This is 24 minutes or so, but it moves fast…
I’m curious, in your text book in the ‘How Government Finances it’s Spending’ section, you state “Traditionally there are three main vehicles through which the government raises money: taxation, budget deficits, and inflation.”
However, if that’s true, how come massive spending bills, like TARP, the stimulus, the Iraq war, are not passed on condition of a bond deal or higher taxes? I mean, if taxes and deficits (bonds) are the only way to fund spending, then how come funding is not lined up first before the spending takes place? Does Congress confer with the bond market before passing spending bills?
Can you explain this is other words? I’m not understanding what you are asking. There is a debt limit, that Congress has to raise lest they can no longer spend money like drunken sailors. Yes, the Treasury did indeed have to sell bonds to cover the upfront cost of TARP etc. Is that what you’re asking?
how come massive spending bills, like TARP, the stimulus, the Iraq war, are not passed on condition of a bond deal or higher taxes?
Because taxes can be deferred?
Put the debt limit aside for a moment since it’s a politically driven self imposed limit, not a limit placed on the US by financial markets. The debt limit is irrelevant to my question.
“Yes, the Treasury did indeed have to sell bonds to cover the upfront cost of TARP etc”
Did it? Are you sure about that?
Was TARP passed on condition of a successful bond auction? Was there an unscheduled $700B auction that took place the day after TARP was passed? I guess my question is when Congress implements big spending bills like TARP, are these spending bills done on condition of a successful bond auction? Does the treasury schedule bond auctions immediately after big spending bills are passed in order to have the funds to spend?
AP, I don’t know the exact details of the answer. E.g. how much was in Congress’ “checking account” when they passed TARP etc. Are you asking me out of genuine curiosity, or do you think I’m totally wrong and you’re trying to back me into a corner? I don’t mind if it’s the latter, but I’m not going to bother digging up an attempted answer if you’re just trying to show what a fool I am.
“how much was in Congress’ “checking account” when they passed TARP etc”
Yes, this is probably a better way to ask my question. The chapter in your book implies the government must tax and/or borrow before spending, and so I was interested in how emergency spending bills like TARP get implemented with out emergency bond auctions or emergency tax bills.
So I guess my question is how much was in the ‘checking account prior to TARP passage? If it exists, where is the account located? How much is in that account now?
Maybe I have the facts wrong. Please correct where I go wrong. The US was running deficits throughout 2008. Pretty sizeable deficits, agreed? So when TARP passed on October 3rd, Hank Paulson got his $700B bazooka and basically a blank check. The treasury spent is first round of TARP capital on October 28. So far so good? Treasury auction dates and sizes are announced in advance. I went back and checked the treasury calendar, and no changes were made during October. No special auctions of $700B. No unscheduled or sudden increases in bond auctions. And I could not find any special tax bills that were passed as well. Did I miss something? Is that a pretty fair description?
So, what you’re saying is that money came from a ‘checking account’?
“Are you asking me out of genuine curiosity,”
If TARP was not paid with previously existing money, then how does that not constitute inflation? Or, how are you suggesting that TARP was paid for?
AP, I can’t look into this right now, but this is exactly the kind of thing I want to research for the class on the Fed that I am teaching. (I’ll blog my infomercial in a minute.) If I don’t come back to answer you here, please remind me in a couple of weeks.
Sounds great. Much appreciated. Thanks.
Just want to keep this on your radar screen. Looking forward to a response. Thanks!
I think what AP is getting at is that taxes and bond sales are not means the government uses to raise funds, but to control the money supply.
I have not read any MMT, but from following AP’s post on this and other blogs, I gather that chartalists argue the government does not engage in fiscal operations to raise money (i.e. taxes and bond sales). They strictly engage in monetary operations; governments are the source of money, and taxation and bond sales are means by which they control its supply.
A friend of mine with little interest in economics was watching this over my shoulder and instantly perfected a Jeff Tucker impression. Coming soon to Youtube.
Taylor Conant at EPJ has started his evisceration of the Chartalists like Warren Mosler and AP “Hut Tax” Lerner here:
Conant jousted with them for awhile after the first entry:
They have no familiarity whatsoever with Austrian School analysis. Their claims appear to be based upon the assumption that the fiat money banking system is unconstrained by ANYTHING. However, as Conant points out, they really have no economic theory whatsoever and their attacks on Austrians are always limited to saying that we don’t understand the “operational” reality of the fiat money banking system. My impression is that if what they are saying is true, then the system is even more criminal and corrupt that we originally thought and that anyone who supports it is morally challenged in the extreme.
Of course, all Austrian School analysis applies to Chartalist vision in spades.
Hey guys n gals, Jon Stewart ripped into Bernanke on his show. I was going to send this to my favorite economist in an e-mail but then I remembered that I never use e-mail.
I don’t think the free market is as complicated quantum physics.
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