Word is getting around. The last mile continues to close. GMO is not the Bank of England, but it is influential in financial circles. This will be widely read.
Naked Capitalism
Investment Manager GMO Debunks Mythology of “Sound Finance,” or Deficit Hawkery
Yves Smith
http://www.theguardian.com/business/2016/jan/20/goldman-sachs-backs-campaign-keep-britain-in-european-union-referendum
ReplyDeleteGrantham newsletters are worth a read always. One of the good guys in finance, those on GMO.
ReplyDeleteBut they have been aware of this for a while is not new, people just does not understand or does not want to understand.
Excellent piece. I believe he makes one error in explaining why the "debt is not a burden on the future". That is, he says, in effect, since we "owe it to ourselves" (ignoring foreign holders) it will not be a burden. However, the bonds are already owned. If they are paid off with tax money (running a budget surplus) this will a burden on those paying the taxes. Yes, the bondholder receives this money, but the bondholder is no wealthier since he lost the bonds. Overall, it's a net loss for the private sector. The real reason the debt need be no burden on the future is that, given the legal authority to do so, the debt could be retired in exchange for "ex-nihilo" bank deposits (similar to QE). This would not be inflationary for the same reasons QE was not inflationary - it's just an asset swap - no additional money in the system. In effect, the private sector just changed debtors from the government to the banking system. And the debt is gone. As we know, the "debt" is really just a private sector asset, convertible into bank deposits, and is part of the nation's financial wealth. At least that is my understanding.
ReplyDelete"That is, he says, in effect, since we "owe it to ourselves" (ignoring foreign holders) it will not be a burden. However, the bonds are already owned. If they are paid off with tax money (running a budget surplus) this will a burden on those paying the taxes."
ReplyDeleteTaxes is always a "net loss."
That's not completely how it works. Any government spending will generate 100% tax if there is no saving in the spending chain.
So spending "pays for itself" by generating tax and savings after the spending. If there is no saving the government gets all its money back. However, you also have to take into account Government can're choose to run a surplus or deficit.
Second of all the Treasury runs intraday overdrafts on a particularly and has a Cash Buffer, taxes is not related to spending. Better to view all spending as coming from nowhere and taxes going nowhere. Gilt issuance not related to spending and an asset swap.
Random thx You are correct. Taxes don't go anywhere including "paying off the debt". However, my big picture point was that the debt is not a burden so I tried to explain in terms "non-MMTers" would understand. That is, saying "all spending and taxes come and go from nowhere" loses the average person - so the debate gets diverted and they don't get to understanding my principle point - that we don't have to worry about the "debt" (at least in my experience). I think it is good that the average person understand that the debt is not a problem even if they don't understand the technicalities.
ReplyDelete"If they are paid off with tax money (running a budget surplus) this will a burden on those paying the taxes."
ReplyDeleteThey are not paid off with tax money.
That's the line spun by the other side. Nobody ever rings down to the tax office to see if enough taxes have been collected before a bond is redeemed. They are just redeemed.
Bonds are always a swap with ex-nihlio reserves regardless of what is happening elsewhere in government.
*That* is the key point to get across to non-believers. The asynchronous and disconnected nature of the spending system.
If they can understand banks can issue loans without needing savings first, they can understand governments can redeem bonds without needing taxes first.
Neil thanks agreed. Bonds are never paid off with taxes operationally. But if there is a budget surplus, it means taxes will exceed spending -resulting in money coming out of the private sector and lower debt. So, the lower debt coincides with taxes exceeding spending. So, "in effect and appearance" (but not operationally), the excess of taxes exceeding spending reduces the debt. Does that make sense?
ReplyDeleteThanks.
"Does that make sense?'
ReplyDeleteI know what the spurious correlation is. The job is to counter that view - both on government and on banks.
It's the 'vegetables make me sick' line. A belief and a line that needs countering constantly since it simply isn't true and is detrimental to good health.