MMT says that by definition having a Federal surplus is forcing the Public Sector to be in deficit. - Page 4 - Politics | PoFo

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Hong Wu,
MMT asserts that the US Gov. can sell its bonds at whatever interest rate it wants. A rating of AA or B doesn't matter, because the Gov. can always pay off the bonds. Even if it has to just create dollars to do it. There is no way in hell that us bonds are risky, says MMT.

Pres. Hoover and Clinton thought they were doing good by running a surplus. Hoover for many years. Both led to a recession or the Great Depression. MMT asserts that once people have gotten dollars from deficit spending, that they resist pulling the money out of their savings accounts to pay their part of the budget surplus the Gov. is running. MMT asserts that running a surplus for a few to several years *always leads to a recession*. That is, rather than reducing their savings the people cut their spending. Cutting their spending will always have the effect of reducing the growth in the GDP. Run the surplus long enough and the growth in GDP reaches zero, which is the start of a recession.

The point of the thread is that deficits are good. And that surpluses are *very* bad. Also, really big deficits are also bad, especially when there is full employment. Full employment here includes those who might want work but have given up looking for work or are working part time. When there is full employment big deficits will lead to inflation.

The thing is, MMT is contrary to most other economic theories. That does not make it wrong. No Macroeconomic theory has ever been proven. The old theories are all based on obviously false assumptions. They had to make simplifying assumptions but if some of the assumptions are false then the proof is invalid.

An analogy is with Chaos Theory. Mathematicians could not solve the non-linear equations that scientists said described reality. They tried to assume the non-linear parts didn't matter in the result. That is small errors didn't grow to become big deviations from reality. Then came the personal computer and people could do the arithmetic in a heartbeat. This allowed them to test what happened. The result was a revolution in Math, Chaos Theory. The point is simplifying assumptions can lead you astray.

Another analogy is --- with Plate Tectonics vs the old stable earth theory. Instead of old land bridges from Africa to South America, you have them separating and moving slowly apart. Those land bridges were just assumed to be there hidden under the ocean water. They are not there, as we know now with sonar data.

Yes, I know analogies don't prove anything. I'm just using them to illustrate what I'm saying.
Last edited by Steve_American on 17 May 2018 04:34, edited 1 time in total.
Reaper wrote: The fact is that modern economies tax to spend

What, then, is deficit spending? How is it even possible?

and a (more or less) independent central bank controls monetary policy to maintain stable price levels. The US, for example, spends at the federal level, via the treasury. Are you aware that the treasury has no role in money creation? They have nothing to do with the creation of money, and as such, no access to printed money to use in leu of taxes.

Treasury has unique authority to create physical currency and could, theoretically, mint a coin of arbitrary value to match any reqired central bank reserves.

They don't because they don't need to.

When, say, gov't pays a contractor for road building, the central bank credits his bank's reserve account along with instruction to credit his current/checking account. Reserves are like meta-money which regular banks use to borrow from each other and settle with each other "overnight". The central bank, licensed by govt, creates reserves out of nothing with keystrokes. Since the central bank does not commission the building of roads etc, gov't is effectively spending money into existence, albeit at several removes via a rather arcane mechanism.

That has obvious inflationary potential, hence gov'ts with fiat currencies also tax i.e. remove money from the economy. But the converse is sometimes true. Spending into a demand constrained economy can stimulate production, consumption and employment. Where both the money supply and the real economy expand you have, not inflation, but growth. MMT, as I understand it, recognises inflationary constraints, but argues that the economy is currently demand constrained.

Gov't so-called "borrowing" has more to do with regulating demand for reserves (which are swapped for bonds) - i.e. "interest rate targeting" - than financing gov't spending. It's a self-imposed stricture and nothing like what you or I do when we need to get money from somewhere else : ... onal-debt/
I keep saying this and you-all don't reply specifically to agree (or not) that the difference between having money in a savings account at a bank is not all that different from having a US bond.
. . Well, I am trying to reach the lurkers as much as the active posters. Maybe the lurkers will all scroll up and click on the "I like this" button.

