You are browsing the archive for savings.

Government Financial Asset Addition = “Deficit”; Government Financial Asset Destruction = “Surplus”

12:50 pm in Uncategorized by letsgetitdone

The word “deficit,” when applied to the Government financial accounting of a monetarily sovereign nation, that is, one that issues a non-convertible fiat currency, with a floating exchange rate, and no debts in a currency it doesn’t issue, is a problem, because the label “deficit” when applied to such a Government doesn’t mean what most people think it means. As Michel Hoexter points out:

. . . The word “deficit” is a hold-over from conventional accounting and the era of the gold-standard when currencies were supposed to be fixed in their quantity by convertibility of the currency into a fixed quantity of precious metal. Deficit means primarily a “lack”, an “absence” and in conventional accounting it means being “in the red”, not having taken in enough income to cover expenditures. . . .

Euros on a monopoly board.

Maybe to fix the 'deficit' we must redefine our terms.

The term “deficit” in this sense can be properly applied to households, corporations, other private and inter-governmental organizations, and states and nations that aren’t monetarily sovereign such as the US States and the members of the Eurozone. In all these instances the governments involved can run out of money, and the more deficits they run, the more the risk that they will become insolvent increases. But when that term is applied to monetarily sovereign nations, then the “deficit” notion is profoundly misleading because neither the size of the “deficit,” nor its accumulation over time when it is accompanied by selling debt instruments, makes a bit of difference when it comes to solvency, because monetarily sovereign governments always have unlimited power to issue currency, if they decide to remove all self-imposed constraints on currency issuance and use that power.

There’s a corresponding problem with the term “surplus” as applied to monetarily sovereign Government accounting. Surpluses are supposed to represent the situation where tax revenues exceed spending and the gap between them is described as net “savings” increasing the financial assets of the Government running the surplus. A surplus over a particular time period is viewed as being “in the black” for that time period, as a good thing for the Government doing it, and as reducing the “debt” of that government giving it an increased financial capability to spend in the future.

The term “surplus” in this sense can be properly applied to households, corporations, other private and inter-governmental organizations, and states and nations that aren’t monetarily sovereign such as the US States and the members of the Eurozone. In all these instances the governments involved can accumulate surpluses as financial assets, and the more surpluses they run, the more the risk that they will become insolvent decreases. But when that term is applied to monetarily sovereign nations, then the “surplus” notion is also profoundly misleading because neither the size of the “surplus” during a time period, nor its accumulation over time, makes a bit of difference when it comes to solvency, or adding to the government’s capability to spend in its own currency either currently or in the future.

So, from the viewpoint of Modern Money Theory (MMT), both the terms “deficit” and “surplus,” and also the term “national debt” are misleading when applied to monetarily sovereign nations. Recognizing this, some of us have been kicking around the idea of using new terminology for talking about national financial accounting. In the recent post by Michael Hoexter I referred to earlier he proposes:

Read the rest of this entry →

Myths, Scares, Lies, and Deadly Innocent Frauds, Updated: Part Three

8:06 am in Uncategorized by letsgetitdone

(Author’s Note: This post updates Part Three of a series reviewing Warren Mosler’s book: The 7 Deadly Innocent Frauds of Economic Policy. The updating is prompted by a post by Hannah at DailyKos offering a “. . . a Review Sort of” of Warren’s book.

Hannah’s post begins by stating Warren’s “7 deadly innocent frauds” (DIFs), and then goes on to point out that they are not innocent and to make a number of claims about Warren’s beliefs which clearly indicate that she neither read his book, nor researched his actual positions stated frequently on his web site, nor bothered to note Warren’s economic truths that his book counterposes to his DIFs. So, in this series, and because of the importance of his easily accessible book, I’m presenting a more detailed discussion of the frauds and the corresponding truths.)

In the previous two posts in this series I’ve examined four ideas that Warren Mosler has called “deadly innocent frauds,” (difs) and that others have variously referred to as myths, scares, and lies. Three of the difs — that Government deficits create a debt burden for future generations, take away non-governmental sector saving, and that social security is broken are all “deadly innocent frauds,” supporting the idea that deficits must be avoided, even if we have to suffer through extreme economic downturns to avoid them. These frauds, like the fourth dif that Government spending is operationally limited by the need to tax and borrow, all serve to reinforce the idea that Government can’t do anything about a bad economy without doing more harm than good.

