In an NBC/Wall Street Journal poll released Friday, 44 percent of respondents said they are against raising the debt ceiling, while 22 percent said it should be raised so the U.S. avoids "going into bankruptcy and defaulting on its obligations." The remaining third said they are unsure....
A Reason-Rupe poll released Thursday by the libertarian Reason Foundation and Arthur N. Rupe Foundation found even wider opposition, with 70 percent against raising the debt ceiling and 24 percent in favor of it. The poll, unlike the one from NBC/WSJ, didn't explicitly give respondents the option to say they didn't know enough to form an opinion....
Despite the lack of support for increasing the debt limit, a CNN/ORC poll released earlier this week found that 62 percent of Americans said failing to do so would cause a "crisis" or "major problems." A 54 percent majority said they would blame Republicans in Congress for such a failure, while 25 percent said they'd blame President Barack Obama. Both figures are roughly the same as they were in CNN/ORC's 2011 polling.
The Huffington Post
44 Percent Of Americans Don't Want To Raise Debt Ceiling, Poll Finds
Ariel Edwards-Levy
44 Percent Of Americans Don't Want To Raise Debt Ceiling, Poll Finds
Ariel Edwards-Levy
86 comments:
Obama will respond to the showdown by, once again, proposing more cuts.
Still have a lot of work to do... rsp
See. No one believes your nonsense that funny money has abolished or can abolish scarcity. I've been imploring you people for years to explain that to me and you never even try. I've also been saying for years that all that really needs to be done to get the public to rise up against the Keynesians is to explain that the government debt, deficits and excessive spending plus funny money are purposeful policies and not pathetic accidents of incompetence.
Nobody thinks that fiat money can abolish scarcity.
Nobody thinks that fiat money can abolish scarcity.
Then where are the real goods and services to satisfy the government's $220 trillion in unfunded liabilities? Obviously what will happen is that there will an effective default while perhaps not a nominal default.
This is an incredibly important point overlooked by almost all participants in this debate. There are two things to note here. First, because the government hasn't made any "real" promises (ie, "A 5lb. chicken in every senior citizen's pot"), the real social safety net supposedly provided by Social Security, Medicare, etc., is ALWAYS up for negotiation within the political process, meaning that at any time what the political process actually decides to provide beneficiaries with and what they thought they were bargaining for when they contributed to the system (for example, what they gave up in real terms at the time in taxes versus what they get back out in real terms in benefits) might be vastly different. No explicit (real) promise can be kept because no explicit (real) promise has been given. Second, the fact that the government hasn't made any promises in real terms doesn't change the fact that whatever it ultimately gives out to beneficiaries in nominal terms WILL have a real cost to the non-beneficiaries in society as far as what they'll have to forgo.
I think this point bears dwelling on and repeating because time and time again I have seen the MMT disciples respond to concerns about this future resource allocation problem by attacking critics for being so simple-minded as to think we'd "run out of dollars" because it's "just an accounting problem." Ie, "Social Security can't go insolvent because the government can create more dollars to satisfy the dollar-denominated obligations at will". This is not what I, in being critical on this point, have ever been worried about (the supply of dollars). What I have been critical about is that in real terms the promises being made will either not be kept in the way future beneficiaries are expecting, or else they will not be kept in the way non-beneficiaries will be expecting. That is, in real terms, either future beneficiaries will get a lot less out of the system than they thought, or those funding the system will put in a lot more (and have a lot less to keep for themselves) than they thought. Either way, some group is going to be disappointed and there is no magic solution to leave both groups satisfied in real terms.
http://publicdebates.blogspot.com/
Then where are the real goods and services to satisfy the government's $220 trillion in unfunded liabilities?
They haven't all been produced yet, in part because we are tolerating massive unemployment in the labor force, and a significant drop in overall labor force participation. At a time when we should be employing all of our people who are willing and able to work, in order both to rebuild our society and meet our existing commitments, we are instead shrinking the labor force.
These promised goods and services simply will not be produced and that is problematic. Thus, people who claim that the public has been massively over-promised by government apologists are not "morons".
where did you get the $220 trillion in unfunded liabilities figure from?
U.S. Is Bankrupt and We Don’t Even Know It: Laurence Kotlikoff
http://www.bloomberg.com/news/2010-08-11/u-s-is-bankrupt-and-we-don-t-even-know-commentary-by-laurence-kotlikoff.html
I thought that you guys claimed the debt was "real" but it didn't matter because we can never run out of "dollars".
here's an article by Randalll Wray on the subject:
http://www.economonitor.com/lrwray/2013/02/05/social-securitys-unfunded-entitlements-much-ado-about-nothing-or-little-to-do-about-something/
I listened to Randy Wray's speech from Thursday night. He claims that there has been 4,000 years of state money.
