabilities plus savings desires
@Ben, In Germany 95% of the tax revenues arise from some sort of income taxes and some sort of sales taxes.
You don’t try to earn money to pay your taxes. If you earn money, than you have to pay taxes.
The banking sector net saves in order to pay future taxes and in order to be prepared, if their customers pay their future taxes.
just checked it. works ok for me
@WARREN MOSLER,
Those students appear to be getting their money’s worth.
Warren,
Where are we – Are you going to be in Congress, teaching at Columbia or continue Valance & moslereconomics.com?:)
About the politicians who claim “we cannot say that” and who demand more comfort. What do you think is the main reason behind that?
Is it just about fear for losing votes when not talking mainstream?
Is it a condition in exchange for support from Wall Street that’s fearing loss of bond business?
Is it fear foreign nations will sell off the dollar?
What else?
In recent presidential debates I noticed both candidates proposing some policies that are in line with MMT.
One could argue of course there is always something to find that matches with MMT.
In the first debate I heard Obama defending he prolonged tax cuts because that would enable people to spend more and thus would create jobs.
Romney all the time talks about tax cuts, not really explaining how and what.
Do you also see some signs of light?
I have the feeling there is more and more “comfort” for politicians to come out with MMT policies. More and more investors ask for it, I would say almost demand it. Do you agree?
i’d like to think you’re right but just don’t know
@WARREN MOSLER, As you mentioned in your presentation: Goldman knows, Npmura knows, Morgan knows etc . I cannot assume different than that these guys whispered to their political friends already long time ago.
How about your explanation for the main reason for “we cannot say”?
@walter, i think Warren left out the defense industry ,the oil industry ,the Bush/Cheney governemt ..they all khow how to benefit from fiat systems .(maybe not as prescribed by MMT exactly but they know how to spend fiat money ) ..
Sigh. Another world leader who just doesn’t get it.
Warren, please send this man a copy of 7DIF pronto.
@ESM, It’s only $5.4T of which $3.9T are OFFICIAL Reserves…
http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt
rsp,
@Matt Franko,
What does
“Of which:
For. Official”
mean at the bottom?
@MRW, I believe it means “Foreign Official” which I assume means they are the official USD financial assets of a foreign government. They are held in securities accounts at the US Fed on behalf of the foreign governments…
So when someone would say “foreign claims” it may be more descriptive to say “foreign government claims” for almost all of these balances…rsp,
email him a link to it, thanks
@WARREN MOSLER,
It’s better to deliver it by air.
NB that guy understands pretty well the meaning of the term “dollar hegemony”.
“Once the monthly inflation rate of a country exceeds 50 percent, it is officially undergoing hyperinflation. Hanke estimates that Iran is experiencing a rate of about 69.6 percent inflation at the moment. He, having studied currencies for 45 years and been responsible for stopping 10 of the world’s 57 hyperinflations, was able to uncover the disparity between the Iranian government’s official exchange rate and the black-market exchange rate.”
http://www.jhunewsletter.com/2012/10/18/hanke-uncovers-iranian-currency-hyperinflation-52095/
Despite the fact that there are a few countries and some corporations still willing to trade with Iran, the American control over the global banking/payment system appears to be efficient. If the Iranian regime is overthrown (or forced to accept a compromise) without the need to endanger the lives of American/Israeli/other Western nations citizens and Iranian civil population, this will be another powerful argument for maintaining the status quo.
Warren, you certainly didn’t hold back in the Q&A. Nicely done.
thanks!
The organizers of the seminars should be encouraged to break the Youtube into smaller chunks.
Okay, deficit spending (even in perpetuity) is fine (and desired); that is understood. But does it really follow from this (or where does it follow from) that massive debt is fine, too?
Any amount of debt may be no problem in terms of the question of default (which is inapplicable), but if we are indebted in large part to a few big entities, then I don’t see how that is not worrisome. I see mentioned around negative consequences such as skewed distribution (of costs and benefits –within a cohort– of domestic debt) or degradation of productive capacities (in the case of foreign debt/trade deficits). Are those it? I somehow feel there’s got to be more to it, but can’t quite articulate it. (I am new to this stuff.)
So there are 15 or so trillion of savings account balances at the Fed.
Why care?
@WARREN MOSLER, I suspect many worry (unconsciously?) about the possibility that the owners of those huge savings balances may decide one day to go on a huge spending spree and what the negative consequences then may be.
I understand that by now you put the burden of proof on those who always use inflation as excuse not to increase the deficit.
It would be helpful though to elaborate a bit more on how MMT would deal with inflation prevention, other than watching the line of unemployed people.
After all inflation is not so simple phenomenon. It may vary strongly per asset class or even individual products and also over time and it can hit at very different pace.
Thanks Walter. I didn’t see your input before I posted mine.
@walter,
The cyclical component of the budget would play a moderating role. As spending picked up employment would also increase, reducing government outlays. Revenues would also rise into surplus territory and act as a demand drain. You might get a sudden surge of inflation but it would attenuate over a relatively short period of time.
yes, seems the foreign dollar pile just gets higher, and same for most nations, as savings in general increases over time.
and if sudden spending, for any reason, starts driving up prices, it’s good to know that a fiscal adjustment will cool demand.
but with out current tax structure seems that works automatically in any case
@walter, My concern isn’t that we can’t easily pay all those bondholders, but that when we do pay them, they get richer. Seems like welfare for rich people. Why should we have to dole out cash to the rich simply to run our fiscal operations? Basically, people with enough of a surplus to spend it on financial assets are permitted to buy stock in our government and profit from it, while everyone else gets diddly. It’s a racket.
hence my 0 rate proposal…
😉
@walter, @Dan Kervick
Dan, I do not understand your point.
I refer to inflation worries and what kind of inflation control measures MMT suggests.
You talk about your worries to pay bondholders.
If you suggest that the interest on risk free govt bonds should be zero that’s one thing, but do you suggest haircuts, not paying back principal?
By the way, how risk free are those govt bonds? After all there are some self imposed restrictions in place that could create some serious havoc or not?
I think I am being theoretical and curious about the consequences of possible pathology in the debt structure. Like, in the extreme, one foreign country or one filthy rich dude holding a big claim (e.g., 100% of GDP, like you say) against your economy. Couldn’t that be a threat in any way? Couldn’t, for example, such a claimant take that money out to a shopping spree, and blow MMT’s thermostat?
Thanks, and the best of luck in your run for office.
@Nihat,
If the rich dude goes out and buys all the output, then people would have to make and grow more. Who would have all the money to spend?
@Nihat, I think it is important to remember that this money exists in the form of bonds. Not so liquid and as a result it would be hard to just go out and spend it all. It just isn’t going to happen like that.
@Nihat,
China as the most obvious example has to do something with the dollars they earn as a net exporter to the U.S. They can but Treasury securities, which they do as the #2 holder of Treasuries behind the Fed. They can buy American real estate, which I’m sure they must do in a meaningful way and/or invest in assets like U.S. companies which produce a downstream flow of income. Or, they can simply buy more goods and services from the U.S. which would bring those inflationary chickens home to roost.
