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The U.S. "National Debt" explained, MMT-style

Updated on October 16, 2013

The "National Debt" is not a measure of debt, but a measure of saved dollars.


Step One: forget everything you thought you knew about economics.

Most of the conventional wisdom is bunk. Flush your old college Econ 101 course out of your memory and start with a clean slate. If what you think you know doesn't stand up to both logic and hard data, it's probably wrong.

Where dollars come from


The U.S. dollar is a fiat currency. Dollars can only be created by the U.S. government (for simplicity, it helps to think of the Fed, the Treasury, and the government as a single entity, as they work in concert). Dollars are introduced into the economy by deficit spending. (Where else are they going to come from?)

Where dollars go


When large amounts of dollars are amassed, the people, banks, businesses, or countries that hold them often choose to "invest" those dollars in federal government bonds, as they earn a bit of interest, and are basically non-risk places to park money. This is our "National Debt." As you might have already noticed, it's not really debt at all.

Here is the best analogy I have heard to illustrate this... You have $12,000 in a non-interest-bearing checking account at your bank. You only need $2000 available for checking, so you put $10,000 of your money in a Certificate of Deposit account at the same bank. The bank marks down your checking account by $10K, and marks up your CD/savings account by $10K. When it matures, the bank marks your CD account down by $10,000 and marks your checking account up by, say, $10,050. You were always in the same financial position - you had $12,000 (now, a bit more). And the bank was always in the same position as well. Nobody ever says that the bank is "in debt" for $10,000 just because you moved money from your checking account into a savings account. Saying that the U.S. government is "in debt" because people have exchanged dollars for government bonds is just as misleading. Government bonds are basically dollar equivalents - you can easily trade them for dollars, or vice versa. And the government creates them both from thin air.

The "National Debt" is not a measure of debt, but a measure of saved dollars. And since that pile of saved dollars never gets any smaller, you can consider those dollars to be "retired." Government bonds, in a net sense, don't ever get cashed in and spent (although they could). They just sit there, unused, and once in a while a small bit of interest is added to the pile. And that pile has no discernable effect on the economy.

America is the richest country in the world. We are not in debt up to our ears. That should just be common sense.

Then why does everybody call it the National Debt?


Because those people don't know what they are talking about. But realistically, it's an arcane subject, and not many people are interested in learning the details, so it's hard to blame people for simply parroting what they have heard over and over. Politicians have no such excuse - anybody that gets to vote on the federal budget should know how money works.

At best, those people are living in the past. Back in the gold standard days, the creation of dollars was restricted by our gold holdings. When the government wanted to create more dollars than we could back with gold, they actually did borrow in the form of bonds. Happily, those days are over, and we are no longer restricted by some amount of a certain shiny ore randomly chosen to represent value.

The government is still required by law to issue bonds in the same amount as the federal deficit. This law is a holdover from the gold standard days. Now, those bonds are used to control the interbank lending rate. By controlling the sale of these bonds (and buying them at auction when necessary), the government can keep the interest rate where they want it.

What about banks? Don't they create money?


Banks can only create credit. Every dollar loaned out by a bank comes with an attached liability. A bank can lend you $1000, but that does not make you any richer, as you are now in debt for the same amount. And the bank is not any poorer, because (assuming you pay them back) they are owed $1000 (plus interest). No net dollars created there. Also, you may notice that your dollars don't bear the name of Wells Fargo or Chase Bank. ;)

So, with all of these new dollars, how are they holding their value?

The value of dollars is backed up by our economy's productive capacity. As long as we don't create so many dollars that we can't keep up with the demand they create, inflation should not be a problem.

Here's another analogy: A bakery, one of many in the city, sells 100 loaves of bread in a typical day. With the bakers and the equipment they have, they are able to crank out 150 loaves/day if the demand is there, but normally they don't run at full capacity. There is no shortage of flour, eggs, milk, energy, etc. - i.e., if they need more flour, they can get it.

If the government decides to distribute some new dollars to the poor (how or why isn't important), more people now have the means to buy bread, and demand goes up to 120 loaves/day. The bakery easily adjusts to the increased demand, buying more supplies and working a bit faster. Since there is no shortage of any ingredients needed to produce bread, the per-loaf price remains the same. (Remember that there are many bakeries in town - if they raised their price for a loaf, plenty of other bakeries would take their customers by keeping their prices low.) This is an example of an economy's productive capacity being able to absorb new dollars without inflationary pressure.

On the other hand, if the government decided to distribute so many new dollars to the poor that the demand for bread rose to 200 loaves/day, the bakery would either have to invest money in their labor and/or equipment to satisfy demand, which takes time, or they would simply raise their prices (as would the other bakeries, assuming they are in similar circumstances). Or, the increased demand for ingredients might lead to a shortage of flour or eggs, which would drive up the per-loaf cost of bread. Now, you have inflation (demand-pull inflation, to be exact). This is an example of an economy's productive capacity being outstripped by demand (too many new dollars created).

America clearly has plenty of dormant productive capacity. Detroit could certainly produce more cars if there was sufficient demand. We don't suffer from many shortages of anything. So new dollars are welcomed by businesses, and prices remain low. Most, if not all, of our inflation can be blamed on the price of oil, which we have no control over. (That's cost-push inflation.)

Some links on Modern Monetary Theory

When I was introduced to MMT a couple of years ago, it was a revelation. I haven't looked at politics the same way since that time. I encourage you to read up on the subject, and here are a few links to get you started:

http://en.wikipedia.org/wiki/Chartalism

http://mmtwiki.org/wiki/Main_Page

http://neweconomicperspectives.org/p/modern-monetary-theory-primer.html

http://pragcap.com/understanding-modern-monetary-system


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    • januaryrichard profile image

      Richard Sims 4 years ago from Memphis

      Excellent!

    • ib radmasters profile image

      ib radmasters 4 years ago from Southern California

      You forgot to include that the government after printing the new money, cannot pay back the original loan plus the interest, so it gets another loan and the cycle continues. The national debt also increases.

      The government is also at the mercy of the government bond auctions. As the United States becomes more and more indebted and more of the economy goes out of the country, the standing of the US goes down.

      Yes, the problem is still FIAT money, but at any time the economy of the US and those countries that invest in our FIAT money could collapse at any time.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      ib radmasters - thank you for commenting.

      None of this is a loan. The government prints it's own money, and most of that eventually comes back to them when savers exchange their dollars for government bonds. I understand that this is a very hard thing to get past - we have all heard for so long that the "national debt" is something that needs to be paid back that few people stop to consider what is actually happening. But if you just examine the mechanics behind money creation and bond sales, you will soon understand that nobody is loaning the U.S. government anything.

      The government is not at the mercy of bond auctions. First of all, they are in close communication with dealers and know ahead of time what to expect, so they can adjust the volume of bonds accordingly. Second, they can and do buy up their own bonds when necessary, which drives the price of the bonds up, and therefore the interest rate down.

      What happens if nobody buys a bond? Then those parties continue to hold their dollars, and the government steps in to buy them. Since the government prints up dollars, this operation costs them nothing. But demand hasn't been a problem - rates are hovering around 1% or so, and that's without any government interference. Even 1% beats the 0.25% paid on reserve balances, so banks are reliably buying them up. But bond sales are not necessary for funding operations, only printing is.

    • CHRIS57 profile image

      CHRIS57 4 years ago from Northern Germany

      Isn´t all you write only valid within an economic entity with the sovereign right to print money? Is the US alone on this planet?

      Certainly the US is a rich country. But i would not attribute that to debt ( as a measure for saved money) but to the difference between assets and debt. And because both assets and debt are measured by the same scale (the USD), this has not much to do with inflation or deflation. But only at first glance.

      The impression changes if the scale is set to percentage of GDP. That number has increased in the last decade by 70% for the total debt of corporate, household and public debt. Now - I would assume total assets to be in the range of 600% of GDP. 6 times the GDP or 6 years of GDP. That is the lifetime of my lawnmower :-). Housing assets will last much longer, while the loaf of bread is gone in a day. Total debt ratio of the US should range close to 300% of GDP by now. Refer to Stephen Cecchetti et al http://www.bis.org/publ/othp16.pdf

      So - the difference between the 600% and the 300% seems to make the US a rich country. But the US is not alone on this planet. And here another figure should draw attention. From 2008 on until today, almost all of the debt added to the bill was contributed by fellow economies outside the US, (via trade deficits and reinvesting) adding up to some 80% of GDP. Is the US really that rich, considering this math: 600% - 80% - 300% = 220% of GDP in wealth? This puts the US in the same league as lets say Portugal, still certainly on a higher absolute GDP level.

      It seems to me that this not so bright outlook is basically sensed and experienced by the people. Big monetary interventions don´t change anything. What else does quantitive easing do but transfer private household ("housing") debt to the public wallet. Nothing is changed in real economy, except that the loaf of bread may get more expensive.

      I give common sense for of chance than MMT to figure out the mess.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      Chris57 - thank you for your comments.

      "Isn´t all you write only valid within an economic entity with the sovereign right to print money? Is the US alone on this planet?"

      What I wrote is also valid for a fiat economy that interacts with the rest of the world. In some ways, MMT treats other countries the same as citizens of the U.S. - they, too, are capable of saving dollars. When China's trade surplus with the U.S. results in a pile of dollars amassed in various banks (dollars, since we only do business with China in dollars), they eventually end up in reserve accounts at the U.S. Federal Reserve, just like the saved dollars of Americans do. And China has the same options as Americans do - hold their dollars, spend them (which includes normal investments), or exchange them for government bonds. At present, China chooses to save many of them. They also spend quite a few dollars to peg the renminbi.

      Consumer debt is a bigger concern, but only because it leads to uneven spending. Over the last decade, Americans spent too much money based on the equity they had in their homes. Home value was rising steadily, and people thought they were loaded. When home values crashed, so did consumer spending.

      On federal debt as a percentage of GDP - MMT rejects that thinking, as it doesn't seem to make any difference. Japan is at 200% debt-to-GDP, and they are having no trouble selling their bonds at even lower yields than U.S. bonds.

      Comparing the wealth and productivity of a nation to the number of government bonds outstanding really has no basis in logic, because almost all of the wealth and productivity is owned by the private sector, while the "national debt" is built up by the government. The government's role in the economy is basically to provide some method for the private sector to keep score of their production. For this, they print dollars. It really isn't all that different than being the banker in a game of Monopoly.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      From Wikipedia: http://en.wikipedia.org/wiki/Treasury_security

      "Foreign countries later started to buy U.S. debt as an investment of their surplus U.S. Dollars. There is fear that foreign countries hold so many bonds that if they stopped buying them, the U.S. economy would collapse; however, the reality is that more bonds are transferred in a single day by the Treasury than are held by any single sovereign state."

      As I said before, holders of large piles of dollars, like China, invest many of their dollars in t-bills. It is not a loan in any sense of the word.

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      kendonhank 4 years ago

      John,

      Guy from the comment section.

      "Look at the Reagan years - the economy did very well not merely because of tax cuts, but because Reagan increased spending by a ton."

      Tax cuts are good because they let private companies decide what and how much they will produce. Government spending is bad because the government on average does not spend or invest as wisely as the free market. All dollars spent are not created equal. Government spending on a bridge to nowhere does not increase wealth or standard of living as mush as new information technology.

    • profile image

      kendonhank 4 years ago

      In response to your comment about Japan,

      GDP growth in Japan has averaged 0.5% since 1980, hardly what you would call a healthy economy. That said, comparing them with Europe and the U.S. and Europe is a waste of time because they are traveling the same failed socialist path of enormous debt and government micromanagement of the economy. Comparing growth over 2001-2010 is silly because our market correction occurred in the most recent decade, whereas theirs occurred in the 80s. What we all have in common is flat-line growth for an extended period following the correction due to high debt, below market interest rates, and government meddling in the economy.

    • profile image

      kendonhank 4 years ago

      Credit is money John. My promise to do an hour of work a week from now is just as good as money and I can use to purchase a like amount of goods and services. Credit is money, debt is money. Contracts are money. When the government prints money, extends credit, or enters into contracts, it creates money. Dollars bills are one form of money.

    • profile image

      kendonhank 4 years ago

      With respect to your constant harping on the distribution wealth,

      Distribution of wealth is irrelevant and determined by one thing, contribution to production. The more valuable your part in the production process, the greater your share of the profit. Total production and the pace of new technology development is what matters in the end, for even those who receive an inferior share of production will still benefit from increased purchasing power in the form of lower prices and better technology.

    • profile image

      kendonhank 4 years ago

      With respect to your notion that savings removes dollars from the economy and must be replaced by deficit spending to avoid deflation,

      Saving takes dollars out of circulation, but it does not take their inflationary pressure out of circulation. If I have $100 in savings, or a $ 100 treasury bill, I can spend that money or cash that bond (or use it as collateral to borrow) at any time. So the amount of money I have to make a purchase is the same whether it's in my pocket, in a bond, in the bank, or on a credit card. The total amount of money in whatever form (cash, deposits or debt) chasing the total amount of goods and services is what determines inflation. So if you print more money or provide more credit for the same amount of production, then you are creating inflation and devaluing existing money by definition.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      Ken - thanks for coming to my blog, and thanks for the comments.

      You said: “Tax cuts are good because they let private companies decide what and how much they will produce. Government spending is bad because the government on average does not spend or invest as wisely as the free market.”

      Tax cuts really don't have anything to do with a company's decisions about what and how much they will produce. Those decisions are made by the market. Tax cuts just leave them more profit to do with as they wish. Now, if you are instead arguing that tax cuts are better than government spending because the money spent better reflects free market decisions, I'll accept that, even though I don't agree that the money is always better spent.

      One thing the private sector does is save some of their money, which doesn't help the economy as much as consumer spending does. Another option is to spend that money on imports, or even completely within another country's economy. So my argument in favor of government spending is that the government will not only spend 100% of that money, they will spend that money domestically. Plus, the government pays for useful stuff that the market does not bother with – infrastructure, basic research, the environment, etc. And one spending cycle later, all of that government spending is in the hands of the private sector anyway.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      Ken said: “What we all have in common is flat-line growth for an extended period following the correction due to high debt, below market interest rates, and government meddling in the economy.”

      I still maintain that growth is not the whole story. The three countries with the highest real growth rate are Qatar, Mongolia, and Turkmenistan. (http://www.indexmundi.com/g/r.aspx?t=100&v=66&... (I challenge you to make sense of that, because I sure cannot.) From what I can gather, the best predictor of a high growth rate seems to be a crappy starting point. I would bet that any of those countries would trade their economy with that of Japan in a second.

      Please explain to me why you think that high government debt has any effect, positive or negative, on the economy, if the dollar (or yen) retains its value. And I would think that below-market interest rates would be a boon to the economy. Why do you list this as a negative?

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      Ken said: “Credit is money John. My promise to do an hour of work a week from now is just as good as money and I can use to purchase a like amount of goods and services. Credit is money, debt is money. Contracts are money. When the government prints money, extends credit, or enters into contracts, it creates money. Dollars bills are one form of money.”

      Credit is credit. It has its place in an economy, no doubt, but a dollar's worth of credit is not the same as a dollar. You can't pay off your loans with more credit, and at the end of the day, banks settle up with reserves, not promises.

      When the government creates a dollar, they also create the liability (not much of one, as they can meet that liability at no real cost). When they pay you with that money, they retain the liability, not you. You are up one dollar. That is different than a bank loaning you money. They give you a dollar, and you owe them a dollar (plus interest). And when the loan is paid off, there are no real dollars to show for it. No assets have been added to the economy. The loan might have allowed you to attract more real dollars than it cost you to pay it back, but those dollars came out of somebody else's pocket. No net gain within the economy.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      Ken said: “Distribution of wealth is irrelevant and determined by one thing, contribution to production. The more valuable your part in the production process, the greater your share of the profit. Total production and the pace of new technology development is what matters in the end, for even those who receive an inferior share of production will still benefit from increased purchasing power in the form of lower prices and better technology.”

      What are they going to buy that better technology with? There is an “inferior” share of production, and there is zero share of production. There is no satisfactory mechanism in the free market to distribute shares of production. The only thing the free market does well is to make money for ownership. A while back, production was still labor-intensive enough that labor could unionize and extract a fair share from ownership in return for their efforts, but everything is changing in ownership's favor. Lately, labor has no leverage at all. Automation, outsourcing, and even increased worker productivity work against labor in general. We produce more than ever using less labor than ever, and that means record profit margins for ownership, and an increasing disparity in income. The problem we face is decreasing consumer spending, and that's not good for the economy.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      Ken said: “...So if you print more money or provide more credit for the same amount of production, then you are creating inflation and devaluing existing money by definition.”

      If there is any inflationary pressure caused by using t-bills as collateral, I imagine it is minimal. Loans are generally not dependent on using t-bills for collateral. Yes, if you own a t-bill, that is easily convertible to dollars, and you can spend it. But, as I have said before, this does not happen on a net scale. Some people cash in t-bills and spend the money, but more people buy t-bills, so the net effect is that dollars are being retired.

      A reasonably-sized infusion of new money will not cause inflation, because our economy has the ability to meet that increase in demand. Most, if not all, businesses are not running at full capacity right now and would welcome an increase in demand, and would have no trouble whatsoever producing a bit more without having to raise prices. So while there are more dollars chasing goods, the amount of goods they are chasing will also rise to meet that demand. There is no reason for per-unit prices to go up until and unless we start to run up against a shortage of whatever is needed to produce that item.

    • profile image

      kendonhank 4 years ago

      "A reasonably-sized infusion of new money will not cause inflation, because our economy has the ability to meet that increase in demand. "

      ALL new money in any form (cash, credit or contracts) in excess of real production IMMEDIATELY devalues all existing money. When and how that shows up in prices is another matter. As for your point that a relatively small infusion of money would not be noticed, of course. But deficit spending has exceeded 10% of GDP for five years, and that does not include the trillions in Medicare and FICA taxes that have been collected and spent. So we are not talking about a small infusion of money.

    • profile image

      kendonhank 4 years ago

      "What are they going to buy that better technology with? There is an “inferior” share of production, and there is zero share of production. There is no satisfactory mechanism in the free market to distribute shares of production."

      They will buy with their share of production. Wages (share of production) are determined by supply and demand. That is the mechanism of all distribution in a free market. Attempts to alter that distribution result in inefficient use of capital, reduced production, diminished technology growth, higher prices, and diminished standard of living for all.

    • CHRIS57 profile image

      CHRIS57 4 years ago from Northern Germany

      Ken wrote: "So we are not talking about a small infusion of money."

      Yes, indeed. And much of that money is coming from foreign hand. Actually to keep things balanced foreign investors pour into the US economy money (purchase bonds) representing the current account deficit, something between 3% and 6% of GDP every year.

      This raises the question of how sovereign the fiat currency USD still is? Isn´t the accumulated current account deficit already some 70 to 80& of GDP? What happens with all this money printing leads to a "bank run", foreign investors losing faith?

    • profile image

      kendonhank 4 years ago

      "Please explain to me why you think that high government debt has any effect, positive or negative, on the economy, if the dollar (or yen) retains its value. And I would think that below-market interest rates would be a boon to the economy. Why do you list this as a negative?"

      What you are asking is whether you will get hurt jumping off a very high bridge provided it's not very high. New money (however it is created) in excess of real production devalues all existing money, IMMEDIATELY. Play whatever shell game you want to hide, delay or redirect price increases, but the devaluation occurs as soon as the new money hits the market in whatever form (cash, credit, debt, contracts, reserve requirements, regulations, subsidies, bailouts etc).

      As for interest rates, below market rates (below that of REAL inflation) reduce the rate of return for savers, which reduces purchasing power and available investment capital.

    • profile image

      kendonhank 4 years ago

      "Credit is credit. It has its place in an economy, no doubt, but a dollar's worth of credit is not the same as a dollar."

      Of course cash and credit are different. But they both can be used to purchase goods and services, so they are both money and have the same effect on inflation. So when you say there is only a trillion dollars in circulation, that is irrelevant, because I can purchase goods and services with cash and credit. More money chasing the same goods equals inflation.

    • profile image

      kendonhank 4 years ago

      "Tax cuts really don't have anything to do with a company's decisions about what and how much they will produce. Those decisions are made by the market. Tax cuts just leave them more profit to do with as they wish."

      Of course they do. You said it yourself. Tax cuts leave them with more profit to meet demand, or in the absence of demand, to invest in new technology, either to increase productivity or create new/better products.

    • profile image

      kendonhank 4 years ago

      "When the government creates a dollar, they also create the liability (not much of one, as they can meet that liability at no real cost). When they pay you with that money, they retain the liability, not you. You are up one dollar. That is different than a bank loaning you money. They give you a dollar, and you owe them a dollar (plus interest). "

      You are comparing apples and oranges. When you say the government gives me a dollar, do you mean the government gives me a dollar in exchange for performing some service? Of course I have no liability. I have traded my production for a dollar, which is a share of the production of the U.S. economy. The government has the liability for creating the dollar, and that liability is precisely one dollar's production, which it must take from somewhere else in the free economy. Government spending is a redistribution of production, a taking of production from one group of Americans and redistribution to another group.

      This is totally different from the bank loan. When I borrow a dollar, I am pledging a dollar of existing wealth or future production against that loan. We are both liable in a sense, me to pay back the bank, the bank to pay back its reserves.

    • profile image

      kendonhank 4 years ago

      "One thing the private sector does is save some of their money, which doesn't help the economy as much as consumer spending does."

      Saving is good. It provides capital reserves for new technology and production. Consumer spending creates no wealth. It is simply the exchange of existing production. Consumer spending and demand determine what will be produced, not how much will be produced in the aggregate. Government subsidy of consumer spending not only steals investment capital, but encourages willy nilly spending and speculation, causing consumers to purchase things they wouldn't ordinarily purchase, thereby distorting and reducing production efficiency.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      Ken - Austrian school? Am I right? Is your definition of inflation a rise in the general price of goods, or simply a rise in the number of dollars (the Austrian definition)?

      Remember that most of the new money gets absorbed back into government bonds, so the actual increase in the number of dollars in play is nowhere near the amount of deficit spending.

      By your definition, we should have 10% yearly demand-pull inflation in addition to normal cost-push inflation, shouldn't we? Where is it? And how do you explain any time delay in the effect? Aren't those new dollars chasing goods right from the day they are introduced?

      Also - if you count credit as money, where did that money come from? If a bank loans you $100, doesn't somebody else have $100 less to potentially spend?

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      Hi, Chris, thanks for your comment.

      You said: "Yes, indeed. And much of that money is coming from foreign hand. Actually to keep things balanced foreign investors pour into the US economy money (purchase bonds) representing the current account deficit, something between 3% and 6% of GDP every year."

      Those bonds are denominated in dollars, not euros. Nobody can supply the U.S. with dollars that the U.S. didn't create in the first place.

      I think you have found a false correlation, Chris. When countries have a trade surplus with the U.S., that means they hold extra dollars. There are a limited number of things they can do with those - they can trade them for other currencies on the forex market, they can buy dollar-denominated goods (but that would mean less of a trade surplus), or they can hold onto those dollars. If they choose to hold onto those dollars, they might as well earn a bit of interest, so they buy U.S. government bonds. Any "shortfall" (dollars leaving the country) is made up by U.S. deficit spending. There does not have to be a balance in value, but there has to be a balance in the number of dollars.

    • profile image

      kendonhank 4 years ago

      I think you need to rethink what money creation and government spending really are. You are caught up with the process of creating money, but have lost sight of the real impact on production, wealth creation, and distribution.

      A dollar is a share of U.S. wealth/production, similar to a share of stock in a corporation. It gives you the right to buy one share of U.S wealth/production in any form. When the government prints a dollar, it issues a new share, which dilutes all existing shares (unless production is also increased by one dollar). Same result when the government issues a dollar in debt (sells a treasury bond). If it sells the bond to a third party, then the government receives a share of production from that third party in exchange for promises to pay back a share of production (ignore interest for now) at some future date. No harm done if the government invests the money wisely. Production received will equal or exceed production taken. If it does not invest wisely (which is generally the case), then the government will have to take more in production from the economy to repay the bond than it created from investing the money it received from the sale of the bond.

      When the government issues bonds payable to itself in exchange for the money it prints, the result is the same as printing the money outright. The printing takes production from the economy in the form of devalued money. In exchange the government issues a bond to itself for the equivalent production. This transaction is net zero though, since the government is both the payee and payor. The only way the government can cash the bond is by taking additional production from the free economy.

      The bottom line is that government printing or debt takes production from the free economy and redistributes it from one group of Americans to another group. This government driven redistribution is rarely as efficient as free market distribution resulting in diminished productivity and pace of technology creation, seen as higher prices and reduced standard of living.

      What it really comes down to is socialism (government production and redistribution) vs capitalism (free market production and redistribution) and you have come down on the side of socialism.

    • profile image

      kendonhank 4 years ago

      "Austrian school? Am I right? Is your definition of inflation a rise in the general price of goods, or simply a rise in the number of dollars (the Austrian definition)?"

      I have been told it is Austrian school. I would simply call it common sense. To say inflation doesn't occur until prices of select goods increase is akin to saying you don't have cancer until you start coughing.

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      kendonhank 4 years ago

      "Remember that most of the new money gets absorbed back into government bonds, so the actual increase in the number of dollars in play is nowhere near the amount of deficit spending."

      What is your proof that most new money gets absorbed into government bonds? By money, do you mean only cash? Cash is only one form of money. Cash, checking, savings, stocks, bonds, and credit are all liquid money for the purposes of chasing goods and services. Even if most of the newly printed money is used to buy bonds, so what? The bond can be cashed at any time, and even if not cashed, provides reserves for capital investment or consumer spending. There is no difference between $ 100 in my pocket vs $ 100 in my savings account vs $ 100 in stock, vs $ 100 in my T-Bills with regard to my liquid wealth and means of purchasing new goods and services.

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      kendonhank 4 years ago

      "By your definition, we should have 10% yearly demand-pull inflation in addition to normal cost-push inflation, shouldn't we? Where is it? And how do you explain any time delay in the effect? Aren't those new dollars chasing goods right from the day they are introduced?"

      No, because part of the 10% GDP deficit spending creates real production. So part of the money is chasing increased production. The difference between the amount of deficit spending and real production created is inflation. As for the time delay, it depends on the way that government injects the money into the economy and how it is used, things that government thinks it can control, but in reality cannot, for the free markets are much smarter than the government.

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      John 4 years ago from Cleveland, OH

      Hi, Ken - again, thanks for commenting, and sorry for the delay in responding...

      You said: “So if you print more money or provide more credit for the same amount of production, then you are creating inflation and devaluing existing money by definition.”

      “ALL new money in any form (cash, credit or contracts) in excess of real production IMMEDIATELY devalues all existing money. When and how that shows up in prices is another matter.”

      “New money (however it is created) in excess of real production devalues all existing money, IMMEDIATELY.”

      “Play whatever shell game you want to hide, delay or redirect price increases, but the devaluation occurs as soon as the new money hits the market in whatever form (cash, credit, debt, contracts, reserve requirements, regulations, subsidies, bailouts etc).”

      There are two common definitions of “inflation:” the Austrian one, which is an increase in the number of dollars (prices notwithstanding), and the far more common one, the increase in the price of a basket of goods. You seem to be combining the two. On one hand, you recognize that some, if not all, new dollars will be absorbed by new production, and that won't cause an increase in prices. On the other hand, you insist that new money devalues all dollars even if prices don't go up.

      I personally think that the Austrian definition is useless. If prices don't rise, nobody is adversely affected. I'll stick with the “price of a basket of goods” definition.

      *****************

      You said: “As for the time delay (before prices rise), it depends on the way that government injects the money into the economy and how it is used, things that government thinks it can control, but in reality cannot, for the free markets are much smarter than the government.”

      Please give me an example of how the government can delay the onset of higher prices by injecting money into the economy in certain ways. If, as you claim, new money causes immediate inflation, how are we to know when inflation is hurting us when prices aren't going up?

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      John 4 years ago from Cleveland, OH

      Ken said: “The government has the liability for creating the dollar, and that liability is precisely one dollar's production, which it must take from somewhere else in the free economy.”

      No, the government's liability on one dollar is just another dollar. You don't get $1 worth of merchandise from the government, you get that from the private sector (for example, a store). And that is an important point – the government is not on the hook for anything. They created a dollar for use in the economy, they got goods or services for it when they spent it into the economy, and their job is done. It used to be that you could present your dollar to the government and demand a bit of gold in exchange. But those days are gone. Now, the only thing you can get for your dollar is another dollar. The government is under no obligation to do anything more.

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      John 4 years ago from Cleveland, OH

      Ken said: “Consumer spending creates no wealth. It is simply the exchange of existing production. Consumer spending and demand determine what will be produced, not how much will be produced in the aggregate.”

      Consumer spending (i.e. exercisable demand) does not determine how much will be produced in the aggregate? Really? How long do you figure businesses will make products without anybody buying them? Demand is a pretty important part of the cycle, if you ask me. Nobody is going to produce anything if there is no demand, or even an expectation of demand. I don't even try to separate demand and production – I just accept that both are essential to the cycle.

      ******************

      Ken said: “To say inflation doesn't occur until prices of select goods increase is akin to saying you don't have cancer until you start coughing.”

      What if you never start coughing, or displaying any other symptoms? Are you still sick? If I am diagnosed with cancer, but I have no pain, everything still works fine and the doctors say that my life expectancy will not decrease, what difference does the cancer make? By the same token, if prices never go up, how is the economy hurt? How can you even call that “inflation”?

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      John 4 years ago from Cleveland, OH

      Ken said: “What is your proof that most new money gets absorbed into government bonds? By money, do you mean only cash? Cash is only one form of money. Cash, checking, savings, stocks, bonds, and credit are all liquid money for the purposes of chasing goods and services. Even if most of the newly printed money is used to buy bonds, so what? The bond can be cashed at any time, and even if not cashed, provides reserves for capital investment or consumer spending. There is no difference between $ 100 in my pocket vs $ 100 in my savings account vs $ 100 in stock, vs $ 100 in my T-Bills with regard to my liquid wealth and means of purchasing new goods and services.”

      By money, I mean government-created dollars. You might be able to buy a t-bill using your credit card, but you will still have to pay that bill with real money. And you would have to convert everything else you call “money” into dollars before you can buy a t-bill. So there is obviously a difference between government-created dollars and credit/stocks/bonds/etc.

      What is my proof? Well, the government issues those bonds in the same amount as deficit spending, and they all get sold. For dollars. The actual number of dollars in play has actually gone up very steadily, even with the recent large amounts of dollars created due to the financial crisis, quantitative easing, etc. (I have a graph of that steady increase somewhere – I wish I could find it now.) If new money didn't get absorbed into govt. bonds, we would have about $9 trillion in play instead of $1 trillion.

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      kendonhank 4 years ago

      "You seem to be combining the two. On one hand, you recognize that some, if not all, new dollars will be absorbed by new production, and that won't cause an increase in prices. On the other hand, you insist that new money devalues all dollars even if prices don't go up."

      What I said is that new money in excess of new production causes immediate inflation. So if the money supply increases 1% and production increases 1%, there is no inflation.

      When inflation/devaluation of the currency shows up in the price of particular goods depends on many factors. For example, there may be deflationary forces in the economy due to oversupply of certain goods, housing for example. So, if housing prices are 50% overpriced and falling, then a 1% increase in the money supply isn't going to make houses more expensive. They will continue to drop until they reach fair market, though inflation may prop them up a while longer. How the government injects money into the economy also effects how long it takes inflation to manifest itself as high prices. For example, if government prints and spends money directly (writing stimulus checks to individual taxpayers for example), inflation is felt immediately, whereas if the government prints money and deposits it with the big commercial banks, then inflation will not be felt until the money is loaned out. There are many many factors that determine how long it takes prices to increases and which prices will increase as a result of devaluing the currency. The basket of goods metric is utter foolishness, the tail wagging the dog. You have cancer as soon as the cancer cells begin to metastasize, not when you develop your cough. By then it's generally too late to do anything about it.

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      kendonhank 4 years ago

      "What is my proof? Well, the government issues those bonds in the same amount as deficit spending, and they all get sold. "

      I'll buy that, but so what? As I said dollar bills are not the only form of money. Credit is money too. I will have to pay my credit card bill with real money eventually, but while I am using it to purchase goods, I am putting upward pressure on prices. All purchases, whether cash or credit, constitute demand that puts upward pressure on prices and increases inflation. T-Bills are no different. Even if I don't cash them, they are still assets that improve my balance sheet and can be used to support other spending.

      As an aside, when the government issues and sells bonds to cover newly printed money, are you saying that the newly printed money never reaches the economy. Of course it does, or what would be the purpose of printing the money. It may not appear as dollar bills, but it will appear as credit in some form.

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      kendonhank 4 years ago

      "What if you never start coughing, or displaying any other symptoms? Are you still sick? If I am diagnosed with cancer, but I have no pain, everything still works fine and the doctors say that my life expectancy will not decrease, what difference does the cancer make? By the same token, if prices never go up, how is the economy hurt? How can you even call that “inflation”?

      You can do better than that John. If you have malignant cancer, you will die of it. You may not express any outward symptoms, but you will die, unless of course you get hit by a truck first. Inflation of the money supply WILL eventually drive prices up, because more money chasing any finite set of goods will eventually make the goods more expensive in proportion to the devaluing of the money. What you are arguing is that inflation of the money supply doesn't cause inflation because you don't see it right away, or it doesn't affect a particular set of goods. Very silly.

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      kendonhank 4 years ago

      "Consumer spending (i.e. exercisable demand) does not determine how much will be produced in the aggregate? Really? How long do you figure businesses will make products without anybody buying them? Demand is a pretty important part of the cycle, if you ask me. Nobody is going to produce anything if there is no demand, or even an expectation of demand. I don't even try to separate demand and production – I just accept that both are essential to the cycle."

      Total demand equals the total wealth and credit of the economy at any give time. That demand always exists. It does not need to be created. The amount of demand that each consumer can exercise equals their total wealth, or the total of what they themselves have produced. As we produce goods and services, we become wealthier and are able to demand more. So production determines all wealth creation. When you make something, you create wealth and increase your own ability to demand. Even if there is no demand for our products, each of us is free to make or improve products and services for ourselves. These can later be exchanged for products and services made by others. In order to demand something, you must first produce something of equal value for exchange.

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      kendonhank 4 years ago

      "No, the government's liability on one dollar is just another dollar. You don't get $1 worth of merchandise from the government, you get that from the private sector (for example, a store). And that is an important point – the government is not on the hook for anything. They created a dollar for use in the economy, they got goods or services for it when they spent it into the economy, and their job is done. It used to be that you could present your dollar to the government and demand a bit of gold in exchange. But those days are gone. Now, the only thing you can get for your dollar is another dollar. The government is under no obligation to do anything more."

