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:
«Oldest ‹Older 201 – 299 of 299Today, 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 fedwire is used, the thing being transferred is a reserve balance. The entire point of netting, as described above, is to minimize the size and frequency of those transfers.
When you buy a security from the government, your account is debited and the payment is settled between your bank and the government in reserves as are all payments to the government, be it bonds, taxes, fees or anything else.
Banks typically prefer to make payments of higher value and of a less time-sensitive nature by CHIPS instead of Fedwire, as CHIPS is less expensive (both by charges and by funds required).
CHIPS differs from the Fedwire payment system in three key ways. First, it is privately owned, whereas the Fed is part of a regulatory body. Second, it has 47 member participants (with some merged banks constituting separate participants), compared with 9,289 banking institutions (as of March 19, 2009)[2]eligible to make and receive funds via Fedwire. Third, it is a netting engine (and hence, not real-time).
Wikipedia _Clearing House Interbank Payments System
Either way, if you believe that any transaction that involves the exchange of electronic reserves by the banks of the respective parties is funded by the government then the government is funding something like 350 * $10 billion per day. But this doesn't make any sense, at least for usual values of "funded".
Either way, if you believe that any transaction that involves the exchange of electronic reserves by the banks of the respective parties is funded by the government then the government is funding something like 350 * $10 billion per day. But this doesn't make any sense, at least for usual values of "funded".
The claim that all transactions involving rb are ultimately "funded" by govt simply means that the rb had to come from govt prior to the transaction, either through a fiscal deficit or Fed lending to banks that have accounts at the Fed. There is no other way to get rb. The rb used in the transaction therefore had to be provided by govt ex post through some prior transaction, i.e., net fiscal expenditure or banks' borrowing from the Fed.
Either way, if you believe that any transaction that involves the exchange of electronic reserves by the banks of the respective parties is funded by the government then the government is funding something like 350 * $10 billion per day. But this doesn't make any sense, at least for usual values of "funded".
The distinction being made is between intra-sector transactions (which is the bulk of them) between private parties and cross-sector transactions between government and a private party.
Intra-sector can and does for the most part settle via netting without transfer of reserve balances.
Cross-sector must settle fully in reserve balances. Every payment that goes from the private sector to the government ultimately resolves to a debit against a reserve account.
That's a very odd definition of funded though, isn't it?
Geerussell,
Despite my efforts we've ended up discussing lots of unnecessary detail about the reserve system.
Why don't you explain why it matters that any settlement between the central bank and the rest of the financial system has to occur via the transfer of electronic reserve balances?
vimothy,
Those details answer the question what does the government borrow when it borrows. The answer being that transactions sales of treasury bonds from the government to a private party are settled 100% in reserves.
Does that private party necessarily start out holding a reserve balance? If it's say, you or me, no. We start out with a bank deposit balance, which is a promise to deliver a reserve balance. That promise gets redeemed in full to buy a bond from the government.
Why don't you explain why it matters that any settlement between the central bank and the rest of the financial system has to occur via the transfer of electronic reserve balances?
Because any transaction using rb involves outside money provided by govt and this must be so since non-govt cannot issue currency.
The issue is keeping inside and outside money straight in order to understand now the system works as presently configured.
Geerussell,
Those details answer the question what does the government borrow when it borrows. The answer being that transactions sales of treasury bonds from the government to a private party are settled 100% in reserves.
When I buy a bond from corporation, the corporations bank account gets credited and mine gets debited. Underneath that, the banks are doing whatever they do. If they can net it out between themselves then presumably they do, if we both bank at the same bank then it's all done internally, if there are international transactions involved then that all gets resolved in whatever way those things do.
In the same way, when the government borrows from you, your account is debited and the government's account is credited. And again, between themselves, your bank and the government's bank (i.e., the CB) make the necessary adjustments.
The flow of funds here is from you to the government: your savings are the source for the government and the purchase of the bond is a use for you. What the government borrows is these savings, not some reserves, which, as you note, you do not actually possess and the government does not actually require.
"when the government borrows from you, your account is debited and the government's account is credited"
No. The cash in your account is swapped with an asset of equal value and near-equal liquidity, a bond. Your dollars become dollars that pay interest. the interest being the incentive for you to give up that small degree of liquidity.
Someone else's account is credited with cash (demand deposit).
Net gain = face value of the bond.
There should be no change to your net worth, assuming that you weren't stiffed by your broker.
In the same way, when the government borrows from you, your account is debited and the government's account is credited. And again, between themselves, your bank and the government's bank (i.e., the CB) make the necessary adjustments.
