Tom Woods Talks MMT With Me
Here. Two things:
(1) I misspoke early in the interview, when I confused Abba Lerner with Oskar Lange. They both advanced the “market socialist” response to Mises during the celebrated Socialist Calculation Debate, but it was Lange (not Lerner) who wrote (somewhat tongue in cheek):
Both as an expression of recognition for the great service rendered by him and as a memento of the prime importance of sound economic accounting, a statue of Professor Mises ought to occupy an honorable place in the great hall of the Ministry of Socialization or of the Central Planning Board of the socialist state.
But just to be clear, I was right that Abba Lerner is the forerunner to today’s MMT guys.
(2) I summarize my view on MMT near the end of the interview like this:
“[T]hey run around with these accounting tautologies that yes, technically are accurate mathematically, but how they deploy them in policy discussions is completely misleading.”
“Tom Wood” or “Tom Woods”?
Okay,
I clicked the “here” link at the top of this article and was taken to Schiff radio. I listened to the Tom Woods/Bob Murphy discussion. It was good and I think Bob Murphy needs to write a book expanding his last statement. Title it “The difference between MMT theory and practice.” Socialist talk a good game but their ideas always result in death.
Now onto my question. I listened to some other shows about deflation, good stuff. Then I listed to the brand new David Friedman interview. Good stuff. I think there should be 2 camps. Interventionist and non interventionist, or maybe economist versus socialist. There are far too many sects and divisions. It similar to Christianity. Rather than focus on God,Jesus and The Bible, church/Christians want to be unique/special and end up focusing on themselves.(ego,lucifer) We economist are talking past each other. Our differences are minor and we should let freedom be the guiding light, not a club or cult. We are letting them win. We believe in an economy, they believe in interventionism. They believe in the guns of government. We believe there are economic laws, although not testable in same ways as natural science but never the less, we don’t want to bang our heads against the impossible. They believe nothing is impossible and ignore all evidence to the contrary. Economics do not exist in the mind of an MMT. They say the word economic, but it is simply lip service.
Oh yea I had a question. I accidently closed the Friedman interviews. I tried to go to Tom Woods website and find the radio show again ( great new site btw) and I could not find the radio show link. Sure there is learn more tab but nowhere at Toms new site is a simple link to get to the radio show.
Where is it?
Actually, it is because socialism cannot be talked as a good game, that it results in death.
Theories that cause death when put into practise are not “good” theories.
But we don’t even need to impose a world socialist state before we can know what can and cannot be done in such a system. We can know a priori that prices for capital goods would not exist, and thus we can know a priori that cost accounting would be an impossibility.
Bob Murphy said:“[T]hey run around with these accounting tautologies that yes, technically are accurate mathematically, but how they deploy them in policy discussions is completely misleading.”
I sincerely said Bob should write a book.
Title: The difference between MMT theory and practice.
Sub Title: Socialist talk a good game but their ideas always result in death.
I see your point that Socialism never needs to be put into practice to understand the consequences but I think it has been tried and is still tried. I think the result is always the same, human suffering and death. Either by misallocation, population boom then starvation, lack of new birth, or just plain murder, etc.
The original point I was trying to make is that Bob is onto something. MMT worshippers can prove their theory’s on a chalk board but real life experience does not hold up. I think that is what Bob was trying to say? Maybe Bob was saying that they look good on the chalk board but they bait and switch at deployment? Well now I am not sure.
B/C MMT’ers conflate nominal terms with real terms.
Top of the page, all the way to the right under the search button is a link labeled Podcast.
Thank you. I saw podcast and did not equivocate it with radio show. I forgot about his internet thingy, I guess Schiff radio is all internet.
“I saw podcast and did not equivocate it with radio show.”
At the risk of being a grammar Nazi I think you meant to write “equate” instead of “equivocate”. However, the use of the technical term “thingy” is correct and I hope no one here equivocates on that point.
You are correct. Equivocate was the wrong word, not even close. Wonder how many times I have uses equivocate incorrectly,duh.
.
http://www.tomwoodsradio.com
You can also subscribe on Itunes!
Thank you.
I just had a site redesign done, and it will have a big and obvious link to the show. To get to the show, btw, just go to TomWoodsRadio.com.
I still get the show intro stuck in my head…….
especially
The Tom
Woods
Shooooooww
then wicked base line
Well, Geddy Lee is a pretty wicked bassist.
Bob Murphy,
In the interview you said the following:
“Suppose the government comes up to me and gives me a million dollar IOU. So now I’m holding a treasury bond and Uncle Sam’s going to give me a million dollars. So I feel rich; I have a million dollars more now and my net financial assets have gone up. Now next year to pay that off Uncle Sam points a gun at me, takes a million dollars from me at gunpoint and then redeems that bond – it gives me the million dollars and takes the treasury back. Clearly that process didn’t make me richer, and that’s what happens in the aggregate when the government runs a budget deficit with the rest of the world”
So in your example you own the following:
(1) Assets:
$1 million Treasury bond
$1 million currency
Then Uncle Sam taxes you $1 million, and redeems the Treasury bond by paying you $1 million. So now you have:
(2) Assets:
$1 million currency
Question: where did the $1 million currency in (1) originally come from?
FM.
Or more politely the magic mandrake machine.
Question: where did the $1 million currency in (1) originally come from?
http://en.wikipedia.org/wiki/Mandrake_the_Magician
Mandrake is a magician whose work is based on an unusually fast hypnotic technique. As noted in captions, when Mandrake “gestures hypnotically”, his subjects see illusions, and Mandrake has used this technique against a variety of villains including gangsters, mad scientists, extraterrestrials, and characters from other dimensions. Mandrake also possesses psychic and telekinetic powers, can turn invisible, shape shift, and teleport periodically. His Hat, Cloak and Wand passed down from his father Theron possess great magical properties which in time Mandrake is figuring out how to use.
The Mandrake Mechanism is the method by which the Federal Reserve creates money out of nothing; the concept of usury as the payment of interest on pretended loans; the true cause of the hidden tax call inflation; the way in which the FED creates boom-bust cycles” -The Creature from Jekyll Island, G. Edward Griffin
actually I was hoping for a response from Bob Murphy.
I can’t speak for Murphy, but I think in this case you are hypothetically assumed to already have the initial 1 million.
So, a million might be an overly high number that causes people to miss the point. Make the number ten bucks and try the analogy again. The government comes along and gives you an IOU for $10. Then an IRS agent comes along and informs you that there’s a new tax you haven’t paid yet that costs exactly $10. Then the government redeems its bond and pays you the $10 from the IOU and takes the IOU back. You’re right back where you started from, except that on the aggregate, the guys who write the IOUs and the IRS agents all are getting paid salaries, so overall, the nation as a whole comes out a loser, as the taxes collected must, by definition, exceed the benefits provided due to overhead costs.
P James, well if it’s in the current world, it came from the Treasury.
But I can re-do the example where the government has nothing to do with money, and you start out with 100 ounces of gold coins stamped by the Selgin Mint. Then the government gives you a Treasury bond promising to pay 100 ounces of gold next year. So you feel great, because your net assets just went up by (almost) 100 gold ounces (according to MMTers). But next year the gov’t takes your gold coins at gunpoint, then hands them right back to you to redeem the Treasury bond.
So at the end of this example the government debt is zero and the budget is balanced. Which is not what MMT recommends, is it.
Wait a second… You’re a fan of MMT, P. James, and that’s the way you’re dealing with my example?
OK by the same token, in my example there is only one person. But MMTers have in mind a world with more than one person. So clearly my argument is irrelevant.
Bob, the number of people in your example is not relevant.
MMT describes the real world, in which the government issues its own currency (i.e. the dollar in the US).
If for simplicity you divide the world into two sectors: the government and the non-government, it is obvious that for the non-government to be able to accumulate the currency (or financial assets denominated in that currency) in net positive amounts, the government has to spend more of the currency than it receives in revenue, i.e. it has to run a deficit. Given that the currency is a liability of the government, this means that the government’s net debt has to be greater than zero for the non-government to accumulate net financial assets denominated in the currency that are greater than zero. The non-government’s net accumulation of financial assets equals its net financial wealth.
In your first example (from the interview) you assumed that you already own 1 million dollars in currency. This means that the government debt already equals 1 million dollars, so the government must have previously run a 1 million dollar deficit. In your example the government then increases its debt to 2 million dollars by giving you an additional 1 million dollar Treasury bond, so now your net financial wealth equals 2 million dollars. Then the government taxes the 1 million dollars in currency from you, and redeems the bond by paying you 1 million dollars in currency. So now the government debt is back to 1 million dollars and so is your net financial wealth. This is all perfectly consistent with MMT. However, you do not give any reason for why the government chooses to increase its debt from 1 million to 2 million, and then reduce it back to 1 million, so your example is rather arbitrary.
In your second example you imagine a world in which the government doesn’t issue its own currency, and instead borrows, spends and taxes coins issued by Selgin’s private mint. This is of course an imaginary world that is different to the real world described by MMT, so this example is somewhat irrelevant in that sense to the MMT argument. Nonetheless we can still analyse it with reference to MMT. To begin with you own financial assets in the form of 100 coins. Then the government gives you a Treasury bond worth 100 coins, so now you have 200 coins’ worth of financial assets. Then the government taxes you 100 coins and redeems the bond by paying you 100 coins, so your financial assets go back to 100 coins. This is still consistent with MMT (although the overall scenario isn’t, of course): your financial assets increased as the government debt increased, and then decreased as the government debt decreased. At the end of your example the government debt equals zero and the budget is balanced (tax revenue equals expenditures). However, as I said, MMT does not recommend zero government debt or balanced budgets as a policy rule, so what you are describing is a form of arbitrary government policy that has nothing to do with the policies recommended by MMT, within an imaginary scenario that has nothing to do with the real world described by MMT. So in that sense your example is indeed irrelevant.
P James, the point of the example was this: What good is it to have an “asset” that only pays off, if the money is taken from you at gunpoint and then handed back to “redeem” the asset?
You are saying that the guy holding the 100 gold coins, and the Treasury bond promising an additional 100 gold coins, is indeed richer because he’s holding that Treasury bond. And I’m saying no, not if it’s going to be redeemed by taxing him in the future.
So, if you agree that that particular guy isn’t made richer by a promise to rob him down the road, the same logic applies to “the private sector” as a whole.
If you want to say no, the government can just print more money, OK fine, then you run into the standard problem that green pieces of paper don’t actually make us wealthier. If the government prints up $1 million in new currency and hands it out, the Earth didn’t just get wealthier in real terms.
“Now you accept that private individuals can very easily accumulate financial assets denominated in a government issued currency”
Do you believe that MMT says private debt contracts don’t exist or have no value? If you do then I suggest you do some more research to alleviate your ignorance.
Suppose I do some programming work for Bob, and then Bob pays me with an IOU note for 100 US dollars then I now have a financial asset denominated in US dollars. Presuming by labour costs me nothing, I’m ahead by $100. Even if you want to consider the opportunity cost of my labour, plus extra coffee beans, I’m still ahead by something.
Bob is nominally even because he got the work done (a positive) and he has a liability in the IOU note (a negative) but actually Bob is at least slightly ahead because he must have thought the work was a bit more valuable than what he paid for it.
Neither of us need government deficits to achieve this, although having the US dollar as a convenient reference point has been of assistance.
This is why the MMTers bring in the artificial and meaningless concept of “nett saving” to pretend that financial assets exist only as a nett total. Which is complete crap. No one in the world uses “nett saving” for any purpose whatsoever, the only reason it exists is to allow MMTers to talk fast and try to pretend that real world saving might be a bit related — but no such relation exists.
“Suppose I do some programming work for Bob, and then Bob pays me with an IOU note for 100 US dollars then I now have a financial asset denominated in US dollars”
Right, so what you are talking about is a private debt contract or payment arranged between you and Bob. These sorts of agreements happen every minute of every working day and are of course a fundamental part of the economy.
The question is whether people want to accumulate claims on the government, which issues the currency in which all of these private contracts are denominated. To answer that question you only really need to look inside your own wallet or check the latest Treasury debt auction results:
http://www.treasurydirect.gov/RI/OFGateway
Now you accept that private individuals can very easily accumulate financial assets denominated in a government issued currency (or denominated by any other reference for that matter).
Given that private debt is what the economy runs on, why make such a big deal about the importance of claims on the government? Who cares? The private economy has no need for it, and the only purpose deficits serve is to make it easier for government to distribute money to political cronies.
If you want to talk about Treasury debt auctions, why is it that the primary place Treasury debt is accumulating is at the Fed? Perhaps because without the Fed buying, no one else would.
