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

[Ahlevah]

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.

I think we've already had this discussion, but for anyone new to the forum here it goes again.

You're right. Technically, a country that prints its own currency and allows it to float freely can't default in the sense that it can always pay off its debts in the form of depreciated currency. But it might find it advantageous under certain circumstances to force a devaluation by re-pegging the currency at a lower value against other currencies. I can see this happening if a country is drowning in debt and has been unsuccessful reflating because so much of its productive base has been hollowed out in a "bubble economy." Also, people will hold a currency only as long as they have faith it will maintain all or substantially all of its value while they hold it. If someone buys a bond, he expects to get back his purchasing power in real terms plus interest. So if he expects the real value of the currency to drop, he's going to demand a higher rate of interest. If he doesn't get it, say, due to purchases by a central bank, he'll sell the currency and shop for return elsewhere.

 

[Khayembii Communique]

I have never advocated any such thing.

I think this is the only possible response conservatives have to your position.

 

[JP Hochbaum]

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.

They weren't monetarily sovereign, they relied on borrowing from other countries to spend.

 

[JP Hochbaum]

You are here to push heterodox economic agenda. MMT has some interesting point of views, but you are to MMT what Phattonez is to Austrian Economics.

I don't have an agenda, I've been an Austrian a Keynesian and now an MMT'er. I changed my stances based on which schools have evidence to back up their claims.

 

[imagep]

I wonder how long it will take before people are saying that they are an "imageper"?

So far I can only count one of us imagepers, but I'm sure there will eventually be more, once I spread the word about the imagep school of economics.

 

[Kushinator]

I don't have an agenda, I've been an Austrian a Keynesian and now an MMT'er. I changed my stances based on which schools have evidence to back up their claims.

You only post links to MMT blogs and websites. When was the last time a thread you created didn't have a billyblog or Mosler website link in the OP?

 

[JP Hochbaum]

You only post links to MMT blogs and websites. When was the last time a thread you created didn't have a billyblog or Mosler website link in the OP?

I've posted numerous other sources like Forbes, Mises, the federal reserve, etc....

In fact just look at three of my threads on the first page here....

 

[Kushinator]

I've posted numerous other sources like Forbes, Mises, the federal reserve, etc....

I know. I'm just giving you a hard time about MMT obsession. In time, you will find that a multi-school approach is the most insightful. Microeconomic foundations are actually quite important.

 

[AngryOldGuy]

Just from reading the title of this thread I'd hoped someone would have come in and destroyed this commie propaganda right away and I wasn't disappointed, Thx TNAR
It's when not if the Dollar is no longer the World's Reserve Currency that the jig will be up?

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.

 

[austrianecon]

They weren't monetarily sovereign, they relied on borrowing from other countries to spend.

And the US doesn't?? Guess you missed the Chinese hint I gave you. Guess who is the second largest US debt holder. It's not Americans but foreigners. :lol:

 

[JP Hochbaum]

And the US doesn't?? Guess you missed the Chinese hint I gave you. Guess who is the second largest US debt holder. It's not Americans but foreigners. :lol:

No, the US doesn't borrow in anyone elses currency.

 

[AngryOldGuy]

I thought it created it out of thin air.

 

[austrianecon]

No, the US doesn't borrow in anyone elses currency.

You don't have to borrow anyone else's currency. Russia didn't borrow dollars as you don't pay government workers with dollars but rubles, thus they exchanged Dollar for Ruble. US has 43,493 million in currency other then the dollar. That's 1/3rd of the currency reserve the US holds. This holding is to provide a stable fixed rate. If the Chinese dump any of the 3 trillion dollar position they have the US would have to devalue or buy up foreign currencies to narrow the spread.

All you have to do is look at the currency swap the Fed and the ECB did to see this. The Euro was crashing and the Fed said we'll take Euros and give you dollars to stabilize the currency. US monetary policy is no different.

 

[austrianecon]

I thought it created it out of thin air.

you can create out of thin air but you have to hold foreign currency to give it value or your currency value will drop by % you create.