Your bank deposits are a promise by the bank to deliver reserves. When you buy a bond from the government, you hand that bank promise to the government. The government isn't satisfied. It wants its own liabilities returned to it as settlement so it goes to your bank to demand reserves. The bank debits its own reserve account at the CB and the transaction is settled 100% in reserves.
100% settlement in reserves, $ for $, for every bond sold. And what are reserves? Government liabilities. And government "borrowing" just swapping one government liability for another.
"There should be no change to your net worth, assuming that you weren't stiffed by your broker."
There is no change to the new bond-holders net worth…the net worth of the non-government increases by the face value of the bond, in net dollars.
When you buy a bond from the government, you hand that bank promise to the government. The government isn't satisfied. It wants its own liabilities returned to it as settlement so it goes to your bank to demand reserves. The bank debits its own reserve account at the CB and the transaction is settled 100% in reserves.
When you say, "the government," what you mean is the government's bank, which is the central bank.
Whenever the government transacts with the private sector, it does so through its bank, the CB. Whenever its account has positive balances, those balances are necessarily central bank liabilities--and the central bank is part of the government.
100% settlement in reserves, $ for $, for every bond sold. And what are reserves? Government liabilities. And government "borrowing" just swapping one government liability for another.
It's not "just" swapping one govt liability for another though, is it? That's what we've been discussing.
When the treasury sells a bond to me, it borrows some of my saved income. Because transactions with the cb occur in reserves, there is reserve activity between our two banks. But that's not very interesting or significant from an economic point of view, at least as far as I can see.
"When the treasury sells a bond to me, it borrows some of my saved income."…
…and spends it back into the economy. In the meantime…
…you still have your saved income, in the form of a bond, and if you choose to "dis-save" or spend your savings (the bond) you will only have to wait until tomorrow to get your funds (by selling the bond).
I agree.
When the treasury sells a bond to me, it borrows some of my saved income. Because transactions with the cb occur in reserves, there is reserve activity between our two banks. But that's not very interesting or significant from an economic point of view, at least as far as I can see.
It's very significant at tax time, and if one wishes to hold govt securities, or deal with foreign countries if they require currency transactions as most do.
While it is possible operate in the private with bank created inside money, it is not entirely possible due to tax obligations, and it is also much more convenient (efficient) to operate an economy using currency in the govt's payment system. Moreover, the govt heavily influeces the economy through monetary and fiscal policy which function through currency.
The monetary system is certainly important, and the government clearly has a central role in that. But we've drifted from what seemed to be Y's argument.
Suppose we phrased it like this:
Say that all money is outside money. Then when the government borrows, if it borrows money, it has to borrow its own liabilities. And, if I lend to the government, if I lend money, I have to lend it government liabilities, because there isn't any other sort.
Now, when the government borrows from the private sector, is it really borrowing from itself?
Say that all money is outside money. Then when the government borrows, if it borrows money, it has to borrow its own liabilities. And, if I lend to the government, if I lend money, I have to lend it government liabilities, because there isn't any other sort.
Now, when the government borrows from the private sector, is it really borrowing from itself?
Yes and the answer is yes even after you add inside money back to the picture.
Say that all money is outside money. Then when the government borrows, if it borrows money, it has to borrow its own liabilities. And, if I lend to the government, if I lend money, I have to lend it government liabilities, because there isn't any other sort. Now, when the government borrows from the private sector, is it really borrowing from itself?
At the micro level, it is borrowing its own currency, which it controls. At the macro level, govt borrows back what it spends in such as way that NGNFA increases. That is to say, the govt is not competing with NG for funds to borrow, since it provides the funds it borrows.
Moreover, the govt under the present monetary system has no operational need to borrow in the first place since it could increase NGNFA through direct issuance, save itself the interest, and not provide the public utility of a default-riskless saving vehicle.
This would mean that the private sector would have to provide a compensating saving vehicle, or saving would flow toward external govt-guaranteed securities, and the interest would not add to NGNFA as interest on US govt securities does.
Yes and the answer is yes even after you add inside money back to the picture.
How can the government borrow from itself? This idea seems very strange to me.
What about when to non-government actors borrow between themselves--if one borrows outside money from the other, does he really borrow from the government?
Also, why does the govt issue liabilities, and why do people hold them, if it can't actually borrow?
"How can the government borrow from itself? This idea seems very strange to me."
It seems strange to us that anyone can think otherwise. There must be a reason why MMT seems so opaque or illogical to many observers.
If counterfeiting was legal you would be doing the same thing, and by doing so you would be "borrowing from yourself" if you were anal about accounting for the transaction.
The government is the only entity that can create net dollars from thin air.
The government must create a liability on it's balance sheet in order to enter an asset on the non-government's balance sheet…to be consistent with double-entry accounting (a choice).
