At some point, this just comes down to willful ignorance. And especially those that are ignorant keep bringing up the Clinton surpluses of the 90's having zero awareness of the damage it did to the private sector long term. The notion that gov budgets must balance or operate like a household is literally killing us. It's no accident as to why we are lacking the necessary investments needed in our economy (falling behind China via solar & clean energy) simply because the majority of Americans have misunderstood the word "debt". It's just numbers on a spreadsheet, the focus should not be on the lack of dollars but the real resources & not to mention there are limits to spending mainly in the form of inflation. I would encourage those to read The Deficit Myth by author Stephanie Kelton.
The Glasgow study was 2022, not 2002, by clicking on your link.
We discussed this last time this came up, but, again, lest your readers misunderstand: this represents an absolute decline in deaths since 2010, a year with, until then, the lowest mortality in forty-seven years or more. While the real and very sharp turn in the trend line from 2010 onwards makes for a solid comparison with the start of Austerity, this also makes for a good illustration of the possibilities for abuse inherent in the excess deaths statistic.
Thanks for catching my typo Tom - I've got that sorted. As to the deaths related to austerity I'm more inclined to believe that research: it is related to and about the actual topic. Top-line death rate figure aren't the way to tell that story. As you say statistics can be easily abused - I agree - I used to teach the topic at Glasgow Caledonian University, so I know that's the case: politicians, journalists and TV reporters routininely present statistics in ways that obscure the truth. They do that because they want to support their own (or the people who pay their wages) story/agenda/ideological view. As a Scot we are particularly prone to that behaviour. However, the research I mention in the article is not that: it's research showing austity had an impact on life-expectancy - it has slowed dramatically since 2011. It's not an isolated finding - or an outliner as a research result - and it's not just confined to the UK. The same thing has happened across Europe.
When you say “with the equally erroneous belief (for currency issuing governments) that government ‘debt’ must be reduced”. A collar to this statement would be that government debt should be increased. Why is this an inherently good thing?
Thanks for your comment UME. Currency-issuing governments do not have debt in the way the word is commonly understood. For such governments, it is simply a figure on a ledger, which can remain there indefinitely. The debt figure itself has no effect on current or future spending.
What the government should concentrate on is the availability of real resources in the economy and how it competes for and uses those resources. The real restriction on spending is the risk of inflation.
The debt to be concerned about is private sector debt - that is what we found out in 2008.
Thanks for the explanation - I understand and accept the identity concept that gov debt is an ledger entry and = private sector savings. I do not, however, agree with the idea that debt has no effect on future spending. if the debt (or rather the debt to GDP) grows too big it will limit gov ability to borrow in the future either due to inflation or lack of lenders.
More importantly - when the gov spends it is deciding how real resources in the economy should be deployed. I personally do not think that the gov is the best entity to make these decisions. What are you thoughts on this?
The government doesn't need to borrow. It makes the stuff. There are no modern markets without the government: without the government's currency; without regulations; without the infrastracuture the government builds; without the educated population the government ensures is in place; without the legal system; without the research that the government funds.... The governments role is central to the economy. Read 'The Entrepreneurial State' by Mariana Mazzucuato if you need convincing.
The government’s borrowing is better understood as a safe saving facility: it is the only way for the finance sector to store it’s money overnight without risk because only the government can guarantee repayment. If the monies were stored in a bank it could be lost if the bank went bust.
In respect of spending on limited resources, it is a choice of either private finance or the government, and all private finance is aimed at making a personal profit at the expense of everybody else. At least the government’s spending priorities are democratically accountable.
It's not only an inherently 𝑔𝑜𝑜𝑑 thing to increase government debt in a nation with a growing population, it is 𝑛𝑒𝑐𝑒𝑠𝑠𝑎𝑟𝑦 (no government avoids it for long): 𝐠𝐨𝐯𝐞𝐫𝐧𝐦𝐞𝐧𝐭 𝐝𝐞𝐛𝐭 = 𝐧𝐞𝐭 𝐧𝐨𝐧-𝐠𝐨𝐯𝐞𝐫𝐧𝐦𝐞𝐧𝐭 𝐬𝐞𝐜𝐭𝐨𝐫 𝐬𝐚𝐯𝐢𝐧𝐠𝐬, to the last penny. A growing population needs a growing money supply — and that's just to sustain the existing price level and avoid deflation and crippling completely needless involuntary unemployment.
If net government spending is not continually positive then 𝑖𝑓 𝑡ℎ𝑒𝑟𝑒 𝑎𝑟𝑒 𝑎 𝑙𝑜𝑡 𝑜𝑓 𝑠𝑎𝑣𝑒𝑟𝑠 then the non-government sector is placed in tax liability default, by accounting identity. Why would you want that (as your question seems to obliquely imply)? It'd be viciously cruel. Putting people into debt who cannot counterfeit the tax credit.
Maybe additional money should come into circulation as the economy grows (as additional goods and services are coming to the marketplace). But money should not be created or issued on the basis of interest-bearing debt because that creates an artificial scarcity of money which keeps us in a collective state of perpetual debt and also contributes to involuntary unemployment.
