A recurring theme in the Presidential Debates has been the role of the government in the economy. There are obviously many complex issues involved and a number of tradeoffs and caveats exist with any policy. That said, however, the assertion that the government cannot create jobs is ridiculous. It is a function of a biased definition of “job” designed to decide the question even before it has been asked....
But, those who say that the government cannot create employment are adding another element to the definition. To them, a job is any routine activity for which we earn income paid by an entity required to earn a profit....
Why would someone would embrace such a questionable characterization? Because their true goal isn’t to generate a scientific understanding of the manner in which the macroeconomy operates, but to make a moral statement.
Specifically, their contention is that only those routine activities financed by profit are truly of value. Everything the government does is unnecessary because if people really wanted it, they would have bought it in the private sector: that which is useful is profitable....
It is not surprising that those who espouse this view are almost always in the private sector themselves. It says, “I deserve my income because I work hard creating something of value. Meanwhile, government employees are just handed a portion of my salary for doing something no one really wants. Therefore, not only am I morally superior, but my taxes should be cut!” It’s a very convenient philosophy, but it’s not economic analysis.Forbes | Pragmatic Economist
Of Course the Government Can Create Jobs!
John T. Harvey | Professor of Economics, Texas Christian University
299 comments:
1 – 200 of 299 Newer› Newest»it's because they believe the government has no money and has to borrow or tax every penny from the private sector - pretty dumb
demand for goods and services creates jobs. Spending creates demand. Government spends, therefor Government creates jobs. can't get any simpler than that.
Did you notice the recent neo-chartalist tirade that Krugman posted in his blog?
"Is fiat money a bubble in this sense? Not at all. It’s true that green pieces of paper have no intrinsic value (except that they can be used to pay taxes, which is actually important..."
Pretty good, don't you think?
A recurring theme in the Presidential Debates has been the role of the government in the economy. There are obviously many complex issues involved and a number of tradeoffs and caveats exist with any policy. That said, however, the assertion that the government can create productive jobs is ridiculous. It is a function of a biased definition of “job” designed to decide the question even before it has been asked....
But, those who say that the government can create productive employment are adding another element to the definition. To them, a job is any routine activity for which we earn income paid by an entity that pays money....
Why would someone would embrace such a questionable characterization? Because their true goal isn’t to generate a scientific understanding of the manner in which the macroeconomy operates, but to make a moral statement.
Specifically, their contention is that any routine activity financed by the state is necessarily of value. Everything the government finances is necessary because if people really didn't want it, they would have elected different politicians in the public sector: that which is useful is paid for by the state....
It is not surprising that those who espouse this view are almost always in the public sector themselves. It says, “I deserve my income because I work hard creating something the state values. Meanwhile, private employees are just handed a portion of income for doing something "routine". Therefore, not only am I morally superior, but your taxes should be raised!” It’s a very convenient philosophy, but it’s not economic analysis.
This moron is claiming he is doing economic analysis and chastising those who moralize, but he's just moralizing himself.
Businesses in the aggregate can't succeed on sales to their employees alone. They rely on government hiring part of the workforce and from transfer payments.
Profits are funded with government spending.
Interest on private debt is funded with government spending also.
And, every penny of principal on private debt is borne by the wage-earners, either directly or through purchase of products that have debt costs folded in…in other words, wage-earners pay for everything.
@Jose I would not call it neo-chartalist *at all*. Krugman basically says that the ability to pay taxes in fiat *contributes* to fiat value. No one doubts this. Everyone believes that taxes are (yet) another expense that we must save/plan for. We must also save/plan for food.
Further, Krugman points out that most of the fiat's value (it's purchasing power) comes from its marketability. It is valuable on it's own as a medium of exchange: "there’s nothing to prevent that process of monetary circulation from going on forever."
> Businesses in the aggregate can't succeed on sales to their employees alone. They rely on government hiring part of the workforce and from transfer payments...wage-earners pay for everything.
You don't really believe this, do you?
Businesses allocate all income as wages, dividends, investment expenditures, and cash balance (often invested in Treasuries).
All the money usually *does* go out... unless maybe you're a small business which keeps lots of cash on hand? I dunno.
It's certainly not the case that the "wage earners pay for everything," at least if you understand paying as deferring consumption in terms of real resources. Everyone does this. Even a landowner pays property tax.
> Businesses in the aggregate can't succeed on sales to their employees alone. They rely on government hiring part of the workforce and from transfer payments...wage-earners pay for everything.
You don't really believe this, do you?
Businesses allocate all income as wages, dividends, investment expenditures, and cash balance (often invested in Treasuries).
All the money usually *does* go out... unless maybe you're a small business which keeps lots of cash on hand? I dunno.
It's certainly not the case that the "wage earners pay for everything," at least if you understand paying as deferring consumption in terms of real resources. Everyone does this. Even a landowner pays property tax.
Pete PetePete,
One obvious problem with your comment is that the government can create jobs. So the assertion that the government can't create jobs is obviously false. Therefore Harvey's basic point is correct.
Your comment also doesn't make any sense:
1) "To them, a job is any routine activity for which we earn income paid by an entity that pays money"
Definition of "job": "a paid position of regular employment", "a task or piece of work, especially one that is paid".
You're the one who seems to have some difficulty sticking to standard english definitions.
2) "Specifically, their contention is that any routine activity financed by the state is necessarily of value."
No one is saying that. You're just making things up.
3) "Everything the government finances is necessary because if people really didn't want it, they would have elected different politicians in the public sector: that which is useful is paid for by the state...."
No one is saying any of that. You're just pulling stuff out of your ass now.
3) "Meanwhile, private employees are just handed a portion of income for doing something "routine".
More crap you just made up that no one but you is saying.
4) "morally superior".
More nonsense you just made up.
Paul,
what?
Mitt Romney: "government can't create jobs".
There is no way that this statement can be factually correct. Romney is speaking in his own fact-free world of pure nonsense ideology.
Pete Petepete (satire?): Harvey doesn't go nearly far enough. The function of the "biased definition" may be designed to show "the government can't create jobs". But as the "biased definition" is propounded by morons, what this definition actually proves is that "Only the government can create jobs."
Only the government has a printing press for its money & its money is the top of the pyramid. As Paul says, "Businesses in the aggregate can't succeed on sales to their employees alone. " Aggregate all businesses together & if they use US dollars, then there is no way they can make dollar profits without the government spending they hallucinate is coming out of their pockets.
So if "A job is any routine activity for which we earn income paid by an entity required to earn a profit." then since profits are impossible without government spending, so are jobs.
The contention is NOT "that any routine activity financed by the state is necessarily of value." The contention IS that any activity financed by the state is, uhh financed by the state, and that includes profit-making businesses, which are all financed by the state. It's a point of logic, equivalent to the fact that US businesses use US dollars.
Note to everyone:
If you haven't yet read this IMF paper by Michael Kumhof and Jaromir Benes, read it now!
It's blowing my mind!
"The Chicago Plan Revisited"
http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf
This is epic, epic stuff.
y,
Yes interesting paper...
"But a long line of distinguished thinkers argued in favor of a return to
(or, depending on the country and the time, a maintenance of) a system of government
money issuance, with the intrinsic value of the monetary metal (or material) being of no
consequence. The list of their names, over the centuries, includes John Locke (1692, 1718),
Benjamin Franklin (1729), George Berkeley (1735), Charles de Montesquieu (1748, in
Montague (1952)), Thomas Paine (1796), Thomas Jefferson (1803), David Ricardo (1824),
Benjamin Butler (1869), Henry George (1884), Georg Friedrich Knapp (1924), Frederick
Soddy (1926, 1933, 1943), Pope Pius XI (1931) and the Archbishop of Canterbury (1942,
in Dempsey (1948))."
Don't see Marx on this list.... interesting....
Calg,
"So if "A job is any routine activity for which we earn income paid by an entity required to earn a profit." then since profits are impossible without government spending, so are jobs"
this reads like a corollary to Warren's statement that once a govt imposes a tax, everyone immediately becomes unemployed...
good stuff... rsp,
Calgacus,
Great stament. Concise and direct.
This is the kind of presentation we have to use as talking points to get the message across.
When we do this we attack the very core of conventional wisdom directly.
Often MMT arguments are indirect. I mean indirect wrt peoples thinking not as far as math is concerned.
Right Paul.
Marris you write: " and cash balance (often invested in Treasuries). All the money usually *does* go out.."
The balances in Treasuries has not "gone out" here, these balances are "hoarded" in the non-govt sector, and can come from no other place than govt sector deficits.
rsp,
I like the description of public money as "equity in the commonwealth"
Rather than chase red herrings involving make-work government transfers of money for nothing, let's just consider a few of the productive jobs governments routinely create:
1. Educating tens of millions of citizens in publicly financed schools is productive.
2. Establishing and upholding a rule of law so that commerce and everyday life can proceed in a more predictable and unmolested way is productive.
3. Building Interstate 95 was productive.
4. Helping to destroy the Third Reich was productive.
5. Running and staffing the National Weather Service is productive.
6. Launching communication satellites into orbit around the Earth is productive.
7. Building, stocking and administering the strategic petroleum reserve is productive.
8. Building dams and hydroelectric systems is productive.
What is not productive, when so many urgent jobs around the nation are not getting done, is to sit around indolently and stupidly waiting for some private entrepreneur to do them for us. Americans are afflicted with a superstitious creed of private sector self-sufficiency, and the result is the pointless toleration of underemployment of resources and underachievement of national potential.
"Rather than chase red herrings involving make-work government transfers of money for nothing…"
Dan,
The red herring is the assumption that most jobs are productive. They aren't. They never will be. Most of the stuff and sevices we consume are non-essential.
Tranfers of "money for nothing" as you put it puts money at the source of highest potential, which makes the general economy go.
What you are describing, spending money on public purpose, is essential and important but a completly different animal.
Both types of spending are essential for a healthy economic system that provides for a good quality of life for it's citizens.
Unless you think that quality of life is being able to sit and watch water flow through a dam.
No Dan you see building a Starbucks or a Hooters is productive... the heck with I-95.... (which btw in some places is STILL ONLY 2 LANES WIDE YOU MORONS!!!!)
good stuff, rsp
A general fault I see is the allowance of the creation of surplus in our economies...
This happens in the external sector and leads to exporting (mercantilism: ie chaos).
and also in the domestic sector as people are allowed to work extra/overtime and this creates surplus labor in the domestic economy as the "workaholic" displaces another worker...
looks like a good case for a shorter work week, more vacation, and earlier retirements if we are satisfied with present levels of domestic output at the macro level...
rsp,
Dan, don't forget govt-funded research and govt agency inventions
Paul, I disagree with your suggestion that most jobs are not productive. Whether those jobs are essential or not is an entirely different question. We enjoy all sorts of things of positive value that we could nevertheless live without - books, umbrellas, toothpaste, flowers, podcasts, school buses. None of these things is absolutely essential to individual and community survival, but they all add positive value to our lives and make those lives better than they would otherwise be. So the work that generates these things is useful, productive work.
Even a few minutes thought should be able to convince anyone of the fact that there are many useful goods and services that we could be producing but that we are not producing. Some of these things are so useful and strongly desired that we might call them "needs". And yet, at the same time, we have unemployed people and resources. That's irrational.
I don't know what you mean when you say transfers of money for nothing put money at the source of highest potential. In the case of the the unemployed, who are by definition those who are willing and able to work, and who are looking for work, but who do not have work, it seems to me that our social potential is best achieved by exchanging the money for work.
"Paul, I disagree with your suggestion that most jobs are not productive"
Dan, I was merely differentiating between spending on public purpose and spending on consumption.
The people working down at the drivers education school where you go if you get too many tickets are not providing any real public service, nor are they particularly useful. The instructor and the people attending can't get out of there fast enough.
Same ting goes for continuing education requirements that must be met in order to renew licenses, say, to be a General Contractor.
They are parasitical money-making scams. They also create flow which is good, because even if what they do is useless (actually worse than useless, they waste our time) the money they earn doing useless stuff ends up in someone elses pocket that may do something useful with it, and on and on through the economy until someone saves it.
"I don't know what you mean when you say transfers of money for nothing put money at the source of highest potential. In the case of the the unemployed, who are by definition those who are willing and able to work, and who are looking for work, but who do not have work, it seems to me that our social potential is best achieved by exchanging the money for work."
This sounds good in theory and I would love to live in this world but it's a fantasy.
First, theres 10 dogs and 8 bones. We have to give money to the ones without bones. You want to make them pick up trash on the side of the road to be eligible for it?
That's a form of slavery. Sure, if there's something useful for them to do and they want to do it, give them something to do. Mother Nature churns out all kinds of personalities, and she churns out a bunch of worthless, useless people too (I don't mean the ill or handicapped).
I accept that's the way it is and we will never be able to change it. I don't blame anyone for being that way, it's a curse. I wish they could see the joy in having passion for life. I want to help them too. But the bottom line is we have no control over these things, other than maybe an individual here or there.
But we can't let them starve and if we mix them up with productive people we will just make the productive less efficient.
At ant rate, if we "give" money to the poor and unemployed (low entriopy), it will stay in their pockets for about 15 seconds before moving on throughout the economy like fish…enticing entrepreneurs to catch them by providing goods and services.
This is the essence of a market system and how the market figures out peoples preferences through trial and error and ultimately ends up producing what people both need and want.
This is not a big mystery.
Aggregate all businesses together & if they use US dollars, then there is no way they can make dollar profits without the government spending they hallucinate is coming out of their pockets.