The government "chooses" to issue bonds dollar-for-dollar with deficit spending because bureaucrats long-dead believed it was less inflationary (and passed a law requiring it) to do it this way…as opposed to just "printing it and crediting bank accounts in the non-government.
None of that has any bearing on the fact that the government must create funds (bonds) in order to spend new dollars into the non-government following through on Congress' appropriations.
It better to look at it as a "black box" that money comes out of expanding the net money supply (not rb, credit, private debt).
Just like we look at an audio amplifier as a "black box" from which emanates an amplified audio signal for our speakers.
We don't care how the amplifier does it (unless we are purists), all we care about is that it works. If it doesn't work we get pissed and look for a new amplifier.
If the money-creation Rube Goldberg doesn't get the job done (create new net funds as needed) the natives will get restless and heads will roll.
"Also, why does the govt issue liabilities,"
The government issues assets. The government holds liabilities. The government can always satisfy those liabilities, just as you could if counterfeiting was legal.
"What about when to non-government actors borrow between themselves--if one borrows outside money from the other, does he really borrow from the government?"
When non-government actors borrow between themselves they are borrowing-lending dollars that are already within the system…it's not outside money any longer. Once spent into the economy it becomes net money, net dollars…neither outside nor inside money. Private debt is inside money, it has zero net value.
Outside money is money created form thin air when needed (for various leakages and (cringe) profits) entered into the non-government as an accounting transaction.
Once the transaction between the government and non-government takes place it is no longer outside money, it is net money (no offsetting liability) and the system is larger than it was in terms of NFA.
And, I believe you are right to appeal to simplicity when discussing monetary operations because the detail is unimportant and uninteresting to everyone except academics and forensic accountants.
As I opined earlier, worrying about how the monetary machine works is akin to worrying about how an amplifier works…it doesn't matter a whit to 99.9% of the population. If you enjoy solving puzzles, fine, but it actually impedes understanding of how the monetary economy works.
Also, why does the govt issue liabilities, and why do people hold them, if it can't actually borrow?
According to the state theory of money (Chartalism), non-govt must obtain currency to pay taxes when the govt accepts only its own liabilities at payment offices. This need to obtain currency allows the govt to use its sovereign power to transfer private resources to public use without confiscating them, as many govt were wont to do. Look at it as "kinder, gentler way." That's why the cry, "No taxation without representation."
How can the government borrow from itself? This idea seems very strange to me.
It seems strange because we're describing it using terms like borrowing and debt that require a convoluted path to map to what's actually going on.
We could make it very clear and simple describing it the way Mosler does. When a treasury security is purchased, a reserve account at the Fed is debited and a treasury securities account at the Fed is credited. A non-interest bearing government liability exchanged for an interest-bearing government liability.
It's as clear as transferring balances between your own checking and savings account. One might devise a convoluted description and use a bunch of t-accounts to tell how your bank "borrows from itself" when you move a balance into a time deposit but the exercise would only serve to obfuscate what was a very clear picture where a non-interesting bearing liability issued by a bank is exchanged for an interest bearing liability from the same issuer.
Forcing government bond issuance into a "borrowing" framework makes the description harder to understand but doesn't change the underlying simple operational reality.
vimothy,
the popular view is basically: people accumulate savings, banks borrow these savings and then lend them out to individual borrowers and to the government.
The problem is, where do these savings come from?
The post-keynesian view answers this question very simply. Savings come from private debt and government debt (government deficit spending).
The mainstream view has it the wrong way round.
The accurate description is that loans create deposits, and deficit spending creates savings.
That's not so different from what non-Chartalists think, Tom. The government issues liabilities because it wants the private sector to surrender the use of some of its economic resources. That's what "savings" represent from a macroeconomic point of view.
Taxes are also involved in some theories of money, but it seems hard to see how taxes can explain changes at the margin. And of course, not all government borrowing is done via money issuance by the central bank--in fact, most is not.
"Taxes are also involved in some theories of money, but it seems hard to see how taxes can explain changes at the margin.…
Personally I view taxes differently than others here. Taxes do create a necessiity to use the currency…but taxes (and subsequent spending) are necessary to create flow…government-induced flow…that is necessary for the capitalist machine to work. I refer back to my hourglass analogy.
Otherwise, all of the financial resources will accumulate at the top and there will be no way to fuel the machine."
…"And of course, not all government borrowing is done via money issuance by the central bank--in fact, most is not."
Who issues the money is irrelevant in the sense that whoever provides the components for your audio amplifier is irrelevant.
Does it matter that the scorekeeper for a football game is in the stadium or in a room 3000 miles away as long as the points are put up when a team scores?
