Government is constrained only by the inflation it can create by over-spending, but its ability to spend is numerically unlimited. — Pavlina R. Tcherneva, Assistant Professor, Franklin and Marshall College
The dollars are nothing more than data entry on the Fed’s computer. They have no other existence. And it has no impact on the government’s ability to spend as to whether China’s dollars are in their checking account or savings account. — Marshall Auerback, Senior Fellow at the Roosevelt Institute and Warren Mosler, President, Valance Co.
So if the government doesn’t need to tax to be able to spend, why does it tax at all? There are two reasons. First, the government creates demand for its currency through taxation. If the public didn’t need the dollars to pay its taxes, it wouldn’t be willing to sell goods and services to the government in return for pieces of paper (or numbers in a checking account). Taxes, then, are what give value to money. Second, the government uses taxes to control the public’s spending power. When the public has too much spending power, government taxes some of it away to avoid inflation. — Yeva Nersisyan, Doctoral candidate in economics, University of Missouri-Kansas City, Missouri
In the US, hyperinflation will not be an issue if the government spends while it has a large deficit because with high unemployment and unused yet functioning factories all across the country, there is plenty of room to cut taxes and/or increase spending to get us to full employment. — Marshall Auerback, Senior Fellow at the Roosevelt Institute and Rob Parenteau, sole proprietor of MacroStrategy Edge
There much more where that came from, much much more.
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“First, the government creates demand for its currency through taxation. If the public didn’t need the dollars to pay its taxes, it wouldn’t be willing to sell goods and services to the government in return for pieces of paper (or numbers in a checking account). Taxes, then, are what give value to money.”
Shouldn’t the honesty be admired?
Government has to force people to use their money paper.
I do not think that is what he is referring to. I think he is saying that because we are taxed at all is the only reason money has any purchasing power.
You may think I am simply contributing to the idea that this man is a loon, but the evidence of his next statement seems to bear that out. “Second, the government uses taxes to control the public’s spending power. When the public has too much spending power, government taxes some of it away to avoid inflation.” This is from a doctoral candidate in economics? Are you kidding me? This is one of the most absurd notions I have ever heard.
There is some substance to that statement by Yeva Nersisyan. The taxation regime more than anything else, forces people to hold paper currency. If any government allowed the tax payers to pay taxes in a basket of foreign currencies and/or commodity money, that would put a severe dent in the power of Central banks to regulate money supply and consequently the power of governments to misallocate resources. It would be suicidal, they won’t do it.
exactly! the US dollar is a simple public monopoly,
exactly!
it’s coercive and a non market, inherent ‘distortion’
that’s what any public monopoly is.
see and read ‘the 7 deadly innocent frauds’ at http://www.moslereconomics.com
warren mosler
mmt first generation
Oh my god. Did you read the one?
Myth #6: Deficits and government borrowing takes away savings.
Reality: Deficits add to income and savings.
Incredible. This needs only a few tweaks here and there to go straight into The Onion. I actually can’t make it all the way through them.
Where does saving come from? It must come from the deficit of the government. Otherwise money would disappear. Think about it.
nominal savings, mate, not real savings.
read the book?
A money-issuing government is like a landowner who buys groceries with his own IOU’s, and then accepts those IOU’s in payment of land rent. If his land is worth 1000 oz. of silver, he can safely issue up to about 400 oz worth of his IOU’s without impairing their value.
Land rent is the reason his IOU’s have value, but only because land rent is what backs the IOU’s. And it is backwards to say that the purpose of the land rents is to give the IOU’s value. He would collect rent whether or not he had issued IOU’s.
Taxes are not rent. The land owner owns the land he collects rent on. Does the government own the country?
Yes they do, the land was seized from monarchs and the land is now controlled by government and with voting and the such-like everyone, in theory, has a minor controlling interests in the nation they live in.
No. But that’s not Mike’s point, Mike’s point isn’t about morals, it’s that the market understands that the landowner/state is good for the money.
What the Post Keynesian here has said is close to the truth but different from it.
The state issue money and via legal tender laws and the requirement to pay taxes in money they create demand for it. That is, without those laws citizens may decide to use a different sort of money than the state’s money (note Post Keynesian’s often don’t believe this, they believe that only the state can create money and without the state only barter could exist, they don’t accept Menger’s theory of the evolution of money). When the state issue money we citizens who hold it give the state an interest free loan. That loan is to the state directly for cash, and to a commercial bank in the case of checking accounts.
The power to create money does not gaurantee that the state can print what it likes because if the rate of price inflation becomes too high then several things will happen. Firstly, people will economise on holding money. Although people demand money to pay taxes that isn’t the only reason by far, in fact it’s only a small part of money demand. If price inflation continues then a “flight to real values” will occur. Eventually the state will not be able to enforce legal tender laws.
(I’m sure that Mike would disagree with the above in detail, but we’ve had that debate many times before).
Property taxes most certainly are rent.
Skip a property tax payment and see how long you get to stay on “your” property.
In short, Yes.
If you don’t pay your property taxes, who claims that they own your land? If you don’t pay your income taxes, who claims a ‘right’ to back-taxes?
If govt provided any useful services, they’d be able to charge fees and compete in the market, like any clothing producer, food producer, et al, who don’t come after you if you decide you no longer are in need of their service.
we gave the govt taxing authority in the constitution (including amendments), for better or for worse
Mike,
In your scenario, which is money, the Land Rent IOU’s or the silver oz?
How does this compare to what we have today, where (if understand you correctly) the land rent IOU’s = U.S. dollars?
and think of the US dollar as a tax credit, which is all that it is.
If all (or any) of this tripe were even remotely true, then the U.S. government would easily qualify as the stingiest, most cruel bastard that ever existed on the face of the earth for not printing off enough money to make us all instant billionaires.
Or trillionaires.
Why not? There are no limits, after all! Hey, we’re not subject to the same cause-and-effect realities as Germany or Zimbabwe! Or Argentina. Or Greece. Or China under Chiang Kai-Shek. Or Hungary. Or Turkey. Or Bosnia. Or Yugoslavia. Or …
Magnus, you’re forgetting that when the public has too much spending power, that leads to inflation!
1) “Spending… creates new money, while taxation destroys it.”
[Confusion of "money" with "valuable goods" or "capital."]
2) Paraphrased: A system that they claimed was broken and fixed thirty years ago is broken again. Therefore, the system never was and never can be broken.
[Ponzi schemes are always broken. They don't create value. Any "fix" is temporary at best. Printing money and giving it to seniors won't solve the problem.]
3) Good gravy, this person doesn’t understand how money works. Not only that, myth #1 says parallels between private fund paradigms don’t work with the public sector, but myth #3 says that Treasury debt is precisely identical to private savings accounts held by “creditors.”
4) Now this person is claiming that there are both checking and savings accounts at the Treasury. Apparently this person doesn’t understand how a “bond” works.
5) Again. No understanding of how simply incrementing all of those accounts with new dollars could have any effect on how people value dollars.
6) Deficit spending creates savings? What? Reductio ad absurdum? What?
7) Misguided land reforms in Zimbabwe were government spending, weren’t they? What do you mean, they resulted in catastrophe? I thought you were arguing that wasn’t possible?
9) “interest payments are not an obstacle to any other payments” But those payments must be made in foreign currencies… which is the same as that Weimar republic situation you were talking about a while back. Which is it, black or white?
The best part is the futile appeal to authority at the bottom of each “myth.” What an absolute crock.
read the 7DIF where all that is addressed, thanks
http://www.moslereconomics.com/?p=8662/
we can’t have more than our potential output.
but we don’t have to relegate ourselves to less by, for a given size govt, by overtaxing ourselves into unemployment either.
One practical lesson to be drawn from this piece is don’t send your children to the University of Missouri-Kansas City to learn economics.
Oh God, Post Keynesians!
Books have been written to comprehensively demolish the ideas of Marxist economics. Since Post Keynesian economics (dash or no dash) is just as silly I think it would be useful if a book were written refuting it’s main doctorines.
it’s been viciously attacked by mainstream post keynesians for a long time
The operatonal reality is that a sovereign government as monopoly issuer of a nonconvertible currency with a flexible (floating) exchange rate is not financially constrained. It neither taxes to fund disbursements, nor borrows to finance them. Taxes are funded by currency issuance. Taxes serve to withdraw funds from nongovernment to prevent inflationary pressure as nominal aggregate demand approaches real output capacity.
Similarly, the government does not finance itself by issuing securities, and the securities it issues are bought with currency it issues. Treasuries are simply transfers of reserves created by currency issuance, like transferring funds from a deposit account to a CD. There is no financial reason that a monetarily sovereign government needs to issue securities at all in a fiat system. All talk to the contrary became obsolete when Nixon shut the gold window in 1971. It is gold standard thinking that doesn’t apply operationally now. One may prefer a convertible fixed rate system, but that’s not the way things operate presently under a nonconvertible flexible rate regime.
Under the present system, the government as currency provider has the sole prerogative and corresponding sole responsibility to provide the correct amount of currency to balance spending power (nominal aggregate demand) and goods for sale (real output capacity). If the government issues in excess of capacity, demand will rise relative to the goods and services available, and inflation will occur due to a glut of money. If the government falls short in maintaining this balance, recession and unemployment result, due to a glut of goods and services.
The US presently needs to run a larger deficit to close the output gap and reduce unemployment that is cost the country dearly in terms of foregone opportunity and human degradation. Inflation now is low, and unemployment high, so there is no pressure of nominal aggregate demand on real output capacity. Moreover, the rising propensity to save and lagging investment, along with a current account deficit, means that the output gap can only be closed by government’s stepping up with deficits if the output gap is to be closed in a timely fashion. This is a matter of sectoral balances and national accounting identities, not assumption-based theory.
The government’s” debt” is non-government’s savings. Treasury securities are someone’s savings that eventually get consumed or invested. When they are sold or redeemed, then the securities will be converted back to reserves/deposits, whence they came in the first place.
> The operatonal reality is that a sovereign government as monopoly issuer of a
> nonconvertible currency with a flexible (floating) exchange rate is not
> financially constrained.”
What you mean by “not financially constrained” is that the state can issue as much money as it wants. I disagree. The state can print a moderate amount of money and spend it. If it does that it distort the economy due to the injection effect (cantillon effect). And in real terms money holders and creditors will be taxed.
However, once the rate of price inflation reaches high levels then people will start to abandon state-created money. They will move to informal sorts of money, and to barter. The fact that money must be used to pay taxes doesn’t mean that all demand comes from that source. Most agents could hold much less money than they do, they will economise on money if holding it becomes a cost. If the cost becomes even higher they will change to using other sorts of transacation even if it is illegal.
> It neither taxes to fund disbursements, nor borrows to finance them.
> Taxes are funded by currency issuance.
What’s your logic behind that.
> Taxes serve to withdraw funds from
> nongovernment to prevent inflationary pressure as nominal aggregate
> demand approaches real output capacity.
Why should the government care about inflationary pressure? Here is the point where Post Keynesian’s tacitly accept the Austrian case. Let’s say a government is faced with the question of whether to tax to fund it’s actitivies or to create money. It can create a sum of money X without creating much price inflation or discoordination and without agents abandoning money. However, if it wishes to spend an amount much larger than that, X + Y then it must tax, this is normally the case.
It’s not that taxation prevents inflationary pressures it’s rather that creating money produces price inflation.
> Similarly, the government does not finance itself by issuing securities, and
> the securities it issues are bought with currency it issues. Treasuries are
> simply transfers of reserves created by currency issuance, like transferring
> funds from a deposit account to a CD. There is no financial reason that a
> monetarily sovereign government needs to issue securities at all in a fiat
> system. All talk to the contrary became obsolete when Nixon shut the
> gold window in 1971. It is gold standard thinking that doesn’t apply
> operationally now. One may prefer a convertible fixed rate system, but
> that’s not the way things operate presently under a nonconvertible
> flexible rate regime.
Why bother talk about Nixon closing the gold window, you could talk about the suspensions of convertability in the 19th century.
If the state issues money then it is getting an interest-free loan from those who hold it. If the state issues bonds then it is getting a loan from those who hold it that pays interest.
The problem here is that there is not infinite demand for money and the state can only go so far in generating demand. That is why the state must, for some portion of its debts, resort to issuing bonds.
The fact that government bonds continue to hold value in a fiat currency system or a credit money system isn’t a disproof of this. These bonds have value because the bondholders believe that the government will not create so much price inflation as to destroy the net present value of their bonds. Bonds really do become worthless if this criteria isn’t met.
I am describing operational reality based on national accounting identities and stock-flow consistent macro models of sectoral balances under the present monetary system.The issue is not actually finance. It is the distribution of real resources. Money is just the way of keeping score of this, since money represents a financial claim on real resources.
Money is created in two ways. 1) Through bank lending (loans create deposits) and money created through credit extension nets to zero. Everyone’s credit money is someone else’s loan. 2) Money is also created through currency issuance. There is no corresponding liability created in non-government, so currency issuance increases nongovernment net financial assets. This creation through currency issuance transfers real resources from private to public use. The proportion is a political decision independent of financial constraint other than policy that results in either excessive or deficient nominal aggregate demand relative to real output capacity.
Good policy increases public investment in areas where the private sector is either unwilling to act or unable to do so profitably. Bad policy involves subsidizing inefficiency or ineffectiveness.” Efficiency is doing things right and effectiveness is doing the right thing – Peter F. Drucker.
Currency issuance occurs through government disbursement by the Treasury. The Treasury credit non-government bank accounts or send out checks. Settlement requires reserves in the interbank settlement system, which the central bank provides. That’s how net financial assets get created.
If nominal aggregate demand approaches real output capacity, then the government needs to withdraw some financial assets it has created by taxation. At any rate, the taxes are already funded by the currency issuance that created the net financial assets.
Treasury security issuance transfers reserves in the interbank system to interest-bearing securities. This is done in order for the central bank to be able to hit its target rate. It’s a monetary operation, not a fiscal one, as are currency issuance and taxation (other than the issuance of interest, which is a form of currency issuance that increases non-government net financial assets). This is a bit complicated operationally; for a description of this, see Understanding central bank operations The government does not have to issue T-bills or bonds to do this. It can also do it by offering a support rate for excess reserves equal to the target overnight rate in order to hit its target.