      A dollar is a share of U.S. production. You can exchange your dollar at any time for a like share of U.S. production (goods, services). When the government issues a new dollar (assuming production does not increase), it is the same as a corporation issuing a new share. All existing shares are devalued proportionally.

      Sometimes when a company issues new shares, share prices do not drop immediately due to speculation about future production. Eventually though, the share price returns to reflect real earnings and earning potential. Same with inflation. When the government issues new dollars, prices may not rise immediately, but they will eventually reflect the balance between total dollars and total production.

      What the government really does when it prints more money is redistribute existing wealth from savers to borrowers and holders of hard assets. Consumers get screwed because they have to pay inflated prices, often without the benefit of higher wages. Government debt is also a form of redistribution, a transfer of wealth from those who pay taxes to those who do not and bond holders. When the government runs a debt, what it is really doing is promising to redistribute production in the future.

      Supply and demand determines all pricing John . You cannot avoid it with fancy accounting and government shell games. As the supply of money in any form (cash, credit, contracts, etc) increases for a fixed set of goods and services, prices will eventually increase to spread that new money across those goods and services.

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      John 4 years ago from Cleveland, OH

      Hi, Ken

      You said: “What I said is that new money in excess of new production causes immediate inflation. So if the money supply increases 1% and production increases 1%, there is no inflation.”

      OK.

      Ken said: “When inflation/devaluation of the currency shows up in the price of particular goods depends on many factors. For example, there may be deflationary forces in the economy due to oversupply of certain goods, housing for example. So, if housing prices are 50% overpriced and falling, then a 1% increase in the money supply isn't going to make houses more expensive. They will continue to drop until they reach fair market, though inflation may prop them up a while longer. How the government injects money into the economy also effects how long it takes inflation to manifest itself as high prices....”

      I don't know how many times you used the word “immediately” - sometimes in all caps – but it was quite a few. Either prices go up, or they don't. You can't hedge your answer like that. America has been running deficits for the vast majority of our existence, and deficit spending has risen like crazy over the past 30 years. And still, no demand-pull inflation. How much longer do I have to wait before I can declare your answer wrong?

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      John 4 years ago from Cleveland, OH

      Ken said: “I'll buy that, but so what? As I said dollar bills are not the only form of money. Credit is money too. I will have to pay my credit card bill with real money eventually, but while I am using it to purchase goods, I am putting upward pressure on prices. All purchases, whether cash or credit, constitute demand that puts upward pressure on prices and increases inflation. T-Bills are no different. Even if I don't cash them, they are still assets that improve my balance sheet and can be used to support other spending.”

      You have to convert everything to dollars at some point. You say that credit is money and puts pressure on prices, but what about your debt? If you are going to count credit, you must also subtract your debt, because those dollars won't be buying anything. And in the end, as I have always held, credit equals out to zero. In the long run you can't spend more dollars than you have earned just because somebody has extended you credit. We recently went through a period where consumers were using more credit than usual (pre-housing crash), and now spending is still down partially because those people are paying down their debt. (MMT calls this a balance sheet recession.) Dollars have to be spent on goods to have an effect on prices.

      T-bills are different. They may be on your balance sheet, but you aren't spending them. You could, and so could everybody else – but as a whole, you don't. Taken collectively (since you alone won't have much of an effect on the economy), t-bills are retired dollars. They don't “support other spending,” because you are talking about obtaining and spending credit, and as I just explained, credit minus its corresponding debt equal out to zero.

      “As an aside, when the government issues and sells bonds to cover newly printed money, are you saying that the newly printed money never reaches the economy. Of course it does, or what would be the purpose of printing the money. It may not appear as dollar bills, but it will appear as credit in some form.”

      No, of course the newly printed money reaches the economy. It is created by deficit spending, so it reaches the economy in the form of govt. salaries and govt. purchases of private sector goods and services, grants, etc. Bonds are bought with saved dollars, dollars that have filtered through the economy until they have ended up in the hands of somebody that wants to save in the form of t-bills (i.e. the rich). Demand for dollars doesn't change all that much from year to year, so excess dollars find their way to t-bills pretty predictably.

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      John 4 years ago from Cleveland, OH

      Ken said: “You can do better than that John. If you have malignant cancer, you will die of it. You may not express any outward symptoms, but you will die, unless of course you get hit by a truck first. Inflation of the money supply WILL eventually drive prices up, because more money chasing any finite set of goods will eventually make the goods more expensive in proportion to the devaluing of the money. What you are arguing is that inflation of the money supply doesn't cause inflation because you don't see it right away, or it doesn't affect a particular set of goods. Very silly.”

      Didn't I say that the doctors said my life expectancy wouldn't decrease? That means I'm not going to die from the cancer. Anyway, it's your analogy, and of limited use – at least, until you can prove that this country has economic “cancer.” So far, all I have seen are dire predictions, but no evidence.

      I am arguing that an increase in the money supply doesn't automatically cause inflation (and I'm obviously not using the Austrian definition of inflation). I am saying – and you have agreed with this – that new money stimulates increased production, and if production increases enough to satisfy all of the new demand, then there will be no demand-pull inflation. You don't seem to believe that production can possibly increase enough to match all of our deficit spending. I'm trying to demonstrate that not all of that deficit spending translates into an increase in available dollars. Much of it is just needed to replace saved dollars.

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      John 4 years ago from Cleveland, OH

      Ken said: “Total demand equals the total wealth and credit of the economy at any give time. That demand always exists. It does not need to be created. The amount of demand that each consumer can exercise equals their total wealth, or the total of what they themselves have produced. As we produce goods and services, we become wealthier and are able to demand more. So production determines all wealth creation. When you make something, you create wealth and increase your own ability to demand. Even if there is no demand for our products, each of us is free to make or improve products and services for ourselves. These can later be exchanged for products and services made by others. In order to demand something, you must first produce something of equal value for exchange.”

      I've had this same argument before with my other Austrian opponent. Production first, then demand, yada yada yada... everybody already accepts that – but it's an academic argument. In real life, if you don't include demand in your thinking, you will go off the tracks. It's a cycle, and the cycle is already in motion.

      We have a $15 trillion economy. If people (as a whole) want to save, say, 5% of their earnings, that would be $750 billion that won't get spent on goods and services. If the government doesn't replace that, the economy will contract. If that is allowed to happen on a regular basis, you end up in a deflationary spiral.

      Ken said: “A dollar is a share of U.S. production. You can exchange your dollar at any time for a like share of U.S. production (goods, services). When the government issues a new dollar (assuming production does not increase), it is the same as a corporation issuing a new share. All existing shares are devalued proportionally.

      Sometimes when a company issues new shares, share prices do not drop immediately due to speculation about future production. Eventually though, the share price returns to reflect real earnings and earning potential. Same with inflation. When the government issues new dollars, prices may not rise immediately, but they will eventually reflect the balance between total dollars and total production.”

      So if the balance between total dollars and total production is such that the dollar holds its value and we stay at a very manageable (and even desirable) 3% rate of inflation or so, what is the problem? Are you saying that, eventually, we are all going to get our comeuppance? Well, when, exactly? Why haven't these dire predictions come to pass in the past 30 years?

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      John 4 years ago from Cleveland, OH

      Ken said: “What the government really does when it prints more money is redistribute existing wealth from savers to borrowers and holders of hard assets. Consumers get screwed because they have to pay inflated prices, often without the benefit of higher wages. Government debt is also a form of redistribution, a transfer of wealth from those who pay taxes to those who do not and bond holders. When the government runs a debt, what it is really doing is promising to redistribute production in the future.”

      Taxes are certainly a redistribution. New money is not. As I demonstrated before, new money does two things – it replaces dollars lost to savings, and it stimulates new production. As that new production wasn't going to happen without the creation of new money, you can hardly say that it was taken from somebody and given to somebody else.

      Ken said: “Supply and demand determines all pricing John . You cannot avoid it with fancy accounting and government shell games. As the supply of money in any form (cash, credit, contracts, etc) increases for a fixed set of goods and services, prices will eventually increase to spread that new money across those goods and services.”

      I totally agree that supply and demand determines pricing (except the interest rate, of course). But again, we aren't talking about a fixed set of goods and services. I am not avoiding anything - the accounting here is as simple as it gets, if you would just give it a look. And the numbers all back me up, too. What is more important to you, winning the argument, or eventually getting it right? This is a problem I have seen before – if somebody is already invested in a certain school of thought, they are much more likely to fight every point. But others who are starting with a cleaner slate can more easily accept a new premise and build off of that.

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      kendonhank 4 years ago

      "I don't know how many times you used the word “immediately” - sometimes in all caps – but it was quite a few. Either prices go up, or they don't. You can't hedge your answer like that. "

      Inflation/devaluation of the currency occurs IMMEDIATELY after new money is printed in excess of production. When that shows up in prices of particular goods is another matter.

      "America has been running deficits for the vast majority of our existence, and deficit spending has risen like crazy over the past 30 years."

      A portion of deficit spending is absorbed by growth in production. More goods are produced to absorb the new money. When new money gets ahead of production, you get inflation. Deficit spending has been increasing over the past 30 years, but has spiked tremendously over the past 6 with eight trillion in new debt, and very little increase in production. That is why gold is trading at 4x the cost of mining. Some prices have increased. Others have not yet due to oversupply and the reluctance of banks to extend credit. Certainly though, there are far more dollars chasing the same goods, and when the economy gets on firmer footing, that will show up in widespread inflation.

      "Deficit spending has risen like crazy over the past 30 years. And still, no demand-pull inflation. How much longer do I have to wait before I can declare your answer wrong?"

      If you have cancer and you haven't died yet, how much longer do you have to wait before you can declare you don't have cancer. More money chasing the same goods equals higher prices. Supply and demand, sort of like the law of gravity. You can argue that other factors such as oversupply of goods will keep inflation at bay, but eventually that supply will be consumed and growth in the money supply exceeding production will show up as inflation.

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      kendonhank 4 years ago

      "You say that credit is money and puts pressure on prices, but what about your debt? If you are going to count credit, you must also subtract your debt, because those dollars won't be buying anything. And in the end, as I have always held, credit equals out to zero."

      Credit does not have to be paid back immediately, but it puts immediate pressure on prices. What you borrow 330k at 3% interest only to purchase a house, you inject 300k of pricing pressure immediately, while you future spending is only diminished 10k per year. That is why housing prices increased so fast.Easy credit.

      "We recently went through a period where consumers were using more credit than usual (pre-housing crash), and now spending is still down partially because those people are paying down their debt. "

      Spending is down primarily because employment, production and access to credit are down. The damage done by the inflation of housing prices due to easy credit has already been done. Your housing example simply proved my point that more money (cash or credit) chasing the same number of goods increases prices. Subsequent removal of this demand decreases prices, as we are seeing now, though government continues to prop it up with below market rates, bailouts, and purchases of mortgage backed securities, all of which artificially increases demand.

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      kendonhank 4 years ago

      "T-bills are different. They may be on your balance sheet, but you aren't spending them. You could, and so could everybody else – but as a whole, you don't. Taken collectively (since you alone won't have much of an effect on the economy), t-bills are retired dollars. They don't “support other spending,” because you are talking about obtaining and spending credit, and as I just explained, credit minus its corresponding debt equal out to zero."

      I don't have to spend them or borrow against them for them to effect by overall spending. They are reserves that I can draw against if need be, which allows me to be more liberal with other spending. As for your credit argument, once again you are correct that credit minus debt is zero on the balance sheet, but credit injects money NOW, while debt does not have to be paid back until LATER, so credit places upward pressure on prices.

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      Kendonhank 4 years ago

      "I am arguing that an increase in the money supply doesn't automatically cause inflation. I am saying – and you have agreed with this – that new money stimulates increased production, and if production increases enough to satisfy all of the new demand, then there will be no demand-pull inflation."

      But government spending is not as efficient as free market spending. When private companies borrow to finance new equipment, they are betting that they will create new production that exceeds their debt. Government spending has very low productivity relative to the private sector, so there will rarely if ever be enough near term production to satisfy the demand, so there will be substantial inflation.

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      kendonhank 4 years ago

      "We have a $15 trillion economy. If people (as a whole) want to save, say, 5% of their earnings, that would be $750 billion that won't get spent on goods and services. If the government doesn't replace that, the economy will contract. If that is allowed to happen on a regular basis, you end up in a deflationary spiral."

      Saving causes a temporary slow down in demand and contraction of the economy. But it also increases the available pool of investment capital, which facilitates the development of new technology that increases productivity and wealth creation. So, you get near term contraction with long-term increased productivity and production. The opposite occurs when the government incurs debt and hands out money to consumers to stimulate the economy. You get near term growth from a burst of spending at the expense of long term production, because deficit spending takes capital from the private sector in the form of devalued money and higher taxes.

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      kendonhank 4 years ago

      "Taxes are certainly a redistribution. New money is not. As I demonstrated before, new money does two things – it replaces dollars lost to savings, and it stimulates new production. As that new production wasn't going to happen without the creation of new money, you can hardly say that it was taken from somebody and given to somebody else."

      Dollars are not lost to savings, they provide reserves for other investment and spending. It's true that increased spending due to borrowing increases near-term production, but only at the expense of future production, as it takes capital from investors in the form of inflated prices and higher taxes. Also, production caused by government stimulus is not as efficient as private investment. Government stimulus/spending throws dollars into the economy willy nilly, which are soaked up in frivolous consumer spending and pork projects like bridges to nowhere and failed solar power companies. New money is just a deferred backdoor tax.

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      kendonhank 4 years ago

      "So if the balance between total dollars and total production is such that the dollar holds its value and we stay at a very manageable (and even desirable) 3% rate of inflation or so, what is the problem? Are you saying that, eventually, we are all going to get our comeuppance? Well, when, exactly? Why haven't these dire predictions come to pass in the past 30 years?"

      Compare the price of a candy bar and a gallon of gas from 30 years ago and tell me there has been no inflation. If total production keeps pace with new money creation, then there is no inflation. But again, you are using your arbitrary basket of goods to measure inflation, when the only true measure is the growth in the money supply (cash and credit) vs production. Also, you cannot lump the past 6 years in with the past 30. There has been a dramatic increase in deficit spending in the past 6 years with no corresponding increase in production. Prices are somewhat tame because we are in recession due to oversupply. As soon as the oversupply is corrected, you will see higher prices, as evidenced by the current price of gold, which is selling at 3-4x it's production price. Obviously the market anticipates inflation.

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      kendonhank 4 years ago

      "I've had this same argument before with my other Austrian opponent. Production first, then demand, yada yada yada... everybody already accepts that – but it's an academic argument. In real life, if you don't include demand in your thinking, you will go off the tracks. It's a cycle, and the cycle is already in motion."

      Actually, it's the reverse. When you start trying to drive near-term production by artificially manipulating demand (government stimulus, below market interest rates, credit easing), that is when you go off the tracks, because all this meddling does is spur inefficient short term production at the expense of efficient long-term production.

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      John 4 years ago from Cleveland, OH

      Ken said: “Deficit spending has been increasing over the past 30 years, but has spiked tremendously over the past 6 with eight trillion in new debt, and very little increase in production.”

      You know why we have lots of new debt? Because we created lots of new dollars, and they were soaked up by govt. bonds, as I have been trying to explain all along.

      Those new dollars were mostly due to the bank bailouts. The govt. recapitalized banks by buying shares of preferred stock, and also by buying up toxic assets. (It wasn't a gift – the govt. always gets something for their money.) The idea was to inject liquidity into banks, then banks, now holding lots of cash, would make more loans. This, of course, did not work (see my articles on quantitative easing). The banks, with nothing better to do with the cash (since nobody was borrowing it), put it into government bonds. Those new bank recap dollars never saw the light of day. Real people never got their hands on them, and they never got spent. They now sit in the form of t-bills, retired. And, of course, NOT putting any upward pressure on prices.

      Really, Ken, how can you argue that a multi-trillion-dollar creation of money hitting the economy over a very short period of time would not have an immediate impact on prices? I just explained how those dollars didn't actually hit the economy, and my explanation is backed up both by the increase in the national debt (more t-bills) and the lack of inflation. Your explanation, on the other hand, puts you way out there on a theoretical limb. You are the one dodging around, looking for thin explanations for why a giant influx of dollars has not yet shown up as an increase in prices. Keep in mind that the spike happened 4 years ago – where is the inflation?

      Ken said: “More money chasing the same goods equals higher prices. Supply and demand, sort of like the law of gravity. You can argue that other factors such as oversupply of goods will keep inflation at bay, but eventually that supply will be consumed and growth in the money supply exceeding production will show up as inflation.”

      I am not arguing that other factors are masking inflation. You are. (I'm also not always claiming that the amount of goods and services stays the same, but I think this is an oversight on your part.)

      If things like the oversupply of goods haven't resolved themselves in the past 30 years, I doubt they ever will.

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      kendonhank 4 years ago

      You are also ignoring the inflationary pressure of 55T in unfunded liabilities for social security and Medicare? These will have to be paid either with higher taxes or printing new money.

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      John 4 years ago from Cleveland, OH

      Ken said: “Credit does not have to be paid back immediately, but it puts immediate pressure on prices. What you borrow 330k at 3% interest only to purchase a house, you inject 300k of pricing pressure immediately, while you future spending is only diminished 10k per year.”

      You are just one person. In the aggregate, people are paying down that mortgage debt in about the same amount as loans are being disbursed. Besides, what “pricing pressure” does the purchase of a house put on milk, eggs, or cars? The purchase of a house affects the housing market, nothing else.

      Ken said: “Spending is down primarily because employment, production and access to credit are down. The damage done by the inflation of housing prices due to easy credit has already been done. Your housing example simply proved my point that more money (cash or credit) chasing the same number of goods increases prices. Subsequent removal of this demand decreases prices, as we are seeing now, though government continues to prop it up with below market rates, bailouts, and purchases of mortgage backed securities, all of which artificially increases demand.”

      Check your facts, Ken – production isn't down, it's up, and access to credit is as easy as ever (you are always talking about “easy credit,” right?). Spending is down because people are unemployed, or employed but not seeing any raises, or simply not confident about keeping their jobs. You are saying that prices are increasing, prices are decreasing, then prices are being propped up – which is it?

    • profile image

      kendonhank 4 years ago

      "Those new bank recap dollars never saw the light of day. Real people never got their hands on them, and they never got spent. They now sit in the form of t-bills, retired. And, of course, NOT putting any upward pressure on prices."

      Obviously if the government prints money but it is never distributed, it is not inflationary. The government can recall the money on loan to the big commercial banks at any time.

    • profile image

      kendonhank 4 years ago

      "Production isn't down, it's up, and access to credit is as easy as ever (you are always talking about “easy credit,” right?). Spending is down because people are unemployed, or employed but not seeing any raises, or simply not confident about keeping their jobs. You are saying that prices are increasing, prices are decreasing, then prices are being propped up – which is it?"

      Real production is down. Without deficit spending, real GDP has been negative for four years. If you make 40k per year and spend 10k on a credit card, would you say that you earned 50k. No, you are simply borrowing 10k from future earnings, no different than deficit spending, which must be paid eventually with either higher taxes or inflated/devalued currency that reduces future production.

      Prices are increasing except for assets like housing that were artificially inflated. Have you been to the gas pump or the grocery store lately. Have you purchased gas or checked the price of other commodities like gold and silver. They would be increasing faster if we were not in recession.

    • CHRIS57 profile image

      CHRIS57 4 years ago from Northern Germany

      @ John and Ken:

      It is a great pleasure and privilege to follow your discussion in this hub. MMT is an interesting approach to look at monetary impacts on economy. But the more i try to understand, the more i get the impression that MMT solves the "hen and egg" problem by simply adding some eggs to the hens nest and then proclaim that eggs were first.

      In terms of economy: real stuff, products are first, services are second, and then comes the virtual world of money. All economic changes on this planet are the result of real economy, not the result of financial gambling called monetary action.

      As i said, MMT delivers opportunities for good academic discussions. Things get dangerous if politics adopt the mindset.

      Ken wrote "If you make 40k per year and spend 10k on a credit card, would you say that you earned 50k. No, you are simply borrowing 10k from future earnings, no different than deficit spending.." Couldn´t agree more.

    • profile image

      kendonhank 4 years ago

      "You are just one person. In the aggregate, people are paying down that mortgage debt in about the same amount as loans are being disbursed. Besides, what “pricing pressure” does the purchase of a house put on milk, eggs, or cars? The purchase of a house affects the housing market, nothing else."

      The point was that credit is money and does increase upward pricing pressure. Easy credit for housing increases housing prices. Equity lines from housing increase pricing on everything else. General credit increases all prices. And the rate of new mortgage debt only equals payback on old mortgages if there is no spike in mortgage activity as was the case in the 2000s.

    • profile image

      kendonhank 4 years ago

      Jojn,

      If you take 50k from a tool maker (in taxes) who is investing in a new die and give 10,000 five bucks each to go see a movie, which is the greatest good for the economy.

    • profile image

      kendonhank 4 years ago

      John,

      If printing new money does not cause inflation, then why not put an end to taxes (or at least cut them substantially) and have the government pay all or most of its debts by printing an extra trillion or two per year? That is what the government is doing now with deficit spending and shifting Medicare/social security income to the general fund. That adds about 2 trillion per year to the debt without inflation, right? So what's another couple of trillion in tax cuts?

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      Ken said: “If printing new money does not cause inflation, then why not put an end to taxes (or at least cut them substantially) and have the government pay all or most of its debts by printing an extra trillion or two per year? That is what the government is doing now with deficit spending and shifting Medicare/social security income to the general fund. That adds about 2 trillion per year to the debt without inflation, right? So what's another couple of trillion in tax cuts?”

      Actually, this could be done. Whether or not it would be inflationary depends on the circumstances (could growth and savings account for all of the new dollars?), though. The problem with that, as I see it, is that the rich would just amass that much more wealth, and become that much more powerful. As things are structured now, they aren't having much trouble socking away just about all of America's growth all by themselves, so taxes obviously aren't hurting them too much.

    • profile image

      kendonhank 4 years ago

      So then you would be in favor of maintaining the Bush tax cuts, as they don't really add to the debt? Sure the government gets less revenue, but they can make up the difference by just printing new money, which has no effect on inflation because the extra money folks get to keep from the tax cuts eventually finds its way into savings anyway?

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      Hi, Chris – I'm glad you are keeping up with the discussion.

      You said: “In terms of economy: real stuff, products are first, services are second, and then comes the virtual world of money. All economic changes on this planet are the result of real economy, not the result of financial gambling called monetary action.”

      You certainly have a Germanic view of economics, which is understandable. Being a net exporter solves a lot of problems. And since you can't export services, I can understand your preference for manufacturing output. But America is so far from being a net exporter that we just stipulate to that fact without much discussion about it. The trade deficit, plus the fact that a lot of dollars are used as the world's reserve currency, make the accounting important.

      Germany is in a completely different situation. Your country is not able to print up euros on its own – you are a user of currency, much like an American state. If euros flow out of your country, your government has little power to change that – you can't print more euros, and you can't devalue the currency to make your exports more attractive. It is also possible for your government to save euros for later use.

      The ECB is the only entity that can create euros, so the eurozone is basically competing for euros in a zero-sum game. Germany is winning handily (are there even any other eurozone nations that are net exporters?), and most (or all) of the other euro nations are losing. Euros are leaving their countries and entering Germany – plus, they are paying interest to the ECB for the privilege of using their currency. That is truly a debt situation, the kind that the average American mistakenly imagines our own country to be in, and it is unsustainable without *gifts* from the ECB (or Germany). If you aren't net exporting, you are losing euros, plain and simple. And some countries are going to lose.

      Now imagine that Germany is the only eurozone country. You still use the ECB, and you are still a net exporter, and the world still uses the euro as a reserve currency. No matter how many dollars, yen, or francs your exports bring in, you still need euros to operate, and the world still needs euros for use as a reserve currency, so you will need to borrow them from the ECB. At present, that is not necessary, as you just suck them up from other, less competitive, eurozone nations. But that hypothetical should illustrate why countries must run a deficit, even if they are net exporters, in order to supply their economies with their currency. Your holdings of other currencies might allow you to import every good and service you need, or buy up all of the loose euros on the market, but you cannot amass any more euros than the ECB has created, no matter how many dollars, yen, and francs you hold.

      ************************

      There are a couple of tricks one can employ to understand the creation and destruction of dollars in a fiat economy. First, imagine an island economy, starting from scratch, where dollars can only be created by the government. Right from the start, you can see that the government MUST create more dollars than it taxes away, or else there will be no money with which the economy can operate. Also, it should be clear that there is no place from which to borrow dollars, as none have previously been created by the government. And finally, it is possible for the government to produce new dollars that have value, as long as there is some production on which to spend it.

      I'm not trying to hide anything here, or justify taxation, or anything else. I'm trying to keep politics out of the discussion. My only purposes here are to attempt to demonstrate how money works in the real world, and to make people understand that the American government is not in debt, because that misconception leads to all sorts of misguided policy choices. There is a large and rabid contingent in America that wants to not only balance the budget, but “pay off our national debt,” which would be a financial disaster. And the misconception is so widespread that most of the rest still want to balance the budget and pay off the debt, only they don't want to cut government programs that help the poor.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      Ken said: “So then you would be in favor of maintaining the Bush tax cuts, as they don't really add to the debt? Sure the government gets less revenue, but they can make up the difference by just printing new money, which has no effect on inflation because the extra money folks get to keep from the tax cuts eventually finds its way into savings anyway?”

      I don't really care about the national debt, as long as there is no inflation. My only concern with not taxing the rich is that, as I said before, the less you tax them, the more dollars they accumulate, and accumulated wealth is power. I see no reason to facilitate that accumulation, as it doesn't help the economy one bit.

      What I would favor is eliminating all federal taxes, including FICA and Medicare, on everybody up to, say, $200,000 or so, and progressive taxation above that. My reasoning is that most people and families that make $200K or less don't save much (or any) of their income. If someone spends all of their money, there is certainly no good reason to tax them and redistribute that money elsewhere, as it is all being churned back into the economy anyway.

      A little bit of savings is a good thing for people, of course. But there is a difference between a middle-class guy saving 5% of his income and a fabulously rich guy saving 80% of his income mostly because spending any more than that would be a full-time job. Normal savers aren't accumulating dynastic wealth. My family, for instance, pulls in about $100K. Aside from what is automatically removed from our paychecks, we save almost nothing. When we retire, we will probably burn through all of our savings, and what we may pass on will not last long. There is nothing wasted there, no pile of unused savings that forces the government to create more dollars. We spend all that we produce.

      The rich, by contrast, do *not* spend all that they produce. Much of their “production” is sitting idle in the form of t-bills. If the government does nothing to rectify that, it will be lost, as there will not be enough dollars to buy all of the current production. The economy will contract. And that's the problem with savings. It's good for the individual, but bad for the economy in the aggregate.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      Ken said: “If you take 50k from a tool maker (in taxes) who is investing in a new die and give 10,000 five bucks each to go see a movie, which is the greatest good for the economy.”

      First of all, business expenses and investments, like investing in new machinery, are going to be written off against profits. If the tool maker is paying $50K in taxes, that means they have made far more than $50K in profit, so they would still be perfectly able to buy the new machinery – in fact, they would get a tax break for doing so. You make it sound like the government takes a company's operating money away from them, and that is simply misleading. You are letting your politics color your thought.

      ******************

      So let me rephrase your question, then answer it: If the government either taxed away $50K from the tool making company and redistributed $5 each to 10,000 moviegoers, or let the company keep their profits, which does the greatest good for the economy?

      Well, it's a bit of a wash, actually. If you let the company keep their profits, there are a few options they have: they can distribute those profits to shareholders; they can save the money for later use; they can give employees bonus pay; or they can invest it back into the company. If they distribute dividends to shareholders, some of that money will get spent, and some will get saved (it's a safe assumption that at least a few shareholders are rich); if they give employees bonus pay, again, some of the money will get spent, and some will get saved – how much depends on how well off the employees are; if they buy new machinery, that $50K will go to another company, and you can start the analysis all over again.

      If instead we give the $50K to moviegoers, we know that the whole $50K will get spent at least once, which is good. The theater will get some money, and the movie production company will get some, and on down the line, until it all ends up in the hands of the rich, as savings (in the form of t-bills). It's just a different group of people that benefit while the money remains in play.

      You want to tell me that, no, investing in the company will do the most good, because it allows the company to be more productive. Well, there is no real difference between spending on movie tickets and spending on machinery. Income from the movie allows the theater to invest in improvements, and it allows the production company to invest in new equipment, too. Businesses invest in themselves when they decide it is probably advantageous to do so. Not every investment pays off. So the answer “it's always better to invest in production” is not correct. Sometimes it is, and sometimes it isn't. And the upshot of that insight is, “spending is spending.”

      In short, I believe that the most advantageous fate of a dollar is to remain in play, being spent as many times as possible and as fast as possible, before it is inevitably lost to savings.

    • profile image

      kendonhank 4 years ago

      "The problem with that, as I see it, is that the rich would just amass that much more wealth, and become that much more powerful."

      The rich become rich by investing and achieving a return on investment that exceeds real inflation. Those who dump their money in T-Bills are primarily retirees or the risk-averse wealthy and these groups see diminished wealth over time as their T-Bill holdings lose purchasing power to inflation. Look at where the richest people in the world have their money invested. Bill Gates, Warren Buffet, Carlos Slim, Mikhail Prokorov. These men do not have their wealth in T-Bills. Their wealth is in the means of production, because the only way to grow wealth is to grow production. What is it about the wealthy that you fear? How does their increased wealth diminish you?

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "Well, there is no real difference between spending on movie tickets and spending on machinery."

      True. All spending tends to shift money from consumers to businesses, ultimately leading to disproptionate wealth distribution by big business (see Apple Computer).

      Individual savers are able to get a small share of the financial wealth but not really a significant amount.

      Every cycle of business investment extracts funds from the economy in the form of profits in the aggregate. As profits are accumulated and held as savings (capital) there is less for the rest of us remaining. Our share of the pie gets smaller.

      We are the ones that must be able to buy the products in order for those businesses to succeed and earn a profit.

      Where do the funds come from? How long can this dynamic last before it collapses through lack of demand?

    • profile image

      kendonhank 4 years ago

      "Well, there is no real difference between spending on movie tickets and spending on machinery. “spending is spending.” In short, I believe that the most advantageous fate of a dollar is to remain in play, being spent as many times as possible and as fast as possible, before it is inevitably lost to savings."

      Is redistribution a tenant of MMT, or is that your own wrinkle, because it is fatally flawed. Spending is not spending. It depends on what is produced during each phase of the spending, transaction after transaction.

      If you don't think so, try this experiment. Get 10 of your friends together . Ask them to bring $ 100 each, such that the total wealth of the group is $ 1000. Have them form a circle. Have each man sing a song and pass his $ 100 to the man on the left in payment for the song. At the end of the song, count the total wealth. It will be $ 1000 plus the 10 songs ($0 wealth) = $ 1000. Now repeat this as many times as you like, spending to your heart's content. Count the wealth. Still $ 1000.

      If no production occurs in the spending of money, then no wealth is produced. So it is not the velocity of spending that matters, but the production that occurs as the result of the spending. Letting the die maker keep his 50k to produce a new tool results in 50k in new wealth production (the 50k tool + 50k spent making the tool, which filters into the general economy).

      Taking the 50k from the tool make and giving it to the movie goer produces nothing. When the movie goer spends it, he gets to see a movie and the movie maker gets some profit. All that got produced in the transaction was a movie. The movie maker may subsequently spend it on meaningful production (he may buy a tool for example), but total wealth production lags (with respect to the die maker spending the money on a tool) because at the end of his first wave of spending, the die maker has a new tool, and the movie goer has nothing, and the movie maker has some profit, but the only thing produced was a movie.

      So the question is, who spends money most productively, the man who produced it in the first place by making tools, or the man who produced nothing and simply redirects the money that was given to him and spends it on bread & circuses.

      Now you could say that the money given to the tool maker may eventually end up with him, as someone will eventually buy his tools. Possibly, but then it will be taken from him again, and no new tools will have been produced in the process. The money will never be in his hands long enough to invest in new tooling.

      What an economy produces matters more than how often money exchanges hands. An economy that derives 90% of its GDP from government spending and redistribution will never be as productive as one that derives 90% of its GDP from private sector spending.

    • profile image

      kendonhank 4 years ago

      @Pjmeli,

      "Every cycle of business investment extracts funds from the economy in the form of profits in the aggregate. As profits are accumulated and held as savings (capital) there is less for the rest of us remaining. Our share of the pie gets smaller."

      That is only true if the total wealth of the economy does not grow, or you contribute nothing. The accumulation of profit by a successful business does not impede your ability to produce and accumulate your own profit. Also, the profit collected by successful business is reinvested into expanding or new business. If it is not, and is instead stored as savings (unproductive capital), then the wealth of the business owners will shrink due to inflation and the unproductive capital will eventually be returned to the economy. The wealthy become wealthy and grow their wealth, by investing, not saving.

    • profile image

      kendonhank 4 years ago

      "The rich, by contrast, do *not* spend all that they produce. Much of their “production” is sitting idle in the form of t-bills. If the government does nothing to rectify that, it will be lost, as there will not be enough dollars to buy all of the current production. The economy will contract. And that's the problem with savings. It's good for the individual, but bad for the economy in the aggregate."

      Again the rich do not become rich or maintain/grow their wealth by investing in T-Bills. The rate of return is too low to keep pace with inflation. As for savings generally, these provide reserves and capital for new investment. Even if they are not spent, they buttress other spending. My ability to invest is determined by my ability to weather the storm should my investment fail. Savings also provide reserves to the bank for other business lending. $ 100 in savings at your local bank provides reserves for $ 900 in new lending through fractional banking. Letting the productive keep their own money grows wealth for all much faster than redistributing it to the nonproductive.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      @kendonhank

      "That is only true if the total wealth of the economy does not grow,"

      What kind of wealth growth are you talking about? What happens if financial wealth (dollars) doesn't grow with the production of "real" wealth?

    • profile image

      kendonhank 4 years ago

      "Businesses invest in themselves when they decide it is probably advantageous to do so. Not every investment pays off. So the answer “it's always better to invest in production” is not correct. "

      Of course some businesses fail and some investment does not pan out, but in the aggregate, letting productive people keep their own money for further investment creates more wealth than taking money from productive people and giving it nonproductive people for conspicuous consumption.