The (only) important event is that net money is issued into the non-government as needed…otherwise the non-government nachine will not move forward.
"The government issues liabilities because it wants the private sector to surrender the use of some of its economic resources."
The government does not issue liabilities…it issues assets. The government holds liabilities.
The government also has no need for the private sector to "surrender" the use of some of it's economic resources.
The government has no use for resources.
The government spends on resources to induce flow…otherwise there would not be enough funds available to purchase production.
Every dollar the government spends goes into a private sector actors pocket…creating the potential for aggregate demand.
When a treasury security is purchased, a reserve account at the Fed is debited and a treasury securities account at the Fed is credited. A non-interest bearing government liability exchanged for an interest-bearing government liability.
But this doesn't mean that when the government borrows some outside money (sticking with our outside money only economy), say, that the government is borrowing from itself, or not borrowing at all.
Imagine that in our economy, there is $100 and no other form of government debt.
Well, in that case, government borrowings are $100, even though there are no bonds, since outside money is just another form of government liability--one that pays no interest.
Then the government borrows $100 from the private sector by issuing a bond. So at stage 0, with no outstanding bonds, government borrowing equals $100. Then, the government sells a bond for $100. Now there is a weird intermediate situation where government borrowing considered in toto hasn't changed, because now the government has the $100, and the private sector has a $100 bond. Then the weird intermediate situation is resolved and the government spends the $100 it borrowed from the private sector.
So at the end of the steps, government borrowing has increased by $100, even though it involved swapping one government liability for another.
It's as clear as transferring balances between your own checking and savings account. One might devise a convoluted description and use a bunch of t-accounts to tell how your bank "borrows from itself" when you move a balance into a time deposit
But a bank doesn't borrow from itself when you change between types of accounts. The borrowing is just: you hold the banks liabilities. If the bank issues new liabilities, then it has increased it borrowings. Similarly, if the government dwps one type of liability for another (money for debt, or between debts of different maturity), then it isn't "borrowing" in the sense of increasing its borrowings. If the government issues new liabilities, then it has increased its borrowings.
Forcing government bond issuance into a "borrowing" framework makes the description harder to understand but doesn't change the underlying simple operational reality.
What is the economic significance of this "simple operational reality"?
Paul,
The government does not issue liabilities…it issues assets.
The government issues liabilities and acquires assets. The government has a balance sheet like any other agent in the economy. Its liabilities are things like net government debt in foreign and domestic currencies, held externally and internally, the stock of outside money, and, implicitly, the present value of social security programmes.
Y,
The problem is, where do these savings come from?
The savings come from: income.
The post-keynesian view answers this question very simply. Savings come from private debt and government debt (government deficit spending).
That seems like an odd way to answer the question. Surely debt is a use of savings or a vehicle for savings. What do you mean when you describe debt as a source of savings?
The accurate description is that loans create deposits, and deficit spending creates savings.
I agree with the first part of that sentence: for the banking system as a whole, loans create deposits. The second statement seems like another very counter-intuitive, confusing way of looking at things. The deficit is a use of savings-- that's the usual way of looking at things.
What do you mean by "deficit spending creates savings"? How is it related to the argument about the government being unable to borrow--doesn't it contradict it?
Govt issues liabilities in the form of currency securties. Govt uses these liabilities it creates to increase the financial assets of non-govt (NG) through expenditure in excess of taxation (fiscal deficit). This either through spending that moves real assets to public use in exchange for the financial assets it provides in payment, which are essentially tax credits as Warren notes. Govt also issues liabilities and transfers them to NG, e.g., "welfare" payments. These also become financial assets of NG. The net of expenditure (provision) and taxation (withdrawal) is the fiscal deficit, and it is the change in NGNFA (flow). When an deficit offset with securities is mandated politically, the accumulated amount of govt securities held by NG is aggregate savings of NGNFA. NG cannot net save in aggregate using inside money, since inside money must net to zero. Thus aggregate savings of NGNFA is provided by govt through net expenditure of liabilities that it alone can create sui generis without operational contraint in a fiat system.
"Where does saving from from?"
"Income."
"Where does income come from?"
"Investment."
"Where does investment come from?"
"But this is a circle. Where does the money come from that gets saved, earned and invested?"
"Either from bank credit or from govt deficits. Bank credit nets to zero, so one entity's saving is another entity's borrowing. Net saving in aggregate only comes from govt deficits, the cumulative total of which is the national debt = total NGNFA."
Tom, how about ngNFA ?
NGNFA looks like you're shouting ;)
The way economic theory models the economy is to say that income is produced by combining input flows (factors and raw materials) under a production technology or function.