Not according to Farley Grubb. The only "state" money in the US constitution were gold and silver coins based upon metal purity. As such, there was no conceivable "nominal" value associated with them. The amount of metal in each coin bought what it bought based upon the subjective values of parties using it for exchange. The coins may have gotten their consistency and purity from state regulation, but they did not get their "value" from the state and the state could certainly run out of them.
Dan Kervick said...
Nobody thinks that fiat money can abolish scarcity.
Mike Norman, Tom Hickey and Matt Franko think it can.
http://www.blogger.com/comment.g?blogID=2761684730989137546&postID=1785478721035486487
Wray says:
The number of workers per retiree falls from three to two; however, worker productivity will quadruple over the same period.
Oh really?
"The number of workers per retiree falls from three to two; however, worker productivity will quadruple over the same period."
"Oh really?"
Maybe, and here is how that might work. The trick to making worker productivity quadruple or at least to produce as much with 2 workers in the future as it takes 3 workers today will be to abolish the capital gains tax. Worker productivity is predicated on applying ever advancing forms of technology to the labor process which requires capital investment, not just in the machines but also in the skills that will be needed (i.e. education) to design, build, operate, maintain and improve those machines. Eliminate the capital gains tax and capital will come out of the woodwork to invest in making rapidly escalating worker productivity a reality.
Rombach Report:
But then the argument simply becomes the MMTers claiming that their scheme for the government to spend unlimited emissions of funny money created from nothing into society creates the wealth and productivity needed to supply the wealth of the future. From reading Bill Mitchell, it is clear that he is nothing more than a socialist central planner who insists that the future will be bright so long as the central planners with their guns can commandeer sufficient resources.
Further, due to the ephemeral government promise to supply everyone with a nanny and upon which people are actually relying, people are not working and saving for their own future survival. They are just assuming that those resources will magically appear as if the government was unconstrained by reality and has a secret stash of unlimited wealth hidden somewhere that it can dip into at any time and in any amount.
MMTers, like "progressives" everywhere, are oblivious to the problems of economic calculation and the diffusion of knowledge in society.
"The trick to making worker productivity quadruple will be to abolish the capital gains tax"
The most common capital gains come from sales of stocks and other financial assets, property, and things like shiny metal. How is untaxing all of that going to increase productive investment?
Bob,
Did you ever work with Dr Kevorkian up there in Michigan?
If not what are your views on euthanasia in any case?
Death panels?
rsp,
Bob,
No one is talking about 'unlimited amounts' the MMT view is more or less that we should at least spend so that everyone who wants to be is gainfully employed/provisioned and can settle desired exchange transactions within the limits of REAL constraints...
There is nothing 'funny' about this Bob... rsp
Bob,
I think in the spirit of full disclosure I would like to hear your views on euthanasia/death panels... Do you support these policies?
rsp,
I don't think one can initiate force against someone with whom one is not in contractual privity if the other person desires to commit suicide.
"Death panels" refer to bureaucracies that must ration scarce resource because the price system has been abolished which made things scarce in the first place.
Finally, as Taylor Conant described it in his original critique of Mosler, you guys base all of your "claims" upon unstated and unproven assumptions that a government spending funny money out of nothing causes prosperity. That's absurd and baseless. The price and wealth distortions that your policy causes are the cause of unemployment and poverty in the first place. Your "solutions" are the problem. Because I care about poor people and unemployment, I spend time exposing your silly and heartless schemes.
Your head is so full of gibberish. You really have absolutely no idea what you are talking about.
Quote from Malthusian Bob Roddis: "These promised goods and services simply will not be produced and that is problematic. Thus, people who claim that the public has been massively over-promised by government apologists are not "morons".
Okay, Bob you haven't proven MMT wrong but rather you've admitted what MMT says i.e. the real constraint isn't our capacity to make promises but our physical capacity to deliver the real production needed to meet these promises to ourselves or face inflation. So we all agree only you are too stupid to notice.
You've seem to think that we have physical inability to produce enough for everyone and thus we let the market optimize the distribution of scarce goods rather than absent human coordination by anyone outside of the ever shrinking ownership class i.e. a free market.
The people outside of the powerful should simply be left to die ala Malthus and Adam Smith.
MMTers on the other hand don't believe in such centralized views of political power or humanities powers of production are so limited.
The question is whether or not money should be allowed to be used to help organize people into greater productivity by allowing everyone not just the ownership class should be allowed to have a form of democratic representation over how the power of finance is used increase the productive powers of labor via a system of republican government.
Bob hates the idea of republican government and allowing the non-capitalist any say in the organization of society and thus claims that any attempt to change the power distribution away from the Capitalist is "aggression" against the divine of right of capitalist ownership and thus ironically claims the right to violent or fraudulent suppression of the working class.