    • profile image

      kendonhank 4 years ago

      "First of all, business expenses and investments, like investing in new machinery, are going to be written off against profits. If the tool maker is paying $50K in taxes, that means they have made far more than $50K in profit, so they would still be perfectly able to buy the new machinery – in fact, they would get a tax break for doing so. You make it sound like the government takes a company's operating money away from them, and that is simply misleading. "

      That is very silly. Regardless of how much profit a company made, taking 50k from them in taxes deprives them of 50k that could have been investment in new tooling.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "The accumulation of profit by a successful business does not impede your ability to produce and accumulate your own profit. "

      Sure it does. If a small cohort holds a significant portion of the funds in existence, there is less left for others to compete for.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "taking 50k from them in taxes deprives them of 50k that could have been investment in new tooling."

      John's talking about taking $50k away from excess savings, not investment. By definition saving is exclusive of investment. Saving is income not spent, spending can only be for consumption or investment.

    • profile image

      kendonhank 4 years ago

      @Pimeli,

      "What kind of wealth growth are you talking about? What happens if financial wealth (dollars) doesn't grow with the production of "real" wealth?"

      Wealth is production. A widget is wealth. Dollars are simply a means of exchanging wealth/production. When a business produces a widget, wealth is created.

    • profile image

      kendonhank 4 years ago

      @Pimeli, "John's talking about taking $50k away from excess savings, not investment. By definition saving is exclusive of investment. Saving is income not spent, spending can only be for consumption or investment."

      Saving provides reserves for other investing and lending. The stronger your balance sheet, the greater your ability to invest and take risk.

    • profile image

      kendonhank 4 years ago

      @Pimeli, "The accumulation of profit by a successful business does not impede your ability to produce and accumulate your own profit. "

      "Sure it does. If a small cohort holds a significant portion of the funds in existence, there is less left for others to compete for."

      No it doesn't. You are stuck on a fixed pie. I don't compete for a piece of the pie. I produce new pie. What you make doesn't affect how much I produce.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      "Sure it does. If a small cohort holds a significant portion of the funds in existence, there is less left for others to compete for."

      “No it doesn't. You are stuck on a fixed pie. I don't compete for a piece of the pie. I produce new pie. What you make doesn't affect how much I produce.”

      This is the whole point of new money creation, Ken. Pjmeli is correct – there are a limited number of dollars in play. You already admitted that the government needs to create new dollars to replace those lost to savings, and they need to create dollars to accommodate growth. Now, you seem to have forgotten those lessons. You might be able to produce something, but you need dollars to realize your gains, and you can't produce dollars. If that small cohort is holding a large share of existing dollars, you are going to be competing with others for fewer dollars. That's deflationary. Fewer dollars chasing more goods.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "No it doesn't. You are stuck on a fixed pie. I don't compete for a piece of the pie. I PRODUCE NEW PIE. What you make doesn't affect how much I produce."

      You can't increase the monetary part of the fixed pie. You can't create money.

      Create all the real stuff you wish through production. Doesn't mean you will be able to sell it. One thing we know for sure, if there isn't enough money in the hands of those that buy your production, you will end up with inventory. How will your newly-created pie look then?

      Your statement assumes others are able to buy your stuff. That isn't necessarily true and that's the part of the pie you can't ignore.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      @kendonhank

      "Saving provides reserves for other investing…"

      Successful investment makes the demand side of the pie smaller.

      "…and lending …"

      No. Banks are NEVER reserve-constrained. A bank can ALWAYS make a loan to a qualified borrower, regardless of the level of savings. Loans create deposits.

    • profile image

      kendonhank 4 years ago

      "You might be able to produce something, but you need dollars to realize your gains, and you can't produce dollars. If that small cohort is holding a large share of existing dollars, you are going to be competing with others for fewer dollars. That's deflationary. Fewer dollars chasing more goods."

      You are conflating two different issues. One is wealth production. The other is the number of dollars needed to purchase the wealth. When I produce a widget (assuming it is widget people would like to have), wealth is produced. If somebody would like to purchase that widget, they can do so by trading part of their wealth (cash), or part of their future production (credit). The dollar amount they will pay me depends on the ratio of available dollars to total wealth in the economy. If no new dollars are added to the economy to support my new production, then there will be deflation and prices will decline, but I will still still get dollars for my widget, and the purchasing power of the total dollars I receive will be the same as before the deflation. If on the other hand, more dollars are added to the economy than my production, then there will be inflation and I will get more dollars for widget, but again the purchasing power will be the same, as the extra dollars will have less purchasing power. Bottom line. The fixed pool of dollars in the economy does not stop new wealth creation or production, it just affects the dollar value. Ideally of course, new money will equal new production and there will be no inflation or deflation, thus preventing redistribution of wealth between savers, borrowers, and various asset classes.

    • profile image

      kendonhank 4 years ago

      "No. Banks are NEVER reserve-constrained. A bank can ALWAYS make a loan to a qualified borrower, regardless of the level of savings. Loans create deposits."

      Where do they get the cash to loan if not from depositors? Borrowing from commercial banks? Even if that is the case, wouldn't additional deposits from savers allow additional lending without forcing the bank to borrow itself? Also, banks are not the only lenders. You are forgetting private lending from savings.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "Where do they get the cash to loan if not from depositors?"

      Banks don't lend out deposits. Banks create loans from thin air. Your deposits don't go anywhere. Total outstanding loans in the US is about $54 Trillion. The government has only "printed" about $2 Trillion in currency (electronic, paper and coins combined).

      "Also, banks are not the only lenders. You are forgetting private lending from savings"

      I'm not forgetting anything. Private lending from savings is a very small number. Remember the $2 Trillion cash? Besides, once it was lent out and spent (invested) it can't be savings any longer, right?

    • profile image

      kendonhank 4 years ago

      John,

      You say that new money creation in moderation is not inflationary because it soaked up in savings at the same rate by downstream purchases of T-Bills. As evidence, you cite low inflation over the past 30 years and constant money supply.

      Regarding the money supply, M1 ( cash and demand deposits excluding bank reserves) growth was fairly flat from 1980 to 2008 growing from about 300 billion to 1.5T, or about 4% per year, which tracks pretty well with official inflation with also averaged about 3%.

      Since 2008, M1 has accelerated, growing by an addition 500B in just 4 years. That's over 7% per year.

      If you look at M2, which is the generally accepted measure of money in circulation, the money supply has grown from 1.5T in 1980 to 10T in 2012. That's over 600% or about 15% per year. GDP over that time has increased from about 3T to 15T, a 500% increase that has eaten up most of the new money and kept inflation tame.

      Bottom line is that inflation has fairly well tracked growth in the money supply less GDP growth, so I really don't understand your T-Bill argument, specifically your contention that the money supply and inflation have not expanded as the result of deficit spending because the new money from deficit spending is taken up as savings in T-Bills.

    • profile image

      kendonhank 4 years ago

      Correction to my last post. M1 has grown from 300 billion in 1980 to about 2.2 trillion in 2012. That's a 700% increase in M1. However, GDP growth over that time has increased at 500%, thus eating up most of the new money inflation, hence the relatively low inflation rate. So, whichever measure of money you use, M1 or M2, neither of which includes T-Bills, inflation tracks money supply adjusted for GDP growth. So I fail to see how the purchase of T-Bills moderates the money supply or inflation. Deficit spending increases the money supply and inflation in the amounts one would expect based on supply and demand. Where am I missing here?

    • profile image

      kendonhank 4 years ago

      "Banks don't lend out deposits. Banks create loans from thin air."

      I am not a banker, so I hope you'll bear with me.

      Which banks can create loans from thin air? Any banks? Commercial banks? The Fed? Where do they get the cash to make the loan? What is the limiting factor on the total amount of loans banks can make, if not reserves? I believe fractional banking requires a 10% reserve or thereabouts.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "I am not a banker, so I hope you'll bear with me."

      I'm not a banker either, but I spent the night in a Holiday Inn Express :-)

      This is not a particularly difficult subject but it can take a lot of words and we are writing into a small box.

      All banks that are part of the Federal Reserve Banking system create loans out of thin air…think of this network of banks as one big bank because in practice that is how it is structured.

      A loan by one bank becomes a deposit in another bank, loans-create-deposits. A bank can always acquire necessary reserves after the fact either through the Fed or from other banks in the system via the inter-bank (overnight) clearing system.

      There are usually plenty of excess reserves in the system but if they can't be found they can be obtained through the Fed at a higher cost. The only thing a bank cares about is the spread…that's how they make money.

      Fractional Reserve Banking is a misnomer because that isn't an apt description of how loans are created. As I showed earlier the multiplier is greater than 10 because $54 Trillion is 27 times $2 Trillion. The trouble is we don't really know exactly how much cash the government has spent into the economy. I figured out the $2 Trillion through a kind of reverse-engineering.

      Banks in other countries, such as Canada, don't have a reserve requirement, so the lack of constraint by reserves is obvious. Some have argued that 100% reserve requirement would constrain bank lending and make it less risky. I've seen that argument dissected showing it wouldn't make a bit of difference.

      This is about all I want to squeeze into the little box but I will try to answer any question.

      I don't claim to be an expert, I'm not one. I've just spent the past couple of years trying to figure this stuff out because I'm naturally curious. Especially since the GFC destroyed my trust in experts and institutions.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      " So, whichever measure of money you use, M1 or M2, neither of which includes T-Bills, inflation tracks money supply adjusted for GDP growth. So I fail to see how the purchase of T-Bills moderates the money supply or inflation."

      Congratulations. You've just single-handedly debunked the claim that issuing T-bills instead of direct money printing has no measurable effect on reducing inflation. This is a big deal.

      The bonds/no-bond argument is one of the signature differences between mainstream economics and heterodox (MMT).

      A bond is just the asset side of money creation. A bond is nothing more than cash that pays interest. A dollar is cash that doesn't pay interest.

      The liability side is a liability of the government, but it's a meaningless liability because the government creates the liability out of thin air. It is a consequence of double-entry accounting rules. An accounting abstraction.

      There is no such thing as a National Debt. The proper and more accurate description would be National Savings. It's where our money comes from.

      We kind of need money for the economy to function.

    • JohnfrmCleveland profile image
      Author

      John 4 years ago from Cleveland, OH

      Ken – here is a good article on the subject. He gets more complicated than I do, but maybe a different perspective will help clarify things.

      Money Growth Does Not Cause Inflation!

      http://www.forbes.com/sites/johntharvey/2011/05/14...

      ***********

      “...So, whichever measure of money you use, M1 or M2, neither of which includes T-Bills, inflation tracks money supply adjusted for GDP growth. So I fail to see how the purchase of T-Bills moderates the money supply or inflation. Deficit spending increases the money supply and inflation in the amounts one would expect based on supply and demand. Where am I missing here?”

      Some things sound like they should be correlations, and some things look like they should be correlations, but not all of those actually *are* correlations, and you have to reason your way through them and check them against the available evidence to figure out if they are real or not. If you pin inflation completely on the money supply, you are neglecting the price of oil. And once you factor in the price of oil, the money supply/inflation ratio doesn't track so well anymore. There are other explanations for why the money supply isn't causing inflation (see the above article), but there are no such plausible explanations for oil and a few other cost-push items.

      Austrian thinking is a good example of things sounding logical, but not standing up to scrutiny. Their logic is pretty sound, and it's possible that, under the right circumstances, an economy might work in the way they describe. But in real life America, the economy doesn't fit that framework. Our banks don't loan out money based on how many reserves they have, so there is no limited pile of capital for which demand determines availability or interest rates. Interest rates don't float freely – they depend on the interbank rate, which is controlled by the government. And the government, for better or worse, is heavily involved in distributing new dollars and redistributing tax dollars. None of that is remotely compatible with Austrian thinking. It just happens to be how things are done here, and in most other places around the world.

      ******************************

      Inflation is a tough thing to really nail down – some prices go up, others go down, the basket of goods changes a bit, etc. But some trends are easy to see – I can remember when the price of gas spiked around 2008, that's when the price of groceries shot up as well. Logically, the price of gas affects the price of everything that has to be transported. We have to count that kind of stuff. Droughts drive up the price of some foods, including meats. Biofuel drove up the price of corn.

      T-bills just act as a sop for excess dollars. Banks, for instance, often have excess dollars when nobody is taking out loans (like now), and they are better off buying govt. bonds than letting that cash sit around. They would prefer to make more loans, but the opportunity just isn't there. It's the same for anybody else – t-bills bring a lousy return, but they are safe. If there are better investment opportunities available, dollars will go to those. But there are not always better investment opportunities, and the availability of more dollars does not change that. You can't drive consumption just by having more goods on the shelves, and you can't drive people to borrow just by having extra dollars in the banks. So simply having more dollars in play does not necessarily mean that they are going to be spent and have any effect at all on prices. About the only thing you can really count on is that the poor are going to spend all of their money, because they have to, just to get by.

    • profile image

      kendonhank 4 years ago

      I read the article. Most of what he says is correct, yet it refutes none of my argument, which is that over time, inflation tracks

      money supply adjusted for production/productivity. The data I gave you bears this out over the 30-year period that YOU picked, and you did not refute it.

      What you and the author are unwittingly arguing is that increases in the money supply may not affect SHORT-TERM inflation due to temporary mitigating factors such as oversupply of housing, bursting of asset bubbles, oil price spikes, influx of cheap labor, etc. Long term, though, these fluctuations even themselves out according to supply and demand, and inflation ultimately tracks the money supply adjusted for growth in production.

      It's kind of like pointing to a stock whose price is rising against declining earnings due to irrational exuberance about future earnings and concluding that earnings do not affect stock prices. In the short term that may be true, but long term, earnings (current and projected) determine stock prices.

      Notice that nowhere in the article does the author address production and productivity growth, which are the main factors that soak up new money and stem inflation.

      Spending by the government to boost the economy does not work in the long run because it is not as efficient and productive as spending initiated by the free market. When the government spends, what it really does is take from producers (through current and future taxes) and redistribute to consumers. So what you get is a burst of willy nilly conspicuous spending and production at the expense of efficient allocation of resources and prudent investment in new production technology. Over time, the rate of new technology and total wealth production declines relative to free market investment and allocation.

      The author's ignorance of production and productivity shows up in his opening statement,

      "The only problem is, it’s not true. That’s not how inflation works. Hence, this is yet another of the false alarms being raised (along with the need to balance the budget) that is preventing us from doing what we need to do to recover from the worse recession since the Great Depression."

      What he is saying there I suppose is that we need to go on a mad spending spree to boost production like we did in the Great Depression/WW II and that we don't have to worry about inflation. That worked in WW II because we were the only economy standing after WW II. For a period, we were the only game in town for goods and services, so we were able to pay back the debt and wasted production of WW II. Today, we are not the only game in town, and our debt is much larger if you consider the 16T in official debt + 55T in unfunded liabilities for Medicare and social security. We have already borrowed 70T from future production. There is no room for a mad spending spree. Or, if you don't like the debt model, then we have reallocated 70T from producers to conspicuous consumers, which will be seen as greatly diminished future productivity and production.

      I fail to see how T-Bills play in any of this. As I noted, T-Bills are not part of M1 and M2, and inflation seems to track M1 and M2 quite well adjusted for production.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "…we need to go on a mad spending spree to boost production like we did in the Great Depression/WW II and that we don't have to worry about inflation."

      We need to spend enough to employ everyone or at least make sure everyone have a living income, to offset the loss in spending created by the trade deficit and to account for growth and saving. This isn't a mad spending spree.

      As long as we don't create spending in excess of our ability to produce the things that people want to buy, inflation will not be an issue.

    • profile image

      kendonhank 4 years ago

      Pimeli,

      First, six trillion in deficit spending in four years + additional trillions in spending funded by future Medicare and SS debt is excess spending.

      Second, taking money from efficient production to make work for otherwise unneeded workers and provide spending in excess of what those unneeded workers actually produce simply degrades real production, resulting in additional unemployed workers with reduced purchasing power down the line.

      There are 25 million unemployed right now. If you paid them 100k each, accounting for governmental overhead and waste, that would cost 2.5 trillion dollars per year.

      That is about what we have been spending the past four years in new deficits + medicare/SS liabilities, the result being that there are fewer working now then when Obama took office. If you want full employment and high wages, you have to have greater productivity, which means greater investment in new technology and industries BY THE PRIVATE SECTOR.

    • profile image

      kendonhank 4 years ago

      If you want to know what government stimulus does for the economy, look no further than Solyndra. A half billion in government spending and capital investment taken from the free economy to create 1000 jobs that produced NOTHING for two years. What would the free market have produced with that half billion and 2000 man years of labor?

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      @kendonhank

      "First, six trillion in deficit spending in four years + additional trillions in spending funded by future Medicare and SS debt IS EXCESS SPENDING."

      With all due respect, that is an opinion, not a fact. Let's try to stick to facts here.

      First, if you insist on using the term National Debt, the amount as of 10/4/2012 is $11,314,031,454,864.60. Debt held by the Public, not the 16 trillion number which includes intra-governmental holdings. If you owe yourself money, are you in debt?

      Second, National Debt is a minomer. The correct interpretation is National Savings. If we didn't have the "debt", Grandma wouldn't have any savings, at least all Grandma's combined wouldn't. There would be no net savings possible, because in that case every dollar held by someone in the private sector would be offset by a dollar liability by someone else. A credit -based economy in which money didn't belong to the economy as a whole, even though peopled worked and earned that money.

      When the government "borrows" to pay for the deficit what is actually happening is the government is paying interest on money it previously created, spending it back into the economy somewhere else. Just like it does with taxes except taxation doesn't result in interest payments.

      Another misconception is what a deficit is. It's an ex-post (after-the-fact) accounting record of the previous years economic performance. It doesn't mean we are spending too much, it means we have idle production, saving, growth and in our case a large trade deficit, plus a huge drop in tax revenue.

      About $2.1 Trillion of the 6 Trillion is to account for losses to the trade deficit alone. Another $2+ Trillion is a result of lost tax revenue because of the depression, and most of the rest is from transfer payments resulting from increased unemployment benefits, food stamps, etc. all automatic stabilizers, no extra dollars were budgeted.

      The unfunded liabilities you allude to here and in a previous comment are an example of a zombie narrative that has no truth or meaning but can't be killed.

      Everything that may occur in the future is an unfunded liability. To single out SS or Medicare is disingenuous. Food needed to feed people in the future is an unfunded liability. So? It is meaningless. We will always be able to produce what we need unless we torpedo our infrastructure and destroy our capacity to produce.

      There is no "liability", just as there is no current liability for anything the government buys. The government creates money when it spends, destroys money when it taxes. There is an infinite amount of money available, the government tries to balance the supply with the demand, meaning there has to be enough spending to maintain full employment and at the same time maintain price stability. The government has abandoned the first part of that mandate.

      Just to touch on you characterization of inflation earlier, the quantity of money has nothing at all to do with inflation. Inflation is a function of spending, production and resource allocation. The quantity of dollars is irrelevant. What matters is where they are, who holds them.

      As long as we don't try to buy more than we can produce we won't have demand-push inflation. Most if not all of the inflation we have experienced over the past 30-40 years has been from the rising cost of oil. It is a limited resource. Our production is not.

    • profile image

      kendonhank 4 years ago

      Pimeli,

      "Everything that may occur in the future is an unfunded liability. To single out SS or Medicare is disingenuous. Food needed to feed people in the future is an unfunded liability."

      The government has no obligation and has made no promise to provide food. It does have an obligation to provide Medicare and social security benefits to those who have paid into the system. No different than a corporation has an obligation to make good on its pension and health care plans. Presently, the government owes 55T in benefits to those who have paid into the system. Those benefits will have to be paid by taking from future production.

      "We will always be able to produce what we need unless we torpedo our infrastructure and destroy our capacity to produce."

      Huh? We will always be able to produce unless we are unable to produce? Our ability to produce in the future will be determined by how productive we are, which in turn will be determined by how efficiently capital is allocated, something you continue to ignore in all your posts. There is certainly no guarantee that productivity will increase enough to meet our promises and obligations, and in fact, the more money the government takes from producers and redistributes to non-producers through taxes, the less likely it is that we will be able to achieve sufficient productivity growth.

    • profile image

      kendonhank 4 years ago

      Pimeli,

      "There is an infinite amount of money available, the government tries to balance the supply with the demand, meaning there has to be enough spending to maintain full employment and at the same time maintain price stability. "

      Real employment is determined by production and productivity, not government spending. In order for the government to spend, it must take money from the free economy. So any attempt to drive short term production and employment from government spending simply reduces long term productivity, production, and employment. That is unless you believe the government invests more wisely or allocates resources more efficiently than the free market.

      Price stability comes from ensuring that growth in the money supply tracks real production growth. Contrary to your assertion, the quantity of money has everything to do with inflation. Pricing is determined by the number of dollars chasing the available goods and services. More money chasing the same amount of goods equals inflation. Supply and demand.

    • profile image

      kendonhank 4 years ago

      Pimeli,

      "National Debt is a misnomer. The correct interpretation is National Savings. If we didn't have the "debt", Grandma wouldn't have any savings, at least all Grandma's combined wouldn't. There would be no net savings possible, because in that case every dollar held by someone in the private sector would be offset by a dollar liability by someone else.".

      Grandma's savings are her share of total wealth measured in dollars. Why make it any more complicated? What does it matter what internal accounting the government uses to keep track of its spending. Government spending is wealth taken from the private sector to fund government functions. That wealth can be taken either through direct taxation or indirect taxation (printing new money).

      How the government accounts for the wealth it takes and redistributes within the economy is irrelevant. What matters is the impact of government redistribution on production, which is driven by capital investment in new productivity technology. The more the government redistributes wealth from producers to consumers through whatever means (printing, taxation, debt, regulation, bailouts, subsidies, welfare, interest rate manipulation, etc) the slower the rate of new technology development and productivity growth. Government does not know better than the free economy how to allocate scarce resources, increase production, and distribute wealth in an optimal manner that increases standard of living for all.

      Why do you have to complicate simple concepts think that in your quest to apply note a desire on your part to complicate very simply concepts with

    • profile image

      kendonhank 4 years ago

      Pimeli,

      "Most if not all of the inflation we have experienced over the past 30-40 years has been from the rising cost of oil. It is a limited resource. Our production is not."

      Oil is one component in overall production. For some products and services, it is a significant contributor, for others it contributes almost nothing. Overall, the contribution of oil becomes less significant as productivity increases and a larger share of product cost is driven by intellectual property development.

    • profile image

      kendonhank 4 years ago

      "Another misconception is what a deficit is. It's an ex-post (after-the-fact) accounting record of the previous years economic performance. It doesn't mean we are spending too much, it means we have idle production, saving, growth and in our case a large trade deficit, plus a huge drop in tax revenue."

      Again, unnecessary complication of a simple concept. The deficit is the difference between what the government spends and what it takes in direct taxes, the difference covered by indirect taxes such as printing new money (devaluing existing money) or selling debt (promising to tax or print money later).

    • profile image

      kendonhank 4 years ago

      Pimeli,

      A dollar is no different than a share of stock in a corporation. When a company issues more shares, it dilutes the value of existing shares by the same amount. That dilution may not show up immediately in the share price,due to a myriad of factors (speculation about future earnings, short term supply and demand for the stock, etc), but eventually the price tracks the company's earnings.

      Same thing when the government prints new dollars. Increasing the number of new dollars used to represent the same goods and services dilutes and devalues existing dollars. When that shows up in prices will depend on various short-term supply and demand factors, but over time, prices will track the ratio of available money to real wealth (goods and services).

      The government's only job should be to keep the supply of money in line with real production. Government attempts to control production, employment, and wealth distribution by playing with the money supply, credit, spending, interest, bailouts, subsidies etc are doomed to failure because the free market is the most efficient allocator of scarce resources. Government redistribution introduces inefficiencies that diminish productivity and inevitably show up as reduced production and wealth creation for all.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "A dollar is no different than a share of stock in a corporation."

      There is no similarity between a dollar and a share of stock. A dollar is backed by the full faith and credit of the US government. A dollar can always be exchanged for a dollar, anytime, anywhere. A dollar is not a thing, a dollar is a "measure" of ones wealth, like a tape measure is a measure of length. It's an accounting entity. The government is the monopoly issuer of dollars. Any entity creating dollars without permission fron the US government is a counterfeiter. Dollars are the only payment the US government will accept to extinguish your tax liability.

      When dollars are exchanged for government bonds, the bond will always be worth it's face value, unlike a stock which can lose it's value overnight.

      Dollars must be valued by many as the demand for bonds is far greater than the supply, resulting in decreasing yields at a steady rate over the past 30 years. Soon, people will be paying the government for the priveledge of holding it's bonds, as the Japanese are now doing for their government bond issues.

      A stock is an equity, representing shares in a company. A dollar is merely the unit of account, a way to measure wealth. Not even remotely similar. A stock can lose it's entire value overnight, and often does. This has never occurred with the dollar.

      "Increasing the number of new dollars used to represent the same goods and services dilutes and devalues existing dollars."

      This is incorrect in so many ways. New dollars are intoduced to account for population growth.

      New dollars are issued to account for dollars lost to the economy through the trade deficit.

      New dollars are issued to account for the savings desires of those that wish to save them.

      In each of the above instances, the net level of spending is reduced, which would result in an increase in inventory for the companies that produce products and ultimately increase unemployment if the government didn't follow through with the new money creation.

      New dollars are not issued or used to represent the same goods and services, as demonstrated above. They are issued to account for leakages and growth. When enough of them are not issued, we get unemployment.

    • profile image

      kendonhank 4 years ago

      "There is no similarity between a dollar and a share of stock."

      Really?

      "A dollar is backed by the full faith and credit of the US government. "

      A dollar is backed by the wealth and productive capacity of the U.S. economy. It's purchasing power is determined by the ratio of total dollars to total wealth and earnings potential, just like a share of stock in a corporation.

      "A dollar can always be exchanged for a dollar, anytime, anywhere."

      But it's purchasing power, which is all that matters, is the ratio of total wealth and productive capacity to the total number of dollars, just as the value of a share of stock is determined by the ratio of the company's assets and earnings capability to the number of shares.

      "A dollar is not a thing, a dollar is a "measure" of ones wealth, like a tape measure is a measure of length."

      A dollar represents a share of U.S. wealth and production, just as a share of stock represents a share of a corporation's assets and earnings potential.

      "The government is the monopoly issuer of dollars. Any entity creating dollars without permission from the US government is a counterfeiter. Dollars are the only payment the US government will accept to extinguish your tax liability."

      The corporation is the monopoly issuer of stock. Any entity creating stock shares without permission of the corporation is a counterfeiter. I can hold my wealth in any currency or asset and pay my taxes the day they are due with a simple exchange to dollars.

      "When dollars are exchanged for government bonds, the bond will always be worth it's face value, unlike a stock which can lose it's value overnight."

      Bonds can and do lose their value all the time, just like stock. Unless you hold the bond to maturity, it's value drops every time the interest rate increases. The dollars you use to purchase government bonds also lose their purchasing power and value through inflation. No different from stock.

      "Dollars must be valued by many as the demand for bonds is far greater than the supply, resulting in decreasing yields at a steady rate over the past 30 years. Soon, people will be paying the government for the priveledge of holding it's bonds, as the Japanese are now doing for their government bond issues."

      Dollars/U.S. bonds are valued versus other debt ridden currencies of the western socialist democracies for short term deposit. So we are the best of the worst. But nobody but the U.S. government is purchasing long term treasuries, because current interest rates are below real inflation, and long term bonds will become worthless when inflation kicks in and real interest rates increase. Smart investors are transitioning as much of their currency as possible to hard assets, hence the dramatic rise and gold/silver prices, which are selling at a 3-4x premium over mining cost.

      "A stock can lose it's entire value overnight, and often does. This has never occurred with the dollar."

      A stock loses its value when earnings (current and projected) decline. Fiat currencies lose their value when the supply of currency exceeds the wealth and production they represent. Can they go to zero? Perhaps not overnight, but hyperinflation is possible. Ask Weimar Germany.

      "New dollars are introduced to account for population growth. New dollars are issued to account for dollars lost to the economy through the trade deficit. New dollars are issued to account for the savings desires of those that wish to save them."

      Issuing new dollars to account for those lost to trade, anticipated production growth, and savings does not alter the ratio of circulating dollars to production. Inflation occurs when the number of circulating dollars exceeds production. I have explained this at least 5o times.

      "In each of the above instances, the net level of spending is reduced, which would result in an increase in inventory for the companies that produce products and ultimately increase unemployment if the government didn't follow through with the new money creation. New dollars are not issued or used to represent the same goods and services, as demonstrated above. They are issued to account for leakages and growth. When enough of them are not issued, we get unemployment."

      The total number of dollars in circulation has ZERO to do with the amount of goods and services people purchase nor the number of jobs in the economy, it simply changes the price of the goods and services. If the government does not replace money lost to savings and new production, then the amount of money chasing existing goods decreases, which reduces prices and increases purchasing power of existing dollars. But the effect on spenders and producers is a wash. Consumers have less money, but they have the same purchasing power, so they can purchase the same amount of goods and services. Companies have to charge less for their products, but it costs them less to produce them, so profit is unaffected. The purpose of maintaining constant prices is to keep purchasing power constant across asset classes, not to maintain spending and employment levels.

    • profile image

      kendonhank 4 years ago

      Pjmeli,

      Rather than debate silly definitions and accounting practices, why don't you just explain what you propose. You seem to think that trillion dollar annual deficits are no problem because they are absorbed by the trade deficit, savings etc. You also seem to believe that the government can control employment by spending money.

      So tell me, how much money does the government need to print and spend to get the economy growing and reduce unemployment to 5%.

      What about the 16T debt (OK, 11T if you remove intergovernmental debt). Does that need to be repaid, and if so how?

      What needs to be done about the 55T in Medicare/SS liabilities. You say these don't matter, but taxpayers have already kicked trillions into the system with an expectation of future benefits. Given that the government has already spent that money, where are they going to get the 55T to pay those benefits, if not from future taxes and printing.

    • JohnfrmCleveland profile image
      Author

      John 4 years ago from Cleveland, OH

      Ken said: “Rather than debate silly definitions and accounting practices, why don't you just explain what you propose. You seem to think that trillion dollar annual deficits are no problem because they are absorbed by the trade deficit, savings etc.”

      The accounting is pretty important. If your theories don't/can't match up with the accounting, then you know you can't be correct.

      MMT is all about the accounting. If you understand where the dollars come from and where they go, you can eliminate a lot of the common misconceptions that get in the way of understanding how things work.

      “You also seem to believe that the government can control employment by spending money.”

      Here's how the government can control employment by spending money: they can hire the unemployed. Problem solved. Do that, and watch the economy get better, fast, because people are not only spending money, they have some stability.

      “So tell me, how much money does the government need to print and spend to get the economy growing and reduce unemployment to 5%.”

      That depends on policies. IF the government knew what it was doing, we could probably do it for less than we print now. But that means a lot of money would be coming out of the pockets of the rich. Our economy produces more today than it ever has. Our economy's problem isn't production, it's distribution. There is plenty, right now, for everybody's basic needs to be met, and then some.

      “What about the 16T debt (OK, 11T if you remove intergovernmental debt). Does that need to be repaid, and if so how?”

      Think about it – you already know what the “national debt” is. It is t-bills held by savers. China, Saudi Arabia, Japan, banks, businesses, hedge funds, rich Americans, etc. “Paying off” the debt would mean exchanging dollars for those t-bills, which the government is perfectly capable of doing, operationally. But to answer your second question, why bother? It does not need to be repaid, and the sale of those bonds serves a purpose (which is NOT raising money).

      “What needs to be done about the 55T in Medicare/SS liabilities. You say these don't matter, but taxpayers have already kicked trillions into the system with an expectation of future benefits. Given that the government has already spent that money, where are they going to get the 55T to pay those benefits, if not from future taxes and printing.”

      Taxpayers paid taxes into the one and only pile of tax dollars that the federal government collects. Yes, they expect future benefits. They will get them. Why you insist on classifying SS and Medicare differently is beyond me. It is a political football created by deficit hawks, and you have been one of the many fooled into kicking it around as if it matters. Don't you have an expectation that America will continue to have an army? Is that a “liabiltiy” too? How about the FDA? FBI? Coast Guard? Everything the government does costs money – SS and Medicare are no different than any of these other things. The bills will be paid when they come up, and they will be paid out of current production, like they always have. I don't project how much my electric bills are going to add up to in the next fifty years, then subtract that number from my net worth – do you? But I sure expect to be paying those electric bills for the foreseeable future.

    • JohnfrmCleveland profile image
      Author

      John 4 years ago from Cleveland, OH

      Ken said: “But it's purchasing power, which is all that matters, is the ratio of total wealth and productive capacity to the total number of dollars, just as the value of a share of stock is determined by the ratio of the company's assets and earnings capability to the number of shares.”

      No, it's purchasing power is determined by whatever other people will trade you for your dollar. The only dollars that have an effect on prices are the ones in play – and that number changes.

      "When dollars are exchanged for government bonds, the bond will always be worth it's face value, unlike a stock which can lose it's value overnight."

      “Bonds can and do lose their value all the time, just like stock. Unless you hold the bond to maturity, it's value drops every time the interest rate increases. The dollars you use to purchase government bonds also lose their purchasing power and value through inflation. No different from stock.”

      pjmeli is correct – govt. bonds will always be worth their face value. They are 100% safe, as good as cash. That's different than stock. They are bonds, after all. Different instruments.

      “Dollars/U.S. bonds are valued versus other debt ridden currencies of the western socialist democracies for short term deposit. So we are the best of the worst. But nobody but the U.S. government is purchasing long term treasuries, because current interest rates are below real inflation, and long term bonds will become worthless when inflation kicks in and real interest rates increase.”

      The government buys long-term bonds to influence long-term rates. And I have demonstrated a number of times how interest rates won't increase until the govt. decides they want them to increase.

      “Smart investors are transitioning as much of their currency as possible to hard assets, hence the dramatic rise and gold/silver prices, which are selling at a 3-4x premium over mining cost.”

      The price of gold really has nothing to do with the subject. It's not in any way connected to the dollar. The price of gold is determined purely by speculation.

      “A stock loses its value when earnings (current and projected) decline. Fiat currencies lose their value when the supply of currency exceeds the wealth and production they represent. Can they go to zero? Perhaps not overnight, but hyperinflation is possible. Ask Weimar Germany.”

      Weimar Germany's productive capacity was heavily damaged by the war. Plus, they had tons of foreign-denominated debt, war reparations, etc. Our situations are not remotely comparable.

    • JohnfrmCleveland profile image
      Author

      John 4 years ago from Cleveland, OH

      Ken said: “Issuing new dollars to account for those lost to trade, anticipated production growth, and savings does not alter the ratio of circulating dollars to production. Inflation occurs when the number of circulating dollars exceeds production. I have explained this at least 5o times.”

      No, you have made that declaratory statement at least 50 times, but you have never sufficiently explained how an increase in the money supply necessarily leads to a rise in prices. Like most others, you are just repeating the conventional wisdom, but you haven't yet (plausibly) explained why, after all these years of seemingly large deficits, we aren't experiencing runaway demand-pull inflation right now.