To generate income then you need capital and labour. Labour you can get the old fashioned way, but capital needs to be produced, so it's a recursive system, that stretches backwards, each current state building on the preceding state.
You say, "but this is a circle." This is nicely phrased, but I don't understand the implied criticism. Since it really is a circle (of sorts), it doesn't seem right to criticise a description of it as circular.
Where does the money come from that gets saved, earned and invested?"
Who said money is what is being saved, earned and invested? money is one asset in a spectrum of possibilities.
Banks create money. Money is a type of asset, used generally as a means of payment. Money is not income and it is not savings. These are distinct things, in my view, or should be kept as distinct things.
Tom, how about ngNFA ?
NGNFA looks like you're shouting ;)
Well, NGNFA was JKH's suggestion after he rejected Winterspeak's NFA (e) and my NFA*.
So now there's another proposal in the table. Anymore?
Here's another quote from Meister Eccles which Paul might like:
"The United States economy is like a poker game where the chips have become concentrated in fewer and fewer hands, and where the other fellows can stay in the game only by borrowing. When their credit runs out the game will stop."
Tom,
how about NGNFAINSPDTO
(I'm Not Shouting Please Don't Take Offence)
vimothy, you stating the positon that money is neutral, simply an accounting record of what goes on in the circular flow of production - distribution - consumption with which economics is chiefly concerned.
Keynes and his followers (excepting those that accept the neoclassical synthesis) reject that approach as flawed. They hold money is not neutral but influences the circular flow, too.
vimothy,
I don't know how you can try to understand a monetary economy by thinking about it without including money.
Everything in this discussion so far has been about money - a monetary system/economy. Now you're saying we should think about the economy without thinking about money?
v, are you talking about some sort of barter economy?
I'm not sure about that. I'd bet that most people agree that it influences the real economy. If you think about it, it would be hard to square the existence of central banks with an economic theory that says money has no effect on anything.
What about debt, where does that fit into this barter economy of yours?
If you wanted to talk about the exchange of real goods you should have said so. So far we've just been talking about the structure of the monetary system.
But I'm not thinking about a barter economy and we haven't discussed one, so I don't know how to respond to your questions...
How did we get onto this topic?
I'm not sure about that. I'd bet that most people agree that it influences the real economy. If you think about it, it would be hard to square the existence of central banks with an economic theory that says money has no effect on anything.
There seems to be a contradiction between what you said about about the circular reasoning and what you say here.
It is very clear that the reason that Minskian Post Keynesians saw the crisis coming and said why back then, and now show how to fix it, while neoclassical did not see it coming, cannot explain it, and don't know how to go about fixing it judging from their prescription of fiscal austerity.
ok maybe you should clarify what you're saying, because up till now everything has just been about the benjamins and now you're bringing in factors and raw materials.
If you wanted to talk about the exchange of real goods you should have said so. So far we've just been talking about the structure of the monetary system.
Now I'm confused gain. What does this comment mean?
Are we talking about the economy as a whole, or just the "monetary system" and nothing else?
There seems to be a contradiction between what you said about about the circular reasoning and what you say here.
How so?
How so?
As others have pointed out, we were talking about money flows and all of a sudden "savings" were real rather than financial.
well we've moved from a discussion about government borrowing and spending of money, to raw materials and production technologies. Please explain your reasoning, as I'm as confused as you are. Hopefully this won't last long.
ok maybe you should clarify what you're saying, because up till now everything has just been about the benjamins and now you're bringing in factors and raw materials.
You can't really talk about the benjamins without implicitly also talking about everything else--what's going on between banks or between your bank and the central bank doesn't occur in isolation and it can't really be understood as such.
That's why it doesn't always help to focus on these operational details, you lose sight of what's important, which is always the use and transformation of economic resources and human welfare.
"The government issues liabilities and acquires assets." - vimothy
This is another obtuse off-topic comment. The discussion at hand for the past 100 or so comments at least have been wrt transactions between the government and non-government.
For transactions between the government of the United Staes of America and agents in the non-government, the government issues assets, and holds liabilities, except for income taxes, which in over 80% of the cases over the past 150 years has resulted in a net transfer of funds from the government to the non-government, and an overall net transfer of some $11 Trillion dollars.
There may be some isolated instances where the goverment holds private-sector agent assets but that is about as frequent as hens teeth and should be treated with equal importance in discussions of asset transfers.
As others have pointed out, we were talking about money flows and all of a sudden "savings" were real rather than financial.
I don't understand the distinction between real savings and "financial" savings. What do you mean by "financial"?
how about NGNFAINSPDTO
Actually it is standard practice when there is no commonly accepted acronym to use the technical term followed by parens with the convention that will be used in the paper.
as in:
net financial assets held in aggregate by the consolidated non-govt sector (insert your convention)
As others have pointed out, we were talking about money flows and all of a sudden "savings" were real rather than financial.