When the US Gov. sells a bond for some dollars*, the Gov. creates the bond out of thin air. The situation before the bond was sold was 'some rich guy A' had $100K in in a bank account and Comp. XYZ had $100K worth of stuff. Also, Comp. XYZ owes or will owe $100K to someone.

After the transaction the situation is guy A has a $100K bond, the Gov. has the $100K in its bank account, and Comp. XYZ has $100K worth of stuff. Comp. XYZ still owes or will owe $100K to someone.

Now, the Gov. deficit spends that exact $100K and buys $100K worth of stuff from Comp. XYZ. Now the situation is guy A still has the $100K bond, Comp. XYZ has the $100K, and the Gov. has $100K worth of stuff. Comp. XYZ does not have the $100K worth of stuff and still owes or will owe $100K to someone.

Now, Comp. XYZ has to pay someone [I'll make it be rich guy A**] $100K. Now the situation is guy A has $100K in dollars and still has the $100K bond, Comp. XYZ does not have the stuff, the Gov. has the stuff, and Comp. XYZ has paid its debt to guy A (aka someone).

Now, guy A puts his $100K in dollars into his savings account.

How many dollars [not counting any other dollars or bonds, etc. that he has] does guy A have? Does his future actions look like he thinks he has $200K or do they look like he thinks he has $100K? Remember he can easily sell his bond for about $100K.***

Why do most economists think the $100K in a savings account at a bank counts as money that guy A has, but the $100K bond does not count as money that he has? Both will require some action on his part for him to spend them.

Therefore, for the Gov. to just create dollars with key strokes and spend them to buy stuff is not that different from the Gov. selling bonds to get dollars to spend.
. . In this case in the end, the Gov. has the stuff, Comp. XYZ does not any longer have the stuff, Comp. XYZ has paid its debt to guy A with the $100K it got for the stuff, and guy A still has his original $100K and also the $100K that Comp. XYZ paid him [total = $200K]. The only difference is the difference between guy A having
$100 in his savings account PLUS either $100 in his savings account or him having a $100K bond instead. Is there really that much macroeconomic difference between those 2 situations? Or, is the difference tiny?

.*. . 1] The dollars are never cash, they are always already in a bank and the buyer writes a check or just transfers the money.
.**. 2] It doesn't matter if it is someone else, because rich guy A will eventually be paid $100K by someone for something. For the macroeconomic impact on the economy it doesn't matter how many hands the dollars go through to get to guy A.
*** 3] I am ignoring the interest on the bond. Normally guy A would have paid the Gov. less than $100K for the bond and he would get less than $100K if he sold it pretty soon. The 2 "less than" amounts are about the same amount.
Reaper wrote:What an absurd post. Why does any government even collect taxes if it “doesn’t need your taxes to fund spending”.

Article by Beardsley Ruml, Chairman of the Federal Reserve Bank of New York, written in 1946

In this article, Ruml outlines the various uses/purposes of taxation. Raising revenue is not one of these reasons. Sorry if this sounds smug, but facts is facts.

Or you can do this simple thought experiment. If I have a printing press and I have the exclusive right to print dollars, why do I need more of these dollars from you?

The US government does not "use" dollars; it creates dollars. Every time it needs to spend, it creates more dollars. This is literally how it works, at the basic mechanical level of monetary operations. This is the real world meaning of the US being a currency-issuer. Yes, taxation IS necessary, but not for government spending. I know this offends many people's assumptions about the rightness of things, but facts is facts.

But to answer your question directly, the purposes of taxation are:

1) To establish a demand for the national currency. You must obtain dollars to pay taxes. A slightly different way of stating this is taxation exists to create unemployment. (This is what British colonial authorities did in Africa. They created scrip currencies and forced colonial subjects to pay taxes in the scrip. The object was to create unemployment - that is, force them to work in order to pay taxes. The authorities didn't need the scrip; they just needed a way to compel work.)

2) To control aggregate demand, as a way of controlling inflation. Taxes function as a demand drain, by removing purchasing power from individuals and firms.

