This weekly roundup thread is intended for all culture war posts. 'Culture war' is vaguely defined, but it basically means controversial issues that fall along set tribal lines. Arguments over culture war issues generate a lot of heat and little light, and few deeply entrenched people ever change their minds. This thread is for voicing opinions and analyzing the state of the discussion while trying to optimize for light over heat.
Optimistically, we think that engaging with people you disagree with is worth your time, and so is being nice! Pessimistically, there are many dynamics that can lead discussions on Culture War topics to become unproductive. There's a human tendency to divide along tribal lines, praising your ingroup and vilifying your outgroup - and if you think you find it easy to criticize your ingroup, then it may be that your outgroup is not who you think it is. Extremists with opposing positions can feed off each other, highlighting each other's worst points to justify their own angry rhetoric, which becomes in turn a new example of bad behavior for the other side to highlight.
We would like to avoid these negative dynamics. Accordingly, we ask that you do not use this thread for waging the Culture War. Examples of waging the Culture War:
-
Shaming.
-
Attempting to 'build consensus' or enforce ideological conformity.
-
Making sweeping generalizations to vilify a group you dislike.
-
Recruiting for a cause.
-
Posting links that could be summarized as 'Boo outgroup!' Basically, if your content is 'Can you believe what Those People did this week?' then you should either refrain from posting, or do some very patient work to contextualize and/or steel-man the relevant viewpoint.
In general, you should argue to understand, not to win. This thread is not territory to be claimed by one group or another; indeed, the aim is to have many different viewpoints represented here. Thus, we also ask that you follow some guidelines:
-
Speak plainly. Avoid sarcasm and mockery. When disagreeing with someone, state your objections explicitly.
-
Be as precise and charitable as you can. Don't paraphrase unflatteringly.
-
Don't imply that someone said something they did not say, even if you think it follows from what they said.
-
Write like everyone is reading and you want them to be included in the discussion.
On an ad hoc basis, the mods will try to compile a list of the best posts/comments from the previous week, posted in Quality Contribution threads and archived at /r/TheThread. You may nominate a comment for this list by clicking on 'report' at the bottom of the post and typing 'Actually a quality contribution' as the report reason.
Jump in the discussion.
No email address required.
Notes -
I've said this before, but I'm pretty sure a lot of members of congress have learned at least some MMT stuff about banking & government finance accounting. They pretty much all still use the deficit, debt, and fear of large numbers as rhetorical weapons against their opponents when out of power. But we seem to see fewer people than ever signing up for the mistaken sucker play of being in power and actually crashing the economy with austerity. Maybe more senators than house members understand the reality; surely more democrats than republicans have been incentivized; and definitely more congressional aides and rank&file treasury/fed people know how the financial plumbing works compared to elected & appointed officials (but in the US in particular, these types seem to effectively be able to get the word out to stop politicians from wrecking things usually). This time around, Trump even potentially had Elon as a perfect fall guy to take any blame, if Trump actually wanted to cut the deficit (luckily he didn't).
To be economically literate, one would have to know that saying the government deficit should be cut is identical to saying the non-government surplus should be cut. Or that the government's debt is not "our" debt, it's our asset: the government is just a balance sheet entity we made up, which we use to emit IOUs that we (the actual people) get to hold & use. It's much more akin to a scorekeeper, tracking the points everyone has. The national debt is essentially the net money supply, and that money is being created by running a deficit (constantly for hundreds of years, with no reason to stop if the people keep wanting to accumulate monetary savings). Government deficit & debt are good things, and the only problem is along the lines of 'too much of a good thing' (inflation, which is the self-correction mechanism).
I think MMT was especially catching on amongst politicians around like 2018-2019. The inflation of 2022 probably put it on the backburner for awhile. But even back in 2012, here they are talking about how a load of congress members understand things but just can't say anything publicly: https://youtube.com/watch?v=ba8XdDqZ-Jg&t=1h4m25s
What will inevitably happen is that some lefty will use this bullshit to do what they always do and spend with abandon until collapse. It will not be like greece, who was bailed out by the nordic german taxpayer (while being decried as evil austerites), more like venezuela. Oh, how surprised they will all be, that the infinite money machine did not, in fact, work.