The contrapuntal truths that: Government can create money, and is not operationally limited by the need to tax and borrow; there is no debt burden on future generations that limits production or consumption; deficits don’t subtract from, but add to non-governmental savings; and Government checks including Social Security checks don’t bounce; all reinforce the idea that Government deficit spending is not to be avoided, but, on the contrary is something we can and need to do to avoid the economic and human waste of unnecessary economic recessions and depressions. In this final part of the series, I’ll review the remaining three of Warren Mosler’s difs and discuss their political implications.

Beware the Trade Deficit?

Mosler’s fifth dif is:

“The Trade Deficit is an unsustainable imbalance that takes away jobs and output.”

The normal arguments for this dif, in my view, are that if other countries give us more in goods and services than we give them, then we 1) build up unsustainable monetary debts and 2) lose jobs and outputs because we are not producing those goods and services here in this country. As trade imbalances accumulate over time, our monetary debt grows larger and we, as a nation, lose industries that have been producing the goods and services we get from abroad, and therefore continue to lose jobs and output until, eventually, we may become de-industrialized and our workers, in increasing numbers find themselves out of jobs, careers, and all that depends upon them.

Warren Mosler opposes this line of argument by noting that “the real wealth of a nation is all it produces, plus all its imports, minus all its exports.” This is basic economics. But it’s important to stop for a moment and reflect on why it makes sense.

Real wealth is the sum total of valued goods and services possessed by an entity. It is not money, which is only the medium of exchange. We produce goods and services, i.e. real wealth. We also import goods and services, also real wealth, from abroad. But when we export real goods and services, what we are doing is sending real wealth abroad. So we are subtracting from our net real wealth when we export.

So why export, one might ask? For some nations, it’s because they need the foreign currency they would gain from exporting in order to import. But what happens when other nations want to export to a specific nation so badly that they let that nation import even though it doesn’t have their currency to pay for it, and they allow it to owe them for what it buys in their own currency? This, of course, is the enviable situation of the United States and other nations that are sovereign in their own currencies.

So, specifically for the United States, the answer is that they are giving us real wealth on credit, and agreeing that we can pay them for that wealth using our own currency at some future time. Which means, in other words, that they are sending us their wealth, and are agreeing that we can pay for it with a medium of exchange that our Government can create at will, and that is not real wealth, but only a warrant, backed only by the value of the current and future economic output of the United States of America.

As Mosler says: “. . . a trade deficit increases our real standard of living. How can it be any other way? And the higher the trade deficit the better!” Or to put this in terms of his counterpoint to the fifth dif:

”Imports are real benefits and exports are real costs. Trade deficits directly improve our standard of living.”

So, the greater our trade deficits, the more wealth other nations are shipping us, without us having to ship them real wealth in return. Well, what about the monetary debts that are accumulating say, obligations to China, and others? Those debts are all in US currency. And we, or our children, can make as much of that as we want without producing anything to send to China in return. So where is the debt burden, and the unsustainability in these accumulating debts?

The answer is that there is none. Well, what about the problem that by our importing goods and services from China in such a profligate way, we are hollowing out our own industries and productive capacity, and destroying jobs and the lives of our workers over here? Isn’t this an unsustainable burden on us? I think there are two points to be made about this. One made by Warren Mosler and one of my own.

Warren’s is that we can always use fiscal policy to develop new industries and to keep our people working so that we are using our full productive capacity to create wealth, while also importing whatever China or other nations are willing to export to us on credit. So, to amplify his view, the fact that we accept imports that drive us out of certain industries doesn’t have to mean de-industrialization or unemployment here. It’s all up to us.

We can take foreign imports at the expense of domestic productive activity, or we can take them, and ramp up our own economic activity in areas where there are no imports that are less expensive than what we can make ourselves. In particular, in our current situation there is all kinds of work to be done in re-building our infrastructure, re-inventing our industries along green lines, fighting climate change, cleaning up the environment, and educating our ourselves.

If other nations can free our labor force to do this kind of work, while they export to us various goods and services on credit, then we only get richer and suffer not at all. To have things work this way however, we have to have a fiscal/economic policy that will keep our people working and moving forward, we cannot afford to have periods in which people are unemployed when there is important work to be done.

My own point about the possibility of long-term unsustainable burdens, or at least negative consequences from a trade imbalance is that imports of certain kinds can, indeed, be harmful to the United States. But the harm, in this case, doesn’t come from the short-term economic effects of those imports on productive activity, which remain beneficial, but rather from their effects on certain other values, such as our ability to provide for our national security, or our ability to produce certain components such as computer chips that are important to industry and manufacturing across the board, or our ability to keep our environment clean, or our energy foundations strong, regardless of the choices made by external parties to continue or refrain from trading with us, or their choices about what they want us to pay fpr products we cannot provide for ourselves.

