Why do so many people cling to the Household analogy for the US Gov.? - Politics Forum.org | PoFo

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#15051613
Why do so many people cling to the Household analogy for the US Gov.?

1] Before 1971 it made more sense. At that time everyone knew that the world was on the gold standard or that it would return to it after “this crisis” {WWI?} was resolved. At that time there was a significant difference between paper dollars and dollars in a bond. Paper dollars could be traded in at the Treasury for gold and bonds could not. Every nation had to protect its gold supply, so it could not let too many dollars {or whatever the currency was called} be in circulation. It was thought that selling bonds had the long term effect of attaining that goal. [I'm not so sure this was so, but I think the leaders then did think that way.]
. . . So, before 1971 the Household analogy made a certain amount of sense. If all the gold was sucked out of the nation's treasury then ts paper money would not be backed by gold and would therefore be worthless.

2] For a few or many years after 1971 many people were afraid that there would be a lot of inflation. Among them were the hyperconservative leaders of the Arab members of OPEC. IMHO, this led those Arab leaders to drive up the price of oil. They saw some inflation and they feared more so it made perfect sense for them to raise the price of their oil to keep up with or even get ahead of the inflation that they were certain would happen when the dollar was not backed by gold.

3] Now it is 48 years later. For the last 20 or 30 of those years, at least, there has been low inflation. This proves that fiat currency does not cause hyperinflation. This proves that the chartalists were right, money is given value by the fact that many people need some of it to pay their taxes. And many of those people are high income people rather than low income people, therefore the high income people will their trade the stuff they make for the dollars of poor people. And this fact is what makes the economy keep going with “worthless” paper money being used as legal tender.
. . . Now there are economists that say that with a fiat currency a nation can now deficit spend and not worry about its gold supply being drained as a result. And that it doesn't even need to sell bonds to deficit spend. This means, they say, that bond buyers must accept the interest rates and other terms offered by the nation's Gov. or just not buy bonds. This means, they say, that the Gov. is NOT *financially* constrained from deficit spending in ANY way because it can always just spend newly created dollars. However, they also say that the Gov. IS *constrained* by the amount of real stuff and unemployed labor in the economy. As soon as all the labor and stuff is being used for something, any additional deficit spending is likely to lead to inflation and a lot of deficit spending {in this situation} could lead to hyperinflation. This would happen with or without bond sales.

4] So, how is the US Gov. like a household or, more accurately, a company? Some economists have been saying for decades that this is just a fallacy. A story told to keep the population ignorant of the facts. That the US Gov. is now able to spend a lot more to help the little people. Is seems like the top 1% want the little people to be desperate for a job and so willing to work for lower wages.

5] However, actually, the 1% are shooting themselves in the foot. The 1% would make more profit if their customers had more money. The business owners can't pay their workers more if no other businesses do the same. However. if the Gov. makes them all pay more then they all make more profits. Apparently the business owners are so afraid that the workers will get even more power and make them pay them so much that their profits will not be increased by the increased sales. Or, maybe it is a conspiracy to keep from damaging the environment even more than we are already. this
seems unlikely because the 1% *don't* seem to care that the IPCC says we are risking the end of civilization if we don't stop dumping CO2 into the air.

But, this doesn't really matter much for why does so many people believe that the US Gov. is like a household. Unless it is because the 1% use their media power to keep the people ignorant.
#15058463
So many views, but no replies, and no "Likes".

Anyway, one part of the Gov.== a household or comp. is the claim that "someday" the national debt will have to be paid off by increasing tax receipts to run a surplus and pay it off. You hear this from time to time as an attack on deficit spending and the bond sales it causes.

This is a scary thought. But, it is meaningless. Why? I have 2 reasons.

1] England became GB and then became the UK. Then it lost most of its Empire. As I said above, in 1694 England started its national debt. Since then it has almost never paid it down at all, and every decade saw the debt grow in actual Pounds compared to the start of the decade. Every decade. So, for 32 decades the national debt has grown every decade. Just when is this mythical "someday" going to arrive?