What the government needs to do is to maintain nominal aggregate demand at near full capacity to prevent recession and avoid unemployment, while not letting nominal aggregate demand exceed real output, which would result in inflation. It can do this with a combination of fiscal policy (currency injection and withdrawal) and monetary policy (adjusting interest rates).
This is how the present system works. I am not saying whether it is good or bad. It’s what we got to work with. We can argue the politics of proportion of distribution of real resources between public and private, but this is a political issue not a financial one. Fiscal and monetary policy can be adjusted to accommodate what the voters decide in any instance.
> I am describing operational reality based on national accounting identities
> and stock-flow consistent macro models of sectoral balances under the
> present monetary system.The issue is not actually finance. It is the
> distribution of real resources. Money is just the way of keeping score of
> this, since money represents a financial claim on real resources.
What do you mean by “finance” here?
Does the view you expressed above have anything to say about “real resources” or is it all about the distribution of the “score”?
> Money is created in two ways. 1) Through bank lending (loans create
> deposits) and money created through credit extension nets to zero.
> Everyone’s credit money is someone else’s loan.
No money created in this way doesn’t net to zero. Think about the maturities involved. For example, my home mortgage is a long term bond. It is not liquid. My checking account, and my savings account on the other hand *are* liquid – they are money in the broader sense. My savings bonds are not liquid.
> 2) Money is also created through currency issuance. There is no
> corresponding liability created in non-government, so currency
> issuance increases nongovernment net financial assets. This creation
> through currency issuance transfers real resources from private to
> public use.
I agree with you there.
> The proportion is a political decision independent of financial
> constraint other than policy that results in either excessive or
> deficient nominal aggregate demand relative to real output capacity.
But, what do you mean by “financial constraint”?
I don’t think that here you really mean anything much different to me. By “nominal aggregate demand” you really mean price inflation. You are modelling the demand to hold money by relating it to real output capacity.
Your point is essentially that the state may issue money to cope with a rise in the demand to hold it without causing inflation. That’s correct and exactly what Austrian economists say.
> If nominal aggregate demand approaches real output capacity,
> then the government needs to withdraw some financial assets
Yes, the old process of buying bonds to take money out of circulation.
> it has created by taxation.
But how has it “created by taxation” these assets? Do you mean that since the income to pay the interest is funded by taxation that bonds are created by taxation?
> At any rate, the taxes are already funded by the currency issuance that
> created the net financial assets.
What do you mean by “funded”? How?
“What do you mean by “finance” here?”
Notional vs real
“Does the view you expressed above have anything to say about “real resources” or is it all about the distribution of the “score”?
You either have real assets or a financial claim on them. For example, a share of equity is a financial claim on a share of a real asset. Money is a non-specific financial claim on anything for sale in that monetary system.
“No money created in this way doesn’t net to zero…”
All loans, through which deposits are created, are creditor assets and debtor liabilities, and vice versa. The deposits that these loans create are called credit money and this money is denominated in the currency, e.g., dollars. It nets to zero, as is obvious from the accounting identities cited above. When the loan is extinguished so is the credit money created by it. This money flows through the economy through consumption, saving, investment, etc.
“But, what do you mean by “financial constraint”?”
In a convertible fixed rate system, government is limited in currency issuance due to the real reserve requirement that fixes money supply, so it requires taxes or borrowing to fund disbursement. This is a financial constraint not present in a fiat system, where government is not restricted by the amount of money it can create expect politically, on one hand, and real consequences of inflation/deflation, on the other. These are not financial constraints in the sense that the government does not require revenue to issue currency.
“By “nominal aggregate demand” you really mean price inflation.”
Nominal aggregate demand is measured the amount of money committed to consumption multiplied by the velocity of transactions. It is a measure of flow, not stock. NAD affects price level along the AS/AD curve.
“Yes, the old process of buying bonds to take money out of circulation.”
Buying bonds puts money in deposit accounts, i.e., makes it more liquid than it was in bonds.
“But how has it “created by taxation” these assets? Do you mean that since the income to pay the interest is funded by taxation that bonds are created by taxation?”
Sorry for the confusion. I intended to say: If nominal aggregate demand approaches real output capacity, then the government needs to use taxation to withdraw some financial assets it created through issuance.
“What do you mean by “funded”? How?”
Since bank created money is committed to repaying loans and interest, taxes must come from money that the government creates through currency issuance. Thus taxes don’t fund issuance in a fiat system, as I addressed above. Issuance is independent of taxation, and taxation simply withdraws currency already issued. In short, the government must spend first in order to tax or borrow. This is how a government exerts financial claims on real resources and can control for inflation/deflation relative to its resource use, while managing full output capacity and full employment, along with price stability, using fiscal and monetary policy.
>> What do you mean by “finance” here?
> Nominal vs Real
In that case I don’t think you understand the point of all this. Austrian Economists don’t think that some nominal quantity is tied to some real quantity. Our discussion of this monetary economics and national debt relates to how the nominal and real quantities interact.
Now, it’s true that in early Austrian books all of the discussion is in terms of the gold standard.
> You either have real assets or a financial claim on them. For example,
> a share of equity is a financial claim on a share of a real asset.
I know this is OT, but I don’t think there is really much difference between the title deed of an asset and a share.
> Money is a non-specific financial claim on anything for sale in that monetary system.
Depending on how that is interpreted it’s either right or not a precise enough description of money. My easy chair would be money because I could exchange it for something else by barter at a second hand shop which is also on sale for money. The point of money is that it is a liquid asset, it is the widely accepted medium of exchange and can be exchange against most goods on sale.
>> No money created in this way doesn’t net to zero
>
> All loans, through which deposits are created, are creditor assets
> and debtor liabilities, and vice versa. The deposits that these
> loans create are called credit money
But, it doesn’t necessarily lead to “deposits” of money at all.
It’s quite possible for two parties to create a loan and for no liquid asset to be involved, except possibly indirectly. I can buy a pint for my friend Dave and he can loan me it be offering to buy me a pint next time we meet. But that doesn’t create a liquid asset which is money-like. Afterwards, I can’t sell a piece of paper saying “Dave promises to pay the bearer on demand the sum of one pint”.
Capital is denominated by money. But that doesn’t mean that capital assets or financial assets are themselves money. They aren’t unless they fulfill the function of money which we discussed above, which is to act as the medium of exchange.
> and this money is
> denominated in the currency, e.g., dollars. It nets to zero, as is
> obvious from the accounting identities cited above.
No, what net’s to zero is obligations that are denominated in money.
>> But, what do you mean by “financial constraint”?
> In a convertible fixed rate system, government is limited in currency
> issuance due to the real reserve requirement that fixes money
> supply, so it requires taxes or borrowing to fund disbursement.
You’re talking about the gold standard here. In that case the central bank is limited by outflow and that in term limits reserve requirements.
> This is a financial constraint not present in a fiat system, where
> government is not restricted by the amount of money it can create
> expect politically, on one hand, and real consequences of inflation
> /deflation, on the other. These are not financial constraints in the
> sense that the government does not require revenue to issue
> currency.
Yes, I agree entirely.
>> By “nominal aggregate demand” you really mean price inflation.
>
> Nominal aggregate demand is measured the amount of money
> committed to consumption multiplied by the velocity of
> transactions. It is a measure of flow, not stock. NAD affects price
> level along the AS/AD curve.
Now we’re verring into the realms of business cycle theory and macro. I don’t really agree with the viewpoint you are expressing.
However, the only real difference is that you are concentrating on consumption only while I’m concentrating on all transactions. If we consider all transaction that are performed with money then demanding money is the opposite of demanding any other good.
In Austrian Economics the demand for money performs a similar role to aggregate demand in Keynesian economics. (Except, I would argue, the demand for money is a more careful concept).
>> Yes, the old process of buying bonds to take money out of circulation.
>
> Buying bonds puts money in deposit accounts, i.e., makes it more
> liquid than it was in bonds.
My point was about central banking. Central banks buy bonds to reduce the supply of money.
>> But how has it “created by taxation” these assets? Do you mean
>> that since the income to pay the interest is funded by taxation that
>> bonds are created by taxation?
>
> Sorry for the confusion. I intended to say: If nominal aggregate
> demand approaches real output capacity, then the government
> needs to use taxation to withdraw some financial assets it created
> through issuance.
The problem here becomes that we have different macroeconomic theories. It’s impossible to talk about these things clearly without discussing macroeconomics and business cycle theory.
>>> At any rate, the taxes are already funded by the currency
>>>issuance that created the net financial assets.
>>
>> What do you mean by “funded”? How?
>
> Since bank created money is committed to repaying loans and
> interest, taxes must come from money that the government
> creates through currency issuance.
I don’t see how that follows.
> Thus taxes don’t fund
> issuance in a fiat system, as I addressed above. Issuance is
> independent of taxation, and taxation simply withdraws
> currency already issued. In short, the government must spend
> first in order to tax or borrow.
I don’t see how that follows either.
>This is how a government exerts
> financial claims on real resources and can control for
> inflation/deflation relative to its resource use, while managing
> full output capacity and full employment, along with price
> stability, using fiscal and monetary policy.
But, clearly government hasn’t done that. If it were so easy then why not?
Do you believe that if the state were to balance the budget then there would be no private savings?
It’s not a matter of belief but accounting identities. Based on sectoral balances, government deficits imply nongovernment surpluses, and vice versa. When the government and nongovernment accounts are equal, then the balance is zero. The national “debt” represents the accumulated nongovernment savings accruing from previous deficits. This is basic national accounting, not theory or belief. Hereis an explanation of how it works.
Tom Hickey,
Due to the eccentricities of this blogging software I can’t reply to your post above.
I will read the post that you link too tomorrow. While I’m at it have a go at resolving the problems with your ideas about banks creating money which I point out above.
Tom am I correct in assuming in your system, which by the way is Chartalism http://en.wikipedia.org/wiki/Chartalism ,
that you would eliminate fractional reserve banking?
Konst, Bill Mitchell address this (in relation to Murray Rothbard) here.
Current (April 28, 2010 at 4:37 pm),
If the state were to balance their budget, then private savings in terms of financial assets would depend upon the private sectors trade balance. A trade deficit would mean that the private sector is in fact reducing savings, while a trade surplus would mean the private sector is increasing its savings.
As to your question re bank created money.
Chartalists state that there are two processes of money creation: the first is money creation by the state, and second, is bank creation. The state is the only entity which can create its currency, the bank can only create claims to this money.
> If the state were to balance their budget, then private savings in terms
> of financial assets would depend upon the private sectors trade
> balance. A trade deficit would mean that the private sector is in fact
> reducing savings, while a trade surplus would mean the private sector
> is increasing its savings.
Read the reply I gave at the bottom of this thread to Tom Hickey.
The financial balance equation quoted by post Keynesians can be written:
Nominal Private Savings – Nominal Investment = Nominal Government Deficit + Nominal Current Accounts Balance
Now, it seems the you guys cancel nominal private savings against nominal investment and create a figure for “net savings”. What significance does this difference between two nominal flows have? None whatsoever as far as I can see.
It isn’t the case that if government deficit is reduced then real private sector savings must reduce. The equation doesn’t tell us anything about real magnitudes.
> As to your question re bank created money. Chartalists state that there
> are two processes of money creation: the first is money creation by the
> state, and second, is bank creation. The state is the only entity which
> can create its currency, the bank can only create claims to this money.
In a fiat money system that’s quite correct. Austrian economists have a name for those claims to money which can be used effectively as money – “money in the broader sense”.
You seem to take a different view on this than Tom Hickey who doesn’t think that banks can create money.
Perhaps it would be best if we avoided the word “creation” here, or at least defined it more precisely.
Most of the institutions we are talking about have been the result of long running evolution.
thanks for the reference, tom hickey.
“…(Austrian libertarian) gang. They seem to get so het-up whenever they are talking about economics that you get the impression they think the sky is about to fall in on them any time soon.”
sort of like the gfc? really a storm in the proverbial teacup.
do post keynesians have any sort of us govt monetary policy making role
“What the government needs to do is to maintain nominal aggregate demand at near full capacity to prevent recession and avoid unemployment, while not letting nominal aggregate demand exceed real output, which would result in inflation.”
*bangs head on wall*
Inflation is not caused by a rise in aggregate demand.
Yes, if demand for Product X increases (and the supply of X remains the same), the price of X will increase. But this only means people, if they want X, will have to spend more of their money on X and, consequently, less of their money on Products A, B, or C. This means less demand for A, B, or C and therefore a falling price for A, B, or C. (If the price falls too far, these products simply will not be produced, since they’re obviously not valuable to consumers.)
In other words, a consumer only has so much purchasing power to allocate. If they allocate more towards X, they will have to allocate less towards other products and services.
If demand rises economy-wide (perhaps due to population growth or economic growth), but the supply of money remains fixed, what happens? Simple–lower prices, meaning higher purchasing power per money unit. More goods and services are competing for shares of that fixed money supply, so the exchange value of each unit grows.
Prices cannot rise across the economy, for all goods and services, unless the supply of money has increased. Period. Exclamation point. Inflation is an increase in the supply of money, not an increase in demand.
Yes.
The problem here is that Post Keynesians don’t study the Cantillon effect (just like the mainstream economists).
The central bank inject money into the capital markets, it then takes quite a long time before it has a significant effect on consumer goods prices, because it must filter through many other markets. Friedmans rather mysteriously talked about “long and variable lags” instead of investigating this. As a result those who study the short-run without considering this talk about sudden changes in aggregate demand which puzzle them.
Post Keynesians agree with this. If the stock of money increases to the degree that nominal aggregate demand in the entire economy exceeds total output capacity so that goods and services get bid up, that is inflation. Random price increases are not inflation, and random price decreases are not deflation.
However, if the money stock increases infinitely but everyone prefers to save the increase instead of spend it, then nominal aggregate demand will not rise and inflation will not occur. It is not the money supply itself that causes inflation. The increase has to lead to increasing demand when supply does not keep up with demand, and do exports do not offset either.
> If the stock of money increases to the degree that nominal aggregate
> demand in the entire economy exceeds total output capacity so that
> goods and services get bid up, that is inflation.
