You are implicitly assuming that the amount of money you have available to lend out is the same no matter whether there is a government budget deficit or not. But that assumption is clearly false.
To the contrary, the assertion is clearly true because every lender has a choice between lending to private sources and lending to public sources. The public money is usually more reliable than private sources, so it'll get preference over private borrowers. The competition exists almost trivially.
Let me try to make it even more painfully obvious to you.
Let us consider Joe The Construction Worker. Joe is currently unemployed and is therefore not saving at all. Now the government increases its spending, and as one of the results of that, Joe gets a (for his skill-set) decently paid job. This allows Joe to save money. But Joe saving money is essentially the same as Joe lending his money to somebody else.
So. There is at least one person who has more money to lend out under the increased budget deficit scenario. In other words, the government's budget deficit affects how much money people can lend out - at least for some money. Do you still deny that?
Once you have understood the case of Joe, who now, thanks to the government's budget deficit, is trying to lend out money, you will perhaps finally understand the rest of the argument as well.
I am all in favour of dissing the central banks of this world and opening them up to more oversight.
However, don't buy into their nonsense claim that they have any control over inflation. They don't. They get lucky occasionally, but by and large they're trying to use a sledgehammer to hit a ninja in a darkened room. The economy is way too complex for them to really decide what the inflation should be.
Comparing the Greek government to the US federal government is invalid. The Greek government is a user of its currency like you and me and has not control over it. The US federal government cannot ever become unable to make payments. This is a very significant difference, which makes it pointless to look at the deficit or the debt as a political goal in itself. Rather, goals in real terms (such as health care, high standard of living, low unemployment) should be set and the monetary powers of the government used towards that goal. Yes, you also need to look at CPI rises while doing that, but to put it bluntly: denying benefits to the poor (which is what usually happens when politicians want to "fight the deficit!!11oneone", whether you like it or not) is not going to help against inflation that comes from energy and commodity price increases.
It is nice to see a reasoned post in such a discussion, I'm especially happy to see somebody point out that banks do not lend out deposits, but this caught my eye:
There is a limit to the total credit but it is related to the fractional reserve and the money multiplier and has nothing to do with real things.
This has not been true for a very long time. Availability of reserves does not limit bank lending, because banks can always obtain required reserves after the fact. The central bank acts as lender of last resort for that purpose. Explained by an actual economist: Lending is capital- not reserve-constrained.
I just realized that I should probably clarify why I would make that Blizzard bet. In the long run, players accumulate gold, for at least one reason: there are players who become inactive, and their gold never re-enters the in-game economy. Therefore, Blizzard necessarily create more gold than they destroy in WoW in the long run. An equilibrium cannot be reached as long as new players enter and old players leave WoW.
This is the in-game analogue of the fact that private actors like to save money, which creates a drag on aggregate demand, which is why governments have to run budget deficits in the long run.
I was pointing out the error in your argument. Second, there is no tradeoff between financial assets and government debt. If the government paid off its debts, then private enterprise could borrow more, adequately compensating for the absence of government debt.
I recommend you read a little on accounting. When you borrow X amount, you have an additional assets of amount X. However, you also have an additional liability of amount X. The person who gave you the loan has X amount of assets less (the ones that he loaned out), but they will be replaced by a new asset worth X, namely your debt. In other words, the net outcome in financial assets is therefore zero.
No matter how you play this game, as long as only private actors (banks, firms, private persons) are involved, the net financial assets held by the private sector sum to zero. The only way that this quantity can increase is when the government comes in.
Incorrect. Less money is loaned to private sources when government debt is involved. Once again, I can lend only a finite amount of money. If I'm lending more to government, then I'm lending less to private enterprise. Either way, it is obvious that the government or private source will spend or invest the money. So there's no inherent change in the availability of capital for further loans from that.
You are implicitly assuming that the amount of money you have available to lend out is the same no matter whether there is a government budget deficit or not. But that assumption is clearly false.
The economy is flow-consistent. What this means is that when somebody spends money somewhere, then this money does not magically disappear. It has to come out again or accumulate somewhere. So, with a government budget deficit, some private entity ends up holding more money than they would otherwise have held. In fact, when you sum up over all private entities, the additional amount of money held by all private entities compared to what they otherwise would have had is exactly equal to the government's budget deficit. Note that this is not a theory. It is a mathematical fact that follows from flow-consistency.
Now you may say that time plays a role, and that the additional money is only available after the government has borrowed the money. In fact, if government were to borrow money and then hold on to it for a year before spending it, then you would be right at least inside your flawed model. However, this is not what is happening. The borrowed money is spent, and in the next "time step" it is back in the hands of private entities to be lent out again. The computation becomes a bit longer than what I wrote in my previous post, but the end result is still the same: when you average over time, the introduction of the budget deficit actually reduces the competition between borrowers.
(And let me state again explicitly, in the unlikely case somebody else stumbles into this thread this late: The above three paragraphs are written under the assumption that your approach to how lending works is correct. Reality works quite differently, but I don't expect you to take my word for it. This is why I put forward this argument that even if your model were correct, your conclusions based on it would still be wrong. My hope is that this will encourage you to read more seriously some of the sources I've linked to - in particular 7DIF and Bill Mitchell's blog - where these things are explained in more detail.)
[1] I am assuming here that the classical model of a market for loanable funds underlies your thinking, where people with savings go to loan them out for a profit, and borrowers go to request funds. This model is pretty flawed, because the way in which banks give out loans is not compatible with it. So I reject your premise - your model of ho
Once again, you claimed existence of a free lunch. Why not tune this machine to generate a vast amount of wealth?
Actually, I don't claim the existence of a free lunch. I realize that a lot of what MMT states looks like a claim of a free lunch on a first glance. However, when you actually read what those economists write, you'll realize that they simply have a better understanding of what the constraints are that prevent a free lunch.
In a nutshell, MMT says that there are no financial constraints, but there are real constraints. Here, "real" is used in the economic sense of real goods and services etc.
Government spending adds to aggregate demand, and when that grows too quickly for real productive capacity to adjust, then inflation results. On the other hand, when aggregate demand is too low and the productive capacity is under-utilized, firms will lay off workers and unemployment will result.
Fiscal responsibility therefore means to achieve a budget deficit that is neither too high to push inflation nor too low to result in unemployment. Note how there is no mention at all of whether this means the budget deficit is zero.
Furthermore (and this is simply an observation) since the private sector tends to save in net financial assets in the long run, the private sector creates drag on the aggregate demand. Therefore, budget deficits are normal and in fact desirable.
This last part is what may sound like a "free lunch", but it's really not. It's simply the observation that the private sector tends to not use all its spending power, and therefore, there is cake left over for the government. (The US is also in the special situation where China just keeps sending a lot of cake for no good reason other than they are unable to adjust their economy to do differently, so even more cake is left in the US.) Moreover, the government should eat that cake, because otherwise it will rot and stink up the entire house. (The last sentence is analogy for: if the government does not fill the gap in aggregate demand, this will cause unemployment; unemployment leads to loss of labour skill, which reduces the potential for future growth in the economy; similarly, other productive capital such as factories may be closed and removed forever.)
As to your links, I find them delusional as mentioned below. For example, the first link claims fiscal prudence at the government level is a "innocent fraud", an inherently contradictory phrase (hence, automatically wrong). I don't take serious people who make arguments that are wrong by definition.
Dude. If you could have been bothered to at least read the Prologue of that book, you would have read that: "Professor Galbraith coined the term to describe a variety of incorrect assumptions embraced by mainstream economists, the media, and most of all, politicians. The presumption of innocence, yet another example of Galbraith’s elegant and biting wit, implies those perpetuating the fraud are not only wrong, but also not clever enough to understand what they are actually doing. And any claim of prior understanding becomes an admission of deliberate fraud - an unthinkable self-incrimination."
It is a clever and unusual play with words that you failed to recognize for what it is.
You obviously need to look at the very examples you cite (also look at your Japan example). Blizzard doesn't need a functioning economy, nor do they need to respect the property of their players. But if they want to keep getting paid by their player base, they won't monkey around with the game economy.
If you had actually read anything about game-based virtual economies, you would know that game inflation is actually a big problem. And game developers spend a lot of time balancing money sources with sinks. For example, Blizzard introduced money sinks such as high-end mounts.
