Wednesday, September 26, 2012

Business Economics Has Become a Cruel Joke?

commentary by Roger Erickson

Economists' surprising election-year request: Raise taxes [and cut national spending], please!

Brad Lewis: "It's not intended to be, but what is clear is that the multiyear studies don't take into account the monetary regime. This may be the time to put out a manifesto."

Manifesto? Ahem. We DID put out several pretty significant manifestos. In 1933! As did Beardsley Ruml, in 1946, not to mention Abba Lerner, in 1942? etc, etc. There was at least one per decade, as it turns out.

Or, maybe it's time to simply write off orthodox economics ... in it's entirety?

Heck, go for both, simultaneously!

I'm no longer sure which is disintegrating faster, the GOP or the orthodox economics profession. :) There may even be a dark-horse contender ... the USA!

79 years and the bulk of PhD economists haven't yet NOTICED that we changed paradigms?

Would anyone notice even if we put out a hundred manifestos?

Reminds me of the beagle we once had: it would, nose to the ground, follow the scent trail of a meandering deer, even to the point of walking - oblivious - right past the deer still standing there munching grass!

I saw that with my own eyes; and now I'm seeing the exact same behavior in orthodox economists. Only difference is that their ears aren't as long & floppy. The one-track mind is still recognizably present - and dramatically magnified. Do they still bay at the scent of tenure, or academic prizes? :)

Can we at least start laughing at them? Is that the key?

101 comments:

paul said...

I'm on board with raising taxes:

Tax capital gains at 75%.

Tax inheritance at 90% on anything over $5 million.

Tax income over $1 million at 90%

Eliminate FICA.

Lower taxes to near-zero on people making less than $100,000. 00/year.

Leave spending as-is.

The deficit will be lower, but in any case it can't be less than the trade deficit plus growth in the money supply necessary to accomodate growth in population.

Jure Jordan said...

I am from Croatia which has domestic curency peged to euro and it is implementing same austerity policy: raising VAT to 25% (highest in Europe) and cutting spending. ANd for first time is acctually trying to enforce taxation which lack of it contributed to ammount equal to external debt.
I was wondering is there any economic policy that could help economy without breaking the peg, since we are schedulled to join EU on 7.1.2013?
Croatia is probably the last country that will enter EU if it lasts till then.
Btw, i am aware that loose collection of the taxes does not contribute too much to external trade deficit but to lack of trust in domestic currency. And i am also aware that domestic investment projects leak a lot of investments outside of the country due to high tehnological demand for some projects like power plant building, airports, shipbuilding and car manufacturing. Btw Croatia is a small country of 4.5M people.
Is there a way without breaking the euro peg?

Matt Franko said...

"domestic curency peged to euro"

Jordan,

Once you establish that peg, imo you are from then on under "the tyranny of the math".

To maintain that peg is imo mathematically equivalent to being in the Euro already; and if you are running a consistent trade deficit (importing key infrastructure items as you develop) then you are just like Greece who are already under the current Euro arrangements.

Your country's deficits are too small (btw same as ours here in the US).

rsp,



y said...

I think Mike Norman is wrong to celebrate the ever-expanding national debt. Much of that debt comes from spending WHICH SHOULD NEVER HAVE HAPPENED IN THE FIRST PLACE, such as the $4 trillion total spent on Iraq and Afghanistan, and the huge amounts spent bailing out the financial sector. Much of it is also simply interest being paid to the richest 10% of society. In many cases it's their savings, not 'ours'.

The national debt should only expand to accomodate worthwhile and productive spending - not to enrich bankers or to wage endless pointless wars. Paying down the debt associated with these things is probably a good idea in the medium to long term, as these debts should never have been created in the first place - though this shouldn't come from cuts to social security or other such services.

For example, imagine the government spent a trillion dollars building the world's largest ever pile of faeces.

Should that increase in spending be celebrated as adding to national savings? No. Would such wasteful spending have negative consequences at some point? I would have thought so.

So either (a) don't incur a trillion dollar debt building the world's largest pile of faeces, or (b) if the government is dumb enough to do such a thing, make sure the right people end up paying for it and don't leave it on the nation's tab.

paul said...

y,

There's two realities occuring here:

The idea that the National Debt is not in and of itself destructive to our future well-being is one that must be made.

The further realization must be that a very small cohort ends up being the ultimate recipient of those funds and there is zero chance anything short of confiscation will change it.

So we are presented with two choices: continue feeding the monster (rich oligarchs) by tageting spenders first or tax the shit out of them when they win.

The meme should be tax the winners because taxing the losers can't work.

There's a talking point for ya.

Jure Jordan said...

Thank you @ Matt Franko for your confirmation of my thinking. It is that i am concerned with the question of how to counter the advocates of hurried entrance to eurozone which does bring some relief of not having any monetary policy option, due to the peg,that could lower the interest rate of 6% for 10Y debt.
They started to aleviate the lack of monetary policy trough only bank still in state hands, HPB, which will be up for sale prety soon. HPB started offering better credit terms then any other bank that is in foreign hands. Which if done quick enough and with purpose can lower the interst rates even before entering eurozone which the government sees as salvation from high cost of credit. Of course that is not a salvation, that will make things even worse given enough time with high trade deficit.
My question is that is it easier to manipulate the peg then entering the eurozone? Peg is manipulated by central bank which has sufficient euro reserves and it prints the money trough private banks reserves but only when it has equivalent ammount in foreign currency reserve. That is clearly done more out of belief then in need.
Btw another problem is that most of the private credit is peged to foreign currency and to make it even worse to Swiss Frank which inflated 30% to euro in last couple of years. But that can be solved easily if willing.
Am i right that it is better to have a peg then to adopt the euro?

Tom Hickey said...

Jure Jordan, ask Warren Mosler at his place. He is the MMT expert in euro matters. Warren answers most questions that people ask there.

I agree with Matt. I don't see anyway around the peg due to the "cruelty of math" i.e. the sectoral balance identities. To meet the EMU criteria given the sectoral balance identities, austerity is a given.

But I would still ask Warren as "the last word."

Tom Hickey said...

Am i right that it is better to have a peg then to adopt the euro?

I would say yes in principle. With a peg, Croatia retains more currency sovereignty than it would have if it joins the EMU. Joining the EMU is essentially forfeiting currency sovereignty by treaty. Pegs can be changed or dropped. Joining the monetary union before they have the bugs worked out is like jumping into an abyss.

Tom Hickey said...

y, Mike's right on the level of the raw numbers, and I am sur ehe is not arguing for the distribution of spending. This is the big issue that the US faces. It is a society that is dependent on military Keynesianism and the way out is politically painful since the spending is distributed through most congressional districts. Converting this behemoth to peacetime use would be a huge political challenge that is virtually impossible at present for a variety of reasons.

y said...

it's better to have a peg than to enter into the fascist bank dictatorship of doom that is the euro.

paul said...

"fascist bank dictatorship of doom"

:-)

y said...

Tom, the problem is the US is spending a fortune building a huge mountain of poo. Saying they should spend more regardless is not the right message.

Jure Jordan said...

Thank You @ Tom H

Tom Hickey said...

y, once you have a system supporting a population at a particular level, even it is creating poo, has certain consequences for the system and changing the system. The challenge is changing the system to eliminate the poo without also overly disrupting the system. This is the political problem of change. It's not just military, of course, but that is a huge share of it. It is also all the negative externalities, the most serious of which is environmental degradation, e.g., leading to declining health, global warming, and resource depletion for future generations. And almost everyone has a hand in not changing the system since in the short run it will negatively affect their perceived interests and preferences.

y said...

Say the debt goes up by another trillion. Should we shout "Whoopee! another trillion in non-government savings!" or say, hang on, what did we just spend that trillion on? Was it money well spent? Was it wasteful, did it achieve anything? Who actually has it now?

Tom Hickey said...

Money as a unit of account is the accounting record for a period. On one level, what counts is how close to a full employment budget the sectoral balances came in at and what the (changes in) employment rate fx rate and price level were. On another level, what counts is public and private investment in the broad sense of ensuring sufficient real resources for future needs of the population. What also counts is quality standards such as living standard, level and change in the Gini coefficient, etc.