      “The total number of dollars in circulation has ZERO to do with the amount of goods and services people purchase nor the number of jobs in the economy, it simply changes the price of the goods and services.”

      The number of dollars has a little something to do with demand – if there are not enough dollars, demand will necessarily go down, as will prices. If you produce $15 trillion worth of stuff, yet there is only $13 trillion available to buy it, the economy sure isn't going to produce $15 trillion worth of stuff next year. The economy will contract.

      “If the government does not replace money lost to savings and new production, then the amount of money chasing existing goods decreases, which reduces prices and increases purchasing power of existing dollars. But the effect on spenders and producers is a wash. Consumers have less money, but they have the same purchasing power, so they can purchase the same amount of goods and services. Companies have to charge less for their products, but it costs them less to produce them, so profit is unaffected.”

      Rather than call that situation “a wash,” I'd call it a deflationary spiral. Or an economic disaster, take your pick. What happens in deflationary times is that people with money now have a greater incentive to sit on that money instead of spending it, because they expect prices to keep going down. And prices do continue to go down, because higher savings mean that less and less money is being used to purchase goods and services, and the economy contracts. Plus, everything you hold that isn't cash goes down in value – including your house. The value of your house goes down, but the nominal value of your mortgage payments stay the same. At the same time, incomes go down, and your mortgage becomes harder and harder to pay. Deflation is a windfall for the already rich.

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      kendonhank 4 years ago

      "Here's how the government can control employment by spending money: they can hire the unemployed. Problem solved. Do that, and watch the economy get better, fast, because people are not only spending money, they have some stability."

      To do what? Visit a socialist country where this was attempted. All failed economies, because government workers do not produce and innovate like free market workers.

      In all of your arguments, you fail to address the fact that government is less efficient in its spending than the free market. What you advocate is taking from the productive (those who produced the wealth in the first place) and giving it to the non-productive. They will spend it on movie tickets, taking it from those who would spend it on new productivity technology. Like most Keynesians, you do not understand that efficiency of production and the development of new technology is the key to wealth creation, not government redistribution from producers to consumers for conspicuous spending. All of your arguments about government spending are ultimately undermined by the simple fact that government-inspired production is less efficient than free market production.

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      kendonhank 4 years ago

      "No, you have made that declaratory statement at least 50 times, but you have never sufficiently explained how an increase in the money supply necessarily leads to a rise in prices. Like most others, you are just repeating the conventional wisdom, but you haven't yet (plausibly) explained why, after all these years of seemingly large deficits, we aren't experiencing runaway demand-pull inflation right now."

      I have already given you data for the last 30 years that shows inflation tracking M1 and M2 adjusted for productivity growth. And you have already admitted that increasing the money supply increases inflation if done in sufficient quantity. You have already stated that the printing of new money must be done in moderation. So the question is how much can be printed before inflation kicks in, and of course you will not give a number, or even a range. Tell me of you can, how much can the government print per year before inflation kicks in. Your entire argument hinges on the supposition that all new printing will be eaten up in Treasury Bills, no matter how attractive the rate or how unproductive the economy becomes.

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      kendonhank 4 years ago

      "The number of dollars has a little something to do with demand – if there are not enough dollars, demand will necessarily go down, as will prices. If you produce $15 trillion worth of stuff, yet there is only $13 trillion available to buy it, the economy sure isn't going to produce $15 trillion worth of stuff next year. The economy will contract."

      So if you don't have enough dollars, prices go down and create deflationary spirals, but if you have too many dollars, prices never go up and create inflationary spirals? So which is it, the money supply affects prices or it doesn't affect prices.

      As for production, it has zero to do with money supply. If the money supply shrinks and prices drop, then 15 trillion dollar in production becomes 13 trillion dollars in production. It's the same production. All that has changed is the dollar price. A house is a house, whether it costs a dollar or a trillion dollars. Assuming that price declines occur uniformly across the economy, then they do not impact purchasing power.

      If there were zero dollars in the economy, we would still be free to produce whatever we liked, provided there was someone else with equivalent assets to trade. Money makes it easier to trade things, but has nothing to do with how much an economy produce. Doubling the money in an economy does not double production, it just doubles the price of the existing production. Similarly, halving the amount of mount doesn't halve production, it halves the price.

      Money and wealth are two different things. Wealth is tangible goods and intellectual property. Money is a way to exchange and store wealth. The amount of money used to represent wealth is purely arbitrary. Changing the amount of money available in the economy to represent available wealth changes pricing and the allocation of wealth, but not the total amount of wealth in the economy, nor the economy's future ability to produce wealth.

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      kendonhank 4 years ago

      "pjmeli is correct – govt. bonds will always be worth their face value. They are 100% safe, as good as cash. That's different than stock. They are bonds, after all. Different instruments."

      Yep, bonds are as good as cash, which loses its purchasing power every day. Unless a bond pays a higher rate of interest than REAL inflation, your bond loses money every day as well.

    • profile image

      kendonhank 4 years ago

      "And I have demonstrated a number of times how interest rates won't increase until the govt. decides they want them to increase."

      Except that the U.S. isn't the only currency or asset class in the world. If government mandated interest rates fall below real inflation, investors will buy other debt and assets, not U.S. bonds. Already U.S. bonds are suitable only for very short-term storage. Nobody who is increasing real wealth is long U.S. bonds. Price controls do not work. The free market either find a way around them, or ceases production and relocates. Government hiring and other spending/ redistribution do not work, because in order to hire workers and spend money, the government must take money from more productive enterprise, which reduces productivity. These are all failed socialist principles.

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      kendonhank 4 years ago

      "Why you insist on classifying SS and Medicare differently is beyond me. It is a political football created by deficit hawks, and you have been one of the many fooled into kicking it around as if it matters. Don't you have an expectation that America will continue to have an army? Is that a “liabiltiy” too? How about the FDA? FBI? Coast Guard? "

      SS and Medicare have already been paid for by taking tax dollars and production from the economy. People will demand that these be paid. You're correct in the sense that all government services must be paid from future production. They are a drag on production and should be minimized wherever possible (as was envisioned by the framers), in contrast to your suggestion that the government increase spending and put everyone on the government payroll.

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      kendonhank 4 years ago

      "MMT is all about the accounting. If you understand where the dollars come from and where they go, you can eliminate a lot of the common misconceptions that get in the way of understanding how things work."

      Yes, I am beginning to see that. It's sort of like convincing someone you have created a perpetual motion machine, or trying to prove an assertion that is a logical fallacy. You create a machine that is so complex that it is difficult to see where the tiny amount of unallowed energy is introduced. Of you create a complex accounting system with a counterintuitive language that makes it difficult to track the flow of money and the correlation between money and production. Then you use that to argue that the laws of supply and demand have been overturned and that the government can allocate scarce resources more effectively than the free market..

      Production and supply/demand determine the growth and distribution of wealth in a real economy. Government attempts to redistribute production through its various shell games always make the system less efficient, which reduces overall production. Equity of distribution may improve temporarily through government redistribution, but over time, reduced productivity manifests itself as equality of misery, as the socialist economy lags far behind the free market economy. Or put another way, what would you rather have, an equal slice of a small pie, or a tiny piece of an enormous pie.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      Geez, Ken (or Ken, Don, and Hank?) - is this your full-time occupation?

      I said: "Here's how the government can control employment by spending money: they can hire the unemployed. Problem solved. Do that, and watch the economy get better, fast, because people are not only spending money, they have some stability."

      Ken said: “To do what? Visit a socialist country where this was attempted. All failed economies, because government workers do not produce and innovate like free market workers.”

      There are actually quite a few “socialist” countries that are doing just fine. Maybe you are thinking about communism, where the state attempts to completely control the market. The problem with your response is that you take it too far. Capitalism isn't being replaced at all. The market is still encouraged to work its magic, and it does so wonderfully. But the market fails at a few important things, like employing everybody, and that is where the government steps in to help. And heaven help us if it didn't – you would not like to live in a 100% free market capitalist's “paradise.”

      Government workers are not supposed to produce like the private sector. The private sector does one thing extremely well – they respond to demand. With great efficiency, the private sector tempts as many pennies from our grip as possible, often even more than we have at the moment. If there was more demand to be met, the private sector would surely meet it. But as things stand, with the number of dollars in play and their present distribution, demand is maxed out. (We know this because there is no shortage of stuff to buy in this country, and there is always more left on the shelves.) Could more be purchased? Sure, but most of the leftover dollars are held by the rich, and they have already bought everything they wanted to buy. So you can either let things stand as they are, you can tax them more and redistribute their dollars to people far more likely to spend them, and/or you can create new dollars and distribute them (if done right) to people far more likely to spend them.

      Government workers are not “productive,” in that they don't contribute to putting price tags on products for sale, but they are not useless. Somebody has to run the country, enforce the laws and regulations, put the bad guys in jail, protect our borders, etc. Their dollars buy goods and services, too, and if they walked into your store you wouldn't know the difference between the dollars they spend and the dollars spent by “productive” private sector workers. (That, BTW, is what you are calling “socialism,” so you may want to revisit your thinking on that.)

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      Ken said: “In all of your arguments, you fail to address the fact that government is less efficient in its spending than the free market. What you advocate is taking from the productive (those who produced the wealth in the first place) and giving it to the non-productive. They will spend it on movie tickets, taking it from those who would spend it on new productivity technology. Like most Keynesians, you do not understand that efficiency of production and the development of new technology is the key to wealth creation, not government redistribution from producers to consumers for conspicuous spending. All of your arguments about government spending are ultimately undermined by the simple fact that government-inspired production is less efficient than free market production.”

      Like most Austrians, you always take your assumptions to an unrealistic point. Nobody is taking 100% of the money away from “productive” people, first of all. We have pretty fair tax rates in this country, and before you break out that “50% of people pay 100% of the taxes” argument, let me remind you that it is not because of unfair tax rates but because of our ever-increasing disparity of income that that is true. There is still plenty of money left over for investment and innovation (not that it is actually used that way, but that is for another article). The rich are having little trouble amassing large piles of dollars in “socialist” America these days. The key to wealth creation is not lost on them, obviously.

      Efficiency is another interesting subject, probably worthy of another article. On another site, I made the argument that efficiency isn't terribly important when it comes to non-essential purchases. I will leave you with one hypothetical question on that: a genuine Coach purse costs $300, and a knockoff Coach purse costs only $50. Each purse costs about the same to produce, and all else is assumed equal. Which is better for the economy, the sale of a $300 Coach purse, or the sale of a $50 knockoff?

      ************

      “I have already given you data for the last 30 years that shows inflation tracking M1 and M2 adjusted for productivity growth....”

      But you disregarded the huge impact of the price of oil, which, to me, ruined your argument.

      Have you considered the possibility that the “tracking” that you are seeing is M1 and/or M2 *responding* to (cost-push) inflation, not causing (demand-pull) inflation?

      Ken said: “And you have already admitted that increasing the money supply increases inflation if done in sufficient quantity. You have already stated that the printing of new money must be done in moderation. So the question is how much can be printed before inflation kicks in, and of course you will not give a number, or even a range. Tell me of you can, how much can the government print per year before inflation kicks in. Your entire argument hinges on the supposition that all new printing will be eaten up in Treasury Bills, no matter how attractive the rate or how unproductive the economy becomes.”

      How can I, or anybody else, give a hard number on that? The answer, actually, is “you'll know it when you get there, because you will see demand-pull inflation.” And we have not yet seen that. There are simply too many variables to make a calculation.

      And I never said that *all* new printing will be eaten up in t-bills. I said that t-bills act to sop up excess dollars – big difference. I have said all along that the danger with creating new money is inflation – but I also hold that you can create some amount of new dollars that will not bring about demand-pull inflation. And the numbers bear me out – inflation is very low. And no, I don't believe that, after 30 years, inflation is just waiting below the surface for a chance to strike.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      Ken said: "So if you don't have enough dollars, prices go down and create deflationary spirals, but if you have too many dollars, prices never go up and create inflationary spirals? So which is it, the money supply affects prices or it doesn't affect prices."

      First of all, I didn't say that prices will never go up if you have too many dollars. I have stated a number of times that the danger of creating new money is inflation. Either you don't understand my argument, or you are deliberately changing my words to make them better fit your argument. What is the point of that? If you want to learn about MMT, great, but if you are just here to try to win an argument, right or wrong, that's a waste of my time.

      Now, I'll repeat, yet again, what I have already said: if you don't provide enough dollars, you will get deflation. Deflation should be easy enough to understand. Dollars become more valuable, and goods become less valuable. It logically follows that there will be more of an incentive to simply hold on to dollars and not spend them. That doesn't mean they will never get spent, but the incentive to save dollars is there. Now - stick with me here - it also follows that the incentive to *invest* dollars will decrease as well, because you are investing present-day dollars in order to get future dividends of less valuable dollars, and you are trying to outpace that deflation by selling goods that are also losing value. In deflationary times, that's a losing proposition - the best investment is to simply hold dollars as their value goes up. You might have noticed that exactly zero countries are striving for a deflationary economy. Most are trying very hard to avoid it.

      Inflation, we are familiar with. A bit of inflation allows you to buy goods with the expectation that they are not going to be cheaper at some point in the future. You can purchase a home, pay interest on the mortgage, and still accrue value. You can borrow money and be able to pay back the interest without constantly indexing the payments to account for the changing value of the dollar.

      Hyperinflation is the danger, of course. Your dollars lose value, but your house and your stuff does not. But we have not experienced hyperinflation, and there is no reason to believe that we will. Our country is still incredibly productive.

      "As for production, it has zero to do with money supply. If the money supply shrinks and prices drop, then 15 trillion dollar in production becomes 13 trillion dollars in production. It's the same production. All that has changed is the dollar price. A house is a house, whether it costs a dollar or a trillion dollars. Assuming that price declines occur uniformly across the economy, then they do not impact purchasing power."

      I'm guessing that you do not own a house and have a mortgage. If you did, you would see the problem with your outlook. Why would anyone purchase a house, knowing that the value of that house was going to continue falling? By the same token, people would be reluctiant to invest dollars in an attempt to make a profit selling goods.

      "If there were zero dollars in the economy, we would still be free to produce whatever we liked, provided there was someone else with equivalent assets to trade. Money makes it easier to trade things, but has nothing to do with how much an economy produce. Doubling the money in an economy does not double production, it just doubles the price of the existing production. Similarly, halving the amount of mount doesn't halve production, it halves the price."

      You are guessing here. Your contention that there is a strict algebraic correlation between the number of dollars and prices is based on absolutely nothing, yet another Austrian tautology that sounds logical, but is not backed up by any evidence. You aren't allowing for savings, increased production, or any number of other variables that can actually affect prices. And most frustratingly of all, you are still ignoring the fact that we haven't had the runaway inflation that Austrians are so fond of predicting.

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      kendonhank 4 years ago

      "On another site, I made the argument that efficiency isn't terribly important when it comes to non-essential purchases. I will leave you with one hypothetical question on that: a genuine Coach purse costs $300, and a knockoff Coach purse costs only $50. Each purse costs about the same to produce, and all else is assumed equal. Which is better for the economy, the sale of a $300 Coach purse, or the sale of a $50 knockoff?"

      Your question shows your lack of understanding of production and efficiency in an economy, which ironically, are the two drivers of real wealth production. A purse is a purse. The dollar value is irrelevant and neither purse boosts productivity for the production of future goods. Purses are for the most part conspicuous consumption. The production and purchase of purses produces very little real wealth.

    • profile image

      kendonhank 4 years ago

      "Your contention that there is a strict algebraic correlation between the number of dollars and prices is based on absolutely nothing, yet another Austrian tautology that sounds logical, but is not backed up by any evidence. You aren't allowing for savings, increased production, or any number of other variables that can actually affect prices. And most frustratingly of all, you are still ignoring the fact that we haven't had the runaway inflation that Austrians are so fond of predicting."

      That is not my contention. I have said repeatedly that dollars added to replace those lost to new production and other leakages do not increase inflation. Also, I have not defined inflation as an increase in prices, but as an increase in circulating currency relative to production (and leakage I will concede). Such inflation, which has more circulating dollars chasing the same goods, puts upward pressure on prices, but other factors, such as oversupply, speculation, and bubble corrections, may prevent currency inflation from manifesting itself as price inflation until these are factors are in balance.

      Over time, however, prices reflect the total number of dollars chasing available goods. I cited data for inflation, GDP and the money supply (M1 and M2) that show that price inflation has tracked growth in the money supply adjusted for GDP growth. You have ignored this data.

      Here's some more data. In 1980, a candy bar cost 25 cents. Today it's $ 1.25. That's 500% inflation. The average price of a car in 1980 was $ 7200. Today it's 30k. That's a 400% increase, and that's after massive increases in automotive productivity that have acted to keep prices down. A gallon of gas in 1975 (normalizing the OPEC blip) cost 57 cents. Today its $3.50. That' s a 600% increase.

      The reason that prices have stayed down for many consumer goods is that they are produced with cheap labor abroad, or in the case of consumer electronics, have benefited from dramatic cost cutting technology. Were these produced in the U.S. and if not for new productivity technology, most consumer items would be far more expensive.

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      kendonhank 4 years ago

      "I'm guessing that you do not own a house and have a mortgage. If you did, you would see the problem with your outlook. Why would anyone purchase a house, knowing that the value of that house was going to continue falling? By the same token, people would be reluctiant to invest dollars in an attempt to make a profit selling goods."

      I invest in property, so I have owned many homes. The average price of a home in 1980 BTW was $72,000. Today it is $ 212,000, a 300% increase, that in spite of cheap materials purchased abroad and cheap labor from Mexico that has served to hold prices artificially low. Would I purchase a home if I knew that the money supply would be contracting for the forseeable future? No, as holding cash would be preferable. So I will concede that mild inflation is preferable to mild deflation. As I said before, government needs to produce enough currency to track production.

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      kendonhank 4 years ago

      "Hyperinflation is the danger, of course. Your dollars lose value, but your house and your stuff does not. But we have not experienced hyperinflation, and there is no reason to believe that we will. Our country is still incredibly productive."

      Our economy is becoming less productive each year as government assumes more ownership and control of the means of production, and bails out/subsidizes unproductive companies. The fact that we have not experienced hyperinflation does not mean that we cannot if government spending is not contained. Your suggestion that government provide full employment would cost trillions each year and require a massive redistribution of wealth from producers to consumers and a corresponding lack of productivity.

    • profile image

      kendonhank 4 years ago

      "How can I, or anybody else, give a hard number on that? The answer, actually, is “you'll know it when you get there, because you will see demand-pull inflation.”

      You will not see the effect of excessive money printing during a recession or asset bubble correction. When normal production resumes and the bubble has been deflated, inflation will kick in, and by then, it may be too late. Why not just have the money supply track production and take artificial inflation out of the picture? Let the natural supply and demand of goods and services dictate prices rather than having the government try to manipulate prices with wasteful spending.

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      kendonhank 4 years ago

      "Have you considered the possibility that the “tracking” that you are seeing is M1 and/or M2 *responding* to (cost-push) inflation, not causing (demand-pull) inflation?"

      Oil prices have increased at about the same rate as everything else, but oil is only one component of product cost, significant for some, virtually non-existent for high productivity goods (electronics). So higher oil prices could explain cost increases for certain items, but not others.

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      kendonhank 4 years ago

      "Government workers are not “productive,” in that they don't contribute to putting price tags on products for sale, but they are not useless. Somebody has to run the country, enforce the laws and regulations, put the bad guys in jail, protect our borders, etc. Their dollars buy goods and services, too, and if they walked into your store you wouldn't know the difference between the dollars they spend and the dollars spent by “productive” private sector workers. (That, BTW, is what you are calling “socialism,” so you may want to revisit your thinking on that.)"

      Again you do not understand the impact of productivity on wealth creation. When you pay a government worker to do something, money changes hands, but ZERO production occurs. When you give a worker in the free economy money to do something, a widget gets created. Wealth is created not by spending, but by spending on things that create wealth. It's the number of spending transaction x the production created per transaction that drives wealth creation.

      The Constitution allows for LIMITED socialism, as spelled out in Article 1 Section 8, because they knew that free people develop products and provide most services more efficiently than large centralized bureaucracies, the kind that you want to provide full employment for 25 million people.

    • profile image

      kendonhank 4 years ago

      "Government workers are not “productive,” in that they don't contribute to putting price tags on products for sale, but they are not useless. Somebody has to run the country, enforce the laws and regulations, put the bad guys in jail, protect our borders, etc. Their dollars buy goods and services, too, and if they walked into your store you wouldn't know the difference between the dollars they spend and the dollars spent by “productive” private sector workers. (That, BTW, is what you are calling “socialism,” so you may want to revisit your thinking on that.)"

      Again you do not understand the impact of productivity on wealth creation. When you pay a government worker to do something, money changes hands, but ZERO production occurs. When you give a worker in the free economy money to do something, a widget gets created. Wealth is created not by spending, but by spending on things that create wealth. It's the number of spending transaction x the production created per transaction that drives wealth creation.

      The Constitution allows for LIMITED socialism, as spelled out in Article 1 Section 8, because they knew that free people develop products and provide most services more efficiently than large centralized bureaucracies, the kind that you want to provide full employment for 25 million people.

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      kendonhank 4 years ago

      "I said: "Here's how the government can control employment by spending money: they can hire the unemployed. Problem solved. Do that, and watch the economy get better, fast, because people are not only spending money, they have some stability."

      And you still haven't told me what these 25 million unemployed people will be doing with the trillions of dollars that you will be printing and taking from the free economy to pay for them. What makes you think that the government can invest those trillions more efficiently than the free economy.

    • profile image

      kendonhank 4 years ago

      "There are actually quite a few “socialist” countries that are doing just fine. Maybe you are thinking about communism, where the state attempts to completely control the market. The problem with your response is that you take it too far. Capitalism isn't being replaced at all. The market is still encouraged to work its magic, and it does so wonderfully. But the market fails at a few important things, like employing everybody, and that is where the government steps in to help. And heaven help us if it didn't – you would not like to live in a 100% free market capitalist's “paradise.”

      Communism and socialism are both government ownership or control of the means of production, with Communism/Marxism being 100% ownership, with most socialist economies allowing varying degrees of private ownership.

      Most of the western socialist democracies are collapsing under debt and the expense of non-productive government. Government contributions to GDP in some of these countries (France for example) is as high as 50%, with taxes as a share of GDP also as high as 50%. These countries, despite their big government make-work economies, actually have higher unemployment than freer economies like the U.S. With the exception of the tiny Scandinavian countries, which have large per-capita reserves of raw materials, most socialist economies are collapsing. Germany is the exception, and even they are straining under their entitlements.

      Our country, though not as socialist as Europe, is still heavily socialist, and moving fast in that direction. Government runs most of the retirement system (social security), mortgage lending (Fannie/Freddie), half of health care (Medicare) with the rest heavily regulated, and college lending. Government is also the largest shareholder in our largest insurer (AIG), is the lender of last resort for the banks, and is now in the business of bailing out car companies and banks, subsidizing/capitalizing the green industry, and propping up failed assets like housing and mortgage-backed securities. Government ownership and control of our economy is pervasive, and you are advocating that government take over the direct hiring of an additional 15% of our workforce (25 million people).

    • profile image

      kendonhank 4 years ago

      "Nobody is taking 100% of the money away from “productive” people, first of all. We have pretty fair tax rates in this country, and before you break out that “50% of people pay 100% of the taxes” argument, let me remind you that it is not because of unfair tax rates but because of our ever-increasing disparity of income that that is true. There is still plenty of money left over for investment and innovation (not that it is actually used that way, but that is for another article). The rich are having little trouble amassing large piles of dollars in “socialist” America these days."

      If you are planning on having the government employ 25 million more people, then yeah, you're talking about significant redistribution from the productive to the non-productive. Very few people in this economy are amassing large piles of money. GDP has been virtually flat for four years. Those who have done the best are the financial types who have been skimming their share from the bailout money, making commissions off the extra money pushed into the stock market through below market rates, and making the spread on the free money given to banks. These people contribute very little to real production and wealth, and make their money precisely from government meddling in the economy. They are not capitalists, they are government cronies (socialists). Real capitalists in the business of real production are struggling.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "Very few people in this economy are amassing large piles of money."

      A few people in this economy are amassing large piles of money.

      There, fixed that for you.

      Deficit spending has increased by $6 Trillion over the past 4 years. Where did those financial assets end up? The top 400 families in the U.S. hold 30% of the total wealth. You don't consider that amassing?

    • profile image

      kendonhank 4 years ago

      Source please.

      The total wealth of the Forbes 400 in 2010 was 1.4T. Total household wealth was 55T. So the top 400 had 2.5% of wealth, not 30%.

      Also, despite deficit spending of 6T over the past 4 years, GDP growth over that time has only been about 6%, or one trillion over four years. So what are you telling me, that out of one trillion in growth, the rich picked up 6T.

      Needless to say, this obvious exaggeration undermines all of your other arguments.

      And even if it was true that the top 400 had 30% of wealth, there is nothing you could do about it, because wealth is money that has already been taxed, unless your proposal is to steal from them outright.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      Ken said: "Our economy is becoming less productive each year as government assumes more ownership and control of the means of production, and bails out/subsidizes unproductive companies."

      Couple of things here - first of all, what our government does cannot accurately be called "socialism." All of the things you listed fall under the heading of normal govt. duties - running the country, taking care of the old and the poor, maintaining an army, etc. They are simply not involved in the "means of production." Temporarily propping up the car companies or bailing out banks does not mean that the government is in the business of building cars or running banks. We don't have nationalized oil or anything like it.

      Second, we are becoming more and more productive each year, with few exceptions. Check your facts. We are producing more than ever, and companies recently made record profits. The only problem with the economy is that a bigger share of those record profits is heading straight for the top, and workers aren't seeing the benefits.

      Third, you continue to throw out this Randian idea that private sector production will solve all of our problems, and we should direct every last dollar their way for our own good; yet when I point out that the private sector fails society on a number of issues, I get no response. Again, the private sector fails at employing everyone, it fails at health care, it fails the environment, it fails at education, and it fails those unable to contribute.

      "I said: "Here's how the government can control employment by spending money: they can hire the unemployed. Problem solved. Do that, and watch the economy get better, fast, because people are not only spending money, they have some stability."

      Ken said: "And you still haven't told me what these 25 million unemployed people will be doing with the trillions of dollars that you will be printing and taking from the free economy to pay for them. What makes you think that the government can invest those trillions more efficiently than the free economy."

      Those 25 million unemployed people can do any number of jobs that won't interfere with private sector production. They can pick up trash on the side of the road, they can write poetry, they can get grants to do basic research, etc. We can rebuild and repair our infrastructure. We can give money to the states to hire more cops, more firemen, and more teachers. There are plenty of useful jobs that need doing, and we have the means to pay for them.

      Right now, nobody starves. Between unemployment benefits, welfare, and food stamps, the govt. keeps everybody afloat, so we are already paying these people. Putting them to work, whenever possible, would not only give us something for that money, it would also give them some stability, and maybe even a bit of satisfaction.

      Free market types always try to make the case that the maximization of total wealth is the most important thing we can do, and that it is better to share a tiny sliver of a large pie than a bigger slice of a smaller pie. But again, that is an unsupported assertion. You not only cannot demonstrate that the lower end will have a bigger share, you cannot even demonstrate that the pie will be any bigger.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      “And even if it was true that the top 400 had 30% of wealth, there is nothing you could do about it, because wealth is money that has already been taxed, unless your proposal is to steal from them outright.”

      The number I have is that the top 1% has 42% of the wealth, which is still pretty staggering.

      The point here is that too much of the economy's money ends up in the hands of too few too fast. That's the savings that has to be replaced with deficit spending. The deficit is a measure of savings, and the rate that the deficit increases is the rate at which the rich are socking away those dollars. The economy works best when the lower end has some of that money for a while; they work for it, they spend it, buy homes, send their kids to college, etc. Even then, it all ends up in the hands of the rich, but at least it does more good along the way.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "So what are you telling me, that out of one trillion in growth, the rich picked up 6T."

      Someone picked it up. Are you arguing it was the middle class? I don't think so. If that were true the economy would be going great guns.

      Also GDP grew from $13923 B to $15587 B ($1.66 T) between 2009 and current (2nd Qtr 2012). Thats 12% growth not 6%. Growth is measured relative to the starting point not the end.

      Consider this then:

      Roughly $1.56 Trillion has gone to the trade deficit:

      http://www.bea.gov/iTable/iTable.cfm?ReqID=9&s...

      Payments on consumer debt has totalled about $1 Trillion:

      http://research.stlouisfed.org/fred2/series/CMDEBT

      Leaving $3.5 Trillion spent into the economy.

      Interest on the National Debt (pmts to bond-holders, you know RICH people) equals $920 Billion (about $1T):

      http://www.bea.gov/iTable/iTable.cfm?ReqID=9&s...

      That leaves $2.5 Trillion spending … $1.66 Trillion in growth

      Much of the deficit results from tax cuts for the stinking rich, which adds next-to-nothing to GDP in the net.

      Who ended up with the money?

    • profile image

      kendonhank 4 years ago

      Pjmeli,

      Combined wealth for the Forbes 400 richest was 1.53 trillion in 2011, 1.37 trillion in 2010, 1.27 trillion in 2009, 1.57 trillion in 2008, and 1.54 in 2007. So their share of the 6.5T in deficit spending from 2007-2011 was ZERO.

      You stated that the Forbes 400 owns 30% of national wealth. That is false. They own 1.4T out of 55T, which is 2.5%.

      As for the tax cuts, even Warren Buffet, who favors rolling back the tax cuts for the top 1%, admits that such a tax cut would only raise about 40 billion in revenue per year.

      In 2007 the top 1% paid 40.5% of all income taxes while earning just 22.8% of national income.

      You should send "the stinking rich" as you call them a handwritten note thanking you for subsidizing you.

      As for the rest of the data you provided, it is irrelevant to the question of how much wealth the top 400 control and how much it grew as a result of deficit spending, for as you see, it didn't grow at all.

    • profile image

      kendonhank 4 years ago

      "Free market types always try to make the case that the maximization of total wealth is the most important thing we can do, and that it is better to share a tiny sliver of a large pie than a bigger slice of a smaller pie. But again, that is an unsupported assertion. You not only cannot demonstrate that the lower end will have a bigger share, you cannot even demonstrate that the pie will be any bigger."

      Unsupported? Well, national wealth in 1980 was 10T. Now it is 55T. So the total pie increased. Now compare the standard of living in 1980

      with today. What kind of car did you drive, how many cars did you have? How big was your house? What was your phone like? Your TV? Your computer? Your appliances? Your health care? And on and on. Standard of living is the true measure of wealth, and it has increased dramatically for everybody as a result of increased productivity and overall wealth creation. Growing the total pie is absolutely the key to wealth creation for everybody. The bottom rung may get a smaller slice than liberals would like, but their standard of living still improves. Liberal attempts to mandate "fairness" by forcibly redistributing the pie simply reduce productivity and shrink the pie for all. Ironic wouldn't you say.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      "Combined wealth for the Forbes 400 richest was 1.53 trillion in 2011, 1.37 trillion in 2010, 1.27 trillion in 2009, 1.57 trillion in 2008, and 1.54 in 2007. So their share of the 6.5T in deficit spending from 2007-2011 was ZERO."

      Not necessarily true, as it depends on their holdings. The rich suffer big losses when the stock market tanks. Those paper losses could easily be offset by an increase in t-bill holdings.

      Ken, those t-bills certainly don't go to the poor. Those not held by the government are held by the rich, either directly or indirectly (banks, businesses, hedge funds, etc.). The way money cycles through the economy is pretty clear if you just step back and look at it for a minute. The whole "who is productive" thing just clouds the issue. Right or wrong, new money flows from the government to the poor to the rich, and their savings ends up in the form of t-bills. Whatever policies we think are best are determined by our politics, but it is important to recognize how money flows through the economy in order to make informed decisions. That is the whole point of the article.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      I said: “You not only cannot demonstrate that the lower end will have a bigger share, you cannot even demonstrate that the pie will be any bigger."

      Ken said: “Unsupported? Well, national wealth in 1980 was 10T. Now it is 55T. So the total pie increased....”

      Yes, it increased quite a bit – but with plenty of government interference. You still cannot say that the total pie would have been bigger with less interference. Nobody can – it's an impossible calculation.

      Ken said: “Now compare the standard of living in 1980 with today. What kind of car did you drive, how many cars did you have? How big was your house? What was your phone like? Your TV? Your computer? Your appliances? Your health care? And on and on. Standard of living is the true measure of wealth, and it has increased dramatically for everybody as a result of increased productivity and overall wealth creation....”

      Yes, the standard of living has increased since 1980. What does that prove? You are supposed to be making the case that the private sector does a better job of improving people's lives without government interference (redistribution).

      Ken said: “Growing the total pie is absolutely the key to wealth creation for everybody. The bottom rung may get a smaller slice than liberals would like, but their standard of living still improves. Liberal attempts to mandate "fairness" by forcibly redistributing the pie simply reduce productivity and shrink the pie for all. Ironic wouldn't you say.”

      First – you cannot demonstrate that redistribution reduces productivity. There are a number of studies that show large disparities in income hinder growth, especially over the long term.

      Second – you still cannot demonstrate that the total pie is smaller because of redistribution. It may well be bigger.

      Third – Worker productivity has increased a ton, yet over the past 10 years or so, their real income has not increased at all. The top few percent has captured 100% of those productivity gains. That trend is not likely to change without government intervention, because labor has lost all power to negotiate. So “growing the total pie” hasn't helped much at all.

      Anyway, this discussion is straying from the point of the article, and it is becoming a big drag on my time. There is no reasoning with circular logic, and Austrian economics are as circular as it gets.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "As for the rest of the data you provided, it is irrelevant to the question of how much wealth the top 400 control and how much it grew as a result of deficit spending, for as you see, it didn't grow at all."

      How much wealth the top 400 families hold was not the basis of my argument, it was only referred to to point out the distorted distribution of wealth we have in the U.S., which is true even if I acknowledge your number on the 400 is more correct. I made the case that most deficit spending goes to the rich.

      Most deficit spending that doesn't leave the country ends up in the hands of the top 0.1% of the population. This is not a statement on morality, it's a mathematical reality, and it can't be any other way.

      How could money possiblbly flow in the other direction? Towards the working man. It can't, there is no natural economic dynamic that moves funds towards the worker. Period.

      "You should send "the stinking rich" as you call them a handwritten note thanking you for subsidizing you."

      Only the people with the income or wealth can be taxed. When they have all of the money, only they will be taxed.

      The handwritten thank-you note should be written to the worker, because without their efforts the rich wouldn't be so rich.