And I would bet you any amount that despite those money sinks,
The Republicans are debating plans to cut spending. This is unlikely to reduce the budget deficit, and if it does reduce it, it will do so at a high cost in real terms, especially unemployment.
What you have to understand is that there is a discretionary budget - what politicians aim for - and then there is an actual budget outcome that is largely driven by automatic stabilisers. In particular, when the economy is going badly, tax revenue will drop and welfare payments will go up, and thus the actual budget outcome will be different from the discretionary budget. This causes attempts to reduce a budget deficit to often be self-defeating. This can be observed nicely in the various Euro countries that are forced to implement austerity measures.
What people need to understand is that achieving a balanced budget is not a reasonable political goal. At any point in time, if the budget deficit is too high, so that it drives aggregate demand beyond productive capacity, it will cause inflation. If the budget deficit is too low, so that firms lay off workers due to a lack of aggregate demand, it causes unemployment. The high unemployment is evidence that the budget deficit in the US is too low at the moment.
This is not surprising, because the government balance is the counter-part of the private sector balance plus the external sector balance. Since the US is a net importer, and the private sector is saving (it is paying down debts at an incredible rate), the budget deficit must be high.
A reasonable political goal is something like "achieve full employment", because employment allows people to have meaning in their life. "Increase real living standards" is a reasonable political goal for obvious reasons. Having "balance the budget" as a political goal is just plain stupid.
Once you define your political goal, you need to take an unideological look at how to to achieve that given the economic reality. If that means maintaining a high budget deficit, then you maintain a high budget deficit.
If what you said were true, then most private consumption would also be bad for the economy: it's spending that only produces stuff to be consumed which will be gone later.
So it's not quite as simple as that. War spending creates jobs, which is good for the economy. The Second World War is how the US managed to get out of the Great Depression.
That said, "good for the economy" as measured with traditional indicators like GDP does not necessarily translate directly to "good for the people". Probably everyone outside the military-industrial complex would agree that the money going towards military spending could be used for much better spending instead.
However, simply cutting military spending will destroy jobs. So you need to have a plan for what you want to do instead of military spending.
As for "the federal government drives the economy", well, federal spending is a significant chunk of GDP.
Where does it get that money to spend?
The federal government gets the money that it spends from the same place where Blizzard gets the gold in World of Warcraft. In other words, whenever the federal government spends, money is created out of thin air. It does not come from taxes. The accounting that creates this illusion is just a historical vestige from the distant gold standard past.
I understand that Modern Monetary Theory is hard to swallow at first, because at first sight it appears as if MMT were claiming that there is a free lunch. And in fact there is something as close to a free lunch as you can get at this point in time, however it is not an unlimited free lunch in any way.
What MMT observes is that the federal government has no financial constraints. However, there are real constraints. The two main points are the following:
1) If the government's discretionary budget deficit is too big, then it pushes aggregate demand beyond the productive capacity of the economy, which leads to inflation. On the other hand, if the government's discretionary budget deficit is too small, then the lack of aggregate demand causes mass unemployment. So how big is too big, and how small is too small? The answer is that it depends on the private sector's decisions. Most of the time, a budget deficit is necessary to accomodate the private sector, though very occasionally, a budget surplus may be appropriate (this must be a very rare event though: six out of seven times that the US government ran a budget surplus in its history, a recession followed, and the seventh time set the stage for the global financial crisis).
2) Irrespective of the discretionary deficit that politicians desire, the actual budget outcome may be very different due to automatic stabilisers (tax revenue and welfare payments). Example: the discretionary budget deficit in the US at this point in time is too small, causing unemployment. The resulting lack of tax revenue and the increased welfare payments cause the actual budget outcome to be bigger than desired. The interaction of discretionary and actual budget lead to the (initially) counterintuitive situation where the discretionary deficit needs to be increased so that the actual deficit can become smaller.
lets take your theory to its extreme conclusion. The government takes 100% of all financial transactions and then spends it. Under your theory our GDP is now 200% of what it was.
Disregarding for a moment that you clearly don't understand how government spending works, this is true. And it's not actually a theory, it's simply the definition of GDP. If the government were somehow to spend that much additional money, the nominal GDP would in fact double (let's ignore multiplier effects for now). Look up the definition of GDP.
Now refer to what I wrote above: while there is a lot of idle capacity in the economy right now, I don't think there's that much spare capacity. As a result, the increased aggregate demand would cause inflation, and therefore the real GDP would not double (it would still likely increase, just not by that much).
However, if the economy really were below 50% capacity utilisation, then yes, the government could really spend that much without causing inflation (with the caveat that the distribution of the additional spending matters: the type of spending must match the type of available capacity, otherwise there may be inflation until the market adjusts to restructure the economy to match the demand).
So let's go back to the "free lunch" thing for a moment. Right now, an unusually large part of the US economy's productive capacity is idle. The most obvious indicator of that is the extremely high rate of unemploymen
Once that happens, the rough outline for what needs to be done is that somebody needs to start spending again.... I am not against that on principle, but you have to realize that when people who are deep in debt get a tax break, they're probably going to use it to pay down their debt.
But doesn't that give the debt owners more money that they can then spend on other stuff, or loan out to other people to spend on stuff?
Not necessarily. What we're talking about here is people paying debt back to their bank. The bank will be very happy about that, but being repaid won't make them give out more loans directly, because bank loans are not limited by the amount of money available to the bank anyway. So debts being settled will just cause the money supply to shrink - the M1-M3 type of money supply, not the monetary base; the latter is still very high in the US due to the Fed's monetary policy, but ultimately it's the private sector that determines the size of M1-M3, and the Fed's quantitative easing has demonstrated spectacularly that the orthodox theories about how those quantities are related are just plain wrong. You'll find a little more on this - light on the theory, but with pretty graphs - here.
This is one of the things that I had the most problems understanding, asking myself the "is it really like this?" question more than a few times. But a number of sources agree that at an operational level, the decision by the bank to give out a loan has nothing to do with how much money (reserves, to be more precise) the bank has. The people who make those decisions don't even know how much money the bank has. They just make the decision based on creditworthiness and interest rates, and then a different department at the bank worries about getting the money - if necessary - after the fact. This liquidity management is entirely separate. It takes a while to unlearn the incorrect elementary school picture of banking that we are all told.
So the total amount of debt, and therefore the size of the money supply, grows and shrinks based on changes in the demand for debt and the risk-averseness of the banks. Currently, the US economy is still settling debts, and the money just "disappears". In the accounting sense of assets and liabilities, the corresponding assets and liabilities (money and anti-money) cancel each other out and that's it, the balance sheet shrinks and nothing replaces the lost volume.
Unfortunately, it seems like these days, government spending never really seems to do much good. Instead of building roads (we don't really need a lot of new highways or the like, but we do need to fix up the ones we have, especially bridges), sending men to the moon and developing new technologies to do so, investing in fundamental research, etc., all I ever see is spending money on military hardware, sending money to other screwed-up nations like Mexico for them to waste, spending money on poorly-designed social programs that don't do anything to relieve poverty, etc. If they cut a lot of that stuff out, and spent the money instead on lots of medical research, a space elevator, a personal rapid transit system, etc., we'd put lots of people to work, create lots of very useful new technologies, and become a world leader in many things again. But we don't seem to want to do that.
It does seem like a kind of vicious cycle:
The almost inquisition-like hatred of everything to do with government spending prevents politicians from pushing for visionary projects like the ones you mentioned. As a result, only two kinds of government spending happen: the boring things that people just take for granted (and that are probably efficient as often as they are inefficient), and the ugly back room deals that continue precisely because they are ugly and dominated by ruthless vested interests. The latter is correctly identified as inefficient and wasteful,
True, those wars were disruptive. But the dependency ratio (number of workers per retiree) did drop as was predicted around 1900 - perhaps not as much as those predictions said it would, but the change was still an order of magnitude. It was productivity improvements that saved the day.
And yes, the retirement system in Germany was reset after the Second World War. And the coolest thing about this is that pensioners benefited from that reset. It was the reason that Germany switched to a Social Security-type system instead of capital-based retirement funds: by using the Social Security-type system, we could guarantee that pensioners could benefit from the general economic upswing in Germany that started in the 1950s and really took off in the 1960s.
