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Im not entirely on board with treating a simple dollar bill as an IOU. I understand your point about it gaining value from being usable for future taxes, but the bill does not, at the point of issuing, create any obligation for the future. "I owe you tax relief, the amount and whether thats relevant at all to be decided, by me." is not a financial instrument, because thats true of everything. Nothing prevents me from demanding taxes in yuan (or kilos obsidian, or literally whatever) instead of dollar tomorrow, so how are dollars my debt, and yuan arent?
Other question: If the government borrowed in a foreign currency or gold rather than dollars, would that be inflationary?
I also notice that you never say whether somethings is in nominal or real terms, whats up with that?
This might be the crux. If people want monetary savings to keep increasing in real terms, that would mean theyre willing to work for more than theyll consume, indefinitely. Thats certainly a disagreement with the classical model, but its not really over something monetary. In that case, I can see how you can grow the economy by just spending the money they dont. A few remaining disagreements:
First, I dont think this leads to full employment necessarily. Firstly, because while more demand can be expected to increase employment, but there neednt be any finite amount of it where employment becomes full. Secondly, because the willingness to increase real saving per unit of time is propably limited, and drawing on that full amount might not be enough for whatever you want to do.
Second, even if savings increase over the long term, there will be fluctuations. If a lot of people suddenly want to spend money that youve already spent for them, what happens?
Last, people want savings, but why would they want dollar denominated savings over non-monetary assets? If people just buy index instead of sitting on money, does that already do what you want to do?
It's a bit strange to think about, without being redeemable for gold or anything, but that is what it is. Cash notes are financial liabilities of the central bank on their balance sheet: https://www.federalreserve.gov/monetarypolicy/bst_frliabilities.htm
The UK pound paper notes even still literally say they are promissory IOUs on them, with the queen or king announcing "I promise to pay the bearer on demand the sum of five pounds". You can't redeem that value in the form of anything other than another one, but yeah it's still an IOU which exists simultaneously on the issuer's balance sheet as a liability and on the holder's balance sheet as an asset. You're holding paper evidence of the government's debt relationship to you.
If by borrowing in a foreign currency you mean they create an IOU promising to pay (for example) a billion yen in the future, and swapped that with some bank like the IMF for actual yen notes or credit which they then spend: I guess it would be potentially inflationary to that other currency. What adds inflationary pressure is any actual spending. I can't think of what borrowing in gold would mean.
Well everything is just nominal in reality and in accounting. Anyone can always inflation-adjust or gdp-adjust any particular numbers when they feel it's relevant to some particular analysis, like doing comparisons over time or across countries, etc.
Yeah I mean just increasing the deficit on any random spending or tax cuts will probably juice the economy up to a certain point like 1-3% unemployment, but it would take something more targeted to try to even go beyond that, somehow minimizing transitory/frictional unemployment, without generating inflation. Can depend on how strict you want to be about the term full employment.
Definitely, it fluctuates even daily. By the nature of having decent "automatic stabilizer" fiscal policies, people suddenly choosing to spend down their savings would result in tax payments going up, safety net spending going down, and thus automatically shrinking the government deficit (maybe even driving it into surplus).
Yeah personally I have almost no appetite for monetary savings, I dump it all into non-bond index funds. I'm not sure what you mean about what I want, but yeah the analysis would be that incentivizing saving in other assets like stocks & real estate surely ends up meaning the government won't end up running as large of a deficit (no need to counter savings leakages). Again that's mostly value-free, so I don't call it good or bad.
Some people have complaints about asset price inflation, where it's not that the value of money is falling compared to goods & services, but where we're all plowing endlessly into the stock market like a clown car, bidding it up constantly. But I'm not sure about that.
The fact that they historically descend from IOUs and there are some conventions left over from that time does not tell us "what it is". Again, what actual reality stops the fed from listing all yuan as its liabilities?
Someone gives me 100 gold, and I commit to giving him back 104 gold in a year. In between, I will presumably sell the gold for money, do something with the money, and then buy gold to pay him back in the end. The difference to borrowing money is that the gold price need not be the same at the start and end.
I asked about this because before you suggested employment as an indicator for the right deficit. Do you have any suggestion for something that directly tells me when the appetite for monetary saving is satiated?
Things like this are why Im wary of your nominal-only analysis. I would like to know if the people doing that spending then end up worse of from your previous spending, and how that can in turn influence previous saving. As is Ill have to work it out myself sometime when Im not right about to go to bed. It propably also negates/displaces the growth benefits of that previous spending.
In theory, all stocks should have the same expected ROI. If you unselectively pour money into a market thats in equilibrium, then active traders will lower their standards for what IPOs to buy, and a corresponding supply of them will show up. The money ultimately goes to new investment.
That is part of why I suggested it: Because while just more demand will grow the economy generally, it also makes a difference what that money is spent on. Digging ditches an filling them back in is worse than building more capital. Putting money into stocks means that the active traders will direct it towards the best investments. Note that current practice is that the fed does its intentional inflating by ultimately subsidising lower interest rates - that has a similar effect. If you do government spending specifically for the sake of the economy, thats generally better than spending on specific things (again, excepting cases where a certain investment is only open to the government).