Just change that to, "money should not be created on the basis of government offering a savings account." Then it's correct. It's logically obvious too, since the currency issuer offering a savings account serves no public purpose. Private banks can compete for customers instead.
It is not correct (if this is what you meant) that government debt creates an artificial scarcity of tax credits, it's the opposite. Private/household debt is the "scarcity", but sometimes there's a good reason for bank credit — allows people to purchase things in advance of income. This also does not create a scarcity provided the government deficit is floating the $ supply, e.g., via the automatic stabilizers.
Debt, by itself, certainly isn't the problem and doesn't create a scarcity of money.
Banks create money (for governments, businesses, consumers, etc.) by allocating credit, but there is a systemic shortage and artificial scarcity of money because all of it is basically created on the basis of interest-bearing debt, even when money is created for a government by a publicly-owned central bank (by purchasing government securities).
Total aggregate debt (principal plus interest) is more than the total amount of money in existence, which keeps us in a collective state of perpetual debt. This is one problem that should probably be addressed.
Another problem that should probably be addressed is the fact that credit is often misallocated for unproductive and destructive purposes.
As for issuing money, one option is that ONLY the issuer of a currency (such as a government, which could spend its currency into circulation to pay for wages, products, services, etc.) should be compelled to accept or redeem its own currency as payment (i.e. for taxes), and at face value. From this perspective money is debt, essentially an IOU, an obligation or promise that the issuer will provide value in exchange for value received.
Bearing in mind that money is credit, maybe new money should only be created (i.e. additional credit should be allocated) when additional goods and services are coming to the marketplace. Create more money as more stuff is being produced. Maybe short-term interest-free credit should be allocated to facilitate production and exchange. Perhaps longer-term financing should come from savings.
The proper allocation of credit (or issuance of money as an IOU) should allow people to temporarily go into debt and obtain goods or services before they provide an equivalent value of goods or services. Credit should be allocated (money should be created) to facilitate trade; goods and services should essentially pay for other goods and services.
You might like 'The End of Money and the Future of Civilization' by Thomas Greco
"Redeeming of currency/deposit settlement at *other than face value."
This was is what naturally occurs--not, really, a regulatory topic--in the abscence of interbank payments clearinghouses such as the nineteenth century reserve account clearinghouse for New England, the Suffolk Banking System or the nineteenth century New York City system, The Clearinghouse (still exists as TCH, and has, very slightly, surpassed the Fed in total dollar volume of transactions), or of course, that famous reserve account-model clearinghouse, central banks. In the nineteenth century, banks themselves, alongside the Treasury, issued their own paper dollar bills. These, as you say, traded at a discount one against the other. Now in a reserve account-style clearinghouse such as the Suffolk Banking System or the Fed, this duscount is replaced by a varying interest rate on interbank overnight loans (the average of which the Fed (the institution) seeks to artificially corall within a narrow band).
But Cato's superbly talented and MMT knowledgeable, George Selgen points out that in the nineteenth century,
1. Different banks within a single city *had no* discount differential, effectively accepting same-city dollar bills at par one against the other even with no clearinghouse.
2. In Canada, which didn't have a lot of local laws requuring local banks to be purely local, also: bank issued paper money pound bills tended to trade at par, naturally and not as a result per se of legal tender laws.
As for legal tender laws, Dr. Collin Drumm, author of The Trial of the Pyx Substack, pointed out, to me in an explanatory comment, that what the formal issuance of a coin does for transactions issued in that unit of account is provide a settlement means that must be accepted at par for payments on a pre-agreed price. As you know, between sale, delivery, and finally, payment, there is a span of time in which exchange rates can potentially fluctuate. Say between bank A's paper dollars and bank B's, or to go by Innes, silver bullion is all over the map on a day-to-day basis.
"Banks create money (for governments, etc.) by allocating credit"
The Treasury sits in the central bank as just another "bank," so it creates its "own" money, its payees' money the same as any bank would create credit for it's new mortgage customer by creating the home seller's new money (the price of the house) within that other bank. Mechanics of how that can even be need discussing, but.
_________________
"scarcity of money because it is created on the basis of interest-bearing debt,"
Note that, as you pointed out somewhere above, the Treasury creates money in its payees accounts via a central bank-type clearinghouse, specifically in the U.S., the Federal Reserve system of accounts, and then that same day settles its own account via a form of interbank overnight loan (called treasuries, the only difference being the overnight part) of, mathematically (those payments cause reserves to rise throughout the day, since net payments *are* reserves) those same payments back to itself.
Fine, here, interest, pre-QE/IOR was accrued, and post-QE/IOR whether interest accrues *or not* depends on the IORB rate.
_________________
Now, going to "even when money is created for a government by a publicly-owned central bank (by purchasing government securities)."
It appears out of thin air. But to the degree it is, the profits revert to the Treasury every April (and a small portion goes to Chase Manhattan, et cetera--but note, doesn't disappear long term). But in fact, a central bank *pays for* its net purchases of treasuries by issuing zero interest notes to the banks, which up until QE/IOR *reflexively* bought these. I estimate the preference rate for physical cash over reserve account balances is five percent. The two trade at a five percent differential, my (hobbyist) research proves...
