So this guy reckons we shouldn't worry about the debt... - Politics Forum.org | PoFo

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#13743877
I've posted this blog up before and didn't get much of a response, though Paradigm offered some interesting thoughts if I remember rightly. I want to see what the more economically literate members make of this. It has a certain logic to it, yet it seems so obviously counterintuitive.

http://bilbo.economicoutlook.net/blog/?p=15028

Particularly for the attention of Nets, he talks about DSGEs here: http://bilbo.economicoutlook.net/blog/?p=15038
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By Paradigm
#13744207
I was thinking of making a thread on Modern Monetary Theory(MMT), which is what led to me to abandon the Stephen Zarlenga school of thought about debt-free money. The reason MMT is so counterintuitive is because the way most people still think about money is based on the gold standard. Under a gold standard, you really were limited in the amount of borrowing or printing you could do in a way that you aren't under a fiat system. So MMT can really be thought of as a theory that explains the difference between gold and fiat money.

Basically, when people think of money, they tend to assume that the government has to get money from the people or from other countries, through taxing or borrowing respectively. The fact is, however, that they have it in reverse. The government issues the money and taxes take the money out of circulation. Thus, taxes are not a revenue-generating device. They are a tool for managing demand, so as to control inflation(among other things, such as wealth distribution). As for "borrowing," a lot of people have this false picture of China as our banker, issuing us loans at interest. This is simply not true. Rather, China's trade surplus with us means that they sell us goods which we buy in US dollars, and rather than keep the dollars, they exchange them for US Treasury Bonds. So, how do we pay off the debt? The same way we always do, by shifting the numbers in China's account from the debit column to the credit column.

Those who wish to compare the US to Greece fail to notice that Greece does not issue its own currency, and so is more comparable to a US state. It is possible for Texas to default on its debts, but the US government can only do so through political failure, as seems to be the trend right now. There is no reason why the sovereign issuer of currency should ever have to default.

Now, we don't necessarily have to borrow money. We can "print" the money, as it is so misleadingly called. That simply means that we issue the money without creating a debt obligation for ourselves, and just as with money, take money back out of circulation through taxation. This is similar to what reformers like Steve Zarlenga and Ellen Brown advocate, and on balance I prefer it to the "borrowing" strategy, though there is probably a case to be made that the sale of treasuries helps prop up the US dollar against other currencies.

MMT is based on the insight that money is endogenous. Banks are not reserve-constrained, as is commonly believed. Rather, they issue the loan first, creating deposits in the process, and then seek the reserves later. Thus, the money multiplier simply does not apply. The money multiplier is yet another example of something that was true under a gold standard, but is not true today. This is the main thing that led me to reject Zarlenga's views. It turns out that banks will still have the ability to create as much money as the market demands regardless of whether the reserve ratio is 100% or 0%. I am still uncertain as to whether the reserve ratio would still have some effect on interest rates, and hope to someday talk to an MMT theorist about it.

So anyway, I would agree with Bill Mitchell that our national debt is certainly not the problem that it's made out to be, but I still think we should explore non-debt forms of financing as an alternative. I had heard about high debt-to-GDP as a destabilizing economic force, but then I realized that that's mainly true for private debt. The one worry about a high public debt is the signal it would send to investors. If selling treasuries props up the dollar, but high deficits cause investors to flee from treasuries, then that's a bit of a counterproductive strategy. So perhaps we ought to mix it up a bit more, and not issue quite so many treasuries.
By Kman
#13744241
Its typical Keynesian stupidity, this moron claims its possible to print money and not cause inflation, any reasonably intelligent person will be able to figure out that pumping money into a system will cause prices to rise.

Its like he is claiming that blowing up a ballon with air doesnt make it bigger.
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By ozone
#13744344
This classified information I give to you free of charge..America yes was once in debt..But not anymore..They have a 400 billion surplus at present..What made Big Brother publish this kind of crap? TO FEIGN WEAKNESS - Sun Tzu, The Art of War..
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By ozone
#13744346
Any corresponding rise in productivity measured by GDP and GNP gives rise to a corresponding rise in printing of money..Kman, this time I agree with you on this although we contradict each other on other issues..
By wat0n
#13744492
Roughly the right conclusion, even though I don't agree with the last part (when he posts the graphs, what's happening can perfectly be explained using mainstream economic theory).
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By ozone
#13744582
If one does proper accounting on USA's alleged "ballooning debt", here's one classified info I am sharing with you..The auditors make an audit. If they compute that on the next year, America would make this amount of surplus, the make appropriate adjustments. Then they borrow what they will appropriate in taxes the next year..Then they cover the appropriation by paying what she earns the next year thereby still incurring the past debt but in reduced amount..Just like a person who does not care if his company is in debt as long as she can buy what she wants and spend what she wants..America is the strongest superpower in the world. That is why a lot of communists like Barack Obama wants to subvert her government and make it bleed..
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By valormae
#13750545
Its typical Keynesian stupidity, this moron claims its possible to print money and not cause inflation, any reasonably intelligent person will be able to figure out that pumping money into a system will cause prices to rise.


Inflation occurs when spending > economy's capacity to produce. At an unemployment rate of 9-10%, its highly unlikely that inflation will occur. In fact, "printing money" could even lead to an increased output of productivity from these idle resources.

You should at least lay off the namecalling before you simplify such a misunderstood concept.
By Kman
#13750551
valormae wrote:Inflation occurs when spending > economy's capacity to produce.


It also happens when you artificially increase that spending when you increase the amount of money in circulation.

valormae wrote:At an unemployment rate of 9-10%, its highly unlikely that inflation will occur.


That makes no sense, increased unemployment means less people are producing which means that production is falling which means there are fewer goods going around in the economy for the money supply that exists. In reality high unemployment makes it far more likely for prices of various goods to go up, not down.

valormae wrote:In fact, "printing money" could even lead to an increased output of productivity from these idle resources.


Printing money doesnt lead to increased output, it reduces it since inflation/money printing punishes savers and it is savers that provide resources for capital goods and it is capital goods that provide employment and growth in an economy.
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By valormae
#13751114
That makes no sense, increased unemployment means less people are producing which means that production is falling which means there are fewer goods going around in the economy for the money supply that exists. In reality high unemployment makes it far more likely for prices of various goods to go up, not down.


Again, you're being too simplistic. The money "printed" doesn't just stand by idle.

higher unemployment = a greater number of idle resources who are looking for work (people) who can be hired for production to keep up with/outpace an increase in nominal demand. Also note that these new workers will be paying taxes, so the public sector can still effectively control aggregate demand to avoid an inflationary scenario.

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