 

[Kushinator]

you can create out of thin air but you have to hold foreign currency to give it value or your currency value will drop by % you create.

What???

Explain your position in greater detail.

 

[JP Hochbaum]

You don't have to borrow anyone else's currency. Russia didn't borrow dollars as you don't pay government workers with dollars but rubles, thus they exchanged Dollar for Ruble. US has 43,493 million in currency other then the dollar. That's 1/3rd of the currency reserve the US holds. This holding is to provide a stable fixed rate. If the Chinese dump any of the 3 trillion dollar position they have the US would have to devalue or buy up foreign currencies to narrow the spread.

All you have to do is look at the currency swap the Fed and the ECB did to see this. The Euro was crashing and the Fed said we'll take Euros and give you dollars to stabilize the currency. US monetary policy is no different.

The only reason we hold currency is for trade imbalances, not for currency valuation.

 

[TNAR]

So you have nothing to add except calling me an elitist?

You’re right, that was rude of me. Allow me to briefly expound my position.

The second sentence in your opening statement exposes your ignorance to economics. Your unfortunately common position on economic activity is that governments get their own rules. Sure, supply and demand might work for mere peons, but governments are monetarily sovereign and, therefore, the laws of economics don’t apply. Sorry, I don’t buy it.

The first thing which must be recognized by any participant in a debate such as this is the source of money for governments. There are many avenues from which to obtain money, but they all break down to two fundamental methods: creation and appropriation. Regardless of how money is appropriated, it is taken from the current supply of money. The concept of spending future money is flat wrong; only current money can be spent today. Money creation is the only method which adjusts the total money supply.

So in simplified layman’s terms, every penny the government spends must first come out of the pocket of someone in the private sector or must be created. In the former case, the money supply has not changed and deficits are irrelevant. However, it must be noted that all deficits are irrelevant, not just government deficits. A deficit is simply an accounting result and has nothing to do with the money supply in the first place, which makes this thread slightly misleading. We may as well argue that consumption spending has no affect on the money supply. But, you did claim that deficits add to the money supply which brings us to the latter case of money creation. In this case, deficits most certainly will have the effect of adding to the money supply. But again, we may as well say that spending in general is adding to the money supply because it is not the spending (on budget or off) which is having this effect.

What you completely fail to take into account is the specific areas from which current assets are taken and the effect of an increased money supply. If current assets are taken in the form of obligations, it makes absolutely no difference where geographically the creditor is located. Regardless of whether they live in Washington, D.C. or if they live in Angola, a debt is a debt. Ignoring all other issues with inflation, if a government were to repay all of its obligations in newly created money it would not take long at all for investors to require higher and higher interest returns until the currency became worthless.

So the effect of deficit spending is a reduction in wealth for taxpayers on the one hand and a decrease in monetary value on the other.

 

[JP Hochbaum]

So the effect of deficit spending is a reduction in wealth for taxpayers on the one hand and a decrease in monetary value on the other.

Deficit spending does neither. Deficit spending increases the financial wealth of the private sector. Read the below link for an accounting explanation of this.

"What the above means is this: government deficits create private sector wealth, while government surpluses drain it. There is no trickery here. When the federal government spends in deficit, it does so by putting financial assets, usually in the form of Treasury bills, in the hands of the public; when it spends in surplus, the net quantity of Treasury bills held by the public declines. Thus, federal government deficits not only create the extra demand necessary when the economy is at less than full employment (which is what I have argued many times in this blog; please see for example Why You Should Learn to Love the Deficit: Federal Budget Fallacies and The Horror Movie That Is Fiscal Responsibility) but it puts money in the bank, too."

Why You Should Love Government Deficits - Forbes

 

[austrianecon]

What???

Explain your position in greater detail.

Basically if you create X amount, you need to create Y amount in value (product) or hold Z amount of currency. If you don't you have higher inflation affecting your currency. It's why JP doesn't understand that US government buys currency because trade balances is a currency balance. Since the US barely produces anything, the majority of dollars created go into the foreign exchange market. So if you produce very little you have to buy currency to stabilize your inflation, devalue or produce.

