[Crantag]

Steve, you seem to misunderdtand the connection between business profits and tax revenue. Taxes are raised on a percentage of profits. Given a constant tax rate, government revenue will be higher in times of high business profits and lower in times of downturn. There is nothing implicit about adjusting tax rates.

[SolarCross]

. . . I propose that the glaring flaw with Keynesian economics is the stated intention to find a way to have a Gov. surplus in good times which has the effect of confiscating the savings of the private sector in order to pay down the debt that was run up in the last business down turn. The people are being swindled out of their work. Yes, the Gov. pays them now but in 10 years it will raise taxes and take it all back. *All back* because of the aim to have the net deficit/surplus over several business cycles be zero. Imagine the uproar if the US Gov. decided to tax all bond holders a 10% tax on the value of the bonds they hold in order to get the cash to pay off the bonds as they come due? Is it that much different to tax something else and make the bondholders cash in their bonds to pay the new taxes?
Well, please answer this last question for me.

Well you are right up to a point in that tax is somewhat akin to stealing (you said "confiscation") and what is given with one hand can be taken back with another, but this is because the government for reason of having an armed forces does not need to ask nicely for things, negotiate or haggle, it has nothing to do with money printing (which anyone can do, see bitcoin). Having an armed force means it can take without reciprocation to a much greater extent than a civilian or civilian organisation can and it is this that the Keynesians love about government. That doesn't necessarily mean governments do or usually do nothing for the taxes they earn though. Generally at the very least they provide a product / service called "national security".

Alternatively you can think of government as a kind of super landlord so then all the different taxes can all just be thought of as essentially rent. If you see tax as rent then it makes complete sense that the landlord would lower rents during times when his tenants are suffering economically and raise them when they are prospering. Here rent is net-tax.

There is nothing mandatory about debt or fiat money being involved in this in anyway. It would work the same if money was literal gold and debt virtually banned as crime as it was in the great age of Christendom during Europe's middle ages.

[Steve_American]

Prof. (Dr.) Keynes did all of his work when the gold standard was in place or (at least) being off it was *definitely* seen as temporary. This means all his thinking was gold standard thinking.

OK, what does that mean? It meant that every nation needed a supply of gold. It was to be used for 2 purposes. 1] To pay off the difference between what it sold overseas & what it bought from overseas. 2] To backup the nation's currency.
. . . If a nation bought more than it sold then it would see its gold supply dwindle. This of course was a bad or very bad thing. If it ran out of gold it was truly fucked. So, the nation would take steps to reduce what it bought with a tariff or increase what it sold by devaluing its currency.
. . . If a nation kept borrowing and borrowing its own currency from its citizens then it would someday face a similar problem. There would be too many dollars [or pounds or Franks, or D. Marks] in total of in circulation plus in bonds. This meant that someone could drain the nation's gold supply by buying up its bonds and demanding to be paid in gold when they came due.

So, nations lived by 2 gold standard rules --- 1] Try to sell more than it bought, i.e. have a foreign trade surplus. 2] Do not keep borrowing and borrowing even in its own currency.

These 2 rules are therefore related because they both stem from the need to maintain the nation's gold supply.

Now the world is off the gold standard. No nation promises to redeem its currency with gold [IIRC]. All the world's nations either have a fiat currency or use a fiat currency. Some nations actually use the US dollar as their currency and many nations use the euro.