In our existing system with money produced endogenously by private sector banks responding to private sector demand for finance, the government role could in principle be limited to the accommodative provision of government liabilities to the interbank payment system as the volume of bank payment needs rises. If private sector initiative and private sector demand were capable of generating full employment, no additional government provision of dollars through fiscal channels would be needed.
But the private sector consistently fails to generate full employment. So the bank-driven system of dollar injection is not sufficient. In addition, there are public purposes which need to be accomplished and that never will be accomplished as a result of private initiative and profit-seeking alone.
I don't understand the dogs and bones analogy, Paul.
But I don't understand why "making" people do a job in exchange for giving them money that enables them to purchase a share of our nation's output is slavery. That output was produced by the work of others. people who get a share of it should contribute work of their own.
I also don't believe that picking up trash or teaching incompetent drivers a few rules of the road is useless activity.
Dan,
"If private sector initiative and private sector demand were capable of generating full employment…"
It isn't…it's not possible mathematically. Not. Even.Close.
"…no additional government provision of dollars through fiscal channels would be needed"
This is what makes it possible mathematically.
"I don't understand the dogs and bones analogy, Paul."
Dan, where in the world have you been hiding…in a cave?
10 dogs…8 bones. 10 people…8 jobs.
No matter what you do to increase the unemployed's training, attitude, personal hygiene, motivation, etc. the best possible outcome is they will be able to take a job from someone else…leaving that person unemployed.
"…teaching incompetent drivers a few rules of the road is useless activity"
Dan, the point is that may be the stated goal, but in reality none of those people want to be there and no one is learning anything.
This is crony capitalism local-style. Create a useless business model, mandated by the local or stae authorities, and you have built-in business from which to extract profits.
You don't even have to compete for customers, their bad behavior puts them in your clutches.
So much of our economy is based on this dynamic, it's laughable to say that all or even economic activity is productive. Cosmetic surgery? Give me a break.
The problem with this kind of discussion is it takes us away from the problem at hand and once again has us traversing rabbit holes trying to find something we don't need.
We need focus.
Dan Kervick said...
Rather than chase red herrings involving make-work government transfers of money for nothing, let's just consider a few of the productive jobs governments routinely create: 1. Educating tens of millions of citizens in publicly financed schools is productive.
Education goes way beyond that. All colleges and universities are either public, private non-profit or private for profit. The bulk fall into the first two categories and and no professors of any note choose employment at private for profits since it is a career dead-end.
That means just about everyone who is a "job-creators" has received his or her knowledge from an education that was either publicly provided or not for profit. That means in turn that the country is almost totally dependent economically on knowledge necessary for employment, success, and innovation that was not provided by the private sector for profit.
y
On the Mitt Romney statement.
Is the President of the United states doing a "job?" If he/she does a jobm then the government can create jobs. If he/she is not doing a "job" - in other words doing nothing useful, he (Romney) should immediately stop his run for the Presidency, and go back to doing a "job" or something useful somewhere else. Going back to Bain would not work, because IMO Bain did nothing useful - being a corporate raider is not doing anything useful.
The red herring is the assumption that most jobs are productive. They aren't.
Yes, depends on definition of "productive." Economically, the only jobs that are productive, i.e., increase supply of commodities, are manufacturing and agricultural. All other jobs are either peripheral to that or else purely service. In a service economy like the US, guess which dominates.
Quite obviously, the most productive tasks in the sense of necessary and fruitful are not included in this, notably child-bearing, with out which there is no society and no economy, and child-rearing and education, without which there is no advanced knowledge and no civilization.
Dan,
With the banks, at loan origination, they create balances for the principle but not the interest that will be required to fulfill the loan contract.
ie if you put together a car loan contract for $20k then perhaps the borrower is on the hook for the $20k principle AND perhaps $8k of interest: where does the $8k come from? The loan only was for the $20k principle to get the car dealer paid. This becomes 10 dogs after 8 bones.
It becomes a race to the bottom as the borrowers fight it out like dogs to obtain the balances each individual needs out of the overall insufficient system balances to be able to be the ones able to make the loan payments.... like you say: "irrational".
There is no plan for success here. No "Intelligent Design" of the system.
This contract imo perhaps could be voided if you could get a jury to understand how it is mathematically impossible for all the borrowers.
rsp,
"Education goes way beyond that. "
Tom, education is a great public investment. But even education must eventually be thought of as a means of self-improvement that doesn't necessarily have to bear fruit.
I'm a big proponent of education just for the sake of education.
Lord knows there will never be enough jobs or the right kind of jobs to take advantage of all that education.
So what? Learning things improves our quality of life. Playing sports improves our quality of life. Beats watching other people play sports when you could be participating yourself.
Matt A general fault I see is the allowance of the creation of surplus in our economies...
This happens in the external sector and leads to exporting (mercantilism: ie chaos).
That this is what most countries value and aim at — a fiscal surplus and maximum exports.
If you recall, Obama solution included doubling exports in five years while reducing the deficit. And the EZ debacle can be traced not only to the monetary arrangement but also to Germany's mercantilism.
> Do you think an individual business could succeed with a business model where it's only sales were to it's employees?
Why don't I describe how the world works, and then you can tell me whether you agree.
Businesses pay wages AND dividends AND investment expenses AND maintain a cash balance. Any model that relies on money "going out" of the business in order to be macro stable would BE FINE since all the money DOES goes out.
Further, it's NOT the case that a given firm's workers NEED to buy that firm's whole product. All the toothpaste made by Colgate is not consumed by Colgate employees. It's also bought by Toyota employees. And by Toyota stock owners. And by Toyota debt holders. So the x vs x+p argument is bogus. It's representative agent analysis done wrong.
> Business entities remove (transfer to themselves) more net dollars than they invest.
Hopefully, the discussion above (looking at all expenditure components) makes it clear that this is also false. Key idea: dividends and cash balances.
@Matt
> The balances in Treasuries has not "gone out" here, these balances are "hoarded" in the non-govt sector, and can come from no other place than govt sector deficits.
Sorry, I can only deal with one MMT confusion at a time. Let's not talk about whether all money comes from the government here. Paul's statement does not become more correct whether it does or not.
The key idea is that the purchase of these Treasuries is offset by government spending. So money is not leaking out *there either.*
Now suppose the government decided to issue $100 less in bonds. What would change? Some company which would have invested in those bonds in the alternate scenario now needs to either (1) pay out the money as wages, or (2) pay out the money as dividends, or (3) pay out the money as interest on it's debt, or (4) invest the money in more production, (5) put the money in the bank, or (6) buy *another* bond from someone else, thereby bidding up a bond price. Further, the previous owner now has to allocate with means (1) through (5).
The only way I see a leak here is if the money goes to the bank and the bank, looking at it's balance sheet, does not lend. Is that what you're saying will happen?
"If private sector initiative and private sector demand were capable of generating full employment…"
It isn't…it's not possible mathematically. Not. Even.Close.
"…no additional government provision of dollars through fiscal channels would be needed"
This is what makes it possible mathematically.
In a capitalistic economy, aggregate profit comes from deficit spending.
"Why don't I describe how the world works, and then you can tell me whether you agree."
marris, your description is not of how the world works,you are unaware of the limitations of closed systems. Your argument fails arithmetic.
If a business steadily increases it's cash balance, it has to be doing it at the expense of the people buying it's products. That would be wage-earners (or retiress).
The wage-earners cash balance decreases, the business entities cash balance increases. Rinse and repeat.
No amount of economic activity can change the level of cash balances in the economy, all it can do is shift them around.
The property we are talking about here is conservation of elemental particles. The particles in this case are dollars. They can neither be created or destroyed (by the economy).
"In a capitalistic economy, aggregate profit comes from deficit spending."
Thank you Tom. Maybe coming from you more people will accept it.
This was one of Minsky's great contributions.
Paul, no higher education, no higher math skills, no science and scientific advance, no innovation. The result, no industrial revolution based on an energy revolution, and no digital age. The rate of increase of complexity until the 18th century was pretty flat. Then it took off.
The good thing is that without the development of higher education and the scaling of advances of knowledge it made possible, humans would likely not have progressed much beyond the crossbow as means of warfare.
"The key idea is that the purchase of these Treasuries is offset by government spending. So money is not leaking out *there either.*"
Treasuries are purchased with dollars people have no intention of spending. This is called saving. Saving is a leakage from demand as compared to a leakage from a sector, like the trade deficit, where you literally "bleed" dollars.
As far as the economy is concerned, the effect is the same.
"Paul, no higher education, no higher math skills…"
Tom, agree with this completely. I merely meant to add that education for the sake of education was a good thing too.
Think of tsys as a temporary parking place for a great many holders, which is why the market is so liquid. It is not exactly correct to think of tsys as savings, although they are in aggregate. But the flow also counts and the high liquidity in tsys shows that they are used as much like demand deposits and time deposits by many holders. For example, large corps that hold funds for short time before putting them to use with a higher potential for return generally use T-bills for the purpose.
I merely meant to add that education for the sake of education was a good thing too.
Yes, it's called culture. Education actually counts as leisure rather than work, and leisure is the basis of culture. Education used to be the prerogative of the upper classes (rentiers) who did not have to work for a living. Workers were uneducated and generally not only not learned but also not even literate.
"the flow also counts and the high liquidity in tsys shows that they are used as much like demand deposits and time deposits by many holders."
The "flow" produces no significant economic activity.
One person selling a Treasury to another just excanges one's spending for anothers, one's savings for anothers.
Treasuries are (themain part of) MMT's savings, they are the definition of NFA.
The "money-ness" of treasuries really makes me wonder if they aren't best categorized as part of M0 right along with notes, coins and reserves. I might be missing something but it seems to make a more coherent picture that way.
That is true, but MMT also counts tsys as being money-like, especially T-bills, wrt flow.
@geerussell
Treasuries aren't used in transactions as spending, maybe that's why. They are more like equities, except they are bulletproof.
And they can always, easiliy be exchanged for dollars at face value, which is really, really special.
geerussell The "money-ness" of treasuries really makes me wonder if they aren't best categorized as part of M0 right along with notes, coins and reserves. I might be missing something but it seems to make a more coherent picture that way.
I believe that this is more or less the way MMT economists tend to think about it, since tys, rb, and physical currency are interchangeable without changing the amount of NGNFA.
"That is true, but MMT also counts tsys as being money-like, especially T-bills, wrt flow."
Yes, but in this case the "flow" is merely to the running total.
The money-likeness I explained in the post above. The Treasury never changes state, it just changes ownership. It remains "savings" at all times.
Yes, as a I said, "in aggregate." I was simply pointing out the money-like nature of tsys according to MMT so that savings in tsys doesn't mean sequestration of the funds. The pool of savings contributes to the flow because they are so interchangeable with rb "on demand."
Paul,
You are obviously having trouble understanding the concept that 2 field goals and a safety are VERY different than if a team were to get a touchdown and a 2 point conversion as far as the determination of who would win a football game... c'mon get with the program!
;)
"The pool of savings contributes to the flow because they are so interchangeable with rb "on demand.""
Tom, when we start getting into reserve balances we are splitting hairs that don't need to be split.
The important point is, Treasuries are funds removed from the pool of funds that can be spent. So they aren't involved in any flow that matters to the economic "machine".
In that respect Treasuries are saving, or demand leakages. But then the dollars that bought them would have been saved regardless. People don't spend funds they have no need to spend just because their mattress isn't big enough.
That's all I'm saying. Let's not make this more complicated than necessary.
First, theres 10 dogs and 8 bones. We have to give money to the ones without bones. You want to make them pick up trash on the side of the road to be eligible for it?
That's a form of slavery. Sure, if there's something useful for them to do and they want to do it, give them something to do.
Just thinking out loud... If requiring the two hungry dogs to work at a job to be eligible for money is wage slavery, what does that really say about the other eight? Aren't they in the same predicament of having to take a bone whether they like it or not to be eligible for money?
Does that logic lead to a basic income guarantee? the revolution? or am I just chasing my tail?
Right.... to think otherwise is basically Monetarist... rsp,
gee,
imo any job can be done "the right way"...
iow "picking up trash on the side of road" can become "roadway shoulder maintenance" and can yes include trash removal but a lot of other things too such as grading/mowing/drainage/ removal of canopy to maintain sightlines, etc... this would require training on specialized equipment and machinery/machinery maintenance, etc.. ie "good jobs"...
Drive around the NE like I did a bit this past summer and all the roadsides are starting to look like the turd world here in the US.... it's embarrassing.
rsp,
Matt,
I don't think I agree that the private banking system doesn't create the interest. It has nothing to do with interest and principle. Banks don't simply recirculate existing money; they are constantly creating more of it. The broad money needed to pay all existing loans is generated within the system by the making of more loans. If the economy is growing, then the rate at which broad money is being created exceeds the rate at which broad money is being extinguished.
The government's role in our system is that all of these banks are plugged into the same universal payment system. We don't have a free banking system in which each bank creates a unique kind of dollar that is part of that bank's own private monetary "base" and in which each bank must then make a choice as to whether or not to accept base dollars created by other banks. We have a system in which bank liabilities to one another are settled with with US dollar reserves, which are USG liabilities they have acquired.
"Does that logic lead to a basic income guarantee? the revolution? or am I just chasing my tail?"
geerussell, good question.
FD, I'm a math-based organism and don't spend a lot of time thinking about these things. My mind must come up with these ideas while I'm sleeping.
I only got into this part of discussion because I was kind of forced to. In order to make my point I had to crawl through a mud hole first.
But let me give it a shot.
Work for pay is a carrot-stick incentive. We can work off the land at subsistence (and maybe still be happy) but the incentive to have a different and maybe better life encourages us to work. It's a choice though.