 

[austrianecon]

The only reason we hold currency is for trade imbalances, not for currency valuation.

Trade imbalance is a currency imbalance. Too few of one currency too much of another (dollar). It's why the US dollar has fallen against the Euro, Aussie dollar and Canadian dollar over the last few years. Why we bitch about the Chinese Yuan. Its why the Japanese are trying to print their way out because there is not enough yen in the foreign markets to increase outside demand for Japanese products.

 

[Kushinator]

Basically if you create X amount, you need to create Y amount in value (product) or hold Z amount of currency. If you don't you have higher inflation affecting your currency.

Your position cannot be supported empirically. M2 money stock has increased by 44% since December 2007, while production (output) has grown by only 12.9% in the same period. Where is the inflation?

Since the US barely produces anything, the majority of dollars created go into the foreign exchange market. So if you produce very little you have to buy currency to stabilize your inflation, devalue or produce.[/QUOTE]

Another bogus claim! The U.S. is the defacto top producer of goods and services in the world. When was the last time the Fed intervened in the forex market?

 

[austrianecon]

Your position cannot be supported empirically. M2 money stock has increased by 44% since December 2007, while production (output) has grown by only 12.9% in the same period. Where is the inflation?

M2 hasn't grown by 44%. The money stock at the start of 2009 was 8,300b. Today it's 10,800b. That's roughly 30% increase. http://research.stlouisfed.org/fred2/graph/?s[1][id]=M2

That's only 2,500b.. I can cut a huge chuck (40%) by the increase in GDP during that period as well. There has been a gain of 1,000b in GDP since 2009. Inflation over that time period has been 9%. So that's roughly 50% of the money stock increase. Now throw in Currency swaps and "natural" savings in Asia.. and it becomes perfectly clear why there is no inflation problem.

Which is why I used China dumping the $3 trillion of that money stock they hold as an example.

Another bogus claim! The U.S. is the defacto top producer of goods and services in the world. When was the last time the Fed intervened in the forex market?

It should say defacto end user producer as you can't find a US "made" product that isn't manufactured overseas, shipped to the US, put together then sold (i.e. Apple, Autos, and so on).

Officially in 2011, but they aren't always "open" about it either.

 

[JP Hochbaum]

Trade imbalance is a currency imbalance. Too few of one currency too much of another (dollar). It's why the US dollar has fallen against the Euro, Aussie dollar and Canadian dollar over the last few years. Why we bitch about the Chinese Yuan. Its why the Japanese are trying to print their way out because there is not enough yen in the foreign markets to increase outside demand for Japanese products.

a trade imbalance occurs when there is a country who produces a lot and a country who wants what they produce. Has nothing to do with currency.

 

[austrianecon]

a trade imbalance occurs when there is a country who produces a lot and a country who wants what they produce. Has nothing to do with currency.

It has EVERYTHING to do with currency. Trade Imbalance is and will always be the difference between monetary value of exports and imports of output in an economy. To make it more simple for you.. You export $100 but import $1,000. That means you moved $900 overseas.

So it's always a race to the bottom of currency value to spur export demand.

As I said before it's why Japan has printed more Yen and panic every time it dips below 80 against the dollar. It's why ECB panics every min the Euro slips against the dollar to around the 1.20 level and it's why the US/FED has no problem printing all the paper in the world. Japan and US motives are pretty close. They want to sell **** overseas and stick it to the Chinese as much as they can. EU's ECB has only 1 rule and that's stable prices (inflation hawks). At the end of the day.. it's monetary policy that drives trade imbalances.

 

[JP Hochbaum]

It has EVERYTHING to do with currency. Trade Imbalance is and will always be the difference between monetary value of exports and imports of output in an economy.

It has zilch to do with money and everything to do with cost of goods sold. We trade with other countries when they could do things cheaper than we can, or when we need/want something they have.