Libertarianism is rooted in fraud. It pretends it is about freedom when it about repression of any ideas outside of a capitalist controlled system.
Bob Roddis is devoted to inflicting this fraud upon society which why he is compelled to resort to strawmen and lies when in discussion. He is totally controlled and has no freedom of thought hence a slavertarian.
Libertarianism is not to be debated. It is to be smashed!
Bob - Not sure how eliminating the capital gains tax translates into government spending unlimited amounts of "funny" money from thin air that somehow creates wealth and productivity. My take on this issue derives mostly from my Supply Side roots. As I'm sure you are aware, Austrians would also support the idea of not taxing capital gains. I've had my share of criticism for Greenspan, but on this issue I agree with him that the capital gains tax should be zero percent.
As a point of full disclosure, I am somewhere in between where you stand on things and where most MMT advocates stand. In a nutshell, I am a mix of Supply Side, libertarian/Austrian and MMT laced with some Marxist insights from the checkered past of my youth. Try to square that circle if you can.
Memo to All - Please refrain from using insulting language and name calling as it only degrades the conversation and is a clear sign of intellectual laziness and poor judgement. I have a lot more to say on the debt ceiling but I want to get some consensus here that we be civil to each other as we debate these important issues. Agreed?
rombach, how would eliminating capital gains tax substantially increase productive investment if most of the capital gains taxed are from sales of financial assets , real estates, shiny metal etc? None of that actually involves real investment. Eliminating capital gains tax would provide a massive windfall for wall street and massively pump up that bloated monster, but that's not the same thing as increasing investment in productive fixed capital, technology, etc.
Rombach Report: I was not criticizing your proposal about capital gains taxes. I don't like taxes at all.
"y" is a kind, thoughtful and mature personality. Perhaps he will make you something like what he made for me:
http://www.flickr.com/photos/bob_roddis/8413813679/
These promised goods and services simply will not be produced and that is problematic.
Whether they are produced or not is a public policy choice. If there are tens of millions of unemployed and underemployed Americans, then it is obvious that we are producing well below our capacity.
The idiocy of our times is the belief that we all have to sit around and wait for private sector firms and entrepreneurs to decide on their own whether to employ those persons and expand our combined national output. An associated idiocy is the belief that the output that unassisted private enterprise chooses to generate is all of the out put we need, in both kind and volume. Both are absurd mistakes. Private enterprise is manifestly incapable of achieving full employment and full actualization of our national potential. Nor is it capable of producing all of the right kinds of goods and services we need to achieve long term national economic and social objectives grounded in a thoughtful and enlightened strategy.
Rombach isn't a nutcase like you bob
Improving productivity is always a useful thing to do. But if the economy is experiencing massive unemployment, then that means it can increase production even if productivity remains unchanged. It just need to bring more workers into the productive process.
The promises to the retired of 20 and 30 years in the future will be met with output from the national capital those same people develop in the present - if they are permitted to work.
Of course, fiat money can contribute to abolishing scarcity whereas sound money cannot. Fiat allows the policy space and tools to do it financially, and sound money does not. The gold standard has always led to mercantilism, which ends in war. Fiat can be used to adjust the relationship of real variables for optimal efficiency and effectiveness.
Of course, finance alone cannot abolish scarcity but it can provide the financial means that are needed to produce real effects.
Why is the US now experiencing scarcity of jobs? What is the solution"
One side says liquidate malinvestment and drop wages. The other side says fund the use of idle resources, which is possible with the policy space afforded by fiat.
Doh.
U.S. Is Bankrupt and We Don’t Even Know It: Laurence Kotlikoff
ROFL
Rombach,
"Eliminate the capital gains tax and capital will come out of the woodwork to invest in making rapidly escalating worker productivity a reality"
or the result would be even greater wealth inequality, and greater 'financialization' of the economy, with little real effect on domestic productive investment.
The findings of this 2010 Congressional Research Service report:
"Capital gains tax reductions are often proposed as a policy that will increase saving and investment, provide a short-term economic stimulus, and boost long-term economic growth. Capital gains tax rate reductions appear to decrease public saving and may have little or no effect on private saving. Consequently, many analysts note that capital gains tax reductions likely have a negative overall impact on national saving. Furthermore, capital gains tax rate reductions, they observe, are unlikely to have much effect on the long-term level of output or the path to the long- run level of output (i.e., economic growth). A tax reduction on capital gains would mostly benefit very high income taxpayers who are likely to save most of any tax reduction. A temporary capital gains tax reduction possibly could have a negative impact on short-term economic growth."
http://www.fas.org/sgp/crs/misc/R40411.pdf
"http://www.flickr.com/photos/bob_roddis/8413813679/"
y - First of all, Rombach is my surname. I doubt you would address Mike Norman as "norman" or Warren Mosler as "mosler". Alternatively, if you prefer feel free to address me as Ed or Eduardo. Aside from that, regarding the use of "nutcase" in your post to Bob Roddis, please see my memo above about civil discourse.
