- 19 May 2018 04:18
#14916059
In war time nations routinely deficit spent, borrowing as necessary.
During the 20th century and before in wartime nations deficit spent to buy what was necessary for the war. For most of the century the world was on the gold standard. However, I'm looking at it from an MMT POV.
OK, nations needed to win so they deficit spent. But then, it seemed like a good idea to run a surplus to pay back those bonds. i.e., get the national debt back in line with the gold reserves the nation held.
During the war the economy was not making consumer goods and yet the people were being paid well. The result was the people bought war bonds. The people saw these bonds as just another form of savings, like money in a savings account at a bank.
After the was was won, the Gov. thought it needed to [as I said] pay off those bonds because it lacked the gold to cover them. For, example, in the US the Repubs controlled the Government. They raised taxes or cut spending and ran a surplus all through the 20s from 1921 to '29. Then there was a recession that turned into the Great Depression. Also during the 20s the stock market took off, fueled by margin credit. Perhaps the mass of the people also increased their debt load. MMT says that they needed to because the Gov. surplus was sucking dollars out of the Public Sector. The comp. and people of the sector did not want to dip into their savings [war bonds] but they had to pay the taxes that were sucking dollars out of the economy.
[In a way we might think of this as a Great Con. In the war the Gov. deficit spends to get the people to work more to win the war. To do this it lets the people earn more dollars which they can't spend. However, after the war the Gov. turns around and cuts spending &/or raises taxes to take those dollars back away from the people. The reason is the gold standard requires this. But, isn't it a cheating thing for a person to bribe another to do something and then later to just take the bribe money back? So, why is it OK for the Gov. to do this?]
Getting back to my story --- So, during the 20s the Gov. is running a surplus, sucking dollars out of the economy, but the people want to keep the dollars they were paid (in good faith?) during the war. The result is the people try to keep their savings intact. They cut spending or borrow instead of dipping into their savings. As long as the banks keep extending credit the banks are increasing the money supply and this increase hides the damage the surplus is doing to the economy. Eventually, the shit hits the fan. The stock market has a bad day (maybe because the people have cut their spending so much that corp. profits suffer), this forces margin calls, this causes the banks to stop extending credit, this means the people can't finance the part of the tax payments that are paying off the war bonds, i.e. the surplus. This means those taxes start taking actual dollars out of the economy without spending putting them back, and suddenly the Great Depression starts. MMT asserts that the surpluses were the ultimate cause the Great Depression.
My point is --- MMT says that the problem is not so much the deficit spending that causes inflation, the problem is the idea that at some point it is *necessary* to stop borrowing and start repaying some of those bonds (by not just rolling them over). Now that most nations are using fiat currency, it is no longer necessary to do this. Why not just let the debt* keep rising without limit? As long as inflation is not a problem, what is the problem? And if inflation becomes a problem this is the signal that the Gov. needs to increase taxes. It means that raising taxes will not result in a recession** if it is done carefully. I suppose this means that some board of MMT economic experts [at the Fed. Res. Bank?] need to be given the power to impose a surtax added to every person's and every company's tax bill. Only un-elected experts have the freedom to fine tune this without being swayed by political pressures. This is, of course, unconstitutional, but it is sort of like the power to raise interest rates that the Fed. was given.
MMT asserts that the deficit and national debt are the only way that all the people can save at the same time. Without the Gov. creating dollars this way, all savings must come from the savings of someone else [or by someone borrowing from a bank, which creates a contract with a negative impact on the money supply that exactly offsets the positive effect of the creation of those dollars by the loan in the 1st place. That is someone went into debt to create the dollars so someone else can save them.]
The alternative is to cause a recession or depression someday because the Gov. again decides to run a surplus for several years in an effort to reduce the national debt. This and the one just below are really the only alternatives other than to default on on some of the debt [which is a truly terrible, horrible, catastrophic idea]. The only other alternative is the halfway measure of reducing the deficit to some small amount forever, and letting economic growth reduce the percentage of debt to GDP. This is just stopping the practice of letting all the people save more at the same time; and replacing it with making the economy a zero sum game again. Why is this better?
.* . Alternately, instead of borrowing to pay bills the Gov. could, for example, just spend newly created dollars. Maybe 1 such new dollar for every 2 borrowed. Again this ratio could/should be fine tuned by the board of MMT economic experts.
** . Again MMT asserts that this can be proven deductively if the right assumptions are made. Because this has never been tried, the experiment has not been done, so this is not a sure thing.
