[Ash Faulkner]

It isn't simply a question of shifting numbers fom one column to another.
I require goods back in exchange.

Shift all the numbers you like, but if I don't get any goods back, I'll never lend to you again.

Bond traders are not and do not expect to be paid in goods.

The assumption you make here is that increased debts are the result of short term monetary policy by the fed. This is of course not true as many institutions and people besides the FED buy debt. China for example is sitting on a mountain of US government debt. This means that the US will have to levy taxes in the future to pay off these debts and interest to the Chinese. So yeah, the US taxpayers is burdened by excess government debt.

Not at all. The bonds that belong to the Chinese government are in the Federal Reserve. If China wants to cash in those bonds, they are shifted from the Chinese securities account at the Fed, and the equivalent dollars are placed in the Chinese current account. All this takes place in the United States - it does not shift abroad. And when China has those dollars, what will it do with them? It can sit on them, but if that's what it's going to do, it might as well keep the bonds. Or it can spend the money, which unless it is spent all at once (and if it did, perhaps as a deliberate attempt at inflation, there are ways we could prevent this) would not be a bad thing. The Chinese government do not have the capacity to create dollars - only the Federal Reserve has that. The US does not 'borrow' money from China.

Second, taxes and government debts don't decrease the money supply and do not prevent inflation. As the goal of government debts is of course not to take money out of circulation, but to spend money. Thus, taxes take money out of circulation, but immediatly bring it back into circuluation when the government spends the money. And as the US government spends everything and is not creating huge fiscal surplusses, the effect on the money supply is neutral.

Indeed, but Paradigm simply means in an operational sense, taxes destroy money - the government doesn't get anything when we pay tax. Instead the only real effect is on the taxpayer, whose spending capacity has fallen by the amount of taxation. This creates room for government spending without inflation.

By the way, it doesn't matter what the 'goal' of certain actions is. Yes, when politicians levy taxes and issue bonds, they think they are funding themselves. But the actual operational effects of such actions is quite different to what it is thought to be. And we can see how this misunderstanding can lead to confused policy; the mysterious ineffectiveness of quantitative easing is a very pertinent example.

Im sorry, but there is no free lunch. We can't have the government borrow money to buy everyone a car, shuffle some savings and checkings and nobody needs to pay the price for the cars.

Well if the people making the cars are prepared to accept dollars in exchange - as the Chinese are - then yes we can. But the point is the real cost of the car is the labour, capital, resources and time that went into its production and sale. The obsessive focus on money leads us to miss the real price of such goods - and the real potential that we often let go to waste for fear of 'insolvency'.

[Baff]

Bond traders are not and do not expect to be paid in goods.'.

Incorrect.

Bond holders expect to be paid in promissaries notes that they may exchange against goods to a specified monetary value.
The numeric value of the currency they get paid in is not what is valuable to them, it is the goods they may exchange for it.

This is not rocket science.
The money being traded directly represents redeemable goods and services.
The instant that it does not, is the very same instant that people stop using it.


The North Korean government has the ability to create dollars. If the Chinese government wished to, it most certainly could also.
But once again, the money China exchanges for goverment bonds, is not just "money" an electronic signal, it is money that is used to trade goods and services.
It has a redeemable value that goes beyond a mere digital signal between two computers.

The US does indeed borrow money from China. Lots and lots of it.
This money is routinely exchanged for goods and services produced in China.

So it's not so much the money that is being borrowed as the goods and services themselves, typically individually valued and quantified by most people around the world as a numerical monetary value.
Currency is a standardised measurement of value that facilitates the trade and not to be considered to be the actual trade in itself.

And the government does get things when we pay tax. It gets monetary value that it may exchange in return for goods and services.
At the most basic level, it's employee's get fed, clothed and housed. Real food, real clothes, real houses.

Well if the people making the cars are prepared to accept dollars in exchange - as the Chinese are - then yes we can.