Regarding capital gains, I think I understand what you are saying about productive investment, but I don't think I agree for a few reasons. For example, if I own a house for 10 years and then sell it at say 50% more than I paid for it, but the gain is all due to inflation, why should I be taxed on that inflated gain? Moreover, if my earned income has already been taxed but I have been able to save enough of my after tax income to buy that house why should I be taxed yet again on that gain? To me, this seems to be adding insult to injury.
That said, I think I can see where we may be able to compromise on capital gains taxes. I would support capital gains taxes on the purchase and sale financial assets of the military industrial complex and other publicly traded companies that derive their income largely from government contracts of one kind or another.
When it comes to shiny metals, it's hard for me to see how such a small and illiquid market constitutes very much of the overall capital gains in the economy. Besides, I support eliminating all taxes on the purchase and sale of gold and silver because I see no reason why this form of hard money should not be allowed to compete with fiat money.
up till now I only knew you as "the Rombach Report"
"please see my memo above about civil discourse"
roddis is one of the most unpleasant and insulting people trolling the econoblogosphere that I know of
"Based on the Taxpayer Relief Act of 1997, if you are single, you will pay no capital gains tax on the first $250,000 you make when you sell your home. Married couples enjoy a $500,000 exemption."
http://www.investopedia.com/ask/answers/06/capitalgainhomesale.asp
"I support eliminating all taxes on the purchase and sale of gold and silver because I see no reason why this form of hard money should not be allowed to compete with fiat money"
getting rid of cap gains taxes on gold and silver wouldn't turn them into money, it would turn them into unproductive collectibles that aren't charged cap gains tax for some reason.
"roddis is one of the most unpleasant and insulting people trolling the econoblogosphere that I know of"
Learn to live with it and adapt if you want to be taken seriously.
"getting rid of cap gains taxes on gold and silver wouldn't turn them into money, it would turn them into unproductive collectibles that aren't charged cap gains tax for some reason"
Gold and silver already have a quasi-monetary status. Why else would central banks all over the word hold gold and silver a reserve assets? Aside from that, do you think that investors should be taxed on the purchase and sale of any type of commodity, financial asset or property where the nominal gain is totally attributed to inflation?
"or the result would be even greater wealth inequality, and greater 'financialization' of the economy, with little real effect on domestic productive investment."
The financialization of the economy has been made possible by way if fiat money. Go to the Fed website and look at the Constant Maturity Yield (CMT) data on US Treasury debt. If you do the math you will find that yield volatility for the 10-year Tsy note is 7 to 8 times greater now than it was in the early 1960s. Abandonment of Bretton Woods gave rise to the development of financial futures / options and other OTC derivatives. Derivatives markets require volatility to flourish. Without volatility the interest rate and foreign exchange derivatives markets would become as obsolete as buggy whips.
Aside from that, do you think that investors should be taxed on the purchase and sale of any type of commodity, financial asset or property where the nominal gain is totally attributed to inflation?
Good point.
Further, "financialization" results from everyone being in a desperate game of monetary musical chairs to avoid holding depreciated funny money. Like most problems in modern society, it is the result of "progressive" "solutions" to problems that do not exist and where the "progressive" cures are, in fact, the cause of the problems.
Again, it's absurd to impute a taxable "gain" upon transactions where the actual result is an attempt to avoid a real loss that results from the immoral, illegal and unconstitutional dilution of the funny money supply. Like everything "progressive" it is based upon lies and a distortion of language.
RR: Your last comment about financialization posted for me while I was writing the comment making the same point so I didn't see it before writing my comment.
Apparently, we are on the same page on this one.
Roddis, I've warned you in the past...don't post here anymore or I will start deleting your comments again. Move on and troll somewhere else.
"do you think that investors should be taxed on the purchase and sale of any type of commodity, financial asset or property where the nominal gain is totally attributed to inflation?"
The rise in the price of gold or real estate and other such things isn't totally attributed to inflation though, is it.
You make it sound like capital gains taxes leave people worse off than they were before the capital gain occurred, or no better off. If that were true then no-one would ever bother trading things like stocks and gold. People like Warren Buffett and Peter Schiff would never be able to get ahead. Obviously that's nonsense.
Also as I pointed out to you capital gains taxes on real estate don't apply at all on properties below $500,000 for couples and $250,000 for single-owners.
Ed -- I agree that Cap Gains taxes should not be levied on gains due to inflation. However, in the case of gains over and above inflation, what is your position? And, would you tax gains that are created by the government's provision of infrastructure, e.g., the increase in the value of a piece of land because of a new interstate highway exit?
