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Bushido, the warrior code says:
1. Think of what is right and true.
2. Put the science into practice.
3. Become acquainted with the arts.
4. Understand the negative and positive qualities in everything.
5. Learn to see everything accurately.
6. Become aware of what is not obvious.
7. Be careful even in small matters.
8. Don’t do anything useless.
This is about items 4, 5, 6, 7, and 8 for people who dabble in economy like me.
The biggest problem in public analysis is the economic illiteracy of mainstream media, congress, president and neo-liberal economists who confuse the budgets of USA (the currency issuer) with budgets of everybody else (currency users). Scare words like “unsustainable debt”, “living beyond our means”, “debt crisis” etc. are used and comparisons made to household budgets, a totally incorrect analogy. The dollar is basically a token that keeps the economy running.
Modern Monetary Theory is true. Lots of data is in conformity with it. Deficits are good, surplus is bad, government debt implies private sector wealth, national debt need not be paid back, USA does not need taxes to spend, the (government_debt/GDP) means the same thing as (private_wealth/GDP) for a monetarily sovereign nation, China does not fund our economy, inflation is not a risk until full employment is reached, USA can afford to bailout the states and stop all austerity. Almost everything said in the mainstream media is wrong. The congress and the president repeat talking point economics as does Fox News. It is a shame!
Income taxes play a minor role in macroeconomics. There is no urgency in fixing taxation. It is a major distraction to allow any useful action. Immediate deficit funding is what is required. Taxation has a role in income equality and inflation control and can be attended to later because right now the plutocracy is in control. Government creates money and the economy uses it.
http://pshakkottai.wordpress.com/2011/11/23/how-the-economy-works-a-diagram/
a) Federal Deficits – Net Imports = Net Private Savings is strictly true.
Government creates money and the economy uses it. Government “debt” is the sum of all deficits and appears on one side of the equation (should be renamed “tbed”) whereas the private sector “debt” means negative savings. Government_ deficit is the source of money.
Government “debt” is the same as private savings. These are in the form of the government_ bonds held by citizens, pension funds and so on. If the national debt is paid off lots of citizens will be unhappy. The interest also flows into the private sector. The two key equations in economics which apply to any system of government are a) and b):
A numerical proof of (a) is shown in figure 4 of
http://pragcap.com/resources/understanding-modern-monetary-system
b) Gross Domestic Product = Federal Spending + Private Investment + Private Consumption + Net exports.
The GDP has been approximately 5 times government spending.
Actual data is in
http://pshakkottai.wordpress.com/2011/10/16/
http://www.davemanuel.com/charts2/surpluses_and_deficits_1940-2011.html shows deficits have been quite common (58 deficits out of 70 years).
The household net worth of USA is $58.5 Trillion.The national debt is very close to it.
“The currency issuer is the monopoly producer of money and, just as every asset has a liability, also results in government liabilities. The issuer’s liabilities, or “debt”, is a digital account of the currency supply used by the currency users. To a fiat currency issuer, the currency supply is a digital accounting tool, not an asset in and of itself. The currency supply is simply the bookkeeping records corresponding to all the currency users’ savings in banknotes, deposits, and treasuries.
Money functions as both a store of value and a medium of exchange. When users acquire dollars they can spend them for items in the marketplace or choose to save them as banknotes, deposits, and treasuries.
The more users choose to save the more “debt” the issuer takes on. A common misconception is that currency issuers “borrow” money. The issuer does not borrow because it is the monopoly producer of the currency – the money that currency users spend or save. This is simply double entry accounting.
Savings by currency users, domestic or foreign, is a straightforward concept on an individual level but becomes counter intuitive on a macro level.” from
http://dollarmonopoly.blogspot.com/p/issuer-user-paradigm.html ,
which has nice sketches to explain MMT.
Another proof of MMT. This is a plot of gross national wealth on the x axis plotted vs. the same quantity in the same year minus govt deficit minus External balance. The years start at 1960 and end at 2011.The plot combines BEA Section S A007 S.7 a Federal Govt and A003 S.3 .a. Households and Nonprofit Institutions Serving Households. (FL152090005 minus FL312090095 minus FL262090095) is the value along the y axis which agrees with the household net worth FL152090005. Each (deficit plus net export) adds to peoples’ wealth. The dollars are current values not adjusted for inflation.
Another way of thinking about the plot is as a plot of actual wealth on the x axis compared to the predicted wealth calculated using the MMT equations of balance which is also used by
http://www.bea.gov/national/nipaweb/Ni_FedBeaSna/DownSS2.asp?3Place=N
The xl files were downloaded from the above website.
(Federal Deficits = Net Private Savings+ net imports), applies to USA and other nations that have their own currencies. Both federal deficits and net exports add to private savings.
12 Comments
By “national debt” here, do you mean both public and private debt? Because what is usually referred to as the “national debt” is the federal government debt alone, which is in the neighborhood of $14 Trillion.
Huh? The U.S. national debt is less than $16 Trillion — see: http://www.usdebtclock.org/
I think you meant the U.S. Total Debt, which is roughly $57 Trillion.