As for what’s in my wallet, I can assure you my total position on fiat currency is significantly negative. You and Mosler can crank inflation as hard as you like and I won’t be personally worse off.
“Now you accept that private individuals can very easily accumulate financial assets denominated in a government issued currency”
Do you believe that MMT says private debt contracts don’t exist or have no value? If you do then I suggest you do some more research to alleviate your ignorance.
“why make such a big deal about the importance of claims on the government?”
I wouldn’t if no one else did. But they do. See your wallet, or some normal person’s wallet.
“why is it that the primary place Treasury debt is accumulating is at the Fed?”
The Fed has been buying bonds as part of its QE program. Perhaps you should watch the news more often.
“Perhaps because without the Fed buying, no one else would”
Keep making that trade. I like to see you lose.
“I won’t be personally worse off”
Good for you.
To believe in MMT, you have to equip a shield that deflects examples and analogies.
More FM.
what is FM?
As predicted, the MMT’er deflected B-Murph’s example, only to restate OBVIOUS truths based on accounting.
You imply an increase in real wealth by only increasing private sector net financial assets. This is done by ignoring the liability.
As a whole, we are our assets and liabilities.
Is our economy better off only when California runs a deficit with the other 49?
Why is it okay to ignore only the federal liabilities?
“You imply an increase in real wealth by only increasing private sector net financial assets.”
No, I don’t.
“This is done by ignoring the liability”
If you read what I wrote you will see that I did not ignore the liability.
“Is our economy better off only when California runs a deficit with the other 49?”
Do you believe that the economy would be better off if there was no debt?
“Why is it okay to ignore only the federal liabilities?”
I don’t ignore the federal liabilities. However the difference is that the federal government issues dollars and dollars are a liability of the federal government. Hence the household analogy is invalid.
The government is like a household full of thieves. The reason it is “unconstrained” is because, according to MMT definitions, it can steal whatever it wants and by emitting funny money, it can fool most of the people most of the time. The same principles of economic apply regardless.
Nixon: Oh, when the President does it, that means that it is not illegal.
Interview with David Frost (19 May 1977) (video); printed in The New York Times (20 May 1977), p. A16;
Bob Roddis,
“it can fool most of the people most of the time”
Though not you, eh? Just everyone else. Because you’re special and have special intelligence.
I believe the economy would be better off with stable public debt, which is the key question here.
Trying to pretend this necessarily implies all debt seems like strategic change of subject. In a free country people should be free to get into debt with one another on mutual agreement. Public debt comes at the expense of future taxpayers… something they never agreed to.
If you ask the Germans how they feel about inflation, you pretty soon get the impression they learned their lesson last time. The Australians went through a few waves of it and most of the people I talked to are pretty clued up. Amongst Americans, yeah quite a lot of them understand that inflation eats your savings, which might explain why personal savings are so low compared to earlier generations.
“In a free country people should be free to get into debt with one another on mutual agreement”
Which they are, hence all the private debt contracts.
“Public debt comes at the expense of future taxpayers…”
That’s like saying that in the future there will be no savings accounts because they will all have to be paid off by the little kiddies.
“inflation eats your savings”
If you keep them under the mattress instead of investing them.
“personal savings are so low compared to earlier generations”
Yeah I think you might need to look up some historical data regarding inflation and try to come up with a more sensible theory.
No it isn’t.
If Bob is in my debt because of a private agreement, that does not give me the right to attempt beat it out of his adorable little boy. This is the one and only reason why government debt is different to household debt.
“If Bob is in my debt because of a private agreement, that does not give me the right to attempt beat it out of his adorable little boy. This is the one and only reason why government debt is different to household debt.”
Private debt is never paid off in the aggregate, nor is public debt. Because they are both savings. No kiddies will be beaten up in the future, unless your kind end up in power and ignorantly go about imposing your ideology on everyone.
“If you read what I wrote you will see that I did not ignore the liability.”
Rather, you ignore the meaning of said liability.
“Do you believe that the economy would be better off if there was no debt?”
It should be whatever it ends up being. I just don’t conflate an increase in nominal savings with being better off.
“However the difference is that the federal government issues dollars and dollars are a liability of the federal government. Hence the household analogy is invalid.”
The household ANALOGY is valid. Both have constraints as to how much their income/spending are in real terms.
The stock market disproves MMT every time there is a forward split, or share issuance. Which is why no company ever issued shares ad infinitum and survived. So let’s quit pretending that an increase in the stock of money is different than a tax. (tax being defined as a loss of purchasing power, ceteris paribus)
“No kiddies will be beaten up in the future, unless your kind end up in power and ignorantly go about imposing your ideology on everyone.”
What about the non-aggression principle do you not understand? Is it the non-aggression part?
“Rather, you ignore the meaning of said liability”
what’s that then?
“The household ANALOGY is valid. Both have constraints as to how much their income/spending are in real terms.”
What does that mean? If you run out of money can you pay your mortgage or not?
“The stock market disproves MMT every time there is a forward split”
Only in your mind.
“let’s quit pretending that an increase in the stock of money is different than a tax.”
By your logic every dollar created after the very first dollar was just a tax on the person holding the first dollar. To me that sounds pretty dumb, but your brain might work differently I suppose.
“What does that mean? If you run out of money can you pay your mortgage or not?”
This is why it is an ANALOGY. You are still thinking in nominal terms.
The constraint on government is inflation and the constraint on a household is getting caught robbing liquor stores.
Thus, when you ” run out of money” you are only unable to make good on existing obligations if you get arrested(inflation).
“By your logic every dollar created after the very first dollar was just a tax on the person holding the first dollar. To me that sounds pretty dumb, but your brain might work differently I suppose.”
Considering you don’t understand what an analogy is, I am glad to take any criticism from you.
I explicitly defined what I was calling a “tax”
“Only in your mind.”
Watch this then,
In the stock market, what happens when a company has 1M shares outstanding and they issue to me 1M new shares? Tell me whether the market capitalization doubled to compensate for my new ownership of 1/2 of the company. Existing stock holders just lost 1/2 of their purchasing power in real terms. (remember, this is an analogy)
I had to explain that?
There is an amount of money that is too small. 1T can easily perform all of the necessary functions required by a currency. An increase in said stock of fiat currency ONLY redistributes the purchasing power in existence. An income tax does the same thing.
Thus, increasing the stock of fiat provisions government with goods and services that it otherwise would not have.
Government spending is proof you were taxed.
The other constraint on government is finding itself unable to raise taxes any more… either that or inflation, there’s a choice.
If you see inflation as a kind of tax by stealth then the choice is a bit moot. I guess regular taxation is robbery at gunpoint, but inflation is silent theft in the night. Each to his own preference.
The problem with Mosler and the MMTers is they don’t accept that tax is a limitation (except now and then when it suits them to bash Bitcoin) and they don’t accept that inflation is a limitation (except now and then when it suits them to mention that raising tax will keep inflation under control).
This is just ridiculous. If Bob has issued me an IOU note for $100 then a year later he pays me and I hand back the IOU note. The private debt is paid.
He can pay me with anything I accept: silver coins, favours done in return, a case of whisky… even exchange me for a different IOU note that Bob got doing work for someone else. Still pays back the debt.
The problem with your example Tel is that a year ago Bob DID issue me an IOU, for an OLG response, and its never been paid off.
“This is just ridiculous. If Bob has issued me an IOU note for $100 then a year later he pays me and I hand back the IOU note. The private debt is paid”
That is true. And the government also pays off its debts as they fall due on a regular basis. But in aggregate, private debt is not paid off. It generally just increases, though it may go down now and again.
See #2
http://www.urbandictionary.com/define.php?term=fm
The Talking Points
1. Any sovereign nation which fails to provide its citizens with the full benefits available to them by virtue of the sovereign’s inherent ability to issue and manage its own fiat currency should be strongly challenged by its citizenry.
2. Any economist who makes the claim, either explicit or implicit, that a nation which issues and manages a sovereign fiat currency must either borrow or collect taxes in order to have currency to spend, should have his or her diploma revoked.
3. Any political leader in a sovereign nation which issues and manages its own fiat currency who claims the national government doesn’t have the “money” to pay for goods or services which are, in fact, available within the national borders—and which would greatly benefit the citizens—should be tarred and feathered and drummed out of office as an ignorant charlatan.
4. Any banker or financial leader who suggests that a sovereign nation which issues and manages its own fiat currency is dependent upon the bond market to “finance” its sovereign spending should be investigated and prosecuted for the financial frauds they are more than likely in the act of perpetrating.
5. Any journalist who makes his or her living counseling the public about economic matters, who fails to take the time to understand and explain to his or her audience how sovereign fiat currencies actually function, should be summarily stripped of their journalistic credentials and pushed out the door of the newsroom.
http://neweconomicperspectives.org/2013/11/talking-points-99-part-1.html#more-6895
1. Increasing the supply of fiat money does not summon goods and services into existence.
2. Increasing the supply of fiat money does not summon goods and services into existence.
3. Increasing the supply of fiat money does not summon goods and services into existence.
4. Increasing the supply of fiat money does not summon goods and services into existence.
5. Increasing the supply of fiat money does not summon goods and services into existence.
http://www.youtube.com/watch?v=_PvWXTsR6kQ
He looked cooler with his MMA look.
The government spending new funny money into existence summons goods and services into the clutches of the government without having to go to the trouble of taxing the victims.
http://www.youtube.com/watch?v=Ji-cT58rgNc
Look guys, the Keynesian theory is that unemployed labour is an existing resource that should be more heavily utilized. They are not attempting to summon something into existence, they want to make better use of resources that already exist.
Yes, there are some Keynesians who don’t actually get this and believe the goods will magically appear but if you argue against that, then you still haven’t hit the heart of the theory.
If the goods are already within the national borders they must already be owned by at least some of citizens. What Mosler is really saying is that government has the option of using violence to take goods from one citizen and give those goods to some other citizen… perfectly true.
What you really should ask yourself why does Mosler bother to talk about money at all when what he is really talking about is government use of force.
BTW on point (2) Mosler oscillates between saying that governments can print money any time they like without worrying about tax, and then saying that government taxation is necessary to give fiat money a value and tax is what keeps inflation under control. By his own rules, Mosler “should have his or her diploma revoked.”
The MMTers also seem to believe that their beloved processes “get the economy moving again” which creates the new wealth that would not be created under a “gold standard” where economic activity would be severely retarded.
I repeat myself: They do not understand economics and they have the most naive 3rd grade understanding of the nature of government. Rudimentary “public choice” problems escape their limited grasp.
Yeah, MMT is just Keynes without the subtlety.
But the real question is whether a government using force to deploy those resources that the government considers idle (e.g. assigning government-chosen jobs to unemployed people) will have a sustained stimulus on the economy.
That’s a different argument to what Cosmo is addressing:
In the past, governments took unemployed people and gave them the job of killing each other. This does reduce unemployment… much like dropping a brick on your foot cures a toothache. This approach also gives you great statistics when you recognize that once people are dead, they are no longer counted.
Having worked this magic once, the temptation of trying to make it work a second time must be enormous.
Yeah, MMT is just Keynes without the subtlety.
Since Fed operations and Keynesianism in general are both scams, MMTers are doing us a favor with their naive explicitness about these awful scams.
To me they are both the same scam.
The Fed manipulating artificially low interest rates is in effect crushing the return on capital. It is exactly what Keynes was asking for.
Inflation plus Capital Gains Tax work together to extract private wealth and move it into the hands of governments which is essentially what MMTers are asking for.
“The Fed manipulating artificially low interest rates is in effect crushing the return on capital”
Some pay day loans in the US charge 800%+ interest. That’s quite a good return on rentier capital. But it involves some risk, of course. What you want is high risk-free returns despite the fact that private investment has collapsed relative to private saving. You think that interest just falls out of the sky.
P James knows nothing about economic calculation and the problem of knowledge in society.
Like all the rest of them.
No, I merely want whatever rate exists when the government is not involved in manipulating the rate.
Now go and tell me that QE is not about interest rate manipulation.
“Now go and tell me that QE is not about interest rate manipulation”
You might have to ask Scott Sumner about that (I think he would disagree with you).
Personally I think it makes little sense to expect high risk-free interest returns (on government bonds or relatively small bank deposits) when the economy is crap and private investment has cratered relative to private saving. But as I said, you can get extremely good returns if you are willing to take a risk with your capital, either by just placing funds on the stock market, or by investing in small cap businesses, or by being a proper rentier and draining the unfortunate by charging them ridiculous rates on short term loans (800%+).
btw I don’t especially recommend any of the above,… my point is simply that it is possible to make money on financial investments in the current environment, if you are willing to take a risk… The Fed sets the risk-free overnight interbank rate, and this has an effect on “risk free” government bond yields. Also QE has obviously affected longer term securities and helped to boost the stock market.. but the market determines rates and yields on all sorts of different financial assets depending on a whole range of different criteria, such as risk and expected earnings, for example. So it’s not just a simple story about the Fed determining everything.
