Let's talk about this debt limit thing.
How many other countries have such a thing?
One, Denmark.

From a legal and legislative point of view, the US and Danish debt ceilings are similar. Both countries require legislative action to raise the ceiling. However, the Danish approach to this process is very different.

The current Danish debt ceiling is fixed at 115 percent of 2010 GDP. Since the outstanding gross general government debt in Denmark is below 40 percent of GDP and is 34 percent of the debt ceiling limit. In other words, the Danish debt ceiling is almost three times the level of actual outstanding gross debt and of no practical relevance for government budget making or debt management.

It is as if Congress set the limit at $50 Trillion and said, Go away and don't bother us for awhile.

Now, why do we have a debt ceiling at all? Can we do away with it? Not really because of two quirks in our Constitution.

The Constitution gives the Congress the primary responsibility for authorizing a bond issue while giving the Executive (Treasury) the responsibility for issuing bonds. In 1917 the various financial burdens (Panama Canal, etc.)  meant the the Treasury kept going to Congress for individual bond issues. Remember, we were on the gold standard so the covering of the deficit with bonds was important and necessary.

The Constitution does not allow the various branches of government to delegate authority without clear goals and limits. It also separates the functions of budget, allocation, and debt acquisition; this is unlike most other countries, except, of course, Denmark. :=))

So Congress set a high debt limit, $11.5 billion, to cover the run up to our entry into WWI and said, go away and don't bother us for a while.

So, what was the debt pattern at the time? In 1911 it was $2,709,000,000. (That's $2.7 billion for those of us that can't count zeros fast.) In 1921 it was $24,965,000,000 ($25 billion is close enough.)

Oh dear, kind of popped through that limit thing? Well, not really. Let's see what Congress did about that debt limit. (With, apparently, little drama.)

In December 1919 it raised the limit to $43 billion. Note, that is just short of double the debt hit in 1921.

For anyone curious I put in three more changes in the debt limit.
December 1939 - $45 billion (20 years?)
June 1940 - $49 billion
February 1941 - $65 billion
(February 1941??? Odd. I wonder what did they see coming?)

I leave it as an exercise for the student to look up the actual debts during those years.

(http://illuminations.nctm.org/lessons/NatDebt/NatDebt-AS-Solutions.pdf) (You didn't think I'd leave you hanging, did you?)

But it is interesting that, much like Denmark, they took care to stay well ahead of the economic needs and did not engage in silly games.

The difference now, with the US debt ceiling, is it has become an excuse to enable members to politically grandstand and vent empty rhetoric about fiscal sustain-ability.

This is half of the problem with the bond indebtedness. (Remember, with a fiat currency, bond revenue doesn't pay for anything.)

By law the Treasury is required to balance the deficit with tax and bond revenue. To be short and to the point: This law became a complete non-sequitur on Aug 15, 1971.

But it is still in force.

Consider this question: On the government spread sheet, the cell containing the outlays of money is negative. It's a negative number, you know, a minus (-) sign in front.

And who cares?

It's a negative number; the government issues a check and subtracts the amount from that negative number so that it's a little more negative. Is there a bank or business that will refuse the government check because "it is overdrawn"?

Will a government check ever "bounce"?

As bond and tax revenues come in they will move that number in a positive direction.

But who cares?

Taxes give money value and control demand to curb inflation. They also move a number a little more positive but no one really cares.

Bonds provide a safe savings account for the public. They provide a means for foreign companies and governments to conduct business here in US currency. They provide a means of controlling interest rates on bank reserve accounts.

Oh! And their revenue moves a number on a spread sheet in a positive direction. And no one should care.

A government check in a fiat currency will never, ever, bounce regardless if that number is plus or minus.

There are a lot of numbers that indicate the health of the economy and of the citizens, the debt is not one of them. Not even close.

One could do well to study the economists in the group self labeled as Deficit Owls, a group including: Stephanie Kelton, Warren Mosler,  L. Randall Wray, James K. Galbraith, and Bill Mitchell.
(Note: JAMES K. Galbraith is the son of JOHN K. Galbraith, lest there be confusion.)

This will be your opportunity, nay, duty, to ask questions about the crazy things I have said.

The government can never go broke.
Taxes are important but don't pay for anything.
Bonds are important but the revenue does not pay for anything.
There is no need to balance the deficit with revenue.

There are Deficit Hawks that claim deficits are bad and must be eliminated.
There are Deficit Doves that claim deficits are not important and we must look elsewhere.
A Deficit Owl says: That spending is a measure of how hard we are pushing the economic gas pedal. Taxes are how hard we are pushing the economic brake.