The important part to recognise here is that the chinese are not willing to accept valueless money.
Or even money that you intend to devalue.
That's why they have this annoying habit of pegging their currency to yours, so that no matter how hard you try and print away your debts to them, it doesn't work.

No one is willing to exchange goods with you in return for nothing.
There is no "if" scenario to be discussed. They don't. No one does.


If you undermine confidence in your currency by devaluing it to rip off your creditors or by dropping hints that you won't honour your agreed promises, they will simply stop using it and stop lending to you.
There is no Smart Alec way around this.

[TropicalK]

Paradigm:

Taxes are always simply a matter of taking the right amount of money out of circulation to prevent inflation, and the proper level of taxation for accomplishing that is independent of however much debt we have.

Treasury bonds pay real interest. Either the bond holder allows the interest to build up exponentially or he redeems it for real goods. Either way, bondholders reserve the ability to exchange their bonds for the promise for real goods. Those goods being provided by at-that-time taxpayers. There is no way around that. The only way to avoid this is to annihilate the purchasing power of the dollar or raise taxes.

The more debt we have, the more interest is paid, which is the more currency that must be destroyed (through taxation) to maintain the same level of dollars in circulation. Even without that direct causation, the value of the dollar is regulated by perceptions in the marketplace, and the perceptions deteriorate with debt loads, see many other countries.

Large amounts of debt have the risk of large holders of that debt selling it on the open market to convert it into real assets. In effect, escaping from the ponzi scheme. The mere knowledge that another player will do that creates the game-theory incentive to do the same behavior and sell first. This results in either interest rates exploding and massive taxes to cover that or massive inflation and just printing. This is oddly enough, the best case scenario as opposed to every US citizen living under the boot of Chinese debt master slavery for all eternity.

When looking through the glasses of a game theorist, the US by continuing the fiat scam is behaving perfectly rationally. The holders of fiat currency and debt are the irrational ones.

[Kman]

The fantastical delusions of MMT'ers make me lol.

[Ash Faulkner]

The fantastical delusions of MMT'ers make me lol.

What do you consider to be its flaws?

[Kman]

What do you consider to be its flaws?

Your whole something for nothing attitude. Just get the government to print money and everything will be fine...

[Soixante-Retard]

Kman, well that's rehashing the mistake that greater money = greater wealth. As Adam Smith observed a nation's wealth does not lie in its monetary supply, but how many goods and services can be consumed.

It would be too ridiculous to go about seriously to prove that wealth does not consist in money, or in gold and silver; but in what money purchases, and is valuable only for purchasing.

[Paradigm]

The assumption you make here is that increased debts are the result of short term monetary policy by the fed. This is of course not true as many institutions and people besides the FED buy debt. China for example is sitting on a mountain of US government debt. This means that the US will have to levy taxes in the future to pay off these debts and interest to the Chinese. So yeah, the US taxpayers is burdened by excess government debt.

I make no such assumption, and it is irrelevant to my point. You still fail to get that federal taxes don't actually pay for anything other currency stability.

Second, taxes and government debts don't decrease the money supply and do not prevent inflation. As the goal of government debts is of course not to take money out of circulation, but to spend money. Thus, taxes take money out of circulation, but immediatly bring it back into circuluation when the government spends the money. And as the US government spends everything and is not creating huge fiscal surplusses, the effect on the money supply is neutral.

I didn't say that treasury bonds decrease the money supply, but taxes most certainly do. If you pay your taxes in physical currency, the IRS will literally shred the money. When you pay by check, they essentially do the same thing, only digitally. Spending = money in, Taxes = money out. Even if they kept all the physical currency they take in, the effect would be the same.

Treasury bonds pay real interest. Either the bond holder allows the interest to build up exponentially or he redeems it for real goods. Either way, bondholders reserve the ability to exchange their bonds for the promise for real goods. Those goods being provided by at-that-time taxpayers. There is no way around that. The only way to avoid this is to annihilate the purchasing power of the dollar or raise taxes.

