Is Krugman Adding an Epicycle Regarding Debt Default?
In standard economic/financial analysis, without having libertarian views about government spending, I would think the standard answer would be, “If the US government defaults on its debt because of political squabbling, that is bad for the economy.” Just like, in standard analysis, government spending crowds out private spending, and government deficits raise interest rates.
But Krugman has been telling us for two years now that these are not normal times. In fact, just about everything you think you know about fiscal issues is the exact opposite when we’re in a liquidity trap.
Because of this, I would have supposed that Krugman would have to admit that if those stubborn Republicans actually triggered a debt default, that this would somehow create jobs. (Normally it would be bad of course.) Nick Rowe made an argument along these lines (read him in the original, I’m not trying to summarize him).
Ah but we can’t have that. The Republicans are always bad, whether in a boom or a bust. So here’s Krugman explaining why:
In fact, I’d argue that [a US government bond default] is in fact contractionary, because it raises interest rates even in a liquidity trap. How, you ask. Well, here’s a first cut.
What we normally say in a liquidity trap is that the Fed is keeping short-term interest rates at zero, which is as low as they can go because below that cash dominates bonds. And the Fed achieves that zero rate by being willing to buy short-term government debt whenever the rate threatens to rise above zero.
But now introduce the threat of default. This makes short-term debt worse than cash, unless it offers a sufficiently positive interest rate. Yet we’ve just posited that the Fed is ready to buy bonds to keep the rate at zero. So what happens? In a simple model, investors sell *all* short-term US debt to the Fed.
Then what? In practice, the hawks at the Fed might force Uncle Ben to stop the purchases, out of fear of too great an expansion in the monetary base. (Misplaced fear, but never mind). But suppose the Fed does in fact buy all the short-term debt. Then there is no longer a market interest rate on that debt. But there is still a “shadow” rate, the rate at which private investors would be willing to buy short-term US debt — and that rate can easily go well above zero.
This shadow rate, in turn, is — if I’m getting this right — the rate that feeds into the determination of longer-term rates. So we should expect rates to rise all along the term structure.
What gets tricky here is the question of whether private borrowing costs rise in tandem. For corporate bonds, maybe not. But the GSEs pay rates that are tied to the cost of government borrowing, and they are the main sources of housing finance, so mortgage rates would probably rise.
I like Rowe’s take on this, and not Krugman’s. Krugman has been pounding the table saying, “These Chicago School morons don’t even get basic macro. Look guys, draw your diagrams. Right now the market clearing interest rate is negative. The Fed can’t push rates negative. So that’s why we’re in recession.”
So, if the fear of default pushes up nominal interest rates, then the market-clearing rate can become positive. Meaning the lower bound is no longer binding. Meaning Krugman’s own case for Big Government falls apart.
Funny how Krugman only likes macro 101 when it supports his case.
A default on bonds will clearly be contractionary, since it is a tax on the private sector.
Not paying back principle and interest on US debt is not a tax on the private sector.
Paying back principle and interest is however a tax, namely, a tax on the portion of the private sector that either does not own any US debt, or does own US debt but is paid interest that is less than the amount they are taxed in order to pay back interest to other US debt holders.
The extremes are foreign debt holders who own US debt but pay zero taxes in US dollars, and Americans who own zero US debt but pay 100% on net in taxes which goes to paying off US debt holders.
Wrong. A default on government bonds is a tax on the private sector (including the rest of the world) by definition, since it is the destruction of net financial assets of the private sector. As any tax, it has distributional effects of course and not everyone will be equally affected. I know you don’t get it, but it doesn’t really matter.
Incorrect. “Destruction of net financial assets” is not a “tax by definition.”
Taxation by definition is the coercive acquisition of money by government from civilian’s earnings. Lending money to borrowers always carries with it a risk of loss and default, however small that risk is in the case of government debt.
Lenders who lend money to borrowers who then later default are not “taxed” by the borrowers.
Moreover, the private sector is not the only owner of US debt. Many foreign central banks and governments also own US debt. But no economist would say that foreign central banks or governments are “taxed” by the US government should the US government default on their debt.
I know you MMTers don’t get basic economics. You are entitled to your opinions, but you’re not entitled to your own facts.
Destruction of net financial assets of the private sector by the government is functionally equivalent to a tax, and that would include taxing foreign governments.
Since it is functionally equivalent to a tax, its effects would be the same, that is, contractionary which is what matters, not the fact that you don’t get it.
Destruction of net financial assets of the private sector by the government is functionally equivalent to a tax,
And the retreat begins.
You went from “by definition it’s a tax” to now “it’s functionally equivalent to a tax.”
Hahaha, you MMTers really have no clue.
Since it is functionally equivalent to a tax, its effects would be the same, that is, contractionary which is what matters, not the fact that you don’t get it.
It’s effects will not even be the same, because when the government defaults in its debt, that means less money needs to be taxed by the government in order to pay back the principle and interest to US debt holders, private and public.