      Business extracts profits from the wages of the worker. There is no where else for profit to come from. The bottom end of the wealth distribution has no other source of funds other than government spending through progressive taxation, deficit spending or private debt.

      This too is a mathematical reality, simple arithmetic. No moral dimension whatsoever.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "Yes, it increased quite a bit – but with plenty of government interference. You still cannot say that the total pie would have been bigger with less interference." - JohnfrmCleveland

      Exactly true. It's impossible for the economy to grow without government spending.

      "It is impossible for an effect to be stronger than its cause" - Aquinas, 1274

      Great quote and it happens to be true mathematically.

      The increase in wealth beyond the increase in money is due to effects of leverage. Leverage can only be maintained if the level of spending is maintained. Reducing spending would be like letting air out of a balloon.

      Did kendonhank not notice how much wealth was lost in the GFC? Where did it go? It disappeared. Real things don't disappear.

      If kendonhank wants to try to make the argument that we can fix the amount of funds in the economy and leverage it to infinity I am all eyes.

    • profile image

      kendonhank 4 years ago

      Pjmeli,

      "How much wealth the top 400 families hold was not the basis of my argument, it was only referred to to point out the distorted distribution of wealth we have in the U.S., which is true even if I acknowledge your number on the 400 is more correct."

      Except that you falsified the data. The top 400 have 2.5% of wealth, not 30% as you asserted. You missed by an order of magnitude, but say that doesn't compromise your point. Why even use data. Just insist that the distribution of wealth is distorted no matter the data.

      "I made the case that most deficit spending goes to the rich."

      Yes, you made another false case. I gave you the data. Total wealth for the top 400 was unchanged from 2007 to 2011 at about 1.5T. Yet deficit spending was 6.5T. So NONE of the 6.5T made it to the rich. You don't like the data, so you set out to prove that the data couldn't possibly true because it does not match the outcome of your strawman shell game, which is what MMT really is.

      " It's impossible for the economy to grow without government spending."

      Really? I can't make and invent things unless the government spends money? I can't grow crops. I can't mine gold and silver. I can't print my own notes backed by my own production, I can't trade them for my neighbor's cattle, or a blacksmith's services, or a tailor's new suit. I can develop a routing algorithm if the government doesn't spend money? I think what you really mean is that the total number of U.S. dollars cannot grow without government intervention. You are so caught up in your shell games that you n o longer understand what an economy is and how it produces wealth.

      "This too is a mathematical reality, simple arithmetic. No moral dimension whatsoever."

      Oh no, "stinking rich". No moral dimension there.

    • profile image

      kendonhank 4 years ago

      "Business extracts profits from the wages of the worker. There is no where else for profit to come from. The bottom end of the wealth distribution has no other source of funds other than government spending through progressive taxation, deficit spending or private debt."

      That is the Marxist view. In a free economy, profit is return on capital and risk. Labor is a commodity and wages paid to labor are based on supply and demand. Workers do not create profits. Productivity creates profits. Workers supply 40 hours of labor. What they produce is dictated by the productivity tools the business employs. And those tools are created by capital investment in new technology.

      The bottom end of the distribution receives an amount of wealth equal to their contribution to production as dictated by supply and demand. Whatever else they receive beyond their real production (through progressive taxation and deficit spending) is simply a forcible taking of wealth from producers and redistribution to non-producers.

      The government creates no real wealth. Dollars are just markers for exchanging the real wealth created by free enterprise. Yes we would have no dollars if government didn't print them, but that doesn't mean printing dollars creates wealth. Deficit spending and taxation simply redistribute wealth from producers to non-producers and in the process reduce productivity and diminish total wealth.

    • profile image

      kendonhank 4 years ago

      Pjmeli,

      "The increase in wealth beyond the increase in money is due to effects of leverage. Leverage can only be maintained if the level of spending is maintained. Reducing spending would be like letting air out of a balloon."

      Leverage produces no wealth in the aggregate. Moving dollars from one pile to the next through printing, deficit spending, taxation, borrowing, and leverage produces ZERO wealth.

      Wealth can only be created by the production of real goods. Money in its various forms (cash, credit, contracts, leverage) simply make it easier to distribute production and wealth for optimal use.

      Government spending, either through direct taxation or deficit spending, produces ZERO net wealth. It simply redistributes existing wealth and production from free enterprise to the government, with a net loss of overall production. Dollars represent production, and all production comes from free enterprise, so the government cannot spend a dollar without taking it from the free economy in some form (taxes or inflation).

    • profile image

      kendonhank 4 years ago

      "Yes, it increased quite a bit – but with plenty of government interference. You still cannot say that the total pie would have been bigger with less interference." - JohnfrmCleveland"

      I see, so it is government interference that caused productivity and production to increase over the past 30 years. It was the forcible taking of wealth and production capacity from the productive and redistribution to the non-productive that caused production to increase. Hilarious.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "That is the Marxist view. In a free economy, profit is return on capital and risk. "

      That is the arithmetic view. Are you arguing with simple arithmetic?

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      "I see, so it is government interference that caused productivity and production to increase over the past 30 years. It was the forcible taking of wealth and production capacity from the productive and redistribution to the non-productive that caused production to increase. Hilarious."

      Ken, you can repeat this mantra as often as you wish, but the evidence bears pjmeli and me out. Money moves, inexorably, in one direction. If not redistributed, or resupplied, the lower end will be starved of the dollars needed to operate, and the economy will suffer for it.

      It's not hard to imagine what would happen in your scenario - if we stopped taxing everybody, stopped all SS, welfare, and medicare outlays, and fired all but the most essential govt. employees, the private sector couldn't come close to providing productive work for all of those people.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "Wealth can only be created by the production of real goods."

      First, baloney, education is real wealth and no goods are produced.

      Production of real goods only increases wealth if there are dollar balances available to purchase the production. No dollars available for spending, no value.

      There may be (probably is) utility value in some of that production, but without question the production will stop if the spending stops.

      Spending = Income, the fundamental equation of the economy.

      Financial wealth, unless the government net spends, is fixed and can't be changed by any amount of economic activity.

      It follows that if wealth is created, it will show up on balance sheets measured in the unit of account ($), and will be some multiple of the net liquidity (cash) in existence, also recorded on balance sheets. Leverage (one type) is the difference between real wealth and net liquidity.

      To increase real wealth is to increase leverage. No financial wealth is created.

    • profile image

      kendonhank 4 years ago

      John,

      Until you understand production, you will never understand economics. Printing and moving piles of money around does not grow an economy.

      MMT as you describe and argue it is really just a rationale for more government spending and redistribution of wealth from the productive to the non-productive, a straw man defense of socialism.

      What your arguments really come down to is the belief that redistribution of wealth and productive capacity from the productive to the nonproductive increases real wealth. You are arguing that taking money from the tool maker and giving it to the movie goer increases overall wealth. You are arguing that all spending is the same regardless of what is produced as a result of the spending. You are arguing that the government spends and invests more wisely than the free market. You are arguing that the government can print money and spend "virtually" to its heart's content without devaluing existing money and taking existing wealth because it magically disappears into savings/T-Bills.

      Everything you argue is counter-intuitive and unsupported by either logic or real economic data, yet you put the burden of proof on your opponent to disprove your straw man view of the economy, which uses the flow of T-Bills to justify big increases in government spending/redistribution. Of course you add the caveat that "too much printing" could cause inflation, but then go to propose that the government hire 25 million new workers and pay them a "living wage", which would require 2.5 trillion in new deficit spending per year. You also see no problem with the 55 trillion in benefits that government has promised in Medicare and social security benefits, which will also have to be paid by printing new money, as there will not be enough production to accommodate them.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "It's not hard to imagine what would happen in your scenario - if we stopped taxing everybody, stopped all SS, welfare, and medicare outlays, and fired all but the most essential govt. employees, the private sector couldn't come close to providing productive work for all of those people."

      It's pretty easy to see where we're headed.

      The top 0.1% will eventually end up with it all. The rest of us will then become wage slaves in order to "rent" our meager existence from the nobles.

      Sound familiar?

      What amazes me is how many people think they will be one of the 0.1%.

      It will be far less percentage-wise than the number of kids that think they will make it in professional sports.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "Until you understand production, you will never understand economics. "

      Until you understand that production won't take place unless there are consumers to consume it you will never understand reality. Investment (and subsequent production) does not put funds in the pockets of consumers in the aggregate.

      Investment injects funds, only to reclaim funds in a larger amount. Which way does the net go?

      If that wasn't the case profits would not be possible.

      It leaves consumers with "stuff". Often "stuff" they don't need. Is pornography valuable productin? Plastic trinkets made in China?

      Again, we have a failure to understand simple arithmetic.

      "It is impossible for an effect to be stronger than its cause" - Aquinas, 1274

    • profile image

      kendonhank 4 years ago

      Pjmeli,

      "Education is real wealth and no goods are produced."

      Education is real wealth, a productivity tool, no different than a die casting for a new tool. The degree to which a worker is educated moderated by supply and demand determines the share of production they receive, not government deficit spending.

      "Production of real goods only increases wealth if there are dollar balances available to purchase the production. No dollars available for spending, no value."

      False. I can produce a bushel of corn, you produce a couple of shovels. I trade half my corn for one of your shovels. Wealth is increased and no dollars were spent. Money makes it easier to exchange and store production and wealth. It has no intrinsic value.

      "There may be (probably is) utility value in some of that production, but without question the production will stop if the spending stops."

      False. Eliminate all spending of dollars and we will all still produce and trade. I will still grown corn and wheat, and you will still create new routing algorithms. Trading in dollars makes it easy to exchange production and wealth, but printing new dollars (other than maintain a stable relationship between production and dollars) produces zero wealth. It just reduces the purchasing power of the dollars.

      "Spending = Income, the fundamental equation of the economy."

      Spending does not have to be done in dollars. And that equation only holds if the money supply (spending) tracks real income, which is real production. Increasing spending by printing new dollars does not increase production, it just sends more dollars after existing production.

      "Financial wealth, unless the government net spends, is fixed and can't be changed by any amount of economic activity."

      By financial wealth, you mean the number of paper dollars. So what? I can still build a house, grow a bushel of corn, and trade with my neighbor without the government printing and spending new dollars. And both my neighbor and I will see an increase in real wealth. Government spending does not create wealth, it redistributes existing wealth. Dollars are not wealth, the production that backs them is wealth.

    • profile image

      kendonhank 4 years ago

      "It's not hard to imagine what would happen in your scenario - if we stopped taxing everybody, stopped all SS, welfare, and medicare outlays, and fired all but the most essential govt. employees, the private sector couldn't come close to providing productive work for all of those people."

      Again, that is the Marxist view. In a real economy, money not spend by the government would be left with the free economy, which would invest in new production technology and new industries at a much faster pace, ultimately employing more people. A small safety net could be provided for those unable to work, but even those on the bottom rung with the least productivity would still benefit overall from the increased productivity and production of a freer economy in the form of reduced prices and better products.

      Just because the government needs to provide enough currency to stabilize prices, doesn't mean the government needs to spend it on goods and services. That is the most inefficient way of all to introduce new money.

    • profile image

      kendonhank 4 years ago

      "It is impossible for an effect to be stronger than its cause" - Aquinas, 1274"

      True, but you do not understand the causes (investment in new technology, increased/better production) and the effects (wealth creation, reduced prices and purchasing power, wealth creation, increased standard of living for all).

      Your focus on the flow of money has you chasing your tail such that you cannot distinguish cause and effect.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "Your focus on the flow of money…"

      So are you arguing that investment, production, etc. will exist without the flow of money? A barter economy maybe. An economy for maybe a few million people.

      Will your automobile go without the flow of fuel? Even if the tank is full a pefectly good automobile won't go anywhere (on flat ground) if it isn't fed fuel.

      A perfectly healthy body won't be very useful if blood and oxygen aren't supplied to the system.

      The question for you is, what causes the flow of funds in an economy? You seem to think it's investment, but the arithmetic doesn't support your argument.

    • profile image

      kendonhank 4 years ago

      Pjmeli,

      "Until you understand that production won't take place unless there are consumers to consume it you will never understand reality. Investment (and subsequent production) does not put funds in the pockets of consumers in the aggregate."

      Wrong. I grow a bushel of corn, you grow a bushel of wheat. We exchange some corn for some wheat. The amount that we both spend is limited by what we already produced. I produced some extra corn knowing that you would need it, and you produced some extra wheat knowing that I would need it. I could not have purchased your wheat unless I first produced some corn. It is total production that determines total spending. Spending is the exchange of production. You cannot spend until you produce FIRST.

      "Investment injects funds, only to reclaim funds in a larger amount. Which way does the net go? If that wasn't the case profits would not be possible. It leaves consumers with "stuff". Often "stuff" they don't need. Is pornography valuable productin? Plastic trinkets made in China?"

      Again you focus on money flow without understanding production. When you produce something, wealth is created. If the amount of wealth you have to expend (for labor, materials, etc) to create a given product is less than the amount you can sell it for, then you make a profit. Profit and wealth are two different things.

      If I grow a bushel of corn and you grow a bushel of wheat and we exchange, what is the profit? What does it matter, the wealth of our economy has grown by one bushel or wheat and one bushel of corn. Who got the better of the exchange is irrelevant. As for what is wealth, pornography is not wealth because it does not contribute to real production. Plastic trinkets might be depending on their utility.

    • profile image

      kendonhank 4 years ago

      "So are you arguing that investment, production, etc. will exist without the flow of money? A barter economy maybe. An economy for maybe a few million people."

      As I said, money helps facilitate the exchange of wealth and production. However, creating new money in excess of production does not grow real wealth production. The government's only role in printing new money should be to match the supply to real production so as to keep prices stable. The real economy will produce goods and services on its own without any government spending. The only purpose for government spending is to provide essential services than cannot be provided by the free market (police, fire etc). They should have no role in micromanaging the economy, growing it, redistributing it, etc.

    • profile image

      Kendonhank 4 years ago

      "you can repeat this mantra as often as you wish, but the evidence bears pjmeli and me out. Money moves, inexorably, in one direction. If not redistributed, or resupplied, the lower end will be starved of the dollars needed to operate, and the economy will suffer for it."

      Money/wealth in a free economy attaches to those who produce it, and the largest producers on average are those who invest it in new production, not T-Bills, which lose purchasing power each year to inflation. T-Bills are a safe liquid place to park short-term money. They cannot compete with the same money invested in new production technology. It is probably true that wealthy risk-averse retirees park their money in T-Bills, but over time, they become less wealthy due to inflation. Money is constantly on the move from the least productive to the most productive. The longer it stays with the most productive, the wealthier we all become. Taking money from the productive and giving it to the non-productive simply slows the pace of productivity and production.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      Ken said: "Again you focus on money flow without understanding production. When you produce something, wealth is created. If the amount of wealth you have to expend (for labor, materials, etc) to create a given product is less than the amount you can sell it for, then you make a profit. Profit and wealth are two different things."

      We are all familiar with this simplistic stuff. It is useless if you are unable to put it into the context of the real world. We are trying to do that for you, and you don't seem to catch on.

      People will only produce what they can sell (or trade, whatever). To produce more than one can use or profit from is a waste of time and resources. Agreed?

      Even today, in backward, heavily agricultural economies, the majority of people work growing food. There is little problem keeping people productively employed, because so much labor is needed just to eat. In America, where productivity is very high, about 2% of our labor force is in agriculture, and we still produce a surplus of food. If we assume that our labor force is about half of our population, that means one farmer produces enough food to feed 100 people, plus a surplus. If we had 4% of our labor force growing food, we'd have a heck of a time unloading everything they produced.

      It takes about 35 man-hours to produce a car. Let's round that up to 40, give the worker two weeks vacation, and estimate that an autoworker produces 50 cars/year. Let's also estimate that a car lasts about 10 years, on average. So if he makes 500 cars over the course of 10 years, that means that one worker produces enough cars to supply 500 people at a time.

      Can you see the emerging problem here? Our needs are being met - more than met - by a smaller and smaller proportion of the labor force. There is only so much "productive" work to be done - the private sector will only produce what it can sell for a profit. If there was more money to be made by hiring more workers and producing more stuff, they would surely do that. As I said before, the private sector is incredibly efficient at convincing people to part with their money in exchange for all sorts of junk.

      That is not to say that everybody is satisfied, and wouldn't like to own more stuff. But the poor don't have the money to spend, and the middle class doesn't have as much as they used to, because the rich are capturing so much more money (and saving much of it). In years past, when production was more labor-intensive than it is today, labor had some leverage with which to demand a greater share of the profits, and workers were able to make a decent living - and buy more stuff. That is no longer true today - between cheap foreign labor, automation, and a large pool of unemployed workers that want jobs, workers feel lucky to have a job at all. Not too many are able to demand more money these days. So ownership keeps the difference, because they can. But because so much of that money never gets spent, consumer spending is down and the economy is suffering.

      The point is that, unlike in your simplistic scenarios, it is not always possible for one to just go out there and "produce" something that allows him to earn money. Until there is more demand, workers that manage to find jobs will just be displacing other workers, and probably doing so for less money.

    • profile image

      kendonhank 4 years ago

      John,

      You're good with T-Bills and accounting shell games, not so much with production and how a real economy works.

      "We are all familiar with this simplistic stuff."

      Evidently not, since pjmeli conflated profit with wealth creation, and both of you conflate deficit spending with wealth creation.

      "People will only produce what they can sell (or trade, whatever). To produce more than one can use or profit from is a waste of time and resources. Agreed?"

      People will produce what other's want, so long as the others have produced enough of their own to purchase it. Demand all you want, but until you produce something equivalent to exchange, you can't buy anything. Taking from producers and giving it to non-producers simply redistributes demand and exchanges short-term conspicuous consumption (movie tickets, lotto, cruises) for long-term capital investment in new productivity technology.

      This is one thing you ignore. Even if I do not have sufficient demand to increase production, that does not stop me from investing in new technology that increases my productivity and enables me to create better widgets at a lower cost. It also does not stop me from investing in entirely new technology and industries.

      "In America, where productivity is very high, about 2% of our labor force is in agriculture, and we still produce a surplus of food."

      True, and it was investment in productivity technology that made that possible, and it was growth in agricultural productivity that grew wealth and freed up capital for investment and development of new industries. None of that has changed. New technology automates existing industries and reduces the number of workers needed to meet demand. Meanwhile, other new technology creates completely new industries and applications that require even more workers. When the pace of new technology creation decreases (through government meddling and redistribution), that is when you have a surplus of workers and wages decline. If new technology and automation reduced employment, we would have fewer jobs now than we had 100 years ago, because certainly all of the industries that existed in 1900 have been thoroughly automated or replaced by now. Obviously, the wealth created in 1900 was used to create new technology and industries that employ even more people today.

      " So if he makes 500 cars over the course of 10 years, that means that one worker produces enough cars to supply 500 people at a time. Can you see the emerging problem here? Our needs are being met - more than met - by a smaller and smaller proportion of the labor force. "

      Yes. Our need for one product, cars, is being met with fewer workers. But what about the workers who are developing the technology for next-generation cars? What about the workers who are developing fusion technology, and hovercraft, and pharmaceuticals and all manner of products you have never dreamed of. Technology begets technology and new industries and new applications. The greater the investment in new technology, the faster the pace of wealth and job creation.

      "In years past, when production was more labor-intensive than it is today, labor had some leverage with which to demand a greater share of the profits, and workers were able to make a decent living - and buy more stuff."

      False. There are more total workers doing more jobs today than there were in years past. What we are experiencing now is a temporary influx of cheap labor from abroad. That temporary oversupply is driving labor costs down for the short term. This labor will be consumed with new industries and applications at a pace determined by the pace of new technology development. Your vision of government employing 25 million more people will take 2.5 trillion from the free economy and slow the pace of technology development, thereby depressing job creation and wages.

      "Workers feel lucky to have a job at all. Not too many are able to demand more money these days. So ownership keeps the difference, because they can."

      False, lower labor and material costs translate to lower product cost because of competition. All manufacturers have the same labor and material costs. They cannot pocket their reduced labor cost, because their competitors will lower their prices. Ownership will make the same markup that they always have. The only thing that enables ownership to increase what it keeps is new productivity technology, and even then, only for a short time as competitors acquire the same technology.

      "The point is that, unlike in your simplistic scenarios, it is not always possible for one to just go out there and "produce" something that allows him to earn money."

      You don't have to. In a vibrant free market economy, others will invest their wealth (if you let them keep it) and create new industries for you to work in. You should thank them.

    • profile image

      kendonhank 4 years ago

      "Worker productivity has increased a ton, yet over the past 10 years or so, their real income has not increased at all. The top few percent has captured 100% of those productivity gains. So “growing the total pie” hasn't helped much at all."

      The data says differently. Total wealth of the Forbes 400 since 2007 has been stuck at 1.5 trillion. Productivity gains have been passed along to the lower rung as lower prices, better products and increased purchasing power, even though real wages have not grown. As cheap labor abroad is consumed by new industries and applications, wages will increase.

      "first of all, what our government does cannot accurately be called "socialism." All of the things you listed fall under the heading of normal govt. duties - running the country, taking care of the old and the poor, maintaining an army, etc. They are simply not involved in the "means of production." Temporarily propping up the car companies or bailing out banks does not mean that the government is in the business of building cars or running banks. We don't have nationalized oil or anything like it."

      Recapitalizing our largest auto owner (GM) and insurer (AIG), naming their new CEO and taking a majority stock position are certainly socialism. As was nationalizing our largest mortgage underwriter (Fannie/Freddie) and the the student loan industry. Having the government run half of our health care system (Medicare) and dictate coverage and profit for the rest of the industry is socialism. Government run retirement (social security) is socialism. The government runs a huge swath of our economy, and liberals would like the government to run a lot more. Most advocate single-payer health care, which would nationalize one sixth of the economy. You have advocated having the government employ 25 million people. That would be another sixth of the economy. Now you know why our economy is stalled, and has been for a decades.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "However, creating new money in excess of production does not grow real wealth production."

      The government creates new money to account for leakages, savings and growth.

      We've already had that class. Several times. You are not taking your homework seriously, and you are about to fail the test.

      Eliminate progressive taxation and spending and the economy would go down in a deflationary spiral. Of that there is no doubt.

      Please demonstrate the sequence of events (flows) that would occur under your government-hands-off scenario. Lets see how you account for a steadily decreasing supply of funds in the hands of consumers.

    • JohnfrmCleveland profile image
      Author

      John 4 years ago from Cleveland, OH

      Ken said: "This is one thing you ignore. Even if I do not have sufficient demand to increase production, that does not stop me from investing in new technology that increases my productivity and enables me to create better widgets at a lower cost. It also does not stop me from investing in entirely new technology and industries."

      I don't ignore that at all. I actually recognize what happens in the real economy. All you are saying is that ownership strives to cut costs. That is not news. What may be news to you is that that is not growth. If you sell $1 million worth of widgets in 2008 and labor costs you $400,000, and in 2012 you sell $1 million worth of widgets while lowering your labor costs to $200,000, you have still only sold $1 million worth of widgets. The economy has not grown. You, the owner, are more profitable by $200,000, but that came out of the pocket of labor. And if that labor happened to be part of your market for widgets, you just lost some of your customers. You probably won't care, because you are richer, but in the aggregate, that kills the economy. Any real business owner will tell you that business is better when there are more paying customers to buy their stuff, and the unemployed don't buy much.

      I said: "The point is that, unlike in your simplistic scenarios, it is not always possible for one to just go out there and "produce" something that allows him to earn money."

      Ken said: "You don't have to. In a vibrant free market economy, others will invest their wealth (if you let them keep it) and create new industries for you to work in. You should thank them."

      That is demonstrably false. There is plenty of opportunity for people to invest their money. The rich already have vast sums sitting around, doing nothing. Nobody is stopping them from "creating jobs." But they still don't.

      Lower taxes on the rich don't lead to job growth:

      http://thinkprogress.org/economy/2011/06/28/256605...

      Lower taxes on the rich don't lead to economic growth:

      http://thinkprogress.org/economy/2011/06/20/249061...

      Tax cuts do not create jobs:

      http://www.commondreams.org/headlines05/1118-02.ht...

    • profile image

      kendonhank 4 years ago

      "There is plenty of opportunity for people to invest their money. The rich already have vast sums sitting around, doing nothing. Nobody is stopping them from "creating jobs." But they still don't."

      Because the government is taking half of what they make in many cases, and threatening to take much more. On top of that they have initiated a takeover of health care which is already sending costs higher. The government is also continuing to bail out companies, subsidize new industries, give preferential treatment to others, and prop up failed assets, all of which are distorting the competitive landscape and creating uncertainty. On top of all that, the government is deficit spending at record rates and doing nothing to address Medicare/SS, will soon require significant additional taxes and/or devaluation of the currency.

      Business is not investing because they perceive the risk is too high. Why else would they be sitting on their money? How do you think they make money? By sitting on it? No, they make money by investing, and they would be investing if the government would get out of the way and let the free market work.

    • profile image

      kendonhank 4 years ago

      "Any real business owner will tell you that business is better when there are more paying customers to buy their stuff, and the unemployed don't buy much."

      Of course, and the faster the rate of new technology development and industrial development, the more people will be employed, the greater real production will be, and the more money they will have to buy stuff. Taking money from productive businesses and giving it to consumers doesn't increase total demand, it just shifts demand and trades capital investment in new technology for conspicuous consumption.

      "If you sell $1 million worth of widgets in 2008 and labor costs you $400,000, and in 2012 you sell $1 million worth of widgets while lowering your labor costs to $200,000, you have still only sold $1 million worth of widgets. The economy has not grown."

      Well, first of all, if my labor costs dropped by 200k, then I would be selling my widgets for 800k (because that's what my competitors would be doing to take my business away), and consumers would be pocketing 200k in the form of increased purchasing power, which as I explained, is one of the benefits of new technology development. Even if workers do not receive higher wages as a result of economic growth, they gain in purchasing power from lower costs. That frees up more dollars for additional purchases and investment in new technology.

      Obviously, the economy does not grow if I sell the same number of widgets. However, if the cost of the widgets decreases, consumers will be able to purchase more widgets, or something else if they prefer, or even invest in their own job or technology creation. So the economy grows wealthier, because it is able to produce more stuff for the same amount of dollar activity. Economic wealth also increases by way of increased quality, as the new widget is likely to have better features.

      So back to my original point, letting business keep more of their own money, even if temporary demand does not warrant increased production of an existing product, provides additional capital for creating new technology that either facilitates new product development, or drives down the cost of existing products, which increases consumer purchasing power and frees up consumer dollars for additional spending or investing. Bottom line, letting productive people invest their money creates wealth faster for all than taking money from productive people and giving it to non-productive people.

    • profile image

      kendonhank 4 years ago

      Pjmeli,

      "The government creates new money to account for leakages, savings and growth. We've already had that class. Several times. You are not taking your homework seriously, and you are about to fail the test."

      Yep, I have already acknowledged that at least 50 times and responded that new money created in excess of these things causes inflation.

      "Eliminate progressive taxation and spending and the economy would go down in a deflationary spiral. Of that there is no doubt."

      Um, no. The government does not need to purchase products and services directly to inject new money capable of accommodating new production and leakage. As for progressive taxation, taking from producers and giving to non-producers reduces productivity and new technology development, which reduces job creation over the long term. So it actually puts less money in the hands of consumers.

    • profile image

      kendonhank 4 years ago

      Sorry guys,

      Thanks for bearing with me. I'm just having a bit of trouble understanding how taking money from producer Bob and giving it to non-producer Bill grows the economy. I guess I'm pretty naive thinking that the free market allocates scarce resources more productively than government bureaucrats.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "I'm just having a bit of trouble understanding how taking money from producer Bob and giving it to non-producer Bill grows the economy."

      Your problem is you seem to think corporate CEO's are producers and their workers are parasites.

      No one is suggesting taking anything from anyone and giving it to someone else as some kind of punishment.

      Progressive taxation is not a punishment, it's a necessity. Without it, all of the funds necessary for commerce to succeed will flow to the top 0.1%. The profit-taking class will consume the host. This is not ideology, not a discussion about what is right or what is wrong, it's not about morality. It's about the survival of capitalism if it is to survive.

      The ideas expressed in John and my comments are expressions of arithmetic that cannot be overcome without re-circulation. It is the tyranny of the arithmetic.

      Are the true believers of free-market fundamentalism so blinded by their ideology that they are willing to bring the entire system down along with nearly everyone in it in order to hold on to beliefs that have never had any basis in fact?

      "I guess I'm pretty naive thinking that the free market allocates scarce resources more productively than government bureaucrats."

      There is not nor has there ever been a free market. Don't try to sell that snake-oil here. The system is manipulated and the playing field tipped in their favor by the only ones capable of doing it - the holders of massive wealth and power.

      You can't expect anyone with any sense to believe that poor people (and now school-teachers) brought the entire world economy down. If we eliminated government entirely those very same people would be just as greedy and tyrannical as the government you so despise now. Most likely it would be worse.

      Every major economic crisis in American and European history has been brought on us by banking interests and the very rich. Pardon me if I don't cry for those poor misunderstood souls. I would be tickled pink if they all went John Galt on us and left the country.

      The post WWII up to the mid-1970's was the most prolific period of growth in world history creating a prosperous middle-class and the chance for the majority of citizens to have a good quality of life.

      The top marginal tax rate during most of that period was over 90%.

      Now a top marginal tax rate of 35% is socialism. Give me a break.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "As for progressive taxation, taking from producers and giving to non-producers reduces productivity and new technology development, which reduces job creation over the long term."

      You keep making these claims with no basis in reality. What part of flow do you not get? Flow = economic activity. Spending =Income. Taxation at the top end of the spectrum is on money sitting on the sidelines. How does one accumulate wealth if they spend it? Wealthy people get wealthy because they don't spend all of their income. I don't care how much money someone makes, as long as they don't hoard it.

      No business hires a single extra worker unless there are willing and able customers ready to buy their products. Jobs are not produced by business. Jobs are produced as a result of consumers having money in their pockets.

      Businesses fall all over themselves competing for those dollars by trying to produce the best products. That's how a market works.

      When businesses succeed in their competition for those dollars it means the consumer doesn't have them anymore. The business has recouped it's investment and then some, called profits.

      Profits come from consumers funds. Businesses couldn't possibly add a net dollar to their funds unless they lost money in the aggregate.

      I see your religious belief in markets thinks that business can do the impossible, but they can't.

      If you want to bring religious dogma into any of your future comments, you will be ignored by me. After tens of thousands of words and free-market religious incantations the time has come to bring arguments made through a logical chain in which the sequence doesn't end up undermining your original premise.

      Outline or numbered format will do until you get the hang of it.

      You have a brain dude. Use it.

      P.S. Increasing productivity creates unemployment. If fewer people can make more stuff why would the private sector hire the excess workers?

      Increasing productivity increases profits by reducing the cost of labor. Reducing the cost of labor leads to fewer customers with discretionary income to spend (hint: your customers are also your workers). This creates more unemployment and thus fewer customers for the business to sell into. Cue downward spiral-race-to-the-bottom-collapse-of-the-middle-class.

      Something even you won't be able to escape from.

    • profile image

      kendonhank 4 years ago

      pjmeli,

      "The top marginal tax rate during most of that period was over 90%."

      But nobody paid that rate did they? Because the shelters were far more generous. Passive loss against ordinary income for example. Nobody works hard and takes risk to hand 90% of what they earn to the government. Only in socialist fairyland do people produce and hand the fruits of their labor to the government for redistribution.

      "Wealthy people get wealthy because they don't spend all of their income. "

      So if I make 10k per year and save most of it, I will be wealthy?

      "I don't care how much money someone makes, as long as they don't hoard it."

      That's very gracious of you, and further proof that you don't understand how wealthy people become wealthy. You cannot become wealthy from hoarding. You become wealthy from producing and investing. The amount that you hoard declines in value due to inflation.

      "What part of flow do you not get? Flow = economic activity. Spending =Income."

      So if I just get a bunch of my friends together and pass money around the room real fast, and we will all become infinitely wealthy? Very silly. All wealth comes from production. Spending is the exchange of production. You cannot spend a dime unless you produce something of comparable value first.

      "Every major economic crisis in American and European history has been brought on us by banking interests and the very rich."

      Boom and bust are an unavoidable part of the free market. Government attempts to repeal the business cycle through bailouts, subsidies, redistribution, price controls, printing money, borrowing, welfare, make work, etc. are doomed to failure.

      "There is not nor has there ever been a free market."

      Nope, but the freest economies are the most productive. The ones with the highest taxation, redistribution, and government meddling are the poorest and least productive. That is why until recently the U.S. was the economic and new technology engine of the world.

      "The system is manipulated and the playing field tipped in their favor by the only ones capable of doing it - the holders of massive wealth and power."

      Most of the manipulation and tipping are done by government through taxation, regulation, and cronyism. In a free market, the wealthy are continually unseated by more productive, efficient, innovative upstarts. Most millionaires are first generation self made. Your ability to prosper is mainly hindered by government, not the wealthy.

    • profile image

      kendonhank 4 years ago

      "You can't expect anyone with any sense to believe that poor people (and now school-teachers) brought the entire world economy down."

      I never said that. You are being hysterical again. Boom and bust are part of the free market. Government of course contributed mightily to this one by meddling in mortgage lending and interest rates, which increased the demand for housing and created the speculative bubble.

      "Increasing productivity creates unemployment. If fewer people can make more stuff why would the private sector hire the excess workers?"

      They wouldn't, but you again miss the point. New technology reduces employment in one product area, but creates new applications and industries that hire even more people. Capital investment in new productivity technology is the driving force behind all wealth creation and increased standard of living for all. Spending, which is exchanging what has already been produced, creates ZERO wealth.

      "No one is suggesting taking anything from anyone and giving it to someone else as some kind of punishment."

      No, of course not. Hence your previous rants about the "stinking rich".

      "Progressive taxation is not a punishment, it's a necessity. Without it, all of the funds necessary for commerce to succeed will flow to the top 0.1%. The profit-taking class will consume the host. This is not ideology."

      Of course it is ideology. If you had actually been in business, worked hard, risked capital and produced/grown wealth, would know better. Wealthy people accumulate wealth because they on average produce more. Taking wealth from productive people and giving it to non productive people doesn't create wealth, it degrades it by reducing investment in new technology. The wealthy become wealthy by producing and investing, not hoarding. Like most liberals/socialists, you are so obsessed with splitting the pie fairly that you destroy the pie. In a socialist utopia, all live in uniform misery with their fair share of the meager pie. Well, all except for the high government officials, who keep a separate pie to themselves.

      "Taxation at the top end of the spectrum is on money sitting on the sidelines."

      If the money is on the sidelines, then it has already been taxed. If the money is being taxed, then it is obviously money that has been generated through successful production or investment. So what you are taxing in part is future capital investment in new technology.