That seems to be the driving fear, although we've never seen it happen in a productive democracy. In the real world, regular people seem to hate inflation so much that we almost always err on the other side: too much unemployment from taxes being too high.
It would definitely be weird if the US ended up looking like a country that gave up their own currency or a country that relied on a single export while borrowing in a foreign currency they didn't control.
The closest, though imperfect, metaphor for the US is actually Japan, which is significantly hampered by its public debt as a gigantic percentage of GDP. It sees inflation, stagnation, but not that bad.
In which area do you see them being hampered by the public debt? The usual story goes that ever since the 90s crash, Japan had mostly been unable to generate any inflation, in their constant fight against dipping into deflation. The only exception being the 2022 inflation where basically every currency got the same tick up.
As far as how this coincides with the story about government debt corresponding to monetary savings desire, a plausible story is that the Japanese people don't trust the stock market after the crash, and thus most of their asset allocation is monetary (cash/bonds), especially as an aging society trying to save for retirement. So for the japanese government to really juice the economy with stimulus, it would have to try a lot harder with a huge deficit (instead they often balked and pulled back multiple times over the decades).
More options
Context Copy link
More options
Context Copy link
Relevant xkcd.
Also, why is weimar germany or argentina quote-unquote unproductive?
I thought the 70s stagflation had put to rest the silly notion that high inflation equals low unemployment.
Germany lost a war and a ton of productive capacity, and had to pay war debts in foreign currencies. The other one about 'productive' was Zimbabwe destroying their own real economy with land reforms.
Don't remember what Argentina's deal was, didn't they keep borrowing in USD and do multiple voluntary peso defaults? Or recently they mistakenly were causing inflation by increasing their interest rate which was supposed to fight inflation, until they finally realized that and cut the interest rate which cut the inflation proportionally? Getting the gas & brake pedals confused is a rough time.
Anyway none of these were some policymakers learning the forbidden dark arts of 'oh the only constraint on fiat currency deficit spending is inflation, not insolvency? That doesn't sound bad, let's spend with abandon!'
Well the premise would be: if prices are going up because 'people just have so much money they can't spend it fast enough', businesses would be booming and would be desperate to hire anyone that's available. But yeah, the '70s shows that if inflation is 'cost-push', ie caused on the supply side by something like an oil embargo out of nowhere, then it doesn't matter if you try to wreck the economy (as volcker tried), those prices may not be tamed by more unemployment slack. May need to deregulate natural gas in that kind of instance, to get costs back down.
If Argentina can cause inflation by mistake, and Japan wants inflation, why can't they copy Argentina?
More options
Context Copy link
Do you think lowering your target interest rate lowers inflation? Like erdogan?
Or does it mean you endorse milei's policies, the austerity poster boy?
It surely depends on the government debt to gdp ratio. But yeah interest spending is government spending like any other, so turning on the fire hose and blasting people with free money is probably more stimulative than high borrowing costs are constrictive. You would have to think the propensity to spend interest income is near 0 to think otherwise. I don't know if that's the same reasoning as neo-fisherians use, or what erdogan is working from.
I'm not up to date with milei either, though I like his chainsaw schtick. If it was his policy to cut rates, the 10-year charts are pretty striking: interest rate, inflation rate. The last I had heard was years ago, that argentina was probably accidentally making their inflation worse by following the orthodox advice of raising rates. It wasn't until yesterday that I looked this up and saw the cut rates preceding the inflation drop.