“I merely want whatever rate exists when the government is not involved in manipulating the rate”
You have to assume that traders in the markets are either stupid or irrational if you think that they just jump whenever the Fed says “jump”.
So the Fed sets the short term rates, and obviously influences the long term rates but the market sets all the other rates.
Got it. Anything else would be completely irrational.
And MMT is all about how the monetary system Really Works (TM).
I’d like to see how you place your money. Presumably you just do whatever the Fed tells you, correct?
What a great comment to start my day with! Thanks Bob!
Everyone should bookmark Joe’s support for these ludicrous statements.
Bob,
My comment was not intended as a show of support for MMT. Quite the opposite.
An ad for EWF paraphernalia appeared as I was viewing that “MMT site bringing you dogma-free economics”.
http://www.flickr.com/photos/bob_roddis/10320236824/in/photostream/
That’s awesome! Can I grab that image and blog it, Bob? (I.e. do I have your permission?)
Of course!
Here’s the largest size:
http://www.flickr.com/photos/bob_roddis/10320236824/sizes/o/
It is interesting that Mises had a brief discussion on “functional finance” in Human Action (1949). But it disappeared in the 1963 edition of the book. Maybe it was out of fashion… There is a very good refutation of the “functional finance” doctrine by Albert Hahn in the free books of Mises.org
Mises noted in Appendix A to “The Theory of Money and Credit” that Knapp’s “state theory of money” is acatallactic. MMT is based explicitly on the state theory of money. As such, MMTers have no theory of exchange and are clueless about the fundamental phenomenon of economic calculation.
http://www.econlib.org/library/Mises/msTApp.html
In that “Talking Points” piece by J.D.Alt I linked to, he makes the ubiquitous MMT claim that the requirement to pay taxes with it gives money its value. I believe that is mostly false. If the money has little value otherwise as money (because it is constantly depreciating), one could and would use a more valuable and stable form of money for commerce and simply convert to the state’s funny money at the last minute to pay taxes with. What keeps people using funny money dollars are old dumb habits and the capital gains taxes on any “gains” that arise from every transaction where one uses gold, silver or a foreign currency. Further, one needs to keep track of their “tax basis” for every such transaction. As Ron Paul never tires of saying, get rid of those taxes on the use of alternative forms of money.
Is this the book, “The Economics of Illusion”?
http://mises.org/document/3097/The-Economics-of-Illusion
Right! And in his “Common sense economics” where he use his famous dictum:
“This application of governmental finance policy is called functional finance and praised as a new invention. One can say that ***in so far as it is correct it is not new, and in so far as it is new it is not correct.***”
*used
Mosler is apparently advising the Italian parliament. We’re not.
http://webtv.camera.it/archivio?id=4272&position=0
COMMISSION FINANCES – Taxation policy and Excise, hearings Mosler and Peleggi
The Finance Committee, at the Globe Hall, carried out the following hearings:
14 Hours Hearing informal Warren Mosler, on the prospects of fiscal policy and the banking sector, in the framework of the Euro and the forthcoming Italian Presidency of the European Union
Hours 15 Hearing informal Peleggi Joseph, Director of the Customs Agency and monopolies, on the issues of excise duties.
https://bitcointalk.org/index.php?topic=120087.0
There’s some video from his Italian tour where Mosler says Bitcoins have no real value, because there’s nothing backing them. The comments from the Bitcoiners are really interesting.
Mosler is an idiot. He says that all you need to give a currency value is a government that’s willing to defend it. He likes to use examples of men with guns forcing people to accept the money they issue.
This is just statist and authoritarian claptrap.
The funniest thing is that this Mosler guy appears to have made all of his money as a “rentier” hedge fund manager and a banker – all of the things MMT purports to hate.
I don’t believe that Mosler is as stupid as what he thinks other people are… and to some extent that must be the case because he did make money as you point out.
It’s perfectly accurate to say that government violence is the fundamental commodity that gives value to fiat currency. Government operates as a protection racket, and fiat currency are protection tokens… you pay them over so you don’t get hurt. You generally won’t hear Mosler say it quite so directly, his audiences prefer a bit of sugar on that, but yeah now and then he will admit that the gun is what drives the fiat currency.
Let’s explore the implications of that (I don’t mean whether you feel happy about living that way, I mean the outcomes of implementing the theory). If a government wants to print more money then it can do so, but for a given quota of violence imposed on the population, printing more money will devalue that money… so in order to print more money and not cause inflation, the requirement is that more violence must be imposed, i.e. taxes must go up.
So now we have a situation where government must tax in order to spend… presuming they don’t want inflation to happen and their fiat currency to devalue.
“If a government wants to print more money then it can do so, but for a given quota of violence imposed on the population, printing more money will devalue that money… so in order to print more money and not cause inflation, the requirement is that more violence must be imposed, i.e. taxes must go up.”
You make it sound like taxes are hoarded.
Sorry if I make it sound that way.
Tax is always paid in labour… eventually. The money acts as an intermediary.
I take it for granted that the government has some project they intend to spend the money on.
I tried reading a book by Mosler. Rambling and I gave up.
Man I hate socialism.
http://online.wsj.com/news/articles/SB10001424052702303763804579183680751473884
Hi Bob, your old friend Charles Hayden from the MMT Deficit Owl Committee:
I just want to reiterate that I sympathize with your disgust for the use of force that backs up the tax system and drives the currency.
Assuming we accept the need for gov’t, if for nothing else but to protect us from other govt , the use of force to compel the citizenry to use/work for the currency, is necessary because a.) communist voluntarism doesn’t work b.) we don’t want gov’t running industry or enslaving a portion of the population to provision public sector goods for the rest, etc. c.) private sector needs incentives to produce for the public sector.
That said, applying revenue constraints to a currency issuing Monopolist that doesn’t have one just makes the coercion driving the tax system even worse.
And the difference between gov’t using force to compel citizen’s to work for the currency vs. the guy robbing the liquor store, is the guy robbing the liquor store doesn’t exist to protect individual rights, particularly property rights, and serve further public purpose.
Also, Warren likes to say that what the right and Austrians have to say applies to fixed exchange, but you can also make the case it applies at full employment/full capacity as well. So in my view, the best way to limit the gov’t sector is to make the private sector as large as possible, so that any further increase in the gov’t sector requires shrinking the size of the private sector to create the shelf space for that gov’t spending.
Thanks
Government doesn’t exist to protect individual rights. On net, it disintegrates more rights than it protects.
Austrians believe In fiscal restraints in REAL terms. No matter how MMT redefines things, you can’t ignore that government “purchased” tanks = less matter for the private sector. and bombs are just redistributions of steel and TNT from us to Afghanistan. We look at the flows of real goods, and this proves government is only a thief. When stuck in nominal terms, MMT can claim government “adds” to our savings. Which is okay, as long as you don’t conflate real with nominal.
Ok. Then what’s the problem? I don’t know how many times we have to say this from the MMT side, but here goes again: THE LIMITS ARE ON THE REAL SIDE OF THE ECONOMY.
And if you don’t think gov’t protects individual rights, and you want to get rid of it, okay, well do you have a plan to organize resistance if another gov’t from somewhere else in the world decides to march on in here and take our lands and make us their slaves? And do you really think we can defend the country without some agent to organize and collect resources to act on a common behalf?
I know you say that, but it is in fine print. And you guys only say it to claim that you have an answer to Austrian criticisms.
Proof? The claim that more $ = more goods and services (care of M. Norman)
The claim that lower taxes, and higher money creation = more wealth in the private sector (yes they implied real terms).
The creation of $ only reallocates the scarce goods already in existence. It is theoretically possible for government on net to be more productive than without, ceteris paribus.
Again, MMT’ers constantly conflate nominal terms with real terms.
If you double the supply of $USD overnight and give all of the money to me, what happens? I now have the claim to 1/2 of the total purchasing power previously held by all users of $USD. I did not receive this because someone voluntarily gave it to me in return for something I built or something I did for them.
Advice would be: quit contradicting yourselves. The proof that you’ve been taxed is when government spends.
It’s not in fine print. Dr. Kelton is explicit on that point.
Fine print can be explicit. My point stands.
LK has come out from under his bridge to chime in:
[H}e just assumes that the government is like a private household. The analogy also bizarrely assumes that government deficit spending is not just immoral but criminal, in a totally absurd example of begging the question by assuming the truth of libertarian ethics.
Note: Whatever the morality of the snatching, it’s still snatching. This is HOW THE MONETARY SYSTEM WORKS! (to coin a phrase). I think we should leave it to the MMTers to explain to average people why such surreptitious snatching and transferring of purchasing power is moral.
Murphy is also committed to the flawed and unrealistic Austrian theory of price inflation. He seems oblivious of any of the empirical evidence on administered prices and the way that demand drives private sector output and employment.
Murphy is also guilty of astonishing intellectual inconsistency. At 22.43 onwards, Murphy’s explanation of recessions and idle resources invokes the Austrian business cycle theory (ABCT) that he himself says is grossly flawed by its reliance on the Wicksellian natural rate of interest (see Murphy 2003). But both the arguments of Murphy’s PhD and this paper are conveniently forgotten as he preaches to the choir and invokes the ABCT – and blames the lowering of the rate of interest below its natural rate – as the explanation of recessions.
LK’s continuous use of that pathetic argument is so dumb that it’s cringe-inducing.
One can note that the interviewer – one Tom Woods – is even more ignorant and incapable of understanding MMT or the theories underlying it.
UnlearningeconNovember 15, 2013 at 3:16 AM
So, so strange. Murphy is a reasonable guy with nuanced views but he just repeats ideas that he himself disagrees with!
Neil WilsonNovember 15, 2013 at 4:06 AM
I think Warren’s comment in his debate with Bob sums thinks up nicely:
“Austrians are trying to use a VCR manual to determine how to use a DVD player.”
Philip PilkingtonNovember 15, 2013 at 7:38 AM
Murphy will say anything to appeal to his fanbase. He’s almost worse than Schiff in that regard. Both of them treat economics as a stand-up act. But I’m not convinced that Murphy even believes the stuff he says. If he does I’d be even more concerned, of course.
http://socialdemocracy21stcentury.blogspot.com/2013/11/robert-murphy-at-sea-on-mmt.html
And you refute none of the arguments there
And I expect that whenever Murphy also notes that Sraffa was right about the natural rate of interest, it’s also a “pathetic argument” and “so dumb that it’s cringe-inducing.” Or more likely you’re projecting the contemptibly poor and shoddy nature of your own arguments into others.
I hope there are some rational, normal, sane, average humans reading this thread and thinking to themselves, “geesh, those MMT weirdo’s sure have found a way to convince themselves stealing is okay.”
See Mosler’s Deadly Innocent Fraud #3:
“Federal Government budget deficits take away
savings.
Fact:
Federal Government budget deficits ADD to
savings.”
This seems like a good example of what Bob means. Imagine the govt has a balanced budget and then decides to go into defict $100 and spend it domestically. It finances by printing money. That new money ends up in someone’s hands. So (at least for an instant) the amount of money savings in private hands has gone up $100 nominal value. No new goods have been accumulated so no real savings. But savings have gone up in total in monetary terms as Moser states. Just not in the way normal people think of as more savings.
Bingo!
He makes it sound like he is talking about saving in the way normal people would think they understand, while he actually talks about something different with a similar sounding name.
If you are the recipient of the spending into existence of new funny money, you are the recipient of stealing from someone else’s purchasing power in the “non-governmental” sector. If you have purchased a bond and get paid back from taxation, your “saving” has come from someone else in the NGS. If you have purchased a bond and get paid back from a new funny money emision, your “saving” has come from someone else in the NGS. Thus, no “net saving”.
Further, it is virtually impossible for the victims lost purchasing power to “account” for their loss.
The wonders of MMT “saving” and “accounting”.
That is why I use the Kool AId analogy. Addition of new fiat is adding H20. take 4 oz Kool Aid, add 4 oz h20 and collect the 4 oz that spilled over in a cup labeled ‘G’.
MMT “accounting” only goes so far as to display VOLUME of water, and ignores quality.
H20 is actually valuable, bureaucrats twiddling their thumbs and bridges to nowhere are not.
Was it Martin Gross that authored the book about down the rat hole? For every dollar government collects, they send a dollar down the rat hole never to be seen again.
Why do you want the Monopolist to strangle the private sector?
Yes, the non-government cannot add to its net U.S. $ financial savings w/o gov’t accommodation of those attempts. So it’s a market driven phenomena.