2] This is my new point. So, what is being claimed here is that all deficit spending is just the Gov. giving the recipient a loan. You can sell this loan on to someone else. However, someday the Gov. will demand that the loan be paid back. Let me restate that, "someday the people will demand that the Gov. must demand that the loan be paid back." You see, when the Gov. is running a surplus it is taking money from all the people and not spending it. Why in the world would the people demand that the Gov. do this? This being run a surplus to pay off the loans that have been accumulated over 325 years. The bond holders are perfectly happy to hold the bonds. If they are not then, over time the Gov. will be unable to sell more bonds. When this happens the least damaging thing that can be done is for the Gov. to create magic currency to pay off the bond. Defaulting would be a total disaster. Creating magic money may cause inflation, but never hyperinflation. Never in all history. All the cases of hyperinflation in history happened after 1900 and most during the years of the gold standard. All the cases happened because of a shortage of food.

Let me say my point again. Why on the world would the people of a nation force or even allow the Gov. to take away their assets {currency} with taxes in order to pay off bonds who's holders don't want them paid off? Why?


If what I said above is correct, then the household analogy is not correct. NO Gov. will ever pay off the national debt and it should not either.
It is true that someday the national debt of the US will be defaulted on. Maybe when the US ceases to exist. All nations in history have failed to exist at some point, except the few that still exist and none of those are over 500 years old. Or some such number. England/GB/UK may be the oldest.
#15059010
Steve_American wrote:
Why do so many people cling to the Household analogy for the US Gov.?



They don't know about macroeconomics.

However, debt is not without consequence. In the 1980s, we went from being the world's largest creditor, to being the world's largest debtor.

Despite the additional money sloshing around, this regime tends to get in the way of productive investment.

"Successful countries do not let themselves become the playthings of the financial markets." Lester Thurow

Which explained the 80s and 90s before they even happened.

https://www.amazon.com/Price-Inequality-Divided-Society-Endangers/dp/0393345068/ref=sr_1_1?crid=JG4XXLCVR7XC&keywords=the+price+of+inequality+joseph+stiglitz&qid=1578772357&sprefix=the+price+of+in%2Caps%2C153&sr=8-1
#15059032
late wrote:
They don't know about macroeconomics.

However, debt is not without consequence. In the 1980s, we went from being the world's largest creditor, to being the world's largest debtor.

Despite the additional money sloshing around, this regime tends to get in the way of productive investment.

"Successful countries do not let themselves become the playthings of the financial markets." Lester Thurow

Which explained the 80s and 90s before they even happened.

https://www.amazon.com/Price-Inequality-Divided-Society-Endangers/dp/0393345068/ref=sr_1_1?crid=JG4XXLCVR7XC&keywords=the+price+of+inequality+joseph+stiglitz&qid=1578772357&sprefix=the+price+of+in%2Caps%2C153&sr=8-1


All mainstream economists don't know or care how the real economy operates. At least the theories they use are a fantasy.

The people want to save some dollars every year, or Pounds, or yen, etc. Some or many of them do save some every year.

When they do this it reduces their spending, and this reduces someone's income, this reduces the taxes they pay and their spending.
One economic theory says that saving provides the dollars for banks to lend. This theory has been proven wrong by an experiment*.

A general lack of income reduces spending and this spirals down and down. A lack of money to spend causes people to buy less, when people are buying less, businesses have no reason to invest in increasing their total productivity. Businesses look at the future to decide when they should increase the number of widdigits to make and therefore the number of people to hire.

So, a general lack of spending causes a reduction in investments. If the investment will not make a profit then a good businessman will not make the investment.

So, I disagree with your claim that too much deficit spending by the Gov. will *cause* a lack of investment. I claim that the lack of investment you are pointing at was caused by some other element in the economy.

But, I din't buy and read the book you pointed to, so I don't really know the details in the book.

