[Steve_American]

Rugoz wrote,
"Right now the FED is raising interest rates. This will act as a brake on real and particularly nominal GDP growth (nominal = real + inflation). The same could be done by the government instead by implementing counter-cyclical fiscal policy (reducing the deficit in the process). Trump does the opposite.

Even if we ignore the presence of a central bank, the claim that reducing the deficit reduces real GDP growth is only generally true in the short-term, not in the long-term."

Over the weekend I saw a youtube video inwhich the economist said that after WWI and the increase in the national debt it caused; all during the 20s the Repubs. in control ran a surplus to try to pay down the debt. If this is true then I think I can see an example where you are wrong. You said reducing the deficit will not reduce the GDP (or was it growth of the GDP) in the long run. Yet, the surplus of 1929 (fall '28 to fall '29) was followed by a massive decrease in the GDP [the Great Depression]. This may be unfair because "reducing the deficit" is not as much "running a surplus".

Sorry I need to go, I may edit this.

[quetzalcoatl]

I agree it's not required to close the deficit to 0 (so long as the economy continues to grow). However, you don't want it to get too large either, which I think is the larger danger right now.

This has a superficial plausibility, but it's based on an incorrect assumption: that a currency-issuer is operationally equivalent to a currency-user. A typical firm (currency-user) must balance long term debt based on an expected schedule of capital improvements. A nation (currency-issuer) must balance net money growth from all sources to roughly match growth in the underlying real economy.

The key term here is "net." The money printing machine operates in reverse as well as forward gears. Money is constantly being created and destroyed via a number of different channels - and some of them the government has no control over (private money markets, for example). A major crash (2008) can extinguish trillions of dollars in a few days or even hours. The government can only forestall major deflation by spending dollars into creation, regardless of deficit considerations. This is the monetary equivalent of infusing massive amounts of blood into a major trauma victim - it's not pretty, but it's vital for survival.

In any event, government spending should always be greater than tax revenues, according to specific circumstances. The accumulated total (debt) is meaningless, and need not be an object of concern; in other words, it's not a problem that needs to be addressed.

[Amusing side note. The debt (not deficit) could quite easily be eliminated in five years or so. It would only require eliminating the obsolete requirement of issuing sovereign debt to "offset" deficit spending. There is no operational necessity for this offset; it's a kind of irrational holdover from the past...as if we were still practicing bloodletting therapy by leeches.]

[Rancid]

This has a superficial plausibility, but it's based on an incorrect assumption: that a currency-issuer is operationally equivalent to a currency-user. A typical firm (currency-user) must balance long term debt based on an expected schedule of capital improvements. A nation (currency-issuer) must balance net money growth from all sources to roughly match growth in the underlying real economy.

The key term here is "net." The money printing machine operates in reverse as well as forward gears. Money is constantly being created and destroyed via a number of different channels - and some of them the government has no control over (private money markets, for example). A major crash (2008) can extinguish trillions of dollars in a few days or even hours. The government can only forestall major deflation by spending dollars into creation, regardless of deficit considerations. This is the monetary equivalent of infusing massive amounts of blood into a major trauma victim - it's not pretty, but it's vital for survival.

In any event, government spending should always be greater than tax revenues, according to specific circumstances. The accumulated total (debt) is meaningless, and need not be an object of concern; in other words, it's not a problem that needs to be addressed.

[Amusing side note. The debt (not deficit) could quite easily be eliminated in five years or so. It would only require eliminating the obsolete requirement of issuing sovereign debt to "offset" deficit spending. There is no operational necessity for this offset; it's a kind of irrational holdover from the past...as if we were still practicing bloodletting therapy by leeches.]

I don't buy this at all. You make it sound like our government is an infallible God.

I do agree that the total debt isn't a big deal, so long as you can manage your deficit.

[Crantag]

I don't buy It either.

'Deficits don't matter.' is a line That has gotten fashionable in economics just as deficits have expanded out of control.

Spare me any red herrings like That I'm suggesting currency issuers are like currency users, or that I am An advocate of the gold standard. To the former, i am not suggesting it. To the latter, I believe the issue of a technically sound world monetary system has never been satisfactorily worked out.

Someone somewhere on here said all currencies are fiat and wrongly said no currencies will be pegged again.