Thanks for all the replies.
Ed, just so I know, can’t they also spend those dollars outside the US, convert them to other currency, etc?
Like I said, I don’t know much about this stuff, but won’t they cause inflationary pressure by the very act of putting their dollar reserves in chase of output?
I think I understand practical mitigating factors (like Rodney explained), but since MMT is said to be a theory, I am asking a theoretical question: what is the difference between money that a sovereign government can create at will, and money that was so created and stashed away by another party? As far as I can tell, if such a stash became too big, it could compete with the government’s spending power.
correct, and if spending is at the limits of output any private sector increase need be met with a net public sector decrease
@Nihat,
You can’t convert to another currency. You can only exchange for another currency.
And you can only do that if there is somebody willing to go in the other direction.
That is a vital distinction.
” but won’t they cause inflationary pressure by the very act of putting their dollar reserves in chase of output?”
They will cause quantity expansion and boom times if they do that – which makes it very easy to tax or back off on spending elsewhere to take some heat out of the system.
You could even encourage more domestic saving.
The policy tools exist to deal with the situation once you realise that all you are trying to do in the monetary economy is maintain the monetary circulation around the system at a particular volume and speed.
Neil,
Yep, exchange, it is, with a willing counterpart. Bad word choice on my part.
I think I see your point re: policy tools. I visualize all this as a flow control issue, too. To me, huge savings held by single parties are like dams, which if unleashed can do a lot of damage (drowning a lot of micro-people even if macro-balance reestablishes in time).
@Nihat,
You have to remember though that if a dam is allowed to burst those that rely on the lake don’t have any drinking water.
It is very important not to assess the external sector as though it can act independently without creating a feedback situation. The external sector consists of economies just like yours subject to the same constraints and impacts.
@Nihat,
Try listening to this (I trust you listened to the video above, esp the Q&A.). Pick it up at 1:30:00. it’s Warren for half an hour.
http://radioornot.com/site/?p=5485:
Warren,
you didn’t really explain why the US gets to import so much and why other countries choose to make themselves “slaves” by exporting.
The implication seemed to be that they are either stupid or irrational. But that’s not a very convincing argument.
@y,
Exports are real costs and imports are real benefits. Clearly these exporters only want the currency which we print. Warren does not get the signs right. The issuer of the currency is the debtor and the recipient is the creditor for the recipient has given up real goods and services in return for nothing. Money is merely an ingenious way to secure payment in advance.
“there are 15 or so trillion of savings account balances at the Fed. Why care?”
That is pure wisdom. Since we shouldn’t care, and since we need a better buffer stock then UE, let’s have the Bureau of Engraving and Printing offer to hire all unemployed seeking to work (at Warren’s $8/hr wage, of course) and make our primary industry the literal printing of tax credits, for these foolish yet generous nations will surely continue to send the US all the real benefits while expecting the US to incur no real costs.
Please read 7DIF and mandatory readings.
@y,
See my comment to the previous post
This is a serious flaw in the reasoning I believe, repeated again during the seminar.
Also: the size of public debt denominated in domestic currency is irrelevant from the solvency point of view but the size of the stock of net savings especially in the hands of foreign entities may reduce the room for manoeuvrings if inflation starts creeping up in the future or if a foreign government tries destabilising the global financial system.
In order to prevent these savings from becoming an inflationary overhang (as in the case of the former Soviet Bloc countries circa 1990) real interest rates cannot be too negative. Even worse, if the inflation accelerates the bonds yield curve becomes steeper amplifying capital losses incurred by the existing bond holders (unless the CB intervenes). If foreign debt holders decide to change their portfolio allocation between different currencies anticipating the losses, exchange rates can wobble dramatically leading to the repetition of the 1997 Asian crisis – but with the American dollar as a numerator not as a denominator. (Domestic debt holders may do the same but they can be subjected to capital controls policies more easily).
http://en.wikipedia.org/wiki/1997_Asian_financial_crisis
The chance of the instability developing would depend precisely on the size of the stock of debt held by the foreign entities. The same applies to the political leverage given to unfriendly foreign governments interested in replacing the current global order or blackmailing the American government.
The positive feedback loop can be:
accelerating inflation -> loses on bonds -> a futile attempt to get rid of the financial assets denominated in the particular currency -> severe fall in the exchange rate -> inflation accelerating even faster due to cost-push effects
The initial acceleration of inflation may be a result of rising commodity prices (as in the 1970s), not necessarily hitting the full utilisation of productive capacities barrier.
We cannot just say that the Govt can stay away because the currency is fully floating so nothing will happen. A significant and sustained fall in exchange rates would dramatically affect the productive economy and the political stability of the country – as seen in Iran.
The political choice left would be very narrow and probably include only severe fiscal repression of domestic demand in the US to halt the inflationary processes on their tracks.
We would be back to square one I am afraid but the global financial system would be de-dollarised and unpredictable political consequences would follow.
So I am sorry but for me the size still does matter – not because of the primary effects (the “Govt has to borrow from China” or “has run out of money” – what is not true) but because of the secondary effects which are ignored in the analysis but which can be severe.
@Adam (ak),
“A significant and sustained fall in exchange rates would dramatically affect the productive economy ”
Depends how long it takes for that to happen. Capital controls can slow that down over decades if required allowing the substitution effects to take place.
And again you are missing a central mechanism in the MMT prescription. ZIRP and no bonds ensures that all foreign entities have to save with entities in the private sector. And private sector entities can ultimately go bankrupt – which then eliminates the excess savings liabilities. Foreign entities then take the loss as domestic entities are usually insured.
The sign on the door is very clear. If you wish to fund excess imports then your savings are insecure and there is no guarantee you will get back the same value of real goods you gave up. On your head be it.
I find it most amusing that people spend so much time on ‘slippery slope’ fallacies rather than the real cost to a domestic economy today of billions of lost man days of output caused by low circulation of funds in an economy. That is *guaranteed* to generate an hysteresis effect in the real circuit of under investment in the future.
Meltdown is very unlikely in an economy that is running at maximum capacity and is investing sensibly in its future.
Crippling an economy due to fear of something that has a low probability of happening is stupid economics and stupid politics.
The idea of football is to keep the ball in the field of play. We have a special procedure called a ‘throw in’ to get the ball back into play. You don’t refuse to play football because you’re frightened of throw-ins.
@Neil Wilson,
Absolutely true but inapplicable to our current political environment.
The whole point of having the USD as the global reserve currency is that politicians / people / entrepreneurs believe that there will be no strict capital controls in the US ever. The second tenet is that private property rights are guaranteed with rather insignificant exceptions.
It is not just about pricing oil in USD. It is about having enormous political influence especially when Eurozone is ailing. Whose are major international banks? I gave an example with the sanctions crippling Iran. Is the current situation rational / optimal from a purely economic point of view? Of course it is not rational or rather it is as rational as the fact that I am paid probably 5-10 times more than a guy doing exactly the same job in India and 2 times more than a guy in Poland. It is optimal but only for me not for the guy living in Poland (that’s why I live in Australia).