Most people (me) that enjoy their work don't think of it as work. It's a joy. I feel for people that don't like their jobs (my wife). She feels like we need the money. She hates her job (the people she works for).
The fly in the ointment is the illusion there is a job for everyone. That's simply not the case. So, waht do we do, hold the unemployed hostage so they must participate in a system that has excluded them?
To keep from starving? I want no part of that system.
So, I suppose I come down on the side of the basic income guarantee as opposed to the job guarantee although they could be used in concert.
I'm flexible on this issue. But I'm not about to lie to myself about what is really going on.
"The broad money needed to pay all existing loans is generated within the system by the making of more loans."
None of this borrow-from-Peter-to-pay-Paul Rube Goldberg contraption generates the balances necessary to pay the interest. Liabilities accumulate at a geometric rate against incomes until the borrower can no longer service the debt.
What do you think we just observed?
Th economy cannot run on private credit. Even if you don't understand it you at least should internalize it or you will be a slave of neoliberal ideology.
You can develop an understanding later.
i still don't understand the dogs and bones analogy. There is no fixed or capped supply of jobs in an economy. The potential for productive work always far exceeds the work that is actually being done. An economy is constantly evolving and creating new work opportunities as it destroys older, obsolete work opportunities. The question is how we organize the creation and distribution of those work opportunities, and how we exchange the products of that work among ourselves.
The private sector can only generate the kind of work that results in a productive transformation of private property, at a more-or-less local, manageable scale. It is also always faced with a massive coordination problem that market mechanisms alone never efficiently solve.
Dan,
The system doesnt create the required interest balances at loan inception, yes I can see that other loans can be created ex ante of this loan that perhaps can somehow reach the borrower's account, but that is left to chance...
Typically in system design one doesnt leave things to chance...
For instance (not that this has any chance of happening) government could actually pay the interest portion of the loan to the bank (1%) as the bank worked with the borrower to successfully guide the borrower thru the loan payment of the principle ... that would be one way to guaranty/design for success...
rsp,
Paul,
I'm not going to discuss these things with you any longer, because you seem to think you already understand everything perfectly.
"There is no fixed or capped supply of jobs in an economy."
It's mathematically impossible for the private sector to create employment for everyone that wants to work.
In a capitalist economy the only jobs that get done are the ones people are willing to pay for.
Companies cannot succeed on sales to their own employees. Thus, all companies combined cannot succeed on sales to their employees combined. It is a closed system.
The funds necessary for success must come from somewhere else.
Where will the additional sales revenue come from?
"What do you think we just observed?"
Some people think it was all based on control fraud, or some sort of naturally occurring "financial instability", or a vast "neo-liberal conspiracy"....
I look at it as it happened due to some pretty basic system design errors... aka "morons in control"...
If the government is going to let people get into contracts to pay interest they damned well better make sure the citizens have guaranteed access to the balances to pay it, BY DESIGN imo.. rsp,
"I'm not going to discuss these things with you any longer, because you seem to think you already understand everything perfectly."
Well it's apparent that I understand them better than you. Perfection isn't necessary in this case.
In this case though I'm pretty certain.
Look at it from my perspective.
I've presented my case in terms of simple arithmetic, so it should be easy to challenge if it's wrong. Granted algebraic word problems can be difficult but if you are going to make claims about the economy that you can't back up with math why do you bother?
You're the guy that called the other side shamanists, magicians.
Now you've made your inability to understand something my fault. I've merely tried to express the math in various ways to get you to see the issue clearly.
I know I can be a bulldog and sometimes obnoxious, especially when someone doesn't even respond to the premise of my argument, but goes off in other directions.
I generally don't press on something unless I'm sure of it because i don't like to be wrong about something and mis-inform others. That's why I tend to stay out of philosphical discussions, or opinion-making.
You are entitled to your own opinions but you are not entitled to your own set of facts.
Matt, I think there is always a chance element involved in any lending. If a bank or anyone else lends someone money at 5% interest so that they can buy some raw materials that they then transform into products, they are taking a chance that the borrower will succeed in transforming those raw materials into some stuff whose total marketable value is at least 5% greater than the value of the raw material inputs.
The bank doesn't want the finished goods. They want money that the producer will acquire for the finished goods. It is possible that that individual producer will simply acquire that money from elsewhere without a net increase in the broad money supply of the whole society. But if the economy as a whole is growing, more money must be created to meet existing liabilities of firms and households to banks. That additional money is being injected into the system by the banks themselves, as they create new balances for new borrowers to finance yet further projects.
Since the universal acceptance of bank liabilities is secured by their exchangeability on demand for USG liabilities, the USG must continually inject additional USG liabilities into the financial system to accommodate that growth.
Paul, as I understand it, a fiscal surplus constitutes demand leakage, not a fiscal deficit, which is where tsys come from.
"Paul, as I understand it, a fiscal surplus constitutes demand leakage, not a fiscal deficit, which is where tsys come from."
Tom, Not sure what you mean here. Let's get back to the simplest argument:
A demand leakage is anything that reduces spending, which is contingent on the level of funds available. I don't know if that matches the technical definition or not.
The agents that buy Treasuries are by definition not spending, either on consumption or investment. In economics investment spending is spending on stuff…wages, materials, plant and equipment.
So it must be saving by elimination. Saving is a demand leakage.
I believe Warren Mosler says the same thing, but I'm not sure.
> If a business steadily increases it's cash balance, it has to be doing it at the expense of the people buying it's products. That would be wage-earners (or retiress).
I'm not sure what you're saying. No company on the planet increases it's cash balance indefinitely. They may have *high* cash balances, but they eventually either invest or pay dividends or pay workers. If what you say is true, then the oldest companies would have enormous piles of cash, not new profitable companies, like Google.
> In a capitalistic economy, aggregate profit comes from deficit spending.
Oh boy. First, why do you think *aggregate profit* is so important? Let's look at the equilibrium and non-equilibrium cases.
In equilibrium, there are NO profits.
In non-equilibrium, profit for me comes with LOSSES for someone else. Profit goes to those with good entrepreneurial judgement, and losses go to those who don't. Everyone else (resource owners, wage earners, interest earners) coast on the investments of *both* successful and unsuccessful entrepreneurs.
Please think through this before posting again.
Dan, your thinking has clearly evolved with respect to money creation. You seem to be leaning more towards MR?
Paul, the US govt spends by issuing tsys. That's the basis of the present system due to the political requirement.
Not really, Geoff. The liabilities banks create are still liabilities for USG dollars. You can go into a bank anytime and demand the sum of your demand deposit balance in USG currency. And if you make a payment to a depositor at another bank, and so your bank and the other debt need to settle a payment, the other bank will demand payment in USG dollars which are held in the banks' reserve accounts and used for settling payments. Banks drive the process, but the payments system will freeze up and/or drive interest rates sky-high if the government is not continually accommodating the increased lending and demand for payments by injecting reserve balances.
The issue is what are the mechanisms by which these USG balances are and should be injected into the system. Most of it happens endogenously in the ordinary course of banks doing their business, and in accordance with whatever monetary policy they Fed happens to have in place at the time. But some of it can happen through fiscal-side injections. The reason we need fiscal side injections is not because it is somehow mathematically or operationally impossible for all needed injections to occur through the central bank. The problem is that the channel that relies only on the financial apparatus - central bank and its commercial bank arms responding to private sector demand - has proven itself incapable of sustaining maximum economic efficiency and growth in line with capacity, due largely to problems of coordination, information and other market failures identified long ago by Keynes - and by many others.
"they are taking a chance that the borrower will succeed in transforming those raw materials "
They always have fungible collateral Dan.
Like in this case, they perhaps would lend against some raw materials (probably not imo, this is normally done via trade credit) but could always take back the stone or oil or whatever they are lending against...
If you look at the H.8, pretty much all banks do is lend against property and automobiles.... they can always foreclose on the property and send out the hook for the cars.... this is not that hard to do.
My view of the GFC is that the govt screwed up the fiscal flows and this led to a shutdown in the system... many "bad loans" that may in hindsight look fraudulent perhaps looked good when they were granted...
So then the govt had to bail out a bunch of the banks anyways, might as well just have the govt pay the interest on loans in the first place... if we are going to maintain a system that has lending and banking anywhere near like we have now...
Again an alternative is to just pay the banks 1% interest on all loans as principle is repaid, if they can leverage 12:1, then they are looking at a 12% gross return minus any expenses they have to get it all done... maybe they end up with 8% or 9% net.... not bad if the overnight rate is held at 0%....
"Oh boy. First, why do you think *aggregate profit* is so important? Let's look at the equilibrium and non-equilibrium cases."
Aggregate profit is important because if companies don't make a profit in the aggregate then one group of companies profits are at the remaining companies loss. Government is not called upon to fund profit. The fact of the matter is that companies do make a profit in the aggregate.
"Let's look at the equilibrium and non-equilibrium cases." Lets not. Waste of time when simple arithmetic will do.
Lets say in the aggregate all businesses invest some number x into the economy, which covers wages, materials, plant and equipment, cost of borrowing, etc.
If those same businesses receive sales plus a profit, they will receive (x+p) over the cycle. They will have to if they earn a profit.
In order to remain in business this will have to be the case cycle after cycle. Business entities have in fact accumulated capital wealth over time in the aggregate.
How did the economy fund p over many cycles, ie
∑ p(1) +p(2) + p(3)……p(n) over time?
The funds came either from savings already in the economy, from net government spending or from expansion of private debt.
Where else could it come from?
Take two pails with 100 ping-pong balls in each.
Call one pail wage-earners pail(1) and the other business entities, pail(2).
A business invests 1 ping-pong ball into pail (1) and creates a widget. the one ping-pong ball paid for everything that went into the making of the widget. Sale of the widget requires two ping-pong balls from pail(1) transferred into pail(2).
Now pail(1) contains 99 ping-pong balls plus (1) widget. Pail(2) contains 101 ping-pong balls.
Repeat over and over. How long can this go on?
"Paul, the US govt spends by issuing tsys. That's the basis of the present system due to the political requirement."
Tom, yes that is a fact. The government issues Treasuries but it spends dollars.
That isn't what we are discussing. We are discussing spending within the non-government, specifically the domestic non-government.
Consumers can only spend funds they have.
Consumers can't spend Treasuries. If they held them they would have to sell them (transfer ownership) to obtain funds for spending, in which case spending ability was merely shifted from one agent to another.
Putting funds in a Treasury vehicle is not spending, because it doesn't purchase consumption or investment. "Funds are put on a shelf" so to speak.
The state of a Treasury (net savings) can't be changed unless the government buys it, replacing it with dollars. Then there are more dollars in the economy, net dollars, and fewer bonds.
Consumers can't spend Treasuries. If they held them they would have to sell them (transfer ownership) to obtain funds for spending, in which case spending ability was merely shifted from one agent to another.
As MMT economists point out, tsy issuance doesn't inhibit desired spending at all. Not only is there an extremely liquid tsy market but also repo. Tsys are the highest level collateral.
In my own view the public holds "money" as cash, rb (bank accounts) and tsys. There is essentially no difference in the way this money is held other than the interest. When funds are not needed immediately, smart people put it out at interest and stupid people don't.
Tom,
You are going to have to remind me what the subject of our discussion is. Define the issue for me.
I'm lost.
marris and paul,
If I label my two pails as households(1) and firms(2), that 101st ping pong ball in pail(2) is distributed back to pail(1) from uses view of national accounts, where GDP = C + S + T which says that GDP ultimately comes back to households (after all the distributions are made) who use it to fund consumption (C), saving (S) or to pay taxes owing to the government (T).
If I read it correctly, this seems to be the viewpoint that marris is looking at it from to say no profits in equilibrium.
To reconcile it with paul's view I might sub-divide households into two pails of business owners(a) and wage-earners(b) with "aggregate profits" being a sustained distributional issue within households of the 101st ping pong ball in firms always coming from (b) and being distributed back to (a) leading to paul's question of "how long can this go on?"
paul you are thinking of tsys are "saving" in the sense of contributing to demand leakage. They don't contribute to demand leakage in aggregate. Demand leakage in aggregate from of the side of govt is due to a fiscal surplus, where no tsys are issued, since tsys are issued to offset a fiscal deficit.
geerussell,
I'm defining business entities as just that, entities. Not people.
Wage-earners, retired folks…those are people. They define households.
Business entities accumulate wealth, just as people do. The shareholders, executives etc. can take wages from the business entity, what is left is the profit of the business. Apple has $130+ Billion in cash. This did not magically appear in their coffers. Apple is not a household.
Net funds flow away from households to business entities, because in the aggregate, businesses make a profit. Something like 90% of businesses make a profit.
If I thought that businesses in the aggregate broke even or made a loss, I wouldn't be making this argument.
What is making this discussion so difficult is that there is too much focus on individual transactions by my critics, or the folks that disagree with me.
This problem is impossible to solve if you don't think in terms of the whole system. Macro.
The beauty of closed system analysis is that it eliminates all of the impossible solutions right off the bat.
There is no solution possible that violates the conservation of the dollars in the container.
Once we establish a finite number of dollars exist within a container…the closed economy…then the problem becomes one of distribution.
That's the problem I am attempting to define.
If you leave too many variables unknown the soultion becoms indeterminate (for mortals).
What paul is saying is that in a closed system there cannot be net profit in aggregate because one entity's surplus is another's deficit, if I understand him correctly.
There is also the issue of compound interest, which "compounds." Compound interest is very different from simple interest in its rate of increase.
In a closed system that interest obligation can only be met if no interest is saved or the system keeps on growing in private debt to stay ahead of the debt service requirement. Historically neither condition has been fulfilled, so there is periodic default.