So the cost of central bank credit has been up until QE/IOR zero interest rate Federal Reserve notes (current high rates are artificial, but a zero rate doesn't rely on continued QE, but only sufficient central bank T-bills, et cetera to stop the drain into hundred dollar bills) Whether that can continue with everyone paying by cash card is a question, but if it doesn't, interest rates *within* the central bank accounts will be zero, but, as with cash, perhaps trade at a differential to "real" bank deposit money...
Thanks for the feedback - I have some thoughts on this.
1) Classical Econ always says deflation = Armageddon and inflation = a good thing. Why is this the case (Other than the fact that every Econ book ever published states this as orthodox gospel)? Why do existing price level need to rise or even maintain current levels? Would everyone not be better off if prices declined and their $$$ bought more goods and services (company profit margins might be a bit lower - but is that so bad)?
The idea that low levels of deflation would cause people to hold off purchasing something they needed and cause a recession is a bit of a stretch when you really think about it (I must confess I accepted it as a truism when I was in school).
If you have time would you please flesh this idea out a bit more? IE How does low level deflation/no inflation or deflation lead to unemployment (the actual mechanics/flows through the economy)? Let's think about this both in real and nominal terms.
2) Net Gov Spending - I am not sure I follow the argument. I will try and touch on the areas I do not understand and maybe you can give me guidance/feedback.
Does "If Net government spendings is not continually positive" = "if the gov is not running a deficit"?
"If there are a lot of savers then the non-gov sector is placed in a tax liability default, by accounting identity" - I am interpreting this as If gov debt = 0 then private sector savings = 0 thru the identity rule and if the private sector has no savings how will they pay their tax liability. Is that what you meant?
"Putting people into debt who cannot counterfeit the tax credit" - I am not sure what this means? I think it is implying that with out gov debt then there would be less private savings and hence people would have to pay taxes from other monies they saved. I am grasping here can you please clarify what this means - ideally via an example.
I'll see what I can do in this comments section, could be lengthy.
---
1) Classical Econ always says deflation = Armageddon and inflation = a good thing. Why is this the case (Other than the fact that every Econ book ever published states this as orthodox gospel)?
Answer: deflation induces a (additional strong) saving bias, that suppresses purchasing, so leads to reduced output, laying off workers, a spiral down, until the government automatic stabilizers kick in to supply the currency to reward spenders. Inflation is bets thought of as "burning the currency slowly" so encourages spending, which is what drives a market economy. Overall, your perspective should change: savings are bad, spending is good. You want the currency to circulate.
Consider the extreme limiting case: we only need a single $1 bill, if it circulates fast enough (at the speed of light or whatever) then that's all an economy needs. But we do not have that, people have savings desires, which is a depressant a demand leakage. So inflation is a good way to get circulation up, to produce sales and hence justify output that people desire to consume. A market economy runs on spending, not on saving.
Saving is the accounting record of past spending/investment. Or you can say "savings follows from investment" (not the other way around.)
Also, change perspective to the flows, not the stocks. What we principally need is income (the flow) not savings (the stock).
1.2) Why do existing price level need to rise or even maintain current levels? Would everyone not be better off if prices declined and their $$$ bought more goods and services (company profit margins might be a bit lower - but is that so bad)?
Answer: the price level does not *have* to rise. There are better ways to increase circulation (hence output and employment) without inflation. One is to, by designed policy, burn the currency slowly, i.e., a stamped depreciation, like a Gesell currency. It is better because the policy rate is set by the authority, so it is fair and known in advance, eliminating risk. When the $ issuer allows the price to float, it is uncertainty, so more risky for folks who make a living from financial trading. We want to eliminate people who make a living from financial trading (serves no public purpose). We want people who make a living from making real goods, or real services (healthcare, education, &c.) — savings does not do this, income and spending does (unless you like not paying people to work, aka slavery). The policy should be to fix price and let supply float. But that's the currency issuer (government). The markets cannot always fix price and let supply float, since they're operating under real goods constraints and competition. But if the government is fixing price and allowing quantity to float (e.g., with a Job Guarantee) then this helps the markets enormously with their desired price stability.
And no, if prices decline not everyone is better off. There are ALWAYS two sides to every ledger, so this creates winners and losers. The people selling the goods now have less per unit sold. They can sustain that if their sales or productivity increase or costs decrease, but that's not always their luck.
Deflation is dystopian too: who benefits the most? Answer is the hoarders of the currency. The poor get crippled, and their past debt becomes all that harder to pay-off. With inflation the poor find it easier to pay down past debt. So inflation is the leveller, deflation to cause of increased inequality. (This is ceteris paribus of course — not all ways inflation is achieved are good, .e.g, "helicopter drops of cash" but for only people who already have a lot of money [aka government bonds] is a terrible way to promote inflation.))
1.3) The idea that low levels of deflation would cause people to hold off purchasing something they needed and cause a recession is a bit of a stretch when you really think about it (I must confess I accepted it as a truism when I was in school).
Response: do you mean high rate of deflation? If it is low level I would not care too much, just as I'd not care too much if there was a low level of inflation. But as just remarked above, inflation levels inequality, deflation increases inequality,so why would you want even a low level of that? Inflation decreases the purchasing power of hoarded currency and decreases the burden of past debt. Deflation the opposite. So which do you prefer?