So you're talking about the flow of goods from the economy to bondholders. This seems to be a distributive issue, and no more of one than the fact that surplus value is taken from workers and given to capitalists. Real output has not changed, so if it's really an issue of who gets what, then the solution is not about simply raising taxes, but making the tax system more fair.

The more debt we have, the more interest is paid, which is the more currency that must be destroyed (through taxation) to maintain the same level of dollars in circulation. Even without that direct causation, the value of the dollar is regulated by perceptions in the marketplace, and the perceptions deteriorate with debt loads, see many other countries.

Except that the interest on bonds mirrors the interest paid by borrowers at banks. This is no accident, since bond sales are what the Fed uses to meet its interest rate target.

Large amounts of debt have the risk of large holders of that debt selling it on the open market to convert it into real assets. In effect, escaping from the ponzi scheme. The mere knowledge that another player will do that creates the game-theory incentive to do the same behavior and sell first. This results in either interest rates exploding and massive taxes to cover that or massive inflation and just printing. This is oddly enough, the best case scenario as opposed to every US citizen living under the boot of Chinese debt master slavery for all eternity.

A ponzi scheme assumes an inability to pay out all the participants. The problem with this is that checks from the federal government never bounce.

[TropicalK]

Except that the interest on bonds mirrors the interest paid by borrowers at banks. This is no accident, since bond sales are what the Fed uses to meet its interest rate target.

This has nothing to do with banks. The government is writing checks to individual bondholders. It is taking hundreds of billions yearly from taxpayers to pay for this either directly or indirectly.

So you're talking about the flow of goods from the economy to bondholders. This seems to be a distributive issue, and no more of one than the fact that surplus value is taken from workers and given to capitalists. Real output has not changed, so if it's really an issue of who gets what, then the solution is not about simply raising taxes, but making the tax system more fair.

We are not talking about total real output in this thread. We are talking directly about distribution across time. Will a segment of the population (children) have a lower standard of living via higher taxation to subsidize current spending and the Chinese? To make the tax system more fair, we would have to tax those who got the subsidy, which is the current generation, which would mean a balanced budget.

A ponzi scheme assumes an inability to pay out all the participants. The problem with this is that checks from the federal government never bounce.

Yet. Ponzis never fail until they actually do. Normalcy bias. You seem to be under the assumption that in some time in the future, the government will just annihilate bondholders through inflation and everything will be hunkydory. If that's the case, why not just do it now?

[Paradigm]

This has nothing to do with banks. The government is writing checks to individual bondholders. It is taking hundreds of billions yearly from taxpayers to pay for this either directly or indirectly.

It has everything to do with banks. Banks are the largest buyers of bonds. They use their excess reserves to buy bonds in order to increase their profit margin. That is how the Fed reaches its interest rate target. Without this tool, interest rates would fall to their natural rate of zero.

We are not talking about total real output in this thread. We are talking directly about distribution across time. Will a segment of the population (children) have a lower standard of living via higher taxation to subsidize current spending and the Chinese? To make the tax system more fair, we would have to tax those who got the subsidy, which is the current generation, which would mean a balanced budget.

Precisely because real output will not be affected, children will not have a lower standard of living. Nor does this mean paying higher taxes in the future, unless taxes are too low now(which they are). There is a proper tax rate for regulating the value of currency, and it is independent of the level of debt we have now. Such a tax rate will naturally reduce debt levels over time without having to tinker with it in the way you describe. And balancing the budget would be about the worst thing you could do for our debt levels, as it eat away at savings, and lead to deflation.

Yet. Ponzis never fail until they actually do. Normalcy bias. You seem to be under the assumption that in some time in the future, the government will just annihilate bondholders through inflation and everything will be hunkydory. If that's the case, why not just do it now?

How can I answer a question which makes such a ridiculously false assumption?

[TropicalK]

It has everything to do with banks. Banks are the largest buyers of bonds. They use their excess reserves to buy bonds in order to increase their profit margin. That is how the Fed reaches its interest rate target. Without this tool, interest rates would fall to their natural rate of zero.