"What paul is saying is that in a closed system there cannot be net profit in aggregate because one entity's surplus is another's deficit, if I understand him correctly."
Yes, and that fact can be demonstrated simply with two containers (or any number) and some finite number of objects representing dollars.
Once the system is established no amount of finagling can increase the number of objects, only the distribution.
In an economy, if companies make profit in the aggregate, net dollars will flow to the companies until there are no more dollars in one container.
Game over. Unless some external entity increases the quantity of dollars.
I also claim that credit cannot be the long-term source of dollars because the amount of debt that can be extended is limited by a feed-back loop that makes debt a function of income.
The magic of compound interest coupled with the growth of interest liabilities that are never extinguished (they grow without end) creates a self-limiting dynamic. Regardless of how much real wealth (production) we create this wealth doesn't necessarliy produce income, and income is necessary to service debt.
It follows that growing debt requires growing income across-the-board. The problem is, the co-hort doing the borrowing is the cohort whose income hasn't risen in real terms in over 30 years.
Couple this with the reality that all debt service is amortized by households one way or the other and we have a system approaching (if we aren't already there) collapse. Nothing from here on but net money creation or a huge increase in the progressivity of taxation will do many good.
Private debt must be serviced.
Hell, take a look at this:
http://research.stlouisfed.org/fred2/series/HSTCMDODNS
Does that look like credit is expanding?
I think marris' point is that capitalism inherently involves failures as part of the competitive market system.
So saying that the private credit system doesn't create enough credit for everyone to repay their debts is missing the point - not everyone is supposed to repay their debts as not everyone is supposed to succeed.
Some people losing and some people winning is what capitalism is about. The most competitive businesses and individual prosper, those that aren't competitive enough lose. Survival of the fittest, creative destruction, etc.
One might add that the private credit system generates boom and bust cycles: in the boom people fight it out for advantage, in the bust the weakest are liquidated and the strongest consolidate their positions. Rinse and repeat.
The boom leads to rising prices and wages, the bust leads to falling prices and wages.
One major problem with this argument is that the game is rigged - in favour of those that have the extraordinary privilege of creating the money supply through the extension of debt.
"Some people losing and some people winning is what capitalism is about. The most competitive businesses and individual prosper, those that aren't competitive enough lose. Survival of the fittest, creative destruction, etc."
You're missing the point, which is if businesses in the aggregate make a profit, the losers are households.
Second, without the government hiring part of the workforce, most businesses would fail. How many people would end up unemployed?
Worse, if government doesn't supply funds by net spending, nobody wins.
And please, if you are going to disagree with me, at least make an argument that uses a little arithmetic, if only in relative terms, which is all that is necessary.
y, it's not just that there are winners and losers. The system fails periodically and some of these failures involve near-collapse. The reset of default means that assets get transferred to debtors and the game starts again with the rubes at the bottom taking on more debt until the next down cycle — or revolution.
One part of net government spending consists in the dollars the Fed injects into the private banking system.
If the Treasury sells a $100,000 bond for $99,000, and the Fed then buys this bond for $100,000, the net impact on Treasury is $0 (when the Treasury pays the Fed $100,000 to redeem the bond, $1000 is ultimately returned to the treasury since it is interest profit.) But whoever bought the bond - probably a financial institution - is $1000 richer. So $1000 has been injected by the government into the economy.
There is no mathematical or logical reason why the entire increase in government liabilities needed to fund the entire increase in interbank payments needed to fund all interest payments created by existing loans can't come through this monetary policy channel.
The reason monetary policy isn't sufficient to drive growth and enable our society to reach capacity is not a matter of pure math and accounting. It is rather a further economic matter having to do with the the lack of perfect information, efficiency and rationality in the functioning of markets, the way the financial sector is plugged into the productive, growth-producing agents in the real economy, and the institutional, structural limits on the ability of the government to drive activity through financial sector stimulus alone.
I largely agree with you on that Tom. Taken as a whole the process is extremely wasteful and unjust.
I'm pretty sure monetary operations inject no net financial asets into the economy. Lately, with QE, it's been removing them in the form of lower interest on the bonds portfolio.
But go ask Warren Mosler, Randy Wray, Scott Fulwiller, et al.
I'm just guessing.
"if businesses in the aggregate make a profit, the losers are households"
So they lower their wages or they starve.
"without the government hiring part of the workforce, most businesses would fail."
The top 1% end up with most of the wealth. That's the whole point.
"How many people would end up unemployed?"
Enough to force down wages. Eventually they might even work for free. back to the good old days.
"Worse, if government doesn't supply funds by net spending, nobody wins."
Except the plutocrats.
1-1=0
y: "So you agree with me 100%. except maybe from this:
"So they lower their wages or they starve."
Wages can only go to zero, products will still cost something because of other inputs.
When wages go to zero, capitalism is dead.
Actually way before then but what the hell…
I'm not inventing anything new here just looking for patterns in numbers.
I'm merely trying to debunk the idea (1) that businesses create jobs and wealth for anyone but themselves. (2) the government does not create jobs. (3) that lowering wages does anything good for the working class.
The government is the part of the equation that must be there. It's the enabler.
Now if we could just remove Congress from the picture via automatic stabilizers we would be good to go.
We could work on solving other problems.
When wages go to zero people work for food and water and to avoid getting beaten. Like in the good ol' days.
Paul,
I was exagerating a bit in the above two comments.
It's worth bearing in mind that when the monetary base was gold and silver coins, gold and silver mining followed by minting was the equivalent of govt deficit spending today, as far as inhjections of NFA are concerned.
y,
That's the way I look at it.. it is interesting that Alexander del Mar although imo he demonstrated true knowledge of MMT in effect, he advocated for silver anyway back in the 1800s....
I believe this is probably due to the information technology available back then... ie with that old IT (limited telegraph and pony express, homing pigeons) it was probably actually better to use silver at that time.... as it was pretty abundant.
resp,
y, I suppose my other point was that introducing NFA'S is necessary to cover interest accrued, saving, leakages and profits (assuming we want capitalism to survive) and progressive taxation to induce flow, an economy can't run on business investment - that's the thermodynamic equivalent of friction.
There has to be net input to overcome the friction. Funds.
Credit is analagous to a battery, it must be constantly re-charged to function.
"It is impossible for an effect to be greater than it's cause" - Aquinas, 1274
I think how it all plays out depends on a lot of things.
For example, if you start off with a fairly equal distribution of wealth, then an economy financed predominantly through private credit wouldn't necessarily end up with a tiny minority owning almost everything, financial crises, and economic collapse. The system could finance itself internally, with everyone's claims on each other growing steadily over time.
For example, if you start off with a fairly equal distribution of wealth, then an economy financed predominantly through private credit wouldn't necessarily end up with a tiny minority owning almost everything, financial crises, and economic collapse. The system could finance itself internally, with everyone's claims on each other growing steadily over time."
I don't see how. Business would gradually (quickly) accumulate the assets, leaving the liabilities behind.
The wage-earners would be paying all of the debt service, because debt is rolled into the price of products.
Business that couldn't extract profits would fail and leave losses with banks. How would that sort out.?
Can you describe a point-by-point dynamic where funds remain evenly distributed and economic activity exists?
I think the problem is basically one of distribution. If you have one sector increasingly accumulating excess savings, with the rest becoming increasingly indebted overall, then you get problems. The saving sector could be a foreign country (CAD) or a minority within the country. In this case one of the debtors needs to be able to keep taking on more and more debt sustainably (which would be the government, or there needs to be a process by which the savings are reduced and spent.
"Business would gradually (quickly) accumulate the assets"
Ownership of the businesses would be reasonably equally distributed among the population.
y,
The argument I've been making all day is that if businesses make a profit in the aggregate, which they do...90% of businesses make a profit...then...
The reality is locked in stone, net funds will always flow from wage-earners to businesses.
In addition, businesses can't (it's impossible) succeed on sales to their own employees (wage-earners) alone, so they must sell to wage-earners that don't work for them.
The only option here is people that work for the government or sales to the government.
There is no way out, funds must be added to the system from outside.
Credit will fail when the wage-earners reach saturation (we're here now).
Now what?
No one today has even attempted to answer that question or found any flaw in my (general) arithmetic.
I've only been told I'm wrong in vague terms, but no real attempt to discredit my math.
Frustrating.
For example, if you start off with a fairly equal distribution of wealth, then an economy financed predominantly through private credit wouldn't necessarily end up with a tiny minority owning almost everything, financial crises, and economic collapse. The system could finance itself internally, with everyone's claims on each other growing steadily over time.
Ideally, but only ideally in a system w/o transaction costs, accumulated saving, interest compounding, and institutions. That would be a very different economy than exists anywhere or has existed anywhere.
"businesses can't (it's impossible) succeed on sales to their own employees "
You have a growing population (and foreigners). It's a global ponzi scheme.
Distribution of wealth can't get to far out of whack however, so you'd probably need some process to recycle funds, i.e. tax&spend or some other social means of redistribution. But that would be different to govt deficit spending.
"You have a growing population (and foreigners). It's a global ponzi scheme."
y, let's solve the domestic economy problem first.
Growing poulation needs a growing money supply (not credit). Another reason capitalism needs to be subsidized to work.
You just keep adding nails to capitalism's coffin.
The answer is in the containers.
plus those accumulating the savings don't always have to be the same people. A new business comes up with a new product and takes over the market for a while; those that were accumulating the profits before shrink or go out of business. Bankruptcies here and there clear out debts over time, etc.
"Growing poulation needs a growing money supply (not credit)."
Not necessarily. The new generation borrows from the older generation. The older generation then rids itself of alot of their savings in old age and leave their remaining wealth to the younger generation when they die.
"plus those accumulating the savings don't always have to be the same people."
In a closed system this kind of argument fails. We are looking at the aggregate.
"Ownership of the businesses would be reasonably equally distributed among the population."
OK, let's start with a 50/50 split.
Now every business has 1 person to sell to.
Go from there and find a workable distribution.
Currently we have 140 million workers with some 80 million or more dependents plus 40 million + retirees out of 315 million population.
Businesses have 140 million wage-earners to sell to (their employees) plus retirees.
Retirees are spending savings for the most part.
Assume a balanced budget, no trade.
As profits are taken, wages must fall (unless they get extra money from somewhere).
The air is leaking out of demand. Credit is done for now. Something has to give.
"The new generation borrows from the older generation."
Borrows how? The older generation is borrowed out and has zero net worth. Do mean we have to sell our organs to rich people?
Paul,
"Frustrating."
there is a deep seated infestation of libertarianism underlying all of this.
I believe you have certainly made the case that the system cannot operate without critical govt involvement, there is no doubt of this...
libertarianism at core denies that humans have the authority to operate this system justly under law... ie "our govt cannot be seen as being in charge of all of this" under libertarianism...
The flight to analysis of all of this ex post and ex ante via higher order math is a form of this 'denial' in itself.
iow we humans have no authority over say 'gravity' or 'themodynamics' or 'particle physics', etc... so we study these phenoms via the higher order mathematics and yes we are able to find out a lot of how these phenoms work and then do our best to work with them to our human benefit...
But as opposed to those systems, which we have been given no authority over, I submit we certainly do have authority to operate these economic systems which underlie all human relationship (Romans 13:1-8)
Accordingly, higher order math analysis ex post and ex ante is not applicable for systems that we humans have authority over...
Warren says: "let the unemployment lines be our gauge".
Or here is the Lord to Israel: "And he is saying to them, 'Why stand you here the whole day idle?'
7 They are saying to him that 'No one hires us.' He is saying to them, 'You also go into the vineyard.' " (Mat 20:6-7)
Pretty simple.
....the whole concept of "the free market" is not only absurd/false, IT IS DARK... rsp,
Matt,
The irony with this libertarian mindset is that if they get the world they say they want the same dark forces will be pulling the strings.
They think the darkness comes from government. If it did we could do something about it.
The darkness comes from "the man behind the curtain".
He's been there for centuries (Bildebergers, Rothschilds, money-changers,whoever it is now).
"I think how it all plays out depends on a lot of things."
It depends on the math of a decaying system, the endgame is known if we don't apply counter-measures. We know exactly what the sand in an hourglass will do.
Gravity pulls us towards the Earth from the sky with unrelenting tyranny…unless we figure out a way to overcome the force of gravity we meet our inevitable end.
"I think the problem is basically one of distribution"
Of course it is, that's been the basis of my entire argument. Distribution is dynamic, and all of the natural dynamics take funds from one (big) group and move it to another (small) group.
Only coercive taxation can reverse the natural course, plus controlled deficit spending to account for leakages and liabilities created in absence of assets.
If we try to pay for stuff with credit, all of the liabilities end up being held by the large group, all of the assets by the small group.
right it's like a 'leadership' vacuum or perhaps I myself might say 'authority vacuum'... then something moves in to fill the void... rsp,
Paul,
Your comment with the pails and ping-pong balls upthread is the first time I've ever seen you write down clearly what you think the problem is.
Lets say in the aggregate all businesses invest some number x into the economy, which covers wages, materials, plant and equipment, cost of borrowing, etc.
If those same businesses receive sales plus a profit, they will receive (x+p) over the cycle. They will have to if they earn a profit.
Right, pretty weird. So if businesses earn x+p, but households only earn x, where does the extra p come from?
Perhaps it comes from savings? But note that, over time, savings are increasing, not decreasing, as they would if they were constantly being dipped into to meet this short fall in the amount needed to purchase all business output.
Perhaps it comes from the government? But note that the government can only borrow from the private sector or tax, which means that it can't add to x.
So where does the extra p come from?
Take two pails with 100 ping-pong balls in each.