Gov’t cannot run deficits w/o non-government attempting to net-save by that amount.
Likewise gov’t cannot run surpluses w/o the non-government attempting to net-deficit spend by that amount.
What does “net U.S. $ financial savings” mean, and why should anyone care?
Tel:
I’ve never seen them answer this and I think we should hound them until they do.
“What does “net U.S. $ financial savings” mean”
It’s straightforward for anyone familiar with basic accounting concepts:
http://mikenormaneconomics.blogspot.com/2011/10/rogue-economist-net-financial-assets.html
It means total financial assets that are not a liability to someone in the private sector.
why should anyone care?
is the question, oh great smart guy.
Conversely, when government deficit spends it creates financial assets in the private sector. These financial assets have no liability in the private sector, so they are non-government net financial assets. The net financial assets injected by government come with no interest payable by the recipient.
Of course “these financial assets” have “liability in the private sector”. Purchasing power is being stolen from unsuspecting victims who receive the money last.
The primary difference between “outside” government funny money and bank “inside” funny money is that the actual terms of the former are purposefully obscured from the victims.
Then the MMTers howl like hyenas and deny that there is any theft at all.
I’d like to correct (for the 15th time) the above reference to the MMT canard that the requirement to pay taxes with funny money gives it its value. It may give it some small value, but one could and would always use more stable and valuable forms of money in commerce and then convert to the funny money at the last possible second to pay taxes. What compels people to use the funny money are the capital gains and sales taxes that apply to each transaction using precious metals and foreign currencies in lieu of US funny money. And do you really want to keep track of your cost basis for each unit of alternative currency?
Of course, our wise and benevolent betters must save us from alternative forms of money.
Attorney for the Western District of North Carolina, Anne M. Tompkins, described the Liberty Dollar as “a unique form of domestic terrorism” that is trying “to undermine the legitimate currency of this country”.[28] The Justice Department press release quotes her as saying: “While these forms of anti-government activities do not involve violence, they are every bit as insidious and represent a clear and present danger to the economic stability of this country.”
http://en.wikipedia.org/wiki/Liberty_Dollar
No, MMT’ers do not think it is okay to steal.
I for one sympathize with the Austrian point of view and have deep admiration and respect for those who adhere and hold to the non-aggression principle.
I question whether taxation in all instances could be characterized as a violation of that basic principle. And we can wax philosophical all day about this topic. But fact of the matter is government exists and government taxes.
And a sovereign currency issuing government collecting its own currency in payment of taxes does not do so to acquire the funds to spend. It taxes to create demand for its currency, so it can then spend its otherwise worthless currency into existence to provision the public sector, so it can defend the nation, serve public purpose, etc.
Attempts to save by non-government agents adds to the demand for the currency, and necessitates gov’t deficit spending by that amount.
And for whatever reason, people, institutions, and foreign gov’ts all like to save U.S. dollars. And if you would rather have your people working, as opposed to sitting idle and poor, well gov’t has got to spend to cover the tax bill and the net-savings attempts of the non-government.
Semantic trickery. If tax is not necessary in order for governments to spend, then show me a government that spends and never taxes.
I would think that the empiricists would have some empirical evidence in support of their claim that the $205 trillion in unfunded government liabilities is nothing to worry about since the government can just spend spend spend money into existence without taxation for revenue (taxation being “necessary” only to control “inflation”).
on $205 trillion in unfunded government liabilities, it’s amusing to consider what “pre-funded government liabilities” would look like.
Money is account credits, not commodities.
That would be a spreadsheet with the positive number $205 x 10_12 in one of the columns. Why a sovereign currency issuer should have to or benefit from “saving” and setting aside a large number of account credits on some balance sheet.
I hate to think about the “Billions and Billions” of hamburgers sold by McDonalds in the past, because I can imagine future “unfunded hamburger liabilities” of “Trillions and Trillions” of future hamburger sales.
Surely, McDonalds must build a giant freezer to stock up hamburgers, so future generations of hamburger buyers are “funded”.
Yes, that’s silly, so is the entire argument. There could be a mass cow epidemic, but a currency issuer is not going to run out of currency.
Also, the MV=PT with V and T fixed, the equation that proves that adding to the money supply debases the currency, that only works in a COMPLETELY STATIC ECONOMY where no economic expansion occurs in response to higher demand, so only prices rise. NO MARKET ECONOMY behaves in that manner, per Irving Fisher, unless there’s some very extenuating circumstances that inhibit growth of Supply, like being bombed out, like losing your productive Ruhr Valley, like govt owing debts in gold or foreign currency due to a war treaty, some natural catastrophe that wipes out productive capacity.
In the world today, productive capacity is idle and under-used, not maxed out, not max capacity.
McDonalds does have funding In place for future production. The same way we look at govt unfunded liabilities is how we look at McDonald’s. the 205T is the amount that EXCEEDS projected income. Their own #’s show no provision to print the difference. so on paper it is a liability. McDonald’s future costs exceed future expenditures, thus NO LIABILITY.
For an MMTer your accounting is terrible.
The government is constrained by congress. McDonald’s is constrained by sales.
The point of the quantity theory of money is not to predict what the price level will be, rather it can be used to consider the EFFECT that one input has on the others in the equation. Just because there are other moving parts does not negate the effect it has proven to have. This means that a doubling of $ supply won’t necessarily precede a doubling of prices, but prices will be higher than they would have been otherwise. Mises explains it very well. That is the point. Look at the CPI pre and post fed reserve. We would have experienced general deflation vs general inflation. The difference is the fed’s effect, not just the amount of positive inflation. Again, always all else being equal.
If you can admit that more $ debases currency in static, then we are half way there!
Print 1T and spend it on bombing factories.
Print 1T and spend it paying people to sit in a chair
Print 1T and spend it on xyz(per Obama stimulus)
What is the result f we consider each option? Some choices are more wasteful than others. Option 1 and 2 I hope you’d agree would hurt the economy more than doing nothing. For option 3, you have to consider what would have happened with those resources otherwise.
If you can admit as much, then we’ve won. It is ALL about the flow of resources in the economy. If you waste resources more than the economy would have otherwise done, then the net result is lower wealth than otherwise would have occurred. The net result may be 1 % GDP growth, but maybe 3% would have been the result from doing nothing.
The purpose of the tax is not to raise revenue in-order to spend.
We understand that.
zzzzzzzzzzzzzzzzzzzzzz
Question for MMT’ers:
Wouldn’t your “system” require a board of central MMT planers (of course, who are well versed in “MMT”) to plan and manage your economy? Effectively circumventing conventional forms of democracy? Thats basically soviet style central planning.
How could this all work within the framework of democracy? Think about it: you have to convince all politicians that MMT is correct, in order for them to pass laws that are consist within the MMT framework.
They all have to agree that raising taxes quells inflation, but how could they pass a bill raising taxes when prices are rising? I mean how can they possibly get re elected raising taxes on people when inflation is eating away at their real wages? Thats politically impossible, in any country.
What if they DO raise taxes in an inflationary environment, and its not enough to stop inflation? They have to go through the entire process again of passing another bill that raises taxes, and how can they POSSIBLY know how much to raise taxes, in order to stop inflation? I don’t get it.
This whole MMT stuff makes zero sense to me.
Interesting question.
Yes, policy lag, and the nature of the democratic process, makes hydraulic Keynesianism difficult to manage, and it tends to break down before you get to full employment.
So you need a way for the market to set the deficit in real time. Hence, why MMT’ers favor a Job Guarantee. Takes the guess work out of fiscal policy. Let anybody able and willing to work for the currency do so in the public serving their country at whatever you want the minimum wage in the economy to be.
Let the market set the gov’t deficit at the margin. Let the unemployed workers choose which JG project they work in.
And the way to limit the JG pool, and the increase in the ‘size’ of gov’t from the JG, is to keep taxes per size of gov’t low.
by “in the public”
I meant “in the public sector”
I always LOL at “Hydraulic”.
Hydraulic Keynesianism. More proof that there is not a single non-Austrian in the galaxy who has even the slightest understanding of basic Austrian concepts.
I say that is undeniable and that it is getting to be quite creepy.
This is the HILARIOUS part about MMT.
“Think about it: you have to convince all politicians that MMT is correct”
MMT’ers attack B-Murph because of what he said in the debate….. that even a population fully versed in ABCT theory could make mistakes and get caught in the boom, then bust.
You can read 7DIF, or watch many YT videos where Warren or Stephanie openly admit that they have counseled with countless congressmen, gotten them to believe MMT is true, just to go IMMEDIATELY on stage and continue their talking points as usual (and continue to this day).
“This whole MMT stuff makes zero sense to me.”
MMT is theoretically PLAUSIBLE. I am not quantifying this possibility, just stating it.
As with any economy, the better the investments are made, as a whole, the better the economy performs. MMT relies on congress to use the new purchasing power (less taxes, printing press) to invest with.
Again, consider it being a controlled experiment. A: Austrian, B: MMT, c: etc.
The world is already ON an MMT system. MMT is not some new proposal.
Govts NOW already spend via adding private account credits and tax by subtracting and destroying private account credits.
The difference is STOP PRETENDING that tax confiscation (destruction of private fin assets) is needed to “fund govt”.
——
Notice that this “tax collection” — it really isn’t “collected” at the federal level, in any critical meaningful sense — particularly sales tax, income tax, VAT tax, and so on — taxes on consumption — harms consumption, then production (and jobs) also shrinks.
Why impose a tax that shrinks the job market and sales and profits? It’s true that the govt *CAN* legally and ethically tax, since it is only taxing in the currency that the Govt issued in the first place, in the case of paper bills the names of officers and institutions are stamped on the front and back, so it CAN demand it’s own paper back … but should it??? When or when not?
Taxes COOLS the economy by cutting Demand. If the economy is not currently “too hot”, then tax confiscation is therefore too high.
Austrians used to argue that tax confiscation is “violence”, NOW they argue that insufficient tax confiscation is also “violence”, because NOT collecting taxes destroys the value of existing savings.
First, most people don’t have ANY savings, so the class that is obsessed with their savings losing value is “rich people”. Those people are compensated by interest payments on savings that would not exist if the Govt didn’t pay interest.
This leads to the question of whether the primary purpose of currency is (should be) COMMERCE, which happens in the instant, or should the currency system be tilted more towards LONG TERM SAVINGS for many decades?
The opposite of using gold bullion (with a market value that changes each millisecond) to buy a Big Gulp Coca Cola, is using a credit card or ATM swipe. Which is better for commerce, the swipe or the bullion? Or maybe commerce and trade, production and consumption, isn’t the point of an economy. Maybe the point of an economy is oligarchic levels of savings, and the creation of private “toll booths” on commerce.
Two, having taxation be LESS than currency creation only causes prices to rise drastically when the economy cannot expand in response to increased Demand. There are a few rare scenarios.
Even during World Wars, western production was able to drastically expand to higher capacity to match Demand. That doesn’t mean war is necessary or advisable.
It’s that in our CULTURE, deficit spending for National Defense and War is considered “patriotic” and justified — even if it’s about a “bogeyman” Evil Empire — then it’s OK as a “jobs program” that boosts profits..
In our CULTURE, deficit spending for broad social well being where everyone has a job instead of FORCED MASS UNEMPLOYMENT, that seems politically and culturally hated, in the absence of a THREAT of war and imminent annihilation by “Red Menace” or a “Green Menace” from Islam, or maybe a “Space Menace” could work too.
Four, to have MILD gradual inflation, even Friedman backed that. The main reasons, which the “Populist” farmers understood in the 1800s, when they were pushing for use of silver to pay back debts (Bi-Metalism), is that “sound currency” meant “scarce currency”.
The FREE SILVER MOVEMENT.
This meant that instead of maybe losing a few points per year on accumulated savings, small Capitalists were instead losing entire farms and small mfg and small retail biz to outright foreclosure and seizure by Sheriffs acting on behalf of Creditors — local banks representing Wall St.
Mild or even strong inflation was typically very HELPFUL to debtors — business and private investors — while deflation most favored creditors, though THEY might also lose, sometimes earning less from disruptive foreclosure than they would on uninterrupted debt payments.
Inflation — other than the instability of catastrophic hyper-inflation caused by severe Supply disruption — might have some downsides, but it’s not all bad.
Anyhow, conservative policy makers are only concerned about keeping down WAGE INFLATION, they never complain about ASSET PRICE INFLATION or INTEREST INFLATION or other forms of inflation.
People generally want what they OWN (or target to buy immediately) to inflate, they want their costs that represent other people’s assets or incomes to shrink. That’s a selfish short-sighted side of human nature, I want mine, “screw you guys, I’m going home” Cartman.
