I’m always clear on the difference between real savings and nominal savings.
Nominal savings is the accumulation of financial assets. In that regard, yes, one sector, such as the govt. sector, must spend more than it’s income for another sector to accumulate net financial assets. what’s wrong with that statement of fact?
some of the discussion is a matter of talking past each other. statements are made that are correct in the context
of a gold standard or other fixed fx regime, and then refuted by someone responding in regards to a non convertible currency regime.
let me try to nip this one early:
Lemme see. Let’s do the accounting.
“Step 1. Govt prints a trillion dollars, gives it to itself. Score: Govt +1 trillion, Everyone else, zero paper, a trillion dollars worth of dresses [say]. No deficit so far.”
The book makes it clear that step 1 is;
US. This creates at least one seller of real goods and services who wants dollars in return,
so he can get what he needs to pay the tax and avoid the consequences of not paying the tax.
for sale in exchange for those dollars.
goods and services beyond what’s needed to pay the tax, the govt is able to spend
more than the amount of the tax. That’s called deficit spending.
and services beyond what
If you agree that spending money created ex nihilo creates inflation, then I don’t see how you can make some of the claims in the seven frauds article. Such as number 2, that our children will not suffer from the money we borrow from China today. They will suffer because their currency will become worthless. Same with number 3, that deficit spending adds to our savings. It may add to the numbers showing up, but those numbers have lost purchasing power. And on and on. Did you bother to read the post that I linked to?
Before I get to the meat of the discussion, I wish to point out that in your article you quoted Bernanke as proof that the govt doesnt spend tax money. Here is the quote:
PELLEY: Is that tax money that the Fed is spending?
BERNANKE: It’s not tax money. the banks have-- accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. So it’s much more akin to printing money than it is to borrowing.
That quote only proves that the Federal Reserve Bank does not spend tax money; it prints its own. But there are plenty of other govt agencies that DO spend tax money. Using that quote to prove the govt as a whole does not spend tax money is an attempt at deception
Mr Mosler, is this the heart of your argument? That since it’s all just changes in the electrical state of some computer chips, then we have nothing to worry about?
Allow me to explain. Let us imagine a time in the near future, when the US govt, as a gesture to the feminist movement, decides to issue pink dollars instead of green dollars. All green dollars still remain legal tender, of course, but when the govt gets its hands on any green money [say as payments for taxes or bonds], it instantly shreds it and gives itself pink money in the same amount. All new money it issues is pink, as well. The printing presses only have pink ink in them. “Think pink” is the new motto.
Has anything changed whatsoever as far as basic understanding of what’s going on? Have the laws of economics suddenly been cancelled because the new paper money is now pink instead of green? Does the economy operate any differently? I think we can agree that nothing has changed.
The advent of the computer made the govt decide, for convenience, to use “pink money” instead of green money. Of course I don’t mean paper money colored pink. Instead they decided that a certain configuration of a computer chip is to be considered money, in addition to printed green paper money. So what? Nothing has changed. The situation is exactly the same as if they had decided to use pink paper money in addition to the green.
They shred the paper, BUT they put into their computer that they now have $20 more to spend which they got from you. Shredding the paper is not the end of the story. They make good and sure that the paper money is transformed into digital money. And they spend that digital money.
I think it is dingenuous to omit that fact, that the paper money one pays, though shredded, is recorded in their computers as extra money they now have to spend. And the reason they shred it is because they never pay in cash, only checks and electronic transfers, so they have no use for cash.
I’m glad we agree on that. BTW why did you write “can” and not “does”? At any rate, once you admit that govt spending depletes our supply of real resources, said supply being the only seeds from which future growth is possible, then you must admit that every penny spent by the govt is impoverishing us. And the fact that they give us paper or digital money in return does nothing to improve the situation.
That being the case, how you can you possibly support govt spending? And how can you argue that it makes an economy grow?