Call one pail wage-earners pail(1) and the other business entities, pail(2).
A business invests 1 ping-pong ball into pail (1) and creates a widget. the one ping-pong ball paid for everything that went into the making of the widget. Sale of the widget requires two ping-pong balls from pail(1) transferred into pail(2).
Now pail(1) contains 99 ping-pong balls plus (1) widget. Pail(2) contains 101 ping-pong balls.
Repeat over and over. How long can this go on?
Indeed!
And yet, it does go on. So how come?
The answer is that two ping-pong balls go into pail one, and then the same two ping-pong balls go back into pail two. Where do the funds come from to purchase all of the output made by firms? They come from the sale of the output. That is the meaning of the identity, well known to MMTers, "aggregate expenditure equals aggregate income."
In fact, there isn't even two pails. There's only one pail: households. That's why, when businesses make a profit, money isn't "leaking out of the economy." Households sell their labour in factor markets and buy output in product markets, but they also... own all of the businesses. All wealth in the economy is ultimately owned by people, the same people, in an aggregate sense, who buy all of the output and earn all of the the income the sale of that output generates. Income = expenditure.
vimothy But note that the government can only borrow from the private sector or tax, which means that it can't add to x.
Huh?
Tom,
I thought the same thing…instant closed-system violation.
People, you really are over-thinking this.
Usually, especially wrt systems, it really is as simple as 2+2=4.
"Your comment with the pails and ping-pong balls upthread is the first time I've ever seen you write down clearly what you think the problem is."
vimothy, with all due respect, I never thought I'd have to resort to Fisher-Price to make my point.
We're talking about simple arithmetic here, and I assume that the folks reading these threads are fluent in arithmetic.
And, I might point out, even though I've made the problem crystal-clear, you are still looking for a way around the obvious conclusion.
The government cannot add to x in the sense that Paul has defined the problem. The "problem" is that if firms pay their employees all of their revenue, they make no profits.
At any given moment, income equals expenditure. If the government is spending, it must either be financing through taxing aggregate income, or borrowing from it, in some sense. There is no third option. The government may be able to increase aggregate income, but at any point in time, it has to satisfy its aggregate accounting c constraints or something impossible is happening. But perhaps this is slightly subtle, and aanyway, it's a distraction.
The point is that your arithmetic is fine, Paul, but you have misspecified the problem.
Household's earn the wages AND the profit from the sale of output. Income = expenditure.
"vimothy But note that the government can only borrow from the private sector or tax, which means that it can't add to x"
1. agent in the private sector borrows from another. Use of the object is transferred from one agent to another. Quantity of assets remains unchanged.
2. Government "borrows" from agent in the private sector, creates bonds as asset swap and spends the same amount of funds back into the private sector.
Agent in the private sector still has use of his asset (a bond)…but there are now more assets than before.
Who's borrowing from whom?
Paul,
There's no need to show-off about your ability to count, any child can do as much.
You've posed the following problem:
If businesses take more from households than they give back in income, eventually households are going to run out of money.
It would be a problem if that were the case, but it isn't the case.
"The government cannot add to x in the sense that Paul has defined the problem. The "problem" is that if firms pay their employees all of their revenue, they make no profits."
Firms go in the hole when they make an investment.
They recoup their investment when they receive revenue from sales.
If they are a successful enterprise, they make a profit…net flow of funds to the business entity.
Note that I made a distinction between households and business entities…they are entities, not people.
Even though Mitt says they are.
Paul,
"Quantity of assets remain unchanged"--but they don't remain unchanged. If someone borrow from someone else the quantity of assets will increase.
Look, there's no need to make things complicated. You want to talk about assets and stuff but there's not much point because you don't use terms in the standard way and we just end up talking past one another.
Your comment upthread that I quoted from is clear and well defined. Let's talk about that.
"There's no need to show-off about your ability to count, any child can do as much."
I thought the same thing but apparently it requires more than counting.
"It would be a problem if that were the case, but it isn't the case."
It isn't a problem because the government monetizes the profits with deficit spending.
I am only trying to demonstrate the fact that that is why it works.
Think of it this way…conservation of matter (thermodynamics) holds mathematically in the case where dollars are discrete objects that can only be produced by the government.
"If someone borrow from someone else the quantity of assets will increase."
This is not a true statement. I'm puzzled why you think it is.
And vimothy, I haven't changed the definition of any terms in this discussion.
And I am discussimg my comment upthread. So far you've made several logical and mathematical errors…I'm trying to isolate where you are going wrong.
You're misunderstanding something fundamental here, so things might be quite insightful if properly applied are missing the mark instead.
If businesses earn profits, those profits belong to the owners of the business--they constitutes income for the owners. If you like you can divide income into wages and profits: Y = W + P.
Now, the sale of is output is going to raise an amount of money, and let's say that's some arbitrary amount. How can the expeniture n output be less than the income that the sale has generated? Obviously it can't. So expenditure has to equal income.
If expenditure only equals wages, then we have E = W < GDP, and then there's no profits. But it would also be impossible to have E < GDP anyway. We would simply have E = W = GDP.
So the amount of spending has to equal the amount earned. If spending is $X, the amount earned is $X. If spending is $Y, the amount earned is $Y.
If profits haven't been "spent" in a macro sense, then they can't exist. If they do exist, then the must be the result of somebody spending. Income = expenditure.
This is not a true statement. I'm puzzled why you think it is.
If I borrow from you or the bank then that is a new asset. every time someone takes out a loan or issues a bond or whatever, the quantity of assets increases.
Undistributed profit is retained earnings that adds to firm equity. There's about 2T on the books of US corps. now as "firm savings."
Right, and of course firms have other assets. The point is that someone owns the firms. They own the plants, the office space, the computer systems, the machinery and they own the savings as well. All wealth in the economy ultimately belongs to the household sector.
vimothy,
Your argument as presented does not maintain stock-flow consistency.
expenditure = income holds for individual transactions and the sum of the magnitude of those transactions gives us GDP.
It doesn't tell us anything about how many dollars are in existence or how they may have been redistributed.
GDP is not tethered to the number of dollars in the system. There is no accounting of dollars here.
My example forces the accounting of dollar movements within the closed system as defined to determine the direction of the net flow of dollars within the system.
It demonstrates how distribution of funds changes within the system under the assumption that businesses in the aggregate make a profit (they do).
If the number of discrete dollar objects within the system are fixed (closed system) then transactions when p>0 will create a net flow, one group must gain at another groups loss. The system is zero-sum.
Someone's a savings must be drawn down to fund profits.
All closed systems are zero-sum.
This changes momentarily when the fiscal authority injects additional discrete dollars into the system at which time the level and distribution of funds is altered, and then the next cycle takes place.
Don't take my word for it…read Minsky.
"If I borrow from you or the bank then that is a new asset. every time someone takes out a loan or issues a bond or whatever, the quantity of assets increases."
If You borrow from me there is no new asset…the use of the asset transfers.
If you borrow from a bank, new assets are created out of thin air along with a new liability equal in magnitude, so mathematically no new asset is created.
The borrowers net assets don't change on his balance sheet either. Or in the aggregate for the economy.
Maybe the point of confusion here is my arguments are always wrt flows, net flows. Seems everyone just waves off the liabilities in the system like they aren't there.
"The "problem" is that if firms pay their employees all of their revenue, they make no profits."
No one has claimed that firms pay all of their revenues to their employees.
Firms invest some quantity x into the economy on wages, materials, plant, equipment and financing.
Firms take in revenue from sales and if succesful make a profit (gross)…(x+p).
The funds that represent profit are a net transfer from the economy at large, ie households.
Households have fewer funds, business entities have more funds. After taxes, bonuses and distributions, the business entity stiil (usually?) has retained earnings. Funds used for bonuses or distributions go back to households.
The net change is still to th ebusiness.
I give you credit for observing that if there isn't another source of funds profits must draw down savings, No one else has done so.
"All wealth in the economy ultimately belongs to the household sector."
Then why do we have corporations? As long as there are retained earnings held by the business entity, they are not held by households.
Otherwise, I want my share of Apple's $130 Billion. :-)
Vimothy,
"note that the government can only borrow from the private sector or tax, which means that it can't add to x."
Here's example of government deficit spending described by Marc Lavoie. You will see that the government doesn't borrow anything from the private sector that existed before the deficit spending occured. The deficit spending simply adds assets and money to the system:
1)The Treasury sells $100 million in T-bills to private banks.
2) The banks’ reserve accounts are debited by $100 million, going from 0 to $100 million overdrawn.
3) The Treasury’s account at the Fed is credited with $100 million.
4) The Fed purchases the T-bills from the banks, eliminating the deficiency in bank reserves.
5) The Treasury spends the $100 million. Bank reserve accounts are credited with $100 million, and bank customer deposit accounts are credited with $100 million.
6) The Fed sells $90 of the T-bills back to the banks to drain excess reserves. The banks keep $10 million in reserves to meet their 10% reserve requirement on deposits.
At the end of this process the banks have $90 million in T-bills and $10 million in reserves, and their customers have $100 million in deposits.
So government deficit spending (“borrowing”) adds money and financial assets to the system.
http://www.boeckler.de/pdf/v_2011_10_27_lavoie.pdf
Paul,
Your argument as presented does not maintain stock-flow consistency.
That can't be right, because all we've said so far is that income = expenditure.
You've asked how households can afford to purchase output if firms make a profit. Surely their wages must be lower than the firm's revenue.
This is quite right. If firms are to make a profit, then there revenue must exceed their costs in the form of wages and other outlays. By definition, what's needed to purchase all of the output is all of the income its sale generates. If that income includes profits, then obviously those profits are needed as well. So wages alone will not be enough.
It doesn't tell us anything about how many dollars are in existence or how they may have been redistributed.
That's true. I agree. It tells us about the flow of income and expenditure.
GDP is not tethered to the number of dollars in the system. There is no accounting of dollars here.
I agree with this as well. The accounting is for income and expenditure. Flows of "dollars" are tracked in a different set of aggregate accounts.
But dollars is a very vague term. Why don't you define exactly what you mean by "dollars". Otherwise, we run the risk of talking pat one another. Do you mean base money? Money in the broader sense--i.e., liquid bank deposits? Broad money and the base?
My example forces the accounting of dollar movements within the closed system as defined to determine the direction of the net flow of dollars within the system.
Your example referred to profits and wages and and outlay on goods. These are income-expenditure flows. To account for dollars you need to refine your framework. But you also need to define dollars.
For example, the only way that base money like Federal Reserve notes can enter or leave this system is if the Fed injects or withdraws them. But injections or withdrawals of base money do not affect income. It's a different flow.
It demonstrates how distribution of funds changes within the system under the assumption that businesses in the aggregate make a profit (they do).
I certainly agree that firms can earn profits, but this doesn't mean that households can't afford to purchase all of the output that firms sell. They must be able to, because they do. What it means is that, in a very abstract, aggregate sense, profits must also be used.
If the number of discrete dollar objects within the system are fixed (closed system) then transactions when p>0 will create a net flow, one group must gain at another groups loss. The system is zero-sum.
To discuss this properly, I think you need to define what it is you mean by "dollar objects".
Someone's a savings must be drawn down to fund profits.
This is not so. But let's agree on what you mean by dollars and then come back to it.
If You borrow from me there is no new asset…the use of the asset transfers.
The new asset is my debt to you. That asset didn't exist until I borrowed. Then there was a new asset created.
Let's say that I agree to buy you lunch. In return, you promise to buy me lunch in the future. That's a newly created debt. Your liability--the future lunch--is my asset. We created it "out of thin air".
All liabilities are created out of thin air in this way. What makes banks different is not that they create liabilities "out of nothing," but that some of these liabilities are very liquid, in fact, they are so liquid that they circulate as money.
If you borrow from a bank, new assets are created out of thin air along with a new liability equal in magnitude, so mathematically no new asset is created.
New assets and liabilities are always created "out of thin air." When you borrow from the bank a new asset and a new liability are created, just like when I borrowed from you or you agreed to buy me lunch. What's different about banks is that their liabilities (some of them) circulate as money. So when banks lend, new money is (sometimes) created.
"That can't be right, because all we've said so far is that income = expenditure. "
This isn't a stock-flow expression.
"To discuss this properly, I think you need to define what it is you mean by "dollar objects"."
Dollars (assets) irrespective of liabilities. It doesn't matter how many, only the fact that the quantity is fixed.
"If businesses earn profits, those profits belong to the owners of the business…profits: Y = W + P.
Now, the sale of … E = W < GDP, …E = W = GDP.
…If spending is $X, the amount earned is $X. If spending is $Y, the amount earned is $Y. "
This argument doesn't address the problem as stated.
I stated the problem simply:
Firms invest x. Firms receive (x+p) over some time period t. There may be millions of transactions between the times those two system states were polled but the bottom line is that over that period net money flowed from households to business entities.
It is the transfer of ping-pong balls between pails writ large. The constraint is the total, some number, and every transaction within it is zero-sum.
What's wrong with that?
If you are saying this can't be true because of the argument you wrote above you are the tail wagging the dog…you have to make your analysis fit my example, which is clearly defined.
This is not an expression of Income=expenditure, it is two sides of an aggregate of transactions for which income=Expenditure is not a constraint.
The equation is not applicable to the problem at hand.
"Someone's a savings must be drawn down to fund profits" - This is not so. But let's agree on what you mean by dollars and then come back to it. -vim
Sure it does, if the system is closed. Every dollar in the economy is in the savings state except for the moment a transaction takes place. Otherwise money would be flowing constantly like electricity in a closed circuit. Money spends as random events scattered out over some period of time. The period between transactions could be a minute, it could be 10 months. During the idle time it's saving, by definition.