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
The problem is never the amount of debt, but the backing of that debt. It is true that government debt is useful: money is a government liability (zero coupon, infinite maturity for cash) and treasuries are a safe security (until we default) in a world where safe securities are scarce. In the 90s, people were worried that by lowering deficits we would create a shortage of government debt and safe assets. This was completely misguided because we can always issue more debt and use the proceeds to buy valuable assets to finance the repayment.
When people say that they are worried about government debt, they mean relative to the ability to repay. Since we see that increases in debt don’t go towards increasing our ability to repay it but rather decrease it, it is natural to say that we want government debt to stop increasing.
I actually think that there is not enough Treasuries around as we can see by the convenience yield that they have. This convenience yield says that we could profit by issuing debt and investing in real assets, turning the federal government into a massive bank (which it kind of is). Yet issuing more Treasuries and then wasting the proceeds is not sustainable.
But what are the 'proceeds' in your formulation? They issue a government liability that pays the policy rate, swap it for a different government liability that pays the policy rate (central bank reserves), and then spend it. There is no difference between reserves and treasuries, so calling one 'money' and calling the other 'debt that requires backing and an ability to repay' is only serving to confuse your thinking.
It's akin to printing up a new $5 bill, then exchanging it for quarters because that's what the arcade takes. No more or less money in any form. They can print as many central bank reserves or treasury securities as they want, so 'repayment' is a non issue. Inflation is the only relevant concern.
When the government issues treasuries and receives money, it can spend that money. When the federal reserve “issues securities” (more accurately, the ON RRP), it withdraws that money from circulation.
If the government were to just take the money from the issued bonds and just sit on it, then there would be no effects (except those via the relative supply of money and treasuries). But it issues debt to get money to spend, so after issuance, the amount of things the government can afford at that moment has increased.
The point is that issuing debt gives you resources now that you have to repay later. Money or nominal versus real does not change that.
My thinking is not confused because I admit that money and treasuries are (consolidated) government liabilities, both of which need backing and ability to repay. People get confused with “fiat money” and think that it doesn’t require any backing. But the value of fiat money today depends on the expectations of its value in the future; that value depends on the demand and supply of money then. If the federal reserve has no assets, then it cannot react to a lower demand for money by withdrawing the money from circulation so the value of money would be lower. Therefore, if you don’t have “ability to repay”, your currency in aggregate and in real terms cannot be too valuable.
The usefulness of money allows you to get some value without any backing (for a different example of that look at Bitcoin). But at the margin, if you want an economy with enough money in real terms you must have backing.
Finally, repayment in real terms is the concern. Inflation is default. No serious monetary economist will ever tell you that a central bank has no meaningful budget constraint (but you might read that in a paper in the AER).
I don't know what you would mean by "backing" in this context. The treasury issues IOUs that pay interest (bonds/bills/etc), and they make those interest payments by issuing more of the same IOUs in the future: they indefinitely roll over. The central bank issues IOUs that pay interest (reserves), and they make those interest payments by issuing more of the same IOUs in the future: it indefinitely rolls over. There is no promised future real 'value', it is what it is, and if there's inflation, so be it (other than the inflation-indexed bonds). And the only thing any of these government IOUs can be redeemed for when returned to their issuer is tax relief (or you can freely swap them for other different types of government IOUs).
They are the monopoly issuer of the currency, and thus can either control price or quantity. There was a bit of a monetarist experiment with Volcker where they tried to control quantity and let price float, but that just caused the price (interest rate) to keep ratcheting up, because commercial bank lending creates deposits endogenously. They have since recognized that they just have to fix price and let quantity float, to run the system properly. So they just set the interest rate and do not care about 'demand for money' - it's infinitely available at some price. We're simply talking about numbers in account balances.
Whose concern? The government doesn't care. And no one else's opinion matters. They are not beholden to the market. If inflation ticks up, that is definitely not the same as defaulting on the debt. We still need the government's IOUs to pay taxes, so they will perpetually be valuable to that extent.