1.4) If you have time would you please flesh this idea out a bit more? IE How does low level deflation/no inflation or deflation lead to unemployment (the actual mechanics/flows through the economy)? Let's think about this both in real and nominal terms.
Response: deflation is a savers bias. SO on balance it's not good for a market economy. It rewards the richer folks disproportionately. The more savings you hoard, the better off you'll be tomorrow, and all the more better off compared to someone with just $1 less than you. Now put that though the actual income/wage distributions in the real world. It's a disaster, a dystopia.
This is not about unemployment. Inflation and deflation have nothing to do with unemployment. But yo should see correlations, for obvious reasons, the reason is the common cause of government policy responses (usually being terrible, or at least dopey). All unemployment is caused by the government not employing everyone that their tax liabilities (by design) unemployed. It's a policy mistake — of epic tragic proportions.
2) Net Gov Spending - I am not sure I follow the argument. I will try and touch on the areas I do not understand and maybe you can give me guidance/feedback.
2.1) Does "If Net government spendings is not continually positive" = "if the gov is not running a deficit"?
Answer: Yes. But = "if the gov is not *continually* running a deficit" to be pedantic.
2.2) "If there are a lot of savers then the non-gov sector is placed in a tax liability default, by accounting identity" - I am interpreting this as If gov debt = 0 then private sector savings = 0 thru the identity rule and if the private sector has no savings how will they pay their tax liability. Is that what you meant?
Response: almost. If government deficit (the flow, not the stock) is zero, and foreign sector deficit in your currency is also zero, then that year if you have savers then the system is in default. So people will be extinguishing their tax liabilities with savings, rather than income — "being in default" here is loose language, but I hope is understood, it means net savings will go down. For those with no savings and maxed out credit cards then they'd be in default, and of course that's quite common, hence bankruptcy happens. "The system is in default" is macro, it doesn't mean any individual household will be in default, but very likely some will be, if there are big savers. One person's spending is another's income.
3) "Putting people into debt who cannot counterfeit the tax credit" - I am not sure what this means? I think it is implying that with out gov debt then there would be less private savings and hence people would have to pay taxes from other monies they saved. I am grasping here can you please clarify what this means - ideally via an example.
Response: yeah, that was rhetorical. It's obvious we cannot counterfeit the State's unit of account, for good reason. Anarchy otherwise. All I meant is that we cannot pay the tax with our own I.O.U.
But more to the point, if you are the decrepit government forcing people to pay tax or otherwise go to jail, then you aught to provide them with the means to pay the tax, right? Not leave them to contemplate counterfeit or robbing a grocery store (or working for a ꕷꖾꕯꖡꖡꔇ boss). Thus you want to hire them all if they need the tax credits (i.e., cannot find decent private sector employment), otherwise you're a completely decrepit government. You, government, can ALWAYS hire them all, since you cannot run out of your own scorepoints (tax credits), and if you pay the going wage rates it cannot possibly be inflationary. Increased currency circulation directly causes higher tax returns, by the automatic stabilizers, cooling off the inflation pressure.
But a sudden policy change can cause one-time price adjustments. In MMT circles we do not call that inflation, as indeed it is not! Inflation = continual upwards adjustments in prices, not one-time adjustment.
It's worth noting that references to reducing government debt are often (or usually) misleading because they mean reducing the ratio of debt to GDP. This is an arbitrary ratio since the GDP value used is a country's total income measured over a year – why a year? Nobody can tell you – it's just what they do.
When they talk about reducing the debt, they usually mean increasing GDP so that the ratio will fall. The debt itself will only decrease if the government sector runs a surplus, which is likely to mean the private sector will be in debt – as Jim points out, that's bad.
George - thanks for chiming in - I agree that debt to GDP (or debt relative to the ability to service that debt) is a much more meaningful measure than just debt. I would note that I was actually referring to both. IE
Why is increasing gov debt to GDP (the ratio) an inherently good thing?
as well as
Why is increasing gov debt even when the GDP ratio itself is going down (IE GDP growing faster) an inherently good thing?
Why would say fixing gov spending to a percent of GDP (or some other option that does not include ever increasing debt) not work? This is not to suggest that gov runs a surplus it just means that it does not run a deficit? Why is this such a bad thing? Why would this cause an economic collapse?
Debt/GDP is neither good nor bad. It's irrelevant. There are two types of government: currency issuers and currency useres. The US, UK, Canada, China and many more are currency issuers. They don't have debt in the way you or I have. They issue the currency. What matters is real resources and the real lives of citizens - and how their wellbeing can be maximised by using those resources in the best and most sustainable way.
I'm not saying the ratio is more meaningful. The government doesn't have to 'service the debt' except by paying the coupon (interest) on the gilts it issues.
Issuing gilts is a policy choice, not a funding meachanism.
If the debt (not the ratio) is not increasing due to the government running a deficit, it means the private sector is unable to save.
At some point, this just comes down to willful ignorance. And especially those that are ignorant keep bringing up the Clinton surpluses of the 90's having zero awareness of the damage it did to the private sector long term. The notion that gov budgets must balance or operate like a household is literally killing us. It's no accident as to why we are lacking the necessary investments needed in our economy (falling behind China via solar & clean energy) simply because the majority of Americans have misunderstood the word "debt". It's just numbers on a spreadsheet, the focus should not be on the lack of dollars but the real resources & not to mention there are limits to spending mainly in the form of inflation. I would encourage those to read The Deficit Myth by author Stephanie Kelton.