When people advocate a system with ZIRP and no bonds I fully agree that there is no reason this won’t work. It is likely such a system would lead to better allocation of resources than the current one (and full utilisation of labour). But if someone asks what the consequences of president Romney running a much higher budget deficits in the current framework for several years would be – I am saying this may lead to an instability of the current system which is overstretched anyway. This is the main reason MMT failed to get traction. Because it is based on political wishful thinking.
This is really bad as Chartalism, Functional Finance, Keynesian and Kaleckian ideas need to re-enter the mainstream if the West is to reverse its state of decay. It is not enough to have Anatole to re-inject the Kalecki’s ideas:
http://blogs.reuters.com/anatole-kaletsky/2012/10/18/to-escape-the-great-recession-embrace-contradiction/
Would the system recover after an exchange rate collapse? The economy itself in the absence of political shocks would eventually recover as shown in Argentina, Russia or Iceland. The time constant describing the adaptation (substitution) process can be several months, maybe a year or two. I am not saying that this would be a total economic disaster with people starving to death on the streets of NYC. But my point is different. Too much time has been wasted on deliberations about idealised economic models based on “ceteris paribus”- type reasoning. Such a scenario would lead to a major political instability. I am thinking of a scenario may lead to a political collapse similar to the collapse of the USSR. Please imagine a 50% or 75% loss of real value of the savings (not hyperinflation but an one-off adjustment) in the country where so many people own assault weapons. How long did it take to clean up in Russia? Over 10 years but the long-term effects of the collapse are still visible.
There is one little point of difference. I was so happy when USSR disintegrated – I couldn’t believe my own eyes. Soviet Union was our greatest enemy in the second half of the 20th century (I’m looking from the Polish not Australian perspective). I grew up in a family persecuted by the communists. When the last Soviet (Russian) soldier occupying Poland left (almost) everyone celebrated. The difference is that if the American state lost its dominant global position I would be on the receiving side. Of course some other people would celebrate. There might be several billion people who would celebrate but I would not be among them.
A few years ago I thought that a stable multi-polar world would emerge. I dug deeper and from what I’ve found this seems increasingly unlikely. One overlord will be replaced by another overlord.
@Neil Wilson,
Crippling an economy due to fear of something that has a low probability of happening is stupid economics and stupid politics.
it’s called an insurance, and it’s always stupid to take one if you are not going to need it.
nor will a fall in fx rates keep the domestic economy from full employment
and full employment is strongly correlated with max levels of real output
Warren,
I agree with the idea of full employment policies such as JG but we must not ignore the consequences of rise/fall in investment in fixed capital and rise/fall in productivity related to the former.
When the last factory is closed employing all the people in services sector will only generate fake output, still accounted for in GDP.
One little change in the pricing system structure and the illusion of postindustrial wealth is gone… Just compare the relative prices of computers, cars and houses 50 years ago and now. There is nothing preventing similar adjustments in the future. The same applies to the measures of “wealth”. Just look at the shares of Google – what did happen yesterday?
if services are ‘fake output’ what you presumably call ‘real output’ is down to 10% or so of reported gdp?
what is the problem with services?
and real investment goes to where it can ‘buy low/sell high’ with real goods and services.
the currency value per se is of little consequence.
“When the last factory is closed employing all the people in services sector will only generate fake output, ”
Are the police fake output? The Military? How about the Judiciary or the politicians? Local Government? Health care and education?
We are moving towards a robotic future where the output of the factories will be generated by machine with little or no human labour requirements.
If we want to continue with a Work = Income = Resources distribution model we’re going to need an awful lot more ‘fake output’.
Warren,
There is no problem with the services as long as productive capacities in the manufacturing sector are not destroyed.
“real investment goes to where it can ‘buy low/sell high’ with real goods and services” – absolutely true. This is exactly what is distorted as a consequence of the supposedly “idiotic” Chinese policy of sending cargo below their true costs as a consequence of the policy of hoarding American currency by the Central Bank.
“the currency value per se is of little consequence” – no this is not true as services cannot be imported but microprocessors, solar panels and other increasingly sophisticated stuff imported from China can and are imported. Also – the Chinese do much more than just setting the exchange rate, they manage where the investment goes.
One may say – so what? Let’s imagine that the Chinese started building a seafood processing factory on Diaoyu and the Japanese are asking their old allay what the American Navy is going to do about it. The executives of Apple Inc and a few American corporations would receive emails telling them that unless the Americans back off, the supply of critical components manufactured in Mainland China will dry off due to “environmental constraints” as some of the workers got sick inhaling toxic solvents. Apple Inc would be ruined as Samsung would not suffer any supply problems. Switching to another supplier would take too long. You may say that I have invented that story. But this is almost exactly the scenario with rare earth minerals in the previous iteration of the game. Would Apple Inc. be able to lobby the American officials to back off? I don’t know. Certainly in a few years time when the dependency on Chinese manufacturing grows and skills loss in the US deepens, such a scenario seems more likely.
Australia has progressed much further along this line. Recently I dealt with one “engineer” (a graduate of a “good” Australian university) who did not know how to connect a relay switch to a circuit so that power would be switched on or off. He thought a relay is like a transformer. 20 years ago people who graduated from a technical high school in Poland would not have a problem with that. I can compare the level of idiocy of some people educated in the current “system” with the good level of skills presented by the migrants from Mainland China. They have no issues with relays or transistors or digital logic circuits or processors or anything else.
You may say that this is irrelevant as the US has its Silicon Valley, still a magnet to young professionals and entrepreneurs or that Australia can source engineers from China and India or even Eastern Europe. Wait a few more years.
Neil Wilson,
“We are moving towards a robotic future where the output of the factories will be generated by machine with little or no human labour requirements.”
Yes I agree. A future when all the machines will be designed, owned and operated by the Germans (Ja! Naturlich!), Japanese, Chinese and maybe Koreans.
There is a very good model of the process I am talking about – the de-industrialisation of India and simultaneous industrialisation of the Great Britain in the early 19th century during the first Industrial Revolution. Just google for “de-industrialisation in India” and you’ll get a big list of scholar articles trying to answer what and why really happened then. It is so ironic to me that the successors of those who benefited so much from the first Industrial Revolution (the British) of from the second and third (the Americans) effectively lost understanding of these processes.
I am not defending old dirty industry like steelworks. I am talking precisely about new industries. Whenever I look for the components of the systems I build I get dirt-cheap Chinese / Taiwanese modules. I am fully aware of how advanced home-grown (not “stolen” from the US) are Chinese systems in the area of my current professional interest. I can say – I am happy that they’re doing that well. They are smart and hard working – they deserve that. I am unhappy however that the inevitable political consequences of the looming technological supremacy of the Asian countries over the West are going to transform the global political landscape – unless a dramatic change in the attitude occurs. I am sorry to say that the change I am thinking about will never occur under people like Barack Obama fretting about the government running out of money.