Just looking at the nations that have their own sovereign fiat currency, the standard current economic model says that they are just like a family and so must not keep borrowing and borrowing. That someday they will have borrowed so much that terrible things *will* happen. MMT asserts that this all is untrue. But, I hope that you can see that the reason that Keynes originally said that in good times nations should run a surplus to pay down their debt was because he was assuming that the nation was going to be on the gold standard, if not now then soon. MMT asserts that Keynes if he were alive today and had the open mind of a youth, that he might be able to see that nations with their own sovereign fiat currency would not have to ever run a surplus. There is now no need to protect the nation's gold supply, and there is no other reason either. This is because ---
. . . 1] Borrowing creates dollars which is the opposite of what the MSE theory says when it says that Federal borrowing sucks up much of the available dollars that can be lent. This is so for 2 reasons --- a] The US Gov. first makes deposits into the US banking system and then it borrows the dollars to pay off the 'kited' checks that it wrote. I.e., it 1st gives money to the people and then borrows it back. b] Banks don't just lend out the money that is deposited into them. They also create the dollars that they lend by making a deposit into the borrower's account without transferring the cash from some other account on the bank's books to allow that deposit to be made. If just one of these 2 reasons is true it is enough to make false the claim that the Gov. sucks up the available credit and crowds out other borrowers. However, both are true. I looked it up.
. . . 2] The bonds that are created [out of thin air] become the savings of the private sector. They are held by rich people and various companies that need them, like insurance comp. that need to have assets to pay off if many of their policies demand payouts at the same time, i.e. they need to "fund" their liabilities. Without these bonds the various parts of the private sector would have to compete among themselves to have savings. That it would be a zero-sum game. That in order for all companies to save $1M in total the people would have to see their savings go down by $1M. Everyone wants to save, deficit spending allows this to happen.
. . . 3] Currently, some of the bonds that are created are moved overseas. This allows the US economy to buy more from the world than it sells to the world *without* this sucking dollars out of the US economy. Having dollars sucked out of the economy is a bad thing because when enough have been sucked out [and not somehow replaced] then the people cut back on their spending and this reduces the growth of the GDP, and when the GDP starts going down for a while we call that a Recession. People would rather cut spending rather than draw down the money that they have been able to save in the past.
. . . 4] The US system can and it has just created vast amounts of dollars [$27T, yes T during the GFC of 2008] and put them into the economy. What this proves is that the US does not need to borrow. It can just spend. Yes, it is against the law, but changing the law is easy and far better than a default. So, there is, in fact, *no way* for the US to be damaged if rich people, banks, &/or foreign nations stop lending the US Gov. dollars in exchange for bonds. This also means that the Fed. Res. Bk can set the interest rate that it is willing to pay on the bonds it sells. If nobody likes that rate, the US can just spend the money anyway. And more dollars in circulation is not really that different from dollars and bonds out in the economy.

So in summary, there is no reason for the US Gov. to ever run a surplus. In fact, running a surplus will cause a Recession because it will suck dollars out of the people's hands without replacing them with Gov. spending. And the people will respond to this, not by drawing down their savings, but rather by cutting their spending [which is the definition of how a Recession starts].
. . . The "need" to run (the bad thing called) a surplus is a result of holding onto gold standard rules even though we are not on the gold standard now and can never get back onto it [short of an economic tsunami size disaster].

[Crantag]

I can ellaborate later. But Steve, you have now evolved from merely wrongly conflating the Bretton Woods Gold Exchange Standard, to now conflating these with mercantilism. You Seem a little confused. I suggest looking up each of these three regimes.

[Steve_American]

Steve, you seem to misunderdtand the connection between business profits and tax revenue. Taxes are raised on a percentage of profits. Given a constant tax rate, government revenue will be higher in times of high business profits and lower in times of downturn. There is nothing implicit about adjusting tax rates.

And you can extend this to the people's income taxes. In good times when the people's incomes are higher they will pay more in income taxes.

Nevertheless, running a surplus will always have the effect of taking more in taxes than the Gov. spends back into the economy. To this we should add the trade deficit which also sucks money from the private sector and moves it to the foreign sector, thus making the private sector be further is deficit.

And, the people's response is always going to be to cut their spending rather than draw down their savings. And companies will always layoff workers if their product is not selling well.

We saw this happen with the dot-com bubble recession. Pres. Clinton had an economy so great that the US Gov. had a surplus without raising taxes on anyone. And everyone thought this was great. And then we had the recession.

Look, what I'm saying in this thread is that it is the need to keep from having a large or huge national debt that causes the problem.
The GFC of 2008 was not caused by deficit spending. it was caused by the banking system being deregulated and so creating trillions of dollars worth of junk bonds and getting them rated AAA, and selling them to suckers; then the borrowers couldn't make the payments and the junk bonds were seen as junk. This destroyed many trillions of dollars that the banks had created. This sucked cash out of the economy just like a surplus does, only all at once and a huge amount.
. . . The Keynesian response was to deficit spend. But, for various reasons, not enough was spent to end the recession. We are still in it now 10 years later.
. . . One huge reason that not enough was deficit spent was the idea that because the nation is like a family, it is a terrible idea to borrow and spend in vast amounts. That someday we will have to pay the debt down [if not off] and the bigger the debt the harder it will be to pay it down. Thus the need to keep the deficit small. Thus not enough was spent to end the Great Recession.

This is why I say the problem is the idea that we need to find a way to pay off the debt someday [so we need to keep it as small as possible now]. Take away this idea and we can spend what we need to spend (by borrowing or just spending) to do what *needs* to be done.