I also agree with the article y quoted above that additional income from the elimination of the Cap Gains tax would most likely be saved and not spent or invested directly. Although there could be some follow on effects from the increase in saving, I don't believe it would make much difference. Could you explain how the elimination of Cap Gains taxes would lead to more investment, particularly if there is no increase in effective aggregate demand?
And, thank you for reminding everyone to remain civil. Name calling and insults are just a sign of an impaired intellect.
Ed if you look at what they did with the policy rate over the last 13 years they put it down to almost zero coming out of the dot com recession of 2000..
Then things started to get hot throughout the early part of that decade with all the increase in govt spending on the war and property prices started to take off so they tried to "tighten" so called and raised back up to IIRC 5.5% before the GFC and then with the GFC they have gone down to zero again...
So it was like a 7 year yo-yo down to zero then up to 5.5 then back down to zero again and we remain stuck at zero as their is no interest income in the economy and there has not been any increase in govt spending in 3 years...
No wonder the volatility indexes are high the Fed is causing all of this thru their idiot monetarism which has the opposite effect of what they think it does both as you point out in terms of reducing volatility and regualting economic activity and price levels...
If they increase rates from here, the economy is going to improve because savers are going to get their interest income back... I hope they do it...
rsp
"The financialization of the economy has been made possible by way if fiat money"
Doesn't mean it's an inevitable result of 'fiat money'. There was plenty of volatility during the various gold standards. Look at the financial history of the 19th and early 20th century.
Going back to a fixed exchange-rate regime is advocated by some post-Keynesians, but these only work in the long term if there is some sort of international mechanism to maintain balanced international trade and investment. In the old systems there was no such functioning mechanism so they kept hitting a wall. The same thing has happened in the Eurozone, which is essentially a fixed-exchange rate system. The euro was initially a stabilizing force, but then the whole thing exploded and now instability in the eurozone is far higher than before.
Ed (@8:57) - I've been saying for years that the ongoing financialization of every aspect of our economy is, in many ways, the root cause of most of our economic problems since it began with the explosion of mutual funds in the 1960's. It has now reached a level that very few people can get their heads around. Nominal amount of derivatives outstanding is something on the order of 50 times the WORLD's GDP. WTF are we thinking? This is truly the Ultimate Ponzi Scheme. And, the only real solution, as I see it, is to outright ban all derivatives.
"outright ban all derivatives"
Some derivatives serve a useful purpose.
y -- I'm not familiar with any. Examples, please.
"Examples, please"
for example farmers use futures contracts to lock in future prices for their produce, allowing them to reduce their risk and increase production, whilst helping to stabilize market prices.
While it would be a good idea to index cap gains to inflation, it would also be a good idea to index nominal debts to inflation, too. We already index COLA to inflation.
What else should be indexed to inflation?
What should the indexing be based on, CPI? Isn't that a bit arbitrary?
"The rise in the price of gold or real estate and other such things isn't totally attributed to inflation though, is it."
No, price swings in gold isn't totally attributed to inflation/deflation but maybe mostly so in the macro economic picture. Gold was pretty stable in the 1990s up until 1997 when chronic budget surpluses rear their head. Gold price fell from around $400/oz level to a low ebb of around $257/oz in 2001 reflecting the deflationary impact of the budget surplus. Note also that the US $ Index peaked at around the 120 level at the same time along with credit spreads surging wider telegraphing the defaults and bankruptcies in the pipeline.
Here is my take on gold as an inflationary hedge compared with TIPS in a video I did when I was at Thomson Reuters. Scroll down to the second video.
http://blog.thomsonreuters.com/index.php/tag/ed-rombach/page/2/
"Ed -- I agree that Cap Gains taxes should not be levied on gains due to inflation. However, in the case of gains over and above inflation, what is your position?"
I agree with Tom Hickey that cap gains should be indexed to inflation. Problem is that they keep changing he goal posts with CPI, which implies that some other universally accepted measure of inflation should be used for indexing
y -- Thank you. In my ranting I had forgotten about those uses. And they are useful and important. On the other hand, I don't usually think of those as derivatives (although they are). My point is that we need to stop the pyramiding of collateral or derivatives based on derivatives. Get the speculative hot money out of the commodity markets. Perhaps restrictions on who can participate in those markets limiting it to producers, middlemen and users. Or something like that.
Ed -- Thanks, that works for me. As long as we can find a better index than the CPI.
"..... the only real solution, as I see it, is to outright ban all derivatives."
John Zelnicker - I disagree with you that derivatives of all kinds should be banned, and I'm not saying that because I have made a living in the derivatives markets over the years. In a world of fiat money, which in my opinion exacerbates the business cycle and fuels volatility in financial assets, derivatives are simply a natural response and necessary tool for managing risk. Problem is that the derivatives markets have now hijacked fiscal and monetary policy to bail out the bad mistakes made by banks, insurance companies (AIG) and hedge funds (LTCM).