It occured to me later, the eurozone consists of mariad countries and A single currency. As such, the nations in the zone are in effect like currency users, largely. A side note, If you will.

[Steve_American]

Crantage wrote, "I don't buy It either.

'Deficits don't matter.' is a line That has gotten fashionable in economics just as deficits have expanded out of control.

Spare me any red herrings like That I'm suggesting currency issuers are like currency users, or that I am An advocate of the gold standard. To the former, i am not suggesting it. To the latter, I believe the issue of a technically sound world monetary system has never been satisfactorily worked out.

Someone somewhere on here said all currencies are fiat and wrongly said no currencies will be pegged again."

- - - - - - - - - - - - - - - - - -
To start with the last part --- The euro is a fiat currency, right? It is just that all its users except the ECB are users and not its issuers. Only the ECB can issue the euro. This is a big deal for the European nations that use the euro. Many nations have pegged their currency to the dollar and some(?) to the euro. A dozen or so nations have a fiat currency; US, Canada, Australia, New Zealand, UK, some other European nations, etc. [But, don't trust me here, I'm a layman and could be wrong.]

I certainly never said you or anyone else were suggesting indirectly that the world should go back to the gold standard. [There may be a few who call for this directly and then I can say that about them.] People like you I say are guilty of 'gold standard thinking'.

OK, I agree that the world has not yet created an agreed upon system of international currencies, including the settlement of Trade Imbalances. I also agree that I have not seen MMTers directly address that point. The closest I've seen is where they say that the US can make its own stuff and not buy from the world any more. [Note: stuff not resources.] It does seem like MMTers are not worried about international trade. I think they are also not too worried about the problem of how to tax international corporations when they can use bookkeeping tricks to have their profit show up in a low tax nation and have losses in high tax nations. Here I think they should be very worried.

I have certainly never said that the US Gov. can have any level of deficit. I always said it needs to be reasonable, so as not to ignite inflation.
Maybe the better way to do it is to ---
1] Decide how much spending you need to have to do what needs to be done.
. . . a] With defense spending and other such things (courts, FBI, national parks, interest on the debt, etc.).
. . . b] On welfare (Soc. Sec., Medicare, other medical, unemployment ins., other welfare, etc.).
2] Decide how much tax revenue you want, i.e. how much is best for the economy as it is; where it is in the business cycle.
3] Then the deficit is whatever it is; so long as it is not more than the tax revenue.
. . . a] Some of the deficit is borrowed with Bond sales.
. . . b] The rest is just spent into the economy.

After a while we will be able to see how this is impacting international trade. We could let the experts decide what to do then. Except that I have zero faith in the economic experts using their best info and thinking rather than following orders from the 1% or even the 0.01%.

[Steve_American]

Rancid,
It is not at all clear to me what you mean there with the word 'manage'.

[Crantag]

I forgot to include. Writing in the 1980s, Paul Sweezy ('the founder of American Marxism') said that tge principal immediate menacing threat of excessive deficits was for debt service obligations to crowd out domestic spending. Note he was no deficit hawk, and favored deficit spending in many cases. He was relatively sympathetic to a Keynsian position on this. Some of the context was actually an effort to refute deficit fear mongering, it seemed to me. Yet his adverse-side projections could be of relevance to the present.

[Rancid]

Rancid,
It is not at all clear to me what you mean there with the word 'manage'.

Manage as in keep the deficit at 0, or at a percentage that is small enough which allows for GDP growth to out pace the growth of the overall debt.

[Steve_American]

Crantag wrote, "I forgot to include. Writing in the 1980s, Paul Sweezy ('the founder of American Marxism') said that tge principal immediate menacing threat of excessive deficits was for debt service obligations to crowd out domestic spending. Note he was no deficit hawk, and favored deficit spending in many cases. He was relatively sympathetic to a Keynsian position on this. Some of the context was actually an effort to refute deficit fear mongering, it seemed to me. Yet his adverse-side projections could be of relevance to the present."

- - - - - - - - - - - - - - -
MMT argues that deficit spending automatically gives the private sector the dollars that it needs to buy the Bonds. It also says that it has become normal for the money to be spent before the Bonds are paid for. So, the deficit spending always provides the dollars that the private sector needs to buy the Bonds that are sold. It *never* crowds out private capital or sucks up money that should be used for something else.