The problem with this is that it isn’t a piece of monetary theory, it’s a piece of Post Keynesian macroeconomic theory. It is very dubious in my view because the process you describe doesn’t happen in terms of aggregates, it happens microeconomically.
> However, if the money stock increases infinitely but everyone prefers to
> save the increase instead of spend it, then nominal aggregate demand
> will not rise and inflation will not occur.
That’s very similar to the Austrian theory. We would say that if the stock of money rises at the same rate that the demand for money substitutes rises then there will be no price inflation. (This is a very old theory, Mises wrote it in 1912, but I think its older).
> It is not the money supply itself that causes inflation. The increase has
> to lead to increasing demand when supply does not keep up with
> demand, and do exports do not offset either.
Certainly if money is supplied to deal with an increase in demand for money then it will not cause inflation, it will prevent deflation and “secondary recession”.
The problem here is that if the supply of money is already adequate then an increase in supply doesn’t lead to an increase in demand. Only if the supply of money is inadequate can it be supplied without causing inflation.
I think that we are defining inflation in different ways.In the Austrian view, inflation is an increase in the supply of money. There is a critical difference from price inflation, to which I think you are referring (correct me if I am wrong here).You might say that if the price of a good, or the general price level, remains flat from year to year, there is no inflation. However, in a growing economy, with a basically fixed stock of money (the market repeatedly chose gold for many centuries, showing the market preference for a hard, non-inflatable currency), prices would be on a gradual decline as the supply of goods and services increases. This is important to consider. It means that a person’s savings should gradually increase in purchasing power over time. The true cost of inflation is the rise in prices plus the size of the decline in prices that would have happened in a sound money system.”However, if the money stock increases infinitely but everyone prefers to save the increase instead of spend it, then nominal aggregate demand will not rise and inflation will not occur.”This would be the case if everyone stuffed the money into their mattresses. However, most people save their money by putting it into a bank or investment fund, from which it is then loaned out. Saved money doesn’t sit still, unless you are Scrooge McDuck with a big money vault in your back yard.”It is not the money supply itself that causes inflation. The increase has to lead to increasing demand when supply does not keep up with demand, and do exports do not offset either.”But you are agreeing that the an increase in the money supply is the first step in inflation, right? You would just add that it only causes inflation if aggregate demand exceeds supply–otherwise, it does not cause inflation (which you would define as a “rise in the price level”). Correct?When the central bank creates money, it is redistributing purchasing power from everybody’s savings. If you previously owned 1/1000 of the money supply (just for illustration!), you now own, say, 1/1500. You own a smaller fraction of the money supply. A portion of your purchasing power has been taken from your savings and distributed elsewhere by the Fed. Regardless of where it goes–even if banks just hold in their reserves to shore up their balance sheet–every holder of dollars has lost something.And in most cases, it isn’t going to be saved–it’s going to be loaned out and spent, loaned and spent until it has multiplied several times to several times the original injection of money.Something seems contradictory to me. You inject new money for the purpose of boosting aggregate demand, and then you say it’s not inflationary as long as it doesn’t boost demand too much. But if it isn’t spent it wont boost demand at all. But if it boosts demands at all, it must be inflationary, because the money is being spent.And I’m not sure why increasing aggregate demand is really a goal. Supply and demand are set by the actions of all individuals according to their own preferences. Manipulating demand or supply can only lead to results different from those of consumers. If you just blindly increase activity for the sake of raising employment, you might just be wasting resources, putting them into lines of production that turn out to be unprofitable and unsustainable.This is why cheap credit is not the answer–it leads to a profligate waste, because artificially low interest rates and relaxed lending standards will only be used to finance marginal projects that would have been clearly unprofitable or bad investments if evaluated according to the natural rate of interest. Constraining credit to current savings may seem very tightfisted to you, providing a slower pace of growth, but it avoids all the suffering (and the capital consumption!) of the boom and bust cycle.
Current, what I am talking about is the macro. Macro is not micro writ large or scaled up.
“Current, what I am talking about is the macro. Macro is not micro writ large or scaled up.”
That’s right, because macro is utter nonsense. It bears no more relationship to reality than ancient Egyptian mythology. And it serves the exact same purpose: to justify unlimited state power.
In reality, the market is just a vast web of discrete microeconomic transactions. The rules don’t change just because you’re looking at larger events, or just because the government gets involved. The government is just one more institution, one more player on the market. Money is just a commodity subject to the law of supply and demand. There is no magic.
>>> If the stock of money increases to the degree that nominal aggregate
>>> demand in the entire economy exceeds total output capacity so that
>>> goods and services get bid up, that is inflation.
>>
>> The problem with this is that it isn’t a piece of monetary theory, it’s a
>> piece of Post Keynesian macroeconomic theory. It is very dubious in
>> my view because the process you describe doesn’t happen in terms
>> of aggregates, it happens microeconomically.
>
> Current, what I am talking about is the macro. Macro is not micro writ
> large or scaled up.
Macroeconomics isn’t microeconomics “writ large” or “scaled up” but it is the consequence of the underlying microeconomic processes.
I’ve quoted all of the relevant paragraphs in this part of the discussion above. Read the very top one that you wrote. The problem here is that you relate an increase of the stock of money to nominal aggregate demand. You then relate nominal aggregate demand and total real output capacity to price inflation.
Let’s say that the stock of money is increased and look at it from a microeconomic perspective. Suppose the government print some fiat currency and use it to pay for some goods. What happens then? The money then enters the markets that the government first buy in, prices may go up if the government spend a lot of money. Then, the new money moves into other markets, and gradually spreads out through the economy. As it does so two things can happen. Firstly, if the demand to hold money is rising then the injected money will replace money that people are putting into their hoards. But, if the demand to hold money is steady then prices will rise as the money spreads throughout the economy.
Trades of GDP components and non-GDP goods are just as important in this process.
Inflation is not caused by a rise in aggregate demand.
price inflation???
@Tom Hickey
Money is created in two ways. 1) Through bank lending (loans create deposits) and money created through credit extension nets to zero. Everyone’s credit money is someone else’s loan. 2) Money is also created through currency issuance.
Banks certainly create money when they lend, but it is my understanding that they also create money when they spend eg by paying staff, suppliers and dividends to shareholders. When spending, of course, they are not creating an interest-bearing asset as a counterpart to the demand deposit liability they create.
Then there is the question of bilateral ‘trade’ credit. Wherever a barter system (eg the Swiss WIR or proprietary barter systems like Bartercard) incorporates credit or ‘time to pay’ then the result is a complementary monetary system, where goods and services change hands not IN EXCHANGE FOR fiat currency but essentially BY REFERENCE TO fiat currency as an abstract unit of measure or value unit.
These systems operate with a central issuer (eg the WIR Bank) of complementary currency, and Keynes Bancor/International Clearing Union proposal envisaged a similar central issuer approach.
However, with the correct ‘Peer to Peer’ legal and financial architecture – within a ‘Guarantee Society’ partnership framework – it is possible to create a credit clearing union without either private banks or the State as credit intermediaries/issuers, and with no requirment for deposits.
The credit embedded in productive assets is another issue, and currently involves the conflicting legal claims of equity and secured debt.
Chris, you are correct here. Regarding your first point, what banks lend dwarfs what banks spend. Bank lending also greatly exceeds government currency issuance. Regarding your second point, it is possible to create work arounds; however, the bulk of transactions occur through pretty standard channels provided by the present monetary framework involving central banks, and it will likely remain in place until that system is replaced by something else if/when it breaks down. I am describing the operational reality that is currently dominant, not lobbying for it.
Tom says,
“Money is created in two ways. 1) Through bank lending (loans create deposits) and money created through credit extension nets to zero. Everyone’s credit money is someone else’s loan. 2) Money is also created through currency issuance”
Of course that’s not how it works.
A banker is a trader whose business consists in buying money and debts by creating other debts. A banker creates and issues credits payable on demand and in doing so puts money already in circulation to greater efficiency.
Absolutely ZERO new money gets created banker sells a credit contract. The banker issues credits payable on demand in the account of the person renting cash from the banker.
Money gets created only through Money Accretion. Money accretion (new notes and coins added to those in circulation) arises from an increase in average withdrawals of cash at ATMs and bank tellers. Simply, Fed Res bankers order money minted by the U.S. Treasury, paying for the minting expense, but not the sum of the face value of money itself.
In the U.S., money is mere legal tender notes and coins and nothing else. All else are credit contracts that must get extinguished with U.S. money (legal tender notes and coins). Because persons do not get banking, they hold false beliefs that all of the various credits bankers issue in their own name, e.g., checking accounts, savings acounts and the like, are money, when in fact, such things are not. In the U.S., only legal tender notes and coins are money. Nearly all “schools of economics” fail to see this fundamental truth.
Because persons lack knowledge of commercial law, especially economists, persons don’t get banking whatsoever. Worse, because they do not get Federal Reserve central banking, they do not get money, inflation, deflation, depreciation, debasement, devaluation and the like.
“Money is created in two ways. 1) Through bank lending (loans create deposits) and money created through credit extension nets to zero. Everyone’s credit money is someone else’s loan. 2) Money is also created through currency issuance”
Of course that’s not how it works.”
does it net to zero instantly??? if 100 people get credit money and the loan made form 100 peoples deposits takes 5 years to repay….is that netting to zero??? does that actaully happen????
“In the U.S., money is mere legal tender notes and coins and nothing else. All else are credit contracts that must get extinguished with U.S. money (legal tender notes and coins). Because persons do not get banking, they hold false beliefs that all of the various credits bankers issue in their own name, e.g., checking accounts, savings acounts and the like, are money, when in fact, such things are not.”
do some consider them money?? does the fed M1 mean a ‘mopney supply’ figure???
though perhaps of a fiat nature??? are bank reserve ratios regualted by federal reserve laws???
does the credit contracts that you speak of generate new dollars or credit counted in dollars???
such as
1. check is deposited
2. dollars are lent for 1 year term from deposited check
3. dollars are instantly created in deposit account and ready to spend
???
first, all govt taxing and spending is a distortion.
taxes are coercive and not a market phenomena
second, the way it’s organized in the (short) book might be helpful:
http://www.moslereconomics.com/?p=8662/
deleted, see below
That looks like a job for Blockatiel!
“Books have been written to comprehensively demolish the ideas of Marxist economics. Since Post Keynesian economics (dash or no dash) is just as silly I think it would be useful if a book were written refuting it’s main doctorines.”Interesting fact. There are more books from the Mises Institute tackling the economics of Keynesianism than there are of Marxism.
That may be true, but Post Keynesian economics, Post-Keynesian economics and Neo Ricardian economics is quite different to old style Keynesian economics. (And yes, the dash between the “Post” and “Keynesian” makes a difference).
These doctorines deserve separate treatment, as does New Keynesian economics.
See for example, my conversation above with Tom Hickey who seems to be a neo-chartalist.
“See for example, my conversation above with Tom Hickey who seems to be a neo-chartalist.”
Correct.
“Second, the government uses taxes to control the public’s spending power. When the public has too much spending power, government taxes some of it away to avoid inflation.”
Anyone care to let me know what “too much spending power” is. And who is capable of defining such an open-ended idea? Who flips the switch and says, “Nope, you are capable of buying too much, we need to tax you”?
Gotta love Hayek’s classic limited knowledge discussion.
Anyone care to let me know what “too much spending power” is. And who is capable of defining such an open-ended idea?
How dare you question the all-seeing, all-knowing Lords of Currency, the fountain of all wealth, the arbiters of want and excess! Get back to work, slave, and stop bidding up prices!
oh, i’m so sorry, I have disobeyed my benevolent masters and I must bow in submission to their omniscience.
Help help, I have too much spending power! Somebody save me!
Money functions as an IOU for goods and services and as an official notation that goods and services have been provided, two sides of the same . . . coin.
I was convinced that the link I was following would go to the onion website. The Huffington Post, however, is not entirely surprising. The context of the entire QA was in a macro-economic model that had no grasp of the capital structure, resource constraints, interest rates as a function of savings, or individual actors in the economy.
Everything is simply a lever that drives the economy up or down based on a bunch of false aggregates. I might as well play Grand Theft Auto and assume that the world economy functions like that.
I think all those economists from that HuffPost article would make terrific consultants for The Venus Project.
It appears that is the direction they are taking though not realizing that it will lead to totalitarianism eventually.
And yet again, capital theory is absent from the monetary inflationists’ crankery.
Richard Moss:
“In your scenario, which is money, the Land Rent IOU’s or the silver oz?”
Both the land rent IOU’s and actual silver can be used to buy groceries, so I call them both money. I hasten to add that it doesn’t matter what we call money. It’s spent just the same.
“How does this compare to what we have today, where (if understand you correctly) the land rent IOU’s = U.S. dollars?”
Suppose the landowner owns 1000 oz worth of land, and he’s issued 100 land rent IOU’s, each acceptable by him for rent. Note that the landowner does not have to redeem them in actual silver, so the IOU’s are physically inconvertible, like the US dollar. Next, the landowner designates his kitchen as his central bank, and proceeds to issue another 200 IOU’s, which he spends at the grocery store. So far, he’s issued 300 oz. worth of IOU’s, which is safely short of his 1000 oz worth of land.
Next, he decides to buy 400 oz worth of land. He buys it by issuing a 400 oz bond, and he pays the interest on the bond using the rent on his new land. He has now issued 300 oz of currency (IOU’s) plus the 400 oz. bond, but he also owns 1400 oz worth of land, so he’s comfortably solvent, with net worth of 700 oz.
Now, from his kitchen, he prints another 200 oz. of IOU’s and buys 200 oz. worth of his own bond, just like the Fed buys US bonds. No problem yet. He’s just swapped one 200 oz. liability for another.
Then trouble strikes. His land, originally worth 1400 oz, falls in value to 350 oz. His net worth is gone, and he has 500 in IOU’s, plus 200 in bonds, laying claim against his 350 oz. of land. Each of his promises to deliver one ounce is now worth .5 oz. But people adjust. They now trade his IOU’s at .5 oz each, and once people get used to this, the landowner will be able to issue new bonds and new IOU’s. But now each of his 1 oz promises will be worth only .5 oz of silver.
Overall, just like what we have today.
how does his land get to be worth 1000 ounces of silver???