      "Your problem is you seem to think corporate CEO's are producers and their workers are parasites."

      I never said that nor do I believe it. Another one of your hissy fits based on the presumption that anyone who advocates free markets and freedom generally must be one of those "stinking rich" types or sympathizers. In a free market, wealth attaches to those who contribute the most to production, whatever their position in the company.

    • profile image

      kendonhank 4 years ago

      "Increasing productivity increases profits by reducing the cost of labor."

      Temporarily, because competitors have access to the same technology, so profit stays relatively constant across any given industry. The cost savings of reduced labor costs are ultimately passed on to the consumer. Have you ever run a business? Seriously.

      "Reducing the cost of labor leads to fewer customers with discretionary income to spend (hint: your customers are also your workers). This creates more unemployment and thus fewer customers for the business to sell into. Cue downward spiral-race-to-the-bottom-collapse-of-the-middle-class."

      So much ignorance in one paragraph. New productivity technology reduces the number of workers needed for a given product in a given market. However, new technology and industries are created all the time (through capital investment) that increase employment overall. So the workers in one industry may see a pay decrease as demand for their services declines, but workers in new disciplines will command a premium because their services will be in short supply.

      Do you think that total employment is higher now than in 1900?

      "Reducing the cost of labor leads to fewer customers with discretionary income to spend (hint: your customers are also your workers). This creates more unemployment and thus fewer customers for the business to sell into. Cue downward spiral-race-to-the-bottom-collapse-of-the-middle-class."

      Wages and employment decline in one industry due to increased productivity, but increase in new industries created by capital investment in new technology. Across the economy, total employment increases, total purchasing power increases and total wages cycle according to supply and demand.

      The downward spiral that you mention comes when government tries to redistribute wealth and production, which slows the pace of new technology and job creation, and reduces purchasing power. That is what we are seeing now. Enormous government intervention. Zero GDP growth. Same in Europe. Greece, Portugal, Italy, Ireland, Spain, France. Hello!

    • profile image

      kendonhank 4 years ago

      "Now a top marginal tax rate of 35% is socialism. Give me a break."

      Total taxation is closer to 50% for the self employed making over 250k. What do you think it should be?

      Oh yeah, 90%. That's the rate that made us so productive in the 50's and 60s, right? My, my my.

    • profile image

      kendonhank 4 years ago

      "No business hires a single extra worker unless there are willing and able customers ready to buy their products. Jobs are not produced by business. Jobs are produced as a result of consumers having money in their pockets."

      And the consumers who buy their products will do so with what they themselves have produced. How do you think consumers get money in their pockets? They produce things.

      BTW, most businesses hire workers on speculation of future customers. That's the risk part of business that you don't understand. Very few businesses have a line of customers waiting for them when they first open their doors. Most businesses fail within the first three years.

      "Are the true believers of free-market fundamentalism so blinded by their ideology that they are willing to bring the entire system down along with nearly everyone in it in order to hold on to beliefs that have never had any basis in fact?"

      Free market believers are typically those who have learned first hand what it means to work hard, save, risk capital, start a business, produce real products, hire people, and build a business. The real true believers are liberals/socialists with no practical experience who are so blinded by their utopian pursuit of fairness that they cannot accept the cold hard logic and efficiency of the free market. They cannot bear to let the free market work, because some may be left behind, so they engage government to redistribute wealth, enact massive welfare and make-work safety nets, and manipulate all aspects of the economy to ensure continuous egalitarian prosperity. The result is uniform misery for all. See it working in Greece, Portugal, Italy, Ireland, Spain, and France. Look at our own pathetic economy. without massive deficit spending, our real GDP has been negative for the past five years.

      Better yet, talk to someone from old Communist Russia, China or one of the Eastern block country. They will tell you about the wonders of redistribution, welfare statism and government central planning.

      "The ideas expressed in John and my comments are expressions of arithmetic that cannot be overcome without re-circulation. It is the tyranny of the arithmetic."

      I think you mean the tyranny of poor arithmetic. After all this discussion, you still believe that wealth creation is driven by taking money from producers and redistributing it to non-producers. What is produced is irrelevant as long as the money changes hands fast enough. Totally clueless.

    • profile image

      kendonhank 4 years ago

      Pjmeli,

      Still waiting for your explanation of how the "stinking rich" Forbes 400 pocketed the 6.5 trillion in deficit spending between 2007 and 2011 when their total wealth remained unchanged at 1.5T. Or how the Forbes 400 managed to acquire 30% of total wealth when they only own 1.5T/55T = 2.5%.

      I hope you'll excuse me if I chuckle when you boast of your tyrannical arithmetic and logic.

    • JohnfrmCleveland profile image
      Author

      John 4 years ago from Cleveland, OH

      Ken said: “Thanks for bearing with me. I'm just having a bit of trouble understanding how taking money from producer Bob and giving it to non-producer Bill grows the economy. I guess I'm pretty naive thinking that the free market allocates scarce resources more productively than government bureaucrats.”

      That is not our argument at all. That is the one you are creating to argue against. We are talking about the flow of dollars. This is not a capitalist vs. socialist argument, Ken, no matter how hard you are trying to make it one. MMT is about understanding how money is created, how it flows, and where it ultimately ends up. Scarce resources are still left to the private sector to allocate – but some of the dollars need to be redistributed in order to keep things running smoothly. Your highly defensive posture on this issue is, I believe, preventing you from understanding the difference.

      “So if I just get a bunch of my friends together and pass money around the room real fast, and we will all become infinitely wealthy?”

      Of course not, and that is not what we are saying. What we are saying is that if you skim, say, 20% off the top of every transaction for yourself, pretty soon your friends will not have much money to pass around. Without new dollars added to the game, the total number of dollars will stay the same, they will all end up in your hands, and the rest of the players will have nothing.

      “Nope, but the freest economies are the most productive. The ones with the highest taxation, redistribution, and government meddling are the poorest and least productive. That is why until recently the U.S. was the economic and new technology engine of the world.”

      The most successful economies have been the ones that have an educated workforce, good infrastructure, low corruption, and strong rule of law. All of that is “government meddling.”

      “The downward spiral that you mention comes when government tries to redistribute wealth and production, which slows the pace of new technology and job creation, and reduces purchasing power. That is what we are seeing now. Enormous government intervention. Zero GDP growth.”

      Wrong. We have had terrific success with what you believe to be “enormous government intervention.” America is responsible for about 24% of the world's production. You are making wild statements (over and over, I might add) that are simply incorrect. You spout out stuff that is backed by absolutely zero evidence. And you haven't bothered to respond to the evidence I provided that directly contradicts your main assertions.

      “Same in Europe. Greece, Portugal, Italy, Ireland, Spain, France. Hello!”

      Hello! Completely different issues! Those countries have actual debt problems, as they are no longer sovereign in their own currencies! We do not have those problems.

      “Free market believers are typically those who have learned first hand what it means to work hard, save, risk capital, start a business, produce real products, hire people, and build a business.”

      That doesn't mean they understand how fiat money works. Lots of people make money in this country. Very few understand the flow of those dollars or how they were created. You are trying to create a distinction that does not exist – you think that I am not a capitalist just because I happen to recognize something that you do not. Nothing could be further from the truth. I just understand that the economy is not the self-regulating machine that you think it is. It needs intervention to thrive and benefit society as a whole. The economy is there to serve the people, not the other way around.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "Still waiting for your explanation of how the "stinking rich" Forbes 400 pocketed the 6.5 trillion in deficit spending between 2007 and 2011 when their total wealth remained unchanged at 1.5T…"

      Already addressed that. I showed in detail where the money went between 2009 and 2nd Qtr 2012. Did you not read it? Or did you not understand it?

      "Or how the Forbes 400 managed to acquire 30% of total wealth when they only own 1.5T/55T = 2.5%."

      You didn't even read that correctly, I said the top 400 FAMILIES. I've already admitted that my number was an overstatement but the fact is top 1% holds about 35% of total wealth. This group includes those paying taxes on income in excess of about $375,000. The top 0.1% holds about 12% of total wealth distributed among some 315,000 people. Most of those are corporate "suits".

      Nothing you have said undermines the reality of those numbers or the premise of my argument - that a small group of citizens controls an out-sized share of wealth and it is impossible for that wealth to transfer naturally into the pockets of the middle class (worker-consumers).

      I suppose if you can't understand simple arguments you can't be expected to do your own thinking.

      Still waiting for a substantive argument from you. So far it's been talking points, bromides and regurgitation of conventional wisdom. I don't see any thinking in there.

    • profile image

      kendonhank 4 years ago

      "Or how the Forbes 400 managed to acquire 30% of total wealth when they only own 1.5T/55T = 2.5%."

      "You didn't even read that correctly, I said the top 400 FAMILIES."

      I couldn't find data for the to 400 families, but income for the top 400 families will not be that much different than the Forbes 400 individuals, as wealth tends to trail off quite fast from the top producer. But even if we doubled that number, it would be 5%.

      So your error would be 600% instead of 1200%. Tyrannical arithmetic.

      "Nothing you have said undermines the reality of those numbers or the premise of my argument - that a small group of citizens controls an out-sized share of wealth and it is impossible for that wealth to transfer naturally into the pockets of the middle class (worker-consumers)."

      Outsized? The wealthy have a share of wealth equal to what they have produced. The middle class has a share equal to what they have produced. Wealth does not flow to the middle class. The middle class creates their own wealth by trading their labor, skills, and investment for a share of production. The burden is on you to show that those with wealth did not earn on it, and that the concentration of wealth in their hands prevents the middle class from producing and earning their own wealth. Prove it!

      More generally, the burden is on you to prove that taking money from those who produce it and giving it to those who did not produce it grows wealth overall. We already know that on average those who have the most money are more productive than those who do not. That's how they got their money (on average). You don't think so? Prove it!

      We already know that if we let the producer keep his own money, he will use it to produce more. How do we know that? Because he has a track record of producing things. The burden is on you to show that taking his money and giving it to someone who is demonstrably less productive will result in greater production.

      The burden is on you to prove that a non-productive person will spend money more wisely and productively than the person who produced it in the first place. The burden is on you to prove that passing existing wealth around a room (spending) at faster and faster speeds grows wealth. The burden is on you to prove that government bureaucrats can redistribute and spend money more efficiently than those who produced it in the first place.

      You cannot prove any of this, yet you declare free market principles to be religious dogma. You ask me to substitute your equations, theories and shell games for what I can see with my own eyes and have experienced first hand in 30 years of business.

      The free market is simply the freedom to produce and exchange goods and services without government intervention. The freedom to keep the fruits of your labor, production, and investment. You are arguing that government bureaucrats who have never produced anything in their lives can achieve greater production and prosperity than the free market by limiting its freedom, by taking money from the demonstrably productive and giving it to the demonstrably less productive. You are arguing that government bureaucrats can divine how much wealth to take from people, who to give it to, how they should spend it, what they should produce, how much they should keep and on and on. The burden is on you to show that restricting freedom, confiscating private property and having government bureaucrats control the means of production and distribution will produce more wealth than letting free people make these decisions for themselves.

      Is it a coincidence that the most productive and wealthiest economy in the history of the world is also the freest. Is it a coincidence that the least productive economies in the past century were communist economies where government bureaucrats were free to redistribute wealth as they saw fit. Is it a coincidence that the economies of Europe with the highest taxation and government contribution to GDP (50% in some cases) are the ones on the brink of failure. Is it a coincidence that the U.S. is becoming less and less productive as the government assumes greater control over the means of production and distribution?

      You are the one spouting religious dogma. You are the one who needs to bring proof to the table.

    • profile image

      kendonhank 4 years ago

      “Same in Europe. Greece, Portugal, Italy, Ireland, Spain, France. Hello!”

      "Hello! Completely different issues! Those countries have actual debt problems, as they are no longer sovereign in their own currencies! We do not have those problems."

      The Euro zone is free to print Euros as it sees fit. There is nothing to stop the Euro zone from printing as many Euros as necessary to retire the debt of all Euro zone countries. The euro debt situation is no different from ours and I believe their total debt as a share of GDP is comparable to ours. The reason they do not print their way out of it is the same reason we cannot print our way out of our debt. Because printing new money in excess of real production causes inflation.

      Of course they could just take the MMT approach and declare their debt as national savings and ignore it. After all, the extra money they print would eventually just make its way to wealthy Europeans, who would use it to buy Euro bonds. So the money would effectively be withdrawn from the economy, save a bit of interest that would have to be paid to the bond holders. Right? So really, there is no debt crisis in Europe? Correct?

      If only the economists and government officials who ran these countries understood MMT, we would all be debt free.

    • profile image

      kendonhank 4 years ago

      Pjmeli,

      Still waiting to hear how the top 400 families soaked up 6T in deficit spending from 2007-2011 when their total wealth was unchanged at 1.5T.

      I can take it. Show me the tyrannical math.

    • JohnfrmCleveland profile image
      Author

      John 4 years ago from Cleveland, OH

      Ken said: "Outsized? The wealthy have a share of wealth equal to what they have produced. The middle class has a share equal to what they have produced. Wealth does not flow to the middle class. The middle class creates their own wealth by trading their labor, skills, and investment for a share of production. The burden is on you to show that those with wealth did not earn on it, and that the concentration of wealth in their hands prevents the middle class from producing and earning their own wealth. Prove it!"

      Bill Gates is worth about $60 billion. He didn't get that by sitting down and cranking out $60 billion worth of code, he got most of that by owning the means of production. He gets to skim a portion of his employees' production and add it to his pile. An employee wouldn't be worth hiring if he didn't produce more than he was paid. So employees have *never* had a share equal to what they produced – it has always been (far) less, but enough to be worth their time. And there is nothing wrong with this scenario in general, but you are missing the point completely. Nobody is arguing against profit, or getting rich, or anything like that. The problem is one of degrees. The rich are now capturing so much of the money that it is screwing up the normal cycling of dollars that allowed the economy to function without the level of redistribution and deficit spending that are now needed.

      The natural flow of money is to ownership, and there has to be some mechanism for some money to cycle back down through the lower end. A while back, labor had enough leverage to demand a bigger share of the money, but no more. Income disparity is increasing. Somehow, you expect ownership to remedy this, but it was ownership that brought us to this point. They have no incentive to do any different.

      What you are suggesting is classic trickle-down economics, and that simply does not work. I already gave you evidence of that, with no response. Here is some more: http://stateofworkingamerica.org/who-gains/#/?start=1977&end=2008

    • JohnfrmCleveland profile image
      Author

      John 4 years ago from Cleveland, OH

      "The Euro zone is free to print Euros as it sees fit...."

      Incorrect, and off-topic. I'll try to write an article about this sometime soon.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "Pjmeli,

      Still waiting to hear how the top 400 families soaked up 6T in deficit spending from 2007-2011 when their total wealth was unchanged at 1.5T.

      I can take it. Show me the tyrannical math."

      I already showed you. Why do you keep asking the same question?

    • profile image

      kendonhank 4 years ago

      “Free market believers are typically those who have learned first hand what it means to work hard, save, risk capital, start a business, produce real products, hire people, and build a business.”

      "That doesn't mean they understand how fiat money works. Lots of people make money in this country. Very few understand the flow of those dollars or how they were created."

      The accounting and the nomenclature is irrelevant to how wealth is produced and distributed in a real economy. Distinctions without a difference.

      What MMT really is is a ruse to justify more government spending and redistribution of income. By calling the national debt savings and insisting that government debt and printing does not have to be paid back and does not cause inflation, MMT hopes to take the public's main objections to government spending and debt off the table. All that remains then is to convince the majority that the government needs to make the rich pay their fair share, again not a problem, as there are more Pauls than Peters, and taking more from Peter to give to Paul will always have the support of Paul.

      Of course, these assertions are just a straw man for the real problem with government spending, which is that it redistributes wealth and capital from producers to non-producers. The greater the share of government spending and redistribution in an economy, the less productive it becomes over time. Your assertion (and those of your comrade pjmeli) that spending is spending (regardless of what it is spent on) and taking money from producers and spreading it around to non-producers to spend creates more wealth than letting productive people keep, spend and invest their own money defies common sense and the reality of production. It is a socialist pipedream with no grounding in fact or experience. On top of that, it requires a a government capable of optimally determining how much to redistribute, who to distribute it to do, what to spend it on, and how much of each thing to produce. This has been tried in many Communists countries, all of which became destitute as a result. A milder form of government ownership and distribution of the economy known as socialism has also been tried throughout Europe, Japan and increasingly in the U.S. The result has been gradual erosion of production and increased debt, culminating in flat-line GDP growth and insolvency.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      John,

      Fortunately for us, folks like kendonhank that think they know something but clearly don't will allow capitalism to completely destroy itself before long. If they get their way the end will come fast, so let them get on with it.

      Then we can finally enact our agenda of socialism (or whatever they want to call it, I call it public purpose) with a system that works for the benefit of all rather than a few.

    • JohnfrmCleveland profile image
      Author

      John 4 years ago from Cleveland, OH

      Guys, this discussion is going nowhere new. Ken, as Austrians always seem to do, you are just repeating your mantra and offering no proof, nor refutation of proof given. Now, it's all a Commie conspiracy. You are derailing the discussion. If you come up with something new, maybe even with some proof, I'll accept the comment.

    • Ralph Deeds profile image

      Ralph Deeds 4 years ago from Birmingham, Michigan

      I doubt that the Austrian theorists, if they were still alive, wouldn't agree with their current adherents. This discredited theory isn't taught in any respectable college economics curriculum any more than Ayn Rand's "objectivism" is taught in any college philosophy curriculum nor her novels in any college literature class. The Austrians only contribution was the idea that markets allocate resources more efficiently than central planners.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "The Austrians only contribution was the idea that markets allocate resources more efficiently than central planners."

      This may or not be true, but one thing markets don't do is provide for public purpose.

      Without infrastructure and an educated populace, the market will be left to allocate amongst a very small group of people.

    • profile image

      kendonhank 4 years ago

      "The Austrians only contribution was the idea that markets allocate resources more efficiently than central planners."

      Not a minor contribution since if it's true it discredits MMT, Keynesian economics, and socialism, all of which are based on central planning and redistribution.

    • Ralph Deeds profile image

      Ralph Deeds 4 years ago from Birmingham, Michigan

      To Keedonhank: Not true. There is no conflict between Keyenesianism and market capitalism. Conventional economics methods of avoiding huge bubbles and deep recessions do not conflict with market principles. They are standard insturments of monetary and fiscal policy taught in virtually every economics class in the country.

      What do you mean by redistribution? There has been plenty of redistribution in the past 30 years or so--one way only from the poor and middle class to the richest Americans. This inequality of income and wealth has increased to the point that many Americans are losing faith in our democratic, freey enterprise system.

      To Pimeli: Unregulated markets don't assure the public interest is served. As in a ballgame rules and an umpire are required.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "all of which are based on central planning and redistribution."

      SOME central planning, yes. How else would we get infrastructure and things the "market" wouldn't provide? Are you claiming that what banks do isn't central planning? Is central planning ruining the military? I guess we would be much safer with a free-market military, little militias running around.

      "redistribution"

      I know you just hate this word but in the mathematical sense it is impossible for a monetary economy to function at a high level without progressive taxation. Transfer of wealth from workers to a few business entities ends up consuming the host. Seems pretty unsustainable to me.

      In the end there would be only one as the Highlander said. What kind of an economy is that?

    • profile image

      kendonhank 4 years ago

      Pimeli,

      You mean some central planning as in deficit spending equal of 10% of GDP for years on end, having the government hire the 25 million who are currently unemployed (which you and John suggested), having the government underwrite 95% of new mortgages (Fannie/Freddie) and school loans, having the government bail out the banks, prop up housing values, and buy up all the toxic mortgage-backed securities, having the government take ownership of our largest auto maker (GM) and insurance company (AIG), having the government run the retirement system, or having the government run our health care system (1/6 of the economy).

      And that does not even include the central planning of the Federal Reserve and games they play with interest rates and the money supply to "control" employment and GDP growth.

      Is that what you mean by "some" central planning?

    • profile image

      kendonhank 4 years ago

      "I know you just hate this word but in the mathematical sense it is impossible for a monetary economy to function at a high level without progressive taxation. Transfer of wealth from workers to a few business entities ends up consuming the host."

      Have you ever heard of wages? How many tens of thousands of millionaires has Microsoft created? How many hundreds of thousands, perhaps millions of high paying jobs have been created through the efforts of Microsoft, Apple, Oracle, etc.

      What is the proof of your theory that all money will flow to one without progressive taxation except your repeated assertion of it.

      Tell me what the tax rate should be? Specifics please. The devil is in the details.

    • profile image

      kendonhank 4 years ago

      Ralph,

      You made the correct assessment that "The Austrians only contribution was the idea that markets allocate resources more efficiently than central planners."

      Than you went on to support Keynesianism, which is based on central planning.

      "There is no conflict between Keyenesianism and market capitalism. Conventional economics methods of avoiding huge bubbles and deep recessions do not conflict with market principles. They are standard insturments of monetary and fiscal policy taught in virtually every economics class in the country."

      Yes Keynseianism is taught in our economics classes, and practiced worldwide in all the western democracies. And it is this central planning and government micromanagement of the economy that has brought most of these economies to the brink of collapse.

      Deficit spending worldwide is far in excess of real GDP growth and will become much worse as unfunded entitlements for medicare and social security come due.

    • profile image

      kendonhank 4 years ago

      Ralph,

      "This inequality of income and wealth has increased to the point that many Americans are losing faith in our democratic, freey enterprise system."

      Anyone who educates themselves, works hard and saves can become wealthy in this economy, without any charity or redistribution from the government. Please explain how inequality of wealth prevents anybody from prospering in this country.

    • profile image

      RGO 4 years ago

      "Gibbs, who has made everything from bras to television sets over a long career in New Zealand and the U.K., launched Gibbs Sports Amphibians 16 years ago after building his own amphibious car and wondering if he could make it on a larger scale. Since then, the company has spent $200 million, built nine prototypes and amassed more than 300 patents."

      Funded by private money, no sales, no ready customers with government supplied cash waiting to buy. Technology development on speculation with private capital (from SAVINGS). The same way most new technologies and industries get developed. And if he's successful, he'll have to hire a bunch of people to build and sell his vehicles, and they will recieve WAGES. And with the money they EARN without government redistribution, they will be able to trade their production for the production of others. What will consumers use to buy his new vehicles? Well, they will use the money they have earned in wages or investment producing other things. That's how a free market works.

    • Ralph Deeds profile image

      Ralph Deeds 4 years ago from Birmingham, Michigan

      " Please explain how inequality of wealth prevents anybody from prospering in this country."

      As I said above, extreme inequality of wealth undermines the support of citizens in our democratic market system. Inequality of wealth and income in this country is getting to the point where it resembles a banana republic or a Middle East sheikdom. The oligarchs like the Koch brothers and people like Grover Norquist and casino billionaires like Sheldon Adelman who are opposing tax reform are reducing public spending on public schools and other programs which are designed to increase the social mobility in this country. Your opinion that anybody who works hard, etc can become wealthy is a myth.

      "Keynesianism, which is based on central planning."

      No, it is not based on central planning. It's actually compatible with and supportive of free market capitalism. It is the basis for standard and well accepted monetary and fiscal measures to avoid or ameliorate recessions and inflation.

      I suggest you revisit your introductory economics course or Nobel Prize economist Paul Samuelson's textbook "Economics."

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "Have you ever heard of wages?"

      Of course I have. Have you ever heard of profits? It's simple arithmetic.

      Step 1: Business entity(s) pays wages to workers (in aggregate).

      Step 2: Business entity receives revenue from workers in the form of sales.

      Revenue captures all of the business cost of production (including labor costs) plus a profit.

      Step 3: Workers (in aggregate) have less money than they had before the cycle took place (unless some entity, say a government spent more into the economy towards the workers).

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "You mean some central planning as in deficit spending equal of 10% of GDP for years on end"

      What part of leakages don't you understand?

    • profile image

      kendonhank 4 years ago

      Leakage is 1.5 trillion per year?

      Come on now pimeli.

      And that does not count the trillions more it would take to put the currently unemployed 25 million workers on the government payroll, which you advocated.

      Then deficit spending would be 30% of GDP. Would that still be leakage?

    • profile image

      kendonhank 4 years ago

      Ralph,

      "Your opinion that anybody who works hard, etc can become wealthy is a myth."

      I said educates themselves, works, hard and saves/invests prudently.

      That is a fact and I can take anybody who is willing to do these things and make them rich. You might give these things a try.

      The biggest barrier to wealth accumulation is taxation. As you move up the ladder and attempt to accumulate wealth, it is taxation that slows you down. Money taken in taxes could have otherwise been saved and invested. That money compounded over a 40-year career would produce would produce an enormous amount of wealth.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "Leakage is 1.5 trillion per year?"

      Leakages (income not spent):

      Trade deficit…$350 Billion

      Principal payments on household debt…$250 Billion

      Interest paid on household debt (conserv. est.) $11 Trillion @ 3.5%…$385 Billion

      Saving…who knows?…3% of GDP?…$480 Billion

      Population growth…2.2 million @ 30k/year…$66 Billion

      Corporate Profits (after tax)…$250 Billion

      Interest on National Debt…$240 Billion

      So far total = $2.0 Trillion

      "And that does not count the trillions more it would take to put the currently unemployed 25 million workers on the government payroll…"

      Putting 25 million people to work paying them $20,000/year would cost $500 Billion, $40,000/year would cost $1 Trillion, etc.…

      Keep in mind those people are already getting transfer payments in the form of unemployment, food stamps, etc.

      Those payments would increase inocomes which would in turn increase tax revenue which would in turn decrease the deficit by whatever the multiplier turned out to be.

    • profile image

      kendonhank 4 years ago

      "Putting 25 million people to work paying them $20,000/year would cost $500 Billion, $40,000/year would cost $1 Trillion, etc."

      Now I know you have never run a business. It costs an efficient business 100k to hire a 50k employee. The cost would be at least 2 trillion, and probably 2-3x that amount with the government handling it.

    • Ralph Deeds profile image

      Ralph Deeds 4 years ago from Birmingham, Michigan

      "The biggest barrier to wealth accumulation is taxation. As you move up the ladder and attempt to accumulate wealth, it is taxation that slows you down. "

      The road to disaster is failure to levy sufficient taxes to pay for the roads, bridges, schools, health care and other programs passed by our elected representatives. Wealth accumulation isn't the only or even the most important objective as you seem to believe. In case you haven't noticed inequality of income and wealth has grown to the point where the U.S. resembles a banana republic. And a lot of people are unhappy about this--those in the OWS and Tea Party movements.

    • profile image

      kendonhank 4 years ago

      "The road to disaster is failure to levy sufficient taxes to pay for the roads, bridges, schools, health care and other programs passed by our elected representatives."

      The U.S. spends plenty on schools Dave, among the highest per capita in the world. Same with health care Dave. The problem isn't that government doesn't spend or tax enough for these programs, but that it doesn't run them effectively, or shouldn't be running them at all.

      Which brings us back to your original statement.

      "The Austrians only contribution was the idea that markets allocate resources more efficiently than central planners."

      Still waiting to see how one American having a lot of wealth prevents another American from acquiring wealth.

      As for OWS and the Tea Party, they are fundamentally different things. The Tea Party advocates fiscal conservatism and limited government. OWS the best I can tell is simply envious that others have more than they do.

    • profile image

      kendonhank 4 years ago

      Pimeli,

      Can you please clarify how the following items constitute Leakages (income not spent):

      Principal payments on household debt…$250 Billion

      Interest paid on household debt (conserv. est.) $11 Trillion @ 3.5%…$385 Billion

      Saving…who knows?…3% of GDP?…$480 Billion

      Corporate Profits (after tax)…$250 Billion

      All of these dollars remain in circulation except for savings, which provide capital/reserves for investment/spending. None of this money leaves the economy, and all of it is available for spending, some of it in the hands of banks and other financial institutions, the rest in the hands of consumers/investors.

    • profile image

      kendonhank 4 years ago

      "Those payments would increase inocomes which would in turn increase tax revenue which would in turn decrease the deficit by whatever the multiplier turned out to be."

      I thought that in the MMT world deficit spending was good and that all economic growth springs from it. So why would we want to decrease the deficit? Also, what is this multiplier? Are you saying that taking money from productive people and giving it to non-productive people multiplies wealth production? Or are you saying that a dollar in deficit spending creates more than a dollar in wealth and/or tax revenues?

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "Can you please clarify how the following items constitute Leakages (income not spent):"

      • Principal payments on household debt…$250 Billion

      When a loan is made, funds are created from thin air. When it's paid back…poof! Income that would have been spent on something is cancelled out. The money supply contracts.

      • Interest paid on household debt (conserv. est.) $11 Trillion @ 3.5%…$385 Billion

      When a loan is created the interest is not created. Interest payments cancels Income plus the funds to pay the interest don't exist unless the government creates them through net spending.

      The $11T number I used is only home mortgage debt…I didn't bother to include the additional $2T in short-term debt including credit cards.

      A 30-year mortgage @ 3.5% today will require 61% more than the loan amount to pay the interest.

      • Corporate Profits (after tax)…$250 Billion

      Corporate profits accumulate as cash or liquidity. That can't happen if all profit is re-invested now can it? Businesses are stting onsome $2T in cash currently.

      "I thought that in the MMT world deficit spending was good and that all economic growth springs from it."

      You don't know much about MMT and what you think you know is wrong.

      Deficits (or surpluses) are an ex-post accounting record of economic performance of the previous year. Governments can't choose to not run deficits. The MMT position is that deficits are neither GOOD nor BAD. They are an ex-post snapshot of economic performance.

      If the economy collapses as it did in 2007-2008, Incomes fall and as a result tax revenues fall. This creates a larger end-of year deficit.

      If the budget authority tries to cut spending to balance the budget (there's a good reason governments don't do this when the economy is in recession).

      Cutting spending to reduce the deficit will result in less spending, leading to lower incomes (spending = income, always. It's an identity), leading to lower tax revenues and the opposite happens, the deficit still increases. Rinse and repeat and the economy goes into a deflationary spiral with massive unemployment. Watch the dynamic in real time with the Eurozone. It's been going on for two or three years now.

      The only possible way to reduce the deficit is to grow the economy, then deficits will trend lower. As long as we maintain large trade deficits we will have to offset them with government deficits.

      Germany is a net exporter, so they run a primary budget surplus. Germany is draining their export partners of their funds. Germany's surplus comes from other countries spending.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      kendonhank said:

      "All of these dollars remain in circulation except for savings, which provide capital/reserves for investment/spending. None of this money leaves the economy, and all of it is available for spending,"

      Savings by definition is income not spent. It is a residual. In reality, the default state for money is saving, as spending only happens when a transaction takes place.

      When we say saving is a "leakage", we mean it is a demand leakage, rather than a trade deficit where the dollars actually "leak out" of the economy.

      The result is the same.

      If people accumulate wealth, they also accumulate financial wealth. One can't continuously accumulate wealth and also spend the same funds. It's all about the NET FLOWS.

      This is true for saving, profit and interest. They all result in growth in financial wealth among a relatively small cohort. If funds are accumulated by a small group, and that accumulation is constantly growing, the remaining larger group must share the remaining funds, which, based on closed-system logic, is constantly shrinking.

      A continuously diminishing level of funds distributed among a large group that is growing in size (population growth) results in less buying power for the group as a whole.

      How can businesses grow if they are selling into a group with a diminishing capacity to consume? How can cuts in government spending NOT make this dynamic worse?

    • profile image

      kendonhank 4 years ago

      "How can businesses grow if they are selling into a group with a diminishing capacity to consume? How can cuts in government spending NOT make this dynamic worse?"

      Government does not have to spend directly on goods and services directly to expand the money supply and accommodate new production and leakage. It can be done by relaxing credit, purchasing bonds, etc. Direct government spending on goods, services and hiring is on average less productive than equivalent free market spending.

    • profile image

      kendonhank 4 years ago

      "When we say saving is a "leakage", we mean it is a demand leakage, rather than a trade deficit where the dollars actually "leak out" of the economy."

      When I want to purchase a new car or home, I use savings. It is still part of the economy, and can still be used to purchase goods and services. So how is this a leakage and why does the government need to replace this money?

    • profile image

      kendonhank 4 years ago

      "Can you please clarify how the following items constitute Leakages (income not spent):"

      • Principal payments on household debt…$250 Billion

      "When a loan is made, funds are created from thin air. When it's paid back…poof! Income that would have been spent on something is cancelled out. The money supply contracts."

      OK, but as some loans are being paid off, others are being created. Assuming these occur at roughly the same rate, then there is no effect on the money supply, so there is no leakage, and no need for the government to replace the money.

      "Corporate profits accumulate as cash or liquidity. That can't happen if all profit is re-invested now can it? Businesses are sitting on some $2T in cash currently."

      They are sitting on it waiting to invest it. So how is it a leakage? Also, this amount does not grow every year. It expands and contracts depending on how bright the investment climate is. I doubt that the total amount of retained profits grows 250 billion per year every year. As an aside, not all corporate profits are retained. In most corporations, they flow through to the proprietor as ordinary income.

    • profile image

      kendonhank 4 years ago

      Step 1: Business entity(s) pays wages to workers (in aggregate).

      Step 2: Business entity receives revenue from workers in the form of sales.

      Revenue captures all of the business cost of production (including labor costs) plus a profit.

      Step 3: Workers (in aggregate) have less money than they had before the cycle took place (unless some entity, say a government spent more into the economy towards the workers).

      Huh?

      If workers earn 90% of the total value of production and owners make 10%, then workers will be able to purchase 90% of the total production and owners will be able to purchase 10%. Of course the government needs to expand the money supply to accommodate the new production, but they certainly do not need to "spend it towards the workers".

      What are you saying, that every time a worker works an hour, his net worth declines by an amount equal to the owner's profit? And that the only way he can get his money back is if the government takes the profit from the owner (in taxes) and gives it back to the worker in some government benefit? Seriously?

      Your fixed pie universe gives me a headache. Workers and owners acquire new wealth in accordance with their contribution to production. Over time, the owners will save more of what they earn and accumulate more wealth because they are more productive, but the owner making a profit does diminish the purchasing power of the worker's wage. By your logic, without government intervention, workers would hemorrhage savings every hour they worked and be wealthier if they did no work at all. And government would have to take 100% of profit and return it to the worker just for the worker to break even.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "Your fixed pie universe gives me a headache."

      Maybe so, but that is how closed systems in this Universe are arranged.

      All profits must be spent into the economy by the government. There is no other source.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "OK, but as some loans are being paid off, others are being created. Assuming these occur at roughly the same rate, then there is no effect on the money supply, so there is no leakage, and no need for the government to replace the money."

      The overall leakage is interest.

      When a consumer loan is made, it is spent immediately, goosing demand. From that day forward every part of the payment is a leakage, it cancels income.