Someone mentioned "income" and Tom asked where it comes from. Income is produced, so I mentioned production. How can we discuss economics without discussing the economy? It's not a word that has been used in every comment, but if we are talking about central banking, saving, borrowing, lending--all of this is a part of economic activity.
Only a few comments previously Tom was saying that mainstream economists don't believe that money has an effect on the economy--but it seems like you are saying something that is very similar: that money, the financial sector, flows of saving and borrowing and so on all exist in isolation where they do not interact with the rest of the economy.
Imagine that in our economy, there is $100 and no other form of government debt.
Well, in that case, government borrowings are $100, even though there are no bonds, since outside money is just another form of government liability--one that pays no interest.
Then the government borrows $100 from the private sector by issuing a bond.
The important question is how did the initial $100 get into private hands in the first place? The private sector couldn't just imagine it into being, the government had to have spent it. At stage 0 before the first bond is ever issued, there's ex nihilo spending required to fund the purchase of the first bond.
The government has to spend to fund bond purchases. If you're going to call those bond purchases borrowing then you are indeed saying the government borrows from itself.
Paul,
This is another obtuse off-topic comment. The discussion at hand for the past 100 or so comments at least have been wrt transactions between the government and non-government.
The net financial assets of the non-government are the net financial liabilities of the government. This is the standard terminology among MMTers.
When the government issues money, it issues liabilities. Money is a liability of the government. When the government issues debt, it issues liabilities. Govt bonds are a liability of the government.
Since government debt and government money are liabilities of the govt they are assets of the private or non-government sector.
That's the language I'm used to, anyway. If you want to call issuing liabilities issuing assets then its hard to see how this could help matters but hey why not.
I don't understand the distinction between real savings and "financial" savings. What do you mean by "financial"?
"S" is defined as household income not spente on consumption. This is expressed as a financial expression in the unit of account.
'y" is defined household income. This is a financial expression in the unit of account.
"I" is defined as firm expenditure. This is a financial expression in the unit of account.
That money has to come from somewhere and it doesn't come from production - distribution - consumption ultimately, since money is not a commodity. So the questions arises as to where money comes from. (Most people either don't know or only have a very vague idea.)
Those who study this know where money comes from. It come from "inside" (bank credit) or "outside" (govt provision). We also know the dynamics of bank credit and govt currency provision wrt to the way these influence circular flow as well as the integrated financial system and real economy. We know that this is both a crucial and fragile relationship. We know that money creation drives circular flow, affects price stability, and a number of other significant factors.
The important question is how did the initial $100 get into private hands in the first place?
Why is that the important question? Perhaps the government printed the money and used it to pay for some goods or services or perhaps it issued the money and used it to purchase some kind of asset from the private sector.
Either way, that $100 represents an ongoing loan at 0% nominal interest rate from the private sector to the government.
The government has to spend to fund bond purchases. If you're going to call those bond purchases borrowing then you are indeed saying the government borrows from itself.
Does the government have to spend to fund bond purchases? I'm not sure I follow.
The private sector has some govt money, the government wants to borrow that money, so it issues a bond. Then it borrows. Total borrowing from the private sector doubles, from $100 (stock of money) to $200 (stock of money and govt debt).
"That's why it doesn't always help to focus on these operational details, you lose sight of what's important, which is always the use and transformation of economic resources and human welfare."
This is where your understanding of the driving force behind a monetary economy goes awry.
These things don't have a chance of happening unless USD balances are in the hands of potential consumers, which happen to be mainly wage-earners, that account for 73% of the population including their dependents.
In the course of normal economic activity with businesses in the aggregate earning a net profit, funds leave households never to return as investment cycles, so obviously the shortfall must be provided by some entity.
It is imperative that the government buy some of the production to both provide the funds needed for profits and to fill the enormous output gap that would exist if businesses had only their employees to sell to.
Being able to sell to retired persons helps but it isn't nearly enough.
Talking about operations was fine when you thought it would help your argument. Now that you seem to be losing that one you move the goalposts.
On the other hand my arguments haven't appealed to operations at all…having chosen to stick to the arithmetic related to the actual functioning of the circuit and no more, yet you've claimed that wasn't enough to make my case.
The evidence shows that you are completely lost in this discussion.
Why is that the important question?
Perhaps the government printed the money and used it to pay for some goods or services or perhaps it issued the money and used it to purchase some kind of asset from the private sector.
Either way, that $100 represents an ongoing loan at 0% nominal interest rate from the private sector to the government.