We must watch the inflation, unemployment, percent of production capacity in use and use these numbers balance the two (control the deficit).

I hope this passes for a correct attribution.
The following is excerpted from a Facebook entry (https://www.facebook.com/photo.php?fbid=600696526636505&set=a.433295386709954.96727.433288343377325&type=1) by Tom Joad (https://www.facebook.com/TomJoadLives).

This story is less politics and more economics. ... [Many are ] feeling the strain of what the Republicans are doing to the country right now. They (John Andrew Boehner (R-OH), the 61st and current Speaker of the United States House of Representatives - and Eric Ivan Cantor (R-VA), House Majority Leader) stood up again today and did what psychologists call "projection," and political commentators call "spin."
 This current crisis and the resulting financial strain and pain and domino effect into the financial markets and private companies that do work for the government - belongs to about eighty morons in the House of Representatives. What's frustrating (for me) is listening to relatively smart people in the media trying desperately NOT to tell the truth about it, because saying that John is lying to us paints them with "the L word" - even if it's an accurate statement.
[...]
. YES, this is - to a degree - a bit of political theater, but more than that - it's folks who need money trying to figure a way around the roadblocks that eighty guys with an axe to grind in the House threw up between them and paying their mortgage at the beginning of next month. Period. This isn't about a difference of opinion. This is about 80 House Republicans throwing a hissy fit because they have no Constitutional remedy over the bitter pill of having the government cut off the gravy train for those in the disease management industry - who have tripled our costs over the past decade. They did that - and "Obamacare" wasn't even on the table. Costs will now flatten out - the party's over - and they are PISSED off.
[...]
[T]he fear of universal/socialized medicine is, in my mind, the driving force behind the hoopla (discounting racial and other party platform divides, the usual suspects). The AMA is a powerful organization and they aren't interested in giving up an inch of their hard won turf. And their hands are in enough DC pockets to make sure this never happens.
...
[I] believe a thriving society needs to care for its members, healthcare being one necessity.
[...]
 But I still want to know--is there anything the POTUS can do to stop this crap? Anything written anywhere? I grew up in an era where people read. Thankfully most folks I know still do.
[...]
 To the best of my knowledge: no. Congress controls the pursestrings - on purpose (that whole separation of powers thing the founders thought was a good idea). The Republicans WILL be violating their Constitutional oath of office if they allow the nation to default (which is why the Speaker is floating the idea of a short-term fix)
[...]
 Many people have floated the idea that the president has the Constitutional authority (granted by the Civil War Reconstruction-era 14th Amendment [which sought to limit the ability of the former slave states from doing what these morons are doing right now]) to direct Treasury to issue bonds to cover any shortfall. I'd like to believe that he would follow that course
[..]
 The Speaker wants to kick the can down the road for six weeks because he doesn't want to go down in history as the guy responsible for a global financial meltdown. He wants Americans to believe (and is getting the press to parrot his nonsense) that this band-aid (which leaves 800,000 people out of job
[...]
 and untold billions in losses by regular folks nervously watching their IRAs shrink) - as meeting the president "half-way."
[...]

From: Mike Norman Economics

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Tuesday, September 24, 2013

This (f*%#ing) Town

It seems like a cruel irony to me that as a society, we have never been more advanced technologically. We can now pay bills and connect to billions of other human beings on a cell phone in nanoseconds, from the middle of nowhere. Every day, scientists are making breakthroughs that make us healthier and happier. But when it comes to economics, we are still neanderthals. As a resident of Washington DC, the caveman level understanding of economics on and around the Hill is amazingly sad. The entire institutional bias of this city is about deficit reduction and the various schemes to achieve it. To say nothing of the Republicans, who are simply insane, it is clear from his public statements that President Obama is utterly clueless on macro issues. His various speeches on the subject have been very muddled and riddled with half truths and contradictions, which he and his staff are seemingly incapable of realizing. What further amazes me is the lack of intellectual curiosity and creativity. It is seen as an absolute given, in circles left and right, that deficit reduction is necessary very soon, if not now. As we know, none of these strategies will do anything to improve the lives of the vast majority of Americans.Very few even dare to think that widespread prosperity is possible.