Since the overwhelming majority of US debt is owned by the Fed, and foreign central banks, it means that the private sector will, relative to the money they “functionally” (to borrow your term) owe to the Fed and to foreign central banks, necessarily via taxation, will dwarf the money owed to them via direct ownership of US debt.
The fact that you don’t get basic economics seems to be a justification in your mind to believing that others should buy into your nonsense.
And just to clarify, I am not including the US debt owned by the primary dealers as “private debt”, considering the fact that the rate of flipping the debt, very soon after issue, to the Fed, which is really an arbitrage of risk free profits at taxpayer and US dollar holder expense, means that a huge portion of US debt owned by “the private sector” really isn’t even private at all, but an indirect holder and steward of the Fed.
No retreat. I sometimes forget you are what the french call a fly wanker (excuse my french).
And to clarify, I do not consider US debt owned by the primary dealers to be “privately owned” US debt, considering the shell game Ponzi scheme of them holding US debt for as little as days before flipping it right to the Fed for a risk free, taxpayer and US dollar holder financed profit.
No retreat. I sometimes forget you are what the french call a fly wanker (excuse my french).
If by “wanker” you mean demolisher of MMT propaganda, then yeah, I’m a “wanker.”
No, just a delusional fly wanker.
Gotcha, MMT demolisher.
OK kids, don’t know who started it, but let’s at least mix in some economic commentary with the pure name-calling.
The government bond is a financial asset that derives its value from the government’s promise to further expropriate the private sector in the future. Any mention of loss of “financial assets” due to a default on government bonds does not take into account the loss of future assets that would be expropriated or never come into existence due to an increase in taxation.
This is not a tax, nor is it equivalent to a tax on the private sector! It is a blessing for the private sector. It is scarce resources that will be saved from expropriation and reallocation from productive to non-productive activity. You are focusing too narrowly on some “victims” in the short term, not realizing all the other spared victims in both the short run and the long run.
The fact you equate a default on bonds with less taxes in the future proves default is functionally a tax on the private sector as a point of logic. The fact you think you are proving the opposite proves you have your logic backwards.
What’s totally wrong is thinking the government debt must be repaid. It mustn’t.
You are just equating any costs with taxes. In your lexicon, it seems that the two are the same thing. Drop the taxes argument. It’s futile. Look up “taxes” in a standard dictionary. As for costs, yes I said that there will be immediate costs on some people, on some more then others, and some will even gain in the short term. In the long run, the net benefit will be that of less taxes. Your analysis focuses too narrowly on what is only convenient for your argument, and your neglect all the other net gains that you now obviously choose not to see.
No, I am equating any destruction of net financial assets of the private sector by the government to a tax, which is what a tax really is even if you and the dictionary prefer not to call it that way.
A total default is a 100% tax on bond holdings payable in bonds.
Interesting. A tax is being defined as when the government stops paying its beneficiaries. So any proposed spending cuts are now also tax hikes because some people’s “assets” they thought they had in their accounting statements (real or mental) is suddenly valueless.
Do you see any difference between cutting social security entitlements by 100$ and leaving them as they are but taxing social security beneficiaries an extra 100$?
Of course there is a difference.
One is giving someone less money, and the other is taking money from them.
By your absurd logic, if I said to you that I am going to give you $5 million, but then I change my mind, it’s the same thing as if I took $5 million from you.
By your absurd logic, if I said to you that I am going to give you $5 million, but then I change my mind, it’s the same thing as if I took $5 million from you
No, in my example both the government and the social security beneficiaries end up with the same balance sheet in both cases.
In your example there is a difference which just proves again that you are an idiot pretending to be smart.
No, in my example both the government and the social security beneficiaries end up with the same balance sheet in both cases.
Your example is stupid, because anyone can make two scenarios equal by imagining a possible, counter-factual world to juxtapose alongside the real world.
I could do the same stupid thing by saying “I am going to give you an additional $100 to add to your money $X” thus creating a possible world, then I change my mind and say “I am going to take $100 from you” thus creating a scenario where you allegedly go from $X + $100 back down to $X.
Hey, they’re the same thing!!
You’re an idiot.
@ Mamoth,
“Do you see any difference between cutting social security entitlements by 100$ and leaving them as they are but taxing social security beneficiaries an extra 100$?”
Social Security is a wealth transfer scheme right? Which means at one point in time, only one person pays 100 bucks in, and another gets those 100 bucks out. So you can never target the same person at one point in time with a 100$ cut and with a raise of 100$ in taxes.
A 100$ cut will hit the current social security beneficiaries, and a raise of 100$ in taxes will hit the current payers. The incentive structure changes. That is a difference (not noticed from a balance sheet view though)
@ Mamoth,
And there is another difference. In scenario A, in which taxes remain the same and the payouts are cut, the whole program of social security is smaller than in scenario B in which taxes are raised. Which means, in scenario A a bigger share of total wealth is available for non social security demand compared to scenario B.
Sorry but where would the extra social security demand come from?
Example: There is Government, Jack and Peter. Jack is the beneficiary, Peter is the payer.
Original scenario: Jack gets 200$ payout from social security per month. This 200$ represent “social security demand” for goods and services in the economy. Peter pays in only 100$ from his 1000$ income. Social security is unsustainable this way. Government decides to balance social security.