Not sure what you mean by a central bank budget constraint. They have various expenses each year, but any preparation of a formal budget is to make their case to congress that they're behaving well and shouldn't be slapped on the wrist. It's not an economic constraint. They tend to end up in profit every year and just dump that amount into the treasury's account.
Bitcoin has no issuer offering a redemption value, and thus is a commodity rather than money. As an economic instrument, the fair value is $0. Any valuation above that might be a small amount for the utility of making transactions (would work if each btc were 1 cent or something), and otherwise just speculative (don't get caught holding the bag).
If you're saying that bitcoin has no 'backing', but US dollars have 'backing', maybe you're using that term for what I'm calling IOU 'redemption'? (returning an IOU to its issuer, to get what is 'owed')
Yes, there is. It made somewhat explicit by inflation targets. I don't understand at all what you mean by "if there is inflation, so be it."
Sure, they set a price but how is that implemented? It is implemented by changes in the quantities. Yes, the rule says adjust the quantity as much as needed to get to the price. But to do that quantity adjustment sometimes you need to reduce the quantity in the market (OMOs sometimes require 'buying back' money) and for that you need assets that the market values.
This is my point about budget constraints. The central bank supplies money which, to think clearly, we should measure in real terms. The amount of money in real terms that a central bank can supply is limited by the assets that they hold because otherwise the bank cannot maintain the real value of money in the face of demand shocks. Demand matters because it is obviously easier to maintain the value of your currency when its demand is growing than when its demand is declining. I don't see how this point is hard to understand, but it is easy to show in a very simple model.
The difference between defaulting on debt and defaulting on money (inflation) is who gets to bear the losses of the default. This is easy to see if you think of money as an infinite-maturity bond with zero coupon (for currency) or some coupon (for reserves). Your argument proves too much: if it were true, there would be no issues with the monetary crises in the late 20th century. Taxes are set in nominal terms, but they are set with a delay so the government will lose in real terms with inflation (after we are all bumped up to higher brackets).
In monetary economics, commodity money means an asset or durable good that has intrinsic value. That is, value for non-monetary uses. In this sense, Bitcoin is not commodity money. Backing need not be about redemption. Think of stock buybacks, stocks are backed by the companies cash flows. You can't show up with one share and demand a payment from the company, but there is an implicit expected future value of the stock and the buybacks help maintain it. Bitcoin doesn't have that and the dollar could work without that, but it would mean a low aggregate stock of money in real terms which is bad because we need money valuable in real terms to make transactions.
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
The damage isn't done by money simply being created or spent. It's done when it's used to Dig Up and Fill Holes Again, or worse, paid to my political enemies to actively undermine my interests. The money is then "backed" by holes dug up and filled again, or hit pieces against Twitter nobodies.
These things probably don't generate as much real wealth as what the private sector would back it with instead, if it was allowed to create the money instead.
Well the private sector definitely creates money and real wealth as well, so it's not a competition for any kind of limited quantity of financing. But it does so pro-cyclically: when times are good there's lending & investments everywhere, but everyone clams up when times are bad. The government can be the counter-cyclical engine, stopping the paradox of thrift.
If you would have otherwise had high unemployment, then creating money and paying those unemployed people to dig holes is at least better than letting them atrophy away, in terms of "damage done", because at least they go on to spend that money and generate more demand. But yeah it would always be a better idea to put people to work generating some kind of base-level valued output (goods/services). Ideally the government catches people at the bottom unemployment end, and they can as quickly as possible transfer back into the private sector to make more money and do something valuable.
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
MMT is a relatively accurate model of how modern Western monetary policy works. But have you sit down for a second and asked yourself if that's a good thing that it works like that or not?
Because if you did not, I don't think you're equipped to engage with its actual opponents.
Does the State having control over the rate of interest incentivize good or bad investments? What's a good rate of inflation and who does that good rate benefit and harm? And most importantly, what happens to all this the day that people stop buying US debt no questions asked?