I agree with every word you say Michael. Sadly, it's a big job to educate people about how government spending and 'debt' works.
The Glasgow study was 2022, not 2002, by clicking on your link.
We discussed this last time this came up, but, again, lest your readers misunderstand: this represents an absolute decline in deaths since 2010, a year with, until then, the lowest mortality in forty-seven years or more. While the real and very sharp turn in the trend line from 2010 onwards makes for a solid comparison with the start of Austerity, this also makes for a good illustration of the possibilities for abuse inherent in the excess deaths statistic.
UK death rate at 'record low' returning to pre-pandemic levels | News UK | Metro News https://share.google/JNyrCqHIFfzs1TmHc
Warran Mosler (p. 44) misspelled
Thanks for catching my typo Tom - I've got that sorted. As to the deaths related to austerity I'm more inclined to believe that research: it is related to and about the actual topic. Top-line death rate figure aren't the way to tell that story. As you say statistics can be easily abused - I agree - I used to teach the topic at Glasgow Caledonian University, so I know that's the case: politicians, journalists and TV reporters routininely present statistics in ways that obscure the truth. They do that because they want to support their own (or the people who pay their wages) story/agenda/ideological view. As a Scot we are particularly prone to that behaviour. However, the research I mention in the article is not that: it's research showing austity had an impact on life-expectancy - it has slowed dramatically since 2011. It's not an isolated finding - or an outliner as a research result - and it's not just confined to the UK. The same thing has happened across Europe.
And Warran Mosler (p. 44) is a misspell.
Thanks Tom, I’ll get that typo fixed.
When you say “with the equally erroneous belief (for currency issuing governments) that government ‘debt’ must be reduced”. A collar to this statement would be that government debt should be increased. Why is this an inherently good thing?
Thanks for your comment UME. Currency-issuing governments do not have debt in the way the word is commonly understood. For such governments, it is simply a figure on a ledger, which can remain there indefinitely. The debt figure itself has no effect on current or future spending.
What the government should concentrate on is the availability of real resources in the economy and how it competes for and uses those resources. The real restriction on spending is the risk of inflation.
The debt to be concerned about is private sector debt - that is what we found out in 2008.
Hey Jim,
Thanks for the explanation - I understand and accept the identity concept that gov debt is an ledger entry and = private sector savings. I do not, however, agree with the idea that debt has no effect on future spending. if the debt (or rather the debt to GDP) grows too big it will limit gov ability to borrow in the future either due to inflation or lack of lenders.
More importantly - when the gov spends it is deciding how real resources in the economy should be deployed. I personally do not think that the gov is the best entity to make these decisions. What are you thoughts on this?
The government doesn't need to borrow. It makes the stuff. There are no modern markets without the government: without the government's currency; without regulations; without the infrastracuture the government builds; without the educated population the government ensures is in place; without the legal system; without the research that the government funds.... The governments role is central to the economy. Read 'The Entrepreneurial State' by Mariana Mazzucuato if you need convincing.
The government’s borrowing is better understood as a safe saving facility: it is the only way for the finance sector to store it’s money overnight without risk because only the government can guarantee repayment. If the monies were stored in a bank it could be lost if the bank went bust.
In respect of spending on limited resources, it is a choice of either private finance or the government, and all private finance is aimed at making a personal profit at the expense of everybody else. At least the government’s spending priorities are democratically accountable.
It's not only an inherently 𝑔𝑜𝑜𝑑 thing to increase government debt in a nation with a growing population, it is 𝑛𝑒𝑐𝑒𝑠𝑠𝑎𝑟𝑦 (no government avoids it for long): 𝐠𝐨𝐯𝐞𝐫𝐧𝐦𝐞𝐧𝐭 𝐝𝐞𝐛𝐭 = 𝐧𝐞𝐭 𝐧𝐨𝐧-𝐠𝐨𝐯𝐞𝐫𝐧𝐦𝐞𝐧𝐭 𝐬𝐞𝐜𝐭𝐨𝐫 𝐬𝐚𝐯𝐢𝐧𝐠𝐬, to the last penny. A growing population needs a growing money supply — and that's just to sustain the existing price level and avoid deflation and crippling completely needless involuntary unemployment.
If net government spending is not continually positive then 𝑖𝑓 𝑡ℎ𝑒𝑟𝑒 𝑎𝑟𝑒 𝑎 𝑙𝑜𝑡 𝑜𝑓 𝑠𝑎𝑣𝑒𝑟𝑠 then the non-government sector is placed in tax liability default, by accounting identity. Why would you want that (as your question seems to obliquely imply)? It'd be viciously cruel. Putting people into debt who cannot counterfeit the tax credit.
Maybe additional money should come into circulation as the economy grows (as additional goods and services are coming to the marketplace). But money should not be created or issued on the basis of interest-bearing debt because that creates an artificial scarcity of money which keeps us in a collective state of perpetual debt and also contributes to involuntary unemployment.