Meanwhile, it is sickening to me how detached Washington is. If you read Mark Leibovich's This Town you got a glimpse into how people at the highest levels think, but they are hardly the only clowns in the show. Many thousands of people in this town live in $500,000 condos, drive luxury sedans, and do all their grocery shopping at Whole Foods. (Dont get me wrong- I like Whole Foods, but I like to call it Whole-yshitthatsexpensive Foods. Most people could never afford to buy most groceries there.) Between the daily happy hours and weekend bar/club binging, people spend hundreds, if not thousands of dollars a month on alcohol and restaurant meals. It is no surprise that the rest of the country is outraged out how people in DC behave. Unfortunately, a great many of the Tea Party idiots, who I really do want to sympathize with, have focused their rage in entirely the wrong places and have made these problems worse.  They have focused their anger on the civil servants, who I want to clearly state are not  the problem. Most government employees are honest, hard working people who continue to serve the public, despite poor pay and constant abuse from Congress and the public. It is the para-government that is the real problem. The massive army of lobbyists, public relations specialists (aka professional bullshitters), media-morons, boot-licking congressmen, and the rentiers that control all of them that are the real problem.

I would add congressional staff to this list, except as a former staffer it is clear to me that most of staff have good intentions; they only turn to lobbying because staffer pay is so ridiculously low that to live decently in Washington basically requires "selling out." This to me is one of the absolute dumbest things that Washington does. Congress, which is the issuer of the currency, is so stupid that it doesn't think that it can afford to invest in having its own top quality staff. It could easily decide to double staffer salaries tomorrow; instead the self-flagellation has gotten so bad that some Republican Senators have even proposed eliminating healthcare premium support from compensation packages. How the staffers in these member's offices haven't gotten up and walked the hell out is beyond me. Its no wonder then that turnover is so high and no one wants to risk proposing new ideas, such as MMT, at risk of being shunned from the established money.


I have no way in hell of knowing how we can change this.

2 comments:

Dan Kervick said...

    Well, I'll just offer my opinion again that these guys aren't dumb. Most of them have bosses, and they serve the interests of their bosses. Their bosses are the tiny fraction of Americans who own most of the country. Others, the ideologues, represent the stridently white part of America, and their agenda is to help the white part secede, socially and economically, from the non-white part.

    It's about interests. Apart from a few wonks and some of their staffers, politicians aren't making economic decisions on the basis of "macroeconomics." That's an irrelevant ivory tower pursuit from the standpoint of the interests they serve.

    September 24, 2013 at 2:00 PM
Michael Norman said...

    Dan,

    Yes and no. I've run into many of their "bosses" in my years working for Fox and I can tell you that while they do have an agenda and it's an agenda solely designed to suit them and nobody else, they are ideological zealots and most of them are quite dumb.

    September 24, 2013 at 2:47 PM

Should Corporations be taxes part deux

I have been taken to task for suggesting that federal taxes on corporations are probably unnecessary and counter productive. It was suggested that corporations should shoulder their share of the cost of the utilities and services they use. That this may be true depends on who is providing these services.

If the federal government, the sovereign, provides the service, such as an interstate highway, then there is no connection between taxes and the expenses. The sovereign issues the money it needs to provide and maintain the services. It has no need to acquire the money first, in fact it really can’t. The only reason it may need to plan a tax is to control the price of goods and services it needs or to lower an overall demand problem.

If, however, it is a local agency, such as a state, city, etc. that provides the service the scenario changes completely. Why? Only the sovereign and issue money; all other entities are users and cannot issue the national currency. Therefore if they wish to pay for the maintenance, they must acquire the money first, either by taxing, borrowing, or a federal grant.

The necessity of taxing corporations at the federal level is open to question because the functions that federal taxes fulfill  is totally different than taxes imposed by agencies below the federal level. At these lower levels tax revenue goes directly to pay for the goods and services that these agencies provide and, therefore, corporations, like everyone else should pay to offset what they use.

Should corporations be taxed?

Listening to an online  conversation last evening and, as an aside, I wondered whether corporations should be taxed, at least as far as the income tax code goes.  I cannot see that it serves a useful purpose.

The first question that must be asked is what taxes actually pay for.  Taxes, in our present economic system, do not pay for anything.  (I can hear brain cells, especially Stuart's, screaming from here.)

Please relax and bear with me as I suggest the logic behind that previous statement.  Since August 15 1971, our economy has been operating with a fiat currency.  To clarify, this means that our sovereign government has declared, by a fiat, that the currency it issues or symbolic entry on its records of that currency are legal tender for the resolution of debts in the country.  Further that the government offers no convertibility of its currency to any other commodity.

In order to create a demand and hence a market value for this currency, the sovereign creates and imposes taxes, a debt that can only be removed using the currency that the sovereign has issued.  This is one of the three purposes taxes serve in the economy. 

A moment's reflection will reveal that the sovereign, in this scenario, is quite free to issue all currency it needs to pay for the goods and services it needs and or wants. It has no need to tax or indeed borrow; in fact, it cannot tax or borrow until it spends, there is nothing in the economy for it to collect.