To the extent that, because of imports, we lose the capability to manufacture certain materials and products, and need to rely on other nations for these, that may not be friendly to us in times of conflict. We allow these imports to hurt our military self-sufficiency and also, our industrial and economic self-sufficiency. While I haven’t studied this link between imports acquired on credit, and a declining industrial foundation for supporting military capability, closely, I have the impression that the trends since the 1980 have been toward increased external contracting of military production, and the weakening of our industrial base in national security-related areas of manufacturing. In addition, the more the industrial capacity to make computer chips and other products is shifted overseas, the more reliant we are on continued favorable trading relationships with other nations who may not always be friendly, to maintain our own economy.

The significance of this point is that while the general economic principle that “Trade deficits directly improve our standard of living”, is correct, nevertheless with respect to certain products and industries we may not want to follow this principle because of political, security, moral, or long-run economic considerations, even though we know that not doing so will cost us economically in the near term, at least.

Do We Need to Save First to Accumulate the Funds for Investment?

Mosler’s sixth dif is

“We need savings to provide the funds for investment.”

To see what’s wrong with this dif, we have to pay attention to the difference between macro and micro levels of the economy. At the individual level, saving is one way for someone to accumulate enough money to make a capital investment. It’s not the only way since individuals can also seek and get grants and loans for investment, but, nevertheless saving money and later using it for investment is a very common pattern and clearly underlies this dif.

At the macro level, however, savings get us into the Keynesian paradox of thrift. Since if spending doesn’t equal all income, some of what is produced in the economy will remain unsold. Thus, at the macro level savings detract from consumption and create a slackening of demand, which, turn, can lead to less profits and investment and future production of wealth, and greater unemployment, unless there are compensating factors.

One possible compensating factor is using credit. When someone saves, someone else can absorb the slack demand created by savings, by borrowing money in order to consume existing products. If that happens to the same extent as savings, then economic output is fully consumed. Another possible compensating factor for savings in lifting demand is Government deficit spending which immediately adds to private sector savings, that, in turn, can be consumed, and so lift demand. Regardless of these compensating factors, however, we can see that, whatever the situation at the micro or individual level, at the macro or societal level, savings has a depressive effect on economic activity and investment, which is why we have ourselves a dif here.

The counterpoint to this dif is that far from savings being necessary for investment,

“investment adds to savings.”

To see why this is true, we have to reflect on what nominal capital investment really is. Namely, it is the use of money to produce instruments or tools, that play a part in producing valued goods and services (i.e. real wealth). Since this is the case, the investment in the capital goods comes first, and these goods are then used along with paid labor to produce output. But it takes time to produce output. So before there is output, there is labor, and pay for the labor, which can’t be used to consume the output because it is not yet there. So, the pay given to labor leads to savings, until those savings can be consumed by spending them on the future output.

This reasoning may seem a little convoluted because workers receiving pay can consume any number of other things even though the immediate products of their labor are not yet available. But viewed from the macro perspective, somewhere in the system, the time lag between production and consumption has an effect resulting in those earning money saving for goods and services that they want which are not yet available. So, the counterpoint that

“investment adds to savings”

holds.

Warren Mosler points out that belief in the dif that “we need savings to provide the funds for investment”, is very damaging because it has led modern economies to divert real resources away from productive sectors of the economy to the financial sector. And he says that this dif:

” . . . drains over 20% annually from useful output and employment- a staggering statistic unmatched in human history.”

In fact, government deficits are much less inflationary in the US than they would otherwise be, because they are compensating for the slack demand created by increasing diversion of resources to the financial sector. Pension funds, IRAs, and other tax advantaged savings institutions, are harmful to the macroeconomy because their net effect is to remove a substantial part of the aggregate demand we need to fully consume our industrial output and our imports. Then we need greater private sector credit expansion and Government deficit spending to fill the gap created in aggregate demand by our misplaced emphasis on savings because we think it is necessary for investment.

Nor, is this all the damage done to our economy. In addition, the existence of “massive pools of savings,” has led to the creation of a sub-industry of thousands of pension fund managers and more thousands of brokers, bankers, and financial managers to service them. In itself this is a great diversion of people and human resources away from the productive portion of our economy, to the segment devoted to financial manipulation.