Scenario A: Government cuts the benefit of Jack to 100$ per month. Social security demand in aggregate 100$ per month.
Scenario B: Government raises social security taxes for Peter to 200$. Social security demand in aggregate still is 200$ per month.
Demand for goods and services which comes out of social security funds is relatively smaller in scenario A than in B. At the end this merely describes the change in the incentive structure and therefore I think does not really count as an additional difference. So it is in fact only one point not two.
Anyway it is fatal to think A and B are the same. This would mean to think the economy would respond equally, no matter if government in my example cuts benefits and social security taxes to zero, or if they raise benefits and social security taxes to 1000$.
In one case there is no economy any more.
You realize that was not my example do you?
I am not sure because MMters switch in using the same word like taxing to actually mean different things done. One time you really mean raise taxes, and next time you use it to describe cutting of benefits as a tax.
I thought in this case you used taxing in the textbook sense.
Scenario A: “Cutting social security entitlements by 100$” = Cutting of Jack’s entitlements from 200 to 100$ per month. Correct?
Scenario B:” and leaving them as they are but taxing social security beneficiaries an extra 100$?” = Jacks 200$ payout per month remain. But taxes should be raised 100$. Since you cannot tax Jack since he is on the entitlement side, the only one whose tax you really can raise is Peters’s.
Of course if you meant by taxing not textbook taxing, but cutting entitlements, then you can “tax” Jack. But then you would merely be describing the same action with different words. And you would contradict “..and leaving them [the entitlements] as they are..” Because if you “tax” Jack you only can do this by cutting his entitlements. So what is it? Maybe you can make your example clearer. Who and what you tax or/and cut.
MamMoTh of course.. Sorry for spelling 😉
Strange the first post is waiting for approval…
Are you retreating now? You are right, my 2 scenarios are equal, so cutting spending or raising taxes can be exactly the same thing. Even idiots can change their mind.
cutting spending or raising taxes can be exactly the same thing
No, they are not the same thing.
One is the government taking less real wealth out of the economy by spending less unearned money, the other is taking more money away from those who earned it.
Does adhering to MMT require one to pledge allegiance to an idiot flag?
No, they are not the same thing.
You understand the difference between can be and are or are you such an idiot that you don’t understand a simple sentence any more than simple economics principles?
Does adhering to MMT require one to pledge allegiance to an idiot flag?
It’s not required, but you won’t be accepted anyway.
You understand the difference between can be and are
Yes, and they are not the same thing, which implies they cannot “can be” the same either.
I hate it but I’m siding with MamMoTh on this one.
The bond is a promise and has value only whilst that promise is viable. A broken promise has no value so the stored value of the bond is lost out of the hands of the bondholder. At the same time, government, once burdened by the weighty responsibility of keeping it’s promises is relieved of that burden.
Therefore wealth is transfered from the bondholder to the government that made the promise in the first place.
Some percentage of US Treasury bonds are held by mom & dad patriotic Americans. They worked, they earned money, they put their money into treasuries, they expect to one day send their teenage son to study under Krugman. If the bonds default, the family becomes poor, and that little boy will only ever get to see his Krugman on little scraps of the New York times that he can scavenge out of people’s gardens (where they are commonly used as mulch).
*sob*
There is no question that value will be lost, and that wealth will be transferred, but this is not taxation, and the transfer is not necessarily from citizen to government. It could be, but not always. Some US debt ends up transferring wealth from citizen to citizen, via the state.
For every US bondholder who is defaulted on, there is some American in some place at some time who owes less debt in their name through taxes.
I think you have just indirectly admitted that it IS taxation, via your last paragraph.
Put it another way: the book always balances, so if the cash does not balance (i.e. if paper money is being created or destroyed) then the book forces itself to become balanced by means of someone defaulting on a promise. Correct accounting would impose a writeoff entry against something.
I would regard the destruction of treasury bonds to be much on a par with the destruction of FR notes or other cash. Suppose government just decided that every note with a serial number ending in “3” was illegal tender and must be returned immediately with no compensation — same thing.
My last paragraph is not an indirect admission that default is a tax. It is an argument that default will necessarily place non-owners of US debt into a position of owing fewer tax dollars which was originally going to go to the US debt holders.
Your last paragraph is rather confusing to me. First you say that US debt is the same thing as dollars, then you say that destroying dollars owned by people is the same thing.
You are making the same mistake as Mammy. You are treating the absence of an expected cash flow to be equivalent to the taking of an existing sum of cash. They are totally different phenomena.
Dollar notes are a promise made by government to the holder of the note.
Treasury bonds are a promise made by government to the owner of the note.
Destroying a dollar note is a broken promise.
Defaulting on a treasury bond is a broken promise.
Owning a dollar note that is taxed is not the same thing as owning a contract that is broken.
On what basis is paper money (i.e. cash) not a contract?
On the basis that money, cash, is the final means of payment and is not a credit instrument that implies a contingent obligation remains.