MMT is mainly about describing how fiscal policy and money itself works, and it apparently has been essentially the same throughout human history. The word 'modern' was a joke from a Keynes quote about "the past 4000 years, at least". Mesopotamian temple accounts, European tally-sticks, various stamped coins, etc. Always money being transferable credit, and dominated by credit from the authority of the day. It's how you would bootstrap a monetary economy into existence, whether you're talking about a hippie commune, a Lost desert island situation, or a new nation, without relying on any circular reasoning "lets call this seashell money: I value it, because someone else will value it, because someone else...". Using the authority's power of taxation (and power to punish/expel those who don't pay) to give value to money is an imposition, but it appears to be the least barbaric method for organizing society we've come up with so far.
Monetary policy as the business of setting interest rates, isn't of that much concern to me. I think they've landed on basically sane goals of desiring slight inflation over time, and a policy regime of simply paying interest on reserves to set the base interest rate (much better than the pre-2008 system of open market operations). I would like to see them just set the interest rate at 0-1% and leave it there forever, as I don't think there's good evidence that it controls inflation or the economy like they wish it did, and I think interest payments are maybe some of the worst government spending.
I was basically a libertarian before I learned MMT and became a normie, although I never really had that core furious uncomfortability that someone else's decisions can affect 'my money', which seems to really animate some people in these questions you're raising.
The whole current system especially in the US is downstream of hundreds of years of business interests, ideological libertarians, and others clashing over precisely the kind of political questions you listed. The core economic logic is actually extremely simple, but there are a million self-imposed constraints, strange terminology, and extra steps between it all (leftover from the gold-standard era mainly, but it's been through a lot).
It's almost purely a charade that they pretend the market has a role in buying US debt. 'Almost', because they currently do like to take the temperature of market predictions on longer-term securities, and let those rates up the yield curve fluctuate with market sentiment. It's a self-imposed constraint that the treasury and central bank are separated, a self-imposed constraint that the treasury can't go into infinite overdraft on their account, a self-imposed constraint that they can't directly swap liabilities with each other, etc. After WW2 when they re-imposed that last constraint, the Fed chair Eccles told congress exactly that the market plays no real role and that it was a charade, but they re-imposed the pretend restriction anyway for the optics.
The current system of maneuvering around the laws in the US is that the central bank contracts commercial banks as 'primary dealers' who have an obligation to make sure every treasury bond issuance goes off perfectly without a hitch at the chosen policy rate. No bond vigilantes get a say in the process.
Frankly, you just sound like a tits and beer liberal, if you're not mainlining Mises to the degree that it affects your metaphysical outlook, you're not really doing a libertarianism in my opinion. But that's a fine and reasonable position. I was once just such.
"It says here in this history book that luckily, the good guys have won every single time. What are the odds?”
I notice you're stalling on answering the question, and trying to get into procedural matters. Nobody gives a shit what the US' opinion of their own system is, they give a shit about the real economic effect of US debt being toilet paper.
Moving the ball is not making it disappear. I too can borrow to myself infinitely in made up me-bucks. But in the scenario where US debt is no longer the world's reserve currency, that doesn't translate into any ability to buy goods.
"Primary dealers" of monopoly money can surely not fail in delivering it to the US government, but how exactly does that translate into food rations for GI?
Not sure you're following the point, that was saying that we have a goofy system precisely because different people have been trading off who wins & loses all the time. Especially in the 19th century the winners didn't exactly know what they were doing (constant boom & bust cycles with many severe depressions).
The government prints up some IOUs called treasury securities, and swaps them for some other government IOUs called central bank reserves, in a primary dealer auction completely unencumbered by "people choosing to buy debt". Then they use those IOUs (widely called 'money') to spend and/or give to people out in the economy, who are willing to trade goods & services for those IOUs. These government IOUs are valuable because they're the only way to settle your taxes that the government declared that you owe.
If that sounded like gibberish to you, well I already said most people don't understand the monetary system and never learned about it. If you think there's "a" world reserve currency conferring special status to a single country, that does explain where you're at, but the basic logic I just laid out also applies to other countries that issue their own currency.