During the 20th century and before in wartime nations deficit spent to buy what was necessary for the war. For most of the century the world was on the gold standard. However, I'm looking at it from an MMT POV.
OK, nations needed to win so they deficit spent. But then, it seemed like a good idea to run a surplus to pay back those bonds. i.e., get the national debt back in line with the gold reserves the nation held.
During the war the economy was not making consumer goods and yet the people were being paid well. The result was the people bought war bonds. The people saw these bonds as just another form of savings, like money in a savings account at a bank.
After the was was won, the Gov. thought it needed to [as I said] pay off those bonds because it lacked the gold to cover them. For, example, in the US the Repubs controlled the Government. They raised taxes or cut spending and ran a surplus all through the 20s from 1921 to '29. Then there was a recession that turned into the Great Depression. Also during the 20s the stock market took off, fueled by margin credit. Perhaps the mass of the people also increased their debt load. MMT says that they needed to because the Gov. surplus was sucking dollars out of the Public Sector. The comp. and people of the sector did not want to dip into their savings [war bonds] but they had to pay the taxes that were sucking dollars out of the economy.
[In a way we might think of this as a Great Con. In the war the Gov. deficit spends to get the people to work more to win the war. To do this it lets the people earn more dollars which they can't spend. However, after the war the Gov. turns around and cuts spending &/or raises taxes to take those dollars back away from the people. The reason is the gold standard requires this. But, isn't it a cheating thing for a person to bribe another to do something and then later to just take the bribe money back? So, why is it OK for the Gov. to do this?]
Getting back to my story --- So, during the 20s the Gov. is running a surplus, sucking dollars out of the economy, but the people want to keep the dollars they were paid (in good faith?) during the war. The result is the people try to keep their savings intact. They cut spending or borrow instead of dipping into their savings. As long as the banks keep extending credit the banks are increasing the money supply and this increase hides the damage the surplus is doing to the economy. Eventually, the shit hits the fan. The stock market has a bad day (maybe because the people have cut their spending so much that corp. profits suffer), this forces margin calls, this causes the banks to stop extending credit, this means the people can't finance the part of the tax payments that are paying off the war bonds, i.e. the surplus. This means those taxes start taking actual dollars out of the economy without spending putting them back, and suddenly the Great Depression starts. MMT asserts that the surpluses were the ultimate cause the Great Depression.
My point is --- MMT says that the problem is not so much the deficit spending that causes inflation, the problem is the idea that at some point it is *necessary* to stop borrowing and start repaying some of those bonds (by not just rolling them over). Now that most nations are using fiat currency, it is no longer necessary to do this. Why not just let the debt* keep rising without limit? As long as inflation is not a problem, what is the problem? And if inflation becomes a problem this is the signal that the Gov. needs to increase taxes. It means that raising taxes will not result in a recession** if it is done carefully. I suppose this means that some board of MMT economic experts [at the Fed. Res. Bank?] need to be given the power to impose a surtax added to every person's and every company's tax bill. Only un-elected experts have the freedom to fine tune this without being swayed by political pressures. This is, of course, unconstitutional, but it is sort of like the power to raise interest rates that the Fed. was given.
MMT asserts that the deficit and national debt are the only way that all the people can save at the same time. Without the Gov. creating dollars this way, all savings must come from the savings of someone else [or by someone borrowing from a bank, which creates a contract with a negative impact on the money supply that exactly offsets the positive effect of the creation of those dollars by the loan in the 1st place. That is someone went into debt to create the dollars so someone else can save them.]
The alternative is to cause a recession or depression someday because the Gov. again decides to run a surplus for several years in an effort to reduce the national debt. This and the one just below are really the only alternatives other than to default on on some of the debt [which is a truly terrible, horrible, catastrophic idea]. The only other alternative is the halfway measure of reducing the deficit to some small amount forever, and letting economic growth reduce the percentage of debt to GDP. This is just stopping the practice of letting all the people save more at the same time; and replacing it with making the economy a zero sum game again. Why is this better?
.* . Alternately, instead of borrowing to pay bills the Gov. could, for example, just spend newly created dollars. Maybe 1 such new dollar for every 2 borrowed. Again this ratio could/should be fine tuned by the board of MMT economic experts.
** . Again MMT asserts that this can be proven deductively if the right assumptions are made. Because this has never been tried, the experiment has not been done, so this is not a sure thing.