Right, because you’re too, um, unsophisticated (let’s put it that way), to see that your “insight” is just the result of a particular choice of definitions and not because a government default somehow has real effects on the private sector’s ability to produce bread.
The bond default is a one-off tax, not ongoing taxation (such as an income tax rate).
Not giving someone an expected cash flow is not the same thing as taking their existing owned money.
Money itself is only an expectation of being able to spend it.
But if you have money, it’s your property.
I am quite sure that if government does default on their Treasury Bond obligations, they will let you keep the certificate (i.e. your property) as a memento.
If they default on their debt, your dollars will stay have purchasing power.
How about this?
Supposing the government printed heaps of extra cash… then actually PAID the bondholders in the hand with cold hard cash!
That would be inflationary right?
THEN, about two minutes after they paid out the bonds, the government put a gun to their heads and took back the cash and burnt all the notes.
That would be tax right? Cancels out the inflationary aspect cos those bondholding bastards never got to spend a cent.
Yes that would be a tax, because the taking of the cash at gunpoint is coercive.
OK, then the two transactions above combine to make one single transaction — that being a bond default.
Exactly the same outcome.
The same net outcome using two very different actions does not mean you can equate the two different transactions.
The ends do not justify the means, I guess is what I am saying.
Taxes have never had any effect on the ability of the private sector to produce bread, only on its ability to buy it.
If your profits are taxed away, you have less money to save and invest in ovens. Of course taxes impair both production and consumption.
Whew!
Here I thought farmers got taxed on the wheat they produced, the logistics company on the gas they consumed, and the bread makers on the profits earned from selling to retailers.
Thanks for giving it to us straight. I’ll let my boss know that he won’t have to pay taxes this year!
Taxes have never had any effect on the ability of the private sector to produce bread, only on its ability to buy it.
Bread isn’t the only thing taxed in the intertemporal production structure of producing bread.
Taking money from all the independent producers in the production structure of making bread, reduces the amount each producer can invest, which reduces the real supply of the capital in the production structure, which manifests itself in a reduced supply of produced bread.
In order to make this as simple as possible for you confused MMTers, imagine wheat farmers being taxed 100% of their incomes. This will collapse the production of wheat, and hence bread makers would not be able to buy wheat, which means they cannot make any bread.
Taxes affect the willingness to produce something, not the ability to do so.
Taxes affect the willingness to produce something, not the ability to do so.
No, taxes affect the ability to do so by reducing the money and hence purchasing power that able and willing producers have in investing and thus producing more capital.
If I am fully able and willing to produce a given quantity of flour, but then I am forced to pay more taxes, then I will have less money available to invest in flour production, and the quantity of flour that I can produce, given my full willingness, will be diminished.
One cannot overcome constraints due to economic laws by psychological willingness. I am binded by the fact that I cannot produce at a loss forever without creditors coming to take control of my assets.
It’s truly unbelievable to me how many economists/financiers (never mind the politicians for now) are insisting that the treasury has to take out a Visa to pay the Mastercard. Are they aware of what constitutes a Madoff scheme (previously referred to as Ponzi schemes)
Haven’t you heard? These are crisis times, and crisis times calls for totally insane economic prescriptions, I mean crisis economics.
Hate to defend Krugman but when we talk about “the” market clearing rate, I am assuming that we are talking about the risk-free rate. If a default premium is added to the short term treasury bill rates, then those rates can obviously no longer be proxies for the nominal risk-free rate. While they may rise to positive levels, that wouldn’t necessarily affect the market clearing risk-free rate.
My inclination is to think of the potential for a default or an actual default in terms of its effect on the demand for money. I am thinking that default would, in the short to medium term, worsen regime uncertainty and therefore increase the demand for money and potentially the demand for monetary assets other than US dollars. Presumably, that would not be good for investment/employment/recovery, etc. Although I suppose that if there were to be a flight from the US dollar, there might be a follow-on positive effect via the depreciation.
David nh wrote:
Hate to defend Krugman but when we talk about “the” market clearing rate, I am assuming that we are talking about the risk-free rate.
I confess I’d never thought of it before now, but I don’t see why this needs to be the case. In any event, it’s not what Krugman is saying. If we take your position, then even if the actual, nominal market interest rate on T-bills is 1%, it could still be a liquidity trap where the 0% lower bound is binding. But that doesn’t make sense (since we’re not butting up against 0%) and Krugman in his example has the Fed keeping the nominal rate at 0%.
To conclude, I think you’re wrong in saying it’s the risk-free rate, but even if you’re right, I’m pointing out that Krugman’s defense is different from what you are saying (I think).
S&P and Moodys have both said that they will downgrade the U.S.’s credit rating if we default. Suppose that happens. How would a downgrade effect the ability of banks to meet their capital requirements?
“We do too meet capital requirements! Look at all the T-bonds we hold! … oh, crap!”