And this just may be of interest to you: The classical models dont believe that people will increase monetary savings indefinitely, for reasons that go back to the "unwinding date" that came up before. I dont know how familiar you are with economics outside of macro, but classical models use backwards induction a lot. Backwards induction requires some kind of "end of the game" with final scores to reason backward from. What is that? Well, it turns out that the backwards induction arguments you want to use in general economic models dont depend on how far away the end date is. So you bascially model the situation as if there was an end date so far in the future that only these in-principle effects are relevant.
Youre not getting any utility out of unspent money at the end, therefore youll spend it down before you get there, therefore monetary savings dont grow indefinitely. Im very curious what an economics looks like where you avoid these indefinite future end arguments generally, rather than just in this one context.
Here's a chicago fed piece that tries to describe it one way, if you like this "But currency is a liability to the central bank that issues it—a promise to stand behind the currency’s value in the future.".
It's just easiest for all the accounting and understanding, to see it as a bearer physical receipt version of the general electronic account credit (rather than the other way around, seeing the electronic reserve balances as promises to pay the physical version). Just all as types of credit from the central bank, which no longer promise redemption into anything, other than abstract value that is accepted by the government for relief from taxes/fees/fines/tariffs/etc.
I agree it's possible that you could do the accounting in other ways, and in fact I think maybe coinage in the US is in a weird spot like that, technically (like they are a liability of the treasury instead of the fed, or even that the treasury doesn't recognize them as a balance sheet liability maybe).
I'm not really sure what that would mean. Without it actually being a real liability, you could just say it is and that their balance sheet is in a massive capital loss in a fake way?
Technically, what actually stops that in the real world is that what the Fed can do is precisely limited by what congress has allowed in the Federal Reserve Act. But yeah congress amends that plenty throughout history.
OK yeah I guess that's a gold bond or practically commodity-futures trading. If writing that "IOU 104 gold at x date" note enables any extra normal spending that you wouldn't have otherwise done, that spending would have some inflationary pressure on prices of things you buy. Because again it's the spending which is the relevant thing.
It's something you observe after the fact. I think in the original transcript post I made at the top of this chain, mosler called it 'you count the heads of the people in the unemployment line', and you also see what is happening with the price level week by week, month by month, seeing if it starts ticking up.
The mainstream econ version of this, at least 20+ years ago, was called NAIRU: the non-accelerating inflation rate of unemployment. The level of unemployment below which any extra pushing just gives inflation. But they were treating it in a very strange way, trying to assume and make predictions about it ahead of time "maybe the nairu is now 5 or 6 instead of 7, can we allow unemployment to keep getting lower before we jump in and cool things off?". That posture is only explained if you think you're going to accidentally tip into a spiral which is hard to escape from (which was never borne out).
There's multiple ways to count unemployment, but the basic headline unemployment rate can definitely get down to 2-3% with no inflation, it seems from maybe the last 50-100 years. It's a bit hard to say because policymakers have usually been so cautious that we barely have any experience with demand-pull inflation (usually there's some type of cost-push supply side explanation for inflation). Probably the best evidence would be re-examining the '60s and what mainstream keynesians found trying to push for full employment.
I suppose it just looks more like just looking at the real world. As they say, the long run never really gets here, we are always in a series of short runs. The actual concrete accounting, logic, and plumbing seems much more useful to nail down and understand first, before starting to build more & more elaborate models on various assumptions. I bet it would probably be a fun job to make DSGE models and papers about theoretical risk-adjustments if you can find someone to pay for them, coming up with new tricks and techniques and assumptions. But I'm not too impressed with the real-world understandings & predictions of most equilibrium thinking, whether in econ or finance. I liked this Keynes quote, compared to Barro-style ricardian equivalence type stuff:
If thats why currency is debt, then youre including that promise into "what currency is". You would then have to, whenever you try to use the fact that "currency is debt" in your reasoning, also show that the promise wont be violated, else the argument is invalid. And you of course cant already use "currency is debt" to show that something will work out without breaking the promise, because thats a regress.
Thats fine, if you can tell at the end of each period whether you went over in the previous. It sounds like youre now suggesting something about inflation as the criterion. Is accelerating inflation the right criterion and old economists where just too worried about going over, or do you object to that criterion as well? What do you think of NGDP targeting?
With private debt, the strategy of taking on more and more debt looks great right until noone is willing to lend you more. People rightly want a plausible model for "observations in the real world" before making them loadbearing. The temptation to ignore limitations based on "real world observation" is omnipresent in economics ("Most people are willing on the margin to help a bit without direct visible compensation, therefore communism"), and using theoretical problems as a setup to ignore theory is precisely what keeps critics of mainstream economics outside the mainstream.
Even without an end-date, economics always depends on expectations about the future. Trying to understand whats happening in the here and now before you get to those doesnt work.
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