The spending, for infrastructure, public care, grants for public services, and military, move money from the public sector, the government, to the private, basically us. With this money the private sector can pay its taxes and then buy goods and services it wants. Assuming there are sub-sectors within the private of individuals willing and able to provide goods and services the cycle repeats until the supply ends.

If there is too much money pushed into the economy, demand can outstrip the supplier's ability to deliver. The government must watch for this by watching unemployment and other signs of inflation like rising prices and supply sources reaching full capacity. When these signs do appear, the government must move to curb the demand pressure. It can do this by decreasing spending or increasing taxes.

Note carefully: The DIFFERENCE between government spending and government taxes is referred to as the deficit. In order to control expansion or contraction of the economy it is the deficit that must be adjusted, not necessarily spending or taxes alone.

Once again, we have a important need for taxes, but once again we see that taxes are not used to actually pay for anything but just to balance spending by the government on what it wants.

Taxes have a third function. Taxes can be used to curb behavior that the government considers detrimental. There are an number of examples that come to mind but the one that seems to have disappeared, definitely to the detriment of our society, is the marginal tax rate on high incomes.

Money is an indisputable source of power. An individual or small group of individuals can, and indeed do, challenge governmental powers based on accumulated wealth. By placing a high tax on income over, say, $1,000,000, the sovereign power is protecting itself against challenge by a small minority.

Again, an important use for taxes; however, the revenue from this source would be too small to be considered useful in controlling the deficit.

Now, based on this chain of logic I argue that taxes don't pay for anything and, further, that taxes on corporations are likely counter productive. Corporations are not brought into existence to earn money for themselves and to pay taxes that may be imposed. In their simplest form, they exist to fulfill a demand, not create one. That they may be the source of a demand for good and services is only a reflection of the demand they are trying to fulfill.

Finally, corporations are not sentient. They only move according to the people behind them. Corporations do not, on their own, challenge governments. Taxes on a corporation serve only to test the ingenuity of the corporate officers in avoiding the taxes; it is the individuals who form the actual "brain" that must concern the government and ultimately us.

Remember, Al Capone, a reputed crime boss suspected of many crimes, as brought to court and sent to jail for --- INCOME TAX EVASION!! And you thought taxes weren't important.

Can a bank "create" money and how much?

When someone deposits money in a bank, the bank takes on a liability; it owes money to the depositor. It also takes on an asset, the cash deposited.

At the present time it, the bank, only needs to keep 10% of that asset in cash so it makes a loan and transfers the cash asset to a loan asset. As the loan is repaid the balance sheet will show a periodic transfer from the loan asset back to the cash asset. The bank should also show an increase in cash and equity from the interest.

The bank can keep cycling cash back into loans but the bank's holdings will never exceed its cash assets, loan assets, and reserve assets. The amount it loans can increase as its equity increases but the total assets must equal its liabilities, what it owes depositors, and its equity, what it earned in interest.

So is the bank creating money? Yes, but there is a limit on how much it can create. (We are not talking the Fed here. As to the Fed, it is essentially a branch of the Treasury for all the talk of it being independent.)

There is a problem with the money that banks create. When economic times are bad, just when an influx of money is needed, banks become reluctant to loan money so the supply dries up. The sovereign has no restraint on creating money and can (and should) put money into the economy when there is a slow down. The time to restrict government money is when unemployment comes down, demand and prices go up, and the supply is struggling to catch up.

MMT thought

Electronic copy available at: http://ssrn.com/abstract=1905625

Understanding The Modern Monetary System
Cullen O. Roche
August 5, 2011

 "The government is an entity created by the people and for the people. It exists to further the prosperity of the private sector - NOT to benefit at its expense. If this entity is allowed to exist for its own benefit or becomes corrupted by a concentration of power or abuse of its currency issuing powers it will become susceptible to dissolution via the populace's rejection of that government."

Virtually Speaking site for Deficitowl

We really have to arrange a way for you to visit "in world".

We hear you and Jay through a connection to Blog Talk Radio. Although we can use an inworld voice system we rarely do, preferring to type into chat. This allows use to "talk" and ask questions without actually interrupting your discussion.

As to the venue: Here is view from the rear of the site. As you can see it reproduces a Roman auditorium that has been up dated.

A closer view of the platform where Jay (avatar) and guest(s) (avatar(s)) are normally seated.

We know it's past its unsell-by-date but we did have our own version of the platinum coin for you.

:=))

The obverse is, of course, your image and the reverse has an owl. :=))

The view from the dais, as seen from the position your avatar might be.

 And yes, that is me (avatar) as I was, oh, 30 years ago? :=))

Probably can't see it but I am wearing our group's Deficit Owl pin.

National Debt? What National debt.