Finally, there is a consideration of what a society prefers to expend its resources in pursuit of, which is a political question with normative implications and real consequences. That is depending on the level of collective consciousness in a representative democracy, along with political and other institutional factors.

Roger Erickson said...

"Say the debt goes up by another trillion."

Y, you gotta get over this fixation that there is any public debt for a sovereign, fiat currency issuer.

There is no public debt.

There is only real growth or decline, fanned by manageable amounts of either inflation or deflation.

Roger Erickson said...

Jure Jordan,

both a peg to the euro or the euro itself are a loss of sovereign policy flexibility. Either convince your compatriots to stop both, or emigrate. There's no middle ground.

The countries to emulate in europe, at least for currency policy, are the Czech Republic, Sweden, Denmark, etc, who had the brains to NOT join the euro. None of them are perfect, by any means, but at least they didn't add absolute currency stupidity to their existing woes.

Matt Franko said...

y,

When you talk to people over here and point out to them the "military Keynesianism", ie how we have typically run very high fiscal deficits during wartime periods and this "worked"... the typical response is "yeah, but that was war!" or something like that. Still thinking that a deficit is "bad" per se...

So again it comes back to fiscal ignorance... the deficit is a "necessary evil" in order to win the war... "kill or be killed", etc..

rsp,

Roger Erickson said...

Paul,
you too need to learn to stop worrying about a fiat deficit

Once on a fiat currency regime, there is no revenue to the currency issuer, so there can - by definition - be no deficit.

The only deficit is a semantic deficit, of failing to define the changing definition of terms loosely repeated across different contexts.

English is a very dynamically sparse & efficient language, where the same words take on widely different meanings BASED ON CONTEXT. Yet if context change isn't noticed, the english language also can stop making sense very rapidly.

We can't have it both ways. That's why legal wording is still critical for effective law-making. Notice we don't have that currently.

y said...

Roger, you could

a) increase the deficit by a lot to achieve full employment,

b) increase the deficit by a little to achieve full employment,

c) not increase the deficit and achieve full employment, or

d) reduce the deficit and achieve full employment.

Option (a) is not necessarily better than options (b), (c) or (d). Indeed there might be very good reasons for choosing options b, c or d.

Roger Erickson said...

Y,
Given that revenue has no meaning to a fiat currency issuer ...

we could also cease, forever, discussing deficit for a fiat currency issuer?

Streamline whatever discussion you want to have by cleaning up the terms, and restricting them to growth, outcomes, aggregate demand, inflation and deflation.

There's no benefit in throwing around terms like fiat deficit or balanced fiat. It's just confusing nonsense incapable of helping any discussion whatsoever.

paul said...

"you too need to learn to stop worrying about a fiat deficit"

Not worried about the fiat deficit. It's an irrelevant number.

What isn't irrelevant is the accumulation of that fiat by a small group hungry for power and control that uses it to buy anything they want.

Letting someone have that much wealth gives them too much power…my only concern.

y said...

Revenue does have meaning to a fiat currency issuer (though not as a source of "funds"), and debt is debt even if it pays zero interest and has zero maturity.

Budget deficits can be any size without having an effect on the exchange rate or on inflation if people want to save the amount spent, in one form or another.

But the assumption that the size of the deficit is irrelevant is dependent upon the idea that savings desires will always increase to accomodate, that any necessary future changes to fiscal, monetary or other policy can be made at the drop of a hat if needs be, and that possible future exchange rate changes are nothing much to be worried about.

paul said...

"hang on, what did we just spend that trillion on?"

Regardless of what it was spent on, we know where most of it ends up. These same folks buy your government right out from under you.

Wonder why your government doesn't listen to you? It isn't a mystery. 99% of our congresscritters are the candidate that spent the most money. I didn't give it to them.

paul said...

"and debt is debt even if it pays zero interest and has zero maturity."

How so? True debt implies an obligation. What obligation is there in fiat?

Matt Franko said...

The people who have authority over the most USD balances of any human beings on the planet are not "the rich", they are the 536 in the Senate, Congress, and the White House.... AND THESE MORONS DO NOT EVEN REALIZE THIS.... THIS IS THE ONLY TRUE PROBLEM IMO.... rsp,

Ignacio said...

We had decades of constant rising surplus (to avoid using the word deficit) and people getting poorer, unhappier, etc. For what use is increasing deficits if we always end up playing the same game: asset prices increasing, wealth distribution being skewed and polarized, having to work more for less losing real purchasing power, etc. This only benefits the "asset-price ponzi" economic game.

By itself increasing injection of currency via spending does not solve anything, unless you are a true believer in "trickle down".

Military keynesianism does not solve anything Matt, it destroy real capital. War is a net destroyer of wealth of the sort kind, and building up military material is also a waste of resources that are scarce and could be used for civilian demands. It's a megadumb policy of the worst kind than only benefits a minority of oligarchs enforced by the sate (fascism in its pure form).

y said...

"What obligation is there in fiat?"

A debtors obligation to his creditor is to give them a reason to hold their debt.

In a simple case, if you want to borrow money from someone, you give them a reason to hold your debt (to give you credit) by promising to pay them interest. If you fail to keep your promise, your 'credit rating' will suffer and people will have less of a reason to hold your debt in future.

If your debt is a zero-interest-bearing zero-maturity note, then your creditor (the person that holds your note) will need some other reason to hold your debt, given the absence of interest payments on the note.

If no creditor can see the point of holding your zero-interest bearing debt then your 'credit rating' will fall to zero. That is another way of saying that your currency will experience 'hyperinflation' - i.e. no creditor will be willing to 'buy' your debt.

So a currency-issuers' obligation to his creditors (to those that hold his currency) is to give them a reason to hold his currency. If he can not, they will refuse to hold his debt and his credit will fall to zero. i.e. his currency will 'hyperinflate'.

paul said...

"A debtors obligation to his creditor is to give them a reason to hold their debt."

The government has no "reason" to hold our debt. The government is us, outsourcing the management of our economy to "experts" who are supposed to be knowledgable and competent to do the job they were hired for.

They are governors, not rulers.

The purpose of money creation is to balance spending capacity with the potential of the citizens to produce output.

It's a balancing act similar to your foot on the gas pedal as it keeps the speed of your vehicle at a level where you don't careen out of control. Keep in mind that if you let off the gas th ecar slows down.

One may argue that the taxes give the currency value because it "forces" the citizens to use it instead of other options. Fck off Bob.

Fine, if you want to think of it like that but as a practical matter I can't think of a scenario where many competing currencies issued by Bitcoin or Bitfuck or whoever would enable the level of commerce that we have enjoyed over the past decades.

And this is in spite of the incompetent management our economy has been subjected too. Tens of thousands of public-servant parasites (not workers, management, politicians and technocrats thru the revolving door) selling out our interests for their own gain.

We (workers) are the hamsters in the wheel. These f'kers have nothing if we don't produce.

In summary, the National Debt™ is not in any way an obligation. It's a necessity.

Tom Hickey said...

y So a currency-issuers' obligation to his creditors (to those that hold his currency) is to give them a reason to hold his currency. If he can not, they will refuse to hold his debt and his credit will fall to zero. i.e. his currency will 'hyperinflate'.

US T-bills are very close to 0% nominal interest and their real rate of interest is negative. Yet there is still demand for T-bills even with the Fed selling them to buy issues at the long end of the yield curve.

Tom Hickey said...

paul We (workers) are the hamsters in the wheel. These f'kers have nothing if we don't produce.

These f'kers have nothing if we don't buy, either.

y said...

What I meant is that the government is a debtor and anyone who holds government paper (cash note, bill, bond etc), coins or reserves is a creditor to the government.

When you walk around with federal reserve notes in your wallet, you are holding government debt. The government's obligation to you is to give you a reason to hold that debt. When no one wants to hold the government's debt, that is called hyperinflation.

Of course we need state-denominated money to pay taxes but we hold much more than we need to do that. If no one had a reason/desire to hold state-denominated money beyond the need to pay taxes, then the government would only be able to spend as much as it could collect in tax.