In the analogy of the above post I had to have the parents increase the taxes on the kids to show what is wrong with the idea that a surplus is an OK thing. However the surplus happens, the result is always the sucking of the Private Sectors savings into the Gov. Sector where like all IOUs the dollars are just destroyed. [Nowadays they are not burnt, but since the dollars were just a number in a bank account they are easy to destroy, and all IOUs are destroyed when they reach the original issuer's possession.]

[Steve_American]

I can ellaborate later. But Steve, you have now evolved from merely wrongly conflating the Bretton Woods Gold Exchange Standard, to now conflating these with mercantilism. You Seem a little confused. I suggest looking up each of these three regimes.

I am not confused with what MMTers are saying. They say that Nixon took the US off the gold standard in 1971. You should take up your position with a professional MMTer not with me. MMTers say that Bretton Woods was a new form of gold standard.

Also, your reply is confusing. I think you were in a hurry. You said I'm conflating Bretton Woods GES with something but didn't say what I'm conflating it with. And then OK you said I'm conflation both with Mercantilism.

I hope you do come back and explain where/how I went wrong.

[Crantag]

I am not confused with what MMTers are saying. They say that Nixon took the US off the gold standard in 1971. You should take up your position with a professional MMTer not with me. MMTers say that Bretton Woods was a new form of gold standard.

Also, your reply is confusing. I think you were in a hurry. You said I'm conflating Bretton Woods GES with something but didn't say what I'm conflating it with. And then OK you said I'm conflation both with Mercantilism.

I hope you do come back and explain where/how I went wrong.

Mercantilism was the system whereby gold reserves were accumulated as a basis of wealth. Gold was also the international means of settlement. So gold was accumulated by running trade surpluses. A trade deficit led to gold flowing out. It was tantamount to zero same rules for trade. It was also inextricably linked to colonialism.

The Gold Standard was a system whereby currencies were fixed to gold. It was implimented as an automatic adjustment mechanism. It was suppose to underly economic liberalism for trade. It was opposed to Mercantilism. Through automatic adjustment, a trade deficit would lead to a depreciation of currency. This would cause imports to become more costly, and cause a country's exports to cheapen. The idea was that things would naturally balance out.

Bretton Woods was based on a dollar hegemony. The dollar functioned as World money. Foreigners could exchange dollars for gold. The price of the dollar was fixed to gold, thus creating a standard. Other currencies were valued against the dollar.

Bretton Woods is gone but not forgotten. Many of the institutional norms survived. They still survive, at least for the moment. The fixed standard is gone; while the claims to gold gave way to financial clames on US financial assets.

[Steve_American]

Mercantilism was the system whereby gold reserves were accumulated as a basis of wealth. Gold was also the international means of settlement. So gold was accumulated by running trade surpluses. A trade deficit led to gold flowing out. It was tantamount to zero same rules for trade. It was also inextricably linked to colonialism.

The Gold Standard was a system whereby currencies were fixed to gold. It was implimented as an automatic adjustment mechanism. It was suppose to underly economic liberalism for trade. It was opposed to Mercantilism. Through automatic adjustment, a trade deficit would lead to a depreciation of currency. This would cause imports to become more costly, and cause a country's exports to cheapen. The idea was that things would naturally balance out.

Bretton Woods was based on a dollar hegemony. The dollar functioned as World money. Foreigners could exchange dollars for gold. The price of the dollar was fixed to gold, thus creating a standard. Other currencies were valued against the dollar.

Bretton Woods is gone but not forgotten. Many of the institutional norms survived. They still survive, at least for the moment. The fixed standard is gone; while the claims to gold gave way to financial clames on US financial assets.

Crantag, thanks for the informative reply. As I understood you, Bretton Woods compared to Mercantilism just replaced gold with dollars for most nations but the US was still on the gold standard. At least if other nations wanted gold for dollars the US had to give them gold. Nixon stopped that. I suppose it was because the US always had a trade deficit and was losing its gold as a result, so he stopped that by making the dollar a fiat currency.
. . . Is this right?

[Godstud]

I sincerely hope that this results in the end of the USA, as a nation. America went from barbarism to decadence without the civilization that normally occurs in between.

[Rancid]

I sincerely hope that this results in the end of the USA, as a nation. America went from barbarism to decadence without the civilization that normally occurs in between.

CAreful, you could see a flood of immigrants to Canada.

[Godstud]

We'll build an ice wall to keep the scum out.

[Rancid]

We'll build an ice wall to keep the scum out.

What about the massive number of decent Americans just looking for a better life?

[SolarCross]

Here is a few thoughts loosely in defence of MMT as I understand it.