I may get a paycheck on Friday and not spend it for 5 months. While I am holding it it is saving (saving = income not spent). Dollars are always saving except the instant transactions take place. This is not to be confused with net saving.
No one has claimed that firms pay all of their revenues to their employees.
No, the question is how do firms collectively make a profit. Profits are revenues minus costs. We could list all of these costs in excruciating detail, or we could divide them up in some simple fashion. A common approach is to is model costs in terms of returns to labour and capital: wages and rent. Or just wages. Or whatever.
In any case, if a firm is buying intermediate goods and raw materials, these outlays become revenue for some other business, who then has to pay for the input flows, and it can all be modelled in terms of factor payments.
At the end of the day, the idea is to make things less complicated, so that they are easier to work with and understand.
Firms invest some quantity x into the economy on wages, materials, plant, equipment and financing.
The easiest way to write the profit function is to say that firms produce output, Q, for price p, with labour, L, and capital, K, or just labour. Labour earns wages w and the rental rate in capital is r.
Then the firm maximises,
Pi = pQ - wL - rK
Or even simpler,
Pi = pQ - wL
Firms take in revenue from sales and if succesful make a profit (gross)…(x+p).
Right, the firms wants there to be some positive difference between its revenue and its costs.
The funds that represent profit are a net transfer from the economy at large, ie households.
Not quite. That profit ultimately accrues to someone, perhaps even many someones. Those someones all live in the household sector, i.e., they're all people. However much firms earn as profits, this is all ultimately household wealth.
What you might very well have, however, is a redistribution of wealth within the household sector, as the owners of capital or businesses or whatever take hold of a greater share of income or a greater share of wealth.
Households have fewer funds, business entities have more funds. After taxes, bonuses and distributions, the business entity stiil (usually?) has retained earnings. Funds used for bonuses or distributions go back to households.
It doesn't only have retained earnings. It might also have expensive real estate, fleets of cars, machinery, inventory, computers, etc. Retained earnings are not so different from these. And they are all held against the firms liabilities. Firms don't own themselves. Apple or Microsoft aren't wealthy--their owners are wealthy, because they own them.
"The new asset is my debt to you. That asset didn't exist until I borrowed. Then there was a new asset created."
Sorry, but this is a circular argument. Following this I could then take the dollars I borrowed from you and loan them to someone else and so on and so forth ad-infinitum…before long millions of dollars in assets have been created. Wrong.
No net asset has been created, none destroyed. In a closed system, what is, is and there ain't no more.
The only flows worth measuring in an economic system are the net flows, and the only assets that matter are net assets, unless you are playing a game of musical cahirs, in which case the last man standing will end up with the net asset.
You can't create something out of nothing. Or as Aquinas said back in 1274…"It is impossible for the effect to be greater than the cause."
vimothy,
your long comment up there is pretty but it is just too involved, way more than necessary to demonstrate a model, which by the way is trivial, is expressed improperly.
We will just have to agree to disagree, but I will leave you with this:
http://www.levyinstitute.org/pubs/wp74.pdf (Minsky)
"In a more complex (though still highly abstract) structure, aggregate profits equal aggregate investment plus the government deficit." - pgs 5-6
And no, I figured this out long before I saw this paper.
btw, why do you think perpetual motion is impossible? Or do you think it is?
Y,
Here's example of government deficit spending described by Marc Lavoie. You will see that the government doesn't borrow anything from the private sector that existed before the deficit spending occured. The deficit spending simply adds assets and money to the system
It can be good to go through these things in terms of all the transactions but it's also important to try to look at this sort of stuff from the proper perspective.
This is a list of things that (hypothetically or actually) happened. It doesn't tell you what causes what.
1)The Treasury sells $100 million in T-bills to private banks.
[Snip]
At the end of this process the banks have $90 million in T-bills and $10 million in reserves, and their customers have $100 million in deposits.
It seems to me that you have a lot of extraneous elements here that mostly serve to obscure what's ultimately going on, which is that the government is financing some expenditure by selling bonds to the private sector. The stuff about the reserve balances doesn't add anything to that picture, as far as I can see.
If the government has sold some bonds to the private sector then for sure it as added assets. The Fed must also provide the reserves banks need to meet their requirements on reservable liabilities at any given moment, but that's a separate issue.
t's not a separate issue because all of the actual 'financing' for the expenditure is coming from the Fed.
Let's say the Fed didn't purchase the T-bills from the banks in step 4. The banks would have no way of paying back the overdraft (loan) from the Fed... until the Treasury spends, at which point they can pay back the loan.
*it's
The point is the government isn't borrowing any financial resources from the private sector that existed in the private sector prior to the government expenditure.
This is obviously different to an individual borrowing a $10 note from another individual, for example.
In Lavoie's example, the private non-financial sector holds $90 million in bonds and the financial sector has increased its reserves by $10 million to meet the increase in reserveable liabilities due to the newly created deposits. So the expenditure is being financed entirely through the private bank and non-bank sector.
If the Fed doesn't supply banks with the reserves they need to meet their (Fed mandated) requirements, then they won't be able to meet them. This doesn't mean that the Fed somehow funds the expenditure. Govt expenditure is still $100 million, financed by $90 million in bonds, and $10 million in new reserves.
In fact, Lavoie has the government just selling bonds to banks, with no involvement from the rest of the private sector. So all the expenditure is financed by borrowing from the financial sector, $90 million in bonds and the rest in reserves.
I was referring to table 3 in his paper.
In his example the banks take a loan from the Fed and use this to purchase T-bills from the Treasury.
The purchase of the T-bills is financed by the Fed.
The Treasury does not borrow pre-existing 'savings' from the private sector in Lavoie's example. The banks finance the purchase of government debt by borrowing from the government (Fed).
In your example, the government first borrows $100 million from the banks. Then presumably it spends the money, increasing deposits held by the non-bank private sector. But this will raise banks' reserve requirements, and if they are to meet them, the Fed will have to supply the necessary reserves.
So you hvae:
Govt borrows $100mn from private sector (i.e. sells bonds to banks).
Govt spends $100mn.
Fed adjusts supply of reserves as needed.
In the example, banks borrow $100 million from the Fed to buy the bonds.
In the example, they can't pay for the bonds without borrowing the money from the Fed.
Spending by the Treasury then allows them to pay back the loan from the Fed.
This is different to:
1. Banks hold savings
2. Treasury borrows savings.
3. Treasury spends.
What happens instead is:
1.Banks borrow from government
2.Banks use borrowed money to buy government bonds
3. Treasury spends and banks can repay loans to the government.
to make it simple:
I give you a bond, but you don't have any money to pay for it.
So I lend you the money, with which you pay for the bond (you give the money back to me).
I then spend the amount you just gave back to me, giving it back to you.
you then repay the debt you owe to me (for the money I lent you) by paying the money I just gave to you back to me.
You now have a bond.
Wait, I'm afraid you've lost me a bit there.
First of all, the banks borrow from the govt.
Then, the banks use the money that they just borrowed from the government to lend to the government.
Then, the government spends the money that it leant from the banks and the banks use it to repay their original loan from the government.
Is that it?
to make it simple:
You got funny ideas about what's simple, compadre!
You want to borrow money from me, except that I can't afford it, so you're proposing to lend me the money that you're going to borrow...?
Why?
v,
Ask your Congressman... rsp,
"why?"
well exactly. The government does this sort of thing because a) the central bank isn't usually allowed to lend directly to the treasury, and b) bonds are an 'interest-rate support mechanism'. They serve to raise interest rates. If the govt just spent by the treasury issuing money the overnight rate would go to zero (in the absence of interest paid on reserves) and there would be no govt bonds for investors to buy.
In my example ("you and I") you don't have any money to lend to me but you still end up with a bond and I (therefore) end up in debt to you - even though you didn't have anything to lend to me!
"Is that it?"
In a nutshell, yes. And at the end of the process the banks end up with a government bonds (and reserves) and depositors end up with bank deposits.
So the govt ends up in debt to the banks, although it hasn't actually borrowed anything from the banks that they had prior to the process.
(There are of course other ways that deficit spending can and does happen - Lavoie just describes one way. The basic principle is the same though - govt deficit spending creates non-government savings).
The government does this sort of thing because a) the central bank isn't usually allowed to lend directly to the treasury,
So do you think that all lending to the government is done by the Fed?
b) bonds are an 'interest-rate support mechanism'. They serve to raise interest rates.
Why is the treasury trying to raise interest rates? Surely the treasury would like to lower interest rates. And anyway, that's the Fed's job. When the Fed wants to raise rates it makes an announcement and any necessary adjustments with its own portfolio of bonds.
If the govt just spent by the treasury issuing money the overnight rate would go to zero (in the absence of interest paid on reserves) and there would be no govt bonds for investors to buy.
And why would the government do that?
You are suggesting that:
The Fed abandons its nominal IR target; and,
The government issues money to pay for new borrowing.
What's the logic behind this proposal? How do you square it with your belief that the Fed already pays for all government borrowing by issuing money?
In my example ("you and I") you don't have any money to lend to me but you still end up with a bond and I (therefore) end up in debt to you - even though you didn't have anything to lend to me!
Right, but it doesn't make a whole lot of sense, though.
How can you end up in debt to me if I don't have anything to lend?
If you end me some money, then I'm in debt you, not vice versa. If I give you back that money, then the debt is cancelled and we're back at square one.
And if you already have the money you need, why are you trying to borrow to from me in the first place? And if I don't have any money to lend, why would I be interested in lending to you?
And at the end of the process the banks end up with a government bonds (and reserves) and depositors end up with bank deposits.
So the govt ends up in debt to the banks, although it hasn't actually borrowed anything from the banks that they had prior to the process.
The government is in debt to the banks, even though it hasn't borrowed anything from them?
The basic principle is the same though - govt deficit spending creates non-government savings
Does Lavoie really say this?
"So do you think that all lending to the government is done by the Fed?"
The government borrows money that it creates itself through keystrokes. The government thus funds itself.
The fact that the government created laws requiring itself to pay interest to bond-holders doesn't matter, The only possible way new money could be introduced into a closed system is from thin air, or nowhere if you prefer.
All systems are closed systems. Anything added to a closed system must come from a source outside of the system.
The net effect of the "borrow to spend" Rube Goldberg contraption the US uses is that the government is "obligated" to pay interest on money it created previously in order to be "allowed" to create an equal amount of new money into the economy.
So, in the end mathematically, the government is spending new money into the economy constantly and paying interest on the amounts in perpitude, which results in adding more new money into the economy.
Economic agents will never turn down interest earned on money in exchange for "safety", so we have no chance of anyone refusing to "buy" our "debt".
In a closed system it is impossible for any transaction or collection of transactions to net to any number other than zero. The debit is always equal to the credit.
THIS CANNOT BE QUESTIONED.
Thus, it is impossible for the government to "borrow" from the private sector and have the private sector gain assets. In a traditional debt transaction an asset is transferred from one party to another, net ∆assets=0
Mainstream economics and conventional monetary theory can only make the "borrow" case on semantic grounds, which can't have any traction.
No verbal description can ever have the slightest infuence on a real system.
Re-define the function of your loudspeakers as fans, see how that works out.
Paul,
You tend to make a lot of very strong assertions, but you don't have any background in this area, so who is going to take you seriously as an authority? Either your arguments are good or they are not. If they are good, then let's hear them.
When you write things like, "the government borrows the money it creates with its own keystrokes," my first thought is, "this guy doesn't actually know what he's talking about." Coupled with your strong assertions to the contrary it makes you seem like a bit of a crank.
Now, probably you're not a crank. You may very well have a lot of sound ideas, and we're just talking two totally different languages. I've never studied engineering and you've never studied economics. Or whatever. That's all good, but it would help the debate if you relaxed, toned down the "this cannot be questioned" rhetoric and just laid your ideas out in the simplest and clearest way possible.
vimothy,
"The government is in debt to the banks, even though it hasn't borrowed anything from them?"
not quite, in the Lavoie example the treasury borrows money from the banks which the banks have borrowed from the Fed. In that example, before they borrow from the Fed the banks have zero reserves.
The fed is part of the government, as is the treasury. So in that example the banks borrow from the government to lend to the government.
It doesn't make much sense because the enforced division between central bank and treasury doesn't really make much sense, except perhaps politically, depending on your point of view.
Technically, it's not even really possible for the government to borrow money issued by the Fed. Given that fed liabilities are government liabilities, when the government borrows them, it borrows its own liabilities. That doesn't make much sense does it?
The fact that the government created laws requiring itself to pay interest to bond-holders doesn't matter, The only possible way new money could be introduced into a closed system is from thin air, or nowhere if you prefer.
Earlier you said this:
You can't create something out of nothing. Or as Aquinas said back in 1274…"It is impossible for the effect to be greater than the cause."
But now you seem to be saying that you can create something out of nothing. Isn't this a contradiction?
Anything added to a closed system must come from a source outside of the system.
That seems straightforward.
The net effect of the "borrow to spend" Rube Goldberg contraption the US uses is that the government is "obligated" to pay interest on money it created previously...
But the US government doesn't pay any interest on money that it has previously created. Money is a liability that pays no interest. That's the principle difference between Fed notes (money) and treasury notes (not money). Fed notes pay no interest.
...in order to be "allowed" to create an equal amount of new money into the economy.
I'm not sure where "equal amount" comes into the picture, but the government doesn't create "new money" when it borrows, it creates new money whenever the private sector wants or needs new money. If deposit account rise and the banks need to increase their reserves to meet their reserve requirements, then the govt has to supply them or it will lose control of its interest rate target. If the public suddenly decides that it wants to hold less cash, then the Fed has to accommodate them. This is sometimes known as "endogenous money".