Everything it spends beyond that (in 'deficit') it essentially 'borrows' from whoever agrees to hold the govt debt (to grant the government credit), whether that debt is a zero-interest bearing note or a 10yr interest bearing bond.

Roger Erickson said...

"What isn't irrelevant is the accumulation of that fiat by a small group"

Now we're getting somewhere.

Roger Erickson said...

y

"Everything it spends beyond that (in 'deficit') it essentially 'borrows' from whoever agrees to hold the govt debt (to grant the government credit), whether that debt is a zero-interest bearing note or a 10yr interest bearing bond."

You seriously need to look up the definition of "fiat."

The Treasury happens to sell T-bonds. It doesn't have to. Either way, it can't possibly fail to create the currency to pay whatever it wants to do.

T-bonds are a policy, NOT a debt.

Someone keeps telling us it's a debt, and you keep believing it.

Our real problem is that a unique species of tick - the seman tic - keeps sucking the blood out of our group brain. The result is failed discourse, that goes nowhere, all for lack of adequately defined terms.

It's worse than tomato/tomato, or potato/potato.

I say fiat, and you say debt.

It's like we're all faux Austrian-economics boneheads now.

Matt Franko said...

Ignacio,

Agree wrt warfare economy I tried to put "worked" in parenthesis to signify it worked in name only...

My point was intended to explain how the only way you can get people over here to agree to deficit spending is during times of warfare... which of course is sad for all involved.

this is based on the false belief that a "balanced budget" should be pursued.... it's not possible, people will always desire to save and the east will always desire to acquire western net financial assets till the end of this eon imo...

rsp,



rsp,

Dan Kervick said...

T-bonds are a policy, NOT a debt.

I think this is just false. Of course it is true that the government doesn't have to sell securities, and only chooses to do so as a matter of policy. But once it does sell the securities, those securities are government obligations. They are debt.

It's also the case that since the government can manufacture at will the final means of payment of all legal debts, there is never an issue about whether the government has the ability to pay its debts. But the fact that these debts are easily and unproblematically repaid does not mean that they are not debts.

Dan Kervick said...

The government has no "reason" to hold our debt.

That's not the issue. The issue is what reason we have to hold the government's debt. I would say there is no one single reason, but the fact that the government can create tax obligations by legislative fiat, and accepts its own debt in payment of those obligations, is part of the reason.

Roger Erickson said...

'By itself increasing injection of currency via spending does not solve anything, unless you are a true believer in "trickle down".'

An unsubstantiated claim. Increased public spending did a lot at various times, from the original American Revolution, through Reconstruction, the Panama Canal, the New Deal, the federal highway system, NASA ... yada, yada.

It all depends on where it's spent. But we can't even get that far if we con't get over the roadblock of whether any public initiative whatsoever can or can't be spent into existence.

Roger Erickson said...

@Dan Kervick
'"T-bonds are a policy, NOT a debt."
I think this is just false. Of course it is true that the government doesn't have to sell securities, and only chooses to do so as a matter of policy. But once it does sell the securities, those securities are government obligations. They are debt.'

Was expecting you to say that, DK, since you keep saying similar things that indicate you're not fully on board with existing monetary operations.

T-bonds are simply another decision to spend more fiat currency into existance. That decision is not forced by anyone else, it's a volntary act, used as a convenient excuse for draining banking reserves. A debt means getting something & then having an obligation to give something back. The US Treasury never gets anything from T-Bond buyers.

Are you now going to go on to say that Fed & Treasury creation of TTL accounts is a debt too?

paul said...

" those securities are government obligations. They are debt."

A distinction that has no real-world meaning. In this context debt is nothing more than a word. It is irrelevant to the functioning of the economic system. It serves to confuse those that have difficulty with math or logic.

The government isn't "obligated" to pay interest on savings so that rich people don't spend the savings. There was no intention to spend it anyway. The government has chosen to pay that interest to it's crony friends because that is the deal they cut to sell it's citizens out for a nickel. Congress knows who is important to them.

If the government were constrained by this arrangement funding for WWII couldn't have happened. It's a constraint when tbtb want it to be one. As a constraint it's like the edge of the flat Earth. It's only a constraint in the minds of the weak.

If you want to tie yourself up in a semantic straight-jacket for some unknown reason go ahead. But don't expect the rest of us (well, me. I'm only speaking for myself) to buy into your argument.

The funds the government ties up in bonds are not necessary for the funding of the system. It is nothing more than a choice. One cannot think otherwise and at the same time claim he is a proponent of MMT. It's like you have never read anything the MMT founders have written.

Dan Kervick said...

Was expecting you to say that, DK, since you keep saying similar things that indicate you're not fully on board with existing monetary operations.

I'm not sure what you mean since I didn't say anything that isn't completely consistent with a full understanding of our contemporary monetary institutions, as described by MMT economists and other economists.

T-bonds are simply another decision to spend more fiat currency into existence. That decision is not forced by anyone else, it's a voluntary act, used as a convenient excuse for draining banking reserves.

As before, you are confusing two questions: (1) whether a government has any need to issue securities; and (2) whether, once the securities are issued, they constitute a debt of the government. It is certainly true that a monetarily sovereign government has no inherent need to issue debt in order to spend, and does so only as a voluntary policy choice. But it doesn't follow that after the government makes that voluntary policy, the securities are not a debt of the government.

A debt means getting something & then having an obligation to give something back. The US Treasury never gets anything from T-Bond buyers.

A debt is simply a legal obligation to surrender something to someone - usually a monetary payment. When the government sells a security, the owner of the security then has a legal claim on a future payment form the government, and the government has a legal obligation to pay.

Of course the government doesn't need the money, and only chooses to sell a security for money as a tool of its monetary policy. But it does issue debt in order to do this.

That's the difference between taxation and security sales. In the first place, the government simply takes someone's money. In the second case, the government takes the money, but gives the person who had it a claim on a future payment at a defined date, and has then assumed an obligation pay.

Here's a passage from Warren Mosler's "Seven Innocent Frauds":

Paying off the entire U.S. national debt is but a matter of subtracting the value of the maturing securities from one account at the Fed, and adding that value to another account at the Fed. These transfers are non-events for the real economy and not the source of dire stress presumed
by mainstream economists, politicians, businesspeople, and the media.


One more time: to pay off the national debt the government changes two entries in its own spreadsheet - a number that says how many securities are owned by the private sector is changed down and another number that says how many U.S. dollars are being kept at the Fed in reserve accounts is changed up. Nothing more. Debt paid. All creditors have their money back. What’s the big deal?

Notice that Warren doesn't say that the securities aren't debt or that the security holders aren't creditors. He uses the term "debt" throughout and says that the debts are paid and the creditors have their money back. All he is saying is that the repayment is an easy matter for a government like the US whose debts are in its own currency, and so repayment is no big deal.

Dan Kervick said...

The government isn't "obligated" to pay interest on savings so that rich people don't spend the savings.

In fact, it is. If you don't get paid you can sue, and a court will order the government to pay. If necessary, the Supreme Court would point to the 14th amendment and its requirement that the debt of the US government "shall not be questioned."

Matt Franko said...

Dan, Warren is just having to use the terminology "debt" in order to be able to communicate to those not in paradigm yet. The word "debt" as within the vernacular of those not in paradigm.

Lets go to wiki wrt "debt":

http://en.wikipedia.org/wiki/Debt

"A debt is an obligation owed by one party (the debtor) to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.
A debt is created when a creditor agrees to lend a sum of assets to a debtor. Debt is usually granted with expected repayment; in modern society, in most cases, this includes repayment of the original sum, plus interest."

With the current operations of the US Treasury I would submit that this is CERTAINLY NOT what is happening. Mathematically impossible.

Goes back to: "To do a reserve drain you first have to have done a reserve add".

You have to look at the complete transaction in total.

It's like these people are walking up to a check-out line and watching the person in line before them pay the cashier and they think "hey, that customer just loaned the cashier $50!" Not looking at the groceries that the store just gave the customer right before this moment...