It is precisely the active policy of the governments of the countries I mentioned what nudges the market mechanism of investment allocation towards high-tech manufacturing while market mechanism allocates Western investment into “services” such as Facebook, banking, high-frequency trading or growing real estate or commodity bubbles.
It is delusional to rely on free-market resource allocation mechanism when you are playing soccer and all the other teams play rugby combined with kick-boxing.
It is not enough to provide work for everyone and close the aggregate demand gap caused by saving/private debt de-leveraging/capital account deficit. This is economics for kids I am afraid. I lived in a country where everyone had a job and the government was busy building the heaviest possible industry – and everyone dreamt about moving as far away as possible from the system of social justice and progress.
Real economics starts when you are able to combine the in-depth knowledge of the demand side and the supply side. Otherwise it is a blind trying to convince a deaf to do something together.
if it did happen, seems it would be a one time shift and not ‘inflation’?
@WARREN MOSLER, I didn’t say “inflation”. A one time shift would be enough to inflict a serious damage to American position in the world (USD no more a “reserve currency”) and may lead to a dramatic rearrangement of the pricing system, reducing the profits extracted by international corporations.
In the end the vacuum would be filled by other corporations – owned directly by the BRIC states or indirectly by Russian / Chinese oligarchs who act as agents for these states.
details of what you mean by ‘serious damage’?
it went from about 85 to over 150 vs the euro without what I’d call ‘serious damage’?
@WARREN MOSLER,
isn’t the problem that in practice there is no such thing as a one time adjustment, especially if too big, and that through the political process this adjustment will almost always bring inflation?
history says the oppposite? mexico 1994, russia 1998, se asian crisis, etc? large one time adjustments and then sort of stable since?
@WARREN MOSLER,
Think about the price of oil in USD going from $90 to $300 because the Saudis demand payments in gold or Yuan and refuse accepting dollars, when the Americans lose political influence in the region (Iran brandishing nukes, other countries to follow) and USD goes from the denominator to the numerator.
Impossible? Who was talking about the disintegration of USSR in 1981? It just took 10 years…
Will the economy eventually recover? Probably – if the political stability is not affected.
if it goes to 300 it’s either because they hiked the price or demand finally out stripped their capacity
recognizing the difference between a one time shift and inflation i don’t see any loss of ability to make adjustments
@y, @y Actually, Warren does offer an explanation in passing. It does not require either stupidity or irrationality because there are sectional interests (e.g. the interests of exporters).
that doesn’t explain it.
maybe because their exporters have political say even though its for self interest and not necesaarily good for the macro economy?
@WARREN MOSLER, maybe their exporters do exactly what the Standing Committee wants them to do? I agree that the central authorities have very little control over the regions but the policy of the Central Bank in regards to setting exchange rates is determined only by the top leadership and their advisers.
Please read TPSCC…
http://www.amazon.com/The-Party-Secret-Chinas-Communist/dp/0061708771
So what if export-led growth aided their policy of rapid industrialisation? NB this policy may change in the next stage.
Mr. Mosler, awesome video! Thanks for all the information..
Would it be fair to say that the primary cause for the recession/depression here in the US as well as across the Euro area is due to mismanagement of fiscal policy? That if we had simply cut taxes or ramped up spending enough we wouldn’t be facing this situation? (assuming the Euro’s still had their own currencies)
Stephanie makes the point that running surpluses has always led to recessions, do you agree that it is that simple of an explanation? Clinton running the surplus led to massive borrowing and unsustainable private debt, so (along with deregulation of derivatives and government incentivizing of borrowing) we ended up with the housing bubble?
yes, yes, and fraud played a large role in the housing run up.
Warren,
As far as I understand the event was at Columbia Law School and the moderator, Thomas Edsall, is from Columbia Journalism School, who was previously at Huffington Post.
Has there been any reaction from the economic faculty at Columbia, people like Joseph Stiglitz and Robert Mundell, on your presentation?
Warren I’m having a hard time wrapping my head around your statement “Japan sends us cars and we send then NOTHING”Can you explain that? Thanks
@Rod,
We send them nothing real.
Except under extraordinary/catastrophic scenarios, they can convert the virtual stuff (keystrokes, I figure) we send them into real stuff, can they not?
@Nihat,
Only if they have tanks and are prepared to invade. Otherwise it is with the permission of the currency issuer.
There is no guarantee that the keystrokes are worth anything, and if you implement ZIRP and no bonds then those keystrokes will have to be stoed with private sector entities – and they can go bankrupt.
No guarantees – and stop worrying about catastrophic scenarios. The general idea is to avoid catastrophes.
@Neil,
I had no such worries in that question. On the contrary, I meant: under stable/normal operating conditions (no tanks or invasions), they can spend our keystrokes to do imports of their own (from us or not, who cares). And, unless what they are exporting is some non-renewable essential matter, I don’t see how they got nothing, or lost something. On the contrary, can’t we say that they had us provide employment to their people?
Anyway, I think I understand why Warren says what he says. He is trying to make “a” point, not “all” calculations analyses that can be made.
work is an input/real cost, not a benefit
@Nihat,
There is no guarantee that the keystrokes are worth anything
there is an implicit guarantee that they are worth something, or there wouldn’t be any international trade.
they are tax credits
yes,they could buy things from us with their dollars and take them home.
but they don’t, and even if they did try to do that, they can buy only from willing sellers
and are subject to a number of US policy choices to limit their ability to import from the US
@Nihat,
yes they are tax credits, which means they’ll be worth more than 0 but nothing else.
and whatever policies are introduced to limit imports, that would lower the exchange rate all things equal.
so what do you think will happen to USD held abroad if the US banned exports to any country? that would severe the link between the pieces of paper and the fact they are tax credits in the US (assuming you can’t use them to pay taxes in another country, just a thought experiment)
why should we care what happens to the US dollars held abroad’s purchasing power, apart from if it went down the risk of exporting when we don’t want to goes down?
@Nihat,
why should we care what happens to the US dollars held abroad’s purchasing power, apart from if it went down the risk of exporting when we don’t want to goes down?
my point is that if US dollars are held abroad it’s not only because they represent a tax credit.
and that there is an implicit guarantee that those dollars will keep their value in the short term at least, or else Americans wouldn’t be able to import and their standard of living will decrease.
on balance we import a lot more than we export. the statement used the extreme case to make the point
Warren, why are you giving this presentation to a bunch of law students…why don’t you have a debate with the mainstream economists at the university and also with those at Harvard , MIT and Chicago. Those are the people you need to convince.
@Fin,
Because they’d eat his lunch. All they’d have to do is recite Keynes word for word, either out of Volumes 27 and 28 of The Collected Writings or just repeat his objections to Abba Lerner. This is low hanging fruit.
