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Government deficits should be renamed to adding to the money base.

JP Hochbaum

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This terminology may go over many heads, but it is important to learn about our economy. In laymen terms, the below statement by Mosler simply means that government deficits are more appropriately named as adding to the money supply. The simple naming of something drastically effects how people view things, and in general 99% of people I know view the government deficit as a bad thing, when it isn't.

"With fixed fx/convertible currency 'base money' doesn't include govt. secs as those obligations are claims on govt. reserves (gold, fx, etc.), which are part of 'national savings' as defined.

However, with today's floating fx/non convertible currency tsy secs (held outside of govt) are logically additions to 'base money', as the notion of a reduction of govt reserves (again, gold, fx, etc) is inapplicable to non convertible currency.

That is, with today's floating fx, I define base money as currency in circulation + $balances in Fed accounts. And $ balances in Fed accounts include both member bank 'reserve accounts' and 'securities accounts' (tsy secs). And to me it's also not wrong to include any other govt. guaranteed debt as well, including agency paper, etc.

That is, with floating fx, 'base money' can logically be defined as the total net financial assets of the non govt sectors.

(Note, for example, that this means QE does not alter base money as thus defined, which further fits the observation that QE in today's context is nothing more than a tax that removes interest income from the economy.)

And deficit reduction is the reduction in the addition of base money to the economy, with the predictable slowing effects as observed.

The point of this post is to 'reframe' govt. deficit spending away from 'going into debt' as it would be with fixed fx, to 'adding to base money' as is the case with floating fx where net govt. spending increase the economy's holdings of govt. liabilities, aka 'tax credits'."
 

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Hold on ... I'm rather confused. What does he mean by "today's floating fx/non convertible currency"?

A nonconvertible currency wouldn't even have the option to be floating.

/notaneconomist
 

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Hold on ... I'm rather confused. What does he mean by "today's floating fx/non convertible currency"?

A nonconvertible currency wouldn't even have the option to be floating.

/notaneconomist

He's talking about a floating exchange rate system in which the value of the currency is determined by allowing it to float against other currencies in the foreign exchange (fx) markets as opposed to a fixed exchange rate system in which the currency's value is pegged (i.e., convertible at a fixed rate) to precious metals or another, presumably stable, currency.
 
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JP Hochbaum

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Hold on ... I'm rather confused. What does he mean by "today's floating fx/non convertible currency"?

A nonconvertible currency wouldn't even have the option to be floating.

/notaneconomist
Non convertible means you can only exchange a USD with the government for another USD, you can no longer convert into gold.
 

Ahlevah

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(T)he notion of a reduction of govt reserves (again, gold, fx, etc) is inapplicable to non convertible currency.

I take issue with this statement. Although the value of a currency in a floating rate system fluctuates, a nation or central bank may find it beneficial to keep its currency at a certain value relative to other currencies. It does this buy selling forex reserves, not more debt. I mean, if anyone really thinks reserves are inapplicable to a "non-convertible" currency they should just ask the Russians.

http://research.stlouisfed.org/publications/review/02/11/ChiodoOwyang.pdf
 

imagep

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I can see that deficits which are funded by the fed purchasing treasuries could be looked at as just "adding to the money supply", but why would deficits funded by anyone other than the fed be adding to the money supply?

I'm thinking that deficits funded by anyone other than the fed is more like borrowing away money instead of taxing it away.
 

JP Hochbaum

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I take issue with this statement. Although the value of a currency in a floating rate system fluctuates, a nation or central bank may find it beneficial to keep its currency at a certain value relative to other currencies. It does this buy selling forex reserves, not more debt. I mean, if anyone really thinks reserves are inapplicable to a "non-convertible" currency they should just ask the Russians.

http://research.stlouisfed.org/publications/review/02/11/ChiodoOwyang.pdf
Russia was on a fixed exchange rate and had declining production. I don't see how this comes close to being comparable to the US?
 

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JP Hochbaum said:
This terminology may go over many heads...

Elitism; gotta love it.

Economics, contrary to what many would like us to believe, is not a dark science. One does not need to obtain a PhD to understand the underlying mechanics of the economy. The claim of complexity is simply the attempt of shallow men to make themselves feel more important. The unfortunate aspect is that politics and economics are joined at the hip in an ever expanding bid for power which makes it extremely difficult to learn about opposing views in government schools. So much for learning from history...
 

brothern

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He's talking about a floating exchange rate system in which the value of the currency is determined by allowing it to float against other currencies in the foreign exchange (fx) markets as opposed to a fixed exchange rate system in which the currency's value is pegged (i.e., convertible at a fixed rate) to precious metals or another, presumably stable, currency.

Non convertible means you can only exchange a USD with the government for another USD, you can no longer convert into gold.
So he's using "nonconvertibility" to mean non gold/silver standard currencies rather than a currency that's outright restricted from from being traded on a forex market?

OK ... that would make a lot more sense.

For example, the North Korean won is a nonconvertible currency. You cannot go onto the open market and legally attain it. Saying that it could be floated against other currencies to determine its value is odd, because it cannot be traded on a forex market in the first place.
 
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JP Hochbaum

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Elitism; gotta love it.

Economics, contrary to what many would like us to believe, is not a dark science. One does not need to obtain a PhD to understand the underlying mechanics of the economy. The claim of complexity is simply the attempt of shallow men to make themselves feel more important. The unfortunate aspect is that politics and economics are joined at the hip in an ever expanding bid for power which makes it extremely difficult to learn about opposing views in government schools. So much for learning from history...
So you have nothing to add except calling me an elitist?
 

Ahlevah

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So he's using "nonconvertibility" to mean non gold/silver standard currencies rather than a currency that's outright restricted from from being traded on a forex market?