Just change that to, "money should not be created on the basis of government offering a savings account." Then it's correct. It's logically obvious too, since the currency issuer offering a savings account serves no public purpose. Private banks can compete for customers instead.
It is not correct (if this is what you meant) that government debt creates an artificial scarcity of tax credits, it's the opposite. Private/household debt is the "scarcity", but sometimes there's a good reason for bank credit — allows people to purchase things in advance of income. This also does not create a scarcity provided the government deficit is floating the $ supply, e.g., via the automatic stabilizers.
Debt, by itself, certainly isn't the problem and doesn't create a scarcity of money.
Banks create money (for governments, businesses, consumers, etc.) by allocating credit, but there is a systemic shortage and artificial scarcity of money because all of it is basically created on the basis of interest-bearing debt, even when money is created for a government by a publicly-owned central bank (by purchasing government securities).
Total aggregate debt (principal plus interest) is more than the total amount of money in existence, which keeps us in a collective state of perpetual debt. This is one problem that should probably be addressed.
Another problem that should probably be addressed is the fact that credit is often misallocated for unproductive and destructive purposes.
As for issuing money, one option is that ONLY the issuer of a currency (such as a government, which could spend its currency into circulation to pay for wages, products, services, etc.) should be compelled to accept or redeem its own currency as payment (i.e. for taxes), and at face value. From this perspective money is debt, essentially an IOU, an obligation or promise that the issuer will provide value in exchange for value received.
Bearing in mind that money is credit, maybe new money should only be created (i.e. additional credit should be allocated) when additional goods and services are coming to the marketplace. Create more money as more stuff is being produced. Maybe short-term interest-free credit should be allocated to facilitate production and exchange. Perhaps longer-term financing should come from savings.
The proper allocation of credit (or issuance of money as an IOU) should allow people to temporarily go into debt and obtain goods or services before they provide an equivalent value of goods or services. Credit should be allocated (money should be created) to facilitate trade; goods and services should essentially pay for other goods and services.
You might like 'The End of Money and the Future of Civilization' by Thomas Greco
vdoc.pub_the-end-of-money-and-the-future-of-civilization.pdf
https://substack.com/@tomazg/posts
"Redeeming of currency/deposit settlement at *other than face value."
This was is what naturally occurs--not, really, a regulatory topic--in the abscence of interbank payments clearinghouses such as the nineteenth century reserve account clearinghouse for New England, the Suffolk Banking System or the nineteenth century New York City system, The Clearinghouse (still exists as TCH, and has, very slightly, surpassed the Fed in total dollar volume of transactions), or of course, that famous reserve account-model clearinghouse, central banks. In the nineteenth century, banks themselves, alongside the Treasury, issued their own paper dollar bills. These, as you say, traded at a discount one against the other. Now in a reserve account-style clearinghouse such as the Suffolk Banking System or the Fed, this duscount is replaced by a varying interest rate on interbank overnight loans (the average of which the Fed (the institution) seeks to artificially corall within a narrow band).
But Cato's superbly talented and MMT knowledgeable, George Selgen points out that in the nineteenth century,
1. Different banks within a single city *had no* discount differential, effectively accepting same-city dollar bills at par one against the other even with no clearinghouse.
2. In Canada, which didn't have a lot of local laws requuring local banks to be purely local, also: bank issued paper money pound bills tended to trade at par, naturally and not as a result per se of legal tender laws.
As for legal tender laws, Dr. Collin Drumm, author of The Trial of the Pyx Substack, pointed out, to me in an explanatory comment, that what the formal issuance of a coin does for transactions issued in that unit of account is provide a settlement means that must be accepted at par for payments on a pre-agreed price. As you know, between sale, delivery, and finally, payment, there is a span of time in which exchange rates can potentially fluctuate. Say between bank A's paper dollars and bank B's, or to go by Innes, silver bullion is all over the map on a day-to-day basis.
"Banks create money (for governments, etc.) by allocating credit"
The Treasury sits in the central bank as just another "bank," so it creates its "own" money, its payees' money the same as any bank would create credit for it's new mortgage customer by creating the home seller's new money (the price of the house) within that other bank. Mechanics of how that can even be need discussing, but.
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"scarcity of money because it is created on the basis of interest-bearing debt,"
Note that, as you pointed out somewhere above, the Treasury creates money in its payees accounts via a central bank-type clearinghouse, specifically in the U.S., the Federal Reserve system of accounts, and then that same day settles its own account via a form of interbank overnight loan (called treasuries, the only difference being the overnight part) of, mathematically (those payments cause reserves to rise throughout the day, since net payments *are* reserves) those same payments back to itself.
Fine, here, interest, pre-QE/IOR was accrued, and post-QE/IOR whether interest accrues *or not* depends on the IORB rate.
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Now, going to "even when money is created for a government by a publicly-owned central bank (by purchasing government securities)."
It appears out of thin air. But to the degree it is, the profits revert to the Treasury every April (and a small portion goes to Chase Manhattan, et cetera--but note, doesn't disappear long term). But in fact, a central bank *pays for* its net purchases of treasuries by issuing zero interest notes to the banks, which up until QE/IOR *reflexively* bought these. I estimate the preference rate for physical cash over reserve account balances is five percent. The two trade at a five percent differential, my (hobbyist) research proves...