I am not a professional economist either. I'm a mathematician who got interested in macroeconomics and I seriously started reading around about a year ago. I don't have a quick fix to the US situation, but the first thing that needs to happen is for the focus of the discussion to shift. People need to realize is that there is no debt crisis. The debt is basically just after-the-fact accounting (with the exception of interest payments, but those shouldn't be the primary concern).
Once that happens, the rough outline for what needs to be done is that somebody needs to start spending again. After all, the actual problem (from my political perspective) is the insane amount of unemployment, which is really the biggest kind of waste you can imagine. Any kind of squabbling over government inefficiency is just peanuts compared to that. And the unemployment is caused by the simple fact that not enough spending is happening to put the people into employment.
There are basically three sources of spending: private (consumption and investment), government, and external sector.
The private sector is still dealing with the aftermath of the financial crisis. Part of the reason why the stimulus has not been as effective as it could have been is that it consisted of a lot of tax breaks. I am not against that on principle, but you have to realize that when people who are deep in debt get a tax break, they're probably going to use it to pay down their debt. So spending doesn't increase and so it doesn't help the economy recover. (This is the balance sheet recession argument of Richard Koo) Businesses are in a similar situation, and they aren't going to invest unless they see spending go up first.
The external sector is also unlikely to be a source of spending soon (and it's questionable whether you even want it to be one; if you look at it simply in terms of cargo ships bringing stuff to the US vs. cargo ships taking stuff away from the US, then I would say that the trade balance is hugely in favour of the US - China just keeps sending you guys stuff for free!)
Which basically leaves the government to fill in the spending gap because there is nobody else left to do it. So if you want a soundbite, I'd say: build that high-speed rail (to fit with the article) or carpet the southern US with solar plants, or fix the roads, or something like that. Basically, any kind of labour-heavy infrastructure investment is the way to go.
And it's important to keep in mind that adding X amount of discretionary spending to the budget will not increase the budget deficit by X. After all, those newly employed workers are going to pay taxes and they will no longer receive unemployment benefits. And then realistically there's also the multiplier effect which orthodox economists don't like because it conflicts with their ideologies, but even they have to concede at least the first part of the argument. So increasing discretionary spending by X will increase the budget deficit by less than X, and it might in fact reduce the deficit (possibly with some delay).
This may sound strange to the libertarian types out there, but the biggest benefit of a government-controlled currency is that it can be controlled. This allows a reasonable government to dampen economic cycles by implementing countercyclical policies. The facts of life are that the economy can get into a situation that is universally agreed to be bad, without any single individual being able to do anything about it. Then collective efforts are required to get out of it, which is where government comes in.
In a world of only Bitcoin, such collective action would be forbidden by the mathematical safeguards of the system, and the consequences would be roughly as bad as the consequences of the gold standard. (Yes, despite what some people believe, getting rid of the gold standard allowed for a lot of good to be achieved in the world economy.)
Since the hashes depend on the entire previous block chain containing all previous transactions, you cannot simply pre-compute hashes in private to prepare for one giant dumping on hashes into the network.
It is possible to corrupt the network, you have to be able to produce more hashes than everybody else together, i.e. you have to own >50% of the computing power in the network. So you need more than a decent size cluster; you actually need more than the sum of all the decent sized clusters that are already out there.
Some historical perspective: around 1900, people bemoaned demographic change in Germany. People were starting to get older, and who would pay for all the old people? They used the exact same language and arguments that are en vogue again today. But the reality is that throughout the 20th century, retirement systems worked just fine. In fact, the situation improved instead of getting worse. That's just for perspective.
Now here's the thing: it's not about the money, and it's not about the demographics. It's about productivity. In those days, the number of workers per retiree was in the double digits. Today it's an order of magnitude lower. The world didn't end, because our productivity increased. Technology helped, and it will help in the future.
Ask yourself this: can the real goods and services that society wants to supply its retirees with be provided? Given the high rate of unemployment throughout the Western world, the answer for the US and Europe seems to be a very clear Yes. If only our politicians were to use money and the financial system to solve problems instead of creating them, there would be no Social Security problem at all.
You do realize that a bank robbery can never actually steal your money, right? A bank robbery is about stealing bank notes that are owned by the bank. If you give a couple of bank notes to a teller at the bank to add them to your account, and five minutes later they are stolen in a bank robbery, nobody actually stole your money at any point.
Unless you store bank notes in a safety deposit box at the bank, in which case I am not so sure they owe you anything in case it gets stolen.
Every country can do that. Printing money is something every government does, and printing money doesn't create debt, and never has.
However, printing more money does cause inflation.
Kind of off-topic, but this is a common misunderstanding. The most direct causal link between inflation and printing money is that when inflation happens, you are eventually forced to print more money so that payment settlement can continue normally. [1] The misunderstanding comes from people confusing printing money with government spending.
There are a number of causes of inflation, but for this type of discussion, the relationship of productive capacity and aggregate demand is key. The short version is the following. When aggregate demand grows too fast for productive capacity to keep up, then you get inflation (because competition drives up prices). When productive capacity grows faster than aggregate demand, then unemployment results (because companies that cannot fill their order books lay off workers). Those are the key constraints of the economy.
From a sovereign government's point of view, this means that while it can obviously spend as much as it likes, there are real constraints to keep in mind. If the discretionary budget deficit is too large, there will be inflation. If the discretionary budget deficit is too small, there will be unemployment. (Of course, due to automatic stabilisers, the final budget outcome can be very large and unemployment can be high at the same time. In such a situation, the reasonable thing to do is to increase the size of the discretionary budget deficit. This often decreases the final budget outcome via automatic stabilisers.)
One cannot say a priori how large the budget deficit should be to be neutral with respect to both inflation and unemployment. The size of the neutral budget deficit changes over time, based on changing circumstances in the private sector's savings behaviour and the development of the external sector.
Fundamentally though, printing money is just a liquidity management operation. What really matters are spending flows.
If you truly have an open mind and want to learn more about the long version, I suggest you search for Modern Monetary Theory. A good starting point is here, and more thorough analyses can be found on this blog of an Australian economics professor.
[1] The recent story of Argentina in that respect is very educational. Basically, Argentina has long had quite high inflation, and the government believed - like most people do, unfortunately, due to that misunderstanding - that they could fight inflation by not printing any more money. Well, prices were rising anyway, and at some point there was a lack of physical money for people to make their payments. Keep in mind that electronic payments are not well developed in Argentina, so people might have had money in a bank account, but were unable to get it out simply because the ATMs ran out of notes. This was not in any way a bank run, it was just an under-supply of tokens, and the irrationality that goes along with that kind of problems hurt price stability on top of the inflation that was happening anyway. In the end, printing more money solved that problem, but crucially, it was really only about printing more money, purely liquidity management. By printing this money, the government did not increase its spending.
You mentioned only one actual effect of those numbers, namely interest payments. Those constitute a risk-free stream of income for holders of treasuries. Is that a bad thing?
Yes, it means potential borrowers who can't offer the so-called "risk-free" stream of income have to settle for higher interest rates and/or lower borrowed amounts.
Be careful to get the causalities right. It is not the budget deficit and the issuing of treasuries that drives up interest rates. Interest rates are set by monetary policy, which is decided by the central bank. And as I said, I would be all for a zero interest rate target (which would mean zero interest paid by the central bank and government, and a very low cost of borrowing at the central bank).
A third effect of excessive borrowing is higher future borrowing rates due to an elevated risk of default.
There is no risk of default for the federal government, by definition. If the Tea Party lunatics get their way, it might default voluntarily. But the federal government cannot, ever, find itself in a position where it is unable to pay.
(Though to clarify, from an economics point of view, "government" means all of government, not just the executive branch. If the legislative branch decides that the government should go into voluntary default, then there's not much the executive branch can do against that under current political arrangements. The important point is to understand that the government can never be unable to settle its bills, it might just become unwilling to do so for stupid ideological reasons.)
The good news is that interest payments are entirely voluntary, and the interest rate is set by political choice via monetary policy.
If it's so easy, why not turn the dial to 11 and make bank? What could possibly be the obstacle to this fascinating money machine?
Inflation. Someone who bothered to save money or loan money to others gets shafted. There is no such thing as a free lunch. Someone always pays for it.