Here is Abbott and Costello demonstrating the mathematical absurdity of this belief as comedic entertainment:

http://youtu.be/5kAH5ZvWMfU

If you believe that the US government has a "debt", then you HAVE to believe Lou owes Bud the $10.

Our semantic brothers and sisters are all mentally twisted up on this one... math can straighten them out, if they have the sense to listen to the mathematicians...
Which 99.999% of them dont, they are FULL of vainglorious reasonings which is taking them down... nobody can tell them anything...

Analog: I suffer under no delusion that I can communicate via writing well and am always open to suggestions...

rsp,

paul said...

"The government isn't "obligated" to pay interest on savings so that rich people don't spend the savings."

"In fact, it is. If you don't get paid you can sue, and a court will order the government to pay."

Irrelevant.

I already wrote in that post that this distinction brings nothing useful to the table. It brings less than nothing because it detracts from the discussion of how the fundamental system functions and what makes it go.

The debt arrangement is a bolt-on that doesn't create any meaningful alteration to the functioning of the system.

It is as important as the tennis players "obligation" to wear the logo of it's sponser is to his/her performance.

In this context, the "obligation" you speak of is trivial, of no consequence. Further, it could just as easily be called an "entitlement" from the non-government point-of-view.

Every law passed by Congress is an "obligation" of some sort. You trivialize the meaning of the word.

Money creation requires one step…enter the balances into private sector bank accounts using keystrokes.

Anything added to that is obviously superfluous, serving only to "govern" the output of balances. The bond governor fails miserably in this respect, creating no drag. The government is unconstrained in it's ability to pay the interest.

The behavior of the system would not change in any significant way if it were removed. It is not worth arguing over it.

I will leave it to you to prove otherwise, show quantitatively how that arrangement affects the normal operation of the non-government, and further, how that operation would change in a significant way if the "obligation" were removed.

Ignacio said...

"An unsubstantiated claim. Increased public spending did a lot at various times, from the original American Revolution, through Reconstruction, the Panama Canal, the New Deal, the federal highway system, NASA ... yada, yada.

It all depends on where it's spent. But we can't even get that far if we con't get over the roadblock of whether any public initiative whatsoever can or can't be spent into existence."


Not unsubstantiated claim, as I said, by itself it does nothing. As you point out it all depends on where it's spent.

We had decades of rising "deficits" and we have got worse, not better. That's my point.

Now because the benefits of the system still will be mostly captured by a few there is nothing that is going to change that for now. Demanding increases of deficit spending won't fix nothing per se, and seeing how these deficits have been used last decades I ask myself if it's not better to let chaos be and the whole thing collapse sometimes.

TL/DR: Most probably we are fucked one way or an other. There is no way things will get really solved without some major social (and economic) disturbance.

y said...

Roger, Paul,

Wray also refers to money as debt. What I was saying is just MMT.

From the MMT primer:

"We conclude: money is debt. It need not have any physical existence other than as some form of record—mostly, an electrical entry on a computer. Money always involves at least two entries: debt of the issuer and asset of the creditor."

http://neweconomicperspectives.org/2012/06/mmp-51-conclusion-the-nature-of-money.html

So according to Wray money is a debt of the issuer and an asset of the creditor, or holder, as I said.

y said...

"If money is debt, then as Minsky said, anyone can create money by issuing an IOU denominated in the social unit of account. The problem is to get it accepted, that is to get someone to hold one’s IOU. To become a debtor requires finding a creditor willing to hold the debt."

http://neweconomicperspectives.org/2012/06/mmp-51-conclusion-the-nature-of-money.html

paul said...

"Roger, Paul,

Wray also refers to money as debt. What I was saying is just MMT."

y,

No one is disputing the fact that money is debt.

The argument is whether or not the "obligation" has any meaning in this context of debt. Apparently according to some "debt" is one of the words in the language that can have only one meaning no matter what the context.

Or, maybe not. You guys need to go back to the drawing board.

You are pushing a distinction that adds nothing useful to the understanding of the system. Talk about missing the forest for the trees.

The "obligation" can always be met by the government simply by entering numbers in balance sheets. This is not true for private sector debt.

In the private sector the obligation of debt is real…if not met the borrower loses his collateral. The borrower must earn income or divest assets in order to remove the obligation.

The government has no income, it doesn't need it. It generates its own funds out of thin air.

The tax/spend cycle is not to fund anything…it creates flow. At least 1/3rd of our GDP is government-induced flow.

This discussion has become absurd. Apparently we have several neoliberals among us masquerading as MMT'ers.

One of the fundamental insights of MMT is that a government sovereign in it's own currency doesn't have to borrow to fund it's activities, nor does it have to tax.

Some of you must have missed class that day.

y said...

I wasn't saying the government needs 'funds' to spend. I was (trying) to say that the government needs people who are willing to hold its money (i.e. its debt) for that money to have any value, or purchasing power.

These people are called creditors. By agreeing to hold the government's money (debt), they give the government credit, and the government's money has value.

Now the government can force people to hold its money by imposing tax obligations and other legal requirements. But beyond that imposed value, it's money will only have value if people actually want to hold it.

y said...

Say I go into a shop and buy some goods by giving an IOU (my IOU) to the shopkeeper.

I am issuing 'money' in the form of an IOU, but it is the shopkeeper that is giving me credit.

He is buying my debt in exchange for his goods. I am a debtor and he is a creditor.

Buying someone's debt is basically the same thing as lending them money. As such I am 'borrowing money' from my creditor, or rather I am borrowing the VALUE of the money I issue from my creditor, the shopkeeper.

If no want wants to hold my debt - if no one wants to give me credit, then the money I issue will have no value.


Similarly, if I buy goods in a shop with cash, the shopkeeper is buying the government's debt from me in exchange for goods. He then becomes the government's creditor by holding the government's debt.

If no one wants to hold the government's debt (or if no one wants to 'buy' the government's debt in exchange for goods, or anything else), the government's debt (money) will have no value, beyond that which is imposed through taxation, or law.

Matt Franko said...

"Wray also refers to money as debt."

Is he saying that "money" (metonym) in all of its past and present forms is "debt"?

Or is he talking about our specific "modern money" like our USD today specifically?

I dont see the previous historic use of weight measures of silver for instance as involving "debt" in any way at all, so Wray must be writing about our specific arrangements today in the US...

rsp,

y said...

Yes coins are basically records of debts stamped on metal.

"From the beginning, coins did have precious metal content. We examined a hypothesis for that, because from the MMT view, the “money thing” is simply a “token” or record of debt. If that is true, why “stamp” the record on precious metal? For thousands of years, debts were recorded on clay or wood or paper. Why the switch? We argued that the origins of coins in ancient Greece must be placed in the specific historical context of that society. Use of precious metal was not a coincidence, but also was not consistent with the commodity money view."

http://neweconomicperspectives.org/2011/08/mmp-blog-13-commodity-money-coins.html

Tom Hickey said...

"Debt" is a legal term. A "debt" is a legal obligation involving a liability, e.g., an account payable, that is enforceable in law owing to a valid contract.

Public debt is not "just a liability on the books" because it involves an enforceable promise, i.e., a legal contract. There is no question but that governments must meet their legal obligations in a timely way, or be declared in default.

That the US and US states can enter into debt obligations under the law is shown the 14th Amendment, Section 4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void. Courts have reasoned that the US cannot renege on its "debts" as legal obligations that are constituted by a valid contract.

The controversy among constitutional lawyers at the time of the recent debt ceiling debate about default also goes to show that Tsy securities are considered public "debt" under the law. What this means is that the US govt is legally required to pay interest on time as promised and to convert the face value of tsys to bank reserves at the time of promised redemption, i.e., neither the executive nor the legislative branches can choose politically to default when it has the means to meet its obligations operationally. There is no legel right to conversion of tsys to reserves prior to this date unless this is specified in the contract, as it is in the case of E-bonds, for example, but not most tsys.

Arguing that tys are not public debt is probably counterproductive. The need is to explain exactly what this means and how federal debt n the US is different from other public debt and all private due to the difference between currency issuer and currency users.

Tom Hickey said...

Ignacio I ask myself if it's not better to let chaos be and the whole thing collapse sometimes.