So the cost of central bank credit has been up until QE/IOR zero interest rate Federal Reserve notes (current high rates are artificial, but a zero rate doesn't rely on continued QE, but only sufficient central bank T-bills, et cetera to stop the drain into hundred dollar bills) Whether that can continue with everyone paying by cash card is a question, but if it doesn't, interest rates *within* the central bank accounts will be zero, but, as with cash, perhaps trade at a differential to "real" bank deposit money...
Thanks for the feedback - I have some thoughts on this.
1) Classical Econ always says deflation = Armageddon and inflation = a good thing. Why is this the case (Other than the fact that every Econ book ever published states this as orthodox gospel)? Why do existing price level need to rise or even maintain current levels? Would everyone not be better off if prices declined and their $$$ bought more goods and services (company profit margins might be a bit lower - but is that so bad)?
The idea that low levels of deflation would cause people to hold off purchasing something they needed and cause a recession is a bit of a stretch when you really think about it (I must confess I accepted it as a truism when I was in school).
If you have time would you please flesh this idea out a bit more? IE How does low level deflation/no inflation or deflation lead to unemployment (the actual mechanics/flows through the economy)? Let's think about this both in real and nominal terms.
2) Net Gov Spending - I am not sure I follow the argument. I will try and touch on the areas I do not understand and maybe you can give me guidance/feedback.
Does "If Net government spendings is not continually positive" = "if the gov is not running a deficit"?
"If there are a lot of savers then the non-gov sector is placed in a tax liability default, by accounting identity" - I am interpreting this as If gov debt = 0 then private sector savings = 0 thru the identity rule and if the private sector has no savings how will they pay their tax liability. Is that what you meant?
"Putting people into debt who cannot counterfeit the tax credit" - I am not sure what this means? I think it is implying that with out gov debt then there would be less private savings and hence people would have to pay taxes from other monies they saved. I am grasping here can you please clarify what this means - ideally via an example.
Thanks
I'll see what I can do in this comments section, could be lengthy.
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1) Classical Econ always says deflation = Armageddon and inflation = a good thing. Why is this the case (Other than the fact that every Econ book ever published states this as orthodox gospel)?
Answer: deflation induces a (additional strong) saving bias, that suppresses purchasing, so leads to reduced output, laying off workers, a spiral down, until the government automatic stabilizers kick in to supply the currency to reward spenders. Inflation is bets thought of as "burning the currency slowly" so encourages spending, which is what drives a market economy. Overall, your perspective should change: savings are bad, spending is good. You want the currency to circulate.
Consider the extreme limiting case: we only need a single $1 bill, if it circulates fast enough (at the speed of light or whatever) then that's all an economy needs. But we do not have that, people have savings desires, which is a depressant a demand leakage. So inflation is a good way to get circulation up, to produce sales and hence justify output that people desire to consume. A market economy runs on spending, not on saving.
Saving is the accounting record of past spending/investment. Or you can say "savings follows from investment" (not the other way around.)
Also, change perspective to the flows, not the stocks. What we principally need is income (the flow) not savings (the stock).
1.2) Why do existing price level need to rise or even maintain current levels? Would everyone not be better off if prices declined and their $$$ bought more goods and services (company profit margins might be a bit lower - but is that so bad)?
Answer: the price level does not *have* to rise. There are better ways to increase circulation (hence output and employment) without inflation. One is to, by designed policy, burn the currency slowly, i.e., a stamped depreciation, like a Gesell currency. It is better because the policy rate is set by the authority, so it is fair and known in advance, eliminating risk. When the $ issuer allows the price to float, it is uncertainty, so more risky for folks who make a living from financial trading. We want to eliminate people who make a living from financial trading (serves no public purpose). We want people who make a living from making real goods, or real services (healthcare, education, &c.) — savings does not do this, income and spending does (unless you like not paying people to work, aka slavery). The policy should be to fix price and let supply float. But that's the currency issuer (government). The markets cannot always fix price and let supply float, since they're operating under real goods constraints and competition. But if the government is fixing price and allowing quantity to float (e.g., with a Job Guarantee) then this helps the markets enormously with their desired price stability.
And no, if prices decline not everyone is better off. There are ALWAYS two sides to every ledger, so this creates winners and losers. The people selling the goods now have less per unit sold. They can sustain that if their sales or productivity increase or costs decrease, but that's not always their luck.
Deflation is dystopian too: who benefits the most? Answer is the hoarders of the currency. The poor get crippled, and their past debt becomes all that harder to pay-off. With inflation the poor find it easier to pay down past debt. So inflation is the leveller, deflation to cause of increased inequality. (This is ceteris paribus of course — not all ways inflation is achieved are good, .e.g, "helicopter drops of cash" but for only people who already have a lot of money [aka government bonds] is a terrible way to promote inflation.))
1.3) The idea that low levels of deflation would cause people to hold off purchasing something they needed and cause a recession is a bit of a stretch when you really think about it (I must confess I accepted it as a truism when I was in school).