Question:
Has Krugman actually said something along the lines of “Everything you know about fiscal policy is the opposite during a liquidity trap” or even to give you the benefit of the doubt, actually pointed to at least a few other things besides interest rates that act backwards in a liquidity trap? I’m honestly just wondering, because if not it would appear like you pulled a slippery slope fallacy with the line:
“Because of this, I would have supposed that Krugman would have to admit that if those stubborn Republicans actually triggered a debt default, that this would somehow create jobs.”
Danny, he definitely has said that. I can’t find it right now, but maybe someone else can (I’ve linked to it from this blog before). He calls it Alice in Wonderland economics, and says stuff like: “Normally you want the government to be careful about how it spends its money, but not now.” (paraphrase)
He’s also said that “green” regulations or taxes that would normally hurt conventional economic growth (while promoting overall efficiency due to externalities) will actually boost even conventional growth now, because they’ll force businesses to invest in insulation etc. He’s even said that some protectionist policies make sense in this environment.
Continually poining out Krugman’s hypocrisy would be like going after low-hanging fruit if he weren’t so popular as to make it worth it every time. Although even though I’ve learned a lot about economics and finances in the last few years, this back-and-forth is beyond me.
Right. The government steals land, money and opportunities from its people, and now its a “tax” to tell the government it can’t give it to its buddies who helped finance the racket.
If I loan money to a thief to rent a getaway car, and the thief gets caught after breaking millions in merchandise, who thinks I should get my money back?
Its a cruel world that maybe Timmy cant go to University because his parents speculated in government bonds (aka theft financing.) But giving money to Timmy would mean that the tax burden on jimmy’s family will be higher, who didn’t participate in the racket, now jimmy cant go to school, but who cares, jimmy wont be on the 5 o’clock news to talk about his story.
I don’t think it’s going to be that bad for Timmy’s parents. The college fund is mostly gone, but it’s the same way for everyone, so they’ll find tuition costs have “mysteriously” dropped. Ah, positional goods…
Does this make any sense: http://factsandotherstubbornthings.blogspot.com/2011/07/some-good-old-fashioned-keynesianism.html
This puzzled me… but what I realized bothered me most was this idea from Nick that default is comparable to inflation and that we can treat it as such in the IS-LM model. But it’s really not (after all – why do politicians seem to prefer inflation to default?).
In a way I’m taking the MMT position (although not an MMT position that should be hard for people in general to take). This is a destruction of financial assets. It’s not clear why that shifts the IS curve up the way Nick describes.
(after all – why do politicians seem to prefer inflation to default?).
Because inflation allows the surreptitious theft of wealth which is why politicians prefer it to default and/or taxation. That is the purpose of the central bank. The purpose of Keynesianism was to provide a semantic jargon-filled cover to that process of theft and fraud which is the essence of the fiat regime.
To concepts like suicide, homicide, and genocide, we should add ‘semanticide’ – the murder of language. The deliberate (or quasi-deliberate) misuse of language through hidden metaphor and professional mystification breaks the basic contract between people, namely the tacit agreement on the proper use of words. Thus it is that the ‘great’ philosophers and politicians whose aim was to control man, from Rousseau to Stalin and Hitler, have preached and practiced semanticide; whereas those who have tried to set man free to be his own master, from Emerson to Kraus and Orwell, have preached and practiced respect for language.
http://lewrockwell.com/burris/burris18.1.html
If Krugman claims that “there would still be shadow rate,” [emphasis mine] despite Fed policy, which investors presumably use in their investment choices up and down the term structure, then wouldn’t that imply that he holds the position that there is ALWAYS a “shadow rate” despite Fed policy, which means he holds that interest rate management is actually superfluous?
Why then would he ever claim that central banks should lower short term interest rates in order to stimulate economies? Investors would presumably just utilize the “shadow rate”, despite the Fed’s policy.
Is this another Krugman Kontradiction?
Excellent point.
Just for the record and to keep my name and conscience clear, when I supported Ole MMT-Head above, I only support him on the definitional matter that bond default is effectively really tax. I do not support him on his deeper assertions re. the bigger picture effect of taxation on the economy.
I believe that inflation is tax (by stealth) eroding the value of savings. I believe that bond default is tax (by broken promise) rapidly eroding savings of bondholders; and direct confiscation of assets (be they physical assets or cash assets) is tax by the traditional method. Tax is tax is tax. It’s the only self-consistent stance.
All of these methods can support government spending, not necessarily spending at the exact same day that the tax is leveed.
Tel, your posting history leaves no doubt to the fact that you are far above Mammy in terms of your knowledge, your ability to think and speak clearly, and in your contribution-oriented style of posting.
I just think you are wrong about calling bond default a taxation.
In order for an action to be called a taxation, the action must be coercive in nature.
Inflation can be considered a tax, because there is coercion behind the legal tender laws that backstop the fiat money system, and it decreases the purchasing power of individuals through such coercion.
Direct taxation is obvious and a tautology, so no need to consider this.
Defaulting on debt is not so obvious. The question that I ask is, when the government defaults on their debt, does such an action carry a coercive component to it? I will submit that there is no coercive component attached to defaulting on debt. Debt is a risky investment. Even government debt is risky. As such, once a lender lends money to the US government, they necessarily incur the risk of losing 0% to 100% of their investment, however remote the higher loss percentages happen to be.