Five years ago AIG was bailed out by the Fed to the tune of $150 billion, but it was really a massive bailout of Goldman Sachs, Deutschebank, Soc Gen and other banks which had purchase credit default swaps from AIG. Terms of the bailout gave them 100 cents on the dollar to tear up the contracts. How many Wall Street bonuses would have been paid in 2009 were it not for that bailout and others like it?
Back when I worked for the Chicago Mercantile Exchange, the understanding was that exchange traded futures and options were a zero sum game. Losers paid winners as contracts settled daily in cash. However, in the wake of the credit collapse, Dodd-Frank inserted a provision in the law that gives the exchanges access to credit from the Treasury in the event a member firm fails and the collective pooled assets of all the other member firms are unable to make up for the loss. To add insult to injury, a swine like Jon Corzine can lose $1.6 billion from segregated customer accounts from making bets on EZ sovereign debt and get off without doing a perp walk in an orange jump suit and leg irons. You or I would not be able to get away with that.
"Some derivatives serve a useful purpose."
Yes indeed! Agricultural derivatives have been around for a long time given the inherent uncertainty of crop prices due to weather and crop failures. Moreover, I reckon these markets would be much more widely used if the government eliminated price supports and subsidies which mostly benefit large agribusiness concerns.
"If they increase rates from here, the economy is going to improve because savers are going to get their interest income back... I hope they do it..."
I know this will probably seem anathema to most MMTrs, but what I would like to see would be for the Fed to abandon interest rate targeting and let interest rates float to whatever clearing level the a free market would dictate. The Fed and/or Treasury shoukd then target some equilibrium value for the price of gold which would balance the interests of debtors vs. creditors. I believe this type of arrangement could easily accommodate budget deficits of around 2% of GDP without stifling economic growth or fueling inflation.
With Warren' proposal to set the interest rate to zero and issue only short-term bills, providing unlimited liquidity to solvent banks, then interest rates would be set in the credit markets.
CB's generally only buy and sell gold to influence the exchange rate of their currencies/
CB's purchasing and selling gold affects the amount of $NFA, therefore is fiscal, and in my view it should be prohibited for central banks to do fiscal.
Many experts advise requiring greater transparency in the derivatives markets by requiring that they only a traded on exchanges and regulated as insurance. Right now, a lot of the business in derivatives is akin to naked short selling. There's nothing substantial behind it. That needs to be prohibited and those providing insurance needs to take the full hit if it comes. If there is systemic failure, then there has to be a cram down, as Ms. Tavakoli advocates. Otherwise, it's not capitalism, but socialism for the privileged.
"CB's purchasing and selling gold affects the amount of $NFA, therefore is fiscal, and in my view it should be prohibited for central banks to do fiscal."
The Fed has been crossing over the line into fiscal policy for a long time... not that I think they should. However, CB's could just as easily buy and sell gold via futures and options. That said, if you don't like the idea of the Fed buying/selling physical gold which would translate into a reserve add/drain, the Treasury could do it. Gold was pretty stable in the early to mid-1990s at around $400/oz amid a healthy economic expansion at a time when budget deficits weighed at about 2% of GDP... give or take.
"If there is systemic failure, then there has to be a cram down, as Ms. Tavakoli advocates. Otherwise, it's not capitalism, but socialism for the privileged."
Agreed! Instead of banning derivatives, lets ban socialism for the privledged!
I'm OK with Treasuries buying/selling gold as a fiscal op but not central banks under the guise of monetary policy.
"what I would like to see would be for the Fed to abandon interest rate targeting and let interest rates float to whatever clearing level the a free market would dictate. The Fed and/or Treasury should then target some equilibrium value for the price of gold"
Do you mean the US should go back on a gold standard?
"cap gains should be indexed to inflation"
What about if your salary/income fails to keep up with inflation, should you get a tax cut?
What about if your salary/income fails to keep up with inflation, should you get a tax cut?
Of course. If we are going to index, it should be across the board.
"Do you mean the US should go back on a gold standard?"
Yes. Some modified version of it. As a Supply Side, libertarian, MMT hybrid kind of guy, I am not phobic about deficits like Austrians are and nor am I hostile to gold the way MMT is. The current system is clearly not working. I don't want the federal government to have enough policy space to start wars like they almost just did in Syria.
"What about if your salary/income fails to keep up with inflation, should you get a tax cut?"
I like that idea!
"Could you explain how the elimination of Cap Gains taxes would lead to more investment, particularly if there is no increase in effective aggregate demand?"