@Macros am,
From David Landes Biographical Memoir of Lerner
@Clonal Antibody,
Keynes praised Lerner for reaching the conclusion but not the plausibility which if you continue reading your own post, the Colander paper, or either of thereto very large volumes I referenced, which you won’t, you’ll start to understand. Also read Adam Smith. Feel free to distribute.
understand what?
not
@WARREN MOSLER, only original Keynes can prove neoclassical wrong bit PK has rejected (unknowingly for some ) his mathematical proof. You’d be smoked. All they’d have to do is take Keynes’s position against you. Lerner was a good as at you, but do some homework, Warren.
what is keynes position ‘against me’?
and nc theory isn’t ‘wrong’ for the most part, just inapplicable, best I can tell.
give us a quote Macros Am.
i take what i can get
@WARREN MOSLER, that’s one of the truest things you’ve said
@Macros am, and make no mistake I know you’re a good man. Stop being sloppy and careless with this, and don’t rely on those canards. You want a fighting chance, rely on the masters. Do it like a Fabian would.
fighting chance for what?
I’m already too old to die young…
I don’t fully understand, why imports are real benefits and exports are real costs. Would you agree to the assertion, that “to have financial assets” is a real benefit and to be indebted and not to know, how to pay your bills for the next days is a real cost?
@Ben,
When Warren says “real” benefit or cost he means real in the economic sense. Financial assets are not real assets. Your labor, your car, your home, our roads and highways are real assets. Your 401-k, your savings account and all the paper US dollars in existence are financial assets – not real assets.
Exports are real costs because real labor, capital and material had to be consumed to create the output which was then shipped off to someone else who got the real benefit for a bunch of paper. Yes you may find comfort in all that paper/fiat currency, but it is not a real benefit in the economic sense.
@Adam1, My point is, that the division between the real sector and the financial sector is “in reality” not as clear as it might seem at a first glance. When I have sleepless nights, because I don’t know how to repay my debts, then I think my sleepless nights are a real cost, even though my debts belong to the financial sphere in the economic sense.
If it would be true, that imports are real benefits and exports are real costs, than China and Germany are acting foolishly. But before I believe this, I rather believe that the idea that imports are real benefits and exports are real costs is somehow flawed.
@Ben, Please read my comments, I am arguing that the policy of running trade surpluses nudges firms in a surplus country (Germany, China) towards higher investment in productive capacities (real capital). At the same time countries running trade deficits (USA, Australia) while enjoying temporarily higher level of consumption, de-industrialise. At some point of time countries previously running a trade surplus will stop doing that, demanding a balanced trade. Since productive capacities in the former trade deficit country are severely constrained and real capital cannot be easily replenished (as it requires the pre-existence of some real capital such as machineries to make other machineries) and retardation of skills of the workforce, a previously-rich country has to export agricultural products or raw materials while the previously-poor surplus country enjoys better terms of trade.
@Ben,
I think you are confusing the outcomes of poor policy choices with real economic costs and benefits.
When you say, “When I have sleepless nights, because I don’t know how to repay my debts, then I think my sleepless nights are a real cost, even though my debts belong to the financial sphere in the economic sense” my assumption is you’re referring to falling real wages for average workers in large trade deficit nations say like the US. That is the outcome of policy!
Currently the US runs a trade deficit of somewhere between $400 and $500 Billion per year. That is output produced by other nations that they could just have easily kept or diverted to other domestic activities but instead they shipped it to the US where the US was able to consume for the price of fiat money that is only valuable in for consuming goods denominated in US dollars.
Now this large trade deficit also represents a huge demand leakage for the US which needs to be offset by something – for the most it is offset by the US Federal Deficit, but for the past 30 or so years the US government has NOT had a policy of full employment. Yes the FED has an employment mandate, but the reality is that the FED is ill equipped with ensuring full employment. On top of lacking any policy to insure full employment, many policies have been put in place to actively work against wage gains by average workers. While the trade deficit aides and abets this it is not the cause – it is policy choices that cause this.
For example, in the late 1990’s the US had a short period of time where it was fully employed with unemployment dropping to 4% or lower. It also consumed HUGE amount of imports! It produced enough to employ just about everyone who wanted a job AND it consumed vast amounts of goods and services produced by other nations. How was that not an economic benefit? (Note: the problem with this time period is that the economic driver of was driven by increasing private sector indebtedness – again another policy choice).
There is NOTHING operationally that prevents the US from maintaining a policy of full employment and consuming everything we can produce and whatever foreigners are willing to send us for US Dollars. What prevents us from doing this consistently is policy and those that make the policy.
No
Real vs nominal
Warren,
do you think there is any chance at all – any at all – that US bond yields could spike to very high levels at some point in the (post-QE) future, as a result of fears over “unsustainable government debt” or inflation?
I’m still trying to get my head around this basic thing.
– Yes the Treasury could just keep on crediting accounts regardless – but Congress might not let them (“money printing”, “hyperinflation”, etc).
– Yes the Fed could control yields – but it might not want to in future, and Congress might not want to make it (“independence”, “the market”, “money printing”, “hyperinflation”, etc, etc).
@y,
So long as we have a central bank who’s primary mission is to ensure the safety and soundness of the US payment system which underpins the US banking and financial sector the FED will always indirectly fund US Treasury bond auctions. It can’t do one without doing the other.
If the FED or Congress tried to prevent it we would have a repeat of the Volker years as Warren described in the video. If continued long enough it would risk CAUSING a financial meltdown, hence it wont be voluntarily tied again (one would hope).
only in anticipation of Fed rate hikes
Warren I watched the whole thing twice and have given it great thought……..here are my findings
The first part would be better if you would hit on the “interest” part of the equation and why everybody just cannot barrow from the FED at 0%……..
The second part seemed boring and makes me happy I never went to college…….
The third part did not convince me that we don’t have a petro dollar, that people in Africa are not buried in foreign debt and that they would be more likely to be piling up bodies than rocks…..
You do a very good job of theorizing how a utopian fiat currency should work however MMT seems kind of “smug” with all the too bad for them then talk. Maybe after the New World Order takes over MMT will have a place but for now………My research shows this cannot last no matter how we change the numbers on the spread sheets……
Sorry…….
I watched this the other day. Its Neil Tyson talking about why people believe in UFO’s. Sounds rather reminiscent of the economic and political debates we have been hearing. The first part is about the human condition of “argument from ignorance” second part is the unreliability of human observations.
Warren,
GDP is normally seen as indicator of wealth. Every country tries to grow its GDP.
From demand sources point of view GDP is defined as GDP = Y = C+I+G+(X-M)
If net exports, (X-M), are real costs then GDP is not the correct indicator for real wealth is it?
Never was
😉
Great video, thank you!
In my opinion, it deserves a permanent link.
I think the US should not try to reach full employment, because this would maximize the real cost of the nation and labour is a real cost. Rather, the US Government should print money, and buy all the goods and services American people want to consume from foreigners and then allocate them to the domestic people.
No American has to work, and in real terms this strategy would maximize the wealth of the US.
@Ben,
Keep it secret or everybody else will try to forge US dollars
@Ben,
So basically 100% unemployment?