“But people adjust. ”
cancer kills.
is there a difference economically (an effect of the prices of goods) is the farmer got a 1400 ounce loan of (saved) silver (to buy groceries and timber) with his land as collateral and then trouble strikes and he looses his farm to the bank???
than the printing of ious based on silver prices for land??
That Huffington Post link is epic in its stupidity.
Let’s forget diminishing marginal utility, distinguishing between subjective and objective (power/function/capacity in terms of degree) value, coincidence of wants, problem of divisibility, marketability, prerequisite for the divisibility of labour and roundabout production structure, and Mises’s regression theorem. Expropriations of private property by the inept and gluttonous leviathan is the predominant keystone in the theories of money and value.
Its like magic. You just create more money and you get full employment and wealth and everybody is rich rich rich!!!!
I wish we did not have insane IP laws so they could not pull the old video from Youtube, but you just get the lyrics:
Oh oh oh
Its magic, you know
Never believe its not so
Its magic, you know
Never believe its not so.
Its like magic. You just create more money and you get full employment and wealth and everybody is rich rich rich!!!!
does the federal resreve print currency based on some monthly schedule or does it print currency to meet some type of bank loan to paper-dollars in vault ratios??
has the federal reserve ever said that printing money will provide full employment and wealth???
or do the print money and create banking reserve regulations just to keep banks operating and let the entreprenuers create wealth???
“The dollars are nothing more than data entry on the Fed’s computer.”
is the above correct??
there has been descriptions of the current us currency system as fractional reserve…if dollars are data entry is the paper dollar not a paper dollar??? what does the fractional reserve then pertain to so far as the current currency system in the us.
Yes, it is correct. The federal reserve system uses a computer system which is used at each commercial bank that deals with this. The monetary base used by banks takes two forms, firstly, the notes themselves, and secondly as a collection of entries on computerized account databases.
“I wish we did not have insane IP laws so they could not pull the old video from Youtube, but you just get the lyrics:
Oh oh oh
Its magic, you know
Never believe its not so
Its magic, you know
Never believe its not so.”
Dissenting against interventionist and mercantalist doctrines automatically makes you a trickle down theory bolstering zero.
Never believe its not so.
“The operatonal reality is that a sovereign government as monopoly issuer of a nonconvertible currency with a flexible (floating) exchange rate is not financially constrained.”
Of course the people who control the government are not “financially” constrained. They can add as many zeroes to their own bank accounts as they want. But they are still constrained in their ability to acquire goods and services from other people. Printing money (on paper or electronically) does not alter the fundamental rule of economics that the only two ways to acquire wealth (reals goods and services) are (1) earn it, or (2) steal it.
Simply printing money is not “earning” anything since you are not working, saving or investing but only declaring to the world that your bank account now gives you a larger-than-before claim on their goods and services. Therefore printing money belongs to category (2), stealing. The more money that is printed, the more keenly aware the public become that they are being robbed, and the more pains they take to avoid being robbed (by refraining from working, saving, investing or doing anything else that presents a target to the government). The people who control government end up even more constrained in the acquisition of wealth, because stealing a little bit from a very large pie would have been a lot more remunerative – IN GOODS AND SERVICES – than trying to steal a very large piece of a rapidly shrinking pie. That’s the story of Zimbabwe, the EU and the USA in a nutshell.
Good luck with the flaky utopian monetary theories. Please come back in a couple of years and tell us how much pie you’re getting.
“Simply printing money is not “earning” anything since you are not working, saving or investing but only declaring to the world that your bank account now gives you a larger-than-before claim on their goods….”
has anyone ever said that printing money is earning???
if you are printing money doesnt the bank have to lend it and someone have to accept it to get a larger claim on any goods???
Henry,
Chartalists distinguish between three types of constraints:
1. financial constraints
2. real constraints
3. political constraints.
The government that is a currency monopolist (such as the U.S) has no financial constraints. The government faces real constraints, which is as you state: “they are still constrained in their ability to acquire goods and services from other people”. What you state here is nothing new and in fact has been discussed many times in the literature and on various Chartalist blogs.
The act of ‘printing money’ is done all the time by governments, who spend by crediting bank accounts or by issuing cheques. Why then does the public continue to accept government currency?
That’s all fair enough, every other school of economics makes a similar distinction, Austrians included.
The problem is that in the Huffington post article and some of Tom Hickey’s posts here you are firstly defining “financial” is a strange way which effectively means “pertaining only to nominal magnitudes”. That definition is completely different from the one used by normal people or other economists.
Then you are using statements about “financial constraints” to try to imply things about the situation in terms of real magnitudes.
Tom Hickey wrote below: “The PK position is that operational understanding shows that there is no economic substance to the ‘fiscal responsibility’ arguments that the Peterson people are putting forward, for example. Examination of operational reality shows that these objections are basically moralistic rather than economic, and that financial sustainability is not dependent on or related to the operationally erroneous information being put forward in the name of ‘fiscal responsibility.’”
Tom can’t legitimately discuss “economic substance” without talking about real magnitudes and bringing in macroeconomics. He can’t show that the objections are “moralistic” rather than economic without some theory of macroeconomics. In the sentence about “financial sustainability” the meaning of financial here is “pertaining to nominal magnitudes”, it says nothing of “financial sustainability” in the normally accepted sense.
Think about it, I could invent my own currency called the BS$ and print a bunch of them. I can come up with tautological equations all day about how their nominal values sum and call these statements about “financial operational reality”. But, they could, in actual reality, be worth nothing.
Ohhh Henry is brilliant!
Mike Sproul continues spinning his fairytales and believing he has actually said something meaningful, rather sad……
In this case it’s interesting to compare Mike Sproul and Tom Hickey.
Mike is an adherent of the banking school. Tom is effectively an adherent of an extreme form of the doctorine of the currency school (one the school itself never proposed).
To banking-schoolers every agent always has an easy choice over what money they use, so no increase in money supply beyond demand may performed without bankrupting the bank. To the Neo Chartalist school agents have no choice in the money they use.
Neither doctorine is correct because both take things too far. In fact agents have some control over the money they can use, but not perfect control. In extreme situations they will use the opportunity to change things.
Current am I correct in assuming that chartalists advocate eliminating fractional reserve banking?
konst, I provided a link for you on this above where you asked. Also read the comments to this Mitchell post, especially those by JHK, Scott Fulwiller, and Ramanan, who are all experts in banking and finance. You may not agree, but you will learn a lot about the operation of the banking system if you take the time to go through this (long).
Current,
You are incorrect when you state that Chartalism is an extreme form of the currency school. Chartalism would be more closely associated with the banking school.
As I stated above, Chartalists describe two processes of money creation:
1. Government spending, which creates net financial assets for the private sector. The money created by the government a credit or token, which is the primary means of extinguishing tax liabilities.
2. bank creation, which creates a financial asset and matching financial liability, which net to zero. The ‘money’ created by the bank is a claim on government currency, and is endogenously created (banking school).
> 1. Government spending, which creates net financial assets for the private
> sector. The money created by the government a credit or token, which is
> the primary means of extinguishing tax liabilities.
See my reply above.
> 2. bank creation, which creates a financial asset and matching financial
> liability, which net to zero. The ‘money’ created by the bank is a claim on
> government currency, and is endogenously created (banking school).
Ah, that’s much more reasonable. But, not what I thought Tom Hickey meant.
Wow, I seriously felt like I was losing brain cells reading that article.
Fortunately, it looks like even the HuffPo liberals aren’t buying this head-in-the-clouds propaganda piece. Based on my skimming of the comments, the majority of them, even regulars, are rejecting this English lit PhD’s piece (as someone pointed out the author is) as being nonsense. There is hope for them yet.
What the HuffPo article is saying is half true: Domestic checking and savings accounts, commercial bank reserve accounts, foreign central bank fed accounts, US Gov’t operating accounts and Treasury bills and bonds are all just computer book entries. Money transactions have the operational effect of moving book entries from one column to another. IF everyone had perfect knowledge AND could adjust instantaneously to changing conditions, then this might be just okay (if annoying). In the real world of imperfect knowledge and cantillion effects, it is very much not okay. Believing that creating a book entry “out of thin air” is economically equivalent to withholding savings from current consumption to fuel investment seems to me a symptom of the great Keynesian fallacy: that money=capital and that all capital is homogeneous.
Bill, I don’t think you have this quite right. The Post Keynesians I know (which includes most the people contributing to the HuffPo piece) hold that capital = capital goods, and investment = spending for capital goods. Trading financial assets in the markets, they call speculation. Picturing them as demand-side alone and ignoring supply-side is a caricature of their position. They hold that in the present environment too much is committed to speculation (financial, or notional) and not enough to investment (real, or capital). When this happens, the economy does not expand quickly enough to absorb the increased demand for employment owing to population growth. These PK people are chiefly concerned with full output utilization and full employment, along with price stability as an economic and policy goal. This requires investment to grow the economy in order to accommodate population growth.
I found this post through a Google alert I run on “Chartalism.” I came by to clarify the position put forward in the HuffPo article. The thread has been useful, and it has brought to light three areas that need to be considered separately:
1. Economic theory. Austrians and Post Keynesians disagree on this. I did not come by to debate theory.
2. Policy. The distribution of public and private in the economy is a political issue. I did not come by to debate that either.
3. Operational reality under the monetary regime currently in place. This is what I came to clarify. The Huff Po piece is about operational reality in relation to macro effects as they affect policy decisions. The PK position is that operational understanding shows that there is no economic substance to the “fiscal responsibility” arguments that the Peterson people are putting forward, for example. Examination of operational reality shows that these objections are basically moralistic rather than economic, and that financial sustainability is not dependent on or related to the operationally erroneous information being put forward in the name of “fiscal responsibility.” Government has a wide range of options for meeting conditions in society, which depend on how the electorate chooses to approach public/private distribution.
I did not come over here expecting to change anyone’s mind. I simply wished to clarify the PK position regarding monetary and fiscal operations, which are based on how things work rather than theory. Theory is hypothetical, but operations are factual and easily checked by examining the day to day workings of the system.
What is the case may not be what one would like to be the case, and the way to change that is through elections. But until things change, we have to work with the operational rules in place. Best to understand what they are and therefore what they can do.
For example, one may not like Social Security as a matter of principle and wish to abolish it, but that is a political question different from whether it is fiscally sustainable under the present system. Operationally, it is fiscally sustainable and will neither break the bank nor foist an unfunded obligation on our children, as claimed.
However, such policy decisions do affect the distribution of real resources between public and private, and that is a political issue. The PK contention, put forward in the HuffPo piece, is that the economic rationale against public spending on social welfare is flawed and is being used to justify a normative stance.
PK’ers also emphasize that operational reality is factual and not normative. Analysis of operational reality simply shows what is possible and what is not under the rules in play. Therefore, some PK’ers are conservative and others liberal regarding its application to policy, depending on their attitude to public/private distribution.
What PK’er’s agree upon, which differs from Austrians, is the essential role of government in macro in a modern society. Government is the elephant in the room, and it cannot be ignored. There are more and less efficient and effective ways for government to operate relative to the economy, but government is here to stay in complex societies. Government is not an extraneous appendage.
Tom you wrote “For example, one may not like Social Security as a matter of principle and wish to abolish it, but that is a political question different from whether it is fiscally sustainable under the present system. Operationally, it is fiscally sustainable and will neither break the bank nor foist an unfunded obligation on our children, as claimed.”
Well then why not increase benefits to all those on social security say to $200,000 per year. That would help them greatly and as you said it would not “break the bank nor foist an unfunded obligation on our children”? Also why deduct social security taxes from paychecks since the government can print all the money it needs to fund social security benefits?
In addition why not just print enough money to raise everyones standard of living to at least current middle class levels?
In your system wouldn’t it be cruel for the government to not do it?
I suspect you’re going to say the government has some limits in how much money it can print.
I think you’re neglecting one the most important problems which is: Who decides?
I know I don’t understand much of Chartalism yet but I can already see the seeds of a road to serfdom in Chartalism.
In case you want to know more about it, wikipedia has a general description of Chartalism, and it also has a concrete example of it in a colonialist situation.
Note, I’m not disagreeing with the idea that a fiat currency can be imposed and that taxes can be used to create demand for it, that is true. I don’t think the other poster are really disagreeing with that either.
The discussion is mostly about the macroeconomic theory of neo-chartalism.
As I wrote earlier, we Austrian Economists don’t think that any nominal quantity has a fixed relationship to any real quantity. Nobody thinks that the US government can run out of US dollars, of course they can’t, the government print them. All that “operational relationships” can tell us by themselves about is nominal quantities.
But, in order to relate nominal quantities to real quantities requires macroeconomic theorising.
You can’t show that “operational understanding shows that there is no economic substance to the ‘fiscal responsibility’ arguments that the Peterson people are putting forward, for example” using only “operational understanding”. An argument like that requires macroeconomics too.
I read the blog post you referred to above.
Here is the equation the author uses put in the clearest possible terms:
Nominal Private Savings – Nominal Investment = Nominal Government Deficit + Nominal Current Accounts Balance
And the quantity described above is the “Private Sector Financial Balance”.
This is, as the author points out, an accounting tautology.
However, it doesn’t tell us about proper monetary economics. It was true even under the gold standard, because it’s an accounting tautology. It doesn’t tell us anything about the real value of the flow of savings or anything else.
The blog post author then makes an incredible leap from accounting tautologies, he writes “First, the private sector financial balance naturally increases with GDP, since higher income means higher net saving, ceteris paribus.” Now, that is a statement about real magnitudes. Depending on your view of the productivity/time-preference theories of interest is may be right or incomplete. However, its a statement about real magnitudes: higher real income means higher savings.
But, if I understand this “Private Sector Financial Balance (PSFB)” correctly then it is nominal savings minus nominal investment. Agents both save and invest more as their real income grows. Deciding which to use depends on circumstances.
The next step is so mind-meltingly wrong that I think I lost at least five IQ points thinking about it; the author graphs a schedule of GDP against PSFB. Such mixing of real and nominal quantities is total rubbish.
Current,
I’m unsure of the blog post you are referring to. Could you please link it.
Thank you.
http://neweconomicperspectives.blogspot.com/2009/07/sector-financial-balances-model-of_26.html
“Well then why not increase benefits to all those on social security say to $200,000 per year.”