The problem here is inviting a man on a white horse. Might be an FDR, but it also might be a Hitler, Mussolini, Franco, or Stalin.

And don't forget Maximilien de Robespierre.

Tom Hickey said...

Exchanging a given weight of a PM of specified purity is a barter exchange. The use of coins is not barter exchange but monetary exchange due to seigniorage. The face value of the coin exceeds the value of the weight and that is the 'rent" or embedded "tax" extracted by the sovereign for the use of the sovereign's money in markets under the control of the sovereign, the sovereign's realm being a currency zone.

Tom Hickey said...

BTW, I suggest it more constructive to call money "credit" rather than "debt." Same meaning accounting-wise, just a different emphasis. This is consist with Warren's terminology of currency (state money) as a "tax credit." A tax credit is an asset of the private sector, which has tax obligations to government that has to obtain the state's money to satisfy, and a liability of govt, which uses its liabilities along with its power to create non-govt liabilities to transfer private assets for public use.

Similarly, a Tsy security is a savings credit for non-govt., similar to an interest bearing deposit account at a bank. Do most people think of their savings account as a loan to the bank, even though it is? Do they even realize it?

It's all a matter of emphasis. In issuing interest-bearing securities, which is operationally optionally under a fiat regime, govt that is sovereign in its currency is acting voluntarily as a default risk-free bank paying discounted interest due to lower risk premium.

"Philosophy is a battle against the bewitchment of our intelligence by means of language" — Ludwig Wittgenstein, Philosophical Investigations, 109.

Matt Franko said...

" why “stamp” the record on precious metal? For thousands of years, debts were recorded on clay or wood or paper. Why the switch? "

Nomisma was not based on "debt", I think Wray has missed nomisma. (I dont have his book to check...)

I saw this word in the Greek scriptures some time back and then David here gave me Del Mar and Del Mar got nomisma from Aristotle looks like.

I think it may be the first true non-convertible state currency in recorded history.

It's important to see this...

I dont think they had many metals to choose from back then so they may have used silver instead of iron, steel, or copper (looks like all they had to choose from was gold, silver, copper, iron (or derivatives thereof) as it was more scarce and imputed a form of "information security" to their system...

Rsp,


y said...

Tom,

yes state currency is a tax credit, but people hold more government tax credits than they need to pay taxes or think they will need to pay taxes in future.

These ‘tax credits’ are held in the form of cash, reserves, or bonds, with bank deposits also serving as tax credits 'by proxy'. That is, bank deposits are immediately convertible into currency at a 1-to-1 fixed 'exchange rate', with the bank holding the risk of maintaining that exchange rate (with the central bank providing quick access to currency/reserves in exchange for bonds, or as a loan, and the government ultimately insuring covertibility of certain bank deposits up to a certain amount).

When the government credits an account (spends), it is issuing a government obligation, which we can call a liability or a debt. Generally we call liabilities that pay interest over a fixed term 'debts', though debts can also pay zero interest and have no fixed term. As such currency (including ‘nomisma’) can either be called a liability or a debt, as can bonds.

Tom Hickey said...

y, the reality is that no one thinks of state currency ("cash") as a debt. Trying to explain to people that the dollars they hold in their wallets are a "debt" of the government would be futile. Most people would regard it as absurd to consider cash anything but "money." This is what "money" means for most people.

But if one was talking to sincerely interested parties of sufficient intelligence about MMT and one started with the accounting, then one could perhaps get them to see what is actually going on operationally wrt currency users and the monopoly issuer of the currency.

There are, however, not many sincerely interested parties of sufficient intelligence around. So we need to figure out some other avenues of approach and test them.

Tom Hickey said...

Continuing on that last thought, most people in economics and finance know that just about everyone else hasn't a clue about either economics or finance, so when they talk to these people they make up stories simply enough to understand.

The stories are always shaped ideologically in a way that reinforces the normative views of the storytellers. In this process, a lot of dishonesty is involved.

MMT needs a narrative that is close enough to be operationally correct to be acceptably honest.

Dan Kervick said...

I will leave it to you to prove otherwise, show quantitatively how that arrangement affects the normal operation of the non-government, and further, how that operation would change in a significant way if the "obligation" were removed.

It seems to me pretty clear that if the government removed the obligation from its securities, so that when a person purchased a treasury bond, for example all they received was a government statement of a non-binding "intention" to pay them the principle plus interest at various times in the future, then fewer people by far would choose to but government bonds. Without the binding legal commitment to pay up, we wouldn't even call these bonds "securities", because the yields from them would be less secure. Without government debt obligations to purchase, people would look for other low-risk assets to purchase instead.

Perhaps there is some confusion here about two separate questions: (1) are government bonds, notes and other securities debts of the government that correspond to a legally binding obligations to pay a certain quantity of dollars in the future, and (2) are those dollars themselves a form of government debt.

I personally don't think there is really much question that government-issued bonds are a debt of the government, and so the answer to question (1) is "yes". The more controversial question is question (2. As everyone here seems to know, most of the MMT thinkers, following Innes and others in the chartalist tradition, regard a dollar as a form of government debt. It is regarded as a government debt because, if the government imposes a tax obligation on a person, that person has the ability to discharge the obligation with the dollars. Nevertheless, I do think classifying dollars as government debt deserves to be regarded as a more controversial statement, because once one has discharged one's tax obligations, then if they still have any dollars, the government doesn't owe that person anything further.

However, this is not the case with a security. If you own a government security, the government is not merely obligated to exchange that asset for another of equivalent value, the government is instead obligated to pay you dollars that you don't presently possess.

paul said...

Tom, regarding your comment at September 28, 2012 10:20 AM

Nothing you've written in your comment is in dispute. As far as I can tell no one has said the facts are other than you have stated, or Dan or y. Here, we are in agreement.

My argument, in the simplest terms is:

So What?

The facts lead to no real-world outcome of significance. The effect of interest paid to bond-holders on the greater economy is vanishingly small.

There exists no negative feedback loop between the non-government and government that would limit the goverments ability to create money as a result of the bond interest "obligation".

The government is unconstrained in it's ability to create the interest.

Hence the "obligation" is not an obstacle.

So, you say it's an obligation. I say it's an obligation, so what? That's the fundamental difference between my position and yours, Dan's and y's.

BTW, The mainstream argument between bonds and no-bonds is predicated on the claim that bonds are less inflationary than no-bonds (direct money printing). There is no empirical evidence to support this. The "obligation" add-on to this is just more obfuscation of a distinction without a difference.

I hate to drop Bill Mitchell's name here but his position (educated opinion) is that bonds/no-bonds is not important, the system functions pretty much the same either way. He then moves on to more important stuff.

paul said...

Dan K.

It seems to me pretty clear that if the government removed the obligation from its securities, so that when a person purchased a treasury bond, for example all they received was a government statement of a non-binding "intention" to pay them the principle plus interest at various times in the future, then fewer people by far would choose to but government bonds. Without the binding legal commitment to pay up, we wouldn't even call these bonds "securities", because the yields from them would be less secure. Without government debt obligations to purchase, people would look for other low-risk assets to purchase instead.

There are no other low-risk assets comparable to Treasuries. Not even close. A Treasury is as close to a dollar as one can get. It's face value is always exchangable for the same in dollars on very short notice. They are cash equivalents. Nothing else can meet that threshold.

The beginning part of the paragraph doesn't address anything I've been discussing.

(1) are government bonds, notes and other securities debts of the government that correspond to a legally binding obligations to pay a certain quantity of dollars in the future,

This sentence is framed inaccurately from my point of view. Here's why:

The government has a legally binding obligation to CREATE, not PAY a certain quantity of dollars only when creating new bonds as NFA's, not when rolling over existing bonds. Pay doesn't make much sense in this context, it implies giving up something, which the government never has to do. The government doesn't HAVE money, nor does it NOT HAVE money. The government is not a storage facility, it is a manufacturing facility when it comes to dollars and bonds.

Second, if and when bonds are redeemed they are either rolled over, requiring no new net funds generated, or they are sold to other investors for dollars already existing in the non-government. In either case the government doesn't have a financial obligation that is an obstacle.