“The world is already ON an MMT system. MMT is not some new proposal. ”
MMT’ers have policy proposals, yes or no?
“The difference is STOP PRETENDING that tax confiscation (destruction of private fin assets) is needed to “fund govt”.”
Noone here thinks that way, so why the attack?
“Austrians used to argue that tax confiscation is “violence”, NOW they argue that insufficient tax confiscation is also “violence”, because NOT collecting taxes destroys the value of existing savings.
”
Used to? lmao
You damn sure never heard an Austrian say that taxes are too low.
“This leads to the question of whether the primary purpose of currency is (should be) COMMERCE, which happens in the instant, or should the currency system be tilted more towards LONG TERM SAVINGS for many decades? ”
The purpose is for the economy to function. I will exchange $ for things and contracts will be written in the context of the monetary and fiscal policy.
“It’s that in our CULTURE, deficit spending for National Defense and War is considered “patriotic” and justified ”
This is the site of an Austrian economist, and obviously libertarian…..
“In our CULTURE, deficit spending for broad social well being where everyone has a job instead of FORCED MASS UNEMPLOYMENT”
Government destroys wealth. The economy would be better off with less interference from the government. You are whining about a problem that you are causing.
“Four, to have MILD gradual inflation, even Friedman backed that”
The rate of inflation should be whatever it ends up being. If prices rise, then it should be because supply and demand. If we had free market money, then we can CHOOSE to avoid inflation or deflation at our will.
IT ISNT THE INFLATION OR DEFLATION, IT IS WHAT CAUSES IT that Austrians are concerned with.
“Mild or even strong inflation was typically very HELPFUL to debtors ”
DUH.
It is called distorting contracts when you go and CAUSE inflation.
“while deflation most favored creditors, though THEY might also lose, sometimes earning less from disruptive foreclosure than they would on uninterrupted debt payments.”
Fallacy, inflation always beneficial, and deflation always destructive BS.
We have had periods of generally falling prices along with massive economic growth….. the economy can adapt to anything. The problem is that governments create an inflationary environment to gain power and scope.
“Inflation — other than the instability of catastrophic hyper-inflation caused by severe Supply disruption — might have some downsides, but it’s not all bad.”
Severe supply disruption? really? Why not say “caused by the monopoly issuer” ?
“Anyhow, conservative policy makers are only concerned about keeping down WAGE INFLATION, they never complain about ASSET PRICE INFLATION or INTEREST INFLATION or other forms of inflation. ”
Let the price level adjust on its own.
“People generally want what they OWN (or target to buy immediately) to inflate, they want their costs that represent other people’s assets or incomes to shrink. That’s a selfish short-sighted side of human nature, I want mine, “screw you guys, I’m going home” Cartman.”
Yet you can’t get around the fact that this will always persist. This is the reason why you own a computer instead of giving that $ to poor people.
The purpose of a system is what it does. Show me a government that spends and never taxes.
The tax has a purpose. It’s just not to raise revenue in-order to spend.
Again, the TAXPAYERS COULD NOT PAY TAXES IN THE GOV’T CURRENCY IF GOV’T DID NOT SPEND ITS CURRENCY FIRST.
THE GOVERNMENT CANNOT EXIST AT ALL IF IT DID NOT FIRST TAX.
Show me a government that arose on the basis of no taxation.
Exactly. This is why Warren says that upon creating a new currency, the ENTIRE POPULATION has just become unemployed.
WIth legal tender, the government has just obtained 100 percent of the legal purchasing power. THEFT.
Pathetic MMT reasoning for a morally corrupt system.
“The tax has a purpose. It’s just not to raise revenue in-order to spend. ”
Yea…. that is what MMT’ers like to say. But what is an income tax? A surrendering of purchasing power that I can see on my pay stub.
IF ALL TAXES (income to the government) ceased, then government could only spend by receiving donations OR spending new currency into existence. At which point the MMT’ers claim doesn’t cause inflation until full employment is reached.
Pathetic reasoning and provably wrong.
It is called supply and demand. Enter the world of MMT, where new supply will be summoned to meet the new demand that their policy proposals necessarily cause.
Govt levies tax to support fiat currency for similar reasons as the NFL sells and collects “worthless paper fiat tickets” (or better, the Laser Tag gamespot where ticket buyers play to win).
If anyone could get in and play for free, with no gatekeepers, the value of NFL tickets would be zero. But even if children and/or legally disabled and/or other classes of fans (red hair? people with ADHD?) got free admission, the existence of a gatekeeper and price for at least SOME tickets, makes these tickets valuable.
Yes, the NFL stadiums use “force”. If you try to sneak in without paying, you will be forcibly evicted, and arrested.
The value of NFL tickets falls quickly around half-time and are practically worth zero at the end of the game, except for souvenirs.
Nobody has suggested that for “worthless paper fiat NFL tickets” that “don’t retain their value” and thus are “battered by inflation” after the game, the solution to give them more stable value is to force NFL to print them in gold ink or mandate that NFL stores a large supply of gold jewelry to hand out for refunds.
——————–
This is an analogy. By definition, it’s not a “perfect analogy”, but it should at least be helpful to explain how taxes “drives the currency” by creating a demand for paper currency.
People are free to not use currency. You can write a promissory note — you just can sign the name of a Govt official or otherwise commit fraud. Now find someone to accept it.
Some people avoid using United States currency — for the most part — by living on dumpster diving and foraging, or bartering services for a bed and breakfast.
I’m not sure, but I think the Austrians want to benefits and super convenience of using a standardized state-issued currency, but without any drawbacks or obligations whatsoever, and without negatively impacting their “ideology”(s). This could be classified as ENTITLEMENT MENTALITY.
People who are opposed to Govt Handouts and spending, many of them believe that the Govt ought to be required by Law to go out into the Market and purchase gold jewelry at full market value, thereby artificially driving up the sale price of said gold, and then the Govt ought to be forced by Law to sell that gold to anyone who happens to have some surplus US Dollars, at a FIXED discount price.
But they are “against communism”, and claim to be “patriotic” about how much they care about America.
What a stupid straw man.–
“Some people avoid using United States currency — for the most part — by living on dumpster diving and foraging, or bartering services for a bed and breakfast.”
I’m supposed to not use the $ just because I don’t like the fact that it is the only legal money? How stupid. I Guess an innocent man in prison is supposed to starve himself because he doesn’t like being there?
“I’m not sure, but I think the Austrians want to benefits and super convenience of using a standardized state-issued currency, but without any drawbacks or obligations whatsoever, and without negatively impacting their “ideology”(s). This could be classified as ENTITLEMENT MENTALITY.”
We are pursuing what is in our rational self-interest. If legal tender laws were removed, would you live in a dumpster when the grocer only accepted gold, and silver? (example)
We have had the $ as legal tender for a long time now, are you ever going to decide how much $ should exist?
Aww, don’t like it when your stupid attacks backfire, do ya?
“But they are “against communism”, and claim to be “patriotic” about how much they care about America.”
This isn’t a neocon website……
“No, MMT’ers do not think it is okay to steal. ”
“Yes, large Federal deficits that push the economy beyond the point of full employment can lead to inflation or currency devaluation”
You believe that more $ in my pocket = more real spending. Suspending FICA, giving $ to the states, running the printing press…..
Is more fiat inflationary, deflationary or no effect, all else being equal?
The proof that you were taxed is provided when government spends. You believe that our real incomes will rise per the stated proposals by Warren……. but government’s spending remains the same or greater.
Conflating nominal with real and refusing to look at things ceteris paribus.
We are LUCKY that congress is too stupid to know the full power they wield.
Government acquires real wealth through “spending money into existence.”
That real wealth is supposed to be ignored. You’re only supposed to focus on the “net financial assets” that have been “injected” into your bank account, after which you’re supposed to then buy goods and services.
Since the cost (government acquiring real wealth) is spread out over everyone who holds dollars, but the gains (your personal bank account) is localized, you’re supposed to think you’ve gained via inflation, and thus everyone else in the “non-government sector” is supposed to gain in the same way.
Where the real wealth comes from is not supposed to be seriously addressed. Just listen to clowns like the one who Murphy made fun of on this blog. They’ll say vague things like “There is so much real wealth, we don’t have to worry about hyperinflation when the government prints money”.
Government acquires real wealth through “spending money into existence.”
So why have Capitalists for at least a century, since the Industrial Age, lobbied for the Govt to acquire “real wealth” from the private sector.
Prior to the Industrial Age, economics was built around scarcity. Anyone can see that. The Kind would take — or buy with future tax credits — limited scarce output. The private individuals might go hungry so the King and the Army would get fed.
Since the rise of the Industrial Age, the main economic problem has been Surplus Output, Over-Production, and how to get rid of that.
Kevin Carson, partly-Austrian, has quoted Capitalists and Govt officials from the end of the 19th century bemoaning the issue of being forced to sell surplus goods at discounts that would leave them unprofitable on their capital investments. One said, I could make all the shoes for America in 5 months, what then?
Part of the answer was Consumerism and psy-Marketing, which hadn’t yet been developed (Bernays). The trick was to get the average Joe and Jane to shop for status, like “rich people”, instead of for necessity.
Part of the answer was govt-assisted Open Door policies, FORCING foreign countries to become new Markets for US corps, and sometimes supplementing their purchases with loans or grants from the US Govt, and sometimes trade partners exporting raw materials. Hence, “charitable” foreign aid.
A third factor was DIRECT govt purchases of industrial corp output, typically for military use, sometimes other buyers.
This was not some minor trend. This was a huge foundation of the American 20th Century.
Kevin Carson describes this to a T, but instead of being supportive of the American success story, Carson’s Austrian-Libertarian angle leads him to suggest that Americans and the world would have been BETTER OFF if Govts had never intervened to expand business or markets in ANY way, and we would ultimately have more freedom in Small Inter-Connected Autonomous Anarchist Communes that might have arisen in place of, in the absence of, State-Capitalism.
Certainly, Big Capitalism as we have experienced it would never have arisen, being so dependent on Govt Spending for profits, and to absorb the “real wealth” of industrial output, WITHOUT the massive influence of Govt Spending.
That makes Austrian Austerity politics highly ANTI-CAPITALIST in the realistic —- not to say idealistic — meaning of what Capitalism really is and has been.
Which do you guys prefer, pragmatic realism or an idealistic argument about ethics? It’s not hard to see why critics have called Austrian Econ the “Marxists of the Right”, being so thoroughly obsessed with “morals and ethics” arguments about capitalism, as much as Marxists were about the Labor Theory of Value.
“That makes Austrian Austerity politics highly ANTI-CAPITALIST in the realistic —- not to say idealistic — meaning of what Capitalism really is and has been. ”
You just love being wrong, huh?
What we want is for the profit and loss mechanism to work uninterrupted. There would be an organization in existence to enforce property rights….. otherwise if a business is unprofitable, it is not a valid business. If it requires the government, it is NOT a valid business. Find an Austrian that agrees with G.E.’s business model. Find just 1.
Try an attack without redefining things.
Is more fiat inflationary, deflationary or no effect, all else being equal?
——
Quantity Theory of Money
Irving Fisher
MV=PT
Point being, ALL ELSE ISN’T EQUAL. If it were, that arg might make sense.
But that would be a totally static economy, in which no increased velocity or transactions occur when the money supply expands, when Aggregate Demand increases.
“If the currency in circulation increased, there would be a proportional increase in the price of goods.”
Per Steve Keen, Irving Fisher’s back-notes said that this “Law” of price rises being proportional to growth of the real money supply (in circulation), referred to a hypothetical static economy, not a dynamic market economy … (though something of that effect could be true depending on other factors, such as, for example, full employment aka max capacity usage of critical resources).
This ought to be obvious. When a restaurant has lines of customers out the door, changes likely to occur are (a) hire more staff (b) build out more seating (c) open a 2nd location (d) someone else competes.
Price hikes or lack of “special discounts” will ALSO probably occur..
The question posed by MMT realists (real about how our current system functions) is whether the Govt should be so inflation-phobic (wage inflation) as to use high-tax and low-spend policy to purposely BLOCK at least 22 Million people from finding jobs, while keeping many more eager workers on half-income and “anything they can get” jobs for which they are under-qualified, and block high school and college grads from starting their career path for a decade, and at the same time prevent new businesses from starting up (due to lack of sufficient consumer Demand to fund many profitable businesses).
How much Austerity suffering is enough for a “sound economy”? How much more blood-letting should be applied to the patient to cure their anemia? How high must the air conditioner be set for the room to start heating up?
And, how low must housing asset prices fall, and how risky must consumer incomes get, before banks decide they see an opportunity to create new long-term loans on cars and houses?