This is similar to the situation in private banking now, where a loan is deposited into an account at that bank. This deposit automatically gives that bank the deposits that it needs to meet its reserve requirements that night. When the recipient of the loan spends the money it is transferred to other banks in the system were it automatically provides deposits in the system as a whole which can be tapped in the overnight market by any bank that needs cash to meet its reserve requirement. That is the loan *always* provides the cash for the whole banking system to meet its reserve requirements.

Also, there is no limit on the money that banks can loan. Banks are not lending the money they get from depositors. Banks create new money when they make loans. This is why the Fed. Res. Bank can't control the money supply. I read recently that the Fed. has given up even trying to control the money supply and now just wants to control interest rates. But, I may be remembering wrong.

[Crantag]

'MMT says...' doesn't convince me of a single thing. I don't care about doctrine I care about evidence and logic; nor do I give a lot of credence to a fringe current.

That said, I went on a Fed tour in 2006. Someone asked an economist during a discussion session about the money supply. He responded, 'money supply? Do they still teach that?'

So yeah the Fed doesn't seem to retain delusions of their ability to control the money supply. That doesn't mean they don't effect the money supply. They just don't attempt to track it I supposeI Which actually makes sense.

[Steve_American]

Crantag,
In the other thread about Stagflation in the 70s, I said it was all my own ideas. But, based on MMT thinking.
Here I said it was the ideas of professional MMTers, which do you think most people will give more credence to?
Even if you don't.

[Crantag]

No I don't. Economists are notorious for one thing above all others, summed up like this. If you put 6 economists in A room, you will get at least 6 different opinions.

[Steve_American]

Crantag,
I'm sorry if I was not clear.
It seems to be obviously true that when the US Gov. deficit spends and then sells a bond to cover the spending,
the Gov. 1st adds cash into the economy and then
pulls the cash out when it sells the bond.

This is the same as when a bank creates money by making a loan. 1st it adds to the total deposits of all banks in the US, then all the banks in total need that much more reserves to meet the Fed. requirements.
Then months later most of the money is destroyed as the loan is laid off. Only the interest the bank earned on that loan remains in the economy.

In the US deficit spending case, the money will be destroyed if the Gov. ever retires the bond without rolling it over by selling another bond.

This much seems obviously true to me. What may not be true is the claim that there is little if any down side to deficit spending.

It is obviously true that when the Gov. runs a surplus it is by definition retiring bonds and not selling new ones. Obviously this is also destroying money. So, running a surplus destroys dollars, it doesn't 'save' them; like it did when the nation was on the gold standard.

If I'm right and all you agree that all this is true then, what you and I disagree on is what damage too much deficit spending will do to the economy. I'll grant you that this is not proven one way or the other. Can we agree on that?

[quetzalcoatl]

Manage as in keep the deficit at 0, or at a percentage that is small enough which allows for GDP growth to out pace the growth of the overall debt.

Here is the consequence of a series of declining deficits under the Obama administration (please note I said declining deficit, not declining debt):



link

"This year, 2018, will be the 11th year after the 2007 business cycle peak that preceded what is generally called the “Great Recession“. This year American national income per capita will be about 7.5% above its 2007 level. If we are lucky we will hit 10% above 2007 in 2020. That is growth of 0.4% per year—compared to the yardstick of 2.0% per year that we were reasonably expecting back in 2007.

1940 was the 11th year after the 1929 business cycle peak that preceded the Great Depression. Output per capita then relative to 1929 was 10.5% higher. That is growth of 0.95% per year. And output per capita in the 12th year, 1941, was 29% higher than at the 1929 peak—growth of 2.5% per year.

Up until now the disastrous consequences of the financial crisis that started the Great Recession have been first far less dire and then less dire than the disastrous consequences of the financial crisis that started the Great Depression. But this is the year that changes. Now and looking forward, the Great Recession is going to cast a larger shadow on the American economy them the Great Depression did." [my bolding]

This is devastating. It's why the US has created a permanent and growing underclass.

This is, beyond a shadow of a doubt, caused by insufficient fiscal stimulation during the Obama years. BO's economic advisers substituted QE for fiscal stimulus, which exacerbated income inequality. Insufficient fiscal stimulation = annual deficits WAY too low.