3) To express public policy in the distribution of wealth and of income, as in the case of the progressive income and estate taxes. (This is used to break up concentrations of wealth. Or, as in the case of the Trump tax bill, to magnify concentrations of wealth)

4) To express public policy in subsidizing or in penalizing various industries and economic groups. (for instance, taxes on cigarettes and alcohol, or a carbon tax)
At the bottom of page 3, Reaper wrote:
"By Reaper - 16 May 2018 12:07
US inflation by year:


US recession started in July of ‘81 and ended in November of ‘82."

Also at the bottom of page 3, I (Steve_American) wrote:
The Gov. printed money in the Civil War. That is now old technology. These days, the Gov. mostly makes payments by using key strokes on a computer to credit somebody's bank account. "Printing money" is now just a figure of speech. I used it that way. I assumed you knew enough to read it that way. ...

Also, thanks for the info about inflation. It is interesting. But, does it explain why all the tax cuts and spending by Reagan didn't cause inflation to start again? I don't think it does. [MMT claims the idea that deficits cause inflation is wrong as long as there is not real *full* employment.]

So, I ask you again to try to explain why Reagan's deficits didn't cause inflation."

- - - - - - - - - - - - - - - -

Noone has come forward to propose a theory of why Reagan's massive deficit spending of $3T over 8 years* did NOT result in reigniting inflation. I find this quite telling. In another thread I gave my understanding of the inflation of the 70s and early 80s. I blamed it on OPEC raising the price of oil and reducing production to punish the West for letting Israel win the Yom Kippur War and on the Fed. raising interest rates to 16% to fight the unavoidable resulting inflation.

Here I have asked the naysayers 2 or 3 times to explain why Reagan's tax cuts and massive military spending which resulted in massive deficits DID NOT result in inflation. I hear crickets in response.
. . . It seems to me that --- if their theory is correct then Reagan's massive deficits should have resulted in inflation. But, it didn't happen that way.

* . To put this in context, when Reagan was sworn in in Jan.'81, the total National Debt was just $1T. Reagan raised it to $4T. If Obama had done the same, the debt would have gone from [IIRC] $15T to $60T. So, Reagan's deficits were massive for their time.
SueDeNîmes wrote:...crickets...

...perhaps people are reassured by the idea that the economy is just a big household and prefer to have pointless "debates" on that basis..?

We are still waiting. The lurkers would like to hear your theories about why Reagan's deficits didn't result in reigniting inflation and Trump's will not either; but deficits to help the mass of Americans now will create massive inflation.

But, so far still ... crickets ...
BTW --- on the question of --- is the interest paid on the US National debt paid with $$ from tax revenues or from newly borrowed $$ ? The MMT answer is neither; MMT asserts that all US Gov. spending is always made with newly created dollars.

MMT says this is so because *all* IOUs are and must be destroyed as soon as they return to their issuer. MMT asserts that the US Gov. [not the Fed. Res. Bk] is the issuer of all dollars. So, as soon as the $$ reach the Gov. bank account they are destroyed and therefore can't be spent for anything. "Anything" includes interest on the debt. So, according to MMT, I am much more right than Crantag.
Steve_American wrote:I hope the lurkers here can see that when the defenders of Main stream Economics (MSE) head for the hills to hide when asked to explain a key question --- that this is good evidence that MSE is not a good theory.

I don't know that anyone has actually abdicated. Some people have better things to do. Like jobs, for example.
Maybe my original title/subject wasn't clear enough.

1] The only reason for the US today to run a surplus is --- to pay down the national debt. Never mind why we want to do this. This is the desired effect of having a surplus.

2] Paying down the national dept is --- removing US Bonds from the care of their current owners and giving them cash instead.

3] The cash is taken from the American people with taxes. Or American companies, but we just slashed their tax rates and didn't close loopholes to offset the rate cuts.

4] The tax cuts moved America further from a surplus. So, maybe this thread is unnecessary.

5] However, we are now hearing that Repuds in Congress are calling for cuts in Soc. Sec. by delaying eligibility.
. . . . {Never mind that S.S does not add to the deficit because it is funded with a special tax and with US Bonds that it bought years ago with dollars the surplus from the revenue from that special tax when that tax was about doubled.}
. . . . The point here is that the Repuds in Congress want to reduce the deficit and maybe then have a surplus.