Hmmmm, the national debt and how it might effect our progeny.

The US contracts to have a highway built and pays $20,000 for the work.

The builder does the job for $10,000 and then spends $10,000 for a new Chinese car. (No comments on the profit and then the car decision; I just needed some numbers.)

The Chinese dealer deposits the $10,000 in her checking account and is faced with a decision, does she go to the money market and buy yauns with the dollars? Assuming she hopes to sell another car. perhaps buy some new shoes here, and may have bills to pay in the US, like US taxes, she will probably just keep the US dollars in the checking account. Or, perhaps, want to invest for a little interest in something safe, like US bonds.

She buys $10,000 worth of bonds; the Treasurer looks at the $10,000 and says," Wow, we have our road and some of the money back too. That drains some money out of the public pool that we put in earlier, which eases inflationary pressure but, unfortunately, it also reduces demand; we must watch and see if more spending is needed."

Note Well: The money used to buy bonds, increase the National Debt, had to have been spent first by the government. There is no other source for that money. Even if the Chinese government wants to buy US bonds, it must go to the financial market and buy US dollars with its yauns. And the dollars it buys were spent for some project earlier. The only new money involved in paying back bonds is the interest and at present there is damn little of that. The principle is merely recycling back money that had already been spent.

Are we burdening our children? With poor education, health care, crumbling infrastructure? Yes. With a debt and inflation? No.

Conrad Neil ‏@Radman622 (And any others. :=))   )

I have never tried to list URLs like this before. I hope I haven't left you with a copy and paste chore.

No attempt has been made to put these in any particular order.

I think it is vital that we, as in We The People, gain a general knowledge of how our financial system actually works. If this theory does, in fact, model our system, then we are making really bad decisions. I have seen no examples where, when this model is applied, the outcome wasn't as predicted.

Conrad Neil asked in a Twit about the need to control inflation. As you read through all of this , and I hope many of you do, remember that a "Deficit Owl" understands that the ability to "print" all the money you want doesn't mean you do not exercise restraint. We have two major economic controls: 1. Deficit - the accelerator and 2. Taxes - the brake. Coordinate these to achieve three things: 1. Slight inflation, 2. Zero unemployment, and 3. Full production.

Essentially, the deficit is used to inflate the currency some by getting more in the public hands. More in public hands means an increase in demand. An increase in demand will pull on production and start increasing supply. An increase in production will mean a decrease in  unemployment.

As to supply siders who think pushing on the string will increase demand, I suggest there is a great opportunity for a snowplow distribution system in Florida.

Oh, Deficit Owl, a term coined by Dr. Stephanie Kelton. Her Twitter handle is @deficitowl and is well worth following. And so is the tag #MMT.

!                                            MMT Bibliography
http://boonyvilleusa.blogspot.com/

http://www.forbes.com/sites/pascalemmanuelgobry/2012/10/19/no-the-united-states-will-not-go-into-a-debt-crisis-not-now-not-ever/

http://moslereconomics.com/

http://www.mikenormaneconomics.blogspot.com/

http://mythfighter.com/2013/01/23/mmt-to-make-your-case-begin-with-what-people-already-believe/

http://www.modernmoneyandpublicpurpose.com/tutorials-new.html

http://www.youtube.com/watch?v=nBOxnpdCqds&feature=youtube_gdata_player

http://en.wikipedia.org/wiki/Chartalism

http://www.washingtonpost.com/business/modern-monetary-theory-is-an-unconventional-take-on-economic-strategy/2012/02/15/gIQAR8uPMR_print.html

http://neweconomicperspectives.org/category/stephanie-kelton

http://neweconomicperspectives.org/p/modern-monetary-theory-primer.html

http://www.youtube.com/playlist?list=PL85C3640A1C6F23DA

http://pragcap.com/understanding-modern-monetary-system

http://pragcap.com/understanding-the-modern-monetary-system-2

http://www.youtube.com/watch?v=jT-Bvy7qy3A

http://pragcap.com/whoa-thats-a-lot-of-private-sector-savings-i-mean-debt?utm_source=twitterfeed&utm_medium=twitter

http://hir.harvard.edu/debt-deficits-and-modern-monetary-theory

Fiat Currency in (very) brief

[Vox ‏@deniseromano

[#TeaParty didn't protest about taxes when white POTUS put two illegal wars on a credit card & [blew the Clinton surplus #tcot #GOP #ccot


Taking a great leap into space from this Tweet. Please note: This in no way is intended to suport Bush or denigrate Clinton. I suspect that neither realized the implications of what they were doing.

First, two (at least) illegal wars. Yes, so we move on.

