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Warren Mosler
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Interesting! One comment: changes in interest rates matter to the extent the propensities to consume differ between borrowers and savers. And with the govt a net payer of interest, that adjustment needs to be made as well. And let me also add that the islm model is a fixed exchange rate model. Warren Mosler
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MMT (Mosler Monetary Theory :) response: "The MMT (Modern Money Theory) people think almost like Keynesians except they don't all think we need to tax or borrow to pay for government." I say it this way- govt spending is not operationally constrained by revenues. "Just spend the money. Well, okay the MMT believes taxes regulate inflation and say to forget that borrowing or debt actually mean anything." treasury securities are nothing more than interest bearing accounts at the Federal Reserve Bank. Another bank would call them CD's or Savings Accounts. When they mature the Fed simply subtracts the dollars from that savings account and adds the dollars plus interest to a checking account at the Fed called a 'reserve account' "What I've come across is the point of view from the MMT crowd that spending begets borrowing. Meaning that a bank never looks at reserves (other people's savings, checking, etc.) in their bank before making loans. Instead they just make loans." Banks look at their cost of funds to price their loans which they make to credit worthy borrowers. Banks are constrained by capital and regulation, but not reserve balances at the fed. "These loans are then deposited into a bank which then feeds more loans. Thus, spending creates more borrowing. Without spending there'd be no borrowing." Loans create deposits, but that ends that process. If the deposits are spent, they become deposits of the seller of whatever was bought. There is no connection to new loans in that regard. "This theory has correlations with the increase in money supply. A growing economy needs more money. Thus, as the government borrows, this money is deposited into banks via the Fed money laundering scheme, and we get more money." A growing economy most often (but not always) needs 'net savings' which are called 'net financial assets' The monetary aggregates often called the 'money supply' include bank deposits 'paired' with bank loans which is another matter. net finanical assets = cash in circulation, balances in fed reserve accounts, and balances in tsy securities (national income accounting, not theory or philosophy) "But, does the government first borrow the money to spend? Or does the government spend and then borrow? Is there a difference? According to the US Treasury, the government borrows first or at least seems to:" Yes, in practice the treasury borrows first and then spends as a political imperative, but not as an operational imperative. and the same congress that legislates the spending and orders the tsy to do it that way can just as easily let it spend 'first.' "The Department of the Treasury operates and maintains systems that are critical to the nation's financial infrastructure, such as the production of coin and currency, the disbursement of payments to the American public, revenue collection, and the borrowing of funds necessary to run the federal government." When looking at MMT people that doesn't seem to apply. From Warren Mosler's Soft Currency Economics: "Under a fiat monetary system, The government spends money and then borrows what it does not tax..." That's a bit out of context? "What's the diff you ask?" as per my above discussion of operational vs political constraints "Here's my point. Who loans us this money? If you recall, Hamilton wanted to stop the idea of Ben Franklin who said the government owns the treasury and thus can spend what it needed to spend. Hamilton felt it better to have the public interested in government via the idea that it would loan the government money. Thus, people would have an active engagement with the government to protect their money." In today's monetary context that would be termed a 'useful fiction' for better or for worse. the same argument is used to justify the social security trust fund as a supposed source of funding. "If we dive deeper on the "who" question we need to ask this: If the people that we borrow from are later told that we no longer need their money and thus will take away their interest income stream, how do you think they will respond?" Japan has had near 0 rates for almost 20 years, the US going on 2 years, and it doesn't seem to matter nor should it. "There are people (Warren Mosler included) who have said the answer to this Euro mess, the California budget mess, etc. is to just print money and give everyone (thus not to play favorites) a certain amount of money to make their debt payment." First, I never use the term 'printing money' as it's a gold standard term that expressed the ratio of convertible 'paper gold dollars' to actual gold on hand. This ratio got out to about 4:1 if I recall correctly when the US was forced off conversion internationally. Second, yes, I'm recommending an annual per capita distribution from the ECB to member nation govts. "Who is hurt by this? The lender. The people who loaned the money. They don't want this to happen. They are the ones pushing for "austerity" programs in Europe. They are the ones who don't want us to know that WE have the capability to do ALL of the things we need (not want) without their debt money. If we understand this then they lose control of us." first, the owners of the euro debt want to get their euro back with interest vs the threatened default where they don't get their funds back at all. second, the ecb distributions can tied to and be contingent on austerity compliance with the threat of with holding payment far more credible than the current threats of fines. third, it's not inflationary as inflation comes from spending, not nominal levels of debt. "In summary, what you're witnessing today is the same as what has gone on in the progressive movement of the 1890's, the Great Depression, all wars, the Euro, California/Michigan today, and any debt based transaction throughout the beginning of time. The debt owner (the lender) wants you to remember to pay your debts. It never wants you to understand that there is no debt. The government doesn't need the lender's money. Government has all the money it needs and thus IS NOT controlled by the select few banksters in this world. We are at a tipping point where the banksters have to be careful not to push too hard for austerity programs. For if they push too hard, people will seek the truth, find it, and overthrow them. The banksters have done this many times before and have managed to retain their power and their wealth. Will they win again this time?" their odds of winning go down if i get in! best,
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banks lend based on their cost of funds. and their loans create the deposits that sit on the liability side of their balance sheets. for example, assume you buy a house from me. and neither of us has any funds in our bank accounts. (we can have incomes and other assets) you borrow 200,000 from a bank, and you pay me the 200,000 which I keep on deposit at the same bank. The bank makes the loan based on the spread between what they pay on the deposit and what they charge on the loan. I sold my house because all considered, I'd rather have the $ than the house. And you would rather have the house and owe the bank the dollars. What continuously adjusts is prices including the relative value of the currency vs other currencies. And during times of even high inflation market forces work to that continuous end. so the question is, perhaps, what makes anyone want to hold a dollar balance rather than another asset or currency? the answer is, prices continuously adjust to indifference levels hope this helps.
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you all need to read 'the 7 deadly innocent frauds of economic policy' at lots of misconceptions on this page thanks warren
Toggle Commented Apr 6, 2010 on Giving Up on Policymakers at Economist's View
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Seems you may approve of my proposal for a full payroll tax (FICA) holiday?
Toggle Commented Mar 30, 2010 on Declining Progressivity in US Taxes at ataxingmatter
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Mar 30, 2010