One is not obligated to lend money to the government. If the laws were such that citizens were legally required to lend money to the government, and then the government defaulted on the debt, then it would make sense to call the default a tax, because the action contains a coercive component. The government used force to collect money, but then didn’t give money back to the forced lender.
If we start calling broken promises as such a tax, then regular civilians would have to start being considered tax collectors for all the broken promises they make with each other. Every borrower of money who defaulted on their debt would have to be called a taxman. Clearly that cannot be right because only governments can tax.
* you should only be concerned about how he is far above you in terms of knowledge, and ability to think and speak clearly.
* legal tender laws do not backstop fiat currencies, taxes do
* taxation is not required to be coercive
* taxation is the destruction of net financial assets of the private sector. as a point of logic the private sector cannot tax itself, any broken promise does not destroy anything else than the promise.
I think that MMT is the best thing that has ever happened to Austrian economics. I’ve long maintained that our biggest problem is getting the public to accept in their hearts and in their heads that inflation is caused by “The Printing Money” by “The Ben Bernank” or funny money dilution or whatever you want to call it. It is the result of purposeful government policy and could be stopped immediately and permanently. The public still thinks that inflation is just “one of those things”, a mysterious force of nature.
The public is not going to understand malinvestment if they don’t understand the cause of inflation. At the same time, once the public understood the cause of inflation, I think they could easily understand Cantillon Effects (perhaps not the term, but the idea) and malinvestment and would they would be outraged.
The Keynesians have always been coy about the nature of their program. Let the MMTers scream their “program” from the rooftops. If it helps the public understand the nature of inflation as caused by funny money dilution, it’s nothing but a good thing.
Yeah but with MMT, the good comes with the worse.
They’ll start screaming that because “private net savings” (which is really just an increase in people’s cash balances brought about by inflation) cannot increase without government deficits, then in order for private sector to save on net, the government has to run a deficit.
The laymen will hear this and will more than likely not be able to break through the confused and bungled thought process that led to such an accounting tautology, and they will connect the alleged need for net savings (i.e. inflation) that they always hear about, but not understand, as requiring a need for government deficits, which as voters they can chirp for with great success, because politicians are only too happy to live as parasites off of the voters.
Every time an MMTer makes the above claim, there has to be an equivalent Austrian refutation that the economy does not need to save out net income thus creating “net savings,” in order for the economy to grow. Saving out of net income only continues to take place in the aggregate precisely because the government keeps increasing the money supply. If the government ceased inflating, then as people save out of their net incomes, their accumulated savings grow and grow relative to their net income that eventually a point will be reached where people will stop saving out of their net income, and just live off their net incomes in totality, comfortably ensuring that their accumulated savings remain in the same ratio as their net income. Economic growth will then continue on the basis of gradually falling prices (and costs) of capital goods, as more and more are produced into the same aggregate demand.
I’m not saying that we should ignore or welcome the MMTers. If people are so stupid that they will buy the MMT narrative, we’re doomed as a civilization anyway.
I simply submit that after 40 years of trying to warn people that the fiat money regime is illegally and immorally detached from everyday concepts of finance, the MMTers scream to the heavens that it’s detached from everyday concepts of finance, as if that’s a good thing. And they come onto Austrian blogs and tell us that, as if we didn’t already know and as if it’s a good thing.
I agree, the main difference between MMT and Austrian economics is one of emphasis, rather than one of observational facts.
MMT believe their sectoral balance equation is the deepest, most fundamental key component of economic understanding and pretty much everything else can be ignored.
Austrians believe that pretty much everything else that happens in the economy is of far greater significance to economic analysis than the stupid MMT sectoral balance equation.
It’s a bit like two football teams: one of them spends the entire match measuring exactly where the goalposts are, checking that those posts aren’t moving, counting the number of players on each team. The other side primarily focus on where the ball is and just kind of glance at the goalposts now and then. Neither team is exactly wrong, just difference of emphasis.
legal tender laws do not backstop fiat currencies, taxes do
Then explain why foreigners who pay no US taxes would find value in holding US dollars.
You MMTers are out to lunch.
US taxes are collected only in US dollars via legal tender laws.
taxation is not required to be coercive
Taxation is by definition the coercive confiscation of property.
taxation is the destruction of net financial assets of the private sector.
No, you’ve already been refuted on that point. Merely repeating it isn’t going to make it any more true.
as a point of logic
Did anyone else giggle?
the private sector cannot tax itself
If this is the extent of MMT thinking, then good lord is the first M must be a practical joke.
any broken promise does not destroy anything else than the promise.
A is A. Tautologies and tautologies. Idiots are idiots.
Then explain why foreigners who pay no US taxes would find value in holding US dollars.
For the same reason americans who pay no US taxes do: those who faces taxes will accept them.
Taxation is by definition the coercive confiscation of property.
Not by definition. You don’t write the definitions.
No, you’ve already been refuted on that point.
I have not. You can try, but reality is on my side. Taxation is functionally and economically the destruction of net financial assets of the private sector. So as a point of logic, the private sector cannot tax itself, even if idiots don’t get it.