      If new loans are taken out to pay off old ones only the principal is paid off (obviously), the accrued liabilities remain as do th eprevious interest paid. as debt is expanded this way the liabilities expand exponentially relative to incomes. UN.SUS.TAINABLE.

      The system is closed. The funds must come from the government to monetize any growth that has taken place (profits and saving), otherwise the gains will collapse.

      ALL interest including household debt and business debt is borne by the consumer, either directly or indirectly through recapture via profits.

      How could it be any other way?

    • profile image

      kendonhank 4 years ago

      "All profits must be spent into the economy by the government. There is no other source."

      But the spending does not have to be direct government spending on goods and services, nor redistribution of wealth from producers to non producers. You prefer it be done be this way, but money can also be injected through credit, purchasing bonds, etc. Money can also be injected by private lending and contracts. Your argument that the government must spend to provide an adequate money supply is really just a straw man for achieving a certain kind of spending, which is redistribution of wealth (welfare).

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "money can also be injected through credit, purchasing bonds, etc."

      "Money can also be injected by private lending and contracts."

      This has already been discussed ad nauseum. Credit (debt) cannot expand an economy mathematically. It can only create bubbles. As with all bubbles, they must burst, contracting the economy. What happens during a contraction is that more wealth is shifted towards the wealthiest. It is a game of musical chairs with only a few chairs available when needed. Everyone else loses.

      What you call welfare or re-distribution is mandatory for a sustainable functioning of a capitalist economy.

      If the funds in the hands of the worker class are declining, how far can the bubble go? It isn't like we haven't witnessed the result.

      There is no problem with some people being higher-paid or wealthier than others. The problem occurs when the distribution of wealth is such that when the economy expands everyone doesn't rise proportionately. A rising tide should float all boats.

      With rising income inequality the level of funds in the consumer (wage-earner) cohort declines. As that level declines average income declines within the cohort. Thus, the market the companies must sell into have less money after every cycle forcing the companies to lower production and layoff workers. This continues the downward spiral to oblivion.

      The reason it hasn't fully happened yet is that the government is still maintaining budgets leading to deficits and the level of progressive taxation is barely adequate.

      For capitalism to succeed, progressive taxation is a feature, not a bug. It is necessary component. It is not welfare or taking the hard-earned earnings of the Producer class.

      Without it, capitalism will fail mathematically. Without adequate expansion in the real money supply, not credit (debt) profits become mathematically unsutainable.

      You can pay me now or you can pay me later.

      Next I expect you to claim that the guy that makes a $billion/year works 1000 times harder than the guy that makes a $million.

    • profile image

      kendonhank 4 years ago

      "Next I expect you to claim that the guy that makes a $billion/year works 1000 times harder than the guy that makes a $million."

      Working hard and working productively are two different things. On average the guy who earns a billion is a thousand times more productive than they guy who earns a million. Money naturally flows to the most productive and government attempts to redistribute production simply reduce production overall.

      One day you will understand production, and then you will understand economics. Money and spending are just a way to exchange production. Of course you need enough money to facilitate fine-grain exchange of production and price stability. Beyond that, your obsession with which piles the money is stored in and how it flows from one pile to the next is just an academic exercise.

    • profile image

      kendonhank 4 years ago

      "With rising income inequality the level of funds in the consumer (wage-earner) cohort declines. As that level declines average income declines within the cohort. Thus, the market the companies must sell into have less money after every cycle forcing the companies to lower production and layoff workers. This continues the downward spiral to oblivion."

      More straw man reasoning. I have already agreed that government has to inject enough money into the economy overall to keep pace with production and keep prices stable. That does not mean the government has to take money from producers and redistribute it to non-producers through welfare payments and direct spending on goods and services. You do not become poorer because I become richer. You become richer by the amount you contribute to production. If I pay you 90 cents to build a widget for me and I sell it for a dollar, you get 90% of the production. Your wealth increases by 90 cents. T0 make that wealth tradeable in dollars with price stability, the government must inject an additional dollar into the economy.

      Wealth production is not a fixed pie, nor is the money supply.

      BTW, what amount of progressive taxation do you believe is necessary to prevent your imagined "downward spiral to oblivion". Right now taxation as a percentage of GDP is 25%.

    • Ralph Deeds profile image

      Ralph Deeds 4 years ago from Birmingham, Michigan

      If your ideas about welfare and other social programs were adopted our country would end up like Bangladesh, and we'd all be tripping over beggars on the sidewalks.

    • profile image

      kendonhank 4 years ago

      I haven't expressed my ideas about welfare and social programs, except to say that they reduce productivity, wealth creation, and the standard of living for all (including the poor) in the long run.

      The redistribution and government central planning you advocate have already been tried all over the world, most notably in Communist countries. My wife is from the old Communist China. She can tell you all about the squalor and corruption of government provided employment, retirement, health care, and housing in the worker's paradise.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      kendonhank said…

      "That does not mean the government has to take money from producers and redistribute it to non-producers through welfare payments and direct spending on goods and services. "

      No single business can profit from sales limited to it's own employees as customers.

      It follows that all businesses combined can not profit (in the aggregate) from sales to employees as customers.

      I've just defined the entire universe of available customers, and profit is not possible yet.

      Where will the sales come from? Government purchases which add to the (incomes) spending potential of the wage-earners and spending from savings.

      Can you feel the noose tightening?

      "If I pay you 90 cents to build a widget for me and I sell it for a dollar, you get 90% of the production. Your wealth increases by 90 cents."

      My wealth increases by $0.90, someone else's wealth decreases by $1.00. The net transaction in aggregate is -$0.10. You just made my point for me.

      "BTW, what amount of progressive taxation do you believe is necessary to prevent your imagined "downward spiral to oblivion""

      I'm not an econometrician, bit given time I could figure it out. Let's just say in general terms that taxes need to be high enough to fill the output gap and must be targeted towards aggregate demand.

      Workers earning less than say, $250,000/year should be paying nearly zero income taxes. We should be paying zero FICA taxes. This kind of taxation robs from aggregate demand and makes the need for government purchases greater.

      Taxes should only be on excess savings like capital gains and rentier income (financial investments). This class of income produces nothing towards the needs of society. It is parasitic upon the sytem of capitalism.

    • profile image

      kendonhank 4 years ago

      "Workers earning less than say, $250,000/year should be paying nearly zero income taxes. We should be paying zero FICA taxes."

      So if I invested one million in a startup and made a one million dollar profit (capital gain), my tax would be what?

      If you taxed those at above 250k at 100% of income, you could not come close to funding the current government. Unless you taxed wealth rather than income. That would work for a short time, say about five years, after which you would have exhausted and redistributed all of the wealth of the top 10% of the population. By then of course, the productive people would have either fled the country, stopped working, or moved their businesses underground.

      Please explain where you would get the 6T per year you would need to fund the government.

    • JohnfrmCleveland profile image
      Author

      John 4 years ago from Cleveland, OH

      Ken said: “Working hard and working productively are two different things. On average the guy who earns a billion is a thousand times more productive than they guy who earns a million. Money naturally flows to the most productive and government attempts to redistribute production simply reduce production overall.”

      Here is where it becomes impossible to take Austrian reasoning seriously. Do you not see the silliness of this reasoning, even when we are talking about somebody “earning” a billion dollars/year?

      Assuming a 40-hour work week, someone making $1 billion/year is “earning” $500,000 every hour.

      Someone making $10 million/year is “earning” $5000 every hour.

      Any reasonable person should see that no one person actually produces, on their own, that much. You only make that much money by appropriating part of the production of other workers. That also means that whatever portion of that $1 billion *not* produced directly by the hand of that person (i.e. the vast majority of it) is production that the workers are not getting paid for. Every employee produces more than he gets back in pay, that's just how companies work. And how much of his production that employee immediately cedes to ownership changes with circumstance. Lately, workers have been ceding quite a bit of it, even though their productivity is higher than ever.

      The contention that people are compensated based solely on their productivity is incredibly simplistic, so naïve, that it borders on stupid. And that is the mantra that you continually fall back on to “prove” your whole economic theory. In reality, the economy is far more complicated than that. You have to take into consideration labor's leverage, ownership's power, politics, greed, luck, timing, and any number of other factors – productivity is just one factor. But Austrians automatically look at a man with $1 billion in his pocket, declare that he has “produced” that much, and reverse-engineer their thinking to try make that overly-simplistic reasoning work.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "If you taxed those at above 250k at 100% of income, you could not come close to funding the current government."

      Taxes don't fund the government. The government doesn't need funding. The government provides the capital, for free mostly. Progressive taxation makes the economy go, it doesn't "fund" government.

      You haven't finished addressing your previous arguments that I demolished, please quit introducing new arguments without bringing old ones to conclusion.

      Apparently you've just given up on on the laws of arithmetic because they don't suit your arguments.

    • profile image

      kendonhank 4 years ago

      "No single business can profit from sales limited to it's own employees as customers."

      Of course it can, because the owner is also a customer. I hire you to make 10 widgets for me. I pay you 9/10 of a widget for each widget you produce. When you are done, your share is nine widgets, my profit is one widget.

      Nothing changes if I pay you in dollars. If I pay you ninety cents per widget to make ten widgets, then your take will be $ 9.00, enough to buy nine widgets back from me. Again I keep the tenth widget as profit. Profit and wages are the same thing, one a return on labor, the other a return on capital.

      "My wealth increases by $0.90, someone else's wealth decreases by $1.00. The net transaction in aggregate is -$0.10. You just made my point for me."

      Nobody's wealth decreased. The guy who paid a dollar for the widget now has a widget worth a dollar. You have ninety cents for the labor you provided to make the widget, and I have ten cents in profit. So total wealth has increased from one dollar to one dollar + one widget, or two dollars assuming that there enough new dollars to keep up with the new widgets.

      There is no descending spiral or need for the government to take profit from owners and redistribute it to the employees.

      You have confused yourself with your own money piles.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "By then of course, THE PRODUCTIVE PEOPLE WOULD HAVE EITHER FLED THE COUNTRY, STOPPED WORKING, or moved their businesses underground."

      This is funny in so many ways. If all of the "productive" people left the country we would lose about 140 million of our population.

      If all of the people you consider "producers" left the country we might lose a few thousand. Please God make it happen. Send some Japanese entrepreneurs over here so we can at least see what competence looks like while we're getting screwed.

      The vacuum would be filled so fast by more competent people it would likely cause tornados.

      Also, in case you hadn't noticed, once they left they would have to rely on sales from the folks they left behind :-). We buy most of the stuff. Here's the thing…there's smart people in Europe too. They aren't about to just roll over and let someone like Carly Fiorina (superstar) take their markets.

    • profile image

      Kendonhank 4 years ago

      How do account for depreciation of existing production. As new goods and services are consumed and used up, the money supply increases relative to available production. Shouldn't that number (quite large I would imagine) offset the items you introduced as leakage.

    • profile image

      kendonhank 4 years ago

      "Assuming a 40-hour work week, someone making $1 billion/year is “earning” $500,000 every hour. Any reasonable person should see that no one person actually produces, on their own, that much."

      It doesn't matter how many hours you work. If you own the means of production and it is sufficiently productive, you can earn an unlimited amount of money per hour. That is why capital investment in new technology is the engine for all wealth creation.

    • profile image

      kendonhank 4 years ago

      "Taxes don't fund the government. The government doesn't need funding. The government provides the capital, for free mostly. Progressive taxation makes the economy go, it doesn't "fund" government."

      Private sector production funds the government, whether taken directly in taxes, or indirectly through printing/spending. If there was no production, there would be no government, because the dollars would be worthless. Conversely, if there was no government, there would still be production. Progressive taxation doesn't make anything go. It simply redistributes wealth from the productive to the nonproductive to the detriment of overall production.

    • profile image

      kendonhank 4 years ago

      "If all of the people you consider "producers" left the country we might lose a few thousand. Please God make it happen. Send some Japanese entrepreneurs over here so we can at least see what competence looks like while we're getting screwed."

      From 1995-2010, Japan's annual GDP growth was zero. The U.S. is the world's technology innovator and has been for the past 100 years. That is because we have the freest economy in the world."

      "Here's the thing…there's smart people in Europe too. They aren't about to just roll over and let someone like Carly Fiorina (superstar) take their markets."

      Europe? Other than Germany, the only thing Europe produces is government. In France, government is 50% of GDP. U.S. technology innovation far outstrips Europe in every field. I have been in the business 30 years and I would have to do some thinking to come up with a list of Euro firsts. Please!

      Carly Fiorina is an affirmative action castoff from Lucent. She is an empty suit. Please don't mention her in the same breath as technology innovators.

    • JohnfrmCleveland profile image
      Author

      John 4 years ago from Cleveland, OH

      pj: "My wealth increases by $0.90, someone else's wealth decreases by $1.00. The net transaction in aggregate is -$0.10. You just made my point for me."

      Ken: “Nobody's wealth decreased. The guy who paid a dollar for the widget now has a widget worth a dollar. You have ninety cents for the labor you provided to make the widget, and I have ten cents in profit. So total wealth has increased from one dollar to one dollar + one widget, or two dollars assuming that there enough new dollars to keep up with the new widgets.

      There is no descending spiral or need for the government to take profit from owners and redistribute it to the employees.

      You have confused yourself with your own money piles.”

      So it is your contention that total wealth doubles every time a dollar cycles?

      You are confusing yourself with your own simplicity.

      You obviously need to make some real-world adjustments to your thinking. First of all, we do not live in a barter society. Dollars matter. You can't pay your employees in widgets.

      Second – wealth is a harder thing to define than you think. It is constantly eroding. One minute you have a sandwich worth two dollars, and the next minute you don't. A pile of widgets might look like “profit” to you, but it's really just inventory, and it's only worth what people are willing to pay for it (in dollars).

      Third – people want to save money - especially people with more dollars than they need – so you must account for savings. And savings happens almost exclusively in dollars, because few other things hold their value. In your example, you are going to save some of your profit, and in a universe with a fixed number of dollars, that means there will be fewer dollars left over to produce more inventory, and fewer dollars left over with which to buy that inventory. So, yes, as long as people net save dollars, more dollars will have to be created, or there *will* be a deflationary cycle.

      Fourth – production and consumption go hand in hand. Talking about one without considering the other leads to incorrect conclusions. Increasing production only makes sense if that production is going to be consumed. Creating jobs is not as simple as everybody unemployed worker going out and breaking a sweat – there has to be a market for whatever is going to be produced, and those markets are not created by simply pushing more production onto the shelves.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "Europe? Other than Germany, the only thing Europe produces is government. In France, government is 50% of GDP. U.S. technology innovation far outstrips Europe in every field. I have been in the business 30 years and I would have to do some thinking to come up with a list of Euro firsts. Please!"

      Are we starving? Give me a break with this production crap. Th epoint of production is to give people something to do and make a living.

      The stuff we need is produced by less than half the workforce.

      Everything else is fluff. And if wage-earners don't have the money to buy it the producers of that fluff will go out of business. I'll bet you produce fluff.

      BTW, I was in business too for many years…General Contractor. I produced stuff that people need. Proud of it.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "How do account for depreciation of existing production. As new goods and services are consumed and used up, the money supply increases relative to available production. Shouldn't that number (quite large I would imagine) offset the items you introduced as leakage."

      You're still failing math. It's a closed system. Leakages are nominal dollars. There is no accounting transaction in the economy that can produce new net dollars. This goes for depreciation, write-offs, profits, anything.

      The number is fixed until the government changes it. Everyting else on a balance sheet is contingent on that number, including real wealth.

    • profile image

      kendonhank 4 years ago

      "The point of production is to give people something to do and make a living."

      Give people something to do? Again you reveal your central planner make-work mindset. The point of production is to increase everybody's standard of living. That is achieved by increasing productivity, which enables you to produce more things for the same amount labor and raw materials. Productivity in turn, is driven by new technology, which is driven by innovation and capital investment in that innovation. Giving people something to do is a byproduct of technology, productivity and new industry growth.

      You say you were a general contractor, so it is true that you produced something people wanted. Your business, however, is a largely static business from a productivity standpoint. Houses are built more or less the same way today as they were 40 years ago. Contrast that with the technology industry, where productivity doubles every couple of years. That is the source of all new wealth creation for the economy. It is information technology and intellectual property creation that drives productivity increases in all areas of the economy.

      Your static view of production, productivity growth, labor and wealth creation likely has its roots in your background as a general contractor.

      "The stuff we need is produced by less than half the workforce. Everything else is fluff. And if wage-earners don't have the money to buy it the producers of that fluff will go out of business."

      The stuff we need? I guess the stuff we really need, like modest shelter, basic clothing, food, and fuel, is produced by far less than half the economy, perhaps 2%. It is the stuff we want, the stuff that increases our standard of living, that must be produced, and that amount of stuff is infinite, bounded only by development of new technology?

      As for fluff, it is true that most of what is produced is fluff. The foundation and subsidzer for that fluff though is new productivity technology, which again is driven by capital investment provided by the rich people and investors you detest. As for what wage earners can afford to buy, that is driven by their contribution to production moderated by supply and demand, not by welfare payments derived by siphoning the profit of productive people. Taking from productive people and giving to non-productive people gives you a short-term boost in conspicuous production (fluff) at the expense of long-term capital investment and productivity growth.

      You would understand that if you had been in a high-skill, high-wage industry driven by innovation, investment, and productivity growth.

    • profile image

      kendonhank 4 years ago

      Pimeli,

      You did not answer my question about consumption as a leakage. You say that the government must add new dollars to the economy to account for new production and leakages like savings and paying down debt. This is necessary to prevent the dollars in circulation from lagging behind the available goods and services. Deflation. Fine.

      But what about the other side of the equation. If I keep the number of dollars constant but decrease the available goods and services (through consumption, deterioration and obsolesence), then I have a leakage in goods and services. The ratio of dollars to goods and services increases and I have inflation.

      So again, wouldn't leakage of goods and services offset leakage of dollars.

      Let's say my economy is two apples and two dollars. Each apple is worth a dollar. Now I save a dollar. But I also eat an apple. So I have a leakage of one dollar to savings offset by the loss of one dollar in goods and services. The ratio of circulating dollars to apples remains the same, so why do I need to print new dollars to compensate for the leakage to savings.

    • profile image

      kendonhank 4 years ago

      "Creating jobs is not as simple as everybody unemployed worker going out and breaking a sweat – there has to be a market for whatever is going to be produced, and those markets are not created by simply pushing more production onto the shelves."

      As long as I am producing the things you want and you are producing the things I want, then our economy will continue to grow, whether the exchange is conducted by barter or paper. We will produce and exchange (spend). Our economy slows down when you stop producing stuff. It slows further when the government starts taking my stuff and giving it to you to buy my stuff.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "As long as I am producing the things you want and you are producing the things I want, then our economy will continue to grow, whether the exchange is conducted by barter or paper"

      This is nonsense. Under a barter system commerce would slow to a crawl.

      There's a reason humans invented money.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "If I keep the number of dollars constant but decrease the available goods and services "

      If that happens unemployment will skyrocket, since fewer workers will be needed to produce fewer goods and services.

      As I already pointed out, we don't need lots of production to survive (food, shelter, transportation, energy). The rest is fluff that puts people to work, and if businesses are to profit it will have to be added from somewhere. Guess where?

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "Creating jobs is not as simple as everybody unemployed worker going out and breaking a sweat – there has to be a market for whatever is going to be produced, and those markets are not created by simply pushing more production onto the shelves."

      True. As has already been proved, the production of goods by all business entities combined will not generate enough income among the wage-earners those entities to sell into to even cover their costs of production.

      In order for businesses to succeed, there must be either savings pre-existing in the economy or the government must employ a significant subset of the wage-earners in order to add the necessary funds to the wage-earner cohort.

      SIMPLE.ARITHMETIC

    • profile image

      kendonhank 4 years ago

      "Under a barter system commerce would slow to a crawl."

      Which has nothing to do with my point, which was that taking profit from a producer, who is also a consumer and investor, and giving it to another consumer, creates ZERO wealth. Wealth grows when Bob and Bill produce, not when you take money from Bob and give it to Bill to buy Bob's stuff back.

    • profile image

      kendonhank 4 years ago

      " As has already been proved, the production of goods by all business entities combined will not generate enough income among the wage-earners those entities to sell into to even cover their costs of production.'

      You didn't prove anything. The business entity is no different than the wage earner. The wage earner trades labor for a share of production. The business owner provides the means of production for a share of production. The business owner is also a consumer.

      Again, the owner hires a worker to produce 10 widgets and pays the worker 90 cents to produce each widget, which sell for a dollar each. The worker receives nine dollars for producing the widgets. With the nine dollars, the workers purchases nine widgets. The business owner gets the cost of production ($9) back plus one widget as profit.

      Now if you want to ask how the owner will get an extra dollar for the the widget he kept as profit, that's a different question, but stop confusing the two topics. None of this requires government intervention to redistribute profit from the business owner to the worker.

    • profile image

      kendonhank 4 years ago

      "In order for businesses to succeed, there must be either savings pre-existing in the economy or the government must employ a significant subset of the wage-earners in order to add the necessary funds to the wage-earner cohort."

      The government needs to add enough money to the economy to facilitate exchange of new production at existing prices. But it does not need to give that money to wage earners or employ wage earners to add money to the economy. That is just the way you prefer it to be done, because your objective is redistribution for redistribution's sake, not redistribution to keep the economy running.

      Again, your assumption that workers cannot collectively afford to buy what they produce (without a government subsidy) is based on your exclusion of owners as workers and consumers. Once they are included, profits can accrue, everything that is produced can be consumed, and both workers/owners will receive their share of production according to the laws of supply and demand.

    • profile image

      kendonhank 4 years ago

      You still haven't addressed my point about leakage.

      You assume all leakage is in one direction (removing dollars from circulation) and use that to justify more printing of money.

      But leakage goes both ways. If I consume a product or service (eat an apple), dollars are effectively returned to the economy. Not directly, but the ratio of dollars to available goods increases. New dollars were created to purchase that apple. Now the apple is gone, so the dollars are surplus. Unless you remove those dollars from the economy, or apply them against some other leakage, the same dollars will be chasing fewer goods and you will have inflation.

      So, how do you account for consumption, obsolesence, damage and depreciation when calculating NET leakage.

    • profile image

      kendonhank 4 years ago

      'As I already pointed out, we don't need lots of production to survive (food, shelter, transportation, energy). The rest is fluff that puts people to work, and if businesses are to profit it will have to be added from somewhere. Guess where?'

      True, you could live in a cave, hunt buffalo, walk, make a fire, and wear animal skins.

      The rest is fluff? You mean like automobiles, planes, phones, synthetic fabrics, pharmaceuticals, medical instruments, computers, and industrial automation?

      These things weren't created to put people to work. They were created to make profit, the side benefit of which is employment and increased standard of living for all. Government contributes very little to this process other than safety and basic infrastructure.

      Wealth is created as soon as something useful is created. Now, if you want to exchange that wealth for U.S. dollars at a constant price, then you will need government to maintain a constant ratio of circulating dollars to wealth. But the government does not need to hire anybody or redistribute profit to accomplish that.

      Again, what you want is redistribution for redistribution.

    • Ralph Deeds profile image

      Ralph Deeds 4 years ago from Birmingham, Michigan

      We're getting too much redistribution already--from the middle class and poor to the plutocrats. Recommend you see the "Queen of Versailles," a documentary about one of Romney's big supporters--David Siegel who is building a $100 million, 92,000 square foot house in Florida. Ann Romney's two Cadillacs are peanuts compared to Jackie Siegel's house and collection.

      Allocating scarce, limited economic resources to tasteless displays of luxury is hard to justify.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "You still haven't addressed my point about leakage."

      I've addressed it repeatedly. It doesn't seem possible that you could have missed it, which leads me to believe you are lazy and prefer I repeat the same things over and over again so you don't have to go back through the thread and find them. And so Iwill for the last time.

      "So, how do you account for consumption, obsolesence, damage and depreciation when calculating NET leakage."

      Leakages are accounted for in nominal dollars. None of these items represent accounting of nominal dollar assets…cash, cash equivalents and liabilities.

      Those are the only things on the list. All other balance sheet entries are irrelevant to the idea of leakages. If you conflate them, you will become hopelessly lost.

      "But leakage goes both ways."

      When dollars leave the economy to trade, they don't come back, at least they haven't yet. Until they do they will be part of the total level of leakages.

      When principal is paid on outstanding debt, that money disappears into the ether…what was an injection to aggregate demand becomes a leakage.

      When interest accrues on outstanding debt, it creates liabilities in the economy that must be satisfied. Not a big problem until the ratio of debt to income reaches a level where it affects a large subset of the population.

      Then there is normal saving, which is income not spent. If it is invested in say stocks, it is no longer savings, the company invests the money in the means of production (labor,supplies, plant and equipment), thus it is spent.

      Savings represents accumulated wealth that is not spent on consumption or investment.

      Investment in financial instrumenst is not considered "investment". No wages are paid, nor are any of the other things inherent in real investment present.

      Since most companies must make a profit, it follows from simple arithmetic that commerce removes funds from the wage-earner cohort. The only way the opposite could happen is if companies lost money in the aggregate. I am not calling this a leakage, just pointing out that in order for commerce (capitalism) to work, the Government must hire some of the workforce and pay transfer payments to others in order for there to be enough funds for the companies to sell their products. Again, in the aggregate.

      Please do not ask me anything else about this unless it is a request for a clarification or if you disagree with one of the points that I made and would like to challenge it. Do not claim that I haven't responded because clearly I have and I could point you to the other parts of the thread where I wrote the same things, but I won't because you don't deserve any more of my time.

    • profile image

      kendonhank 4 years ago

      "So, how do you account for consumption, obsolesence, damage and depreciation when calculating NET leakage."

      Leakages are accounted for in nominal dollars. None of these items represent accounting of nominal dollar assets…cash, cash equivalents and liabilities."

      The point of the leakage discussion was to justify the addition of new dollars to the system to prevent deflation. The items I listed, though they may not fit into your accounting model, nonetheless affect the ratio of circulating dollars to available goods and services. When goods are consumed, the ratio of circulating dollars to available goods increases. That inflationary force would seem to offset the deflationary forces caused by the leakage items you mentioned. You don't want to consider their affect because they don't have a nominal dollar value on your balance sheet, but that does not mean the effect isn't there.

      Again, if my economy is 100 apples and 100 dollars, and I save fifty dollars, but eat 50 apples, the ratio of dollars to apples stays the same, so the money leaked to savings is offset by the goods consumed.

      Save the accounting mumbo jumbo and tell me the flaw in my reasoning if you can.

    • profile image

      kendonhank 4 years ago

      "Since most companies must make a profit, it follows from simple arithmetic that commerce removes funds from the wage-earner cohort. The only way the opposite could happen is if companies lost money in the aggregate. I am not calling this a leakage, just pointing out that in order for commerce (capitalism) to work, the Government must hire some of the workforce and pay transfer payments to others in order for there to be enough funds for the companies to sell their products. Again, in the aggregate."

      Business owners contribute to production just like wage earners. A profit is no different than a wage. A wage is the worker's contribution to production, a profit is the business owner's contribution to production. Business owners are also consumers of the goods they and others produce, so their profit does not leave the system. So in the aggregate, business owners and wage owners consumer all production.

      You are conflating this with a different topic, which is where the dollars come from to buy the production, and how the business owners will monetize their profit. Of course new dollars need to be added to the system to account for the new production, but those dollars can be added without government make work and welfare payments.

      By your reasoning, government would have to redistribute 100% of profit back to the workers in order for them to purchase total production and avoid your black hole of wealth concentration.

      If you want to argue closed systems, then keep them closed. Business owners are part of production and consumption. Wages and profit are part of production. The idea that a worker loses money every time he makes something unless the government takes the business owner's profit and gives it back to the worker is sophistry.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      Ken said: "The point of the leakage discussion was to justify the addition of new dollars to the system to prevent deflation. The items I listed, though they may not fit into your accounting model, nonetheless affect the ratio of circulating dollars to available goods and services. When goods are consumed, the ratio of circulating dollars to available goods increases. That inflationary force would seem to offset the deflationary forces caused by the leakage items you mentioned. You don't want to consider their affect because they don't have a nominal dollar value on your balance sheet, but that does not mean the effect isn't there."

      Ken - your reasoning is truly too simplistic. I know I keep saying that, but it's true. You put this little math problem in the form of ratios of apples to dollars, but you have removed it from any sort of real economic context.

      In short, consumption and leakage are two completely different things. Consuming goods does not remove goods from the cycle, and it certainly does not lower the amount of production. Goods are *supposed* to be consumed. Your reasoning is exactly the opposite of what it should be - unsold inventory sitting on the shelf is a problem, but consumption of goods is, well.. good. So you cannot simply slap a ratio on some numbers without considering the context. You have consumed 50 apples - big deal! More apples are being produced, and dollars are changing hands. We do not live in a world of fixed supply, so you need to adjust the ol' supply v. demand thinking a bit.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      Ken said: "Business owners contribute to production just like wage earners. A profit is no different than a wage. A wage is the worker's contribution to production, a profit is the business owner's contribution to production. Business owners are also consumers of the goods they and others produce, so their profit does not leave the system. So in the aggregate, business owners and wage owners consumer all production."

      No, they don't. Without an influx of new dollars, it's a mathematical impossibility, assuming there is some net saving. pjmeli has been trying to explain this for some number of posts.

      Say you make a million dollars. You spend half on consumables, and you "invest" the rest. It is that second $500K that you need to follow. Most of that will be "spent" on stocks, or invested in production, just like you think, and the dollars will stay in play. But a portion of that will end up, directly or indirectly, in t-bills, bank vaults, or mattresses. That is "leakage." Those are the dollars that are not being used to purchase goods or services. You yourself might not buy any t-bills, stuff cash in your mattress, or hold cash in a vault, but plenty of people do, including some of the people that you purchased stock from, companies you invested in, and the banks that are skimming a bit from some of these transactions. It obviously happens, and the proof is that people, companies, governments, and banks have traded their dollars for t-bills. And the fact that some amount of currency is sitting in bank vaults and mattresses should not be up for debate.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "A profit is no different than a wage. A wage is the worker's contribution to production…"

      Except that profit is a net extraction from the wage-earners sub-sector in the aggregate. This should be obvious from the arithmetic. Look at it this way…

      Assume no funds in the economy. Zero. Businesses invest x into the economy distributed between wages, supplies, plant and equioment, all of which are spending.

      There are now x dollars in the economy available for spending on the products businesses have created. Now, in order to make a profit, the businesses will have to realize x(1 + p) dollars in sales from the sub-sector of the economy that holds only x dollars. We are short gross profit and no one has tried to save…every penny was spent. This has to be trivially obvious to you.

      Besides that, For this scenario I have already proven that a business cannot succeed (make a profit) selling to only it's own employees. Trivially obvious also.

      And I'm not even including deductions from x that wage-earners must pay in taxes.

      IT IS IMPOSSIBLE FOR BUSINESSES IN THE AGGREGATE TO SUCCEED WITHOUT NET GOVERNMENT SPENDING, by simple arithmetic.

      For a time, expansion of private debt can provide the balances necessary to fuel this dynamic. The assets from the debt are gradually accumulated by the business entities, and IF THEY DON"T SPEND IT ALL, INCLUDING THEIR PROFITS BACK INTO THE ECONOMY, THE LIABILITIES WILL BE LEFT HELD BY THE WAGE EARNERS WITH NO MEANS TO ACQUIRE THE ASSETS NECCESSARY TO SATISFY THE DEBT.

      Credit thus fails the sustainability test.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "The idea that a worker loses money every time he makes something unless the government takes the business owner's profit and gives it back to the worker is sophistry."

      The government takes some of it through progressive taxation…only from the winners…businesses don't pay taxes if they don't make money.

      I said profits come from deficit spending. Economic activity come through progressive taxation (government-induced flow). The credit circuit has blown up the world economy so I think that option is out the door.

      Without flow the economy is undefinable. Economic activity is defined as the flow of funds. Spending = Income = GDP.

      Even under this coercive level of taxation wealth held by the top 1% accounts for 35% of total wealth. This percentage has increased substantially over the past 30 years.

      Real wages over the past 30 years have declined while business' share has increased by 250%.

      And then there's the mathematical impossibility problem…

      The government must provide for savings desires and direct leakages such as trade deficits by running…wait for it…budget deficits. Th egovernment must provide the balances for profits by running budget deficits. We have run budget deficits for 65 of the last 85 budgets, increasing net dollars in the non-government by nearly $16 Trillion.

      We working folks don't have (much of) that money. Poor people don't have that money. That money has not disappeared into the ether. Where could it possibly be? I can't quite put my finger on it…

    • profile image

      kendonhank 4 years ago

      "For this scenario I have already proven that a business cannot succeed (make a profit) selling to only it's own employees. Trivially obvious also."

      Except that businesses sell to other businesses as well as employees. Total production is consumed by businesses + wage earners.

      As for savings, businesses and workers are both savers. Yes there is leakage due to savings, but that is a separate matter and I have already conceded that new dollars will have to be added to the system to purchase the additional production at a constant price. Those dollars however do not have to be injected via government make work programs and welfare payments.

      "And I'm not even including deductions from x that wage-earners must pay in taxes."

      Taxes are respent into the economy. They do not change the total dollars available for purchasing goods. Wage earners get some, businesses get some, both are consumers.

    • profile image

      kendonhank 4 years ago

      "I said profits come from deficit spending. Economic activity come through progressive taxation (government-induced flow)."

      Yes you keep saying it. But in fact, profit (the business owner's share of production) and wealth comes from making things. The extra dollars needed to turn new production and wealth creation into dollars comes from the printing of new dollars. How best to inject those new dollars is a separate discussion.

      "We working folks don't have (much of) that money. Poor people don't have that money. "

      True, but you have food and clothing and homes and cars and computers and appliances and furniture and health care and big-screen TVs, and seasons tickets, and on and on. So, the REAL wealth of the poor has increased substantially. Why? Because capital investment in new technology has created new products and reduced the cost of existing products, thereby increasing everybody's standard living.

      You are so focused on dollars, flows, and zero sum games that you cannot see the real economy.

    • profile image

      kendonhank 4 years ago

      "Economic activity is defined as the flow of funds. Spending = Income = GDP."

      That is how you define it. I define it as total accumulated useful production. Spending is the exchange of production, money the means of exchanging production, income is what you receive for your contribution to production, GDP is a very weak measure of real production.

      "Real wages over the past 30 years have declined while business' share has increased by 250%."

      Yet the standard of living for all has increased dramatically. Wages are determined by supply and demand. Wages are currently being depressed by oversupply (mainly from third world countries). If you want to increase wages, you have to create new industries that need more workers. That is best achieved by capital investment in new technology, not government make work and redistribution.