You would have to make the case that some day in the future the government MAY have to create new funds to exchange for bonds, but in fact has not yet had to do so.

However, this is not the case with a security. If you own a government security, the government is not merely obligated to exchange that asset for another of equivalent value, the government is instead obligated to pay you dollars that you don't presently possess.

See above. The government (fiscal authority) doesn't "pay" the bond-holder that wants to exchange his bonds for dollars, another agent in the non-government provides the dollars by buying the bond. Ownership of the bond is transferred.

The government creates net NFA's (new bonds) only when deficit spending. Thus I'm not sure the obligation exists in this case in the way you intend it.

Fed operations in "buying" bonds involves the purchase of bonds of one maturity and selling of bonds of another maturity. An exchange of sorts. Not sure if some amount of NFA's get created here but it shouldn't be significant. The Fed is limited in it's fiscal abilities.

This is based on my understanding of "how things work".

Tom Hickey said...

paul, I agree with all that among us. What we have to do is craft this into language that ordinary people can understand and which will convince them. If enough people actually get it, all the nonsense about economic policy will be over and we can get on with making real choices. So far MMT doesn't have a convincing enough narrative. I don't claim to have one either, and unless a person is genuinely innocent and open, I have a great deal of difficulty convincing them. And when I finally do, it lasts about ten minutes due to the perverse programming.

Tom Hickey said...

The other thing is about govt doesn't have or not have money. No one is going to be able to understand this unless they already do.

The problem is that understand fiat currency perfectly well, and the prospect of inflationary profligacy scares them. They believe that political restraints are in place that prevent Congress form just printing money because they think that the govt funds itself with revenue and finances deficits by borrow from non-govt against future revenue. They not only belive this restriction is in place, they want it in place. Many people on learning that the restriction is not really in place demand that this be fixed so that it is.

MMT has no simple narrative addressing this that ordinary people can understand. Approaching economists and financial types is different. Other approaches are required, but that's for the MMT professionals to deal with.

paul said...

Tom,

I agree with you about simplifying things.

This discussion has been an intra-MMT squabble. It has been about the difference between the picture words paint and the reality of how the system works regardless of what the words imply.

I'm all for coming up with simple descriptions of "how things work".

I happen to be of the opinion that buying into terms like "debt", obligation, or borrowing is not going to get the job done.

Not sure what will, but talking like the mainstreamers doesn't seem like the right way to go.

Tom Hickey said...

I happen to be of the opinion that buying into terms like "debt", obligation, or borrowing is not going to get the job done.

Agree with that, and I don't think that denying "debt" and "obligation" will fly either.

Once people see that a fiat system is not to be feared due to inflation then all the rest of it falls into place. I don't think that they will be convinced by bringing in theory of money, monetary operations or accounting.

The way to go is to explain how the system works in terms of sectoral balances and functional finance. It's not necessary to bring in the MMT JG early on either. First get people to see how the system works in terms of stocks and flows.

I would start with the fundamental question that everyone is really concerned with. How can economic policy best achieve economic growth commensurate with population growth in a way that provides real resources to meet present and future needs, along with full employment and price stability, without breaking the bank or favoring various groups that have political influence? In other words how can we grow the pie so that everyone has more and no one is either left out or disadvantaged, and do so in a way that is sustainable?

Count up the issues there. There are many but they can be dealt with in a fairly simple narrative.

Why are Steve Keen and Michael Hudson getting wide exposure and not MMT? They have narratives that address these issues, at least partially in a way that a lot of people can relate to. While Keen and Hudson are considered to be on the left, they are often mentioned positively on the right, too.

Tom Hickey said...

To put it more directly, if we are arguing about it among ourselves, it probably isn't stated clearly, clearly and precisely enough, or related back to a simple narrative about how the system works.

Matt Franko said...

Tom,

What I see going on here is a disconnect between semantic brains and mathematical brains.

I agree with Roger and Paul .... and it's not that I think that Dan and y are "wrong", I just dont need a lot of words to be able to understand how the system operates and hence how it could be optimized .... I dont need a textbook to understand how our USD system works ...

btw you point out how Keen and Hudson get a lot of love from the right: All these 2 ever talk about is "debt, debt, and more debt", the right is the home of the debt doomsday crowd so of course their ears perk up when they hear this word used falsely as applied to the govt sector which they are always denigrating.. "the govt has to BORROW from the Chinese" we're leaving out DEBT to our grandchildren", "we're a DEBTOR nation!", etc......

We need to confront this falsehood, not appease it imo. It's mathematically ABSURD to say the govt is in "debt" in USDs.

Right now the f-ing US "debt" that the Fed bought is actually counted towards the "debt" ceiling for crying out loud.... this is all absurd and this needs to be exposed over and over and over again...

rsp,

Matt Franko said...

y,

looks like they had Lead too but that looks like it:

http://education.jlab.org/qa/discover_ele.html

Gold, silver, copper, iron, lead.

Take your pick, they had to make their coins out of one of these metals because that is all they had.... silver was probably a good choice all things considered.

rsp,

Roger Erickson said...

Arguments on both sides - of what to call a "debt," and when - are correct in contex. The key point is that the argument is not useful.

The bulk of the electorate are not accountants. They couldn't give a flying frack about economics or accounting jargon. All they worry about is whether a "debt" has to be paid back with THEIR "money."

In everyday parlance, it is not useful to call T-bonds debt. That broken semantics is exactly why we have this inane discussion over fiat "deficits" and fiat "debt" ceilings.

Matt Franko said...

You got it Roger imo... the rest is sophistry... rsp,

y said...

Hudson and Keen are interesting because they emphasise that the structure and operation of the economy are all wrong.

Keen emphasises restructuring banking to reduce the expansion of debt, and posits a debt jubilee as the most effective way out of the current situation. Hudson emphasises the dominance of debt-peddling neo-rentier class and their link to US militarism and imperialism.

In contrast, from the outside MMT can look like it's saying "just spend more!". This isn't the case, but it can look like that, given the emphasis always on increasing the deficit.

I think spending more into a broken system may have not-so-good consequences, like spending a fortune to build the world's largest ever mountain of turd.

This is why I question Norman's celebration of every extra trillion added to USD "savings" (govt debt). WTF was that money actually spent on? How can the national "savings" be rising so fast when so much appears to be falling apart?

There's a dissonance I think between the apparent message of "just spend more!" and what people see around them.

I think the message has to be very clearly one of structural change AND appropriate deficit spending. Otherwise it can look like just "papering over the cracks".

Hudson's analysis also suggests that the CAD may not be so benign. This is another aspect that needs to be looked at very closely I think. The 'free lunch' MMT claims the US can get largely comes from the fact that foreigners want to hoard dollars. When asked why foreigners want to hoard dollars, the MMT answer is sometimes "I don't know, it's irrational", which isn't very convincing.

I think it would also be useful to focus the MMT analysis on countries other than the US. Could MMT policies be enacted in the UK, Brazil or India, or might there be some limitations? By always starting with the US, we're always starting with the exceptional case - the most powerful and 'privileged' (with the dollar) country in the world.

paul said...

"Agree with that, and I don't think that denying "debt" and "obligation" will fly either."

Tom,

It isn't denying them, it's just not using those terms in the framing if they aren't necessary to convey the message.

Money creation does not create "debt" or "obligation" in the sense those words resonate with the average citizen.

When one uses those terms to describe the money creation operation, you are skewing the perception of what is actually going on and clouding the issue over what is important and what isn't.

WRT money creation "debt" and "obligation" are sterile accounting terms that have specific meanings. Those meanings are not trivially different from how they are perceived by the public.

By your accounting, we are "obligated" to repay the National Debt™.

Is that a fair characterization of what you would present to the public, or does it distort the reality?

Roger Erickson said...