That would be inflationary if it pushes the economy beyond capacity constraints. The article is about ability to spend, which is infinite. It doesn’t say that infinite spending is what should be done. What should/shouldn’t be done needs to be considered within the context of capacity constraints. While there are no solvency issues with regard to SS, there can be inflation issues. The article says that former is what we focus on, whereas the latter is the real issue.
Examination of operational reality shows that these objections are basically moralistic rather than economic, and that financial sustainability is not dependent on or related to the operationally erroneous information being put forward in the name of “fiscal responsibility.”
Post-Keynesians? How about post-rationalists. Either way, we’re doomed.
Neo Chartalist folks,
How does the flow of purchases of government debt by the private sector enter into your financial balances equation?
The budgetary balance is represented as G-T, where G = disbursements and T = taxes. When taxes are less then disbursements, the balance is in deficit. Under current US law, a deficit must be offset $-for-$ by debt issuance. Therefore, the amount that the government disburses in deficit for that period is saved $-for-$ as Treasury securities.
Government liabilities are nongovernment assets. The national debt is equal to the accumulated deficits and represents accumulated nongovernment savings in the currency of issue.
Under a fiat monetary regime, government need not issue debt due to any financial constraint. In the US, the constraint is political. Congress has legislated the debt offset.
Government also may issue debt for monetary reasons. Because government deficits increase reserves in excess of required reserves, they putting downward pressure on the interbank overnight rate. Debt issuance drains these excess reserves as Treasuries are purchased, which facilitates the central bank hitting its target rate. In this sense, debt issuance is a monetary operation in a fiat system, not a fiscal one. If the central bank decided to pay a support rate on excess reserves, debt issuance would not be necessary as a monetary operation, although it might still be required politically. For example, the Fed has begun to pay a support rate, but the Treasury is still required to offset deficits with debt issuance. (This involves paying more interest — interest on excess reserves in addition to the interest on the Treasuries that are issued.)
> Government liabilities are nongovernment assets. The national debt is equal to
> the accumulated deficits and represents accumulated nongovernment savings
> in the currency of issue.
I real stock does not arise out of a sequence of *nominal* flows.
Current, if you feel like debating this with Neo-Chartlaists that know a lot more about this than I do, head over to the sites of Bill Mitchell and Warren Mosler, where this kind of debate goes on in the comments quite frequently.
A comment thread related to this issue is active at Warren’s place right now
Tea Party Protest Sign
Warren is running for Chris Dodd’s senate seat as a “Tea Party Democrat”. The sign reads, (I-S) + (G-T) + (X-M) = 0. Warren is using Neo-Chartalism to argue for reducing taxes to address the economic contraction. His proposal is to end the payroll tax, which is not needed to fund SS under the current monetary system. Warren is a former hedge fund principal and entrepreneur, so hardly a Keynesian “socialist.”
Come on. What I’ve written here is very basic. If you believe what you have written above then surely you know how to defend it yourself, here.
Current, I really don’t have time to get into a debate the outcome of which is a foregone conclusion. We are just going to disagree about fundamentals. You and I are not going to resolve the economic kerfuffle between Keynesians and Austrians. It’s just not gong to happen, anymore than we are going to decide the political kerfuffle between left and right. I just wanted to clarify some Neo-Chartalists views that I thought might be unclear to some of the folks here.
Basically when you look at the heart of this post-Keynesian theory and Keynesianism they are authoritarian in nature. Only difference is that Keynesianism gets to a totalitarian state more slowly than Chartalism.
In Chartalism some authority, who always eventually is or becomes authoritarian, decides the major decisions and direction of people’s lives and future.
In a free society, i.e the free market where people’s rights are respected and not infringed, the people and individual people decide.
Though I agree the questions of economic theory are distinct from those of politics. Of course the two are related but a discussion of one doesn’t entail the discussion of another.
What economic theories are correct is a discussion I’ve being having with the Neo Chartalists above.
konst, I think you are missing the point here. What is being claimed based on the accounting identities involved in sectoral balances is that both government and nongovernment cannot run surpluses simultaneously. If one is in surplus, the other must be in deficit. That means that if the government runs surpluses, then nongovernment must necessarily draw down savings or take on debt to maintain real output, or else the economy contracts due to falling nominal aggregate demand and goes into recession (unless net exports make up the difference). This is not theory. It is accounting.Therefore, Neo-Chartalists point out that monetary and fiscal policy is most efficient and effective when it adjusts currency issuance to balance nominal aggregate demand and real output capacity in order to maintain full output utilization and full employment, along with price stability, which increases investment and keeps the economy expanding to meet the needs of a growing population. This means that after funding necessities like government operations and national security, government disbursement is most economically committed to public investment that the private sector is either unwilling or unable to undertake. Neo-Chartalists are not trying to engineer a government take-over. They want a successful economy for all.
Tom Hickey May 1, 2010 at 12:07 am
… This means that after funding necessities like government operations and national security, government disbursement is most economically committed to public investment that the private sector is either unwilling or unable to undertake. Neo-Chartalists are not trying to engineer a government take-over. They want a successful economy for all.
That’s the point. Like Keynesianism, Neo-Chartalism depends on the benevolence and honesty of government officials. What’s to stop them from funding the military to maybe $1 trillion even if it’s not necessary?
The free market penalizes such behavior but centralized control doesn’t and when the government screws up it’s not just a handful of people it hurts but tens of millions and their answer to their screwups is always more control. Economists and some politicians may mean well but there is no justification to affect the lives and livelihoods of millions of people in that way.
konst,
Though I agree with your view on politics, that is not the major error the Neo-Chartalists make.
Take the sentence Tom Hickey writes:
> If one is in surplus, the other must be in deficit. That means that if the
> government runs surpluses, then nongovernment must necessarily draw down
> savings or take on debt to maintain real output, or else the economy contracts
> due to falling nominal aggregate demand and goes into recession (unless net
> exports make up the difference). This is not theory. It is accounting.
There are several problems here. Firstly, the statement Tom makes about “real output” does not derive from an accounting identity. No statements about real output can.
He is wrong to say that a fall in NGDP (nominal aggregate demand) necessarily entails a recession. The true problem in what we call the “secondary recession” is the demand for money. This rises in a recession due to uncertainty.
Current, the equation above derives from Y=C+I+G+NX, the basic equation of marco that says national income = national output. If income is not sufficient to purchase the goods and services for sale at full capacity utilization, then the economic will contract, an output gap will open, unemployment will rise, and there will be costs in terms of foregone opportunity. If present income if insufficient to this, then folks either have to draw on past income that was saved or else on future income through debt to maintain full capacity utilization, or else contraction will occur.
Where the notional meets the real in accounting is at the daily journal entries that record specific transactions.
As I said, I did not come here to debate macro. If you wish to carry on that debate with Neo-Chartalists, I’ve pointed you to some places where it’s happening. The fact is that Neo-Chartalists disagree with Austrian premises and vice versa, so it might be a short debate. Once one uncovers disagreement over the foundations of different viewpoints, debate ends. But on the way there, sometimes some interesting things come up.
> Current, the equation above derives from Y=C+I+G+NX, the basic
> equation of marco that says national income = national output.
That equation is an identity, as you say.
> If income is not sufficient to purchase the goods and services for sale
> at full capacity utilization, then the economic will contract, an output
> gap will open, unemployment will rise, and there will be costs in terms of
> foregone opportunity. If present income if insufficient to this, then folks
> either have to draw on past income that was saved or else on future
> income through debt to maintain full capacity utilization, or else
> contraction will occur.
This is different, this is the highly aggregated Keynesian AS-AD model – a theor which is very old and in earlier forms goes back to Malthus and J.S. Mill. I agree with it in general outline, however if you look at it in detail it’s highly suspect. Austrian Economic theory is, in large part, about making a system to replace it that is derived more carefully from underlying microeconomic reality. This is why we have a more complicated theory that involves the structure of production in time, the reasons for money demand and money injection effects. (This is also what neo-classical “microfoundations” is about, but that’s a slightly different approach).
> As I said, I did not come here to debate macro. If you wish to carry on that
> debate with Neo-Chartalists, I’ve pointed you to some places where it’s
> happening. The fact is that Neo-Chartalists disagree with Austrian premises
> and vice versa, so it might be a short debate. Once one uncovers
> disagreement over the foundations of different viewpoints, debate ends.
> But on the way there, sometimes some interesting things come up.
Fair enough. However, I don’t think that Neo Chartalists and Austrian really differ that much of premises. I know that may be strange given the difference in what’s claimed to be the methodology of both sides. But, experience of debating Keynesians has shown me that they don’t really think *that* differently.
My point here was to show the main two things that your posts concealed. Firstly, that most of your statements are about *nominal* magnitudes and don’t relate directly to real magnitudes. This obsession with nominals is, I presume, why earlier economists called you guys “Nominalists”. Secondly, you do invoke real macro economic theories, it’s not all about accounting tautologies.
“My point here was to show the main two things that your posts concealed. Firstly, that most of your statements are about *nominal* magnitudes and don’t relate directly to real magnitudes”
These are some of the foundational disagreements to which I was referring.
“This obsession with nominals is, I presume, why earlier economists called you guys “Nominalists”.”
I think that you can’t lump contemporary Neo-Chartalists in with earlier folks. This view, called MMT, as it is stated today by the the leading writers is quite recent, subsequent to the revision of the monetary system beginning in 1971. As I said above, Neo-Chartalists agree that the notional has to be connected to the real through data if a model is to be connected to what happens.
“Secondly, you do invoke real macro economic theories, it’s not all about accounting tautologies.”
Yes, the theory is based in accounting identities, but to the degree it is macro (explanation rather than description), it becomes economic theory. What I am saying is that conclusions derived from accounting identities are not theoretical (based on assumptions) but operational (based on rules). These are the aspects that are descriptive of, e.g., how the central bank and the banking system operates today. This is somewhat different from country to country, based on differences in rules.
Contemporary Neo-Chartlaists call their version of macro “Modern Monetary Theory” (MMT). It is based on Abba Lerner’s principles of functional finance and Wynne Godley’s development of stock-flow consistent macro models. See Wynne Godley and Marc Lavoie, Monetary Economics Palgrave Macmillan (2007).
>> My point here was to show the main two things that your posts concealed.
>> Firstly, that most of your statements are about *nominal* magnitudes and
>> don’t relate directly to real magnitudes
>
> These are some of the foundational disagreements to which I was referring.
Not really. Keynesian’s (Post or orthodox) don’t take it as an axiom that each nominal is closely associated with it’s real counterpart. It’s something they attempt to establish by modeling and theory.
The real difference isn’t foundational. It’s that as they they take a different path from the underlying facts to the overall theory.
In my view we both start from the same places or similar places, only you guys make mistakes in deriving theory from those starting points.
Later you write:
> As I said above, Neo-Chartalists agree that the notional has to be
> connected to the real through data if a model is to be connected to
> what happens.
Exactly. Hence you can prove very little with the GDP identity.
Specifically there must be a theory of how the notional corresponds to the real. The actually specific facts about what happened are economic history which is a starting point for economic theory but not economic theory itself.
> I think that you can’t lump contemporary Neo-Chartalists in with earlier
> folks. This view, called MMT, as it is stated today by the the leading
> writers is quite recent, subsequent to the revision of the monetary
> system beginning in 1971.
If that’s true then why in the discussion above have I bashed you over the head with 19th century economic ideas?
I read L. Randall Wray’s paper on Neo-Chartalism here: http://www.cfeps.org/pubs/wp-pdf/WP10-Wray.pdf
In it he compares “Neo-Chartalism” or “nC” theory to “orthodox” or “M” theory. However, he clearly has no idea what “orthodox” theory actually is. Just like Knapp in 1921 he attacks a straw man of “metallism” which had little connection to the actual austrian or neoclassical theories of money in 1921 when Knapp first wrote it. Wray wouldn’t know what a network effect was if someone Rickrolled him.
> What I am saying is that conclusions derived from accounting identities
> are not theoretical (based on assumptions) but operational (based on
> rules). These are the aspects that are descriptive of, e.g., how the
> central bank and the banking system operates today. This is
> somewhat different from country to country, based on differences in
> rules.
Yes, believe it or not we know all that. But the real magnitudes do not arise from accounting identities and rules. You can’t claim that a budget surplus will automatically lead to a reduction in real savings without going through the long-march of macroeconomic theory, despite what you have written above.
Current:
This seems very like the classical Keynesian analysis of insufficient effective aggregate demand due to demand for liquidity.
Yes, it is. It’s “Post Keynesian” analysis, which relies heavily on Keynes’ ideas and those of early Keynesians.
The AS-AD model isn’t silly as short term analysis. But it is very incomplete and the longer term is different.
Current:
“The true problem in what we call the “secondary recession” is the demand for money. This rises in a recession due to uncertainty.”
Was replying to this. For some reason my comment landed here.
As I understand Keynes, his point was that due to the zero production and substitution elasticities of liquidity, there is a stable (long run) equilibrium with involuntary employment *even* in the classical general equilibrium system with flexible wages and prices (since the liquid (“nonreproducible”) asset allows non-employment inducing demand) . This seems very intuitive. And it sounds like Austrians agree. Is that so?
No, we disagree about that. I’ll give you the Austrian “Free bankers” take (which is different from the Rothbardian take).
Certainly demand for commodity money or fiat money is a demand that doesn’t create wealth (some people phrase this by saying that money is “barren”). There is a “composition problem”, if everyone demands more money and there is a fixed stock then we will all be defeated, but we will cause great economic destruction in the meantime.
However, this is a short-run problem. The reason the demand for money rises in a recession is because money is a hedge against uncertainty. People hold money because it can be spent on anything and they don’t need to decide precisely what when taking the decision to hold it.
There are three ways through this impasse. Firstly, more money can be issued by a state institution. It will have to be removed again somehow once the recession turns into recovery, this isn’t necessarily politically or technically simple.
Secondly, after a sufficient period of time agents will no longer be uncertain about the future, it will crystallize into a clear picture (good or bad), then they will invest in longer term investments. Prices will readjust and people will save. This isn’t a preferable solution because readjustment creates losses such as unemployment. (This is the sense in which Say’s law is correct, though it is incorrect in the short-run).