This would only make sense of the tax implemented was a poll tax, i.e. a tax everyone owed simply by “virtue” of being a citizen. However, there is no such tax on either the state or the federal level in the US. The tax that comes closest to this idea is the property tax, but it obviously falls only on people who own real estate. Otherwise, if a person earns no income, he owes no tax. Similarly, if a person buys nothing, he owes no sales tax. I think it’s safe to say, then, that your first point cannot stand.
The laws of economics don’t need revision every time there are institutional changes. They are laws; they are applicable in any location and at any time. It is precisely because we understand such laws that we can understand the ramifications of such institutional changes. For example, it’s absurd to claim that neoclassical price theory is superfluous when analyzing markets with arbitrary price floors/ceilings, where prices are not allowed to adjust. Again, it is precisely because we understand price theory that we can diagnose the affects of such interventions.
It’s pointless to point out the fact that in order to purchase a financial asset it must first be supplied. This is tautological and reveals absolutely nothing. The point is that savings is not defined as purchasing financial assets, and selling financial assets does not diminish the total savings rate (if you agree with this, let me know).
Let me put it to you this way:
Assume that tomorrow, for whatever reason, the government pushed down market interest rates to zero or near zero. Under such a condition, most would find it preferable to hoard their savings rather than put it in jeopardy in the financial market at a 0%, or near 0%, rate of return. But it is still reasonable to assume that some savings would exist; there would still be a demand to retire, to pay for their children’s college tuition in the future, etc. Now let’s assume that the savings rate rises (reduction in consumption), but that the market rate of interest is still zero, so that the QD for financial assets is still zero, or close to zero (simply put, society saves, but rather than buying financial assets, they decide to hoard their savings).
Would this constitute an increase in net savings? The answer would have to be yes, unless you make some sort of argument about the inherent futility of savings, i.e., the paradox of thrift, or if you choose to define savings as purchasing financial assets, and consumption as selling financial assets.
Additionally:
Taxation is a deflationary force- it forces at least some people to sell goods and services to get the funds to pay the tax.
govt spending then buys those things the govt wants as it provides the funds to pay the taxes.
if govt ‘over spends’ for a given tax the evidence would be price increases.
if govt did this continuously there would be continuous price increases which is what we call inflation.
to recap-
for a given tax structure:
spend too much continuously- inflation
don’t spend enough- deflation
but how govt spends also matters. it can spend on a ‘price constrained’ basis- offer to pay a certain price and take what it can get at that price,
or it can spend ‘at the market’ and pay whatever prices the sellers demand. the first is a matter of ‘getting your bid hit’ and the second a matter of ‘lifting offers’ as we say in the financial markets.
lifting offers causes prices to rise, getting your bid hit only keeps them from falling.
as for borrowing from china, that’s merely the process of debiting china’s reserve account at the fed and crediting their securities account. and paying it back, as happens every week for a portion of it, is nothing more than debiting their fed securities account and crediting their fed reserve account. no children or grandchildren are involved.
what you are concerned about is overspending relative to the amount of taxation to the point it causes inflation. operationally, that has nothing to do with borrowing from china.
deficit spending that offsets desires to net save dollar financial assets is not the excess spending that drives up prices.
no, i haven’t read the link
all spending is done via giving instructions to the Federal reserve to debit your member bank’s Fed account and credit another’s Fed account. You can call that printing and unprinting money if you want. Operationally, that’s all there is to it.
for the govt, ‘having money to spend’ is a different matter than ‘allowing itself to spend’ . yes, by it’s own rules, the govt says the treasury isn’t allowed to spend unless there are funds in it’s account at the fed. that’s what I call a ‘self imposed constraint’ which is very different than an operational constraint.
if the treasury gives the fed instructions to debit its account and credit another, the fed can, operationally, always do just that, even if it means it will record a negative balance in the tsy’s fed account. however, congress has told the fed not to do that, so it’s constrained in that sense.
I have Govt. as what’s under the control of congress. that includes the Tsy, Fed, and all other agencies under the control of Congress.