It's useful to look at very analogous semantic-confusion issues, the consequences triggered and how solving the semantics is part of solving the problem.

http://www.economist.com/blogs/analects/2012/09/japan-chinese-history

"Last month a programme director for CCTV 1, Xu Wenguang, reminded his microblog followers of the staggering number of Chinese words, especially in the social sciences, which were likewise reimported from Japan. Japanese translators in the 19th and 20th centuries, faced with the daunting challenge posed by concepts like “society”, “philosophy” and “economics”, often simply borrowed classical Chinese phrases, imbuing them with new meaning along the way—creating what Victor Mair, a Sinologist, refers to as “round-trip words”. Centuries after Japanese culture had incorporated Chinese characters as a major component of its own writing system, Chinese students would return from Japan with a new lexicon for scholarship of their own."

The same problem, in a different context, looks completely different.

Tom Hickey said...

paul It isn't denying them, it's just not using those terms in the framing if they aren't necessary to convey the message.

That's my point. The logic of the MMT basic presentation (argument) needs to be compelling at every step, and terms that are charged, like public debt" need to be avoided. If people get the argument about how the system actually works, i.e., currency issuer v. currency users, then the rest is falls into line as pretty obvious. For example, it is clear that "public debt" is just a bunch of non-govt savings accounts at the Fed, whereas private debt encumbers future revenue so that its continually accelerating growth is unsustainable and leads to financial bubbles that must eventually pop. Not so for "public debt."

Speaking to y's point about the use the deficit and tax policy, my own view is that MMT needs to adopt Michael Hudson's view on economic rent v. productive contribution, as well as reducing negative externality.

Regarding trade accounts, my view is that this must be approached in terms of the global economy as a closed system. If not, then some countries will find it to their advantage to pursue mercantilist trade policy that beggars their neighbors, and that this not sustainable over time without leading to currency crises, financial crises, dangerous global imbalances, and even open conflict — as history goes to show.

An experienced writer who stands between the professional MMT world and ordinary people needs to write a book about this. Philip Pilkington comes to mind. Then it needs to be turned into a documentary by someone like Michael Moore or Charles Ferguson.

Tom Hickey said...

Very interesting, Roger. I was talking to a Chinese-American lady fluent in both languages who works as a translator. She was telling me that it extremely difficult to translate Chinese ideas into Western terms and vice versa since the entire universe of discourse is based on a radically different worldview. Simple enough for ordinary discourse, but as soon as things get technical, then the barriers mount. This is why science, whose language is math, is universal and non-mathematical technical language not so much. It's also why there are so many different interpretations of quantum mechanics. The list goes on. This is the issue that explaining MMT faces.

paul said...

"Speaking to y's point about the use the deficit and tax policy, my own view is that MMT needs to adopt Michael Hudson's view on economic rent v. productive contribution, as well as reducing negative externality."

Tom, we've always been on the same page here. I agree completely.

Matt Franko said...

I think Dan K. could write that book too... Dan: looks to me that you are strongly weighted towards the semantic side, but imo not near 100%, but this is your dominant trait.... that said, you need to be semantic oriented to "write a good book" imo... or to at least write well (which Dan does)...

Tom H. here seems to be pretty balanced between semantics and mathematics, but Tom is an exception in this regard imo (beo is another)...

I think the mathematical MMT arguments are easier to make to math oriented brains than a semantic argument for MMT being made to semantic brains...

The semantic people who are in paradigm and are trying to explain MMT to another out of paradigm semantic person have the harder job imo... this is a challenge for the semantic MMT advocates out there... they may be the ones who are going to have to do the heavy lifting...

How do you explain to out of paradigm people who are semantic that govt currency issuer "debt" is different than non-govt sector "debt" via semantics ie without using math and using words alone? Tough assignment imo...

rsp,

paul said...

The shortcomings of semantic explanations as I see it is this:

The real thing is abstract and practically speaking it is impossible to describe it perfectly with words alone. People have to be able to read between the lines and anticipate the full meaning.

A semantic construction is like painting a picture of an object…it will never look exactly like the object. A photograph will not even look exactly like the object.

I seriously doubt there exists a purely semantic thinker in math or the sciences that is capable of making a contribution to the body of science itself.

On the other hand, when an abstract thinker speaks or writes, most people don't know what the hell they are talking about.

I don't know how to bridge the gaps.

Tom Hickey said...

Matt Tough assignment imo...

That's why I think it will take a professional writer who is experienced in this field, which is why a offered Philip Pilkington as an example. Same with a documentary maker. Charles Ferguson would be ideal, after making several documentaries and writing several books. He could actually write the book and then make the documentary. Nice one-two punch. With our celebrity culture the documentary should also feature a few people who are widely known and respected. It would be great to get Stewart and Colbert on board with this. The could make it fun and add some satire to mock the ridiculousness of the neoliberal view.

paul said...

"I think it would also be useful to focus the MMT analysis on countries other than the US. Could MMT policies be enacted in the UK,…"

What do you think? Can you think of any potential calamitous situations where MMT thinking would lead to worse outcomes than neoliberalism?

I don't think it's possible.

Neoliberalism operates contrary to system relationships that were in place before human beings inhabited the planet Earth.

Neoliberalism is designed to fail. The only question being is it on purpose or is it ignorance?

Success for neoliberalism would have to be the case where a handful of elites control all of the wealth in the world (wait…what?).

I don't consider it success where a handful of people have everything and everyone else has nothing or less than nothing.

TPTB have managed to convince the rest of the citizens that it is their job to sacrifice themselves so that TBTB themselves can have the stuff they deserve.

These monsters put themselves above God.

/end Saturday afternoon rant.

y said...

Paul,

that's maybe a good reason to re-evaluate the concept of money as an obligation, or debt.

Your view seems to be that state money 'debt tokens' in themselves aren't important.

Yet you rage against the fact that some people have too many of these 'debt tokens'.

That's sort of my point. They are an 'obligation' because they have a certain power. The person that holds them is ultimately the creditor of the person that issues them.

paul said...

"Your view seems to be that state money 'debt tokens' in themselves aren't important."

y, I don't know where you got that idea. They are necessary to "keep score" of how many units of the national currency one has earned or otherwise come to possess. Period. So, important in this context certainly.

"Yet you rage against the fact that some people have too many of these 'debt tokens'"

Yes, distribution, or rather mal-distribution is one of the main problems. That should be obvious.

"That's sort of my point. They are an 'obligation' because they have a certain power. The person that holds them is ultimately the creditor of the person that issues them."

This makes no sense to me. It doesn't parse, nor does it translate into any action that would move flows in the circuit.

"obligation" is just a word. Explain why it is important in the context of public debt.

I will repeat what I wrote to Tom:

The National Debt™ is an "obligation". Are we obligated to repay it?

If not, why is use of the term "obligation" meaningful in this context?

The term his meaning only in the context of private sector (non-government) transactions. Outside this system, not so much.

Tom Hickey said...

The National Debt™ is an "obligation". Are we obligated to repay it?

This idea that the national debt has to be "repayed" involves a fallacy of composition. Yes, tsys must be redeemed at par with bank reserves individually as they mature, but the total amount of tsys is never repaid and revenue is not needed to redeem maturing tys at anytime. Tsys can be rolled over indefinitely, generally are, and can be ad infinitum, although there is no contradiction in the govt directing its central bank to convert all tsys to reserves immediately, which is simply an asset swap that eliminates future interest payments unless the policy is to pay IOR. This is the prerogative of being the currency issuer.

But redeeming individual tys at maturity is a govt "obligation" legally, unless Congress would decide politically to default, in which case the issue would go to the courts for adjudication. There is some difference in legal opinion as to which way the decision would go.

paul said...
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paul said...

"This idea that the national debt has to be "repayed" involves a fallacy of composition."

Whether or not it is a FOC is peripheral to the discussion.

The claim is made that an "obligation" is always something that must be reckoned with.

I have made a case where it obviously isn't (I think).

The National Debt™ is "debt" therefore it is an obligation.

Not true from the perspective of the non-government. Meaningless to 99.9% of the population with respect to the government.

One can't have it both ways.The claim is arbitrary.

The important term here is context. People seem to be missing it.

Tom Hickey said...

As far as 99% of the population is concerned, govt has an obligation to "repay" the nat'l debt in full, which is false (FOC), although the legal obligation to redeem tsys with bank reserves as they mature is true, which is what the debt ceiling was about and why default was a real possibility due to politically imposed constraints on using fiat directly. These impositions do substantially affect policy space.