So who would be taxed to keep the demand for dollar? Foreigners?
Would need a strong army for that, and since you want to keep everybody unemployed, foreigners would have to be serving in it…
@Gary, You are right. But maybe 95% unemployment should be possible. We tax 5% of the American people. They should do some work for foreigners, to earn the Dollars so that they can pay their taxes. 😉
@Ben,
Sorry, but your utopia makes no sense. At least make it plausible
make sure to read the 7 deadly innocent frauds on this website thanks
The US should try to maximize real wealth.
real wealth = real benefits – real costs
imports are real benfits, exports are real costs
labor is a real cost
In order to maximize real wealth the US should try to maximize imports and to minimize exports.
If the other nations try to do the same, it can’t work, but fortunately Germany and China don’t know that imports are real benfits and exports are real costs, rather thinking the opposite is true. So the US can import as much as Germany and China are willing and able to sell them for Dollars.
Furthermore the US can maximize real wealth by minimizing the domestic use of real resources. Admittedly this would lead to a reduction of domestic income, but the US Government can provide the Dollars so that the Americans can buy the desired goods from foreigners.
Why is this nonsense?
@Ben,
The exchange rate is floating not fixed.
You can only obtain imports in excess of your exports to the extent that other countries desire to save in financial assets denominated in your currency.
The essence of MMTs suggested policy is that it says to those wishing to save in financial assets that they will have to get their return from the private sector. The government will only offer storage and then only to licensed entities.
So what are the domestic private sector financial entities doing that will deliver an attractive return to the foreign saver?
@Neil Wilson,
You can only obtain imports in excess of your exports to the extent that other countries desire to save in financial assets denominated in your currency.
how many times do we need to say that this is false and that most countries finance their trade deficits in foreign currency?
@MamMoTh,
Yeah, I think, while expounding MMT, it is imperative to be mindful of the reserve currency status of the dollar. As far as I understand, MMT is the same and would work for any sovereign country equally well as long as the domestic economies are concerned. It gets hairy, however, when international trade, or global economy is considered. On that scale, it doesn’t strike me as a theory that still works equally well or smoothly for all, but as one that illuminates the absence of an external sovereign power taxing the countries.
mmt doesn’t ‘work’ it ‘describes’
and it does just fine with international trade thank you
@MamMoTh,
“how many times do we need to say that this is false and that most countries finance their trade deficits in foreign currency?”
And how many more times do I have to point out that is irrelevant.
Particularly when the OP was talking about the US.
“It gets hairy, however, when international trade, or global economy is considered. ”
It doesn’t at all. You just have to pay attention to the transactions and bear in mind that the size of your ‘currency area’ is not necessarily the same size as your country. It could have a wider or narrower influence depending upon the power of the currency issuer.
you can point it out as many times as you like, it will remain more than relevant to those countries that must finance their trade deficit in foreign currency, including the Euro members.
the private sector funds any euro trade deficit.
same in most nations
You just have to pay attention to the transactions and bear in mind that the size of your ‘currency area’ is not necessarily the same size as your country. It could have a wider or narrower influence depending upon the power of the currency issuer.
Neil, do we need MMT to say this? IMHO, the theory is not particularly useful to an arena of players that are not subjects of a common sovereign. Perhaps, it is inapplicable by definition.
“Neil, do we need MMT to say this?”
It does. It is describes all the monetary systems and how much policy space they may or may not have based on the policy configuration of that monetary system.
Classical economics, AFAICS, only describes what happens in a barter economy with fixed exchange.
MMT describes the behaviour of money in monetary economies and how that relates to the real economy. That’s what it tries to achieve.
MMT is a theory of money in a modern context. The name says it all really.
Neil, okay, thanks. I think I am sensing your drift.
except it’s true. the us, australia, uk, etc. run trade deficits and don’t use external debt, for example
except it’s false. the us, australia, uk, etc. are only a handful of countries. most countries finance their trade deficits in foreign currencies. that’s a fact.
name a few, thanks
seems most borrowing of fx by govs seems to go to reserves for currency support,
which I wouldn’t do, and not to directly pay for imports?
@MamMoTh,
” either you have a banking problem that turns into a sovereign debt problem or the other way round.”
In your view.
In my world we have bankruptcy which eliminates the foreign holding and leaves the problem with the foreign government and central bank.
As demonstrated by the approach taken by Iceland.
Private entities can go bankrupt – hence why it is vital that foreign debt is owned by them.
And bankruptcy eliminates excess savings and debts.
@Neil Wilson,
if you think along that line then MMT should stop making a point about governments not being indebted in foreign currencies, since they can always default. actually, it should promote the idea, since that gives government a good excuse to default.
the foreign saver is mainly foreign govs who buy dollars to support their exporters even at 0 rates
@WARREN MOSLER,
By foreign govs are you meaning foreign government sectors, ie largely the foreign central banks.
Because of course a foreign central bank has no need and no incentive to recycle foreign savings – since it is more effective for it to use its own money instead. That’s another blind spot in the classical economic description.
non-sequitur
There are established processes for private entities to go bankrupt that are agreed and importantly *known about up front*.
We’ve already been through the nonsense of debtors’ prisons with private entities and private contracts.
There are no established agreed processes for governments to go bankrupt. In particular the division of losses between creditors and debtors is not defined.
Without an established bankruptcy procedure, the state must avoid going into debt in something it doesn’t control if it wants to remain in control
@Ben,
This does make sense, but net importing works if
1. Government spends enough to cover resulting unemployment
2. Foreign sector cannot blackmail (I am sure US does not net import weapons and food, also watch the military presence near oil fields)
3. Foreign sector wants to net save in local currency
This is my thinking, so I may be missing something
pretty good. almost like you read the 7dif!
@WARREN MOSLER,
Well, of course 🙂
@Ben,
“Why is this nonsense?”
Because the goal isn’t to maximize real wealth. The goal is to maximize real happiness. And I don’t think the government is smart enough to do this by making more economic decisions for their citizens in the aggregate. The best way to do this is to increase economic freedom and let individuals decide how much to work and spend and where to work and spend.
Trade deficits and surpluses are neither good nor bad if they arise naturally, from billions of individual economic decisions made freely by individuals to increase their own happiness.
Around the world, it is very common for governments to put a thumb on the scale which creates a suboptimal trade environment for their citizens. The reason this happens is that the decisions makers in those governments have more pressing concerns than the welfare of their own people (their main concern is usually the preservation of their own power)
Although trade is not a zero-sum game, there are many instances where citizens of a free country can benefit from suboptimal economic conditions in an unfree country. The most glaring example is when an unfree country subsidizes an export industry. It’s pretty clear that the citizens of the free country benefit from that subsidy when they buy the resulting imports, or products made from those imports.
makes perfect sense. it’s called real terms of trade
One more question…
If the US-Government tries to fight deflation by abolishing all taxes, would this lead to hyperinflation because nobody would accept the Dollar when nobody has to pay taxes?
@Ben,
Yes, the dollar would go to zero value rather quickly, unless of course people believed it was just a temporary tax holiday.