You're mixing up too many things for me to bother to reply in detail. The short answer is that since the part of inflation that can be controlled domestically is essentially driven by the relationship between aggregate demand and productive capacity of the economy, it is perfectly feasible to run a zero interest rate regime and control inflation by setting the size of the budget deficit appropriately. This is what Japan has been doing for two decades now. If you honestly want to understand more, I again recommend reading about Modern Monetary Theory, start with e.g. Warren Mosler's 7 Deadly Innocent Frauds, or perhaps Bill Mitchell's blog.
Sure, you can interpret it that way. I don't consider your distinction meaningful, especially to the current discussion. Where's the economic growth that's going to absorb increases of 10% debt per year? Sure, if the economy were growing well over 10% per year, then deficits of 10% of GDP per year wouldn't be that significant. Similarly, if we just borrowed money for a short, spent it on things that raised US economy substantially (you know, that Keynesian economics thing) while and cut back promptly, then that might But that's not what's happening.
Do you believe that the budget outcome is chosen by politicians? If so, I have bad news for you: it is largely a result of automatic stabilisers. If the economy were to grow again significantly, then the budget deficit would reduce automatically via increased tax revenue and reduced welfare outlays. The budget deficit as a ratio of GDP would fall below the growth rate long before the growth rate reaches those 10%.
The second part is that people and businesses aren't stupid. People know when the US i
Trade is the counterexample. Two parties make a mutually agreeable trade that collectively increases the value of the assets they had. It's also worth noting that less public debt means more private debt, which as I've noted before, due to the inefficiency of government action, means more value to society overall.
Yes, there are types of wealth that are not of a financial nature, such as physical assets. What you say applies to them, true. That doesn't give you a free pass to ignore the relationship between financial assets and government debt.
There's more than one interest rate. Private sources aren't going to be able to borrow at the Fed Fund rate. They usually borrow at a higher rate since their debt, usually is considered to be riskier than federal debt. [...]
Obviously there are different interest rates, yes. The point is that those other interest rates end up being relative to the rate set by the central bank. When the central bank raises their target, banks usually follow up by raising their own interest rates so that they can still make a profit. This interaction between the interest rates is the whole point of monetary policy. (I snipped out the last part because you're just re-iterating without justification what follows below anyway)
The second point is about the amount of funds available, and there I would simply encourage you to think for yourself about how the system works. When the government runs a budget deficit, it actually increases the amount of money in the system. The treasuries that are issued simply drain the money back out. It's a wash.
No. You ignore how the borrowed money is distributed to society. Rent-seekers are the primary recipients. It's not based on what value the recipient provides to society, as would largely be the case with private investment, but how much federal funds they can capture.
Your original point was something like this: government borrowing reduces the amount of money available for other borrowers, this raises interest rates for other borrowers. How things are distributed does not affect the aggregate quantities, so of course I ignored the distribution. The distribution is irrelevant to your original argument, so bringing it up now is kind of disingenuous.
A lender has a choice between buying treasuries and loaning money to private sources. They can't do unlimited amounts of both at the same time. The competition is obvious.
Let me accept your flawed premise for a moment [1]. Let us compare two scenarios: (a) the government runs a budget deficit of size B and issues treasuries to match it. (b) the government runs a balanced budget and does not issue treasuries.
In your model, under scenario (b) there is X amount of funds [2] to go around to be borrowed by private borrowers. In addition, there is some request for Y amount of loans by private borrowers. Those things are matched somehow.
Under scenario (a) there is X + B amount of funds to go around to be borrowed, because the government's budget deficit adds to the amount of money that is around. In addition, there is some request for Y amount of loans by private borrowers, and the government attempting to issue B amount of treasuries.
Let us compare the intensity of the "competition", shall we? One measure could be the amount of funds available per desired loan, which is X/Y in scenario (b) and (X+B)/(Y+B) under scenario (a). I encourage you to do the math: if there is "competition" for loans in the first place (i.e. X/Y less than 1, so that there is no "surplus of funds"), then the addition of the government's budget deficit actually reduces the intensity of the competition, because (X+B)/(Y+B) is closer to 1 than X/Y.
[1] I am assuming here that the classical model of a market for loanable funds underlies your thinking, where people with savings go to loan them out for a profit, and borro
You mentioned only one actual effect of those numbers, namely interest payments. Those constitute a risk-free stream of income for holders of treasuries. Is that a bad thing? That's a matter of political opinion. To my mind, this actually is somewhat problematic, because it tends to essentially be welfare for the rich.
The good news is that interest payments are entirely voluntary, and the interest rate is set by political choice via monetary policy. It is absolutely feasible to keep the interest rate as low as desired. Just look at Japan: they have a debt-to-GDP ratio beyond 200%, and yet their interest rate has been at record lows for two decades now. [1]
Also, I hate to burst your bubble, but the debts from the Second World War were never paid off. If you don't believe me, check the numbers from the source itself. The debt-to-GDP ratio did drop, but that happened because the economy was growing. The debt itself was never paid back. [3]
And that last part is really all you need to know to understand how to get out of the current situation: trying to cut the deficit and/or reduce debt is self-defeating. The only reasonable [2] way to improve anything is to get spending going so that the economy can grow.
[1] One caveat is that with the interest rate at or close to zero, a different policy tool may be necessary to dampen excessive private lending. I would suggest a flexible adjustment of capital requirement ratios for that purpose. (And while I would advocate getting rid of those interest payments, I also advocate caution. Such a change needs to be implemented slowly, over the course of many years.)
[2] Of course you could also reduce the debt simply by introducing a tax on the ownership of treasuries. Once you really understand the operations that would be involved in that, you should also understand just how ridiculous all those worries about the debt really are. (And yes, of course such a tax would be utterly stupid.)
[3] You know what's funny about the whole paying-back-the-debt discussion? The owners of US debt as a whole actually don't want to be paid back! After all, they enjoy a risk free income stream thanks to them.
There are two things. Let me first explain why my claim that you quoted is literally right.
Most private individuals hold wealth in the form of US treasuries, either directly or indirectly, especially via retirement funds. Reducing the debt is equivalent to reducing the amount of US treasuries that are in this system. While it is true that there are some other holders of US treasuries, ultimately you cannot reduce the debt without reducing private wealth that is held in the form of US treasuries. Debt and financial assets are simply two sides of the same coin, and removing one necessarily removes the other. That's simply an accounting fact.
Now to counter your point about borrowing, there are two misconceptions.
The interest rate is strictly a function of monetary policy and is unrelated to the budget deficit or the debt. The central bank (i.e. the Fed) sets the interest rate target - this is a political choice - and then performs buys or sells (mostly of treasuries) to manipulate the interest rate in the inter-bank market until the desired target is reached.
The second point is about the amount of funds available, and there I would simply encourage you to think for yourself about how the system works. When the government runs a budget deficit, it actually increases the amount of money in the system. The treasuries that are issued simply drain the money back out. It's a wash. There is no competition between private borrowing and treasury issuance. The money used to buy treasuries would simply not be there if there were no budget deficit.
Besides, how much money can be borrowed is only limited by the amount of capital available to banks (lending is not constrained by reserve requirements or by the amount of deposits, but only by capital requirements and by profitability and creditworthiness considerations - which depend on the interest rate and are subject to Minsky-type cycles).
What do you mean, precisely, by "the federal books define the economy"? I honestly don't know what you're trying to say.
As for "the federal government drives the economy", well, federal spending is a significant chunk of GDP. If the federal government reduces its spending in an attempt to reduce a budget deficit, then unless that reduction of spending is replaced by somebody else, the GDP will fall - since the GDP is essentially just the sum of all spending over the year, there is nothing magical about it, just plain fact.
Some economists believe that when the government reduces its spending, the private sector will magically fill that spending gap somehow, independently of other factors. That would be nice, but empirical evidence starkly contradicts that belief.
This is why I conclude that an attempt to reduce the budget deficit tends to be contractionary.
Note, however, that this is not a magical property of government. It's a function of the amount of the GDP that comes directly and indirectly from government outlays.
Indeed, I phrased that part of my response rather badly because I was in a hurry. However, you would be wise not to disregard everything I say simply based on that.
The point remains: neither the deficit, nor the debt, are by themselves bad things. Targeting a reduction of debt is equivalent to targeting the destruction of private wealth, and targeting a reduction of the deficit generally contracts the economy (unless it is implemented in a very unusual manner). If you have a problem with those observations, we can of course discuss them.
Slashdot Mirror
Your grocer is not obliged to accept the notes printed by the government
This is false in many countries. Learn about legal tender laws. Not all countries have them, but many (most?) do.