The attempt of some MMT proponents to gloss over this legal obligation and the political restraints that have been legislated results in confusion. This is a point often made by critics of MMT and they have a valid point. The kerfuffle over the debt ceiling was not just semantic or a result of failure to understand the operational reality of a fiat currency. There are actual laws involved that determine institutional configuration.

I don't think that it is necessary to explain things like public v. private debt or "obligation" at the outset, because I don't think that most people can get this without first getting the difference between currency issuer and currency users and what this implies as a matter of accounting. This distinction is difficult enough to get across given the mesmerizing influence of the govt as big household or firm analogy without bring in what is subsidiary to it and therefore hangs on it.

paul said...

Tom,

"the legal obligation to redeem tsys with bank reserves as they mature is true, which is what the debt ceiling was about and why default was a real possibility due to politically imposed constraints on using fiat directly."

This is false, it is not what the debt ceiling was about. That was about issuing NEW treasuries through deficit spending, not rolling over existing treasuries, which as far as I know has never been an issue axcept among the Ron Paul brigade.

"The attempt of some MMT proponents to gloss over this legal obligation and the political restraints that have been legislated results in confusion."

Confusion to whom? Complexity adds to confusion. When it isn't helpful, don't add it.

"This is a point often made by critics of MMT and they have a valid point."

The points made by critics of MMT (like those of particular critics participating in another thread upstream) are as misleading or moreso than the object of their criticism. Off-target criticism is not to be taken seriously.

"I don't think that it is necessary to explain things like public v. private debt or "obligation" at the outset, because I don't think that most people can get this without first getting the difference between currency issuer and currency users and what this implies as a matter of accounting."

Your examples would be equally confusing but in any case neither would get much traction because the public is not particularly interested in the subject.

The message needs to be gotten out but none of us has a clue how to do so.

"This distinction is difficult enough to get across given the mesmerizing influence of the govt as big household or firm analogy without bring in what is subsidiary to it and therefore hangs on it."

Anything that increases complexity, which is the mainstay of (semantic) MMT commenters in my experience, will make it more difficult to communicate with the public.

My approach has always been to explain things in mathematical terms at the lowest possible level, which should be the simplest explanation possible.

Semantic thinkers will just not allow simplicity to be part of their arguments.

paul said...

I'm going to take this opportunity to re-frame and summarize the main point discussed in this thread as it has morphed over 90 comments:

The argument has been over whether there is a not-so-subtle difference between "liabilities" and liabilities, between "debt" and debt, between "obligation" and obligation, etc. with respect to the context in which the terms are used.

Tom Hickey said...

This is false, it is not what the debt ceiling was about. That was about issuing NEW treasuries through deficit spending, not rolling over existing treasuries, which as far as I know has never been an issue axcept among the Ron Paul brigade.

The debt ceiling issue was over the inability of Treasury to get reserves to meet current obligations, that is, legally binding contracts previously entered into due to previous appropriations, without increasing tsy issuance above the ceiling imposed.

Rolling over tys is accomplished by first swapping out maturing tsys with reserves from a Tsy account and then issuing new tys as replacements. Tsy did not have the reserves needed to do this operation, as I understand it anyway.

paul said...

Tom,

"to meet current obligations, that is, legally binding contracts previously entered into due to previous appropriations,"

Correct, to pay for stuff that hasn't been paid for yet in the private sector, which is done through deficit spending if the payment is in excess of taxes collected. The treasuries are issued as the funds are spent, Not all in advance right after the budget is passed].

"Rolling over tys is accomplished by first swapping out maturing tsys with reserves from a Tsy account and then issuing new tys as replacements."

Rolling over treasuries doesn't create any new spending, which would be required to "pay the bills".

This is my understanding of how things work.

Tom Hickey said...

It's not a question of new spending. It's a question of getting reserves needed to meet current obligations. The rolling over of tsys involves an asset swap in which bank reserves are an intermediary step. It's not new spending, but Tsy doesn't have the reserves needed to draw and cannot get them directly from the Fed. That's where the platinum coin gambit comes it.

This is basically a legal issue (following established rules) rather than an economic one.

Tom Hickey said...

I should add that there is also "new spending" related to satisfying the debt obligation in addition to returning the principle as bank reserves. This is, of course, the interest on the debt obligation incurred in the legal contract, hence automatically appropriated as an essential of the contract. The debt ceiling prevents this interest obligation from being met by getting reserves through deficit spending, which would require issuance of tsys in excess of the limit.

Then there are all the other legal contracts that have been entered into iaw previous appropriations that require reserves to met, such as govt employee salaries, transfer payments, and purchase contracts. These are legal obligations and a form of "debt" as money owed that must be payed on time as stipulated.

paul said...

Tom, it seems to me you are confusing yourself with reserves when it's not necessary. Isn't the Treasury the entity that pays the bills?

Congress as a whole doesn't even know reserves exist.

In any case, we aren't getting anywhere.

I suggest you present the argument to Warren, Bill, Randy or Scott.

paul said...

Tom.

Good post by Philip Pilkington at Naked capitalism if you haven't already seen it:

http://www.nakedcapitalism.com/2012/10/philip-pilkington-three-reasons-why-endogenous-money-matters.html

Tom Hickey said...

paul, the Tsy is an agency that followed the directives of Congress in the form of institutional rules in general and specifically iaw appropriation. The Tys itself doesn't "spend" anything. As you say, it pays the bills and it does this by directing the govt's bank, the cb, to credit deposit accounts. Tsy must get reserves for its account the the cb in order for the cb to make the payments where the rules disallow the cb from directly crediting the Tsy account with an overdraft. If Congress appropriates more than it levies in taxes, then Tsys must issue tsys to cover the difference in order to obtain the needed reserves. Tsy makes no decisions. There are automatic payments such as interest and return of principal on tys and agency securities, transfer payments like SS, govt salaries, state programs like Medicare, and ongoing federal expenses, like Medicare. There are also invoices submitted through other agencies for purchases, e.g., military expenditure. The Tsy is the agency that tracks all this, juggles the accounts to manage reserves, and arranges for the cb to make the payments in a timely fashion.

Tsy, like the cb, also tracks the economy and the Tsy sec advises the president about economic policy and speaks for the US regarding fiscal policy. The Fed chair does this in a politically independent way and is responsible for monetary policy. The Tsy and cb coordinate their operations and policy statements.

If the Tys and cb were formally consolidated, there would be no issue of meeting obligations since the one agency would issue reserves. But that is not the case in the US due to the politically imposed institutional rules. Tsy has to go through the hoops of obtaining reserves through the private sector (PD's) by selling tsys that it alone can issue to obtain the reserves that the cb alone can issue, since no direct transfer of reserves from cb to Tsy is allowed.

What this means is that the legal obligation to pay on time can be thwarted by Congress after having appropriated the funds. When the deficit ceiling is reached, Congress cannot direct the db to credit non-govt bank accounts since the Tys accounts are out of reserves and Tsy cannot issue new tsys to obtain reserves through the private sector since that would crack the limit.

All these are legal obligations of one form or another if they involve contracts enforceable under the law.

Tom Hickey said...

Thanks, paul. Up.

paul said...

Tom, I think we are both saying basically the same thing but have fundamentally different ways of viewing reality.

It's not so muxch that we disagree but that we don't really speak the same language.

There is a language barrier between us sometimes.

I see every event or collection of events that occurs in the abstract as part of a system.

I have to translate what I "see" into language in order to communicate, which can be difficult. Like you said earlier, Philip Pilkington is pretty good at this.

When one views the universe and it's events in the abstract, words are not necessary or helpful to one's understanding. In fact, they tend to get in the way.

For some ideas, words can't paint an adequate picture. This is how i see it anyway.

Something similar happens when swithing between languages.

Tom Hickey said...

paul, as an engineer you take a particular angle, i.e., a systems view, which a correct approach but no the only approach.

The challenge is to put the system awareness into ordinary language that people can understand in a way that is also technically correct.

This means that there are several sets of rules to follow simultaneously and to integrate as seamlessly as possible. This is a challenge we have not yet overcome.