There are examples of this in the past, although usually it has happened because the currency issuer / taxing authority is destroyed in a war or a revolution.
@ESM, So it makes a difference if the government spends 500 billion and taxes are zero, or the government spends 700 billion and tax revenues are 200 billion regarding the value of the currency?
I am not so sure, if people are aware that they are accepting the Dollar, because they can pay their taxes with the Dollars. Maybe this is only important to start the system?
@Ben,
It’s more a mixture thing to stop the engine misfiring if it gets a bit damp.
If there are taxes then there is no doubt that somebody somewhere will have a demand for the currency.
If you are relying on inertia and convention you could end up with splutters and at worst a complete stall.
@Ben,
“So it makes a difference if the government spends 500 billion and taxes are zero, or the government spends 700 billion and tax revenues are 200 billion regarding the value of the currency?”
Yes, it makes all the difference in the world, assuming of course you’re talking about a recurring process (e.g. annual spending and taxing). In the latter case, if savings desire is greater than $500MM/yr, then there will be deflation (i.e. an appreciating currency) until the desire to save a more expensive currency declines; if it is lower than $500MM/yr, then there will be inflation (i.e. a depreciating currency) until the desire to save a cheaper currency increases.
In the former case, the savings desire will collapse to zero because there is no fundamental demand for the currency. I suppose that cash might be floored by some sort of commodity value (i.e. the value of the paper or the metal used in the currency) or collector’s value, but certainly in its electronic form, demand for currency will go to zero because there is no fundamental need for it.
As Neil alludes to, there might be some inertia in the system because not everybody will realize that the currency should be worthless at the same time (which of course makes it not worthless in the very short term), but I think the process should be mostly complete within a year or two, unless the government goes out of its way to hide the fact that it is not backing the currency (in which case it can last as long as a Bernie Madoff-like ponzi scheme).
@Ben,
I agree there is little or no difference between both cases.
There might be a difference if
i) the government makes a credible promise that it will never tax again (at least in the medium term)
ii) the private sector only net saved in order to pay future taxes, which is quite hard to believe
reread the book?
yes, it makes a difference. please read the book thanks
@Ben,
I read it several times.
Now I’d rather wait for a refutation of what I’ve said.
@Ben,
@MamMoTh:
i) I agree that unless this condition is assumed, there will be little difference.
ii) This assumption is unnecessary; taxes create recurring demand for the currency from some in the private sector, which then creates demand from everybody, whether they pay taxes or not. I suppose that how keenly you feel the effect that taxes have on demand depends upon how you invest and pay taxes. People who have a regular job and pay withholding taxes and end up getting a rebate on April 15th are not going to see the point. Self-employed people like me, who try to maintain as little cash earning 0% as possible and then have to scramble to sell assets to pay the estimated tax bill every quarter, understand the effect of taxes on currency demand rather well.
taxes create a net nominal demand that can ultimatelyl only be satisfied by the govt of issue, which is necessarily price setter, hence value
@ESM,
you can only sell your assets in order to pay your taxes to someone who has saved the dollars you need. so my point is in aggregate, not on an individual basis.
do we collectively net save only in order to pay future taxes?
directly or indirectly, whether we know it or not, yes
@Ben, ….we collectively net save only in order to pay future taxes..
As long as bank money was not state money, was there no desire to save bank money?
it’s a financial asset denominated in the currency of a state
yes
Seems to me, that there is not much practical difference if one needs Dollar to pay taxes or one needs Dollar to repay a dollar denominated loan regarding the demand for Dollar.
To initiate the demand for Dollar you have to tax, but when the system is running and loans are granted in Dollar, you can be sure that there is a demand for Dollar without taxing.
Therefore I see no difference if the government fights deflation with spending 500 billion and zero taxes or with spending 700 billion and taxing 200 billion regarding the value of the currency.
note that all the great latin american inflations were characterized by massive amounts of loans outstanding.
you need to re read the 7 dif on this website
@Ben,
Seems to me, that there is not much practical difference if one needs Dollar to pay taxes or one needs Dollar to repay a dollar denominated loan regarding the demand for Dollar.
and if one needs oil and can only buy it in dollars
@MamMoTh,
Anybody could support the dollar at a positive value, the Saudis especially, if they decided to exchange real goods and services for dollars. I don’t see why anybody would do this, however, except the US government (although the US government has an easier way to support value, which is to impose a tax).
Saudi Arabia is simply one more entity which will note the decreasing demand/value for the dollar and raise prices accordingly. Eventually, they will stop denominating oil in dollars because it will be impractical, but there is little material difference between a price of $1MM/barrel that is growing at an exponential rate and the dollar being completely worthless.
sellers of oil will take any currency you have if it trades in the fx markets, which they all do
it’s not about ‘needing’ the dollars,
value is about what you have to do to get them.
zillions of turkish lira were continually needed to make loan payments while the inflation rate was 100%
@WARREN MOSLER, The real question is not what you have to do to get the dollars but rather what are you willing and able to do, to avoid the adverse consequences, if you don’t pay your debts.
In the case of taxes, maybe the debtor tries to avoid to go to prison.
In the case of bank loans and sound banking: The debtor tries to avoid to lose collateral.
If there are no adverse consequences debts are worthless notwithstanding how much debts there are.
the question at hand is the value of a dollar, right?
the value is what you have to do to get it from the issuer, right?
same as any monopoly?
@WARREN MOSLER, In my opinion the (minimum) value of the dollar consists in the desire to avoid punishment by not paying taxes.
The price of the dollar is what you have to do, to get the dollar.
To use the parents example: Your children have to pay 10 coupons to avoid ban on watching TV. They can get 10 coupons for mowing the lawn.
The minimum value of the coupons is the desire of the children to watch TV. The price that they have to pay for the coupons is to mow the lawn. If there is no desire to watch TV the system won’t work.
ok
and if they want to watch tv the value the coupons will exchange at in the private sector is the value implied by the work needed to otherwise be done mowing
@WARREN MOSLER,
“the value is what you have to do to get it from the issuer, right?
same as any monopoly?”
As Ben recognizes, this is not quite right. There are two components to value: a bid and an ask. The two can be very far apart, and in the case of an intangible like a unit of fiat currency, the bid can easily be zero.
I have long advocated keeping some part of one’s savings in canned tuna fish. That way, if the bid goes to zero, you can always eat it.
@WARREN MOSLER,
the value is what you have to do to get it from the issuer, right? same as any monopoly?
this would be right if there were only vertical transactions, like with the Buckaroos, but it’s not clear what it means in a market economy where most transactions take place at the horizontal level.
how hard it is to get the money from the issuer is only part of the picture. if there is a JG that pays someone 10$ an hour to perform the same task in an expensive big city like NY or in much cheaper small town, then the value of 1$ will be different in terms of the goods and services it can purchase at the local level, but it will be as hard or as easy to earn 1$ in both places.
yes, what it can buy in different place differs for lots of reasons. but the ‘source of value’ remains as stated.