Fiat currency is created as debt and is, to prevent inflation, destroyed on repayment. So hypothetically if everybody were to repay all their debts then all the fiat money would be destroyed with it and the currency would wink out of existence, then you would have a liquidity crisis, this is "deflation" and why it is as bad for fiat currencies as their other risk which is inflation. So for fiat currency to remain in existence at least someone must be a debtor in that currency. But a debtor can die, run away and not ever repay. In this case the fiat money owed because it can never be repayed consequently can't be destroyed resulting in a permanent inflation of the money supply. Governments however are virtually immortal, aren't going anywhere and can always repay just by taxing harder or printing up more debts. This makes the government the ideal debtor.
So:
1. Fiat currency must have a debtor or it doesn't exist.
2. The less debts the smaller the money supply, the greater the debts the larger the money supply.
3. If debtors don't repay the money supply is permanently increased.
4. Because insolvancy and death are risk factors for the private sector but not the public sector, the public sector is the safest holder of debt.
5. To maintain a stable money supply the government should be massively in debt at all times.

I think it is true people do tend to think of fiat money like it was real money like gold but they are really different and so policies which are sensible for one are not for the other. Gold doesn't need a debtor, its global supply can never be reduced to zero nor can it through human malfeasence or incompetance approach infinity in supply, neither inflation nor deflation are issues which require active managment. This is completely different.

[Rancid]

repay just by..... or printing up more debts.

To repay debt, you must create more debt.

5. To maintain a stable money supply the government should be massively in debt at all times.

Sure but in the context of a global economic system with multiple currencies. Can't one nation effectively default against the currentcies of other nations? Therefore carrying massive debt isn't good.

[SolarCross]

To repay debt, you must create more debt. :?:

Not must create, can create. As in gov owes the private sector some dollar, but doesn't want to raise taxes so it borrows more money from the central bank to pay the bond. See this paying a debt with another debt. Which sounds bad until you realise that just paying the debt without creating a new debt would decrease the money supply.

Sure but in the context of a global economic system with multiple currencies. Can't one nation effectively default against the currentcies of other nations? Therefore carrying massive debt isn't good.

Maybe, I don't know, I'll have to think on that, lol.

[Godstud]

What about the massive number of decent Americans just looking for a better life?

They can seek asylum. Canada won't throw their kids into cages, either. I'd give preference to people from Latin countries over Americans, however. They send us their best people.

[Rancid]

They can seek asylum. Canada won't throw their kids into cages, either. I'd give preference to people from Latin countries over Americans, however. They send us their best people.

What about Americans with Latin roots?

[Godstud]

[Crantag]

Crantag, thanks for the informative reply. As I understood you, Bretton Woods compared to Mercantilism just replaced gold with dollars for most nations but the US was still on the gold standard. At least if other nations wanted gold for dollars the US had to give them gold. Nixon stopped that. I suppose it was because the US always had a trade deficit and was losing its gold as a result, so he stopped that by making the dollar a fiat currency.
. . . Is this right?

Really no. Mercantilism was sort of an archaic system, based on accumulation of gold and trading blocks among competing empires. Liberal trade theory was a revolt against mercantilism. Liberal trade rules still underpinned the Bretton Woods system. Also, countries did not merely hold dollar reserves. They also held gold reserves and other currencies.

I think you should stop trying to overly simplify everything and should instead seek to understand the different regimes in a more genuine sense.

[Steve_American]

Really no. Mercantilism was sort of an archaic system, based on accumulation of gold and trading blocks among competing empires. Liberal trade theory was a revolt against mercantilism. Liberal trade rules still underpinned the Bretton Woods system. Also, countries did not merely hold dollar reserves. They also held gold reserves and other currencies.

I think you should stop trying to overly simplify everything and should instead seek to understand the different regimes in a more genuine sense.

Working backwards ---
We know that the US fiat dollar period started in 1971.
We know that the Bretton Woods period started in 1944.
Is they another period we should insert here?
We know the Mercantilism period began way back when around 1500, +/- many years.

OK, I saw that under Bretton Woods all nations could use gold, dollars or other currencies to pay their trade deficit. However, these all eventually led back to gold. So, the whole system was based on the world's finite supply of gold, ISTM. So, it was a modified gold standard and so the gold standard rules still applied.
So, I said that Dr. Keynes did most of his work between WWI and WWII and this was in that time when you might have a different name for the period (see above), but the gold rules applied. Even after WWII the gold rules still applied.
However, they do not apply now. Not really. But, the US acts as if they do.