When the Fed or banks buy bonds, it DECREASES the interest rate. Banks are typically only a middleman in this regard. The Fed is entering the market to distort it as they wish regardless of who is on the opposite side of their trades. Rates would increase if the Fed stopped buying bonds. The natural rate of interest is not zero due to inflation, productivity, credit risk, and the opportunity cost of money. Please provide any evidence to support your "natural rate of zero."

Banks hold almost no bonds. When they do, it is usually to front-run the Fed. It makes no sense for a bank to hold government paper because it would make more sense to retire their own debt at higher interest rates.

http://www.ritholtz.com/blog/2011/08/who-is-buying-u-s-treasuries/

Precisely because real output will not be affected, children will not have a lower standard of living. Nor does this mean paying higher taxes in the future, unless taxes are too low now(which they are). There is a proper tax rate for regulating the value of currency, and it is independent of the level of debt we have now. Such a tax rate will naturally reduce debt levels over time without having to tinker with it in the way you describe. And balancing the budget would be about the worst thing you could do for our debt levels, as it eat away at savings, and lead to deflation.

Output is an irrelevant fact if you do not receive your own output as a nation. I also do not take solace in politicians and the well connected receiving the bulk of the output transfers. Output via GDP is itself a contorted to meaningless statistic for Keynesian central planers since it is a measure of cost and not consumer surplus. Cost is easy to increase.

Please explain to me how running deficits every year will REDUCE debt levels over time. This is mathematically impossible.

There is a proper tax rate for regulating the value of currency, and it is independent of the level of debt we have now.

You have stated this a few times already, but have provided no logic or evidence to support it. Please do. I've already provided two reasons against: perceptions, and interest being spent on real assets.

How can I answer a question which makes such a ridiculously false assumption?

Would you have said that Madoff was a great investment that never lost money, or that house prices never go down? Shit happens. Russia defaulted while on a fiat currency. I take no solace that the US government has the option of printing trillion dollar bills.

[Ash Faulkner]

Your whole something for nothing attitude. Just get the government to print money and everything will be fine...

Ah, I see. As I suspected, you don't have a clue what you're talking about. How depressingly predictable.

[wat0n]

Of course it can, assuming the government wants to follow some sort of an inflation target or at least wants inflation to be below a given level.

[Nunt]

Not at all. The bonds that belong to the Chinese government are in the Federal Reserve. If China wants to cash in those bonds, they are shifted from the Chinese securities account at the Fed, and the equivalent dollars are placed in the Chinese current account. All this takes place in the United States - it does not shift abroad. And when China has those dollars, what will it do with them? It can sit on them, but if that's what it's going to do, it might as well keep the bonds. Or it can spend the money, which unless it is spent all at once (and if it did, perhaps as a deliberate attempt at inflation, there are ways we could prevent this) would not be a bad thing.

It would be a bad thing. Because the US now ows China a lot of dollars. These dollars can be exchanged for American goods. This means that in the future, American producers will be making goods for the Chinese. Future generations of Americans will be producing goods for the Chinese instead of for themselves, so yeah they are burdened by the increase in debt and yeah there is no free lunch. You cannot borrow money to buy real goods today and expect than you don't have to pay a price in real goods tomorrow. Government debt is not just about shuffeling numbers. It affects real variables in the economy. Real resources are being bought and spent when those numbers are being shuffled.

[Baff]

I make no such assumption, and it is irrelevant to my point. You still fail to get that federal taxes don't actually pay for anything other currency stability.

I would suggest to you that federal employee's everywhere beg to differ.

So you're talking about the flow of goods from the economy to bondholders.

That's to and from the economy. It's not a one way flow.

The problem with this is that checks from the federal government never bounce

Never yet in your country, you mean. The recent drop in credit rating is a direct response to the loss of trust in this situation continuing.
They certainly can and do bounce, or if you choose to devalue ad infinitum, they would simply become worth less than the paper they are written on.