(since banks also expand the money supply by a kind of “printing” — creating account deposits — credits — in exchange for signed long-term IOUs)
Pathetic,
“Point being, ALL ELSE ISN’T EQUAL. If it were, that arg might make sense. ”
You obviously don’t understand what a controlled experiment is. When you say ceteris paribus, you are looking for the effect of one thing and one thing alone.
Of course it isn’t actually testable scientifically. But that doesn’t mean you cant conclude correctly what additional quantity increases do ceteris paribus.
“This ought to be obvious. ”
I just didn’t know you’d butcher it so badly with MMT nonsense.
” as to use high-tax and low-spend policy to purposely BLOCK at least 22 Million people from finding jobs”
Okay……. so print enough money and put 22 million people to work. They will produce CO2 24/7/365 for their wages. These people require housing, food and transportation. When you printed the money, did you print housing, food and transportation?
“How much Austerity suffering is enough for a “sound economy”? How much more blood-letting should be applied to the patient to cure their anemia? How high must the air conditioner be set for the room to start heating up?”
The wage seekers are seeking too high a wage for what the employers are offering, thus unemployment. Allow the prices to adjust and you will have nothing to cry about.
“How much Austerity suffering ”
So a budget that only increases is austerity…..
back to those classic MMT redefinitions
“And, how low must housing asset prices fall”
Until demand says they should stop falling
so to recap, it isn’t the dollar $ or speed that matters. It is where the $ is channeled. If you hire 22 million to produce CO2, then you have ONLY taken housing, food and transportation from the already productive sector of society. This drives up prices. Now, if you left the market alone it would allow prices to adjust automatically and there would be no mass unemployment problem, just a natural – thus small amount of people in transition.
My god, we have seen nothing but additional spending and you still wrongly conclude that there is STILL not enough spending. Pathetic
http://www.aei-ideas.org/wp-content/uploads/2012/02/021612jjordan.jpg
This is a picture that shows what happens when government WASTES RESOURCES. You have successfully gotten what you wished for, a massive spending increase to boost demand……… How many more years of additional wasteful government is needed to prove you were wrong?
Bob,
I have a question specific to the MMT claim you addressed towards the end – the one that a government deficit is necessary for net financial assets of the private sector to go up and that a budget surplus would cause a drop in net financial assets of the private sector.
Suppose I were to say “So what?” because after all we do not become any richer or poorer as a society because we have greater or fewer financial assets, would I be incorrect? Would it be an appropriate response to say that real savings are possible in the face of a drop in financial assets and hence that society could be better off as a result? In fact, would it be a good response to say that a budget surplus means that government has taken away fewer real resources from the private sector and hence that the private sector is better off with a government surplus than with a government deficit?
Suppose we then institute a MASSIVE Govt Surplus in which the Govt confiscates 100% of net financial assets from the private sector. That should generate super-abundance.
Actually what monetary contraction ALWAYS generates is a Debt Deflation scenario, where existing outstanding debts become unpayable —- like in 2007, when hyper-expanding bank credit suddenly contracted — and remember, banks don’t lend out the Fed’s money from Reserves, banks create loans by expanding balance sheets, by collecting signed debt obligations (assets) and creating new deposit account credits (liabilities).
The Fed’s normal monetary actions can’t limit lending or push lending — they can cause the payments system to lock up if they fail to add reserves when needed AFTER the fact of a period of loan creation.
Every time in US history that the Govt aimed at or achieved a “balanced budget”, the result that followed immediately or very quickly was a Depression or Recession. Stephanie Kelton posted the years.
In 1929, first the Credit Bubble on Stocks collapsed when future stock rises began to look shaky, investors got skittish, and banks stopped lending to buy stocks on margin.
Coolidge and Mellon believed in very light taxes on wage labor, and lighter taxes on everyone, but they also didn’t believe in cooling off the “lassez-faire” Credit Bubble. Then when the Bubble popped, instead of recognizing that the Bubble beneficiaries were mostly Wall St, and the average worker was still living paycheck-to-paycheck, Hoover (and Mellon speaking up from the sidelines) said that the right thing to do was LIQUIDATE LABOR and BUSINESS and EVERYTHING along with the flood of liquidations and collapse of Wall St. financial assets.
Banks, at least the ones which remained solvent, were willing to scoop up some hot buys at some cheap discounts, but how willing were they going to be to invest in new start-up businesses, in the face of collapsing Demand and falling prices?
What would the future solvency look like for a prospective business or expansion, in a collapsed and collapsing and shrinking economy?
Would YOU invest hard cash in such an environment? Even apartment owners couldn’t collect rent from unemployed tenants, and many people and businesses couldn’t PAY creditors on property or past goods.
That’s why DEFLATION is such a threat. As the song went,
Potatoes are cheaper,
tomatoes are cheaper,
now’s the time to fall in love.
The butcher, the baker,
the candlestick maker,
gave their price a downward shove.
Sure, positive spin for consumers. Keep that hope up. Keep smiling.
But what about THEIR vendors and creditors of the butcher etc., including the farmers and grain suppliers and candle wax vendors?
I enjoy how you willfully ignore the MASSIVE increase in the government and over a decade of wonderful progressive great depression-ness.
I dunno
2+2 dude
You imply that Hoover did nothing, yet federal outlays PROVE YOU WRONG. Pathetic, sad and too easy to disprove the statist rewritten history.
“Would YOU invest hard cash in such an environment? Even apartment owners couldn’t collect rent from unemployed tenants, and many people and businesses couldn’t PAY creditors on property or past goods.
That’s why DEFLATION is such a threat. As the song went,
”
So will you admit that hyper-deflation is built into our monetary system? and being legal tender we have no way to avoid it? So you literally just proved our point (free market money) for us. But this is still blaming the woes on the hangover, instead of the cause itself.
We had huge deflation care of W. Harding, and it somehow didn’t spiral out of control. It ended ABRUPTLY. Harding wasn’t Austrian, but he didn’t Hooverize the economy by WASTING resources.
Would I invest in such an environment? I went “all in” in late 08′ and early 09′. So, yes. Let prices adjust, and most importantly DONT CAUSE MISALLOCATIONS in the first place.
e.g. if you tell the entire US population that they are legally obligated to only inhale and exhale for $, then obviously these jobs MUST be liquidated and put to productive use elsewhere. The profit and loss mechanism does this for us. What you lobby for is more mouth-breathing instead of production. When you create fiat, you are taking purchasing power from the productive sector and handing it to mouth-breathers.
These suppressed “Alternative Budget Scenarios” that claim the government debt is actually $205 trillion are silly because a sovereign government using a fiat currency is not fiscally constrained and can never run out of money to pay for things. People who worry about such things are morons.
http://www.garynorth.com/public/11776.cfm
BTW, why doesn’t someone do a “deep philosophical” analysis of this claim? They’ve run multiple falsifiable tests that prove their claims, right?
Bob,
The only thing that will ever stop fiat, is IF enough people lose their will to organize and produce.
Otherwise this Juggernaut will never stop. I suppose congress could instruct the military to attack/commandeer the Fed Reserve, then unfortunately congress would probably grab the lever and shift into overdrive assuming there is a gear taller than the 1 Bernanke has selected. Current QE is fairly radical, it is difficult to imagine an overdrive.
Rand Paul needs to stop talking about ending or audit the Fed and instead request the Federal Reserve ratio be increased from 10:90 to 20:80.
Also request QE be dropped from 85B to 45B.
Once we get here, we can revisit. Baby steps.
A former Fed guy on WSJ almost explains what QE really is, and why it did NOTHING to expand the economy. Not as good as Mike Norman explained QE, but from the horse’s mouth.
http://on.wsj.com/1gXrnoj
>> Current QE is fairly radical, it is difficult to imagine an overdrive
QE is fairly radical at doing NOTHING.
The Fed could add TRILLIONS to Reserve acct balances, without being able to “push” banks to create new car loans, house loans, biz loans, nor issue any $100,000 credit cards to Joe Six-Pack. Hence, the “monetary base” increased, but the money supply in circulation — including bank-created credit — did not.
That’s why Warren Mosler called QE “Aztec Economics”, compared both to human sacrifice in Apocalypto, but also “magical thinking” about how the Fed could spur econ growth by boosting some numbers inside the Fed.
James Galbraith (and Lord Keynes too) go completely MMT because we can never run out of fiat dollars!:
http://socialdemocracy21stcentury.blogspot.com/2013/11/galbraith-on-us-federal-debt.html
If this is the best they’ve got around here, in six months we’ll be running this planet.
MMT and post-Keynesian logic is as intuitive as a thermostat in your home that runs the furnace more when it’s cold outside and less when it’s warm outside, with insulation and trees and doors opening and closing adding other factors.
This applies to ANY other negative feedback loop in engineering, the lasers that track a CD, the cruise control in a car, most industrial and electronic equipment, and probably chemical processes and biology.
The human body regulates blood sugar by adding insulin when sugar levels get too high, to avoid damage, and reduces insulin production when blood sugar is low.
All of these systems have unique caveats as to their design. Natural Gas COULD run out. The pancreas CAN go bad.
MMT, beyond being descriptive about the monetary system, doesn’t suggest that the ubiquity of money means that it should all be spent at once, nor should be burn up all Nat Gas this year, nor does an All-U-Can-Eat buffet imply eating until you almost puke.
MMT suggests govt spending to COUNTER effects that shrink the money supply in circulation and cause dramatic and terrible effects from monetary contraction and debt deflation, such as unnecessary unemployment, unnecessary business failures, and all the unnecessary heartaches that go along with that.
That is including the PERMANENT loss of real human output every day, amounting to some estimated $2 Trillion per year of REAL economic value lost forever, not the “wasting” of that “worthless fiat currency”.
That is, the same “worthless fiat currency” that Austrians think the Govt ought to treat as precious and conserve it.
That “worthless fiat currency” which nobody wants (except everyone on the planet) can create profits and jobs NOW, and THOSE people can create real wealth, instead of watching Daytime Soaps or hanging out at the homeless shelter or trying to invent some petty crime to get by another day, or simply living in prison instead of WORKING.
How can you guys be vehemently AGAINST WORK and AGAINST WELFARE at the same time?
MMT is strongly PRO-WORK, at least most of them. Not necessarily 40 hours, but everyone gets a chance to contribute, who wants to contribute their efforts and brainpower. I personally know people in prison because they can’t find enough work to pay child support, because nobody is hiring, because nobody is buying.
That’s a failure of Demand that Supply-Side Economics can’t address … and the “Father of Supply-Side” while not down with MMT, stated that Supply-Side was “never meant to be a religion” ~ Paul Craig Roberts, and several of his colleagues.
“That is including the PERMANENT loss of real human output every day, amounting to some estimated $2 Trillion per year of REAL economic value lost forever, not the “wasting” of that “worthless fiat currency”.”
zzzzzzz
This is MMT “logic” at play here. If only government spending could get GDP roaring again. Just look at the lost output gap, blah blah. Your theory never considers a possibility that GOVERNMENT CAUSED the misallocations (thus unemployment) in the first place, and more of the poison doesn’t cure it.
“That “worthless fiat currency” which nobody wants (except everyone on the planet)”
It isn’t worthless. It has no intrinsic value, but is not worthless.
“can create profits and jobs NOW, and THOSE people can create real wealth, instead of watching Daytime Soaps or hanging out at the homeless shelter or trying to invent some petty crime to get by another day, or simply living in prison instead of WORKING.”
If I print money and give it to Bob to start working, the PURCHASING POWER CAME FROM SOMEWHERE!!!! Thus the goods and services he can receive for the work were a provision to him that was not warranted. You think this is free, IT IS NOT.
“How can you guys be vehemently AGAINST WORK and AGAINST WELFARE at the same time? ”
Let prices adjust naturally and we wouldn’t be having this discussion.
“MMT is strongly PRO-WORK, at least most of them. Not necessarily 40 hours, but everyone gets a chance to contribute, who wants to contribute their efforts and brainpower. I personally know people in prison because they can’t find enough work to pay child support, because nobody is hiring, because nobody is buying. ”
Maybe not everyone should work that wants to. Maybe if my pet earns a job in the JG, he will waste more resources than he produces, ever think of that?
MMT can’t ignore the FACT that it is Where the money flows that is what creates the economy. $ is like a cloak that conceals the goods and services flowing. At any time there is a fixed amount of G&S, and thus additional fiat is only creating a larger cloak.
Do you want to know how this is all proven?
Zimbabwe, Weimar, I could go on.
They prove that it IS NOT A LACK OF $$$$, it is how and where it flows.
Creating additional fiat in lieu of taxing is only creating additional demand for goods and services for which there is no concomitant increase in supply. If I trade a 5% tax for a 5% increase in prices, am I any better off?