Thirdly, we can have a system that uses competitive bank money with fractional reserves – free banking. That’s a little harder to explain, but the essence of the idea is that banks may treat money in checking accounts as loans to themselves. Under that system nothing traded is “barren”, not even bank money.
Because of the second factor I mention above there can be no perpetual depression. If you think about it, this *must* be the case, otherwise how did civilization proceed before Keynes? As Hayek said “If you want to explain how everything can go wrong first you must explain how everything can go right”.
Interesting. The “Free bankers” take sounds like something that a “New Keynesian” like Greg Mankiw would say, i.e., that there can be short-run “Keynesian” effects where nominal price and wage rigidities prevent market clearing, but in the long-run the system is drawn to its full-employment equilibrium.
The Keynesian view is that since the future is uncertain and agents know this, they may prefer to hold some of their wealth in the form of money and/or other liquid assets. This can prevent the system from reaching a full employment equilibrium in either the short or long run, even given flexible wages and prices.
Regarding the first the first solution, there is obvious agreement between Keynes and the Free bankers.
Regarding the second solution, I do not find the logic immediately convincing. I do not see any reason why we should expect the “long run” to bring magical closure (since, as noted above, the liquidity preference can generate a stable unemployment equilibrium even in a classical/Walrasian general equilibrium system with flexible prices and wages). The future never “locks-in” to ergodicity, even in the long run. Uncertainty is never-ending.
I disagree that Keynes must explain how civilisation preceded before Keynes. Keynes sought to explain persistent unemployment. Persistent unemployment is a fact of capitalist economies. We have been waiting a long time for the long-run to kick in, and with it Say’s Law. Perhaps classical economists could instead explain when we should expect this to happen.
I’m not sure what you mean by your third solution. Are you saying that banks treat the liability side of their balance sheets as income? That somehow money and other highly liquid assets are “reproducible” and that cash flow directed at them is automatically spend on the products of industry?
> Interesting. The “Free bankers” take sounds like something that a
> “New Keynesian” like Greg Mankiw would say, i.e., that there can be
> short-run “Keynesian” effects where nominal price and wage rigidities
> prevent market clearing, but in the long-run the system is drawn to its
> full-employment equilibrium.
The free-banking side of Austrian economic don’t agree with New-Keynesian’s in general, but they agree with that idea.
> The Keynesian view is that since the future is uncertain and agents
> know this, they may prefer to hold some of their wealth in the form of
> money and/or other liquid assets. This can prevent the system from
> reaching a full employment equilibrium in either the short or long run,
> even given flexible wages and prices.
>
> Regarding the first the first solution, there is obvious agreement
> between Keynes and the Free bankers.
>
> Regarding the second solution, I do not find the logic immediately
> convincing. I do not see any reason why we should expect the “long
> run” to bring magical closure (since, as noted above, the liquidity
> preference can generate a stable unemployment equilibrium even in
> a classical/Walrasian general equilibrium system with flexible prices
> and wages). The future never “locks-in” to ergodicity, even in the
> long run. Uncertainty is never-ending.
I suspect you’ve been reading too much Paul Davidson. Think about it, why are you agreeing with me about money creation but disagreeing with me about on my second point. Why is it that when money is created to satisfy the demand to hold it at the current price level that uncertainty falls, whereas if the price level falls so that the current stock of money meets demand then uncertainty rises or stays the same?
Davidson forgets about ergodic uncertainty when he see a means of ending recession that he likes – such as creating money or deficit spending.
See http://mises.org/misesreview_detail.aspx?control=365
Note also that invoking uncertainty and a walrasian general-equilibrium model at the same time is contradictory. A normal walrasian general-equilibrium model assumes no uncertainty and “money” is only a unit of account not as something that is held. Also, what do you mean by classical? Classical economics isn’t at question here, nobody holds the labour theory of value any more, not us, not the Keynesians or the mainstream.
> I disagree that Keynes must explain how civilisation preceded before
> Keynes. Keynes sought to explain persistent unemployment. Persistent
> unemployment is a fact of capitalist economies.
In the 19th century it was very uncommon. It’s a fact of modern capitalist economies the follow Keynesian and Monetarist policies.
> We have been waiting a long time for the long-run to kick in, and with it
> Say’s Law. Perhaps classical economists could instead explain when we
> should expect this to happen.
It kicks in quite quickly. Austrians often give the example of the US depression of 1920-1921. The Harding government took no countercyclical measures at all. Unemployment temporarily peaked at 12% and GDP fell 17% then both quickly fell back.
We point to four main reasons for the frequent period of high unemployment:
* Booms caused by distortion of interest rates by central bank money creation.
* Wage and price rigidities caused by state intervention to strengthening unions, and by natural market effects.
* Unemployment benefits which subsidise unemployment.
* “Regime uncertainty” caused by governments and large insitutions. This is where the “big players” creates persistent uncertainty by threatening to change policies.
> I’m not sure what you mean by your third solution. Are you saying that
> banks treat the liability side of their balance sheets as income? That
> somehow money and other highly liquid assets are “reproducible” and
> that cash flow directed at them is automatically spend on the
> products of industry?
No. I’m saying that a deposit is a loan to a bank, it’s an asset of the bank. if agents hold large bank balances then the bank may make loans against those assets. This is a complicated issue, and one where the Rothbardian or “hard-money” Austrian Economists disagree, to them only the 2nd adjustment mechanism is a good policy.
In reverse order…
“No. I’m saying that a deposit is a loan to a bank, it’s an asset of the bank.”
A deposit is a liability of the bank and an asset of the customer (depositor): http://en.wikipedia.org/wiki/Liability_(financial_accounting)
It kicks in quite quickly. Austrians often give the example of the US depression of 1920-1921.
I agree that capitalist economies are cyclical. (I also agree that Austrians often give the example of the 20-21 depression!) The questions are 1, whether full-employment is inevitable, and 2, if so, how long this will take. 1920-21 is one data point. The UK had a two decade long Great Depression. Can’t blame that on Keynes.
“In the 19th century it was very uncommon. It’s a fact of modern capitalist economies the follow Keynesian and Monetarist policies.”
When you say “Keynesian and Monetarist”, do you really mean “neoliberal”?
In any case, I suspect that the reasons for low unemployment in rapidly industrialising Western nations in the 19th century aren’t wholly explained by “didn’t follow Keynesian and Monetarist policies.”
“Also, what do you mean by classical?”
Competitive economy w/ flexible money wages and prices model.
“Note also that invoking uncertainty and a walrasian general-equilibrium model at the same time is contradictory”
Yes, should have developed that as a separate point. Please ignore proximity to “Walrasian GE”.
Apropos Walrasian GE, was thinking of Hahn, et al.
“Think about it, why are you agreeing with me about money creation but disagreeing with me about on my second point. Why is it that when money is created to satisfy the demand to hold it at the current price level that uncertainty falls, whereas if the price level falls so that the current stock of money meets demand then uncertainty rises or stays the same?
Good point. I think my proposition needs restating…
>> No. I’m saying that a deposit is a loan to a bank, it’s an asset of the bank
>
> A deposit is a liability of the bank and an asset of the customer (depositor):
Yes, you’re right, and I’m not paying attention. I won’t go any further with this point because it’s quite complex. If your interested read one of the books on Free banking.
>> It kicks in quite quickly. Austrians often give the example of the US
>> depression of 1920-1921.
>
> I agree that capitalist economies are cyclical. (I also agree that Austrians
>often give the example of the 20-21 depression!) The questions are 1,
> whether full-employment is inevitable, and 2, if so, how long this will take.
> 1920-21 is one data point. The UK had a two decade long Great
> Depression. Can’t blame that on Keynes.
The UK’s Great Slump began with the unwise revaluation of the pound. The government brought the value of the pound back to it’s pre WWI value. That created deflation and debt deflation. These caused the slump to begin.
It was then exacerbated by the actions of trade unions. At that time trade unions in Britain were immune from corporate law and tort law. They could intimidate workers who weren’t affiliated with the union and block access to workplaces with pickets.
Later the US great depression began and spread to the rest of the world, making things worse in Britain.
>> In the 19th century it was very uncommon. It’s a fact of modern capitalist
>> economies the follow Keynesian and Monetarist policies.
>
> When you say “Keynesian and Monetarist”, do you really mean
> “neoliberal”?
No, I mean Keynesian and Monetarist policies. There is no real “neoliberal” economics. Austrian Economists are “neoliberal” in terms of political views, myself included.
> In any case, I suspect that the reasons for low unemployment in rapidly
> industrialising Western nations in the 19th century aren’t wholly
> explained by “didn’t follow Keynesian and Monetarist policies.”
They were rapidly industrialising then, but we have had quite rapid progress in the 20th century. According to the Austrian view there are several reasons that there this was not a great problem in the 19th century, which correspond to the reasons I mentioned above for recession. Firstly, with less division of labour jobs were more homogenous, there was “unskilled labour” that doesn’t really exist now. Secondly, trade unions did not have the priviledges they were given in the early 20th century. Thirdly, there was no unemployment benefit to encourage people not to work. Fourthly, and most importantly, the gold standard did not allow much inflation. The gold standard didn’t allow booms to begin and as a result it was better at preventing busts.
>> Also, what do you mean by classical?
>
> Competitive economy w/ flexible money wages and prices model.
I see, normally “classical” means related to classical economists. Keynes misuses the word in General Theory, the economists he calls “Classical” are “Neoclassical” or “Marginalist” economists.
> Apropos Walrasian GE, was thinking of Hahn, et al.
That’s right.
> Good point. I think my proposition needs restating…
While your thinking about it, think about this… When Keynesians point to the problem of deflation they point to a series of microeconomic problems that occur across the economy, what Hayek called a coordination problem. Why don’t you look at inflation the same way?
Two quick points disguised as one:
The reason I suggested “neoliberal” was a poor attempt at humour (note the scare quotes). There is a left wing view in which “neoliberal” is a free floating pejorative. Similarly, there is a right wing view in which the word “Keynesian” performs a similar function. The era of Keynesian demand management in pursuit of full employment is over. You may have noticed that while it lasted it was pretty good. Golden age of growth and all that. Governments today might be “Keynesian” but mostly only in the sense that they are also “neoliberal”.
> The reason I suggested “neoliberal” was a poor attempt at humour (note
> the scare quotes). There is a left wing view in which “neoliberal” is a free
> floating pejorative. Similarly, there is a right wing view in which the word
> “Keynesian” performs a similar function.
Yes.
> The era of Keynesian demand management in pursuit of full employment
> is over. You may have noticed that while it lasted it was pretty good.
> Golden age of growth and all that.
But, was it really so good? You mentioned Britain earlier, have you read about Britains experience of Keynesian policies?
Also, though I haven’t emphasised it here, Austrian economists don’t agree that GDP is necessarily a good measuring rod for growth. It’s really a Ricardian/Classical measure rather, it’s built on the implicit Keynesian assumptions.
(Also, was that era really “Keynesian” in actually policy. John Hicks, for example, said that it was really something else, as sort of “labour standard” of money).
> Governments today might be “Keynesian” but mostly only in the sense
> that they are also “neoliberal”.
Well, they may subscribe to interest rate targetting, or inflation targetting, or some other form of modernised monetarism. All of these though suffer from the same problems and the same problem as Keynesianism, they do not recognize the discoordinating role of inflation.
konst, the libertarian in me agrees with you on this in principle, but the realist in me realizes that government is here to stay, along with corporatism. Libertarians of the right fear big government, while libertarians of the left fear the corporate state. In my view the US is must more threatened at present by corporate statism than socialism. The US is now more a plutocratic oligarchy rather than a representative democracy.
Just stating my viewpoint, since I didn’t come here to debate politics.
Randy Wray sums up the Neo-Chartalist position after reading the comments on the HuffPo post.
http://neweconomicperspectives.blogspot.com/2010/04/paul-samuelson-on-deficit-myths.html
Incidentally, most of the arguments I have used above against the Neo Chartalists are in Appendix A of Mises “The Theory of Money and Credit”.
I do think though that there are real problems to rectify with the Austrian theory, especially related to the _origin_ of money, the Chartalists have a good case on that.
re: origins of money – can you expand on what the problems are with the austrian view?
Remember firstly that in Austrian terms money is primarily the medium of exchange. It is the most liquid good, the one most acceptable for trade. (In this discussion the Chartalists are distracting from this).
The Menger/Mises regression explanation is quite reasonable. Over time goods used for indirect exchange are standardised for various sensible reasons. These gradually become the money through network effects, this is what Mises writes about in his books.
There is a theory between Menger/Mises and Chartalism, that is debt based money. According to this view debt titles evolved first. For example a debt title to a particular rich farmer gauranteeing an amount of grain is produced. Such a title would be called a “bill” in 19th century terms, short term loans paid back to whomever held them. These are then traded and become money-like because they were widely accepted in indirect exchange.
The Chartalist view is a subset of the debt view that concentrates on the state. The Chartalists make a good point though when they say that government can transform the market through fines and taxes. If the government demand certain debt titles (debt title denominated in some commodity such as grain) then they create a large market for them. That market could become the most liquid market. Though that doesn’t mean that is necessarily happened that way.
All of the three theories I mention above are plausible and fulfill the normal requirements of Austrian theories, that is they can be based on human action and simple facts about the market. If you think about each of them carefully they all require network effects. In fact all three could be true in different places and different times, they could comprise competing forces that occurred simultaneously. Regardless of what historically happened, each of them are possible ways that money could arise.
Possibly all three happened but it doesn’t really change the fundamentals does it?
I think the only one that can arise in a free society where property rights and civil rights are respected is the Menger/Mises theory.
> Possibly all three happened but it doesn’t really change the fundamentals
> does it?
No it doesn’t.
Once money exists it doesn’t change any fundamentals of how a monetary economy works. There is a “line” of sorts between the pre-money and monetary economy. Once we pass the line it doesn’t matter how that happened, what matter is what correct monetary theory is.
> I think the only one that can arise in a free society where property rights
> and civil rights are respected is the Menger/Mises theory.
Historically speaking there wasn’t necessarily a free society when money evolved.