For the same reason americans who pay no US taxes do: those who faces taxes will accept them.
So foreign central banks that hold a non-decreasing supply of US dollars are doing so because they are magically using them to both keep as cash reserves and using them to buy US goods and services.
Not by definition. You don’t write the definitions.
You use the phrase “by definition” all the time you hypocrite.
For example, you did so in this very thread here:
http://consultingbyrpm.com/blog/2011/07/is-krugman-adding-an-epicycle-regarding-debt-default.html#comment-21140
Sorry Mammy, but taxation is by definition a coercive confiscation of property. You can deny this all you want, but you won’t ever make it not true.
I have not.
You have, not only by me, but my countless others. You’re a perpetual disaster rivalling Katrina, except Katrina had the decency not to repeat its disaster over, and over, and over again.
You can try, but reality is on my side.
How can reality be on your side when you hold convictions that are not consistent with reality? Are you a wizard?
Taxation is functionally and economically the destruction of net financial assets of the private sector.
That’s just another way of saying that taxation is functionally and economically the state’s coercive confiscation of private property from its legitimate owners.
So as a point of logic, the private sector cannot tax itself, even if idiots don’t get it.
There’s that tautology again.
Are you on troll autopilot?
I completely agree, but I believe we differ on the exact definition of what is “coercive”.
I’m working on a longer answer to that above.
Hmm, when I say “above” what I mean is “below”. This is a liquidity trap and the normal rules are reversed.
I think this all comes down to the somewhat rough edges in the definition of what is “coercive” and what is voluntary.
I agree that no one is forced to buy government bonds, however they do buy those bonds with some reasonable expectation that they are safer than many other investments. The government has fostered these expectations with its statements and its actions.
Let’s go off track for a moment and consider hypothetical use-cases for brute force. Suppose I was to push you over a cliff, then run around to the bottom where I find your skull is smashed and I take your gold tooth for myself. Pretty cut and dried example of coercion used for personal gain… we surely agree on that. Complete and blatant violation of the principle of non-violence.
Now let’s say I dig a pit into the driveway at your house when you are away, then I carefully cover it up and conceal the pit. You come home, fall straight down, smash your skull and I carefully climb down and take your gold tooth. Probably also coercion in many people’s books… but I didn’t actually push you into the pit, you walked into it yourself.
Now let’s say I don’t dig a pit at all, but I know there is an old mine shaft that’s overgrown and easy to fall into, and it’s only a little way off the side of the road on the way to your house. I just beat down the path a bit leading to the mine shaft and put up a sign blocking the good road saying, “WARNING! DETOUR!” and you see the sign, follow the beaten track, fall into the old mine shaft and crack your skull that way.
Hell man, I didn’t push you, I didn’t even dig the pitfall, you just walked right into that one. After I have properly disposed of the detour sign, then to all the world it’s just an accident. God knows where that gold tooth went, I didn’t even know he had any!
Now if I promise you something, of course you take into account that I might not be worthy and there is some risk I could personally default on my promise. I might die by accident, become too sick to work. I might get drunk and wake up having got a dozen girls pregnant on one night… these things happen, we all understand. Should I default on my promise to you, that’s not a tax, that’s transfer of wealth from you to me (i.e. between two private individuals).
Thing is, if I promise you something and then just don’t wanna pay, not because anything really happened but I just don’t feel like it… that is coercive, sure as if I pushed you over a cliff in my books. It’s still a transfer of wealth from you to me, but it’s also a coercive transfer of wealth, because I really should be paying you back.
Sun Tsu in “The Art of War” has a constantly recurring theme on the use of deception as the most fundamental weapon of war. Something to think about in this context I believe.
Hell man, I didn’t push you, I didn’t even dig the pitfall, you just walked right into that one. After I have properly disposed of the detour sign, then to all the world it’s just an accident. God knows where that gold tooth went, I didn’t even know he had any!
Yes, I will agree with you that there are certainly gray areas in the context of coercion, and I appreciate how you are trying to connect such gray area arguments to explain your position regarding government bond default. I have to admit, when you have control over a printing press, then not paying back principle and interest to lenders does seem to be a form of coercion, but my alarm bells also tell me that if the government did inflate their way to paying off the lenders, then they would definitely be coercing holders of US dollars by stealing their purchasing power. So it may be the case that defaulting in the strict “not paying” sense and defaulting in the indirect “inflation” sense, would make coercion inevitable.
Indeed, even if the government paid back the debt through taxes, then it would still be coercion, because they would have to coerce the taxpayers.
I think I now know why we are disagreeing with each other. It’s because we have already taken for granted that coercion takes place, and we are asking if a further action that itself is based on coercion, is itself coercive. I say it’s not, you say it is. So in a way, you’re right to argue that coercion is present with bond default, but then there is also an aspect of non-coercion if debt default is considered in isolation (which is probably a dumb thing to do), because such a risk is incurred by any lender of money, it cannot be avoided.