You are implicitly assuming that the amount of money you have available to lend out is the same no matter whether there is a government budget deficit or not. But that assumption is clearly false.
To the contrary, the assertion is clearly true because every lender has a choice between lending to private sources and lending to public sources. The public money is usually more reliable than private sources, so it'll get preference over private borrowers. The competition exists almost trivially.
Let me try to make it even more painfully obvious to you.
Let us consider Joe The Construction Worker. Joe is currently unemployed and is therefore not saving at all. Now the government increases its spending, and as one of the results of that, Joe gets a (for his skill-set) decently paid job. This allows Joe to save money. But Joe saving money is essentially the same as Joe lending his money to somebody else.
So. There is at least one person who has more money to lend out under the increased budget deficit scenario. In other words, the government's budget deficit affects how much money people can lend out - at least for some money. Do you still deny that?
Once you have understood the case of Joe, who now, thanks to the government's budget deficit, is trying to lend out money, you will perhaps finally understand the rest of the argument as well.
I am all in favour of dissing the central banks of this world and opening them up to more oversight.
However, don't buy into their nonsense claim that they have any control over inflation. They don't. They get lucky occasionally, but by and large they're trying to use a sledgehammer to hit a ninja in a darkened room. The economy is way too complex for them to really decide what the inflation should be.
Comparing the Greek government to the US federal government is invalid. The Greek government is a user of its currency like you and me and has not control over it. The US federal government cannot ever become unable to make payments. This is a very significant difference, which makes it pointless to look at the deficit or the debt as a political goal in itself. Rather, goals in real terms (such as health care, high standard of living, low unemployment) should be set and the monetary powers of the government used towards that goal. Yes, you also need to look at CPI rises while doing that, but to put it bluntly: denying benefits to the poor (which is what usually happens when politicians want to "fight the deficit!!11oneone", whether you like it or not) is not going to help against inflation that comes from energy and commodity price increases.
It is nice to see a reasoned post in such a discussion, I'm especially happy to see somebody point out that banks do not lend out deposits, but this caught my eye:
There is a limit to the total credit but it is related to the fractional reserve and the money multiplier and has nothing to do with real things.
This has not been true for a very long time. Availability of reserves does not limit bank lending, because banks can always obtain required reserves after the fact. The central bank acts as lender of last resort for that purpose. Explained by an actual economist: Lending is capital- not reserve-constrained.
I just realized that I should probably clarify why I would make that Blizzard bet. In the long run, players accumulate gold, for at least one reason: there are players who become inactive, and their gold never re-enters the in-game economy. Therefore, Blizzard necessarily create more gold than they destroy in WoW in the long run. An equilibrium cannot be reached as long as new players enter and old players leave WoW.
This is the in-game analogue of the fact that private actors like to save money, which creates a drag on aggregate demand, which is why governments have to run budget deficits in the long run.
I was pointing out the error in your argument. Second, there is no tradeoff between financial assets and government debt. If the government paid off its debts, then private enterprise could borrow more, adequately compensating for the absence of government debt.
I recommend you read a little on accounting. When you borrow X amount, you have an additional assets of amount X. However, you also have an additional liability of amount X. The person who gave you the loan has X amount of assets less (the ones that he loaned out), but they will be replaced by a new asset worth X, namely your debt. In other words, the net outcome in financial assets is therefore zero.
No matter how you play this game, as long as only private actors (banks, firms, private persons) are involved, the net financial assets held by the private sector sum to zero. The only way that this quantity can increase is when the government comes in.
Incorrect. Less money is loaned to private sources when government debt is involved. Once again, I can lend only a finite amount of money. If I'm lending more to government, then I'm lending less to private enterprise. Either way, it is obvious that the government or private source will spend or invest the money. So there's no inherent change in the availability of capital for further loans from that.
You are implicitly assuming that the amount of money you have available to lend out is the same no matter whether there is a government budget deficit or not. But that assumption is clearly false.
The economy is flow-consistent. What this means is that when somebody spends money somewhere, then this money does not magically disappear. It has to come out again or accumulate somewhere. So, with a government budget deficit, some private entity ends up holding more money than they would otherwise have held. In fact, when you sum up over all private entities, the additional amount of money held by all private entities compared to what they otherwise would have had is exactly equal to the government's budget deficit. Note that this is not a theory. It is a mathematical fact that follows from flow-consistency.
Now you may say that time plays a role, and that the additional money is only available after the government has borrowed the money. In fact, if government were to borrow money and then hold on to it for a year before spending it, then you would be right at least inside your flawed model. However, this is not what is happening. The borrowed money is spent, and in the next "time step" it is back in the hands of private entities to be lent out again. The computation becomes a bit longer than what I wrote in my previous post, but the end result is still the same: when you average over time, the introduction of the budget deficit actually reduces the competition between borrowers.
(And let me state again explicitly, in the unlikely case somebody else stumbles into this thread this late: The above three paragraphs are written under the assumption that your approach to how lending works is correct. Reality works quite differently, but I don't expect you to take my word for it. This is why I put forward this argument that even if your model were correct, your conclusions based on it would still be wrong. My hope is that this will encourage you to read more seriously some of the sources I've linked to - in particular 7DIF and Bill Mitchell's blog - where these things are explained in more detail.)
[1] I am assuming here that the classical model of a market for loanable funds underlies your thinking, where people with savings go to loan them out for a profit, and borrowers go to request funds. This model is pretty flawed, because the way in which banks give out loans is not compatible with it. So I reject your premise - your model of ho
Once again, you claimed existence of a free lunch. Why not tune this machine to generate a vast amount of wealth?
Actually, I don't claim the existence of a free lunch. I realize that a lot of what MMT states looks like a claim of a free lunch on a first glance. However, when you actually read what those economists write, you'll realize that they simply have a better understanding of what the constraints are that prevent a free lunch.
In a nutshell, MMT says that there are no financial constraints, but there are real constraints. Here, "real" is used in the economic sense of real goods and services etc.
Government spending adds to aggregate demand, and when that grows too quickly for real productive capacity to adjust, then inflation results. On the other hand, when aggregate demand is too low and the productive capacity is under-utilized, firms will lay off workers and unemployment will result.
Fiscal responsibility therefore means to achieve a budget deficit that is neither too high to push inflation nor too low to result in unemployment. Note how there is no mention at all of whether this means the budget deficit is zero.
Furthermore (and this is simply an observation) since the private sector tends to save in net financial assets in the long run, the private sector creates drag on the aggregate demand. Therefore, budget deficits are normal and in fact desirable.
This last part is what may sound like a "free lunch", but it's really not. It's simply the observation that the private sector tends to not use all its spending power, and therefore, there is cake left over for the government. (The US is also in the special situation where China just keeps sending a lot of cake for no good reason other than they are unable to adjust their economy to do differently, so even more cake is left in the US.) Moreover, the government should eat that cake, because otherwise it will rot and stink up the entire house. (The last sentence is analogy for: if the government does not fill the gap in aggregate demand, this will cause unemployment; unemployment leads to loss of labour skill, which reduces the potential for future growth in the economy; similarly, other productive capital such as factories may be closed and removed forever.)
As to your links, I find them delusional as mentioned below. For example, the first link claims fiscal prudence at the government level is a "innocent fraud", an inherently contradictory phrase (hence, automatically wrong). I don't take serious people who make arguments that are wrong by definition.
Dude. If you could have been bothered to at least read the Prologue of that book, you would have read that: "Professor Galbraith coined the term to describe a variety of incorrect assumptions embraced by mainstream economists, the media, and most of all, politicians. The presumption of innocence, yet another example of Galbraith’s elegant and biting wit, implies those perpetuating the fraud are not only wrong, but also not clever enough to understand what they are actually doing. And any claim of prior understanding becomes an admission of deliberate fraud - an unthinkable self-incrimination."
It is a clever and unusual play with words that you failed to recognize for what it is.
You obviously need to look at the very examples you cite (also look at your Japan example). Blizzard doesn't need a functioning economy, nor do they need to respect the property of their players. But if they want to keep getting paid by their player base, they won't monkey around with the game economy.
If you had actually read anything about game-based virtual economies, you would know that game inflation is actually a big problem. And game developers spend a lot of time balancing money sources with sinks. For example, Blizzard introduced money sinks such as high-end mounts.