What if people refuse to use your currency to trade goods and services? What if they tell you to fuck off when you ask them to pay you your own fun bucks? And I'm not just talking about Americans that you have over the barrel of your gun. I'm talking about the rest of the world.
This entire scenario is specifically about what happens when your power to enforce the privilege of exchanging debt for ressources ends.
What happens when US treasuries are no longer viewed as the most risk free investment vehicle in the world and are replaced by something else and demand craters?
The answer is usually that you'll have to dip into foreign currency reserves or sell hard assets, but what do you do when you run out?
What if I start paying your military men in the new harder currency to loot your country?
Money is debt. So that would be inflation, which was definitely covered from the start. That is absolutely the relevant constraint on government deficit spending.
As far as the exchange rate goes: in the very worst case scenario of your exchange rate suffering, you can always at least import as much as you export. That's true whether you even have your own currency or not. But if you have a currency that foreigners are willing to save in (a world 'reserve currency', which basically all currencies are to different degrees), that just allows you the luxury of importing even more than you export (not necessary, but can be nice, although then your exporter businesses might start bitching about your country's 'trade deficit', so it's not all roses).
As I tried explaining procedurally above, it doesn't matter a single iota whether there's any market demand for treasuries. That's the charade part of it. The government effectively is just printing money as they deficit spend, and they always have been. They print the money, they set how much interest money pays (if any), and we have to get the government's money regardless of anything, in order to pay taxes.
If the king wants something done, he levies a tax on the subjects. Then he prints up some tally sticks, and pays them out to people to do the thing. Then they pay their tax, and he burns the tally sticks. Same with colonial american paper money: levy a tax, print up some stacks, get the work done, then shred the money as it gets paid back in taxes.
So you're just going to repeat back MMT to me as if I haven't read Tcherneva and never heard of chartalism? Come on, at least engage with the idea of a debt crisis. Do you really think everyone from Louis XVI to Hindenburg was too stupid to realize they could just raise taxes to lower inflation? The political expediency of reasonable policy matters, and all I see from MMT proponents is a total faith in the impossibility of default or hyperinflation.
I'd like you to at least acknowledge recent history, seeing as though your model is supposed to model it.
This just isn't true. I've actually we lived in countries where that wasn't true. Getting your state looted by foreign creditors is a real thing that really happens to people. Ask any Russian.
At some point people just start demanding real collateral. How does MMT explain the Pepsi fleet exactly?
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
MMT is propably not a popular position here. Your comment mostly assumes its true, and your very long quote is entirely about why the reactionaries wont see the light. The justification is essentially this:
The rest is the same thing in different words. And as for that.
Why is inflation correcting it? We have over the last few years heard from many left-leaning economists that inflation is actually fine, the lower classes are just irrationally afraid of it, go right ahead Mr Biden. In a mostly cashless economy like the US, even the logistical problems of hyperinflation can be handled pretty well.
Indeed, it's true that if I want the government to lower its deficit spending on Hole Digging and Filling Up Again, then I am also calling for an equivalent reduction of surplus enjoyed by Hole Digging and Filling Up Again companies. The alternative isn't that money never being created, the alternative it is being created through other means. Under our current system it doesn't even have to be the government. The private sector can also spend money into existence.
More options
Context Copy link
That is definitely the case, but I would be surprised if anyone could do the t-accounts for various government & banking accounting operations and actually put the liabilities & assets on the correct sides, etc. Even most economists mess it up completely. It's just not something most people learn or care about. My guess was definitely about US officials and how their actions may be explained by their private knowledge, rather than an estimation about our forum members' beliefs.
Identities are a basic check to make sure you're not getting something totally wrong. If you think the government deficit is a bad thing that should be reduced, you have to explain why you think that of the non-government surplus as well. It is quite literally the same thing. As Kelton said in that presentation, people goof up on this all the time. The WSJ in the late clinton years proudly proclaiming in one column "isn't this wonderful? This is the longest sustained budget surplus since 1929!" while the next column over is hand-wringing "this is very worrying, the private sector savings are plummeting!".