Something is really incoherent there. You said the government printed/issued that $100 into private hands. Now in private hands that $100 is a loan from the private sector to the government?
Paul,
Why is winning the argument so important to you? Only a handful of people will ever read this thread and most of them have already done so.
Operational details are not important to me and I don't use the phrase.
What is important to me is understanding what are the economically significant relationships and how they work.
This means that some basic features of the economy have to be captured, otherwise the model will make sense internally but it will not represent reality. (This is a serious problem.)
This does not mean that it is necessary to trace out transactions between actors in terms of interbank settlement systems. This is too much detail. It's also not right to arrange these sorts of phenomenon into linear sequences and then make inferences about causality.
paul, vim, peace dudes. We don't want to see another paul-ramanan debacle
Now in private hands that $100 is a loan from the private sector to the government?
I agree that "loan" a "quaint" way of putting it, but Randy Wray points out that all money is debit in that it is someone's liability.
vimothy,
could you possibly try to describe your argument clearly, so I know where you're coming from. So far I'm getting vague suggestions and cryptic questions.
Paul,
Why is winning the argument so important to you?
Paul is working on developing a closed system (engineering-based) model of a modern monetary economy. Think of an electrical or electronic circuit diagram. He is interested in getting it right in a way that helpful for people's understanding of MMT. It's a worthwhile endeavor.
But I agree this thread has gone far enough, or at least about as far as I care to go with it. It's already over 200 comments. I'm sure we will have ample opportunity to pursue in the future.
You said the government printed/issued that $100 into private hands. Now in private hands that $100 is a loan from the private sector to the government?
Yes, exactly--privately held govt money represents a loan from the private sector to the government. Money is just a type of government note that doesn't pay interest and is rolled over continuously. (Actually, given our present weird situation, govt money is actually paying out more than t-bills--or was the last time I looked).
If the government issues money and no debt, this is still borrowing, just at a nominal interest rate of zero.
could you possibly try to describe your argument clearly, so I know where you're coming from. So far I'm getting vague suggestions and cryptic questions.
Argument with respect to what? It's hard to keep track of all of these threads.
What we started discussing was whether the government is really lending to itself when it borrow from the private sector. I didn't think that makes a lot of sense and I still don't.
If we had say, a $3 billion dollar National Debt in 1913 when the FRA was enacted, approximately 100 years ago (we did), it would be logical to assume that nearly all of that debt was in bonds.
Assume there was also $3 Billion in cash in the economy (highly unlikely it would be even 50% of that).
The maximum amount the government would be able to borrow from the private sector in any one year would b $3 Billion IF IT COULD BORROW EVERY NET DOLLAR IN THE ECONOMY, also highly unlikely.
It has already been established that when the government deficit spends THE LEVEL OF NET DOLLARS IN THE ECONOMY DOES NOT CHANGE, only the level of bonds.
Two questions:
At $3 Billion/year over a 100 year period, the maximum amount of dollars the government could have borrowed from the public is $300 Billion, yet the National Debt is $11 Trillion…36.7 times more than possible wrt to the geometric progression based on the parameters at hand.
How did we get there?
Also, how did we increase net cash in the non-government from $3 Billion in 1913 to $1.4 Trillion in 2011…a 46,700% increase? This isn't possible under the "constraint" of the bond requirement.
There should still be only $3 Billion in net cash in the economy.
If you don't think the money creation scheme in the US is a shell game I've got a bridge I'd like to sell you.
I got some "borrowing" for ya.
"If the government issues money and no debt, this is still borrowing, just at a nominal interest rate of zero."
ok, I think I sort of agree with this, as I've said the same thing myself in the recent past. However, what is the government actually borrowing from the person holding its money?
Paul is working on developing a closed system (engineering-based) model of a modern monetary economy. It's a worthwhile endeavor.
I'm sure it is, and credit to him.
Paul was saying that I was losing one argument and moving the goal posts on another, but I don't see why losing an argument should be such a big deal. I don't think it actually matters in the grand scheme of things and I don't mind if I am. So, that's why I asked.
Michael Kumhof describes money issued by the government as "equity in the commonwealth", rather than government debt. It's an interesting distinction, I think.
http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf
I agree that "loan" a "quaint" way of putting it, but Randy Wray points out that all money is debit in that it is someone's liability.
I understand that government issued money is a liability of the issuer and an asset of the holder. Maybe I need to take a step back and question whether I know what what "loan" means. Is every asset/liability pair a "loan" or is a loan something more specific than that?
above comment @ vimothy
However, what is the government actually borrowing from the person holding its money?
That's an excellent question!
I think this is a real breakthrough and we might even converge onto some agreement here before I retire to bed and try not to think about this stuff any more.