Again, for once I’d like to see an MMT’er consider additional fiat’s inflationary effect ceteris paribus.
>> Your theory never considers a possibility that GOVERNMENT CAUSED the misallocations (thus unemployment) in the first place, and more of the poison doesn’t cure it.
——
Post-Keynesians detail precisely how GOVERNMENT CAUSED the misallocations — but NOT how Austrians believe.
Austrians believe that the Federal Reserve “prints money” into banks’ reserves, and that “pool of funds” is what banks lend out at a 10x ratio.
That’s an interesting theory too, but that’s FALSE. That is not how banking operates, that’s not how credit is created.
How can Austrian Econ — or other Neoclassical Econ for that matter — purport to have the answers when they consistently misrepresent how banking and credit functions —- and has always functioned??
Banks DO NOT lend out capital nor reserves for consumer or biz loans, so the Govt doesn’t boost bank lending in the way Austrians think, by “artificially” pushing down interest rates on Interbank lending of reserves. Interbank lending would fall to zero as the result of Banks creating Deposits from lending.
That’s the opposite of how Austrians THINK banking and the Fed operates.
Govts create and spend the common currency out of their LEGAL POWERS to do so,
Banks create deposits account credits on loan agreements out of their LEGAL POWERS to conduct such IOU swaps with customers.
Every commercial transaction — not excluding govt purchases — is some form of LEGAL transaction, because Money as Account Credits and Debts is a function of Business Law and Property Law, not a function of some ephemeral commodity value written by some Invisible Hand.
——
There is nothing “funny” about that. Nor SHOULD cash money bills or account credits have an “intrinsic” value, no more than NFL tickets SHOULD be printed with gold leaf ink. The pieces of paper represent value.
NFL tickets are allocated to match available seating.
US Dollars OUGHT to be allocated to match available resources, such as idle Labor.
Cosmo, I find it hard to stomach your argument that some 22 million Americans who mostly WERE PRODUCTIVE CONTRIBUTING MEMBERS OF SOCIETY who went to WORK every day, they all suddenly became “incompetent” and “worthless people” to the workforce, and this FACT just happened to become revealed in the wake of the Crash of the private Finance Sector’s experiment with a Fraud-driven Asset Bubble.
(No, Cosmo, the Austrian model of the “Business Cycle” had nothing to do with the Financial Sector’s expanding then contracting Asset Bubble in both housing and derivatives of housing. Manufacture of new housing was a MINOR factor, which helped “trickle down” the Credit Bubble to the non-finance sectors of the economy. The MAIN factor was the intentional INFLATION of HOUSING prices, driven by a combination of forces from outright fraud mortgages driven by Lenders and approved by Banks, and the resulting Super-Inflation of a pyramid of Derivatives of Mortgage loans, all perfectly legal, and mostly unregulated to the point of being “govt-approved fraud”. But then Austrians OPPOSE govt anti-fraud regulations.)
“That’s an interesting theory too, but that’s FALSE. That is not how banking operates, that’s not how credit is created. ”
Banks aren’t reserve constrained as you claim we think
“Govts create and spend the common currency out of their LEGAL POWERS to do so, ”
ooh!!!
“There is nothing “funny” about that. Nor SHOULD cash money bills or account credits have an “intrinsic” value,”
The free market is perfectly capable of choosing paper as money if it wishes.
“US Dollars OUGHT to be allocated to match available resources, such as idle Labor.”
Tell that to Zimbabwe…… oh wait, maybe more $ can cause more “idle labor”, which proves it isn’t the # of $, it is how they are employed. Duh.
“Cosmo, I find it hard to stomach your argument ”
I find your lying hard to stomach. You put words in quotations implying I said them.
“But then Austrians OPPOSE govt anti-fraud regulations”
LMAO, We oppose violations of property rights. The truth is that without the guarantees, none of this would have happened. And these frauds were BAILED OUT… the same frauds that Warren claims “did fail (b/c the stock price)”
PATHETIC MMT reasoning at work.
Get it? Let them go under. Protect property rights.
In 1980, Abba Lerner (1903-1982), the Godfather of MMT/Functional Finance, was concocting a ghastly and barbaric Rube Goldberg system where one would be precluded from raising (setting) one’s one prices without trading the right to do so with somebody else under penalty of law:
Lerner found the implications of sellers’ inflation so important that, beginning in
the 1960s, he changed his research program to center on finding cures for sellers’ inflation. Initially he toyed with various administrative wage and price control policies, but he found those lacking and soon gave them up. He replaced them, first, with a tax based incomes policy and ultimately, a market based[!!!] incomes policy in which property rights in prices are set and individuals have to buy the right to change prices from others who change their price in the opposite direction. It was this idea that formed the basis of our market [??] anti inflation (MAP) book. (Lerner and Colander 1980) Under MAP, rights in value added prices would be tradable so that any firm wanting to change its nominal price would have to make a trade with another firm that wanted to change its nominal price in the opposite direction. Thus, by law, the average price level would be constant but relative prices would be free to change [page 12]
http://tinyurl.com/4rfk3jk
Apparently, inflation was more of a problem within the fiat flick-of-a-keystroke system of theft and fraud than the MMTers have acknowledged. If plain ol’ income taxes cure inflation, why was this insane system of prohibition proposed near the end of Lerner’s life?
Bob,
Interesting legwork you have provided.
Interventionist can never stop once they start. I just wonder if they are literally dizzy from chasing their tail?
The interventionist closer to the top of the pyramid already know none of this MMT makes any sense. They know tax payers would never voluntarily fund a tyrannical pyramid shaped hierarchy, they know they cant kill their subjects either because they need their productivity. They needed to hide their thievery/slavery. MMT is the answer.
Unfortunately these young minds are being led like sheep to the slaughter.
I recommend Shrugging. First realize you are under the pyramid, then Shrug the next time you are told to prop up the pyramid.
An important MMT claim is that without govt running a deficit, the pvt sector cannot have “net savings”. This arises from the accounting identity S – I = G – T (deficit), arising from C+S+T=C+I+G, as commonly used in MMT (refer Billy Blog by Prof Mitchell). To put that eq into words, it equates ‘uses of income earned’ with expenditure (i.e., sources of said earned income) respectively. Refer to the flow-diagram used for gdp for a diagrammatic view of the derivation of this identity: http://mindtools.net/GlobCourse/formula.shtml
NUANCES
Before going into the MMT claim itself, there are nuances to the identity above: ‘S’ in the GDP eq does not just mean ‘savings’, as in money left over from income earned, after consumption (C) and taxes (T). It means leftover cash that is put into banks, which is how it enters back into the economy and can be modeled as part of gdp flow. In the gdp flow diagram, pvt intermediators (aka banks) are assumed to be the source for funds for all new loans and equity issued to pvt sector.
2ndly, there is the implicit but important assumption that ALL cash left over after consumption and taxes goes into banks. Without that assumption, one cannot equate C+S+T with C+I+G. Again, refer the flow diagram.
So S is funds left over that are then intermediated by banks to new borrowers and equity-issuers. Those funds become the I = Investment in capital equipment. S-I is then defined as ‘net savings’, in the MMT claim.
THE CLAIM
This accounting identity, given the definitions and assumptions above, is fine. In terms of on-the-ground reality, it is the difference between the cash put into banks and the portion of that cash spent on pvt investments (since gdp tracks flow of funds).
Now, the reason there is a difference between S and I is cos some of the saved money is lent to the govt (buying Ts) instead of being put into pvt debt/equity and thus, the diff between S and I is – by definition – equal to G-T (govt spending – taxes taken in = debt). There are no avenues besides the pvt and govt sectors for cash to be lent to…
That is, and I hope to be clear here, deficits don’t cause net savings (as claimed in MMT), where net savings are defined as S – I. Rather, deficits are one avenue for banks to put people’s saved cash into use. So, deficits are tautologically/definitionally equal to ‘net savings’. What it shows is that ‘net savings’ is a trivial concept from the point of view of economic cause and effect, but it has a valid accounting function.
Given the imperative to justify the value of deficit spending to reduce unemployment (a worthwhile goal), MMT has overreached considerably by claiming that deficits enable net savings. Note the implicit undertone that ‘net savings’ are a good thing, thus anything that enables them is good. There is semantic imprecision, leading to the positive connotations of the word ‘savings’ being applied to ‘net savings’. The unwarranted appending of the qualifier ‘net’ to it to describe S-I helps.
To summarise, ‘net savings’ is a causally irrelevant concept and need have no positive connotations. So, we can appraise deficits without the affective glow of them enabling ‘net savings’.
To put the identity in words, ‘Ppl, via banks, put funds remaining from their income – after consumption & taxes – into pvt bonds, pvt equity and govt bonds’. In equation form, S = I + (G-T) (all hail algebra). Note that people’s savings (S) would be the same regardless of whether or not the govt ran a deficit.
To summarise, incorrect causality is imputed to the identity at the top, and the identity itself is misunderstood. Also, the identity is not terribly realistic, given that people do keep some of the cash from their income outside of banks and away from bonds/equity. But in the gdp flow diagram, it is taken as a given that all extra cash goes into banks, which then utilise it. If someone – quite reasonably – disagrees with that, they could and should critique the construction of the gdp flow diagram**.
COUNTERFACTUAL
To look at the counterfactual where the govt does not raise debt, the cash which went towards govt bonds would be available for pvt debt/equity (the gdp identity above unrealistically mandates that all extra cash from income goes to banks, which then look to use it). This would lower rates paid by pvt sector for debt (due to now-higher supply of funds for lending). So, logically, govt deficits raise rates for pvt sector debt, all other things being equal, though they do not enable ‘net savings’.
For those who think the pvt sector is the engine of wealth-creation and more likely to be effective at using the funds, this is good news. For those who don’t and equate gdp with wealth-creation, this is neutral news.
CONCLUSION
In essence, this specific claim of MMT is not theory, it is accounting, and incorrect at that. The theoretical part of MMT is actually the insight that govts with fiat money are not revenue constrained. So, gdp can be as high as they want it to be via G and thus employment can be 100% (if govt spends enough, no one need be unemployed). Of course, if the govt spending is directing a bulk or even significant portion of economic activity, expect to see that fiat money eventually rejected as a MoS, and thus a “flight to value”. Fun fun.
All this, arising from equating gdp with wealth-creation and misconstruing economic cause and effect from an (unrealistic) accounting identity. C’est la vie.
** There are two other, fundamental issues with the accounting identity on top, which makes it kind of meaningless (hints: timing of transactions and whether the C on both sides is the same variable). But putting those aside, the above critiques and constraints still apply.
The following statement shows a comedic failure to understand basic algebra.
“In equation form, S = I + (G-T) (all hail algebra). Note that people’s savings (S) would be the same regardless of whether or not the govt ran a deficit.”
Lets do it in ridiculously small steps,
Say for some reason, I = 5, G = 4 & T = 3. Then by algebra
S = 5 + (4 – 3)
= 5 + 1
= 6
Now say the government is running a surplus, I = 5, G = 4, T = 5. Then by algebra
S = 5 + (4 – 5)
= 5 + (-1)
= 5 – 1
= 4
So much for the claim,
“Note that people’s savings (S) would be the same regardless of whether or not the govt ran a deficit.”
Because as was just shown S = 6 or S = 4 depending of if the government runs a surplus or a deficit.
The rest of the comment is around as coherent as this.
I have to ask why MMT’ers think a trade deficit (suck it Japan) is a benefit when we can reach the “savings desires” by the amount we want to export vs import?
It also highlights the fact that we trade paper money for real goods every day….. yet only our foreign trading partners are losers when we trade them a depreciating asset? But we aren’t idiots by buying a depreciating asset? Is Japan really an idiot to trade cars for dollars then?
I think the answer is: it would blow a hole in Mosler’s proposals. And obviously any exchange occurs because they want xyz more than their xyz.
And of course…….. per Mosler’s proposal of a deficit of 5% of GDP (permanently per savings desires) means government is spending more than it would if we balanced the budget……
sooooo increasing our net financial assets is collectively giving up real goods for paper money.
Mosler contradicts himself. I.E. he thinks foreign savers are idiots and domestic savers are not.
PLEASE tell me an MMT’er has “attacked” this specific criticism before, I’d love to hear an objection.
Really? This is the response?
I mean the original comment by Lucy is incoherent ideological babbling, based off a clear failure to understand pre-school maths and your response is to try to change the subject?
I think its pretty clear, if what you say is factually correct then that is useful, but on the other hand what is far more important is that its ideologically the right message regardless of if its correct or makes absolutely no logical sense.
I’d like you or another MMT’er to address what I consider Mosler’s inconsistent statements.
You call it changing the subject, but that is not true, see?