When collectively the private sector has more monetary savings than we want, we will value money less and increasingly try to spend it away - the hot potato effect. Prices will get bid up high enough from this economic activity (falling value of a dollar) until we have the correct/desired amount of savings again. Or before that, the increased economic activity will cause the excess monetary savings to get shed off in increased tax payments (monetary destruction, IOUs returning to their issuer).
So taxes being set at rates instead of flat amounts is therefore one of our main automatic stabilizer policies (the other being safety net spending): the government deficit automatically shrinks & grows depending on the state of the economy. Demand-pull inflation is the final relief valve after that, re-valuing money downward until we have the amount we want.
The point of me saying this was that in that situation you should put more effort on justification.
None of this describes an actual problem with inflation. It says that inflation will automatically regulate away any excess borrowings. Why then not set taxes to 0, and just let the inflation run its course?
Is there any reason this is unique to the government? Or is my deficit also literally the same thing as rest-of-the-economy surplus? Because if it is, then it seems noone else should have objections to me borrowing indefinitely, either - it just makes you better of!
Why would they not want more? You demand that I explain why we would ever want non-government surplus to be less, but now you just assert that it will be the case.
Yep fair enough, my initial 2nd paragraph was kind of declaring things outside the point of the rest of it. That was trying to punch up what people might 'know' which I think are incontrovertible, without going into subjective policy implications.
Having some amount of taxes is what gives the currency an initial anchor value. Those taxes being levied broadly and reoccurring every year is what makes the money universally accepted and used even in the private economy. The currency is an IOU where the only thing 'owed' upon redemption is tax relief. If you levy no taxes, then inflation definitely will regulate the value automatically to the desired savings amount of 0 (give or take some inertia).
The only thing unique to government is the ability to levy taxes (backed up by force). That's what allows them to indefinitely print up IOUs that promise to pay nothing but an abstract amount of value in a unit of measurement they make up, and people will still line up to earn those IOUs (working in the army or wherever).
The generalized logic is: "you will always value your creditor's own debt". Because you can cancel out the debts with each other. The government can decree that it's a universal creditor to everyone (everyone owes taxes, abstract amounts of value payable in nothing). Thus enabling it to actually simultaneously be a universal debtor to everyone (issuing IOUs far exceeding the tax liabilities, if people are willing to save some for a rainy day).
You can write any number of IOUs that say "I owe the bearer of this note 1 apple", and use that new money to pay for things. Maybe only people in your neighborhood will accept it (also helps if they know you have an apple tree in your yard, and that there aren't too many outstanding notes to enable a run on your apples). If you write "I owe the bearer of this note $1", then some people (particularly banks) may accept it as valuable if they trust your creditworthiness. Your deficit is indeed definitely everyone else's surplus, if splitting the economy into those 2 sectors is useful to any analysis. So we (in the non-Lykurg sector of the economy) do benefit. The only problem is you run out of creditworthiness before we get very stimulated.
Well, would you be happy holding millions/billions in checking/saving/bond accounts, or would you be tempted at some point to start buying stocks, yachts, and islands instead? It seems that most people tend to have savings targets to hit, after which they feel more free to spend any excess income. And their preferred asset allocation of savings maxes out at some desired amount of monetary savings.
But indeed, the government deficit could certainly be eleventy zillion dollars, if it were to end up in someone's account that has an infinite savings desire who wouldn't touch it. In the MV=PQ identity, that would be money increasing but velocity falling off a cliff, causing no effect on output or price level.
And I didn't say that there's no reason to want to shrink the government deficit, just that it does take an explanation. I could say that I do want to shrink the non-government surplus in hypothetical situations, if we're having obnoxious levels of inflation, maybe caused by too much government spending being indexed against the price level (causing a positive feedback loop that prevents automatic stabilization).