In that sense, govt. is never, operationally, revenue constrained. it can’t run out of money, isn’t dependent on china for funding, and can’t be the next greece.
it can overspend and/or under tax, and/or do a lot of other things that can cause higher prices, lower prices, inflation, unemployment, etc.
again, this to me and most readers is very clear in the book.
http://www.moslereconomics.com/?p=8662/
just for one example, govt spending to build the panama canal was an investment of real resources that saved a lot more in real costs than were consumed in building it. however govt spending to blow it up would do the reverse. so the actual spending matters a lot.
also, for me, govt is there for public infrastructure for further public purpose, and that’s all. and it does this by moving real goods and service from private to public domain, again, presumably, to further public purpose. so the real cost of govt is the resources removed from the private sector, and the real benefit the gains from that transfer.
to get the real goods and service it needs in that regard it levies a tax and then is able to spend, where the real tax is paid as we part with the real goods and services the govt buys from us.
the problem we have is for the given amount of spending right now, the tax is way too high. for a tax this high we would need a lot more spending to allow the private sector to cover it’s tax bills and net save financial assets as much as it wants to. hence my proposal for a full FICA tax suspension.
My comments on your post are in bold:
true, an income tax does not ‘drive the model’ unless imputed income is taxed, which is highly problematic. I cover that in my writings as well.
and state and local taxes do work to drive the model. particularly property taxes.
but once the economy has been monetized by any tax, income taxes and other transactions taxes do drive the model.
not to say that i favor those transactions taxes. in fact I don’t at all favor income taxes and sales taxes, also as per my writings at www.moslereconomics.com
Agreed about the laws of economics, price theory, etc. though there is a lot more to it than most realize.
I’m talking about the role of the institutional structure, which is an entirely different matter.
don’t agree that nominal savings discussion is pointless. with the currency itself a public monopoly, as it is with our current institutional structure, it matters a lot.
agree that real savings = real investment
in your ‘assume’ example, you intertwine real and nominal savings so there is no ‘answer’ to your question.
there is a correlation between deficit spending and the price level, though it’s not ‘tight’ due to measurement issues and other variables.
govt deficit spending adds that many net financial assets, a govt surplus takes that many financial assets away (to the penny).
‘crowding out effect’ and ‘monetize debt (inflation)’ are largely empty rhetoric that doesn’t actually apply to what you think they apply to with a fiat currency.
warrenmosler,
Another challenge to your step 1 above. Could you please comment on the moral implications? Perhaps a ‘step 0’ to justify the inherent force that must back a government-issued currency. Hopefully, you can understand that most on this site find this repugnant. I’m fairly certain that you would do my bidding if I had a gun pressed into your back…up to and including trading goods/services in paper chits that I made myself.
This ugly reality is acknowledged in 7DIF:
The following is not merely a theoretical concept. It’s exactly what happened in Africa in the 1800’s, when the British established colonies there to grow crops. The British offered jobs to the local population, but none of them were interested in earning British coins. So the British placed a “hut tax” on all of their dwellings, payable only in British coins. Suddenly, the area was “monetized,” as everyone now needed British coins, and the local population started offering things for sale, as well as their labor, to get the needed coins. The British could then hire them and pay them in British coins to work the fields and grow their crops.
My comments in bold.
please explain the operational difference between federal spending that is ‘money printing’ and federal spending that is not ‘money printing’
my knowledge and experience is that apart from actual cash transactions, for all practical purposes all spending is done simply by crediting member bank accounts at the fed. there is no other way to spend. so if you want to call all spending money printing, fine, but recognize it’s not a distinction from some other way of spending.
Also, for all practical purposes, the spending itself is the ‘money printing.’
And with all spending ‘printing money’ obviously the dollar still has value. in fact, the value purchased by dollars is the GDP, and real gdp continuously sets new records. This means the currency called the dollar buys more and more real goods and services every year.
And what is ‘all the old money’ you are referencing? Checking account balances, savings account balances, funds in fed securities accounts, money market fund balances, etc. etc. etc?