So, in the end mathematically, the government is spending new money into the economy constantly and paying interest on the amounts in perpitude, which results in adding more new money into the economy.
That's a very idiosyncratic way of looking at things that few other people share, as far as I can see. The government doesn't "spend money" into the economy at all--at least, according to my definitions of "money" and "spend".
Economic agents will never turn down interest earned on money in exchange for "safety", so we have no chance of anyone refusing to "buy" our "debt".
Don't follow you here. What does this have to do with the rest of your argument, can you expand?
Govt debt is not the only asset available, so it's certainly seems implausible to say that there is literally "no chance" of anyone buying its debt. If people don't want it, then surely they can go elsewhere.
In a closed system it is impossible for any transaction or collection of transactions to net to any number other than zero. The debit is always equal to the credit.
If a sector cannot transact with any other sectors, then credits and debits for it as a whole must be equal, yes. No one is disputing elementary stuff like this, as far as I can see.
THIS CANNOT BE QUESTIONED.
Who is questioning it? It's just an accounting identity, the same principle that says income = expenditure, i.e., every transaction has two sides.
Thus, it is impossible for the government to "borrow" from the private sector and have the private sector gain assets.
I'm afraid I don't understand this at all.
When you write, "thus," it implies that the rest follows from total credits = total debits. Is that intentional?
How can it be impossible for the government to borrow from the private sector and gain assets. You described the government borrowing from the private sector above. If the government sells a bond to the private sector, then the private sector gets an asset and the govt gets a liability. MMTers, for whom this sort of thing is central, refer to govt debt as "net financial assets" or "NFA".
In a traditional debt transaction an asset is transferred from one party to another, net ∆assets=0
Any type of borrowing or lending implies that assets and liabilities are created. When you take all of the assets and liabilities created by a sector or economy or whatever and net them out against one another you will end up with: new tangible assets created and net lending to other sectors. This is the aggregate flow of saving for the sector in question.
When I say “it’s not possible”, I mean that when the government holds its own liabilities, it doesn’t actually have anything (other than a promise to itself). It’s quite difficult to spend nothing. This is why people say that when the government spends, it creates or issues money. That is, it issues government liabilities.
Y,
That doesn't make much sense does it?
This reminds me of the "Chewbacca defence":
http://www.youtube.com/watch?v=clKi92j6eLE
It's true that what you say doesn't make much sense, but it also doesn't seem to have much to do with anything, at least by my reading. The government doesn't really borrow from the Fed. If it did then the Fed would own all the government debt. But the Fed does not.
In Lavoie's example the government borrows from the banks. Most of that borrowing takes the form of bonds and the rest is reserves. You should be able to see that from the fact that the government deficit spends $100 million, which is the point of exercise, and the private sector ends up with new net assets to the tune of $100 million. Unless you have a very weird definition of "borrow," I dunno.
When I say “it’s not possible”, I mean that when the government holds its own liabilities, it doesn’t actually have anything (other than a promise to itself).
But it doesn't hold its own liabilities. (Well, it holds some, which is the difference between gross and public debt.) Why would it do that? The whole point of borrowing is to get other people to hold your liabilities. Right?
It’s quite difficult to spend nothing.
Okay...
This is why people say that when the government spends, it creates or issues money. That is, it issues government liabilities.
I don't see how that follows.
Firstly, govt liabilities != money. Money is a particular type of govt liability. Ten times more (roughly speaking) of those publicly liabilities are not money.
Secondly, the govt can finance its spending through several means, most notably raising taxes and borrowing. It can also finance some spending by issuing money, but this option is quantitatively not very significant.
Vimothy,
I said above that the banks in that example start with zero reserves.
They borrow reserves from the government (Fed).
They lend those reserves to the government (Treasury) in exchange for bonds.
The government (Fed) purchases the bonds with reserves.
The government (Treasury) spends the borrowed reserves.
The government (Fed) sells the bonds back to the banks in exchange for reserves.
The banks end up with bonds (and some reserves), and their customers end up with deposits.
So overall, the government lends money to the banks which the banks then lend to the government. The government then spends this amount.
"But it doesn't hold its own liabilities"
When the treasury has a positive balance in its Fed account, the government is holding its own liability.
Which is the same thing as holding your own IOU. If you are holding your own IOU you do not have additional funds to spend.
vimothy,
"You tend to make a lot of very strong assertions, but you don't have any background in this area, so who is going to take you seriously as an authority?"
The only "strong assertions" I ever make are those grounded in arithmetic.
The authority is arithmetic, applied with the law of closed systems. I don't claim to be the authority, I didn't create the universe. I do understand it however, at least this part.
Background? Really? I will put the achievements of engineering up against that of economists over history any time and come out looking pretty effing good. You've got nothing here.
"Either your arguments are good or they are not. If they are good, then let's hear them."
I've made arguments consistent with accepted mathematical principles. You've seen them. I can't get any more granular than that. Moving away from there makes the problem more complex, but doesn't change anything.
Why do I have to go beyond that to satisfy your questions? Attack the argument as I have presented it and if you do so successfully you will undermine my premise.
"When you write things like, "the government borrows the money it creates with its own keystrokes," my first thought is, "this guy doesn't actually know what he's talking about.""
It is a statement of mathematical fact, for which I provided an example. Other than that I don't feel a need to "convince" you of anything, and you already have a pretty good idea of how much I care what you think.
Anything I write in response to your queries is really for the other guy that might also be reading. Or I'm just practicing.
Question: Where is the beginning of a circle?
Answer: Wherever you choose it to be.
"That's a very idiosyncratic way of looking at things that few other people share,"
Why should I be concerned at how others see things? There's a reason I call my blog The View From Mars.
If I am mathematically consistent, and you see things differently, then you are wrong.
Note the if-then? If A is true, then B is true. Your job is to prove my A isn't true. That will be difficult because my A is pretty sound.
If the government doesn't keystroke "funds" (I'll use that term instead of money) into the system then there is are no "funds" to borrow, no net funds anyway, and that's what I am always referring to…NET dollars.
The "system" can't create (or destroy) it's own net dollars, which is basically all I'm saying. Thus, any adds/subtracts must come from the government.
The idea of government "borrowing" becomes absurd, nothing more than a semantic construction.
If the government borrows a ping-pong ball from the pail and puts two back in, I call that an add. YMMV semantically, but it will be hard to take seriously if it is contrary to the arithmetic.
Beyond that there isn't a whole lot I will be able to say to convince you. You will have to figure it out on your own. As far as the crank insult, they thought Galileo was a crank too. I'm in good company.
It is pretty apparent that most people alive today have very poor abstract thinking capacity, so I'm not surprised anymore that people are so confused by the system. MMT ideas will be a very hard sell.
On the other hand, the system is going to behave in harmony with MMT thinking so those of us that are aware of it have an edge.
"When you write, "thus," ",
It means that it follows from the law of closed systems, which should be obvious but as I can see it isn't to you. Again, this is something you will have to figure out on your own.
That's right, if the treasury borrows from the Fed it's not a very economically significant event, because it's just two arms of the government moving stuff between themselves on internal accounts.
Most of the govt debt is not held internally in this fashion, although some is. Most debt is held by the public, about $10 trillion in the US.
Sorry, that last comment should have been addressed to Y.
Say you issue a liability in the form of an IOU written on paper. The person you issued it to then gives it back to you.
Your liability has now been extinguished.
The paper IOU is now no longer a liability. It's now nothing more than a piece of paper. The liability has ceased to exist. It didn't morph into your asset when it was given back to you.
This is precisely what happens when the government receives tax revenue or borrows money. It receives its own liabilities (as you said money is a government liability).
When they are received, these liabilities are extinguished. They cease to be liabilities, and become nothing. They do not morph into government assets.
Given that money is a government liability, when the government receives it in taxes, money is destroyed.
As such when the government spends, it creates new liabilities, i.e. it creates or issues money when it spends.
by this I don't mean that the Treasury prints up new notes and spends them, or that the Treasury just credits its own account before spending.
The Treasury is part of the government, as is the Fed. Fed liabilities are Treasury assets, and vice versa.
However, fed liabilities are government liabilities, and treasury assets are government assets. For the government they net to zero. Therefore, when the treasury has a positive balance in its account, the government has zero. It has zero money to spend. Thus when it spends, the government necessarily creates new money ex-nihilo (even though the treasury doesn't).
Y,
I said above that the banks in that example start with zero reserves.
You keep bringing in the mechanics of the reserve market, but we're taking about something different.
System-wide electronic reserves are maintained by the Fed. Pre QE, these were about $10 billion out just under $1 trillion total base. All of the buying and selling and interbank payments are done with this tiny slither of electronic government money. $10 billion taking care of a $14 trillion economy.
And by the way, you'll note that Fedwire is a real time gross settlement (RTGS) system, which means that settlement is not netted out at the end of the day. That $10 billion is literally doing all of the work, pinging around Fedwire hundreds of times a day.
Now, obviously those electronic reserves came from the Fed. Would you therefore say that every interbank transaction is paid for by the Fed?
In the US, the Treasury is generally restricted by law from spending more money than it receives from taxes (and other payments) or borrowing. (I say generally because the Treasury can also issue coins and a limited amount of Treasury notes, but in general it doesn't spend much this way)
Which means that that the government is generally restricted by law from creating more money through spending than it destroys through taxing and borrowing. This is of course a restriction which the government has placed upon itself and which it could override at any time if it wanted to.
Vimothy,
When the treasury spends, its account at the fed is debited and bank reserve accounts at the fed are credited by an equal amount. When the treasury taxes or borrows, bank reserve accounts are debited and the treasury's account is credited by an equal amount.
So for example, if the treasury taxes $100 and then spends $100, the process is:
1) bank reserve accounts are debited by $100.
2) treasury account is credited with $100.
3) treasury account is debited by $100 and bank reserve accounts are credited with $100.
All treasury taxing, borrowing and spending is done in central bank money (i.e. reserves), and simply involves credits moving between the treasury account and bank reserve accounts. All member banks have reserve accounts at the fed. The only way that additional reserves can be added to the reserve system overall is through treasury spending, treasury lending, fed lending or fed purchases of assets.
Banks cannot create reserves, they can only be created by the actions of the fed or the treasury. Banks can however lend reserves to each other in the fed funds market. As such, all money borrowed or taxed by the treasury must have been added to the reserve system beforehand by either the fed or treasury. That is, the treasury taxes and borrows money which either the treasury or fed has previously spent or lent to banks.
When the government deficit spends, bank reserve accounts are credited, bank customer deposit accounts are credited (by their banks), and the ‘non-government’ gains financial assets in the form of bonds. As such deficit spending adds to non-government savings, adding financial assets (and money in the form of reserves and deposits).
"Would you therefore say that every interbank transaction is paid for by the Fed?"
Either the Fed or Treasury provides the reserves with which interbank transactions are settled. I wouldn't say this is the same as them being paid for by the Fed.
Banks of course create their own type of money (deposits) outside of the central bank system. They create new deposits when they make loans. Borrowers spend these deposits and they are transferred to someone else's account, eventually ending up as someone's savings. Thus private savings come from the creation of private debt - and from government deficit spending, though only government deficit spending adds to the "net savings" of the 'non-government' overall.
"In the US, the Treasury is generally restricted by law from spending more money than it receives from taxes (and other payments) or borrowing. (I say generally because the Treasury can also issue coins and a limited amount of Treasury notes, but in general it doesn't spend much this way)"
y: How about the $2.6 Trillion in off-budget spending? I would be curious where that went.
Here's a link to the series (xls):
https://dl.dropbox.com/u/33741/hist01z1.xls
vimothy,
Here's a quote from former Fed chairman Marriner Eccles. I presume it's still relevant:
"it is the Congress which decides on the deficits or the surpluses, and not the Treasury. If Congress appropriates more money than Congress levies taxes to pay, then, there is naturally a deficit, and the Treasury is obligated to borrow. The fact that they cannot go directly to the Federal Reserve bank to borrow does not mean that they cannot go indirectly to the Federal Reserve bank, for the very reason that there is no limit to the amount that the Federal Reserve System can buy in the market. That is the way the war was financed.
Therefore, if the Treasury has to finance a heavy deficit, the Reserve System creates the condition in the money market to enable the borrowing to be done, so that, in effect, the Reserve System indirectly finances the Treasury through the money market, and that is how the interest rates were stabilized as they were during the war, and as they will have to continue to be in the future.
So it is an illusion to think that to eliminate or to restrict the direct borrowing privilege reduces the amount of deficit financing. Or that the market controls the interest rate. Neither is true."
Paul,
The only "strong assertions" I ever make are those grounded in arithmetic.
No one is arguing about arithmetic, but over what the correct model is. If I say that I am right because 2 + 2 = 4, can you prove me wrong?
The authority is arithmetic, applied with the law of closed systems. I don't claim to be the authority, I didn't create the universe. I do understand it however, at least this part.
But so what if your model is wrong?
Earlier you were saying that every time households spend, businesses, if they make a profit, drain money away from them. But this rests on a simple misunderstanding of national accounting. Your arithmetic might be correct (in fact it is, correct), but it is misapplied because your model is wrong.
Background? Really? I will put the achievements of engineering up against that of economists over history any time and come out looking pretty effing good. You've got nothing here.
What's the point in making these weird boasts? For all practical purposes this is practically anonymous.
We're not discussing engineering, though, so the achievements of engineering don't really seem relevant to me. It's a bit like saying, "What successes has oncology had compared to engineering? Therefore, I will diagnose your tumour."