@Ben,
“… but when the system is running and loans are granted in Dollar, you can be sure that there is a demand for Dollar without taxing.”
This is part of the reason there is inertia in the system. But without the recurring tax, or at least the expectation of future taxes, the demand for the dollar will decline and its value will fall, and the price of real assets will rise in dollar terms. This makes it easier to pay back the loans and/or less costly to default on them. So demand for dollars to pay back loans will decrease, which further depresses the value. It’s a death spiral. It takes time, but any value above zero is unstable. It could last a while of course if there are people who believe the government will support the value, e.g. by starting to tax again or by exchanging real goods and services or assets for the dollar. But if the government were simply to collapse, like the Confederacy during the US Civil War, then demand for its currency would as well.
I think it’s appropriate to modify the motto:
UnitedTaxed, we stand!That may get the democrats attention. Perhaps?
3 questions to Tschernevas Monopoly Money, The State as a Price Setter
1. The colonial government could punish the Africans for not paying taxes, so why not punish them for not doing the required work?
2. Why introducing an European currency instead oa a new national currency?
3. Is it not Wrays existential uncertainty, which induces the desire to save?
1. pretty much the same thing. and the first is more expedient
2. they could have, as it could not be obtained other than by local work
3. Davidson’s actually. Unc used to be the reason people used ‘money’ but with soft currency economics it became the/a reason to save.
@WARREN MOSLER, 1. and 2. there could be a small but important difference: The Africans know that they can buy goods only available for them with the European currency.
Example: The government needs 10 l barley. It pays 10 Dollar for 10 l barley.
It taxes A with 10 Dollar. If A sells 10 l barley to the government, it would be the same as if the government had confiscated the barley from A.
If A has 10 bananas that B wants to buy than B could sell 10 l barley to the government and than buy 10 bananas from A.
A could choose to sell 10 l barley to the government or to sell 10 bananas to B.
If A has nothing, that B wants to buy than he has to sell the barley to the government.
My point is: the government could only tax and issue its currency, when A has something that B wants to buy. And Tschernevas example makes it not fully clear, if the Africans accept the European currency because of the tax, or because of the tax and the possibility to buy goods only available for them with that currency.
I might add that even when A had something that B wants to buy the government can in the long run only tax and issue its currency when it gives a good reason, why it taxes A and not B.
in any case it’s about what the govt wants, which is generally labor as in this case.
so by putting a hut tax in place payable in something only the govt can provide,
the govt can provision itself as desired by offering to buy what it wants with its otherwise worthless currency
Let’s go back to the parents example:
If the parents don’t provide enough food for their children, the children might prefer to live by their grandparents and the value of the coupons is zero.
If the parents don’t be fair with their children, the children rebel and the value of the coupons is zero.
The ability of the government to tax is not independent, how it treats the population.
Furthermore,it seems to me, that the vertical side of money is the consequence of the existence of different pay communities, whose members want to make transactions with each other, governments decision, that granting loans and checking creditworthiness should be done by the private sector, and the implementation of a lender of last resort.
Someone who pays taxes in US-Dollar belongs to the pay community of the US.
A customer of J.P.Morgan belongs to the pay community of J.P.Morgan.
Someone who pays taxes in Yen belongs to the pay community of Japan.
A customer of the Deutsche Bank belongs to the pay community of the Deutsche Bank.
Imagine that all the nations in the world join in the US, so that everybody pays its taxes in US-Dollar. Further imagine that the US Government absorbs the worlds private banking sector. In this case the consolidated government and banking system would act as a super-clearinghouse for all credits and debts in the world.
There would exist (with some exceptions) only one pay community and only one currency. There would be no need for vertical money. We have not to care about reserves, the federal funds rate, deposit insurance, clearing at par and so on. Analyzing such a monetary system is much easier and could bring some enlightenment for the understanding of the real monetary system.
without a tax, the driver of the ‘vertical component’, it’s all just an infinite regression with no source of value.
@WARREN MOSLER, I just read, that you had the same discussion several times. I agree that it is not easy to get bank money accepted. But I can see no infinite regression. The borrower has to redeem the loan later, or he will lose collateral and this is the point, where the regression stops.
@Ben,
Not meaning to start a polemic the terms of which I may or may not understand (*), but I recently came across a certain Bernard Lietaer (100 minutes on youtube); he appears to be calling our government-issued money bank-debt money anyways. Given that all govt spending beyond tax collections goes by law to create treasury securities that pay interest, he may have a point.
(*) I don’t know, I felt like being defensive; there may already be such a polemic as Lietaer appears dismissive of otherwise-praiseworthy (his characterization) efforts of chartalists at UMKC.
I heard him a while ago as well and he had quite a bit right!
‘bank money’ is always denominated in some currency that’s already accepted.
notice that no one borrows confederate dollars from banks any more, because they can’t buy anything with it.
“‘bank money’ is always denominated in some currency that’s already accepted.”
Isn’t it slightly more than that – in that it is *pegged* to some currency that is already accepted.
That’s how it can be swapped one for one – it is actually converted as opposed to exchanged.
i like to say it leverages an existing currency
like gold futures leverage gold
Because English is not my first language, it could be, that I misunderstand something.
Means ‘to lend money’ the same as ‘to grant a loan’?
Can anybody define the term ‘money thing’ without using the word ‘thing’? Thank you.
yes
financial asset used in exchange?
i never use the term.
If the government absorbs the banking sector, where is the inside money and where is the outside money?
it’s all ‘inside money’ for any given sector
@WARREN MOSLER,
‘it’s all ‘inside money’ for any given sector’
So there is no outside money necessary.
A society can have two types of creditor and debtor relations. Relations between members of the society and relations between members and the society as a whole.
If you do a job as a judge than you work in favour of the whole society. The whole society is indebted to you, because you do this job, so you get a credit on your account.
If you are driving too fast, than you are endangering other members of the society, so you are indebted to the whole society. Your debt is cancelled by debiting your account.
When A buys something from B. The account of A is debited (he is the debtor) and the account of B gets a credit (he is the creditor). (See Mitchell Innes: What is money)
Creditor and debtor relation between the society as a whole and the members of the society are mostly settled by the government and its institutions.
So in a given society we have different creditor and debtor relations expressed in a money of account, that also measures the ‘value’ of goods, sevices, real assets, ‘injuries’ infringements of law and so on
So we need no outside money and the private sector of the society net saves in order to pay future debts and not only taxes.
i did not say there is no outside money necessary
@WARREN MOSLER, Is a financial crisis characterised by the inability of the private sector to pay its taxes?
not the financial crisis per se, but unemployment which is the evidence the govt isn’t spending enough to cover tax liabilities plus savings desires
@Ben, In Germany 95% of the tax revenues arise from some sort of income taxes and some sort of sales taxes.
You don’t try to earn money to pay your taxes. If you earn money, than you have to pay taxes.
The banking sector net saves in order to pay future taxes and in order to be prepared, if their customers pay their future taxes.