“Note the implicit undertone that ‘net savings’ are a good thing, thus anything that enables them is good.” ~Lucy
Go back and construct a positive statement of something which does or doesn’t happen, or is or isn’t implied and it might be worth discussing. Or if you want to have a normative discussion feel free to take it up with an ethics forum, because its not a relevant critique or very interesting.
Foreign savings of financial assets is stupid, yes or no?
Domestic non-government saving of financial assets is stupid, yes or no?
then
explain why a constant deficit is the policy proposal to maintain net savings of financial assets of the private sector.
I asked for a positive statement, the truth value of my opinion about if something is stupid, or not, is obviously irrelevant.
I will answer the second question as it is vaguely a positive statement.
The reason you need the government to be running a deficit for people to be able to save is that there need to be additional financial assets for people to be able to save them (or they could not save in that form). This fact is shown by the accounting identity (S-I) = (G-T) + (X-M), I added the balance of trade to Lisa’s version. If the country is running a large trade deficit then the there is only one way for the S-I to be net positive, and that is for G-T to be in deficit.
The S-I component has a strong bias towards being positive (as lots of people in the economy save money). If the government doesn’t facilitate this it doesn’t seem to stop people saving, it usually increases unemployment instead, though savings can also happen even when the government is in surplus because the private sector leverage’s up and takes on more debt.
On the other hand the government doesn’t need to ‘save’ by running a surplus. Since it issues the currency this is kind of pointless as it has exactly the same spending capacity if it has ‘savings’ in the ‘bank’ or not.
A constant deficit is not actually mandated, there may be times when a surplus is advisable, like when the economy is running at full employment. Or when the country has a large trade surplus. However historically the balance has typically been towards a government deficit.
That should be Lucy’s version where I said Lisa’s version.
Kinda what I was expecting to hear, but good to hear it nevertheless.
So what was your miss apprehension which required you to ask, “explain why a constant deficit….” ? I mean other than that nobody in MMT suggests the government running a constant deficit is a good idea.
NicTheNZer:
The argument that the government, as monopoly issuer of money, needs to inflate the money supply, in order for aggregate cash balances, or what you call “savings”, to rise, is factually correct.
Yes, in order for cash balances to rise, the money supply must rise.
However, please do not confuse yourself into believing that this is necessary for economic growth to occur. It is not true that cash balances have to keep rising ad infinitum as the real economy grows, in order to “facilitate” growth, or “support” growth, such that if the money supply doesn’t keep growing, then real growth would be “choked off”, or “curtailed”.
Economic growth only occurs on the basis of an increase in supply. This increase in supply can be, and for some goods even in our inflationary system are, founded upon falling prices (and costs!)
The bait and switch that I notice MMTers do is make it a deliberate thing to call a cash balance a “net financial asset”, as if we all become wealthier with a higher money supply. Calling cash a “financial asset” makes it easy to conflate cash with wealth, since we use the term “financial asset” to refer to claims on real wealth, such as equity.
It is also important to note that MMT contains no theory of how real growth actually occurs in the market. MMT is a collection of accounting relations, which to the discerning eye that is able to translate the MMT terminology isn’t original at all.
“So what was your miss apprehension which required you to ask, “explain why a constant deficit….” ? I mean other than that nobody in MMT suggests the government running a constant deficit is a good idea”
I dunno, 7DIF maybe?
“In general,
I’d expect taxes to be quite a bit lower than government spending,
for reasons already explained and also expanded on later in this
book. In fact, a budget deficit of perhaps 5% of our gross domestic
product might turn out to be the norm, which in today’s economy
is about $750 billion annually. However, that number by itself
is of no particular economic consequence, and could be a lot
higher or a lot lower, depending on the circumstances. What
matters is that the purpose of taxes is to balance the economy
and make sure it’s not too hot nor too cold. And federal
government spending is set at this right amount, given the size
and scope of government we want.”
Then page 44-46
The entire deadly fraud #5 is on the topic I had raised about Moslers inconsistencies.
and especially this
“I pointed out to Candidate Gore that the last six periods of
surplus in our more than two hundred-year history had been
followed by the only six depressions in our history.”
“Also, I
mentioned that the coming bust would be due to allowing the
budget to go into surplus and drain our savings, resulting in a
recession that would not end until the deficit got high enough
to add back our lost income and savings and deliver the
aggregate demand needed to restore output and employment”
@Cosmo Kramer,
I simply don’t see what you don’t understand about Mosler’s discussion here.
He says that about 5% has historically been about right to keep the US economy from running a trend of significant inflation or deflation. But that this number could be significantly higher or lower depending on the circumstances. In particular it would be lower if the US started running a trade surplus for some reason.
Then he points out that all the examples of the US government running a surplus for 6 times in 200 years was followed by the only 6 recessions in that period, this would be what he called the economy running too cold. That happens to be a historical fact and provides some example evidence that the recession was a result of the recent government surplus. As I said, if the government doesn’t facilitate saving it doesn’t stop people saving but tends to result in cut backs in consumption spending, especially in the private sector, GDP shrinking and unemployment.
You said,
“I mean other than that nobody in MMT suggests the government running a constant deficit is a good idea.”
then,
“That happens to be a historical fact and provides some example evidence that the recession was a result of the recent government surplus. ”
(small side note here, I would argue Warren is confusing correlation with causation)
then,
“He says that about 5% has historically been about right to keep the US economy from running a trend of significant inflation or deflation. But that this number [the deficit] could be significantly higher or lower depending on the circumstances. In particular it would be lower if the US started running a trade surplus for some reason.”
From what you have said and what all of my research has shown, I see nothing to indicate MMT being pro-surplus. I could be wrong. I just have not come across an MMT advocate explaining the beneficial reasons for a surplus in any context.
@Major_Freedom,
Of course a lot of MMT is not original at all, it comports to the other economic theories around. The main point of analysing the monetary system to reach the same conclusions already drawn in other economics is to validate the existing theories against the reality of how the economy works, which it does.
Your characterisation of the theory as some suggestion that the money supply should just grow and grow is however simplistic. Of course real wealth is associated with more available goods and services, and as I already mentioned several times the government should reduce or stop running its deficit if the economy reaches a point where the private sector is at full capacity and won’t increase output as a result of more spending (which we call the inflation barrier).
What is called inflation here is the more standard usage (in economics) of the term inflation, e.g an increase in prices for goods and services. This is also what central banks report as inflation. So this should not be confused with what you suggested might be called inflation, an increase in the money supply. These are two different concepts, and from an increase in the money supply obviously it doesn’t follow that people put their prices up somewhere in the economy.
On the other hand you seem to be on the edge of suggesting, without having suggested, deflation (e.g a recession) can be a good thing. That’s not what we have observed however in any example I am aware of, deflation has been associated with episodes of lower output, lower consumption and a lower standard of living for those involved.
“On the other hand you seem to be on the edge of suggesting, without having suggested, deflation (e.g a recession) can be a good thing. That’s not what we have observed however in any example I am aware of, deflation has been associated with episodes of lower output, lower consumption and a lower standard of living for those involved.”
Read deflation and liberty by J.G. Hulsmann
If corn prices double due to a supply shock(drought), will an Austrian be screaming? No.
If corn prices fall in half?
Now what if Corn prices double because of government involvement…. then you’ve upset the Austrians.
Austrians are just as upset about confiscatory DEFLATION. The correct conclusion should (imo) always be that what we use as money should be decided by the market.
Now, you have described a correlation between deflations and depressions. You imply a causal relationship. This is just lazy economic thought at work. We are in an environment such that deflation is a signal that there will be or are economic woes. If you remove government intervention, you will see a long term trend of falling prices WITH economic growth.
It is simply lazy to claim that deflation (or inflation) is always evil. History shows growth during deflation and inflation. As you may understand now, Austrians are focused on the causes of inflation and not inflation itself. This is readily apparent when you understand that we usually talk about “monetary inflation”. Also, please note that hyper-deflation is built into the current monetary system. The environment we are in gives those on the apoplithorismosphobic side talking points that have no basis.
correlation vs causation
and
ceteris paribus
@Kosmo Kramer, First, to go back and answer your earlier question, are their circumstances when a surplus is advisable? Yes, absolutely, I already described some. When the economy is running at full capacity (meaning minimal unemployment, naive estimate 2% in the US) and this will probably be associated with a trade surplus in many cases. In that case further spending will in all probability induce price inflation, not an increase in output, it would be counter-productive. The reason Mr Mosler didn’t discuss them is because the US has run a trade deficit since the 60s and has had nowhere near to low unemployment over the period.
Why do you care if the government is in surplus or deficit? Surely the effect of what that does to the economy is the only important consideration.
You said he confuses correlation with causation, that’s quite a strange way to put it actually. If there is a causal link then there will be a correlation resulting, but Mosler also gave the causal link in the same discussion. He said the surplus means people are not net-saving and their savings run down, then they run out and people cut back consumption spending which results in unemployment. That’s the causal link which is observed between these surpluses and the following recessions.
@Cosmo Kramer
In this case I accept your criticism that deflations are not the same as recessions. I put this badly.
What I should have said is that there are typically negative effects of a recession, you put this much better “We are in an environment such that deflation is a signal that there will be or are economic woes.”. I gather then that if the resulting “economic woes” are the result of the government not running a large enough deficit in recent history, then the appropriate way for the government to have acted was to have run a larger deficit. Unfortunately a lot of the significant widespread deflations we have observed have been the of recession induced kind.
More so if “hyper-deflation is built into the current monetary system”, better for the government to avoid the “hyper-deflation” than to fail to act and have it happen. As you said this could be built into the monetary system, and so until Austrians or others can garner broad public support for a change in the monetary system I prefer the government operating the existing system in the best way it knows how.
This doesn’t appear to be a case of “those on the apoplithorismosphobic side [using] talking points that have no basis”, but those on the apoplithorismosphobic side trying to avoid very real “economic woes” resulting from poorly operating the existing monetary system.
I have no doubt that Warren Mosler would be a more effective dictator than our current leaders are. The fatal flaw in MMT is the trust that you necessarily give to these morons voted into office.
It is one thing to talk about making wise investments, and another to it being a realistic outcome given the power structure.
Also, I think your prescriptions will fail as the economic indicators lag and don’t properly inform us of the proper state of the economy.
As M. Norman states, “GDP is the economy.”
Go back to 2007 and look at GDP. Then look at GDP in 2009. GDP ignored the nuclear meltdown waiting to happen. I put no weight on GDP.
Was our economy “too hot” in 07? Growth was low. Unemployment was not full.
People in the US still have the right to vote, at least last time I checked. That makes you in part responsible for the actions of your government. Anyway this is a very long way from a logical critique of MMT.
If you want to make up a theory that recessions can be predicted by looking at GDP alone (based of something Mike Norman said) then good for you, but as you suggested it doesn’t seem like GDP is a good indicator of impending recessions, that’s certainly not an MMT theory.
“Was our economy ‘too hot’ in 07?” no as you said, “Growth was low. Unemployment was not full.”
The too hot in this case is basically meaning high inflation, and to cool significant unemployment.
MMT doesn’t say the financial crisis are likely to happen when the economy gets too hot, it says inflation (meaning obviously price inflation) is likely to happen and the government should reduce its deficit or even start running a surplus.
hi Nic
Trace the argument out from the First sentence onwards. Once you actually understand how C+S+T=C+I+G is derived (not take it as always applicable gospel cos Billy says so!), it will all progressively make sense.
The main point of the comment is that there is an underlying causal structure in that equation, not just accounting. Your critique essentially demonstrates the same error. Start from scratch, from the first sentence.
The sentence and overall comment is coherent actually. Your understanding of the comment is not. Part of that is prob my fault for being a not-great writer, but the logic is correct.
NicTheNZer: “The S-I component has a strong bias towards being positive (as lots of people in the economy save money).”
Read my 1st comment from first sentence till “…it has a valid accounting function.” Truly understand it. That entire section explains from 1st principles why the MMT claim is incorrect. If there is an error, do point it out.
The quote above btw repeats that precise misunderstanding. S-I is not caused by deficits, it is just the difference between people’s cash savings (which the gdp formulation *assumes* goes into banks) and the portion of them that is NOT lent to pvt sector. Thus, S-I is by definition equal to deficit, since lending to non-pvt sector is going to be to govt sector. No other sectors left, dude.
Which makes me curious: did you actually read and consider my comment? Did you click through to the diagram for gdp derivation and see why the equation is what it is and what the causal mechanisms are etc. Do you know the actual technical definitions of the terms in the gdp equation which you wield, say S?
There is a clear obvious reason why even if the govt does not borrow, the S is still the same, cos the GDP formulation defines it thusly. Study the diagram.