Wednesday, 9 July 2014

This is my problem with deficit doves

Deficit dove comment via the ars-regendi forum:
When the economy is healthy, you have to get rid of as much of the national debt as possible, so when the economy hits hard times (as in '07-'08 in the USA) you can deficit-spend to help get out of it. By GWB massively cutting taxes to turn the surplus into a deficit, he left himself and then Obama without wiggle room when the economy hit an iceberg. A much bigger stimulus package would have been possible if the budget had been in surplus and the debt reduced or eliminated when Obama took office.

My (long) reply to this:

See, this is why both deficit hawks and doves get it wrong. The doves think that the public debt needs to be lowered, that the fiscal deficit needs to be cut in the upward cycle. These things are precisely the things which MAKE the upward cycle drop into a recession.Obama's fault was that he allowed the Bush tax cuts to expire - that brought the deficit even lower. Government fiscal surpluses ARE NOT national savings. Net fiscal surpluses don't accrue anywhere; when the government takes in more money out of the private sector via taxation than it spends in, it makes the net financial savings within the private sector negative. All the money in the nongovernment sector used to pay taxes and buy government debt - it all comes (according not to ideology, but to double-entry bookkeeping) it all comes from government spending. Unemployment is always the result that fiscal deficits are too low in satisfying the private sector's desire to pay taxes and net save. Employment in capitalism is driven by sales. I can't produce and hire people if I can't sell. And I can't sell if you can't buy. So either the foreign sector leverages itself in order to buy my products (I'm relying on importing aggregate demand from abroad) or the government creates domestic aggregate demand by running adequate fiscal deficits.
The public debt is, at operational level, the movement between 2 buffer stocks: the currency and reserves. To quote Abba Lerner, the purpose of the national debt is to let the public hold interest bearing bonds instead of letting the public hold reserves earning interest.The US dollar is nothing more than a tax-credit; fiat money is tax-driven money. The public debt, tax-credits outstanding. The public debt serves several purposes - such as allowing the gov/CB to control short term interest rates in the market and provide a vehicle for institutional savings (pension funds for instance). But its purpose is NOT to "finance" public spending.In a free-floating fiat regime, public spending finances government taxation not the other way around. As a point of logic, in order for the government to borrow its own money - it needs to have spent that money into existence in the nongovernment sector; before the gov takes it on as a loan and promises to pay interest on it.To claim otherwise, that government taxation finances gov spending is not only illogical, it is an operational impossibility. When the government borrows its own currency, the central bank (who is the scorekeeper, keeps all the numbers in a massive spreadsheet) is simply shifting figures on the government's own books from one account to the other. When the government pays off the debt, it debits the checking/reserve accounts and it credits the securities account. Vice-versa when it contracts debt.
All transactions within the nongovernment sector net to 0. One man's spending is another's income. One man;s loan is another's surplus. Every country net exporter of goods and services is a net importer of aggregate demand. The only way the financial net in the nongovernment sector (the balance of nonresidents + the balane of domestic firms and households) can be positive or negative is via VERTICAL transactions. Positive, if the government is running a fiscal deficit, or negative if the government is running a fiscal surplus. Fiscal deficits create net financial assets within the nongovernment sector.
Government taxation creates unemployment of money paying jobs, and public spending employs the unemployed previously created by taxation. Thus, permanent and involuntary unemployment is a government policy choice. The neoliberal establishments call it "the unemployed buffer stock" or NAIRU; but the NARIU is predicated simply only on data fudge.
The purpose of taxation is to create unemployed people looking for paid work (paid in the government's own debt-tokens), its purpose is to create a permanent demand for the government debt-tokens or money - thus giving value to the currency. The purpose of public spending is to create aggregate demand in the economy; the purpose of taxation is to drain excess aggregate demand from the economy.
So long as you have unused resources and unemployment (people willing and able to work) - the government is either taxing too much, spending too little or both. The correct-sized fiscal deficit is that which achieves and maintains full employment and price stability. I suggest you drop the new-keynesian (orthodox) route, and look at MMT (modern monetary theory or chartalism) and the post-keynesian school. After all, Krugman got his ass handed it out to him by Steve Keen. ALL the neoliberal models, the reason why they fail, is because they DO NOT incorporate debt and money in their measurements.

A deficit agnostic's (leaning more toward a hawk) comment:

All debt must be repaid....what happens when debt exceeds GDP several times over? How will the people ever repay the debt? After all the debtors do demand interest on the debt. Look at Argentina.....the government cannot just print a trillion pesos to pay off the debt because the cost of dollars in Argentina will rise with the inflation of pesos..Credit is not infinite. Helsworth your theories aren't for every nation. Maybe for some but not all, since many economies are different.

My (another long) reply to this:

Argentina chose to default because that's what the politicians agreed upon. Argentina kept the peso at a fixed exchange rate with the US dollar - it wasn't free floating. If it was, then sovereign default would not have been an operational concern. Under the fixed exchange rate it was. Of course Argentina suffered a little bit of hyperinflation after the fixed exchange rate fell with the US dollar. It's a no-brainer.
Second, you do not understand the operational reality when a government issues debt in its own currency. As a simple point in logic, in order to borrow its own money, the government must first spend it into existence (and it spends it into existence in the nongovernment sector).The fiscal deficit funds remain in the nongovernment sector as net financial savings - and then the government chooses to take on those particular funds as debt on which the gov promises to pay interest. At an operational level, the public debt is nothing more than the movement of 2 buffer stocks: the currency and reserves. To quote Abba Lerner, the choice of issuing gov debt is a preferene of the government that the public (bankers) should own interest bearing bonds, rather than IOR on reserves.When the government issues sovereign debt, it simply debits the treasury account and credits the reserve account. When the government pays off its debt, it simply debits the reserve account and credits the treasury account.That's all the CB registers on its spreedsheat - the government simply changing numbers on its own books from one account to the other.
The size of the public debt needs to be what it is, depending on the government's goals and the private sector's goals. Public debt itself is an intrinsic part of monetary policy, NOT fiscal policy. So it has to do with controlling the overnight interest rate and providing a vehicle for institutional savings - such as for pension funds for instance. The size of the public debt DOES NOT impact future generations with higher taxes or what not - simply because taxes don't finance government spending.Japan's debt to GDP ratio is around 220%. Is there inflation in Japan because of this reason alone? No. Other countries have super low levels of debt and they still have rampant inflation. So the size of the public debt is NO measurement of inflation. Is there a risk of bankruptcy for the Japanese government? No.
Not all economies are the some. Correct. Credit is not infinite. Incorrect. Money is NOT a constraint - physical resources and free labor are - and those physical things are the true yardstick. That's why MMT uses the byword: full-employment and price stability. And not anything beyond that. At operational level, it doesn't matter whether we're talking about Sweden, Turkey, Nigeria or Honduras.If you get the institutional framework enforced according to the right rules, society can achieve its aims by applying Chartalist principles.

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