My mind is saying no, it’s not coercion to default, but then again it was coercive to begin with, so it’s like we’re arguing over a torturer and a rapist torturing and raping each other, and then asking who is coercing who if one of them punches the other in the face. Is he coercing the other for doing so? He’s getting tortured (or raped) by the other, and so his actions can be viewed as non-coercive (if considered in the context of rape and torture), and it could be considered coercive (if considered in isolation).
I think the principle of proportionality would perhaps be of some use in the debt default question.
Thing is, if I promise you something and then just don’t wanna pay, not because anything really happened but I just don’t feel like it… that is coercive, sure as if I pushed you over a cliff in my books. It’s still a transfer of wealth from you to me, but it’s also a coercive transfer of wealth, because I really should be paying you back.
The risk of default on debt includes ALL conceivable reasons why the borrower would default. Yes, even “screw it, I’m not paying” is a reason. In the market, credit worthiness is what lenders look for in borrowers. Every lender faces the possibility of, and hence incurs the risk of, the borrower just not paying it back because he doesn’t want to. This is why bonds typically have covenants attached to them, so that the lender can guard against such blatant refusals of the borrower to pay. Collateral, minimum EBIT to debt ratios, seniority in debt repayment schedules, etc.
I will have to remain in the position of holding that bond default, even defaults that contain the reason that you suggested, is still not coercion.
Where coercion would enter the picture with a bond default is if the borrower and lender agreed to some covenant, and the borrower broke the covenant, but then refused to abide by the contractual agreement to, say, turn over assets to the lender, or whatever other property the lender can prove the borrower owns but refuses to turn it over as agreed.
But with federal US debt (not sure about state debt), there is no collateral, and no covenants, it’s just naked debt that is backed only by the “full faith and credit” of the US government. Thus, if the government defaults on their debt, even if it is for the reason you suggested in your example of “screw it, I’m not paying” then it is not coercion, because there is no contractual arrangement present in bond contract that would give the lender any legal recourse to getting some value back. His money is, unfortunately, lost.
Your argument seems to rest on the conviction that the psychological beliefs of the lender regarding the credit worthiness of the US government is somehow relevant to the legal implications of bond default and whether or not a contractual agreement was broken in the event of default. But thankfully you realize that there is a small, but certainly positive, risk of default even for sovereign debt.
I don’t consider US debt to be a safe investment at all, especially long term debt. I think that investment is suicide. But the US government has defaulted on their debt in the past, they just inflated their way out of default. It’s like paying back your Visa bill by counterfeiting.
I agree with you that we are at the stage where coercion is inevitable, and that’s just what happens when the government spends stupidly large amounts of money that it doesn’t even have.
I also agree that walking up to Joe Public, putting the gun to his head and cranking up their tax in a direct way is blatant coercion and therefore the greater evil. What did Joe Public do wrong to deserve such treatment?
The bond holders are (at least to some extent) partly responsible for their own position, and many of them (e.g. Chinese govt and Fed Reserve) are quite big enough and sophisticated enough to take care of themselves. I think it is still coercion to come along with a “just don’t wanna pay” attitude toward a promise, but I can accept that the link is more subtle than the blatant direct confiscation of assets — however the overall effect is the same, and overall effect is what matters.
Possibly there’s some kind of end-game behind the idea of bondholder default. If the bondholders take a savage haircut, then their blood will be cold next time government holds its hand out for cash, which in turn will throttle spending early rather than let it get this far.
I was reading Allen West’s suggestions for handling government debt and he was pushing for the “staged shutdown” idea. All spending gets a priority letter A, B, C… at the time it goes through congress and there are percentages of the debt ceiling that automatically slam down the chopper on spending at a given priority level (e.g. 50% of debt ceiling chops all the D’s, 30% of debt ceiling chops all the C’s, etc). Presumably you could also introduce phases where the interest payments to bondholders get reduced and most importantly you could state those thresholds right upfront so everyone is on the level with what’s gonna happen.
Keep your eye on Allen West, he’s a very interesting man. But I digress.
Yes you have a valid point, scalping the bondholders falls into a different moral category to regular taxation. Calling them both “taxation” tends to imply moral equivalence, even though both options do effectively result in accounting equivalence.
Slightly off topic, but we all need to Keep Up With The MMTers.
From Lord “Spiro Agnew” Keynes blog, a cornucopia of MMT wisdom:
http://socialdemocracy21stcentury.blogspot.com/2011/07/some-miscellaneous-links.html
From Bill Mitchell:
The US government budget is not remotely like a family/household budget. Households have to finance their spending, the US government does not. Households use the currency that the US government issues (under monopoly conditions).
No tax dollars go “toward paying off the interest on our loans”. Please read my blog – Taxpayers do not fund anything– for more discussion on this point.
A government that tries to “balance its books” while the external sector is draining demand and the private domestic sector is trying to save to reduce its exposure to debt (after the credit binge) will force businesses to close up shop and sack workers. Government deficits put downward pressure on interest rates.
There is also a video of L. Randall Wray saying that Ron Paul is right about something.
Also, is “coin seigniorage” as bizarre at it appears?