MMTers keep saying that, but that’s not how I see things working.
The Treasury mints coins, which they sell to the Federal Reserve at face value. Also, it prints Federal Reserve Notes, which it sells to the Federal Reserve at cost (paper, ink, etc.). The Fed has sold about $2.2 Trillion of this “currency” to banks, which have circulated it among the public. The rest of our $10 Trillion (M2) money supply is in the form of credit in bank accounts (a.k.a. deposits).
So, by far, the main issuer of money is not the government but rather the banks. And not that the government accepts bank deposits in payment of taxes. In fact, the government prefers to be paid by check rather than in currency that it has issued.
In fact, I think that the government would like to get rid of currency and have all transactions conducted by checks, credit cards, and electronic funds transfers. That way there would be a record of everything. I suspect that a century from now there’ll be no currency, and all transactions will be done with smart cards and/or implanted devices.
Oops. I hadn’t reload my screen since last night, so had not seen your reply when I (redundantly) posted #2.
Yes. The x axis is the cumulative sum of T securities, savings bonds, other treasury and agency backed Govt supported enterprises (which are components of govt debt) adjusted for inflation in billion dollars. The y axis is the national wealth in the same units in
http://pshakkottai.wordpress.com/2012/02/27/national-debt-and-national-wealth-compared/
I agree that banks produce most of the money by fractional reserve and federal govt creates a small part of it. The federal reserve is unnecessary and could be apart of the treasury and could fund projects directly (as India does)without the fiction of borrowing from itself and offering T securities. The money created by banks(horizontal money) is created by debt and disappears after it is paid and the banks make a huge amount in interest. The more the govt funds directly the more people win. For example North Dakota has a State bank and all the interest goes to the citizens of the state.
Even with the system as it is, Government creates money and the economy uses it, if the subsidy to the banks is ignored.
To ignore the banks and the money they create would be to ignore roughly 3/4 of all the money that’s in circulation. I find that difficult.
I do however agree that if the government refused to accept bank money in payment of taxes, then bank money would be of dubious value.
In allowing the banks to loan more money than they have on hand, the government out-sourced what should be a function of the Treasury. I guess that the Fed could stop all that tomorrow simply by raising the reserve requirement to 100%.
They could do that in stages. Here is another proposal
“Mansoor Kahn’s concept with no federal reserve:
http://seekingalpha.com/article/209386-modern-monetary-system-there-is-another-way
to get rid of fractional reserve banking (which produces uncontrolled money leading to corruption of democracy) by separating the functions of storage, money creation and commercial risky banking. He suggests :
a) Remove government bank deposit protection such as FDIC and allow “Free Banking”. Allow banks to fail. This will greatly reduce the ability of banks to create bank deposit private money.
b) Give the public the option to “store” money electronically risk-free in a government owned bank which can only “store” electronic money and clear checks but not lend it out. 100% reserve credit risk-free money storage for a small fee.
c) Allow new money creation in all forms (coins, paper bills or bank deposits) by the treasury department directly
d) The new money should be put into circulation by spending it on legislature approved government expenses and projects and/or the new money can simply be credited to the citizens’ bank accounts, the states and the public itself can decide what to do with it.
e) The object of the government will be no deflation and no inflation (stable purchasing power). I realize purchasing power is hard to measure and the process can be gamed by the government but benefits are so great that this risk should be taken and managed.Inflation or deflation can be controlled by removing or adding money.
USA will fight this.”
If I understand correctly, you’re proposing a system of totally fiat currency. In such a system, the dollar’s only intrinsic value is that American taxes must be paid in dollars.
In the current system, (almost) every dollar is backed by a dollar of debt. American’s can be expected to exchange their assets and service for dollars in order to pay off their debts. That’s in addition to the fact that American taxes must be paid in dollars.
It sort of as though debt is the new gold standard. So, when the banks were making subprime loans, there were doing the economic equivalent of filling Fort Knox with gold-painted bars of lead. It was sort of a form of counterfeiting.
But, I’m not an economist and I have no data on how important that indebtedness is to the value of the dollar.
The present system appears to hide the fact that USA is monetarily sovereign. All this borrowing from the federal reserve mimics the old gold standard for no good reason.The debt ceiling is totally contrary to MMT.
Dollar is merely a token to make transactions easier than barter. USA can create any amount needed to serve the economy and all dollars created eventually end up as private wealth, real buildings, real roads, real educated people etc.
Under the present policies, the government cannot pay its bills with freshly issued money. Notice that I said “policies,” not “laws.” As beowulf and letsgetitdone have been pointing out for more than a year, the laws are in place that would allow the Treasury (executive branch) to mint and deposit to its general account coins of arbitrarily large value.
But, instead, it is current policy to cover all tax deficits via borrowing. Nevertheless, the Fed can indirectly buy Treasury bonds on the open market with freshly issued reserves (magic money), thereby, allowing the Treasury indirectly to pay its bills with freshly issued money. Also, it can give banks no-interest loans with which to directly purchase Treasury bonds.
In any case, I think that the only proper term for the current policies is “bankers’ welfare.”
Yes.