A smaller cap gains tax increases the after tax return on capital. Therefore, if an investor is indifferent to making a capital investment when the cap gains rate is say 20%, a 15% rate may provide the margin of difference to motivate the investor to take the plunge. Political opposition probably means the the cap gains tax would never go to 0.00%, but I think 10% would stimulate a lot of investment especailly if it was joined with 10% rate across the board on all categories of income.
I favor taxing all sources of income at a flat 10%, including earned income, interest income, dividend income, capital gains, corporate income and social security with 5% paid by employees and 5% paid by employers, while eliminating the income ceiling applicable to the SS tax. Estate tax should also be 10% on estates in excess of $5 million.
Most current deductions would be eliminated and replaced by a generous standard deduction such that a U.S. family of four earning $50K would only have to pay the 10% tax on the first dollar of earned income over and above the $50K threshold. This means that even though this tax structure appears as a flat 10% rate, it is nevertheless quite progressive especially when taking into account the elimination of the income ceiling on the social security tax for high income earners. Under current law the SS tax is the most regressive tax borne disproportionately by the middle class and working poor. This feature should appeal to liberal progressives.
Under this plan, if you do the math you will see that regardless of the source of one’s income the total effective tax rate never exceeds 18.75%. Moreover, 10% is a simple number to remember and reminiscent of the 10% Biblical Tithe which should appeal to the religious right.
This approach overcomes the objection often raised by the political left about the Armey/Forbes flat tax which did not tax capital gains, interest income or dividends. Makes sense too, because it doesn’t seem fair that some rich guy who derives all his income from coupon payments on Treasury securities wouldn’t have to pay any tax.
At the same time, the 1% would probably embrace paying a combined effective tax rate of 18.75%, which is more than Romney, Warren Buffet or Bill Gates pay, without having to pay an army of tax accountants and lawyers or create a "charitable" foundation to exploit every available loophole the way they do.
In other words, the 10% solution for tax reduction and reform is likely to garner support from liberal progressives on the left as well as Supply Siders and Libertarians on the right who want to cut taxes. Moreover, it is so simple that a 12 year could calculate the return on a 3X5 index card. I believe that a tax reform of this nature would unleash a shock wave of economic growth that would put people back to work and break the current cycle of economic malaise and stagnation.
ed, re gold standard.
I'm not sure what your plan is exactly.. Should the Fed promise to redeem dollars for gold at a fixed price?
"Should the Fed promise to redeem dollars for gold at a fixed price?
Maybe, but I am not wedded to that idea. I like the idea of competing currencies and see no reason why gold and silver should not be allowed to circulate as alternative currencies. I know people here are going accuse me of being a "metal lover", but I think it is hard to ignore why gold has played an important role in monetary policy in the past and will be likely to do so in the future in some fashion.
"Should the Fed promise to redeem dollars for gold at a fixed price?
Maybe, but I am not wedded to that idea. I like the idea of competing currencies and see no reason why gold and silver should not be allowed to circulate as alternative currencies. I know people here are going accuse me of being a "metal lover", but I think it is hard to ignore why gold has played an important role in monetary policy in the past and will be likely to do so in the future in some fashion.
Ed, could you explain your gold standard/ market-determined interest rates plan a bit more.. If the Fed doesn't redeem dollars for gold, how does it work?
by the way, Perry Mehrling has a free online course running at the moment on Coursera:
'Economics of Money and Banking'
https://class.coursera.org/money-001/class
It started a short while ago, and is running in real time with graded tests every week and an exam at the end.
(no lost points until this friday)
"If the Fed doesn't redeem dollars for gold, how does it work?"
My idea is to target what I refer to as an equilibrium price for gold which succeeds in not tipping the scales in favor of debtors or creditors. Alan Greenspan wrote a WSJ OpEd in September 1981 Can The U.S. Return To A Gold Standard?
http://www.gold-eagle.com/article/can-us-return-gold-standard
The immediate problem of restoring a GOLD STANDARD is fixing a gold price that is consistent with market forces. Obviously if the offering price by the Treasury is too low, or subsequently proves to be too low, heavy demand at the offering price could quickly deplete the total U.S. government stock of gold, as well as any gold borrowed to thwart the assault. At that point, with no additional gold available, the U.S. would be off the GOLD STANDARD and likely to remain off for decades.
Alternatively, if the gold price is initially set too high, or subsequently becomes too high, the Treasury would be inundated with gold offerings. The payments the gold drawn on the Treasury's account at the Federal Reserve would add substantially to commercial bank reserves and probably act, at least temporarily, to expand the money supply with all the inflationary implications thereof.