Finally, we indeed have basically never had much demand-pull inflation in the modern era of democracies with proper central banks using fiat currency (since the early 20th century at least). The bouts of inflation are usually better explained as cost-push, often from energy price shocks. The central bankers take credit for being wizards and steering the economies well, but it's probably those fiscal automatic stabilizers doing the work.
Ill note that you still havent explained why too much inflation is bad, or how we would know what "too much" is.
Transitioning out of just questions, I agree that the taxes give value to the IOUs, but I dont think the made up unit gives you all that much long-term. You can inflate away your debt, but expectations of inflation are built into the interest rate you are offered. Unless you can somehow inflate above expectations indefinitely, in the long term you need to tax back what you borrowed plus interest in real terms. There is no reason to borrow unless your position as the government gives you investment opportunities above market returns, youd just pay interest for no good reason.
I assume you're not asking for the various downsides of inflation in general and why people find it annoying when it's above some small amount like 1-2%? My original statement was that people should have the properly oriented mindset, where the problem of 'too much government debt' is along the lines of 'too much of a good thing'. The 'good thing' here is the money in the private sector, not inflation, if that was the confusion. This is all in contrast to most peoples' gut notion that "deficit" and "debt" sound negative and bad and worth minimizing on their own.
You don't think the US making up their own 'dollar' unit of measurement is too important? You must be on some kind of galactic time scale here for what long term means. This is surely one of the most important things about being a sovereign nation, creating and issuing your own currency.
Again, maybe I'm not thinking long term enough. But in the US, we went into millions, then billions, now trillions. Should we find the tens of trillions a special number, such that we wouldn't expect to see quadrillions? When and why would they ever need to 'tax back' this amount? The IOUs just roll over indefinitely.
Yeah once you recognize that all money is just transferable credit, you will notice that there is basically no economic difference between central bank reserves and treasury securities. So rather than one being 'money' and the other being 'borrowing', they are actually not 'borrowing' at all. They are just creating money in different forms. This fact has dawned on people like Larry Summers a decade after central bank reserves started paying interest just like treasury securities.
As for paying interest, it's purely a policy choice to pay anything other than 0% on any of these IOUs. It's a government subsidy to savers: they will give you more money for having money. There are various macroeconomic effects for any chosen rate. Currently the policymakers in charge think choosing to pay a higher interest rate is on balance more constrictive than stimulative, and think that low rates are on balance more stimulative.
Im asking for some kind of real economic cost; "Its annoying when the prices are different than I remember" doesnt count, no.
If you dont pay enough interest, people will stop lending you money.
Well, you said that the difference between me and the state is that the state can tax. If it doesnt actually need to do that, then whats the difference? Why cant I have ever-increasing amounts of debt that I service by taking on new debt?
What youre proposing here is "The Ponzi scheme that actually works". Because Ponzi schemes do work so long as the investors dont take out their money, ie stop letting you roll over your debt.
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
Private savings don't have to be in T-Bills. To the extent the market is flooded with them, they crowd out private investment and savings in private instruments.
Still, the real reason government deficits are bad is that the bulk of government spending is bad. Transfer programs for the poor and elderly, government schools, subsidies for corn farmers, etc. When you spend money on these things you are buying fairly useless products, employing people in positions where they would be better for the country if they were employed elsewhere, etc. So even if some amount of T-bill generation each year is actually good, it would be best achieved by funding courts and police and setting taxes near to zero.
There's no crowding out there, it's just a price effect. The government sets the risk-free rate, and others price risk premiums on top of that. Finance is infinitely available: price not quantity.
That's exactly right, that's why we fight (politically) for our preferred outcomes. It's just a mistake to say the deficit has anything to do with the size of government or what we prioritize doing in the public sector. The size of the government deficit & debt have to do with the savings desires of the populace. So it's just the wrong target to look at.
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link