OK ... that would make a lot more sense.

For example, the North Korean won is a nonconvertible currency. You cannot go onto the open market and legally attain it. Saying that it could be floated against other currencies to determine its value is odd, because it cannot be traded on a forex market in the first place.

When he says "nonconvertible" he's talking about a currency like the dollar that was previously convertible into gold. Now it's not really convertible into anything except other dollars. And up until Nixon removed the option, currencies such as the French franc were considered convertible because they were pegged to the dollar (which was still convertible by central banks into gold at the fixed rate of $35/ounce) under the Bretton Woods fixed exchange rate system.
 

Ahlevah

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Russia was on a fixed exchange rate and had declining production. I don't see how this comes close to being comparable to the US?

If you define a "nonconvertible" currency as one that is not pegged and convertible to gold, then the ruble was a nonconvertible currency. You couldn't walk into the CBR (the Russian central bank) and say, "Here are your rubles. Gold, please." There was a peg, but it was against other currencies, and as investors bailed out of Russia and wanted their coin the CBR was forced to sell foreign currency reserves until it finally threw in the towel and devalued the ruble. So your author's contention that "reserves are inapplicable to a nonconvertible currency" is nonsense.
 

JP Hochbaum

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If you define a "nonconvertible" currency as one that is not pegged and convertible to gold, then the ruble was a nonconvertible currency. You couldn't walk into the CBR (the Russian central bank) and say, "Here are your rubles. Gold, please." There was a peg, but it was against other currencies, and as investors bailed out of Russia and wanted their coin the CBR was forced to sell foreign currency reserves until it finally threw in the towel and devalued the ruble. So your author's contention that "reserves are inapplicable to a nonconvertible currency" is nonsense.

Yes it is non-convertible to gold, but the major difference is that it was not monetarily soveriegn, and that it can only be converted into USD. Pegging a currency to another currency is just like pegging it to gold.
 

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Pegging a currency to another currency is just like pegging it to gold.

That's true only if both currencies are pegged to each other and at least one is convertible to gold. Otherwise, you'd be arguing that a currency that was pegged to, say, the Zimbawean dollar was as good as gold, and that clearly was not the case. But my point is that even if a nation permits its currency to float, it may find it desirable to defend it from speculation or manipulation in the currency markets, and the only way it can do that is by buying it. In order to buy it, it needs something to sell, like other currencies.
 

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That's true only if both currencies are pegged to each other and at least one is convertible to gold. Otherwise, you'd be arguing that a currency that was pegged to, say, the Zimbawean dollar was as good as gold, and that clearly was not the case. But my point is that even if a nation permits its currency to float, it may find it desirable to defend it from speculation or manipulation in the currency markets, and the only way it can do that is by buying it. In order to buy it, it needs something to sell, like other currencies.

Hence the term, "dirty floating".
 

JP Hochbaum

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That's true only if both currencies are pegged to each other and at least one is convertible to gold. Otherwise, you'd be arguing that a currency that was pegged to, say, the Zimbawean dollar was as good as gold, and that clearly was not the case. But my point is that even if a nation permits its currency to float, it may find it desirable to defend it from speculation or manipulation in the currency markets, and the only way it can do that is by buying it. In order to buy it, it needs something to sell, like other currencies.

But notice that in the Russian case their reserves were demanded to be paid in other currencies that weren't their own. When a country does that it puts them at a default risk. A monetarily sovereign country never has that risk.
 

VanceMack

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Government deficits should be renamed to...

"Hey grandkids...**** you! You know why? Because **** you...thats why!"

or

"Eat it bitches!!!!"

or

"Lets continue to live irresponsibly and dump **** on future generations!"

or something else similarly appropriate.
 

JP Hochbaum

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Government deficits should be renamed to...

"Hey grandkids...**** you! You know why? Because **** you...thats why!"

or

"Eat it bitches!!!!"

or

"Lets continue to live irresponsibly and dump **** on future generations!"

or something else similarly appropriate.
This is a common misconception. Our government doesn't need tax revenues to pay any bill, ever. Thus no reason to kick it down to future generations.
 

VanceMack

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This is a common misconception. Our government doesn't need tax revenues to pay any bill, ever. Thus no reason to kick it down to future generations.
Your knowledge of the economy and government debt is stunning. You should go to work for a progressive newsletter or something.
 

JP Hochbaum

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Your knowledge of the economy and government debt is stunning. You should go to work for a progressive newsletter or something.

Knowledge of economics doesn't have any particular political lean. Unless you are suggesting the less I know the more conservative I would be?
 

VanceMack

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Knowledge of economics doesn't have any particular political lean. Unless you are suggesting the less I know the more conservative I would be?

You advocate rampant and irresponsible spending without regard to debt, deficit, creditors, interest rates...what could POSSIBLY go wrong.

No...your particular 'lean' doesn't drive you. Even most responsible liberals and democrats understand government spending is not a bottomless pit. No... Your ideology encompasses a special class of people.
 

JP Hochbaum

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You advocate rampant and irresponsible spending without regard to debt, deficit, creditors, interest rates...what could POSSIBLY go wrong.
I have never advocated any such thing.
 

austrianecon

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But notice that in the Russian case their reserves were demanded to be paid in other currencies that weren't their own. When a country does that it puts them at a default risk. A monetarily sovereign country never has that risk.

Russia was monetarily sovereign. US is "monetarily" sovereign as well. If it can happen in Russia it can happen to the US. We have the Chinese trillion dollar situation hanging over the US's head. So it really could happen here.
 

austrianecon

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Knowledge of economics doesn't have any particular political lean. Unless you are suggesting the less I know the more conservative I would be?

Economic logic is required, not fantasy economic theory.
 
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