Sadly, Trump's massive tax cut could have been a massive boost to the economy, had he centered it on the middle and lower class. As it is, large companies and rich will just sit on the cash. Trump, in other words, is doing the same song and dance as Obama, but through the tax channel instead of the monetary channel.

[Rancid]

Here is the consequence of a series of declining deficits under the Obama administration (please note I said declining deficit, not declining debt):



link

"This year, 2018, will be the 11th year after the 2007 business cycle peak that preceded what is generally called the “Great Recession“. This year American national income per capita will be about 7.5% above its 2007 level. If we are lucky we will hit 10% above 2007 in 2020. That is growth of 0.4% per year—compared to the yardstick of 2.0% per year that we were reasonably expecting back in 2007.

1940 was the 11th year after the 1929 business cycle peak that preceded the Great Depression. Output per capita then relative to 1929 was 10.5% higher. That is growth of 0.95% per year. And output per capita in the 12th year, 1941, was 29% higher than at the 1929 peak—growth of 2.5% per year.

Up until now the disastrous consequences of the financial crisis that started the Great Recession have been first far less dire and then less dire than the disastrous consequences of the financial crisis that started the Great Depression. But this is the year that changes. Now and looking forward, the Great Recession is going to cast a larger shadow on the American economy them the Great Depression did." [my bolding]

This is devastating. It's why the US has created a permanent and growing underclass.

This is, beyond a shadow of a doubt, caused by insufficient fiscal stimulation during the Obama years. BO's economic advisers substituted QE for fiscal stimulus, which exacerbated income inequality. Insufficient fiscal stimulation = annual deficits WAY too low.

Sadly, Trump's massive tax cut could have been a massive boost to the economy, had he centered it on the middle and lower class. As it is, large companies and rich will just sit on the cash. Trump, in other words, is doing the same song and dance as Obama, but through the tax channel instead of the monetary channel.

Pretty sure the great recession was far more due to irresponsible lending by banks, over leveraged businesses, and over leveraged people.

[Steve_American]

Rancid wrote: "Pretty sure the great recession was far more due to irresponsible lending by banks, over leveraged businesses, and over leveraged people."

- - - - - - - - - -
Rancid, I don't think his post was about the *causes* of the Great Recession [or the Depression], it was about how well the recovery went. It went less than half as good as the Depression's recovery. He claimed this was because of the too small deficits. You can see the slope of the 2 lines are not the same with the Recession one being less steep. BTW the down turn in the green line about 8 years on was caused by FDR easing up on the deficits and other parts of the program. This caused the economy to slump again.

In fact my opinion is that FDR's deficits were not big enough. He needed to have done more. I say this because the massive spending for WWII did end the Depression. Pretty much everyone says that last statement.

[quetzalcoatl]

Pretty sure the great recession was far more due to irresponsible lending by banks, over leveraged businesses, and over leveraged people.

Of course, this is correct. Legislation intended to control risky bank behavior has gradually been weakened, as people became overconfident that another Great Depression couldn't happen.

However, my comment was concerning the government's response to the crash, and the long, weak "recovery" it caused. This also ties in with the argument whether deficit levels are legitimate policy goals.

[Rancid]

However, my comment was concerning the government's response to the crash, and the long, weak "recovery" it caused. This also ties in with the argument whether deficit levels are legitimate policy goals.

Massive bailouts and that American Recovery Act was slow and weak?

[Steve_American]

quetzalcoatl wrote:
However, my comment was concerning the government's response to the crash, and the long, weak "recovery" it caused. This also ties in with the argument whether deficit levels are legitimate policy goals.


Rancid wrote: Massive bailouts and that American Recovery Act was slow and weak?

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Yes Rancid, many economists at the time the Recovery Act was being written wanted it to be 3 times larger.
The massive bail outs were mostly repaid, right?
And, "massive" does not really say how large they were. By 1 account they totally $27T. Yes, more than 50% more than the entire National debt at the time.

[quetzalcoatl]

Massive bailouts and that American Recovery Act was slow and weak?

These efforts were misdirected towards people at the top - socialism for the rich, rugged individualism for the poor. Stimulus is totally pointless unless it puts a lot of ordinary people back to work at a good wage. The results, as shown in the graph, speak for themselves. Slow and weak. It didn't have to be, and that's the point.