6] The thing is the US Bonds that are the national debt are owned by rich people, banks, insurance companies, pension fund organizations, etc.
. . . . Assuming that taxes are not raised then we are assuming that the rich people and corps. will not pay much in taxes. The burden will fall on the middle-class. The poor will bear the burden of the other cuts that will have to be made to result in a surplus without a tax increase.
. . . . If we are hoping that economic growth will happen and this will increase tax revenues, then we need to further assume that the growth in the GDP is shared more than it has been for the last 30+ years.
. . . Otherwise, most of the GDP increase will go into the pockets of the already rich.
. . . I, for one, have zero faith that the trickle down of cash will actually happen this time. ATSGoes, "Fool me once, shame on you; fool me twice, shame on me; fool me thrice, I must be a moron; fool me 4 times will not happen because even the American people are not that idiotic."

7] I ask you-all --- if the above is true --- just how do you think the dollars paid to those who are holding the Bonds now will flow out of their pockets and into the pockets of the middle-class taxpayers so they can pay their taxes year after year. We can assume that they can pay this year by paying down their savings. But since the Gov. is not spending and the rich are not sharing --- just how will the middle-class taxpayers get the money to keep paying taxes as the national debt is reduced year after year by let's say 25%, going from about $20T down to about $15T. No matter how long we stretch it out --- money must flow to the middle-class because their total wealth is not $5T or $5T is a huge chunk of their accumulated wealth.

8] Just why is it worth it for the middle-class to have $5T of their wealth removed? At the same time why is it a good idea to make the banks and insurance comp. etc. exchange the Bonds they have now for cash dollars?
. . . . How does this policy make any sense?

9] It doesn't make any sense. The effect of doing this would be to send the US economy into a recession that would become a depression if the Gov. continued to run a surplus. This is just a fact. If the Gov. sucks $5T away from the middle-class --- it will stop spending because it will have no money to spend. When it stops spending this will reduce the GDP and this is the measure of when a recession starts.

10] What is being done here is a lot like what MMT recommends BUT with a pre-pay plan in effect.
. . . That is, MMT would say if you want to reduce the national debt by converting some of the US Bonds now owned by rich people, banks, insurance comp., pension plans, etc. into cash dollars --- you can very easily do this by just creating new dollars to pay off some of the Bonds as they come due. Now if you are positive that this will result in a general rise in prices as too many dollars chase too few goods --- you have a choice.
. . . A] You can tax ahead of time to suck the dollars out of the economy before before the prices rise [knowing this will result in a recession] or B] you can wait until the prices begin to rise and start taxing them out of the economy then.
. . . I ask you --- if I am right here --- isn't choice B] better? With choice B] (at worst) we get some inflation, but with choice A we get a bad recession that becomes a depression. In both cases taxes are used to suck dollars out of the economy to avert or to stop inflation.
Rugoz wrote:Given there's nothing new about MMT I don't see what policy changes it would imply.

Taxation. Basically to stave off potential inflation, taxes may need to occasionally increase. It's hard to sell tax increases to politicians. The way taxation is done would need to fundamentally change to decouple this part. Then MMT could be implemented better.

This was according to the MMT expert in the pod cast.

In an MMT world, inflation can still happen. The mechanism to combat it, would be taxation.
Rancid wrote:Taxation. Basically to stave off potential inflation, taxes may need to occasionally increase.

They should increase now (in the US).

Rancid wrote:It's hard to sell tax increases to politicians. The way taxation is done would need to fundamentally change to decouple this part.

There are ideas to equip central banks with fiscal policy instruments, but since the central bank is part of the government, that would merely be a different institutional arrangement. A rather pointless one I would say.

Rancid wrote:In an MMT world, inflation can still happen. The mechanism to combat it, would be taxation.

Fiscal policy isn't necessarily the best way to deal with inflation, it depends on the exchange rate regime and how close you are to the zero lower bound. All textbook stuff.
Rugoz wrote:
They should increase now (in the US).

There are ideas to equip central banks with fiscal policy instruments, but since the central bank is part of the government, that would merely be a different institutional arrangement. A rather pointless one I would say.

Fiscal policy isn't necessarily the best way to deal with inflation, it depends on the exchange rate regime and how close you are to the zero lower bound. All textbook stuff.

None of this changes my point.

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