.* . Banks don't lend out their depositors' money. They don't transfer money from some account when they make a loan. Banks just create new dollars when they make loans. By law they have at least a week to get the reserves to "cover" that loan. When the bank's customer spends the loan, someone gets it and it is then a reserve for his/her bank. When the 2nd bank's customers spend it some of it gets back to the 1st bank. If this doesn't give the 1st bank enough reserves, the 1st bank can borrow it from any other bank that has those dollars and therefore has too much reserves and so wants to lend some of their reserves to the 1st bank.
. . Banks have a dept. that makes sure every evening that it has the required reserves to meet the reserve requirement cause by its total loans. Banks have another dept. that makes loans. These 2 depts. work at different times of the day and so can't communicate before a loan can be made. It's a good thing that they don't need to communicate.
#15059086
Steve_American wrote:
So, I disagree with your claim that too much deficit spending by the Gov. will *cause* a lack of investment.



That's the history.

"Immoderate debt creation was behind that “Great Moderation” (Grydaki and Bezemer 2013). That is what made this economy the “Great Polarization” between creditors and debtors. This financial expansion took the form more of rent extraction than of profits on production (Bezemer and Hudson 2012) — a fact missed in most analyses today (for a proposal, see Kanbur and Stiglitz 2015)."

"Since the 1980s, the economy has been in a long cycle in which increasing bank credit has inflated prices for real estate, stocks, and bonds, leading borrowers to hope that capital gains will continue. Speculation gains momentum — on credit, so that debts rise almost as rapidly as asset valuations."

https://evonomics.com/finance-is-not-the-economy-bezemer-hudson/
#15059109
late wrote:
That's the history.

"Immoderate debt creation was behind that “Great Moderation” (Grydaki and Bezemer 2013). That is what made this economy the “Great Polarization” between creditors and debtors. This financial expansion took the form more of rent extraction than of profits on production (Bezemer and Hudson 2012) — a fact missed in most analyses today (for a proposal, see Kanbur and Stiglitz 2015)."

"Since the 1980s, the economy has been in a long cycle in which increasing bank credit has inflated prices for real estate, stocks, and bonds, leading borrowers to hope that capital gains will continue. Speculation gains momentum — on credit, so that debts rise almost as rapidly as asset valuations."

https://evonomics.com/finance-is-not-the-economy-bezemer-hudson/

Oh, I see now.

"Bank credit' is created when banks make loans to people and corps..

US Gov. deficit spending is different.

Bank loans need to be paid back by people or corps.who have to get money to make the payments. If they can't get the money then the banks have a problem. Or whoever the banks sold the loan to has a problem. This is what happened in 2007&08. It may be the cause of all the Bank Panics of the 19th cent. and many depressions and recessions in the 20th cent.
. . . you see during a boom banks make stupid loans. This creates money for people to spend and this boosts the GDP figures. When people stop borrowing for whatever reason {but often because they cant make the payments they have 'now'} this causes a source of new money in the economy to dry up, and this causes the economy to slow, and a slowing economy makes banks slow their lending and it all spirals down.

When the US Gov. deficit spends, it is different because nobody needs to make payments. The money is created by the deficit spending just like when banks make loans, but nobody needs to make payments. Yes, the US Gov. may need to pay the bonds off in 10 years and does need to payoff the ones that are coming due every week, but the Gov. has no problem rolling them over with new bond sales. And, very importantly, if the Gov. can't sell the bonds the Fed Res. will buy them and in a pinch the Gov. can just spend newly created dollars into the economy.

So, your economists are confusing you. Too much bank credit is bad, I agree. Too much Gov. deficit spending is also bad, but for a different reason. And, again vert importantly, the economy needs about 3% deficit spending and can often absorb even 10% deficit spending.

The national debt is really the total assets of the people and never should be taken and extinguished with taxes. It should grow every year forever. It is a good thing. Japan has proven this for 30 years now.
#15059136
Steve_American wrote:
So, your economists are confusing you.



Not really.

First, that Stiglitz book doesn't really cover this territory, so I have to retract that suggestion.

Second, we are not far apart.

Third, this is about the 80s. Republicans did several things that resulted in the crash a decade ago. They include, but are not limited to, massive tax cuts for the rich, financial deregulation, inhibiting regulators from regulating.

An old description of the stock market was the 'fleecing of the sheep'.

This is the fleecing of the country.

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