So, you tell me: what is it borrowing? It's obviously not borrowing money, right?
Y,
Yes, that's quite a common analogy.
Think we will get sidetracked if we go down that route, though, whereas money as 0% loan might be more productive.
before we can answer that question, you have to address Kumhof's argument.
geerussell I understand that government issued money is a liability of the issuer and an asset of the holder. Maybe I need to take a step back and question whether I know what what "loan" means. Is every asset/liability pair a "loan" or is a loan something more specific than that?
I have seen "debt" and "liability" used in this context, but never "loan."
lol, okay
"money as 0% loan might be more productive."
I'm not so sure. I tried to think of it in this way recently, but I don't know if it really makes sense.
Er, it's 71 pages long!
Can you summarise his argument briefly?
And I really did try. But maybe you can convince me.
Why is winning the argument so important to you?
It isn't important me to "win", I don't know what that would even mean. Do I get money if I "win"?
The way I look at it if we were able to help you "see" how the real world works it would be a "win" for you, not us.
Thanks, Paul.
So, you tell me: what is it borrowing? It's obviously not borrowing money, right?
A loan is a promise to repay. Govt promises to accept its liabilities in exchange for the liabilities it creates in non-govt, that is, taxes, tariffs, fees and fines. Govt liabilties are credits against the govt held as financial assets by the private sector. These credits are used to extinguish financial liabilities imposed by govt. If the financial liabilities of non-govt are not met, then the govt is empowered to seize real assets of corresponding value as well the fine imposed on top of that. The only obligation the govt has to non-govt with respect to its liabilities (in addition to accepting its credits) is to make change, which it does indirectly through banks as representatives.
"paul, vim, peace dudes. We don't want to see another paul-ramanan debacle"
Apparently you missed the Ramanan-Bill Mitchell debacle and the Ramanan-Randy Wray debacle. It was just my turn to carry the load.
Some of us don't suffer fools easily. Best to ignore the trolls.
Govt promises to accept its liabilities in exchange for the liabilities it creates in non-govt, that is, taxes, tariffs, fees and fines. Govt liabilties are credits against the govt held as financial assets by the private sector. These credits are used to extinguish financial liabilities imposed by govt. If the financial liabilities of non-govt are not met, then the govt is empowered to seize real assets of corresponding value as well the fine imposed on top of that. The only obligation the govt has to non-govt with respect to its liabilities (in addition to accepting its credits) is to make change, which it does indirectly through banks as representatives.
As a description of government issued money, this is complete. Also, as vimothy correctly pointed out more than one time in the last few comments the only difference between government issued cash and government issued bonds is the interest rate. You can accurately describe cash in terms of zero percent bonds or bonds in terms of interest bearing cash.
Given that equivalence, if cash isn't "borrowing" then neither are bonds and the government doesn't borrow at all, it only issues at varying rates of interest.
yes I did miss those ones, I think. I just saw the aftermath.
"But I agree this thread has gone far enough"
Tom, the I= S + (I-S) thread over at MMR went on close to 1000 comments, and it was way nastier than this one. People got banned and threatened with banishment. Dan K. and Joe Firestone were threatened, along with me. I haven't posted there since. The suffer fools thing.
For a brief moment earlier I thought we had vimothy turning in the right direction, but It appears he just threw us a fake and then made his move to escape.
I probably should take some time off and work on my project (and my house, now that the killer humidity is gone). :-)
Peace vimothy, no hard feelings on my end.
Issuing a piece of paper which you promise to accept in payment of taxes, fees, and other payments, isn't really borrowing, is it?
But that only covers one part of the currency's value.
People also want to accumulate and save these pieces of paper. The question is why.
I think that's where the 'borrowing' element might come in, though I'm not sure if that really is the best word to use to describe it.
Cool, that's enough for me too. My brain is fried and I'm gonna mooch off home and take my goal posts with me. ;-)
Been a massively unproductive day work-wise, but it was good fun for the most part. Cheers.
One last comment:
Think about what happens when the government pays interest on reserves. It can even end up paying more than it does on t-bills. Why is a t-bill that pays out almost nothing a loan, but an electronic reserve balance that pays out more not?
And think about what's on the asset side of the CB's balance sheet: bills that the government sold to the private sector, which the CB bought, thus replacing those securities with money. So treasury notes and bills that were paying X% for an original loan from the private sector are replaced by Fed notes that pay 0%.
Right, that's really it this time...
the I= S + (I-S) thread over at MMR went on close to 1000 comments
There have been long threads at Warren's too. This thread is not at the 300 mark. I think that stuff just gets lost in long threads and it is better to take it up again later on. I'm sure there will be plenty of opportunity for that.
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