And I would bet you any amount that despite those money sinks,
The Republicans are debating plans to cut spending. This is unlikely to reduce the budget deficit, and if it does reduce it, it will do so at a high cost in real terms, especially unemployment.
What you have to understand is that there is a discretionary budget - what politicians aim for - and then there is an actual budget outcome that is largely driven by automatic stabilisers. In particular, when the economy is going badly, tax revenue will drop and welfare payments will go up, and thus the actual budget outcome will be different from the discretionary budget. This causes attempts to reduce a budget deficit to often be self-defeating. This can be observed nicely in the various Euro countries that are forced to implement austerity measures.
What people need to understand is that achieving a balanced budget is not a reasonable political goal. At any point in time, if the budget deficit is too high, so that it drives aggregate demand beyond productive capacity, it will cause inflation. If the budget deficit is too low, so that firms lay off workers due to a lack of aggregate demand, it causes unemployment. The high unemployment is evidence that the budget deficit in the US is too low at the moment.
This is not surprising, because the government balance is the counter-part of the private sector balance plus the external sector balance. Since the US is a net importer, and the private sector is saving (it is paying down debts at an incredible rate), the budget deficit must be high.
A reasonable political goal is something like "achieve full employment", because employment allows people to have meaning in their life. "Increase real living standards" is a reasonable political goal for obvious reasons. Having "balance the budget" as a political goal is just plain stupid.
Once you define your political goal, you need to take an unideological look at how to to achieve that given the economic reality. If that means maintaining a high budget deficit, then you maintain a high budget deficit.
If what you said were true, then most private consumption would also be bad for the economy: it's spending that only produces stuff to be consumed which will be gone later.
So it's not quite as simple as that. War spending creates jobs, which is good for the economy. The Second World War is how the US managed to get out of the Great Depression.
That said, "good for the economy" as measured with traditional indicators like GDP does not necessarily translate directly to "good for the people". Probably everyone outside the military-industrial complex would agree that the money going towards military spending could be used for much better spending instead.
However, simply cutting military spending will destroy jobs. So you need to have a plan for what you want to do instead of military spending.
As for "the federal government drives the economy", well, federal spending is a significant chunk of GDP.
Where does it get that money to spend?
The federal government gets the money that it spends from the same place where Blizzard gets the gold in World of Warcraft. In other words, whenever the federal government spends, money is created out of thin air. It does not come from taxes. The accounting that creates this illusion is just a historical vestige from the distant gold standard past.
I understand that Modern Monetary Theory is hard to swallow at first, because at first sight it appears as if MMT were claiming that there is a free lunch. And in fact there is something as close to a free lunch as you can get at this point in time, however it is not an unlimited free lunch in any way.
What MMT observes is that the federal government has no financial constraints. However, there are real constraints. The two main points are the following:
1) If the government's discretionary budget deficit is too big, then it pushes aggregate demand beyond the productive capacity of the economy, which leads to inflation. On the other hand, if the government's discretionary budget deficit is too small, then the lack of aggregate demand causes mass unemployment. So how big is too big, and how small is too small? The answer is that it depends on the private sector's decisions. Most of the time, a budget deficit is necessary to accomodate the private sector, though very occasionally, a budget surplus may be appropriate (this must be a very rare event though: six out of seven times that the US government ran a budget surplus in its history, a recession followed, and the seventh time set the stage for the global financial crisis).
2) Irrespective of the discretionary deficit that politicians desire, the actual budget outcome may be very different due to automatic stabilisers (tax revenue and welfare payments). Example: the discretionary budget deficit in the US at this point in time is too small, causing unemployment. The resulting lack of tax revenue and the increased welfare payments cause the actual budget outcome to be bigger than desired. The interaction of discretionary and actual budget lead to the (initially) counterintuitive situation where the discretionary deficit needs to be increased so that the actual deficit can become smaller.
lets take your theory to its extreme conclusion. The government takes 100% of all financial transactions and then spends it. Under your theory our GDP is now 200% of what it was.
Disregarding for a moment that you clearly don't understand how government spending works, this is true. And it's not actually a theory, it's simply the definition of GDP. If the government were somehow to spend that much additional money, the nominal GDP would in fact double (let's ignore multiplier effects for now). Look up the definition of GDP.
Now refer to what I wrote above: while there is a lot of idle capacity in the economy right now, I don't think there's that much spare capacity. As a result, the increased aggregate demand would cause inflation, and therefore the real GDP would not double (it would still likely increase, just not by that much).
However, if the economy really were below 50% capacity utilisation, then yes, the government could really spend that much without causing inflation (with the caveat that the distribution of the additional spending matters: the type of spending must match the type of available capacity, otherwise there may be inflation until the market adjusts to restructure the economy to match the demand).
So let's go back to the "free lunch" thing for a moment. Right now, an unusually large part of the US economy's productive capacity is idle. The most obvious indicator of that is the extremely high rate of unemploymen
Once that happens, the rough outline for what needs to be done is that somebody needs to start spending again. ...
I am not against that on principle, but you have to realize that when people who are deep in debt get a tax break, they're probably going to use it to pay down their debt.
But doesn't that give the debt owners more money that they can then spend on other stuff, or loan out to other people to spend on stuff?
Not necessarily. What we're talking about here is people paying debt back to their bank. The bank will be very happy about that, but being repaid won't make them give out more loans directly, because bank loans are not limited by the amount of money available to the bank anyway. So debts being settled will just cause the money supply to shrink - the M1-M3 type of money supply, not the monetary base; the latter is still very high in the US due to the Fed's monetary policy, but ultimately it's the private sector that determines the size of M1-M3, and the Fed's quantitative easing has demonstrated spectacularly that the orthodox theories about how those quantities are related are just plain wrong. You'll find a little more on this - light on the theory, but with pretty graphs - here.
This is one of the things that I had the most problems understanding, asking myself the "is it really like this?" question more than a few times. But a number of sources agree that at an operational level, the decision by the bank to give out a loan has nothing to do with how much money (reserves, to be more precise) the bank has. The people who make those decisions don't even know how much money the bank has. They just make the decision based on creditworthiness and interest rates, and then a different department at the bank worries about getting the money - if necessary - after the fact. This liquidity management is entirely separate. It takes a while to unlearn the incorrect elementary school picture of banking that we are all told.
So the total amount of debt, and therefore the size of the money supply, grows and shrinks based on changes in the demand for debt and the risk-averseness of the banks. Currently, the US economy is still settling debts, and the money just "disappears". In the accounting sense of assets and liabilities, the corresponding assets and liabilities (money and anti-money) cancel each other out and that's it, the balance sheet shrinks and nothing replaces the lost volume.
Unfortunately, it seems like these days, government spending never really seems to do much good. Instead of building roads (we don't really need a lot of new highways or the like, but we do need to fix up the ones we have, especially bridges), sending men to the moon and developing new technologies to do so, investing in fundamental research, etc., all I ever see is spending money on military hardware, sending money to other screwed-up nations like Mexico for them to waste, spending money on poorly-designed social programs that don't do anything to relieve poverty, etc. If they cut a lot of that stuff out, and spent the money instead on lots of medical research, a space elevator, a personal rapid transit system, etc., we'd put lots of people to work, create lots of very useful new technologies, and become a world leader in many things again. But we don't seem to want to do that.
It does seem like a kind of vicious cycle:
The almost inquisition-like hatred of everything to do with government spending prevents politicians from pushing for visionary projects like the ones you mentioned. As a result, only two kinds of government spending happen: the boring things that people just take for granted (and that are probably efficient as often as they are inefficient), and the ugly back room deals that continue precisely because they are ugly and dominated by ruthless vested interests. The latter is correctly identified as inefficient and wasteful,
True, those wars were disruptive. But the dependency ratio (number of workers per retiree) did drop as was predicted around 1900 - perhaps not as much as those predictions said it would, but the change was still an order of magnitude. It was productivity improvements that saved the day.
And yes, the retirement system in Germany was reset after the Second World War. And the coolest thing about this is that pensioners benefited from that reset. It was the reason that Germany switched to a Social Security-type system instead of capital-based retirement funds: by using the Social Security-type system, we could guarantee that pensioners could benefit from the general economic upswing in Germany that started in the 1950s and really took off in the 1960s.