Response: do you mean high rate of deflation? If it is low level I would not care too much, just as I'd not care too much if there was a low level of inflation. But as just remarked above, inflation levels inequality, deflation increases inequality,so why would you want even a low level of that? Inflation decreases the purchasing power of hoarded currency and decreases the burden of past debt. Deflation the opposite. So which do you prefer?
1.4) If you have time would you please flesh this idea out a bit more? IE How does low level deflation/no inflation or deflation lead to unemployment (the actual mechanics/flows through the economy)? Let's think about this both in real and nominal terms.
Response: deflation is a savers bias. SO on balance it's not good for a market economy. It rewards the richer folks disproportionately. The more savings you hoard, the better off you'll be tomorrow, and all the more better off compared to someone with just $1 less than you. Now put that though the actual income/wage distributions in the real world. It's a disaster, a dystopia.
This is not about unemployment. Inflation and deflation have nothing to do with unemployment. But yo should see correlations, for obvious reasons, the reason is the common cause of government policy responses (usually being terrible, or at least dopey). All unemployment is caused by the government not employing everyone that their tax liabilities (by design) unemployed. It's a policy mistake — of epic tragic proportions.
2) Net Gov Spending - I am not sure I follow the argument. I will try and touch on the areas I do not understand and maybe you can give me guidance/feedback.
2.1) Does "If Net government spendings is not continually positive" = "if the gov is not running a deficit"?
Answer: Yes. But = "if the gov is not *continually* running a deficit" to be pedantic.
2.2) "If there are a lot of savers then the non-gov sector is placed in a tax liability default, by accounting identity" - I am interpreting this as If gov debt = 0 then private sector savings = 0 thru the identity rule and if the private sector has no savings how will they pay their tax liability. Is that what you meant?
Response: almost. If government deficit (the flow, not the stock) is zero, and foreign sector deficit in your currency is also zero, then that year if you have savers then the system is in default. So people will be extinguishing their tax liabilities with savings, rather than income — "being in default" here is loose language, but I hope is understood, it means net savings will go down. For those with no savings and maxed out credit cards then they'd be in default, and of course that's quite common, hence bankruptcy happens. "The system is in default" is macro, it doesn't mean any individual household will be in default, but very likely some will be, if there are big savers. One person's spending is another's income.
3) "Putting people into debt who cannot counterfeit the tax credit" - I am not sure what this means? I think it is implying that with out gov debt then there would be less private savings and hence people would have to pay taxes from other monies they saved. I am grasping here can you please clarify what this means - ideally via an example.
Response: yeah, that was rhetorical. It's obvious we cannot counterfeit the State's unit of account, for good reason. Anarchy otherwise. All I meant is that we cannot pay the tax with our own I.O.U.
But more to the point, if you are the decrepit government forcing people to pay tax or otherwise go to jail, then you aught to provide them with the means to pay the tax, right? Not leave them to contemplate counterfeit or robbing a grocery store (or working for a ꕷꖾꕯꖡꖡꔇ boss). Thus you want to hire them all if they need the tax credits (i.e., cannot find decent private sector employment), otherwise you're a completely decrepit government. You, government, can ALWAYS hire them all, since you cannot run out of your own scorepoints (tax credits), and if you pay the going wage rates it cannot possibly be inflationary. Increased currency circulation directly causes higher tax returns, by the automatic stabilizers, cooling off the inflation pressure.
But a sudden policy change can cause one-time price adjustments. In MMT circles we do not call that inflation, as indeed it is not! Inflation = continual upwards adjustments in prices, not one-time adjustment.
Would you like to open a DM thread?
Yes I would like to open a DM thread - although I am not sure how.
Thanks,
It's worth noting that references to reducing government debt are often (or usually) misleading because they mean reducing the ratio of debt to GDP. This is an arbitrary ratio since the GDP value used is a country's total income measured over a year – why a year? Nobody can tell you – it's just what they do.
When they talk about reducing the debt, they usually mean increasing GDP so that the ratio will fall. The debt itself will only decrease if the government sector runs a surplus, which is likely to mean the private sector will be in debt – as Jim points out, that's bad.
George - thanks for chiming in - I agree that debt to GDP (or debt relative to the ability to service that debt) is a much more meaningful measure than just debt. I would note that I was actually referring to both. IE
Why is increasing gov debt to GDP (the ratio) an inherently good thing?
as well as
Why is increasing gov debt even when the GDP ratio itself is going down (IE GDP growing faster) an inherently good thing?
Why would say fixing gov spending to a percent of GDP (or some other option that does not include ever increasing debt) not work? This is not to suggest that gov runs a surplus it just means that it does not run a deficit? Why is this such a bad thing? Why would this cause an economic collapse?
Thanks for post
Debt/GDP is neither good nor bad. It's irrelevant. There are two types of government: currency issuers and currency useres. The US, UK, Canada, China and many more are currency issuers. They don't have debt in the way you or I have. They issue the currency. What matters is real resources and the real lives of citizens - and how their wellbeing can be maximised by using those resources in the best and most sustainable way.
I'm not saying the ratio is more meaningful. The government doesn't have to 'service the debt' except by paying the coupon (interest) on the gilts it issues.
Issuing gilts is a policy choice, not a funding meachanism.
If the debt (not the ratio) is not increasing due to the government running a deficit, it means the private sector is unable to save.