I think that even in a free society the debt explanation may be correct. First we need rich individuals, they certainly exist in all societies. Then we need them to freely contract debt in terms of some commodity – there’s nothing wrong with that either. Then we need a means of making titles to debts that is difficult to counterfeit. Once that happens it’s a matter of free-market competition whether titles like these or some commodity become widely used in indirect exchange. If there are few portable commodities then these debt titles may win the race and become the most liquid asset.
As you say above historically speaking I think perhaps all three processes happened. It’s difficult to tell now though with the evidence we have.
Current, you bring up interesting points that I have thought about. However,I am neither an economist nor a historian of economics, so I won’t attempt to answer them, since I don’t have enough background to be sure that I have it right. Im not aware of any debate on these matters between knowledgeable Austrians and Neo-Chartalists.
Such a debate would be interesting, but as I said, it’s most likely going to boil down to disagreement over basic assumptions, like whether money is ultimately someone’s nominal liability or is intrinsically connected to real value. Still, there are likely some substantive issues that could be illuminated on the way.
> Current, you bring up interesting points that I have thought about.
> However,I am neither an economist nor a historian of economics, so
> I won’t attempt to answer them, since I don’t have enough background
> to be sure that I have it right. Im not aware of any debate on these
> matters between knowledgeable Austrians and Neo-Chartalists.
Yeah, no one much has discussed it recently. I might write a paper about it and see if I can get it published, but I’m not a professional economist either.
> Such a debate would be interesting, but as I said, it’s most likely going
> to boil down to disagreement over basic assumptions, like whether
> money is ultimately someone’s nominal liability or is intrinsically
> connected to real value. Still, there are likely some substantive issues
> that could be illuminated on the way.
I think it could be illuminating because the issue you describe isn’t really a basic assumption, or mutually exclusive. Everyone agrees that money is the medium of exchange used for indirect exchange. Everyone agree that it has a locus of prices that it exchanges against other things, so nobody can deny a connection to “real values”. It may also be someone’s nominal liability, whether it is or it isn’t is a question of the particular circumstances.
Chartalists tell their pupils that neoclassicals believe in “metallism”. They then describe a straw-man of austrian/neoclassical theory. The real theory though is more complex and in some ways closer to what the Neo Chartalists describe. Rothbard, for example, called debt instruments that where used like money “quasi money”, and didn’t deny their existence.
“Chartalists tell their pupils that neoclassicals believe in “metallism”.”
Pont of clarification to take this back to where the discussion began, namely, with the HuffPo article written by prominent neo-Chartalists to counter the Neoliberal arguments about “fiscal responsibility.” The Neo-Chartalists assert that Neoliberals are basing their arguments on a convertible fixed rate currency regime, whereas the present US monetary system is based on a non-convertible floating rate (fiat) currency.
I am familiar enough with their position on this to clarify what I think are misunderstandings, but I am not familiar with the Neo-Chartalist, Austrian, and Neoliberal views to debate them in depth. Unfortunately, the mainstream universe of discourse is dominated by Neoliberalism and so-called heterodox schools of thought are marginalized, so there’s not a lot of public debate over these things as they relate to currency issues and policy-making.
Austrian views are only recently getting some attention in the mainstream debate, and Neo-Chartalism still isn’t much of blip on the screen yet, where New Keynesians rule.
It’s only by debating these issues publicly in relation to their policy implications that the public will be able to make informed political decisions about future economic policy. The HuffPo article is an attempt to get the Neo-Chartalist view some attention and get such a debate going.
I see. Have a read about this stuff, it’s interesting, it’s also a very old debate.
I my opinion you can only really criticise “Neoliberal” economists and say that the prevailance of their orthodoxy is “unfortunate” if you actually understand clearly what they are claiming.
Here’s an interesting paper that discusses property rights and natural law. It is a critique of right libertarianism, so be warned of its content. While not on economics, the opening quote is an ode to the Chartalist theory of tax driven money:
“Is it right to pay taxes to the Roman Empire?”
“Show me a coin in which the taxes are paid. … Whose image is on it?”
“Caesar’s.”
“Render unto Caesar what is Caesar’s…”
-Property theory from the Bible: Mathew, Chapter 22, Verses 17-21
The rest can also be put in perspective to the discussion here. http://works.bepress.com/cgi/viewcontent.cgi?article=1005&context=widerquist
Yeoman’s work, Tom.
Thanks.
Ignoring Lynn’s post and Randy’s write-up, I am struck that a tremendous advancement of thought might be had by having the six prominent Austrians of the day debate the six presenters at the Teach-In on maybe 3 or 4 of the basic points that have been raised on Fiscal Sustainability in this dialogue.
Neo-chartalism versus Austrian economics.
Intelligent, non-belligerent debate on how things really work.
Some may see that as a waste of time, but I am not one.
Maybe a series of six(6) net-meetings, if it cannot be done at one time.
We all want to promote the understanding of what money is, and how it works.
Just a thought.
I think I’ve mostly mined out this thread. There isn’t much left to say here that can be dealt with using the medium of blog comments.
However, I’d just like to end with a neat explanation of the problems of nominalism from Mises which he gives in “The Theory of Money and Credit” and “Nation, State and Economy”.
During the first world war the value of German and Austrian currency lost a great deal of value. According to the Chartalists of the time this was *beneficial*. They explained that the fall of the mark versus other world currencies meant that the value of foreign investments rose. Suppose the mark goes down 5% against the pound (I don’t know the magnitude of the actual fall). In that case German businessmen who have assets in places where the pound is used find that their assets are worth more in terms of German marks. So we have:
Nominal value of capital stock owned by Germans = Nominal value of domestic German capital stock + Nominal value of foreign capital owned by Germans
Chartalists pointed out that the second component rises as the price of German marks falls. Mises called this “the lowest depth to which monetary theory can fall”.
But, this analysis in terms of nominals tells us nothing about real magnitudes. The fact was that the currencies of Austria and Germany fell *because they were probably going to lose the war*. The market estimated, quite correctly, that the destruction of productive capacities brought about by the war would mean that there would be fewer German goods to buy, and hence less demand for German money. (The market may also have estimated that it was likely that the Germans would resort to large scale money creation causing inflation, which was what happened though a few years later).
The fall in the price of the German and Austrian currencies was in fact a marking-down of the capital stock of their entire economies. That represented a market estimate of what the effects of the destruction of the war would be. Foreign investments rose when valued in marks only because they were not affected by this, as domestic investments were.
In reality we have:
Real value of capital stock owned by Germans = Real value of domestic German capital stock + Real value of foreign capital owned by Germans
This total has fallen because the first component (which is of course much larger) has fallen. The second component has remained similar to before.
That there is a nominal inward flow that will produce a higher nominal GDP is irrelevant.
Ed Harrison of Credit Writedowns attended the Fiscal Sustainability Teach-In, which is the subject of this post. He comments on it in Out of control US deficit spending. See also his earlier post, Confessions of an Austrian economist of Dec 10, 2008.
Ed Harrison gives quite reasonable criticisms of the “Hard money” branch of the Austrian school, that of Rothbard that proposes 100% reserves.
However, he doesn’t understand the theories of the other branch of Austrian monetary theory, the Hayekian branch which has a role for money creation in recessions. In fact he doesn’t mention Hayek at all, which is surprising since Hayek is the most famous Austrian Economist.
Also, as I have emphasised earlier, *every* competent student of a school of economics understands how monetary operations occur, this isn’t controversial. Ed Harrison may have learnt this from Neo Chartalists but he could have learnt it from any of the other schools too.
“‘every’ competent student of a school of economics understands how monetary operations occur, this isn’t controversial.”
Current, this just does not seem to me to be the case. For instance, I have witnessed Neo-Chartalist economists and people in banking and finance debate with Neo Liberals over this on several occasions, and there are some big disconnects.Here is one such debate and if you are interested, I can provide more if I dig around my files. If you peruse it, I think you will find quite a bit of disagreement over operations, not only theory. NIck Rowe, Bill Woolsey, and Scott Summer are Neo LIberals. JKH is an operational expert in banking and finance. Scott Fulwiller, Winterspeak, and Ramanan are MMt’ers.
Money, banks, loans, reserves, capital, and loan officers
But more to the point, if economists in general really understood and agreed on the operation of the present monetary system, the mainstream would not be claiming that the US has “unfunded obligations” it can’t meet, or that the government is running out of money, is bankrupt, can become insolvent, or be forced to default. These assertions that are inapplicable in a fiat system.
They would also not be afraid of incipient inflation with a yawning output gap, U3 still near 10%, U6 still near 20%, the overnight rate at near zero, and the yield curve relatively flat by historical standards. These are indications of a deflationary environment and the still looming threat of debt deflation. In light of the European kerfuffle, they would be concerned instead about contagion extending the Global Financial Crisis.Indeed, if people understood monetary operations and were taking sense in terms of this, then the Fiscal Sustainability Teach-In would not have been organized in the first place, and this post in reaction to it would not have existed.
>> every competent student of a school of economics understands how
>> monetary operations occur, this isn’t controversial.
>
> Current, this just does not seem to me to be the case. For instance, I
> have witnessed Neo-Chartalist economists and people in banking and finance
> debate with Neo Liberals over this on several occasions, and there are some
> big disconnects.Here is one such debate and if you are interested, I can
> provide more if I dig around my files. If you peruse it, I think you will find quite a
> bit of disagreement over operations, not only theory. NIck Rowe, Bill Woolsey,
> and Scott Summer are Neo LIberals. JKH is an operational expert in banking
> and finance. Scott Fulwiller, Winterspeak, and Ramanan are MMt’ers.
>
> Money, banks, loans, reserves, capital, and loan officers
That debate isn’t about how the Federal Reserve system works, or about accounting tautologies. It’s about the economics of banking. The “money multiplier” story the monetarists tell is an economic theory not a matter of the insitutional arrangements of central banking. (And I agree with the Post Keynesians that it is wrong).
> But more to the point, if economists in general really understood and agreed
> on the operation of the present monetary system, the mainstream would not be
> claiming that the US has “unfunded obligations” it can’t meet, or that the
> government is running out of money, is bankrupt, can become insolvent, or be
> forced to default. These assertions that are inapplicable in a fiat system.
As far as I know no economist is saying that the US will run out of money. Every economist I have read understands that in a fiat currency system default is a decision that the state and the monetarty authority take.
What “unfunded obligations” means is unfunded in real terms, not in nominal terms. We all know the state can create as much money as it wants.
> They would also not be afraid of incipient inflation with a yawning output gap,
> U3 still near 10%, U6 still near 20%, the overnight rate at near zero, and the
> yield curve relatively flat by historical standards. These are indications of a
> deflationary environment and the still looming threat of debt deflation. In light
> of the European kerfuffle, they would be concerned instead about contagion
> extending the Global Financial Crisis.Indeed, if people understood monetary
> operations and were taking sense in terms of this, then the Fiscal Sustainability
>Teach-In would not have been organized in the first place, and this post in
> reaction to it would not have existed.
All of this is about economic theory not about operations though. Remember you were criticising the knowledge other economists have of operations. Whatismore it is Paleo-Keynesian economic theory which other economists don’t agree with. Austrian economists don’t think the concept of “output gap” has any validity.
“The “money multiplier” story the monetarists tell is an economic theory not a matter of the insitutional arrangements of central banking.”
Please tell that to Chairman Bernanke and all the people that think that the reserves resulting from QE are inflationary.
“As far as I know no economist is saying that the US will run out of money. Every economist I have read understands that in a fiat currency system default is a decision that the state and the monetarty authority take.”
This is exactly what President Obama has been saying, and I assume it is coming form his economic advisers — al least they are not correcting him.
“What “unfunded obligations” means is unfunded in real terms, not in nominal terms. We all know the state can create as much money as it wants.”
The current kerfuffle being raised by, e.g., the Peterson foks, and presumably the president’s deficit commission, is purely notional rather than real, based on a the imposition of a supposed requirement for future taxation on either this generation or generations to come. That argument is bogus because in fiat system taxes don’t fund deficits or the national debt.
However, MMT agrees that fiscal policy has an impact on the distribution of real resources between the public and private sector. If that is the argument, it needs to be stated as such.
“All of this is about economic theory not about operations though.”
In this debate at NIck’s and others, it is clear that the Neo Liberals disagree with the others largely because they don’t understand either central banking or commercial banking operations. The post I cited is a follow-up on earlier posts that also show this, if it is not clear enough from that thread.
“Austrian economists don’t think the concept of “output gap” has any validity.”
That’s theory over which MMT and Austrians apparently disagree.
>> The “money multiplier” story the monetarists tell is an economic theory
>> not a matter of the insitutional arrangements of central banking.”
>
> Please tell that to Chairman Bernanke and all the people that think that
> the reserves resulting from QE are inflationary.
Well, these are all matter of economic theory and how it interfaces with the institutional arrangements of central banking. Also, disbelieving the mechanical version of the money-multiplier theory doesn’t necessarily lead to the theory that the reserves are not inflationary.
I think that the Federal Reserve will have to act very quickly to prevent the reserves becoming inflationary when recovery begins in earnest.
>> As far as I know no economist is saying that the US will run out of
>> money. Every economist I have read understands that in a fiat
>> currency system default is a decision that the state and the
>> monetarty authority take.
>
> This is exactly what President Obama has been saying, and I assume
> it is coming form his economic advisers — al least they are not
> correcting him.
Look at it from our point of view. To mainstream economists, and Austrian economists, there is no danger of running out of money. However, according to our macroeconomic theories creating money is an alternative with the same or worse downsides to high-taxation. How though can a President adequately express this in a speech to the general public? I think his advisers have probably given a simplification to use.
>> What “unfunded obligations” means is unfunded in real terms, not in
>> nominal terms. We all know the state can create as much money as it
>> wants.
>
> The current kerfuffle being raised by, e.g., the Peterson foks, and
> presumably the president’s deficit commission, is purely notional
> rather than real, based on a the imposition of a supposed requirement
> for future taxation on either this generation or generations to come.
> That argument is bogus because in fiat system taxes don’t fund
> deficits or the national debt.
How do you justify this last sentence? It *doesn’t* follow from the GDP identity because the GDP identity is an identity. Like any other mathematical identity it doesn’t give any cause-and-effect relationship. For that a proper economic theory is needed.