Next, on August 15, 1971, President Nixon ended our currencies convertibility to gold. One of the few things I applaud him for. As of that date we have operated with a fiat currency. (Not the car.) I need to skip detail here but a fiat currency is given value because it is the only way to pay the federal taxes that the federal government imposes.

So taxes give the currency value. They also provide an efficient means of draining excess currency (demand) out of the economy. The government in  a fiat economy is free to print all the money it needs. In fact the government can never, never, never go broke. It's impossible. So the government can put money into the economy pool we play in and, if there is too much (inflation), drain some out.

And that's it for taxes. Taxes do not pay for anything. This is like learning that Santa Claus doesn't exist but it's true. The government can print all the money it needs. If it prints too much and inflation shows up, it drains the excess with taxes. That's all; show is over; nothing more to see here.

Which means that the government must, must run a deficit. If it didn't there would be no money to tax. The deficit is the money we get paid and exchange for goods and services. No deficit, no economy; it's that simple.

How to tell if there is a danger of inflation? Is there unemployment? Then the demand for goods and services is obviously not at a maximum. Is our production capacity not at its maxiumum? Then the supply is obviously not at a maximum. If either of these is not at its maximum then the last thing we want is a budget surpluses.

I know that everyone praised Clinton for his surplus. This would have been reasonable if not especially good while we were on the gold standard. However, the surplus meant that the public were going into debt and that proved to be un-sustainable.

And all that borrowing? What are we "borrowing"? It has to be money we have already printed and spent. You cannot buy a US bond with anything but US currency. And the payment? A bond holder can only expect US currency in payment. And who has the monopoly for printing said currency? I rest my case.

I’m sorry that this is, at once, too long and too short. Ask questions and I will try to answer; I will expand on this theme here from time to time.

99% haven’t the foggiest idea how economy works.

Houston, we have a problem. We are “flying” in a financial machine that 99% haven’t the foggiest idea how it works. This really isn‘t  rocket science. (It’s Modern Monetary Theory (MMT) but not all that complicated.)

The government can create money. The government can impose taxes. Everyone wants the money to pay off the debt created by the taxes.

Once again: The government can create money at will. The government can never go broke. It can never become {I}nsolvent.

The money has value because of that tax debt you owe, not because it is backed by some commodity. Since there is no commodity backing the money, there is really nothing for the government to borrow. The government can drain excess money out of the financial system on a temporary basis by borrowing but taxes really serve the purpose much better.

Why drain money out of the system? To lower demand for goods and services. Note that demand pushes to increase jobs and capacity. Too much demand also pushes inflation. The government can never become {I}nsolvent but it can create {I}nflation.

How to increase demand? Increase the deficit. Does the deficit have to be supported with revenue from taxes and borrowing? No. The government can create money at will. Actually, until the money is created, there is nothing to tax or borrow. (That requires a careful thought experiment but it is true.)

Economy not feeling well? Unemployment too high? Increase the deficit (step on the gas pedal) and ease up on taxes (ease off on the brake). Supply nearing capacity? Ease off the gas a bit; just enough to keep some inflation is the system so that the incentive is there to increase capacity. Eventually a balance will be reached with 0% unemployment and 100% capacity.

More later.

Dr. Kelton will be interviewed on Virtually Speaking, Thursday, February 7. I would like the MMT group from SL to consider the things I have talked about and to use the comment section here to post questions for her.

(Actually, anyone that has MMT questions is welcome to post too.)

When the actual URL of the Internet broadcast is available, I will post it here.

Thank you.

(Question #1: Is the Treasury required to balance deficit expenditures with bond revenue? Or does it do that just to drain excess reserves out of the banks? Asked in the light that bond revenue does not actually pay for anything.)

MMT Seminar Note #1

Thank you for joining me here. These are notes that I used in the first seminar class of a series on Modern Monetary Theory (MMT).

This isn't intended to be a debate about the truthiness of MMT but just a tutorial of the basic idea. And you might wait until all the Legos are in place before debating how well it hangs together.

During a recent discussion I was asked why I accept MMT (Modern Monetary Theory) as a working theory. First we must understand that only with mathematical theories can we say, QED (quod erat demonstrandum - "which was to be demonstrated"). That is to say that only math theories can actually be proven. In economics, as in science, we can only say that a theory may be true because there is enough supporting evidence so that it would be perverse to with hold conditional acceptance. (Thank you Jay Gould.)

There are other theories and operating systems that have been, and are being, used to set financial policies and then to explain why the policies aren't working. If I look at the policies and the results of financial decisions going back to the 18th century and see what MMT would have predicted would be the result, I find a good bit of agreement with what actually did happen. Besides, MMT is simple and straight forward once you get the hang of it and that is appealing.