Note that the Fed and many others have tried for years to find some monetary aggregate that would be useful for forecasting, etc. and they have yet to come up with one, best I can tell. The one that does have value is ‘net financial assets’ which is the total financial assets created by govt deficit spending. these consist of cash, reserves, and tsy secs.
Again, printing money, if you mean something different from spending money, doesn’t cause inflation. it’s spending that can cause prices to go up. if the tsy printed a bunch of dollars in a dark room how would anyone even know they were there? nor would they alter the amount of tsy spending which is determined by congress, and not some notion of ‘available funds’.
And what does China have to do with how much the tsy spends? china gets paid for the stuff they sell us and those dollars exist as a credit in their reserve account or securities account at the fed. what’s the big deal?
taxes remove people’s spending power. if the govt taxed all your dollars away, what would happen to your spending? if they stopped taxing so many of your dollars away, as I’ve been proposing, what would happen to your spending?
for a given size govt, including the size govt that you prefer, there is a corresponding level of taxes that corresponds to full employment, and that is the level of taxes that allows us to pay our taxes and net save what we want. And that level of taxes can be a lot less than the level of govt spending, depending on savings desires, credit conditions, etc. etc. Statistically, the odds of a ‘balanced budget’ being the right number are slim and none.
First, I consider myself an extreme libertarian.
And I also recognize that ‘complete freedom’ is no freedom at all. (It makes no sense to be free to kill each other without penalty, for just one example.)
I do see value to some government and public infrastructure- defence, police, legal system, contract law, etc.
That means moving some real goods and services from private to public domain.
And while I’d like to see a voluntary system that worked, I haven’t seen it yet.
Communism simply doesn’t work for human society. It always seems to degenerate into people doing as little as possible.
Provisioning of the public sector always seems to come down to coersion.
In this case the coersion comes at the point of tax enforcement.
If you have other alternatives for provisioning the public sector I’m all ears.
But until then I support the coersion of taxation for that purpose.
And govt for desired public infrastructure for public purpose, including the institutional structure that has incentives built in to allow market forces to work constructively for public purpose. And not most of the built in incentives of today that work against the common good and encouage corruption, inefficiency, and destruction of liberty beyond that liberty needed to be sacrificed on behalf of desired pubic infrastructure.
Anyway, in the 7DIF i tell it how it is. the idea is to recognize available options given the operational realities, and not have our options constrained by the 7 frauds.
Seems pretty moderate to me.. Why do you consider yourself as extreme?
Well that wouldn’t be complete freedom now then would it? That is unless you deem freedom and chaos to be synonomous. If you do, why call yourself a libertarian?
Where you see value, I see decay. Why must this infastructure be controlled by a coercive body? Do you not see value in entrepreneurship?
My comments in bold.
I imagine that the only reason fiat money still works is because we still treat it as though it wasn’t (to varying degrees).
Hi,
My ‘7 Deadly Innocent Frauds of Economic Policy’ is a short read that should be helpful to the readers on this website, particularly the author of the comments on the previous post, as you all try to grasp the operational realities of our current monetary arrangements.
For example, operationally, taxes don’t actually ‘give’ the federal govt. anything to spend. All the federal govt. does when it ‘collects taxes’ is change the number down in someone’s bank account. And when it spends all it does is change numbers up in our bank accounts. That’s just how it works. Not theory or philosophy.
Sincerely,
Warren Mosler
Good to see you back, Warren.
As for taxes just shuffling numbers on computers, I guess we should agree that credit card debt is not really an issue, nor heavy losses in an online gambling game, for the same reason.
hi, thanks!
taxes function to reduce aggregate demand (not raise revenues, etc)
they remove ‘spending power’ and thereby serve to control prices.
no taxes means hyper inflation- the dollar would have no value without them.
credit cards can serve to allow people to spend more than their income, at least for a while. and during that time
aggregate demand is higher than otherwise. This is an inflationary bias while credit card debt builds, and then
a deflationary bias if it reverses and contracts. But not from the ‘money supply’ type of effect itself. Just from the spending
effect.