The point I was trying to make is that you are constantly making declarative statements that are totally jarring because taken literally in the language I am used to they are wrong or don't make sense.
Then, when questioned you return to this I AM A DALEK AND YOU ARE NOTHING type discourse where everyone else who haws ever looked at the problem before is wrong and you are right. Well, maybe you are right, but it's hard to listen to someone who is just telling you over and over how stupid you for not understanding statements that don't appear to make any sense.
I've made arguments consistent with accepted mathematical principles. You've seen them. I can't get any more granular than that. Moving away from there makes the problem more complex, but doesn't change anything.
I've seen them, but I don't think the arguments are good. Not because the arithmetic is wrong, but because the model is wrong--or at least, when I try to translate it, it doesn't make sense.
For instance, you've variously said that assets can't be created, that the government can create assets, that net assets can't be created, you've referred to "dollar assets", which I don't understand... it's a lot of work figuring out what you mean!
Why do I have to go beyond that to satisfy your questions? Attack the argument as I have presented it and if you do so successfully you will undermine my premise.
Well, present an argument then. What you wrote in your comment was that one of your statements "CANNOT BE QUESTIONED" (in capitals, italics and bold, no less). But so what? If you make assertions like this, who will listen? You need to establish why it matters that total credits = total debits or whatever it was that you were referring to. Barking out instructions doesn't help you to make your case, it just puts people off.
It is a statement of mathematical fact, for which I provided an example.
It would be pretty weird if it were a statement of mathematical fact because,
1, If true, it's a historically contingent fact about a social institution; and,
2, It's false.
Other than that I don't feel a need to "convince" you of anything, and you already have a pretty good idea of how much I care what you think.
Okay.
Anything I write in response to your queries is really for the other guy that might also be reading. Or I'm just practicing.
Doesn't everyone comment on blogs for these sorts of reasons? Are you just saying this to be rude?
Look, I get it, you think you're right and I'm wrong. That's fine! No need to go over it in every comment.
Why should I be concerned at how others see things? There's a reason I call my blog The View From Mars.
For one reason, if you know how to solve an important problem and they do not, then this might cause a lot of difficulties for them that could be avoided. If you can communicate the solution to them, then this will make them better off.
At the same time, it might just be that you've misunderstood something, or missed a piece of the picture that's needed to make sense of it, so that you think there's a problem when there's no there, or you think there's one problem, but really it's different.
If you know what other people think, then you can get things like feedback and maybe better information and so on.
If I am mathematically consistent, and you see things differently, then you are wrong.
Wrong about what?
You can be mathematically consistent and still be completely irrelevant. I might make a bunch of predictions from a mathematically consistent model, but they might still turn out to be completely wrong, because the model is wrong.
Note the if-then? If A is true, then B is true. Your job is to prove my A isn't true. That will be difficult because my A is pretty sound.
That's correct, but only if I accept the validity of the argument. If I accept that it's true that A implies B, then it suffices to prove A to prove B. But I don't accept the validity of the argument, so it doesn't matter that you can prove A.
It's like me saying that if 2 + 2 = 4, then Paul is wrong. Well, 2 + 2 = 4, so you must be wrong.
If the government doesn't keystroke "funds" (I'll use that term instead of money) into the system then there is are no "funds" to borrow, no net funds anyway, and that's what I am always referring to…NET dollars.
This is a good example of a statement that doesn't make sense to me.
You are using funds in a way that is totally different to the way it is used by other people. If the government doesn't "keystroke funds into the system," then there are still funds moving around it. The economy generates funds through the production and sale of economic output.
The "system" can't create (or destroy) it's own net dollars, which is basically all I'm saying. Thus, any adds/subtracts must come from the government.
If the private sector is to acquire base money from the Fed, then Fed has to inject that money into the private sector. If the private sector is to acquire treasury bills or whatever, then the treasury will need to issue them.
"Dollars," "assets," "income," "funds," these are all different matters.
The idea of government "borrowing" becomes absurd, nothing more than a semantic construction.
I don't see how that follows.
If the government borrows a ping-pong ball from the pail and puts two back in, I call that an add. YMMV semantically, but it will be hard to take seriously if it is contrary to the arithmetic.
But the government doesn't actually do this, so whether the arithmetic is correct or not shouldn't matter.
Y,
In the US, the Treasury is generally restricted by law from spending more money than it receives from taxes (and other payments) or borrowing.
So how does this gel with what you were saying earlier about the government borrowing everything from the Fed?
Which means that that the government is generally restricted by law from creating more money through spending than it destroys through taxing and borrowing. This is of course a restriction which the government has placed upon itself and which it could override at any time if it wanted to.
If it wanted to stop taxing and borrowing and just print money it could do so, of course. But why would it choose to? What would it gain?
Paul,
that $2.6 trillion is the social security trust fund.
The treasury has received that much in payroll taxes, spent that amount on things other than social security, and left $2.6 trillion worth of bonds sitting in the soc sec trust fund.
Y,
When the treasury spends, its account at the fed is debited and bank reserve accounts at the fed are credited by an equal amount. When the treasury taxes or borrows, bank reserve accounts are debited and the treasury's account is credited by an equal amount.
When anyone spends, there is activity in the interbank markets, and reserve accounts are debited and credited and so on.
At the end of the day, either the government is financing is spending by borrowing or it is not. If it is then the private sector ends up with govt securities of one for or another. If it is not then they don't.
You seem to be producing examples with lots of intricate steps to prove that, when the government borrows, it's really not borrowing, even thought it actually is. I suppose I don't understand what you're driving at. Clearly, if in your example the government borrows, then it must be borrowing. That's one of your assumptions.
So for example, if the treasury taxes $100 and then spends $100, the process is:
Do you need to include any detail about electronic reserves here? Why not just say, the private sector paid $100 in taxes to the treasury, who spent it?
All treasury taxing, borrowing and spending is done in central bank money (i.e. reserves), and simply involves credits moving between the treasury account and bank reserve accounts.
That's true. That's because all interbank settlement of any kind is done with central bank money. Since taxing, borrowing spending by the government one subset of that, it must be the case there as well.
You seem to want to argue that since interbank settlement takes place in central bank money, and any activity involving the private sector transacting with the government requires interbank settlement, then the government can be said to "fund" or "finance" all of these activities.
But this is not what people normally mean by fund or finance. Think about all the other activities that require government money. Are these funded by the government too?
Maybe. But what about all the hullabaloo about the off-budget spending the Republicans were doing and Obama vowed to change the accounting, which he did.
If you look at the series you will see that the off-budget amounts plummet drastically after 2008.
Also note that in the Total column is the sum of budget and off-budget spending, and the deficit recedes by the off-budget amounts in that column.
Why would the S/S Trust Fund reduce the accumulated deficit?
"Think about all the other activities that require government money. Are these funded by the government too?" - vimothy
Yes. Some (most) of it is funded by progressive taxation, or as we math-based organisms call it…"government-induced flow".
What you call "funding" I call re-distribution. Sand is moved to the top of the hourglass (low entropy) from the bottom (high entropy) so that the system (flow) may continue by natural means. Otherwise, the system will come to rest and everyone (meaning 99.99% of the population) loses.
The remainder of the "funds" come from deficit spending - funds are added to the economy.
The hourglass is made larger, with more sand and a higher volume of flow (higher GDP).
vimothy,
sorry for the tedious details.
All the money taxed or borrowed by the Treasury comes from prior spending or lending by the Treasury, lending to banks by the Fed, or purchases of assets by the Fed.
It all happens within the closed loop of the reserve system, in which all the money is created by the government.
At no point did I say that the treasury doesn't borrow from banks. I said that banks have to obtain the money from the government before they can lend it to the government. That is, either the govt has to spend it first, or banks have to borrow it from the government, or they have to sell assets to the government.
It's a circular system in which the government provides the funds.
Taxing and borrowing destroys money, government spending creates money. Government deficit spending adds new financial assets in the form of bonds, adding to non-government savings.
All the money taxed or borrowed by the Treasury comes from prior spending or lending by the Treasury, lending to banks by the Fed, or purchases of assets by the Fed.
That's only true in a very limited sense. The money that's used for final settlement comes from the Fed. But this isn't what the government borrows when it borrows. This is a technical detail relating to the mechanics of the monetary system. Electronic reserves are the means of payment between banks, but they're not what is leant or borrowed by non-banks.
Imagine that you agree to lend me some money. You post me a check which I receive and deposit at my bank. Then, somewhere on Fedwire, some of those 10 billion electronic dollars whiz around. Who provides the funds here: you or the government?
Part of what's confusing is that you're using "money" in two different senses.
So you have an argument that looks a bit like this:
Step 1, You say that the government borrows money from the private sector.
Step 2, Then you note that the government issues money, so it must be the case that the government is ultimately borrowing from itself.
But "money" means different things in steps 1 and 2.
Imagine that you agree to lend me some money. You post me a check which I receive and deposit at my bank. Then, somewhere on Fedwire, some of those 10 billion electronic dollars whiz around. Who provides the funds here: you or the government?
Banks finally settle in the interbank system via Fedwire after netting. All transactions in the interbank system, in the US, the FRS, are conducted in rb and rb come from one and only one source, the central bank, in the US, the Fed.
All final transactions in the USD, that is, after intrabank and interbank netting, occur with either cash or rb, both of which are issued only by govt, considering the cb as a govt agency wrt far as currency issuance, USD being the currency of the USA.
That is to say, final settlement is in outside money, and settlement using rb take place in the FRS, at the interface between govt and nongovt. The regional FRS banks that constitute the payment system are privately owned but the currency is govt currency issued and managed through the Fed as a federal agency.
Tom,
I agree with most of that, but the stuff about netting seems a bit out of date.
Fedwire is a RTGS--real time gross settlement--system:
"Formally known as the Federal Reserve Wire Network, Fedwire is a real-time gross settlement funds transfer system operated by the United States Federal Reserve Banks that enables financial institutions to electronically transfer funds between its more than 9,289 participants (as of March 19, 2009)."
http://en.wikipedia.org/wiki/Fedwire
"Real time gross settlement systems (RTGS) are funds transfer systems where transfer of money or securities[1] takes place from one bank to another on a "real time" and on "gross" basis. Settlement in "real time" means payment transaction is not subjected to any waiting period. The transactions are settled as soon as they are processed. "Gross settlement" means the transaction is settled on one to one basis without bunching or netting with any other transaction. Once processed, payments are final and irrevocable."
http://en.wikipedia.org/wiki/Real-time_gross_settlement
. The money that's used for final settlement comes from the Fed. But this isn't what the government borrows when it borrows. This is a technical detail relating to the mechanics of the monetary system. Electronic reserves are the means of payment between banks, but they're not what is leant or borrowed by non-banks.
When the government sells a treasury, that sale must be satisfied with reserves issued by the Fed. Those reserves are what the government "borrows".
Imagine that you agree to lend me some money. You post me a check which I receive and deposit at my bank. Then, somewhere on Fedwire, some of those 10 billion electronic dollars whiz around. Who provides the funds here: you or the government?
It's fundamentally different. You and I can net out our private intra-sector transactions in whole or in part with inside money, as banks do every day which is why only a small percentage of transactions actually get resolved in final settlement of reserves. You can't settle a treasury purchase without reserves.
Part of what's confusing is that you're using "money" in two different senses.
So you have an argument that looks a bit like this:
Step 1, You say that the government borrows money from the private sector.
Step 2, Then you note that the government issues money, so it must be the case that the government is ultimately borrowing from itself.
But "money" means different things in steps 1 and 2.
Best not to use "money" other than as inside and outside money.
Inside money is credit-debit within the private sector. Net zero regardless.
Outside money is currency held as rb or cash. Net positive, negative, or zero, depending on govt fiscal actions.
Tsy directs Fed to auction X amount in tsys. Auction is among PD's who submit bids. Winners of the auction purchase the tsys with rb, either from their own Fed account or by borrowing rb in the interbank market or from Fed. The rb used to purchase the tsys, being currency, had to come from the side of govt (outside).
The PD's now hold the tsys and the Fed credits the TGA, which Tsy uses to clear expenditure. The result is the amount of tsys held by non-govt increases by the amount of rb extracted in purchase and the returned in expenditure. NGNFA increase by amount of tsys.
PD's then sell the tsys they do not wish to hold in inventory into the market for rb, The PD's then use the newly acquired rb to pay down the borrowing they incurred.
All of this happens in rb and tsys, i.e., outside money, which non-govt has to get because it cannot issue currency.
Today, most interbank transactions occur via massive RTGS systems like Fedwire in the US, CHAPS here in the UK and TARGET2 in the EU. There's no netting in these systems, which do exactly what it says on the tin.
When the government sells a security, the buyers bank account is debited and the sellers bank account is credited. Since this is an interbank transaction it will have to be settled with electronic reserves just like any other.
Sorry, that last comment was to Geerussell.
the stuff about netting seems a bit out of date
The stuff about netting is what banks do among themselves to reduce the number of fedwire transfers they have to make because using fedwire is expensive. Bank A and Bank B will use a private clearinghouse to figure out their thousands of transactions that day net to a single figure and settle it with a single fedwire transfer.
The big banks control over 60% of the US market and they use intrabank netting first and then a clearing house for interbank netting because ti is less expensive for them than Fedwire. After all netting, Fedwire is used for final settlement.
he other banks use intrabank netting, too, but it is not as extensive in their case. Then Fedwire is used for final settlement instead of going to a clearing house for interbank netting first, because it is not cost-effective for smaller banks to do so.
So it's cheaper to use something like CHIPS than Fedwire? Got a link?
Post a Comment