Anyway, let me put it like this, no one who has read an undergraduate economic textbook and understands it thinks that there is a limit on the amount that a central bank can print. However, according to the economic theories of both mainstream economists and Austrian economists creation of new money is a much worse solution than high taxation or persistent high deficits.
> However, MMT agrees that fiscal policy has an impact on the distribution
> of real resources between the public and private sector. If that is the
> argument, it needs to be stated as such.
Well, yes, I agree with you there.
> In this debate at NIck’s and others, it is clear that the Neo Liberals
> disagree with the others largely because they don’t understand either
> central banking or commercial banking operations. The post I cited is
> a follow-up on earlier posts that also show this, if it is not clear enough
> from that thread.
I haven’t really got enough time to read that thread. So, fair enough I believe you.
Tom,
unfunded liabilities is of course wrong term if you are suggesting that govt can just inflate away all problems..
But real problem is following: if govt has used monies collected earlier for consumption, it means that capital stock of economy has not grown as it might have done if this extra taxation would not have happened. Benefits paid and monies used for military etc are spend. No capital was accumulated in this pediod but perhaps only foreign consumption goods imported into country. In future this means that when recipients expect that they can consume goods then economys productive capacity is not such as it might have been.
adi, you are assuming that taxes are used to fund deficit spending and finance debt issuance. They are not under a fiat system. The purpose of taxation in fiscal policy in a fiat system is to reduce nominal aggregate demand so that the stimulus of currency issuance doesn’t become inflationary by exceeding the ability of the economy to produce. Taxation simply reduces the amount of nongovernment net financial assets created by currency issuance.
Debt issuance does not compete in the markets for funds that might have gone to investment because the funds that are used to purchase government securities were injected $-for $ through currency issuance (at the macro level). That is to say, in debt issuance, the only thing that changes is the composition of the nongovernment net financial assets created by currency issuance. The aggregate remains the same.
Does this affect capital investment? No. The funds for capital investment come from credit (bank) money, not currency (government) issuance. Currency issuance does not affect the amount of credit money created by banks, and taxation and debt issuance affect (in aggregate) only net financial assets created through currency issuance by the monetary sovereign.
Obviously, in the normal flow of funds through the economy it is impossible to detect which is which, but in aggregate it becomes clear. Funds that are not introduced by government issuance are not taken from the private sector in order to fund government. Government funds itself directly through currency issuance without affecting the amount of credit money.
Fiscal policy does result in a distribution of real resources from the private ownership to public use. It can be argued that this is unjust and a violation of property rights. However, US Constitution provides for this, and only anarchists think that there should be no public sector at all, with everything funded privately. The distribution of resources between public and private is a political matter to be decided by the electorate through their elected representatives.
Tom, you wrote “Fiscal policy does result in a distribution of real resources from the private ownership to public use.”
Where in the Constitution is this power given to the federal government? It’s not eminent domain.
What you’ve written here is, in my view, bonkers. However, explaining why iis quite difficult because it requires a long discussion of the overall Austrian theory of macroeconomics and growth. Like Abba Lerner, you have taken the Keynesian toolbox and added Chartalism to it. We start with our Austrian toolbox and Chartalism doesn’t fit with it. I’ll see if I can find the time to write an article about this.
konst, “Where in the Constitution is this power given to the federal government? It’s not eminent domain.”
The Constitution gives the Congress the power to coin money, to provide of the general welfare, to tax, etc. See Article 1, sec. 7 and 8. This is the basis of fiscal policy. All this amounts to transferring real resources to public use that would otherwise have been available for private use. The government can also set land aside for public use, e.g., national parks and monuments.
While taxes do not fund spending in a fiat system, they do in a convertible currency system, which the US has operated under in the past. Even under a fiat system, where taxes do not fund spending, taxation does appropriate currency issued that went into deposit accounts and flowed in the economy. These funds are claims on real resources that taxes withdraw from private use.
Current: “Like Abba Lerner, you have taken the Keynesian toolbox and added Chartalism to it. We start with our Austrian toolbox and Chartalism doesn’t fit with it.”
As I said, Austrians and Neo Chartalists seem to disagree over foundations.
If models use only very aggregated nominal flows and accounting identities then all structural changes and other important factors are left out.
It is sometimes argued that these aggregates have life of their own since aggregate is not just a sum of all micro level demand functions. You can add fancy terms like “cybernetics”, “non-linear dynamics” and “feedback loops” to this and then you have made an even more messier story..
But it is important to note that national accounting identities are not necessarily connected to any economic theory. It is just a system with its own concepts and axioms. Economy can be described also differently.
Exactly.
This is not the way that MMT’er think at all. MMT starts with monetary operations and proceeds to stock-flow consistent macro models. The structural issues you are talking about are not ignored in this approach at all. MMT’ers agree on the basic operational principles but they different about structural matters affecting the real economy, some taking a more conservative stance and others a more liberal stance regarding allocation of real resources. The basis in operational reality simply informs of different options that have different real implications. I don’t pretend to speak for any of the MMT’ers in this regard since they have different views.
I specifically stated that I was not getting into such issues here in this thread. I am must trying to clarify what was at issue in the Fiscal Sustainability Teach In, which was a counter-conference to the Peterson conference addressing the need for “fiscal responsibility.” The purpose of the MMT conference was to show that the Peterson analysis and proposals were flawed, based on an operational understanding of the present monetary system since their arguments are grounded in a convertible fixed rate system that no longer applies.
Tom is there any video of that teach-in?
Here is a link to the Financial Stability Teach In blog. The video isn’t up yet, but it is promised.
Here are some audio links and slide shows of the presentations at the Annex.
Interestingly post-Keynesians advocate that Government carry out the policy that Free Banking advocates call for, that is to create money to supply enough to keep spending growing at a steady rate even as the demand to hold money varies over time. And in the case of inflation both advocate a reduction in money supply.
See: post-Keynesian Warren Mosler
See: Free banking advocates George Selgin, Larry White and Bill Woolsey
The post-Keynesians want the Government to get the benefits from the issue of zero interest bonds (cash), free banking advocates want the banks to get the benefits from the issue of zero interest bonds.
Though there are some similarities it’s quite different. Free bankers only claim that a growth-rule is a second-best alternative to free banking.
Selgins “less than zero” rule is quite different to the “quite a lot more than zero rules” advocated by Bill Woolsey and the Post-Keynesians. Selgin’s rule isn’t inflationary, and in the absence of proper free banking it would be the best way to prevent ABCT beginning.
A link to a description of how the FED works:
http://libertyunbound.com/archive/2004_10/woolsey-fed.html
Clearly inflation has gone wild since we dropped the requirement that our paper money at least be redeemable for gold. Check out this chart comparing inflation and employment since 1939. They grow in tandem until the early 70s, where inflation goes through the roof. Politicians will always choose inflation over unemployment…always.
http://www.thumbcharts.com/1307/lots-of-inflation-not-so-many-new-jobs
Here is the entire inflation series for those of you who are interested:
http://www.thumbcharts.com/series/inflation-rate-1913-2010
very nice article. thank for sharing
Current,
Are you still about? This is the only decent critique of Chartalism on the web (AFAIK). I would like to come back to some of the issues raised.
good and healthy discussion on MMT and Austrian economics.
Current Writes:
“Also, though I haven’t emphasised it here, Austrian economists don’t agree that GDP is necessarily a good measuring rod for growth. It’s really a Ricardian/Classical measure rather, it’s built on the implicit Keynesian assumptions.”
The whole MMT/Chartalist theory hinges on the theoretical foundations of the GDP statistic. Mark Skousen is currently working on a paper (http://www.cobdencentre.org/2011/01/gross-domestic-expenditures/) that points out the misleading nature of using GDP as a proxy for all economic activity within an economy. From my understanding of the article, GDP is only a part of the whole, not the whole economy. As such, using GDP as a proxy for total activity leads one to over-emphasize consumption as a driver of the economy. As it turns out, using Skousen’s more comprehensive measure of economic activity, consumption is closer to 30% of spending in the economy as opposed to the 70% figure so popularly cited using GDP. Additionally, using Skousen’s metric, investment accounts for about 63% of economic activity as opposed to the 14% figure GDP provides. Has Say’s Law been vindicated?
Moreover, I think Frank Shostak had it right in this article: http://mises.org/daily/2787 discussing the framework of Hyman Minsky, a prominent intellectual in the Post-Keyensian/Chartalist/MMT School. Frank Shostak writes:
“…[W]hile Minsky’s story accurately describes the present financial-market turmoil, it does not provide any satisfactory explanation based on previously established and identified phenomena.”
I concur. MMT seems to still suffer from the whole Keynesian non-sense of, “any spending to increase output is good.” I’ll admit, such an argument is an easy “buy” if you have NO capital or business cycle theory to speak of – which of course MMT’ers don’t have.
I think what we are saying as Austrian’s is, is that we agree with MMT’ers description of how the current monetary regime works, but disagree with MMT’ers prescription: government intervention. We disagree mostly out of principle, as government has shown itself to add little (if any) value to the economy. Perhaps a case can be made for government in the provision of establishing and enforcing transferrable COMPREHENSIVE property rights, allowing the freedom to contract on voluntary terms and maybe some other bottom level needs on Maslow’s heierarchy, but beyond that it becomes quite hard to ascertain what value the government is adding to the economy.
My suggestion to MMT’ers is to start with first principles. Start be defining capital:
“Capital” may go by other names such as REAL value, REAL savings, REAL equity, Net REAL assets etc. If we want to be sticklers on definitions today, then “capital” is best defined as: the REAL resources (means) AVAILABLE for productive or consumptive purposes (ends).
Some more first principles:
Human wants and needs are infinite, thus, demand is unlimited. At this moment in time physical matter is finite (law of conservation), thus, supply is limited. There are two kinds of demand: 1) The demand for inputs to produce outputs, i.e. production and, 2) The demand for outputs to “use up,” i.e. consumption. Production is a value-adding activity. Consumption is a value-substracting activity.
Business-School Lingo as Austrian Capital Structure Theory:
The economy at any point in time necessarily has a “value-driven structure.” That is, the economy may have its “supply-chain” (i.e. capital structure) “coordinated” in such a way, that on net balance, production > consumption (value creation), production = consumption (neutral), or consumption > production (value destruction).
Consider the last case, where consumption > production. If the economy’s trajectory persists in the “consumption > production value-driven structure” to the point that on net balance, the economy is subtracting value, a corrective recession/depression sets in. The length of the recession/depression depends entirely on how quickly the economy can “re-coordinate” its “supply-chain” (i.e. capital structure) to one where on net balance production > consumption, that is, back to a “value-adding structure.”
Applying the Above Concepts to Modern Times:
Let’s restate our definition of “capital”: The REAL resources (means) AVAILABLE for productive or consumptive purposes (ends).
Notice how I emphasized the words, “real” and “available?” That isn’t by mistake. The economy is constrained to “capital” that is “real” and “available.” Creating new claims on resources (money) does not create “capital” nor does it make existing “capital” available – if anything, it does the EXACT OPPOSITE! Those people who hold the existing “capital” don’t want to make their “capital” available at such low interest rates and risk losing purchasing power with potential negative returns due to increased price-inflation expectations (which expansion of the money supply does – even the Mishkin Textbook says so).
Ceteris paribus, increasing the supply of money such as through government deficit spending as MMT’ers propose, actually LOWERS the interest rate, making it LESS attractive for lenders/investors/capital-holders to risk/spend/loan their “capital” in the economy. It seems as if MMT’ers believe “capital” can be created out of thin air, i.e. “phantom capital.” As I said above, creating new claims (money) on resources does not create “capital” in and of itself, nor does it “coordinate” activity to create “capital.” The central problem in economics is “coordinating” activity in such a way that the economy is on a sustainable capital production-consumption trajectory. The question is “who” or “what” is that “coordinator?” Austrians have identified the “rightful coordinator” as natural interest rates. MMT’ers seem to believe government spending and central bank manipulated interest rates are the “rightful coordinator.” When describing “operational reality,” Austrians only disagree with MMT’ers to a matter of degree. That is, Austrians disagree with the MMT assumption that the government/central bank is the “rightful” or “proper” coordinator of economic activity.
##I think what we are saying as Austrian’s is, is that we agree with MMT’ers description of how the current monetary regime works, but disagree with MMT’ers prescription: government intervention.##
Well, you don’t agree then with MMT. No government deficit spending, no money. As simple as that.
## We disagree mostly out of principle, as government has shown itself to add little (if any) value to the economy.##
As a currency monopolist It has to add currency to the economy. You are misunderstanding fiat money. MMT talks about operational rules and MMT Itself doesn’t advocate big government/small government . Remember those Bush stimulus checks and what they were called? Tax credit! Government was sending money to taxpayers for free. It did not buy any services or hire people. That’s exactly what money is for chartalists-tax credit. Since It is tax credit It has to be spent into existence before It can be taxed(destroyed). You are talking that you Austrians understand what is going on. I think not. Just listen to Ron Paul and Peter Schiff. “Debt crises, end of the dollar, hyperinflation etc. ”
“Creating new claims on resources (money) does not create “capital” nor does it make existing “capital” available – if anything, it does the EXACT OPPOSITE!”
That is wrong. Even in private sector loans create deposits and you don’t have to encourage people to save to make investments. Investments create savings. The way It happens in real world is when banks make a loan, private credit money is created to fund some kind of investment. The company who got a loan has a liability, people and firms who provided services and goods for the investment have money(financial claim/asset). No net financial assets were created for the private sector as a whole. This is how It happens in real world in private sector.(are you wishing that banks didn’t create money this way and economy would stay at 10% unemployment, because ” Creating new claims on resources (money) does not create “capital” nor does it make existing “capital” available”). This is how It is done under current system. You might not like It, well lobby against It then! What about if private sector is not utilizing resources(10% unemployment)? Banks don’t lend, people don’t spend. It is here that chartalists see this as a total waste and suggest government to increase aggregate demand. Who is getting what is a political choice. Excess private credit creation can cause demand-pull inflation just like excess government deficit spending. The difference between deficit spending and private credit creation is that government money doesn’t have the liability side so It is net financial asset, “free money” to the private sector.
Hello, I am new here, please be kind
Thank you for taking the time to write down this article. It is been incredibly helpful. It could not have come at a better time for me!
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