So, how does one derive the right Goldilocks price for gold that is neither too high or low? My approach was to use outstanding Treasury debt with all its different maturities as a proxy for for all the different short and long term supply contracts, labor contracts, mortgages, etc in the economy and take the price of gold at the time of issuance for each security and calculate a duration weighted average price of gold. It might be easier to just take the average price of gold over say the past 10 years and target that price but I don't think that would produce as good a result. Assuming the Treasury or the Fed was confident that they had the right target, they could simply sell gold when the price rises above that level and buy it when it falls below it. A less hard and fast approach might be to allow the equilibrium level to slowly adjust up or down not unlike the way the PBOC allows the Yuan to slowly adjust. Am I making any sense?
what you seem to be saying is the Fed should raise interest rates when the price of gold goes above a certain level determined by the govt, and should lower interest rates when it falls below that level.
i.e. "sell gold" means drain dollar reserves and thereby raise interest rates, and "buy gold" means add dollar reserves and thereby lower interest rates. In which case you would only get something like QE - where the Fed keeps adding reserves even when the fedfunds rate has already hit zero - if the price of gold was at rock bottom.
y - My thinking was to just let interest rates float. Not sure why you say this would be like QE?
the QE comment was an aside.
My point was, if the Fed buys gold in your plan, this increases the quantity of dollar reserves (as the Fed swaps reserves for gold). This causes the Fed Funds rate to fall. And if the Fed sells gold, this drains dollar reserves, causing the Fed Funds rate to rise.
So when the price of gold goes above the target level, under your plan the Fed raises the FF rate, and if it falls below that target level, the Fed lowers the FF rate.
So the interest rate is not set by the market, rather the Fed changes the interest rate in response to the market price of gold, so as to keep the price near the target 'equilibrium' level. Is that correct?
The price of gold is only going to increase over time as Asians and Indians become more prosperous since they traditionally love to accumulate gold as a symbol of wealth. It's already been happening, increasing the demand for physical gold. The gold market is now also heavily influenced by ETF's. Trying to fix the price of gold under then circumstances is probably not possible for any government.
Once Ed came out in favor of MMT and a return to the gold standard, I lost both the ability and the desire to follow this conversation.
"My point was, if the Fed buys gold in your plan, this increases the quantity of dollar reserves (as the Fed swaps reserves for gold). This causes the Fed Funds rate to fall. And if the Fed sells gold, this drains dollar reserves, causing the Fed Funds rate to rise."
Yes. All else being equal..... at least theoretically.
"So when the price of gold goes above the target level, under your plan the Fed raises the FF rate, and if it falls below that target level, the Fed lowers the FF rate."
Well, the Fed would be indirectly raising or lowering the FF rate by way of its open market actions in gold, but the market would be determining how high or low the rate would go.
"So the interest rate is not set by the market, rather the Fed changes the interest rate in response to the market price of gold, so as to keep the price near the target 'equilibrium' level. Is that correct?"
The logical market response to the Fed buying gold would be would be for short term rates to fall and vice versa when the Fed sells gold. However, there would be no way to really know how much rates would change one way or another in response to Fed open market operations in the gold market.
Alternatively, the Fed or the Treasury could also opt to buy or sell gold futures or use options by selling out of the money puts and calls which would be exercised into long or short futures positions if they went into the money. Using derivatives in thus way would have virtually no impact on reserves until and unless the Fed/Treasury opted to make or take delivery of expiring futures contracts.
"the market would be determining how high or low the rate would go"
If we assume for a minute that the Fed targets the CPI inflation rate, you could argue that the market determines the Fed Funds rate by determining the CPI inflation rate. When the CPI inflation rate is above the Fed's target the Fed sells bonds (raises the FF rate), and when the CPI inflation rate is below target the Fed buys bonds (lowers the FF rate).
However in reality the Fed decides the CPI inflation rate target and also decides to try and hit that target by raising or lowering the FF rate. So this is not really a case of the market setting rates at all. It's a case of the Fed setting a particular target and then trying to hit that target using certain methods.
One obvious difference between this example and your scheme is that in yours the Fed can potentially run out of gold to sell, and so fail to achieve its gold price target. Once that happens, the Fed would be off the gold standard as Greenspan says, and that would be the end of that particular experiment.
Targeting a particular price of gold is really a rather arbitrary basis for monetary policy. You can end up with all sorts of strange and pro-cyclical results, such as very high interest rates in a recession/ depression.
The gold standard system you describe is essentially a fixed exchange rate system, where the central bank decides to target a certain gold price for the currency. The eurozone is a good contemporary example of what can happen in fixed exchange rate system - mass unemployment, economic collapse, social unrest, political turmoil, etc, when there is no real mechanism for rebalancing trade and investment between deficit and surplus countries.
In the eurozone you have exactly what one would expect under a gold standard system - low interest rates in trade surplus countries like Germany, and very high interest rates in trade deficit countries like Greece. This makes it extremely difficult for any rebalancing of trade between these countries to occur.
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