I am not a professional economist either. I'm a mathematician who got interested in macroeconomics and I seriously started reading around about a year ago. I don't have a quick fix to the US situation, but the first thing that needs to happen is for the focus of the discussion to shift. People need to realize is that there is no debt crisis. The debt is basically just after-the-fact accounting (with the exception of interest payments, but those shouldn't be the primary concern).
Once that happens, the rough outline for what needs to be done is that somebody needs to start spending again. After all, the actual problem (from my political perspective) is the insane amount of unemployment, which is really the biggest kind of waste you can imagine. Any kind of squabbling over government inefficiency is just peanuts compared to that. And the unemployment is caused by the simple fact that not enough spending is happening to put the people into employment.
There are basically three sources of spending: private (consumption and investment), government, and external sector.
The private sector is still dealing with the aftermath of the financial crisis. Part of the reason why the stimulus has not been as effective as it could have been is that it consisted of a lot of tax breaks. I am not against that on principle, but you have to realize that when people who are deep in debt get a tax break, they're probably going to use it to pay down their debt. So spending doesn't increase and so it doesn't help the economy recover. (This is the balance sheet recession argument of Richard Koo) Businesses are in a similar situation, and they aren't going to invest unless they see spending go up first.
The external sector is also unlikely to be a source of spending soon (and it's questionable whether you even want it to be one; if you look at it simply in terms of cargo ships bringing stuff to the US vs. cargo ships taking stuff away from the US, then I would say that the trade balance is hugely in favour of the US - China just keeps sending you guys stuff for free!)
Which basically leaves the government to fill in the spending gap because there is nobody else left to do it. So if you want a soundbite, I'd say: build that high-speed rail (to fit with the article) or carpet the southern US with solar plants, or fix the roads, or something like that. Basically, any kind of labour-heavy infrastructure investment is the way to go.
And it's important to keep in mind that adding X amount of discretionary spending to the budget will not increase the budget deficit by X. After all, those newly employed workers are going to pay taxes and they will no longer receive unemployment benefits. And then realistically there's also the multiplier effect which orthodox economists don't like because it conflicts with their ideologies, but even they have to concede at least the first part of the argument. So increasing discretionary spending by X will increase the budget deficit by less than X, and it might in fact reduce the deficit (possibly with some delay).
This may sound strange to the libertarian types out there, but the biggest benefit of a government-controlled currency is that it can be controlled. This allows a reasonable government to dampen economic cycles by implementing countercyclical policies. The facts of life are that the economy can get into a situation that is universally agreed to be bad, without any single individual being able to do anything about it. Then collective efforts are required to get out of it, which is where government comes in.
In a world of only Bitcoin, such collective action would be forbidden by the mathematical safeguards of the system, and the consequences would be roughly as bad as the consequences of the gold standard. (Yes, despite what some people believe, getting rid of the gold standard allowed for a lot of good to be achieved in the world economy.)
Since the hashes depend on the entire previous block chain containing all previous transactions, you cannot simply pre-compute hashes in private to prepare for one giant dumping on hashes into the network.
It is possible to corrupt the network, you have to be able to produce more hashes than everybody else together, i.e. you have to own >50% of the computing power in the network. So you need more than a decent size cluster; you actually need more than the sum of all the decent sized clusters that are already out there.
Some historical perspective: around 1900, people bemoaned demographic change in Germany. People were starting to get older, and who would pay for all the old people? They used the exact same language and arguments that are en vogue again today. But the reality is that throughout the 20th century, retirement systems worked just fine. In fact, the situation improved instead of getting worse. That's just for perspective.
Now here's the thing: it's not about the money, and it's not about the demographics. It's about productivity. In those days, the number of workers per retiree was in the double digits. Today it's an order of magnitude lower. The world didn't end, because our productivity increased. Technology helped, and it will help in the future.
Ask yourself this: can the real goods and services that society wants to supply its retirees with be provided? Given the high rate of unemployment throughout the Western world, the answer for the US and Europe seems to be a very clear Yes. If only our politicians were to use money and the financial system to solve problems instead of creating them, there would be no Social Security problem at all.
You do realize that a bank robbery can never actually steal your money, right? A bank robbery is about stealing bank notes that are owned by the bank. If you give a couple of bank notes to a teller at the bank to add them to your account, and five minutes later they are stolen in a bank robbery, nobody actually stole your money at any point.
Unless you store bank notes in a safety deposit box at the bank, in which case I am not so sure they owe you anything in case it gets stolen.
Every country can do that. Printing money is something every government does, and printing money doesn't create debt, and never has.
However, printing more money does cause inflation.
Kind of off-topic, but this is a common misunderstanding. The most direct causal link between inflation and printing money is that when inflation happens, you are eventually forced to print more money so that payment settlement can continue normally. [1] The misunderstanding comes from people confusing printing money with government spending.
There are a number of causes of inflation, but for this type of discussion, the relationship of productive capacity and aggregate demand is key. The short version is the following. When aggregate demand grows too fast for productive capacity to keep up, then you get inflation (because competition drives up prices). When productive capacity grows faster than aggregate demand, then unemployment results (because companies that cannot fill their order books lay off workers). Those are the key constraints of the economy.
From a sovereign government's point of view, this means that while it can obviously spend as much as it likes, there are real constraints to keep in mind. If the discretionary budget deficit is too large, there will be inflation. If the discretionary budget deficit is too small, there will be unemployment. (Of course, due to automatic stabilisers, the final budget outcome can be very large and unemployment can be high at the same time. In such a situation, the reasonable thing to do is to increase the size of the discretionary budget deficit. This often decreases the final budget outcome via automatic stabilisers.)
One cannot say a priori how large the budget deficit should be to be neutral with respect to both inflation and unemployment. The size of the neutral budget deficit changes over time, based on changing circumstances in the private sector's savings behaviour and the development of the external sector.
Fundamentally though, printing money is just a liquidity management operation. What really matters are spending flows.
If you truly have an open mind and want to learn more about the long version, I suggest you search for Modern Monetary Theory. A good starting point is here, and more thorough analyses can be found on this blog of an Australian economics professor.
[1] The recent story of Argentina in that respect is very educational. Basically, Argentina has long had quite high inflation, and the government believed - like most people do, unfortunately, due to that misunderstanding - that they could fight inflation by not printing any more money. Well, prices were rising anyway, and at some point there was a lack of physical money for people to make their payments. Keep in mind that electronic payments are not well developed in Argentina, so people might have had money in a bank account, but were unable to get it out simply because the ATMs ran out of notes. This was not in any way a bank run, it was just an under-supply of tokens, and the irrationality that goes along with that kind of problems hurt price stability on top of the inflation that was happening anyway. In the end, printing more money solved that problem, but crucially, it was really only about printing more money, purely liquidity management. By printing this money, the government did not increase its spending.
You mentioned only one actual effect of those numbers, namely interest payments. Those constitute a risk-free stream of income for holders of treasuries. Is that a bad thing?
Yes, it means potential borrowers who can't offer the so-called "risk-free" stream of income have to settle for higher interest rates and/or lower borrowed amounts.
Be careful to get the causalities right. It is not the budget deficit and the issuing of treasuries that drives up interest rates. Interest rates are set by monetary policy, which is decided by the central bank. And as I said, I would be all for a zero interest rate target (which would mean zero interest paid by the central bank and government, and a very low cost of borrowing at the central bank).
A third effect of excessive borrowing is higher future borrowing rates due to an elevated risk of default.
There is no risk of default for the federal government, by definition. If the Tea Party lunatics get their way, it might default voluntarily. But the federal government cannot, ever, find itself in a position where it is unable to pay.
(Though to clarify, from an economics point of view, "government" means all of government, not just the executive branch. If the legislative branch decides that the government should go into voluntary default, then there's not much the executive branch can do against that under current political arrangements. The important point is to understand that the government can never be unable to settle its bills, it might just become unwilling to do so for stupid ideological reasons.)
The good news is that interest payments are entirely voluntary, and the interest rate is set by political choice via monetary policy.
If it's so easy, why not turn the dial to 11 and make bank? What could possibly be the obstacle to this fascinating money machine?
Inflation. Someone who bothered to save money or loan money to others gets shafted. There is no such thing as a free lunch. Someone always pays for it.