Public Sector Deficits and Taxes

Mosler’s final dif is yet another one directed at the harm caused by Government deficit spending. It is:

“higher deficits today, mean higher taxes tomorrow.”

While there is a good chance that this is often literally true, it is not true because, as deficit hawks would have it, we need to have the higher taxes to pay borrowed money back to reduce the national debt. Instead, we may well have higher taxes because we need them to moderate a booming economy that, in part, resulted from greater Government deficit spending.

In other words, if Government increases spending to create greater demand in the private sector, and to create the conditions where our output and imports can be consumed, and we have full employment, then we may reach the point where we begin to see demand-pull price inflation in the economy. At that point, higher taxes ought to be imposed by the Government to prevent over-heating of the economy. In other words, Mosler’s counterpoint is:

”Higher deficits today when unemployment is high will cause unemployment to go down to the point we need to raise taxes to cool down a booming economy.”

So, while the dif suggests that the burden of debt repayment resulting from deficits, is a bad thing; the counterpoint suggests that there will be higher taxation only after our economic woes are over, and everyone is experiencing prosperity, a good thing, and a price we may all be willing to pay, except those among the 1% whose greed and lust for control and extreme inequality knows no bounds.

Conclusion: Why The 7 Deadly Innocent Frauds of Economic Policy is So Important

The common thread in the three difs I’ve discussed in this part, is that they’re all beliefs that counsel false economy and that, to the extent we follow them, lead to less national prosperity and wealth than we would otherwise enjoy. The sixth and seventh difs both lead to less economic activity and higher unemployment; and the fifth dif, in effect, counsels us to forgo opportunities to increase our national wealth through trading. The seventh dif, also, is like the first four in that it is another support for deficit hawkism, and a counsel against deficit spending, that is sorely needed in a time of slack demand and high unemployment.

Taking all 7 of Warren’s difs together, we see the outline of an ideology whose effect is to cripple American potential in both the immediate and the longer term. The 7 difs together constitute a 19th century economic ideology appropriate for a nation with a commodity monetary system, rather than a 21st century economic ideology appropriate for a nation with a fiat monetary system. Partisans of this ideology often call it neoliberalism. But there is nothing “liberal” or progressive about it. Instead, it is an instrument of elite control, emerging oligarchy, and impoverishment of the 99%.

On the other hand, Warren’s 7 truths counterposed to the 7 deadly innocent frauds, together lead us to an economic ideology that fully supports progressive actions to solve existing problems and to collaborate through the Government to realize the equality of opportunity and the right to a decent life that is very American’s birthright. His 7 truths tell us that we can have full employment, provide for our children and grandchildren making life better for them, strengthen out entitlement safety net protecting the old and the sick, enjoy real wealth other nations are prepared to send us, enjoy savings at the micro-level while we have investment at the macro-level, pay more in taxes only when the economy is operating at full capacity and we can afford it, and do all of this without worrying about our government becoming insolvent.

All we have to do to make these things happen is to cast aside the false beliefs of neoliberalism and embrace the economic wisdom of the MMT deficit owls, and Franklin Delano Roosevelt’s economic bill of rights. As someone once said “the truth will make us free,” if only we have the courage to put aside our fears of some new thinking and embrace it. What do we have to lose? The neoliberal things we’re doing aren’t working. We may as well try MMT-based economic and fiscal policies and reach, once again, for human progress.

Myths, Scares, Lies, and Deadly Innocent Frauds: Part Three

2:17 pm in Uncategorized by letsgetitdone

In the previous two posts in this series I’ve examined four ideas that Warren Mosler has called “deadly innocent frauds,” (difs) and that others have variously referred to as myths, scares, and lies. Three of the difs — that Government deficits create a debt burden for future generations, take away non-governmental sector saving, and that social security is broken are all “deadly innocent frauds,” supporting the idea that deficits must be avoided, even if we have to suffer through extreme economic downturns to avoid them. These frauds, like the fourth dif that Government spending is operationally limited by the need to tax and borrow, all serve to reinforce the idea that Government can’t do anything about a bad economy without doing more harm than good. The contrapuntal ideas that Government can create money, and is not operationally limited by the need to tax and borrow, there is no debt burden on future generations that limits production or consumption, deficits don’t subtract from, but add to non-governmental savings, and Government checks including Social Security checks don’t bounce, all reinforce the idea that Government deficit spending is not to be avoided, but, on the contrary is something we can and need to do to avoid the economic and human waste of unnecessary economic recessions and depressions. In this part of the series, I’ll review more of Mosler’s difs and discuss their political implications. Read the rest of this entry →