Understand that I am not an economist but and engineer/mathematician. MMT appeals to me because the theory presents a nice neat machine with all the wheels and gears fitting together and working.

 I want to start by discussing what MMT isn't. The easiest point of approach is to start with a "kitchen budget" and then seeing where a budget under MMT digresses. The term kitchen budget isn't meant to be at all derogatory. It is simply used as a term for an understandable form of budget that is used by almost all financial centers. The few exceptions will be noted.

A moment's thought and you will see that the term actually covers the vast majority of budgets in the world: Yours, your town's, your state's, General Motors ---- AND ----

Your federal government's IF -- AND ONLY IF -

it has currency based on the value of some commodity. Your kitchen budget depends on you acquiring some commodity that has a market value to exchange for goods and services that you might need or want. You write a check that can be exchanged for  that commodity. In this context, the currency issued by a government can be considered a commodity. It certainly has market value or you wouldn't want it. It has market value or others would not want it in exchange for goods and services. All of these entities are users of the government's currency. Even the government if it is basing currency value on some commodity.

Now the question becomes; how do you acquire the commodity you need?

Borrow it. Perform a service for which you collect a payment. Make something that you can sell. Steal it (Frowned on in polite circles.) Etc. (Be inventive.) :=))

Now look at the government that is operating in exactly the same way you are, i.e. has a currency based on a commodity. The commodity can be anything that has market value, radishes, lumber, gravel.

These would work but they do have problems in that their market value fluctuates over time - and radishes and lumber will rot. (Oddly, good quality construction gravel would work rather well.)

Basically, a commodity that is easy to store, easy to valuate, hopefully holds its value steady over time, would be good. Presumably gold and silver work fairly well; however, they are subject to price swings, and these price swings can be sharp if new sources are discovered.

Now, how does the government acquire the commodity it needs?

Essentially the same way that you do. Borrow it. Perform a service for which it collects a payment (taxes and fees). Make something that it can sell. (Rare but it can happen I guess.)

Steal it? Well, that used to be a reason to have a war.

Having a currency tied to a commodity will suppress any long term inflation. (It will, however, exacerbate short term economic swings leading to rather severe deflation and depressions.)

It is important to note: like a kitchen budget, government insolvency is possible and has happened not infrequently.

Let's consider running a sovereign  government on a currency that isn't tied to any commodity. This currency would be the sovereign's currency by decree. It would be established by a fiat. (not the car). Hence the term "fiat currency".

The term "sovereign" means the ultimate authority of a political entity - A country. In the United States the head of government and the head of state are the same. In most other countries this is not true.

Theories on this type of currency were developed by Keynes and Galbraith (Father and son). These have been expanded into MMT. (Finally got to it.)

So the sovereign, with its printing press, issues this currency. It says, "This is legal tender for debts  foreign and domestic."

(Yawn.)

That's nice.

It's just paper.

Oh! I forgot to tell you. This "paper" is the ONLY thing the sovereign will accept in payment of taxes. And the sovereign frowns on non-payment of taxes. It's the only thing that any business with the sovereign can be conducted in.

In Bellows Falls, Vermont, you might be able to buy candy, ice cream, or even a car with Loonies. But if you want a stamp, you better have dollars because that is the only thing the US Post Office will take. Did I mention that  the sovereign frowns on non-payment of taxes!!!

This give a certain incentive for acquiring this currency.  But, if taxes have to be paid, how do I get this currency?

Well, the sovereign (government) has to get it out somehow. (It has to run a (gasp) deficit.)

What is a deficit?

When you write a check you make an entry in your check register and subtract the check from the balance. If you write enough checks that entry can become negative, which the bank will dislike.

When the government does that THERE IS NO BANK TO GET UPSET!

The balance simply shows a negative amount and that is the deficit. In fact there is no entity what so ever that really is concerned about that.

How about contracting to build a road, setting up a military to protect the country?

Setting up a medical support plan?

Buying land for national parks?

And the people who build the roads, join the military, become doctors, etc. spend this currency on other things. Or, at least, they want to but no one is building these other things. There is an unfulfilled demand?

Trust me, someone will figure out a way to SUPPLY  the DEMAND. (Clever?)

Consider this question: Can the sovereign go broke? (Elegant term is "Insolvent".)

If you are tempted to answer "yes", tell me how; I'll wait.

Answer is, of course, no. It can't. Insolvency can never be a problem with a fiat currency.

If Insolvency isn't a problem, what is?

Ahhhh, the other "I" - Inflation.

Let's see, by printing too much money, the sovereign has increased demand to outrun supply. The solution is to "unprint" money. Anyone have an idea how to unprint money?