You're mixing up too many things for me to bother to reply in detail. The short answer is that since the part of inflation that can be controlled domestically is essentially driven by the relationship between aggregate demand and productive capacity of the economy, it is perfectly feasible to run a zero interest rate regime and control inflation by setting the size of the budget deficit appropriately. This is what Japan has been doing for two decades now. If you honestly want to understand more, I again recommend reading about Modern Monetary Theory, start with e.g. Warren Mosler's 7 Deadly Innocent Frauds, or perhaps Bill Mitchell's blog.
Sure, you can interpret it that way. I don't consider your distinction meaningful, especially to the current discussion. Where's the economic growth that's going to absorb increases of 10% debt per year? Sure, if the economy were growing well over 10% per year, then deficits of 10% of GDP per year wouldn't be that significant. Similarly, if we just borrowed money for a short, spent it on things that raised US economy substantially (you know, that Keynesian economics thing) while and cut back promptly, then that might But that's not what's happening.
Do you believe that the budget outcome is chosen by politicians? If so, I have bad news for you: it is largely a result of automatic stabilisers. If the economy were to grow again significantly, then the budget deficit would reduce automatically via increased tax revenue and reduced welfare outlays. The budget deficit as a ratio of GDP would fall below the growth rate long before the growth rate reaches those 10%.
The second part is that people and businesses aren't stupid. People know when the US i
Trade is the counterexample. Two parties make a mutually agreeable trade that collectively increases the value of the assets they had. It's also worth noting that less public debt means more private debt, which as I've noted before, due to the inefficiency of government action, means more value to society overall.
Yes, there are types of wealth that are not of a financial nature, such as physical assets. What you say applies to them, true. That doesn't give you a free pass to ignore the relationship between financial assets and government debt.
There's more than one interest rate. Private sources aren't going to be able to borrow at the Fed Fund rate. They usually borrow at a higher rate since their debt, usually is considered to be riskier than federal debt. [...]
Obviously there are different interest rates, yes. The point is that those other interest rates end up being relative to the rate set by the central bank. When the central bank raises their target, banks usually follow up by raising their own interest rates so that they can still make a profit. This interaction between the interest rates is the whole point of monetary policy.
(I snipped out the last part because you're just re-iterating without justification what follows below anyway)
The second point is about the amount of funds available, and there I would simply encourage you to think for yourself about how the system works. When the government runs a budget deficit, it actually increases the amount of money in the system. The treasuries that are issued simply drain the money back out. It's a wash.
No. You ignore how the borrowed money is distributed to society. Rent-seekers are the primary recipients. It's not based on what value the recipient provides to society, as would largely be the case with private investment, but how much federal funds they can capture.
Your original point was something like this: government borrowing reduces the amount of money available for other borrowers, this raises interest rates for other borrowers. How things are distributed does not affect the aggregate quantities, so of course I ignored the distribution. The distribution is irrelevant to your original argument, so bringing it up now is kind of disingenuous.
A lender has a choice between buying treasuries and loaning money to private sources. They can't do unlimited amounts of both at the same time. The competition is obvious.
Let me accept your flawed premise for a moment [1]. Let us compare two scenarios: (a) the government runs a budget deficit of size B and issues treasuries to match it. (b) the government runs a balanced budget and does not issue treasuries.
In your model, under scenario (b) there is X amount of funds [2] to go around to be borrowed by private borrowers. In addition, there is some request for Y amount of loans by private borrowers. Those things are matched somehow.
Under scenario (a) there is X + B amount of funds to go around to be borrowed, because the government's budget deficit adds to the amount of money that is around. In addition, there is some request for Y amount of loans by private borrowers, and the government attempting to issue B amount of treasuries.
Let us compare the intensity of the "competition", shall we? One measure could be the amount of funds available per desired loan, which is X/Y in scenario (b) and (X+B)/(Y+B) under scenario (a). I encourage you to do the math: if there is "competition" for loans in the first place (i.e. X/Y less than 1, so that there is no "surplus of funds"), then the addition of the government's budget deficit actually reduces the intensity of the competition, because (X+B)/(Y+B) is closer to 1 than X/Y.
[1] I am assuming here that the classical model of a market for loanable funds underlies your thinking, where people with savings go to loan them out for a profit, and borro
Yes, nice numbers, but what do they mean?
You mentioned only one actual effect of those numbers, namely interest payments. Those constitute a risk-free stream of income for holders of treasuries. Is that a bad thing? That's a matter of political opinion. To my mind, this actually is somewhat problematic, because it tends to essentially be welfare for the rich.
The good news is that interest payments are entirely voluntary, and the interest rate is set by political choice via monetary policy. It is absolutely feasible to keep the interest rate as low as desired. Just look at Japan: they have a debt-to-GDP ratio beyond 200%, and yet their interest rate has been at record lows for two decades now. [1]
Also, I hate to burst your bubble, but the debts from the Second World War were never paid off. If you don't believe me, check the numbers from the source itself. The debt-to-GDP ratio did drop, but that happened because the economy was growing. The debt itself was never paid back. [3]
And that last part is really all you need to know to understand how to get out of the current situation: trying to cut the deficit and/or reduce debt is self-defeating. The only reasonable [2] way to improve anything is to get spending going so that the economy can grow.
[1] One caveat is that with the interest rate at or close to zero, a different policy tool may be necessary to dampen excessive private lending. I would suggest a flexible adjustment of capital requirement ratios for that purpose. (And while I would advocate getting rid of those interest payments, I also advocate caution. Such a change needs to be implemented slowly, over the course of many years.)
[2] Of course you could also reduce the debt simply by introducing a tax on the ownership of treasuries. Once you really understand the operations that would be involved in that, you should also understand just how ridiculous all those worries about the debt really are. (And yes, of course such a tax would be utterly stupid.)
[3] You know what's funny about the whole paying-back-the-debt discussion? The owners of US debt as a whole actually don't want to be paid back! After all, they enjoy a risk free income stream thanks to them.
There are two things. Let me first explain why my claim that you quoted is literally right.
Most private individuals hold wealth in the form of US treasuries, either directly or indirectly, especially via retirement funds. Reducing the debt is equivalent to reducing the amount of US treasuries that are in this system. While it is true that there are some other holders of US treasuries, ultimately you cannot reduce the debt without reducing private wealth that is held in the form of US treasuries. Debt and financial assets are simply two sides of the same coin, and removing one necessarily removes the other. That's simply an accounting fact.
Now to counter your point about borrowing, there are two misconceptions.
The interest rate is strictly a function of monetary policy and is unrelated to the budget deficit or the debt. The central bank (i.e. the Fed) sets the interest rate target - this is a political choice - and then performs buys or sells (mostly of treasuries) to manipulate the interest rate in the inter-bank market until the desired target is reached.
The second point is about the amount of funds available, and there I would simply encourage you to think for yourself about how the system works. When the government runs a budget deficit, it actually increases the amount of money in the system. The treasuries that are issued simply drain the money back out. It's a wash. There is no competition between private borrowing and treasury issuance. The money used to buy treasuries would simply not be there if there were no budget deficit.
Besides, how much money can be borrowed is only limited by the amount of capital available to banks (lending is not constrained by reserve requirements or by the amount of deposits, but only by capital requirements and by profitability and creditworthiness considerations - which depend on the interest rate and are subject to Minsky-type cycles).
What do you mean, precisely, by "the federal books define the economy"? I honestly don't know what you're trying to say.
As for "the federal government drives the economy", well, federal spending is a significant chunk of GDP. If the federal government reduces its spending in an attempt to reduce a budget deficit, then unless that reduction of spending is replaced by somebody else, the GDP will fall - since the GDP is essentially just the sum of all spending over the year, there is nothing magical about it, just plain fact.
Some economists believe that when the government reduces its spending, the private sector will magically fill that spending gap somehow, independently of other factors. That would be nice, but empirical evidence starkly contradicts that belief.
This is why I conclude that an attempt to reduce the budget deficit tends to be contractionary.
Note, however, that this is not a magical property of government. It's a function of the amount of the GDP that comes directly and indirectly from government outlays.
Indeed, I phrased that part of my response rather badly because I was in a hurry. However, you would be wise not to disregard everything I say simply based on that.
The point remains: neither the deficit, nor the debt, are by themselves bad things. Targeting a reduction of debt is equivalent to targeting the destruction of private wealth, and targeting a reduction of the deficit generally contracts the economy (unless it is implemented in a very unusual manner). If you have a problem with those observations, we can of course discuss them.