Raise taxes. That will drain the excess demand from the economy.

So taxes are seen to be important in MMT. In fact they are really more important than the deficit. Taxes proved the means to give currency value. Taxes can also provided a needed brake on demand. Taxes might also be used to discourage behavior that is detrimental, like, perhaps, limiting vehicle weight and, hence, fuel consumption. Taxes, at a high enough marginal tax rate, can also limit the accumulation of sufficient wealth to avoid having the authority of the sovereign challenged by individuals.

Note well: The one thing that taxes don't do, they don't pay for anything. Consider this well. The sovereign has a monopoly on printing money. Any money it needs -  it prints. In fact it has no way to save money in a vault somewhere. A totally useless concept.

As is borrowing money. If the sovereign can print all the currency it needs, why would it ever need to borrow money? Why would it ever consider selling bonds? Bonds are really a left over from the gold standard when the sovereign really had to borrow money to support some spending.

Ahh, well bonds might consider for setting up  mechanism to allow its people to save money, perhaps for a new car or a little better retirement. Or to allow foreign companies a mechanism to trade easily in the sovereign's currency for business purposes. Or as a drain on excess bank reserves created by deficit spending - if it wanted to control overnight lending rates.

These might be excellent reasons for selling bonds.

Interesting concept, sell securities for the state currency to be repaid in the state currency. A currency that the state has a monopoly for printing. Think about that. Is there anyway possible that the sovereign state cannot pay back the bond?

And, if the sovereign places these bonds on the open market for bid, it can actually control the exchange rate for its currency by limiting how many bonds it puts up for sale. I will point out that the present price for the bonds of countries that have complete sovereignty over their fiat currencies is such that the interest on those bonds is essentially zero. (Note well: this excludes every country using the Euro.)

That National Debt that there is much hand wringing about?

It's actually earning money for us. And it could be eliminated tomorrow. Raise Hell with the banking industry but is of no other real consequence to the health of the country. That National Debt is really the accumulated savings of all the currency that has been issued.

Now to consider the austerity, Austrian economy, craze. Presently the economy is sluggish to say the least. Unemployment is nowhere near zero. Inflation, if there is any, is being driven by oil prices over which we have essentially no control. What is needed is an increase in demand for goods and services. What two things would you not do at this point?

Two things you WOULD NOT DO!!!

I'll wait.

Well, I certainly would not give any thought to cutting the deficit. I would put a lot of money into repairing the infrastructure. Expand health care. Expand educational services. Give states grants to help them out. Remember, states work on a kitchen budget.

And It is not the time to step on the tax brake to drain money out of the economy. (Except for increasing the marginal tax rate to control attacks on government policies.)

More to come.

US Bonds do not finance anything.

Positing a hypothesis that the sale of bonds by a sovereign state, which has a monopoly on the creation of its own currency, does not serve to finance any government functions. It is assumed that all bonds are sold and redeemed only in the sovereign currency, a necessary condition if the sovereign is to retain the monopoly control of its money supply.

A moment's reflection might make it clear that for a bond to be purchased, it was necessary for the sovereign to have previously issued the money. The sale of the bond then becomes an exchange of one form of liability for another. This exchange does not result in any increase in the money holdings of the sovereign state. In a fiat currency system the state cannot accumulate wealth outside of capital goods it may acquire. Rather it is like a wizard that can control the weather.  The wizard doesn't have storms stored away and has no place to put them when they are no longer desired. In a similar manner, the state neither has nor doesn't have money.

The sovereign would easily issue the necessary currency for its own expenses. When an appropriation is authorized, there is no " bank account" whose balance must be checked. There is a simple entry made on the sovereign's spreadsheet that places the necessary funds in the reserve account of the appropriate bank.

There is no burden placed on the sovereign by the redemption of bonds. Such redemption's, as noted above, are only paid in the sovereign's currency and there is an unlimited supply of that.

Bonds do serve the state as a means of controlling interest rates, if it desires, but the intent to raise operating funds loses its meaning when a country leaves a commodity base currency, such as the Gold Standard.

In the United States there is an artificial constraint placed on the government's operation, the Debt limit. Congress is required, by the Constitution, to approve of the issuance of debt. Congress is also restrained from delegating its authority to another branch of government, in this case the Executive branch, without clear goals and limits being established. In 1917 Congress established the first debt limit to keep from being bothered by the Treasury during the build up to WWI. The limit was set at $11 B which was well above the debt at the time.

Over the years that limit has been kept high and generally out of the way and only recently has it been used for political posturing. As an interesting note, only one other country has a similar limit: Denmark. As a ratio of debt to limit, we would have the limit set to $50T to emulate Denmark.