    • profile image

      kendonhank 4 years ago

      "Real wages over the past 30 years have declined while business' share has increased by 250%."

      Yet the total wealth of the Forbes 400 is unchanged at 1.5T for the past five years.

    • profile image

      kendonhank 4 years ago

      "The government takes some of it through progressive taxation…only from the winners…businesses don't pay taxes if they don't make money."

      Actually, they pay lots of taxes whether they make or lose money. FICA matching, medicare/medicaid, business tax, property taxes, unemployment insurance, sales taxes, and on and on.

      Did you say you ran a business?

    • profile image

      kendonhank 4 years ago

      "IT IS IMPOSSIBLE FOR BUSINESSES IN THE AGGREGATE TO SUCCEED WITHOUT NET GOVERNMENT SPENDING, by simple arithmetic.'

      I am not arguing that the government doesn't have to add new dollars SOMEHOW to the economy to accommodate new production at constant pricing. That's totally different from saying that government has to redistribute dollars from producers to non producers through welfare programs and make work.

      Your argument is a non sequitur, Latin for "it does not follow".

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      Ken said: “I am not arguing that the government doesn't have to add new dollars SOMEHOW to the economy to accommodate new production at constant pricing. That's totally different from saying that government has to redistribute dollars from producers to non producers through welfare programs and make work.”

      Given that savings is the reason the government needs to introduce new dollars into the economy, it makes little sense to hand over new dollars to the rich, who will only save some portion of that money. The obvious (to us, anyway) prescription is to use those new dollars to do whatever the government needs done – spending on government employees, government projects, the military, welfare, health care, etc. That way, 100% of the money gets spent at least once, goes right back into the domestic economy, and the poor are taken care of. Also – we have already demonstrated that consumer spending is what makes the economy run. Businesses can, as always, use some of their profits on investment.

      Ken said: “True, but you have food and clothing and homes and cars and computers and appliances and furniture and health care and big-screen TVs, and seasons tickets, and on and on. So, the REAL wealth of the poor has increased substantially. Why? Because capital investment in new technology has created new products and reduced the cost of existing products, thereby increasing everybody's standard living.”

      Nobody is arguing that investment isn't important. But neither businesses nor the rich invest 100% of their money, and this is where your argument against any form of redistribution fails. Money taxed from businesses and the rich was not all destined to be reinvested, not even close. Some may have been destined for investment, but much of it was destined for savings, and much of it was destined for spending – and when the rich spend their extra money, it's on fluff. Not that there's anything wrong with buying fluff, but when so many others are having a hard time making ends meet, I have no problem with moving dollars from the top down to the bottom. 99.9% of those dollars are going to be spent as soon as people get their hands on them, and that's more than you can say for the same money in the hands of the rich.

      There is no shortage of investment capital in this country. You argue as if every tax dollar is being taken from businesses and individuals that were about to open up new factories with those very dollars, but that is not even close to being true. When there is an opportunity to make a profit in this country, the private sector has no trouble seizing that opportunity; arguing that taxation is holding back progress is just incorrect.

      Has everybody's standard of living increased? Sure. Is that a justification for allowing an ever-widening gap to grow between the rich and the poor? Of course not. The workers had quite a bit to do with America's economic success, but they have not been compensated in line with their contribution. There is nothing defensible about that situation.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "If Romney Cuts Taxes For The Rich By 20%, Dems Charge-- He Will Have To Raise Taxes For The Middle Class By $1 Trillion" - Forbes Magazine

      There's a leakage for ya - give the money directly to the rich…that way they don't have to bother "producing" anything to get it. Unemployment skyrockets.

      "I am not arguing that the government doesn't have to add new dollars SOMEHOW to the economy to accommodate new production at constant pricing"

      That's how you started out.

      "…That's totally different from saying that government has to redistribute dollars from producers to non producers through welfare programs and make work."

      If we had no progressive taxation, ALL of the funds in the economy would end up in the hands of the top 0.1%. Game Over.

      The only other outcome that would be mathematically possible would be for the rich to voluntarily give all of the cash necessary to fund sales to the consumers (there wouldn't be any wage-earners) from then on.

      Or, 100% of funds for sales would have to come from deficit spending, targeted at the unemployed, poor people and the middle class. Do you prefer that scenario to progressive taxation?

      What is the point of 0.1% of the population piling up cash that they will never be able to spend (there wouldn't be enough stuff to buy with it). They might as well burn the money.

      Unfortunately, they can use the cash to buy government (already happening)?

    • profile image

      kendonhank 4 years ago

      "Assume no funds in the economy. Zero. Businesses invest x into the economy distributed between wages, supplies, plant and equioment, all of which are spending.

      There are now x dollars in the economy available for spending on the products businesses have created. Now, in order to make a profit, the businesses will have to realize x(1 + p) dollars in sales from the sub-sector of the economy that holds only x dollars. We are short gross profit and no one has tried to save…every penny was spent. This has to be trivially obvious to you"

      The reason there is not enough money in your economy to purchase the production is not because the business owner took a share of it, but because you have new production. You have expanded the economy. Anytime you make a new widget, you need to add a new dollar to convert it to money if you want to keep prices constant. Once again you have confused yourself with your money piles and shell games.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      Ken said: "The reason there is not enough money in your economy to purchase the production is not because the business owner took a share of it, but because you have new production. You have expanded the economy. Anytime you make a new widget, you need to add a new dollar to convert it to money if you want to keep prices constant. Once again you have confused yourself with your money piles and shell games."

      I already addressed this. If you created a dollar to match every dollar's worth of production, we would have to create about $15 trillion new dollars every year. That is obviously not correct.

      Even if the economy did *not* expand, pjmeli's point would stand. If you produce $15 trillion, $15 trillion needs to be consumed for a steady-state economy. If the rich saved 5% of the proceeds as profit, there would be $750 billion fewer dollars available to be spent on production, and production would subsequently fall (or, you would have deflation).

      Production gets bought and consumed, then more stuff is produced to take it's place. Even widgets (assuming they are durable goods) don't last forever. Dollars are cycled and re-used - they DO last forever. At least, until they are sequestered away where nobody is spending them.

      Your reasoning on this has hit a dead end.

    • profile image

      Kendonhank 4 years ago

      "Given that savings is the reason the government needs to introduce new dollars into the economy, it makes little sense to hand over new dollars to the rich, who will only save some portion of that money.The obvious (to us, anyway) prescription is to use those new dollars to do whatever the government needs done – spending on government employees, government projects, the military, welfare, health care, etc. That way, 100% of the money gets spent at least once, goes right back into the domestic economy, and the poor are taken care of. "

      The new money should not be handed to anybody. Spending on the legitimate functions of government as defined in the Constitution is fine, and as a side benefit introduces dollars back into the economy. Government spending on welfare payments and make work are neither Constitutional nor productive.

      "We have already demonstrated that consumer spending is what makes the economy run."

      What you've done is state it over and over again. You haven't proven anything. Once again, all wealth creation comes from production. Spending and money enhance production by make production liquid and more readily exchangeable, which facilitates specialization and greater efficiency. But the act of spending in of itself produces zero wealth.

      Production = Wealth creation

      Spending = Exchange of production

      Money = Efficient exchange/storage of production

      Taking money from producers and giving it to non-producers = reduced production, innovation, productivity, and wealth creation for everybody.

    • profile image

      kendonhank 4 years ago

      "If Romney Cuts Taxes For The Rich By 20%, Dems Charge-- He Will Have To Raise Taxes For The Middle Class By $1 Trillion" - Forbes Magazine.

      There's a leakage for ya - give the money directly to the rich…that way they don't have to bother "producing" anything to get it. Unemployment skyrockets."

      Letting someone keep what they produce is not "giving" them anything. Letting productive people keep their own money allows them to invest in new tooling and technology that makes them even more productive and creates more new jobs. Lower unemployment.

      Redistributing money from the productive to the nonproductive creates temporary conspicuous consumption and temporary employment at the expense of long-term production and employment. Capital investment in new technology drives all wealth creation. Taking capital from productive people and using it for conspicuous consumption interferes with and misallocates capital formation and investment.

      If I see you walking down the street and decide not to rob you of $ 100, did I give you $ 100?

    • profile image

      Kendonhank 4 years ago

      "If we had no progressive taxation, ALL of the funds in the economy would end up in the hands of the top 0.1%. Game Over."

      Wealth flows to each according to their contribution to production. If I make a widget, my wealth increases by one widget. The dollar value of the widget will equal the total number of dollars in the economy divided by the total number of widgets. If I want to keep the widget pricing constant, I will need to add more dollars to accommodate the new widgets.

      "The only other outcome that would be mathematically possible would be for the rich to voluntarily give all of the cash necessary to fund sales to the consumers (there wouldn't be any wage-earners) from then on."

      Well I guess voluntarily relinquishing your property would eliminate the need for the government to take it from you forcibly.

    • profile image

      kendonhank 4 years ago

      "I already addressed this. If you created a dollar to match every dollar's worth of production, we would have to create about $15 trillion new dollars every year. That is obviously not correct."

      Obviously we are talking about NET new production.

      "If the rich saved 5% of the proceeds as profit, there would be $750 billion fewer dollars available to be spent on production, and production would subsequently fall (or, you would have deflation)."

      OK. So $ 750 billion new dollars need to be added to the economy.

      My original point stands, which is that business owners and wage earners are capable of purchasing all new production with what they contribute to production with stable pricing as long as enough new dollars are provided to cover NET new production and leakages (savings). Progressive taxation is not required to accomplish this, nor welfare spending, nor make-work spending. No matter how many dollars the rich save (total wealth for the Forbes 400 is flat at 1.5T for the past five years, so obviously they have saved NOTHING), workers will still receive an amount of money/wealth equal to their share of production. Saving by the rich has zero impact on wages, purchasing power or wealth accumulation by the poor, assuming that the ratio of circulating dollars to production is sufficient to maintain constant pricing.

      You continue to conflate wealth production (widgets) with the creation of the dollars that are needed to exchange widgets. Real economies produce widgets, not dollars. Of course the government will have to supply enough dollars to keep widget pricing stable.

    • Ralph Deeds profile image

      Ralph Deeds 4 years ago from Birmingham, Michigan

      "Wealth flows to each according to their contribution to production. If I make a widget, my wealth increases by one widget."

      That's only one of the ways wealth flows to individuals, many of which have nothing to do with production of anything useful.

    • profile image

      kendonhank 4 years ago

      "That's only one of the ways wealth flows to individuals, many of which have nothing to do with production of anything useful."

      True, I am speaking of a free market economy without corruption, cronyism and government meddling, wherein wealth flows to each in accordance with contribution to production.

      The market decides what is useful and what share of production each should have. Having the government decide through government ownership (or micromanagement) of the means of production and redistribution of private property only makes corruption and cronyism worse while degrading production and wealth creation for all.

    • Ralph Deeds profile image

      Ralph Deeds 4 years ago from Birmingham, Michigan

      I haven't noticed anyone advocating government ownership lately. That's a straw man. Most of the conversation lately has been about privatization of public services, everything from prisons to schools, and water utilities. Likewise, "micromanagement" is another straw man. The NY banks have opposed regulations designed to prevent them from running the economy off a cliff again. Free markets are the most efficient way of allocating resources, but, as in baseball, rules and an umpire are required to make sure the markets deliver honestly and fairly on their promised benefits. Judging by the billions paid out in the past couple of years by NY banks to settle SEC fraud charges there definitely is a need for some oversight (but, I agree, not micromanagement).

    • Ralph Deeds profile image

      Ralph Deeds 4 years ago from Birmingham, Michigan

      Also, there's a trend toward privatizing public toll roads. And of course the Bush administration turned over to private, for profit contractors many functions traditionally performed by the military or civilian government employees.

    • profile image

      kendonhank 4 years ago

      "I haven't noticed anyone advocating government ownership lately."

      You must have missed the government bailouts and partial/full takeovers of GM, Chrysler, AIG, Fannie/Freddie, health care, and student loans. The government runs a huge swath of the U.S. economy and heavily regulates the rest. And the folks on this board would like to add another 25 million to the government payroll to achieve "full employment".

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "Real economies produce widgets, not dollars." - kendonhank

      You have just unknowingly isolated the problem. Real economies can't produce dollars, nor can they distribute them in a way that makes the real economy sustainable.

      1. If we produce widgets and the dollars aren't there to buy them, the widgets will go unsold.

      2. If the dollars are not in the hands of the target market for the widgets, the widgets will not be produced.

      3. The problem once again comes down to the distribution of dollars available for spending on widgets.

      4. It doesn't matter one whit how many dollars are in existence. The only thing that matters is who holds them. If enough of them are held outside the universe of business entities, there will be sales. If not…

      5. There is nothing business entities can do that will put net dollars in the hands of wage-earners, the poor or unemployed. Business entities are extraction machines.

      Where will these dollars come from?

      "…the rich must be made richer to encourage them to work and the poor must be made poorer to encourage them to work…" - Lord Eatwell

    • Ralph Deeds profile image

      Ralph Deeds 4 years ago from Birmingham, Michigan

      Kendonhank,

      The actions in the auto industry and Fannie and Freddie are temporary, and they were supported by both parties. I question the accuracy of your comment that the U.S. "runs a huge swath of the economy and heavily regulates the rest." Where is the huge swath run by the government? The regulatory agencies have to a great extent been co-opted by the industries they are supposed to be regulating.

    • profile image

      kendonhank 4 years ago

      The actions in the auto industry were temporary, but unprecedented and there effects long lasting. What the government did was make a mockery of the free market by picking a winner and preventing more efficient producers from taking root and/or buying up GM's plants and equipment. The problem is even worse with Fannie/Freddie which basically underwrites the entire residential housing market. And don't forget the 100 billion bailout of AIG, our largest insurer, and the ongoing purchase of toxic mortgage-backed securities to prop up the banks, insurance and housing industries.

      The government runs half of health care (Medicare) and heavily regulates the other half (including what insurers must cover, who they must cover, how much they can spend on marketing, what they can charge, and on and on). The government also underwrites 95% of new mortgages and runs the retirement system (social security), the student loan program, various welfare programs (50 million on food stamps), and so on, all in addition to its legitimate functions like the military, police, fire etc. Add it all up and government is by far the largest player in the economy.

    • Ralph Deeds profile image

      Ralph Deeds 4 years ago from Birmingham, Michigan

      1. The bailout of GM and Chrysler was not unprecedented. In 1979 Chrysler received a $1.5 billion loan from the federal government. My recollection is that it was fully re-paid. Moreover, the savings and loan companies were bailed out by taxpayers, as I recall when they failed as a result of deregulation under Reagan. [The Federal Savings and Loan Insurance Corporation (FSLIC), a federal government agency that insured S&L accounts in the same way the Federal Deposit Insurance Corporation insures commercial bank accounts, then had to repay all the depositors whose money was lost. From 1986 to 1989, FSLIC closed or otherwise resolved 296 institutions with total assets of $125 billion. An even more traumatic period followed, with the creation of the Resolution Trust Corporation in 1989 and that agency’s resolution by mid-1995 of an additional 747 thrifts.[18]]

      Moreover, billions of taxpayers' money was poured into NY Banks to protect stockholder interests and bondholders from default. The auto bailout didn't protect GM stockholders, but it saved an estimated million jobs.

      2. "What the government did was make a mockery of the free market by picking a winner and preventing more efficient producers from taking root and/or buying up GM's plants and equipment."

      The foreign transplant producers were not necessarily more efficient. The main cost disadvantage for GM, Ford and Chrysler was legacy costs for thousands of retirees. I will concede that there were also cost disadvantages due to the provisions of local and national union agreement that accumulated over 70 years of collective bargaining. It's hard to put a number on this factor. In any event, wages for new employees were cut in half and many other changes were made that leveled the playing field with the transplants. If you talk to just about anyone in Michigan, Ohio or Wisconsin you will find much greater support for the auto bailout than the bank bailout.

      The officers of GM and Chrysler frantically and unsuccessfully sought non-government financing. Private money was not available.

    • Ralph Deeds profile image

      Ralph Deeds 4 years ago from Birmingham, Michigan

      BTW, the civility of this discussion is a breath of fresh air compared to some of the discussions in the political and social issues forum.

    • JohnfrmCleveland profile image
      Author

      John 4 years ago from Cleveland, OH

      "BTW, the civility of this discussion is a breath of fresh air compared to some of the discussions in the political and social issues forum."

      Thanks, Ralph. Happily, since MMT is a heterodox school of thought, it is still pretty apolitical. If Mitt Romney stood up and told the country that deficit spending does not put the United States in debt, I would have to consider voting for him on that basis alone. Unfortunately, neither side seems to get it, including Bernanke. And if they do, they aren't brave enough to say it out loud. So MMT really isn't a Democratic thing - but it does tell us that deficits are not a bad thing, and budget surpluses usually are, and to me, that falls more in line with Democratic thinking.

      In the end, we are all just trying to understand this stuff. It's like arguing about math - there is a correct answer out there, and once that answer is clearly demonstrated, there is no longer much reason to argue.

    • profile image

      kendonhank 4 years ago

      Ralph,

      The bailouts of GM, AIG, and Freddie were unprecedented in that the government took ownership of the companies. The Reagan bailout of Chrysler was a big mistake, and as you saw, Chrysler was back at the trough 30 years later. The S & L bailout was a huge mistake as well, and as you saw, the banks were back again 30 years later for some more government money. Bailouts of private companies, in addition to being Unconstitutional, simply encourage more bad behavior and block more efficient competitors and business practices from emerging.

      The bailout of GM, apart from being a net loss for the government (we still hold their worthless stock), did not save any jobs. GM could have continued operating under bankruptcy protection without government money or ownership. And even if they had closed their doors, more efficient companies would have bought up their plants and equipment and hired whatever employees were needed to meet demand. That's how free markets work. Capitalism depends on failure to root out inefficiency and corruption and boost productivity.

      GM and Chrysler could not get private money because they were a mess. They were failed companies and should have been allowed to fail. They will fail again and be back for more taxpayer money.

    • Ralph Deeds profile image

      Ralph Deeds 4 years ago from Birmingham, Michigan

      "(we still hold their worthless stock"

      GM stock closed a $24.62 today.

      "The bailout of GM, apart from being a net loss for the government (we still hold their worthless stock), did not save any jobs. "

      We disagree on the jobs saved. It's been widely reported and not seriously questioned that the bailout saved upwards of a million jobs.

      "GM could have continued operating under bankruptcy protection without government money or ownership."

      This is simply not true. The banks were in disarray. Private money simply not available.

      "more efficient companies would have bought up their plants and equipment"

      Just go to Flint, Detroit and Pontiac and take a look at the closed plants, and you'll learn that closed auto plants tend to remain closed.

      "GM and Chrysler could not get private money because they were a mess. They were failed companies and should have been allowed to fail. They will fail again and be back for more taxpayer money."

      Money was an essential requisite for GM and Chrysler to recover and remain in business. Moreover, if GM had failed Ford would have been adversely affected because of overlapping supplier relationships.

      We shall see. They seem to be doing pretty well so far.

    • profile image

      kendonhank 4 years ago

      Ralph,

      Private money is ALWAYS available for a good investment. GM and Chrysler were NOT good investments. They were both FAILED companies.

      As for the lost jobs, certainly there would have been short term loss, but if there is a demand for the kinds of products GM makes, and those products can be made at a profit in this country, somebody will make them. The fact that several GM plants remain closed despite the massive bailout proves that those plants are not viable.

      Using the government to prop up failed companies simply prevents more efficient companies from emerging at the expense of long term job creation.

    • Ralph Deeds profile image

      Ralph Deeds 4 years ago from Birmingham, Michigan

      "Private money is ALWAYS available for a good investment. GM and Chrysler were NOT good investments. They were both FAILED companies." Well, I owned GM stock and followed the events carefully, and the fact is money was not available, for a couple of reasons--the amount that was needed, the banking crisis and world recession, and because the negotiations with the UAW, the stockholders and bondholders, retirees and other interested parties were quite complicated.

      I agree that "using the government to prop up companies," as a rule is to be avoided. But in my opinion this was a special situation which warranted involvement of the federal government. And I agree that GM and Chrysler weren't good investments. However, allowing GM and Chrysler and possibly Ford to fail would have been quite disruptive. True enough some other company would have eventually filled in the gap, but these cars would not have been built in Michigan, Ohio and Indiana. It's noteworthy also, that Ford which was not is as tough shape as GM and Chrysler, benefited from the bankruptcy negotiations and concessions at GM and Chrysler. Now, all three companies are on a reasonably sound financial footing.

      Maybe we should agree to disagree. I understand your position and partially agree. And I don't have anything more to say on the subject.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      Ken said: “The market decides what is useful and what share of production each should have. Having the government decide through government ownership (or micromanagement) of the means of production and redistribution of private property only makes corruption and cronyism worse while degrading production and wealth creation for all.”

      Not necessarily true. As I said before, there are many other factors that play into where the dollars end up.

      Example: a company produces a gadget that sells pretty steadily for $600. It is made in America, and labor costs are $200/unit. Materials and all other expenses are $50/unit. The company makes a profit of $350/gadget.

      Later, labor unionizes and gets a raise. Now, labor costs are $300/unit, but profits are still good at $250/gadget.

      Later still, some executive decides to offshore production. Now, materials are still $50, but labor is $50/unit, and profit on each gadget goes up to $500. The extra profits go to ownership.

      You can see that each party's compensation in the various scenarios has nothing to do with their relative productivity. It has far more to do with power. You seem to think that there is some natural equilibrium between ownership and labor that will magically work itself out in the most optimal way, but that vision is simply not supported by reality.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      Ken said: “Using the government to prop up failed companies simply prevents more efficient companies from emerging at the expense of long term job creation.”

      There is no evidence that this is true. Another unsupported Austrian article of faith.

      “Wealth flows to each according to their contribution to production. If I make a widget, my wealth increases by one widget. The dollar value of the widget will equal the total number of dollars in the economy divided by the total number of widgets. If I want to keep the widget pricing constant, I will need to add more dollars to accommodate the new widgets.”

      If too many of the dollars are concentrated in the hands of the few rich, the market value of the widget will change. If they are necessary, like food or shelter, people with limited means will pay what they can to buy one. But if they are not necessary, nobody is going to waste their limited money buying one. Distribution of those dollars matters.

      “Redistributing money from the productive to the nonproductive creates temporary conspicuous consumption and temporary employment at the expense of long-term production and employment. Capital investment in new technology drives all wealth creation. Taking capital from productive people and using it for conspicuous consumption interferes with and misallocates capital formation and investment.”

      First of all, the definition of “conspicuous consumption” is flashy, expensive purchases made for the purpose of showing off one's wealth. What redistribution creates is spending on food, shelter, utilities, and the other things that one buys when you barely have enough money to get by. And yes, that spending does create employment.

      But you offer no proof whatsoever that redistribution causes any harm to long-term production and employment. You also offer no proof that capital investment drives all wealth creation. Finally, you offer no proof that redistribution interferes with capital formation and investment. Again, all are unsupported Austrian articles of faith.

      Earlier, I offered proof that keeping more money in the hands of the rich does no good at all:

      Lower taxes on the rich don't lead to job growth:

      http://thinkprogress.org/economy/2011/06/28/256605

      Lower taxes on the rich don't lead to economic growth:

      http://thinkprogress.org/economy/2011/06/20/249061

      Tax cuts do not create jobs:

      http://www.commondreams.org/headlines05/1118-02.ht

    • profile image

      kendonhank 4 years ago

      "But you offer no proof whatsoever that redistribution causes any harm to long-term production and employment."

      Taking a dollar from someone who is developing new productivity technology and giving it to someone to purchase movie tickets slows the development of productivity technology. I need to prove that?

    • Ralph Deeds profile image

      Ralph Deeds 4 years ago from Birmingham, Michigan

      Ken,

      Haven't you noticed that for the past 40 years or so the "redistribution" has all been one way--from the poor and middle class to the plutocrats, thanks to countless tax loopholes and other tax breaks designed to benefit various special interests. US income distribution is beginning to look like a typical banana republic. I'm tired of hearing multimillionaires whining about redistribution every time a social insurance program is mentioned.

    • profile image

      kendonhank 4 years ago

      "If too many of the dollars are concentrated in the hands of the few rich, the market value of the widget will change."

      What is your proof? The rich have an amount of money equal to what they have produced, the poor an amount equal to what they produced. The ability of the poor to contribute to production, earn a wage, and accumulate wealth has zero to do with how much money Bill Gates has.

      The only argument you have made is that the rich extract money from the economy in savings and that those dollars must be replaced in order to have enough dollars to support production at a fixed price. That does not require redistributing money from the rich and giving it to the poor, nor having the government print it up and hand it to the poor. What I make has ZERO to do with what you make. It is not a fixed pie provided the total supply of dollars is sufficient to support new production. The burden is on you to prove that taking money from one man and giving it to another increases total wealth.

    • profile image

      kendonhank 4 years ago

      "Haven't you noticed that for the past 40 years or so the "redistribution" has all been one way--from the poor and middle class to the plutocrats, thanks to countless tax loopholes and other tax breaks designed to benefit various special interests."

      Letting someone keep their own money is not redistribution. As for government meddling through the tax code, bailouts, underwriting, subsidies, price supports, etc. to support favored groups or companies, I oppose that.

    • profile image

      kendonhank 4 years ago

      "First of all, the definition of “conspicuous consumption” is flashy, expensive purchases made for the purpose of showing off one's wealth."

      What I mean by conspicuous consumption is anything that is not useful. That would include flashy expensive purchases, but also much of what the poor buy, such as lottery tickets, entertainment, junk food, etc. When you give money to the poor that they have not earned, they spend much of their "free money" on useless things. That creates short term jobs at the expense of long term productivity.

    • profile image

      kendonhank 4 years ago

      "Example: a company produces a gadget that sells pretty steadily for $600. It is made in America, and labor costs are $200/unit. Materials and all other expenses are $50/unit. The company makes a profit of $350/gadget.

      Later, labor unionizes and gets a raise. Now, labor costs are $300/unit, but profits are still good at $250/gadget.

      Later still, some executive decides to offshore production. Now, materials are still $50, but labor is $50/unit, and profit on each gadget goes up to $500. The extra profits go to ownership."

      Wrong! Because you haven't included the effect of competition. Competitive suppliers of those widgets will also have access to the same low-cost labor. So the extra profit will be returned to consumers as lower prices, not because of altruism, but because if one supplier tries to pocket the profit, a competitor will undercut his prices. Ultimately, the profit will be about 8%, which is what business needs to return on capital to stay in business.

      "You can see that each party's compensation in the various scenarios has nothing to do with their relative productivity. It has far more to do with power. You seem to think that there is some natural equilibrium between ownership and labor that will magically work itself out in the most optimal way, but that vision is simply not supported by reality."

      Wages in the aggregate are determined by supply and demand. Period! If you want to earn a higher wage, you have to become more productive than the guy next to you, thereby making your labor more scarce. Ownership in a free market has no control of wages. If one business owner will not pay market wages, then they will lose their workers.

      The only way to increase wages in the aggregate is to create new technology and industries that need more workers. Your redistributionist theory actually suppresses wages by slowing the growth of new technology, which creates an oversupply of workers.

    • Ralph Deeds profile image

      Ralph Deeds 4 years ago from Birmingham, Michigan

      Nobel laureate, Joe Stiglitz's op-ed on the growing inequality in America--http://campaignstops.blogs.nytimes.com/2012/10/26/...

    • Ralph Deeds profile image

      Ralph Deeds 4 years ago from Birmingham, Michigan

      Ken,

      Here's a link to a discussion of Romney's positions on the auto bailout by Detroit's best auto writer:

      http://www.freep.com/article/20121027/COL06/310270...

      "As has been widely reported and repeated over the past several years, Romney contended that Chrysler and General Motors should have gone through managed bankruptcies -- which is exactly what ultimately happened in 2009 -- but that they should not have been financed with taxpayer dollars. Private money could have been used, he said.

      :"Most economic experts agree that no private capital on that scale was available during the credit-frozen days of the 2008 economic crisis. Romney said it could have been, if the federal government had guaranteed the loans.

      "We will never know for sure, of course, whether Romney's right about that hypothetical. What we do know is that GM and Chrysler survived, are now profitable and have added jobs during the past few years."

      [Tom Walsh, Detroit Free Press]

    • profile image

      kendonhank 4 years ago

      Ralph,

      The private money I'm talking about would not have gone to sustain GM, but to buy up their plants and equipment for pennies on the dollar.

      Free markets cannot work with the government propping up failed companies and failed assets. Failed companies must be allowed to fail whatever their size. GM is profitable? Big deal. I would be profitable too if you cut me a 100 billion no strings loan and canceled my debt.

      The government has no business financing, subsidizing, bailing out, or propping up private companies. That is the root of cronyism and corruption.

      We are still out 20 billion and GM will go bankrupt again. Count on it.

    • profile image

      kedonhank 4 years ago

      Ralph,

      You need only read one sentence from the Stiglitz article to see his perspective.

      "America also has become the country (among the advanced industrial countries) with the least equality of opportunity."

      That is flat wrong. No country offers greater opportunity than the U.S., and there would be more if government would limit itself to its Constitutional mandate. Anybody who studies, works hard, saves and invests prudently can join the top 10%, and most can join the top 1%. Most however, choose not to, and the government can do nothing about it, certainly not by redistributing wealth.

      If you want to reduce the concentration of wealth, restore competition and stop bailing out failed enterprise. Most of the financial guys and government cronies that now occupy the top 1% should have gone bankrupt in the financial collapse. Your socialist government bailed them out, and now they prosper. Now you complain about income disparity. It is government cronyism that concentrates wealth in the hands of the few.

    • Ralph Deeds profile image

      Ralph Deeds 4 years ago from Birmingham, Michigan

      How do you feel about Bush's $1.8 trillion bailouts?

      "A $1.8 Trillion Bailout: Where the Money's Going

      The U.S. Treasury Department is working through the weekend with Congress to craft a plan to spend as much as $700 billion to absorb bad mortgages and other assets from bank or other institution balance sheets to keep the financial system from collapsing.

      The move comes close on the heels of an $85 billion Federal Reserve rescue of American International Group and the Treasury's takeover of housing finance firms Fannie Mae and Freddie Mac.

      The Treasury plan, which follows a new federal guarantee for money market fund holdings, would push Washington's potential bailout tab to $1.8 trillion.

      Following are details of actions, proposals and amounts:

      —Up to $700 billion to buy assets from struggling institutions. The plan is aimed at sopping up residential and commercial mortgages from financial institutions but gives Treasury broad latitude.

      —Up to $50 billion from the Great Depression-era Exchange Stabilization Fund to guarantee principal in money market mutual funds to provide the same confidence that consumers have in federally insured bank deposits.

      —The Fed committed to make unspecified discount window loans to financial institutions to finance the purchase of assets from money market funds to aid redemptions.

      —At least $10 billion in Treasury direct purchases of mortgage-backed securities in September. In doubling the program on Friday, the Treasury said it may purchase even more in the months ahead.

      —Up to $144 billion in additional MBS purchases by Fannie Mae and Freddie Mac.The Treasury announced they would increase purchases up to the newly expanded investment portfolio limits of $850 billion each. On July 30, the Fannie portfolio stood at $758.1 billion with Freddie's at $798.2 billion.

      —$85 billion loan for AIG, which would give the Federal government a 79.9 percent stake and avoid a bankruptcy filing for the embattled insurer. AIG management will be dismissed.

      —At least $87 billion in repayments to JPMorgan Chasefor providing financing to underpin trades with units of bankrupt investment bank Lehman Brothers. Paulson said over the weekend he was adamant that public funds not be used to rescue the firm.

      —$200 billion for Fannie Mae and Freddie Mac. The Treasury will inject up to $100 billion into each institution by purchasing preferred stock to shore up their capital as needed. The deal puts the two housing finance firms under government control.

      —$300 billion for the Federal Housing Administration to refinance failing mortgage into new, reduced-principal loans with a federal guarantee, passed as part of a broad housing rescue bill.

      —$4 billion in grants to local communities to help them buy and repair homes abandoned due to mortgage foreclosures.

      —$29 billion in financing for JPMorgan Chase's government-brokered buyout of Bear Stearns in March. The Fed agreed to take $30 billion in questionable Bear assets as collateral, making JPMorgan liable for the first $1 billion in losses, while agreeing to shoulder any further losses.

      —At least $200 billion of currently outstanding loans to banks issued through the Fed's Term Auction Facility, which was recently expanded to allow for longer loans of 84 days alongside the previous 28-day credits.

      The AIG bailout was especially offensive. It amounted to almost a straight pass through AIG to Paulson's buddies at Goldman Sachs.

    • profile image

      kendonhank 4 years ago

      Ralph,

      Why do you presume that I support the Bush bailouts?

      I oppose ALL government subsidies, financing, ownership and bailouts of private enterprise.

      Including GM.

    • Ralph Deeds profile image

      Ralph Deeds 4 years ago from Birmingham, Michigan

      I just wanted to get on the record that Bush as well as Obama supported the auto bailouts AND the bankster bailouts. You sound like a Ron Paul fan.

    • profile image

      kendonhank 4 years ago

      Why did you need to get that on the record? I never mentioned Obama or Bush. What I support is limited government per the Constitution.

    • Ralph Deeds profile image

      Ralph Deeds 4 years ago from Birmingham, Michigan

      Well, what may have worked 300 years ago doesn't always work today, especially when the words are interpreted literally and strictly constructed without taking into account the vast changes that have occurred in this country.

    • profile image

      kendonhank 4 years ago

      That's why we have an Amendment process.

    • profile image

      kendonhank 4 years ago

      Pimeli,

      Why not eliminate all taxation and have the government print the money it needs to pay its debts. That would inject 2.5T of extra cash into the economy, more than enough to cover all of your leakages and provide sufficient money to accommodate new production. My guess is that you would not approve, because your real objective is income redistribution for redistribution's sake, not a stable money supply.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      First of all, there is no reason to pay off the "debt." We only have a "debt" because some people prefer to hold bonds instead of dollars.

      The government could do what you suggest, for a while, at least; as long as the economy isn't running at full capacity (and it isn't), the demand from this newly created money could probably be satisfied by an increase in production. Theoretically though, once the economy is running at or near 100%, with all production being bought up by the private sector, the government would not be able to add more dollars (more demand) into the mix without inducing inflation. So to pay for government expenses under those conditions, they would need to skim demand from the private sector for their own use.

      The objective of taxation is not redistribution for redistribution's sake, so your guess would be wrong. Can you not see that allowing every dollar ever created to accrue in the hands of a very few people will eventually be politically problematic?

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      kendonhank

      What John said…+1

    • profile image

      kendonhank 4 years ago

      By debt I meant the things government pays on a daily basis, annual government spending of about 2.5T. Pimeli claims that this is the amount that leaks out of the economy each year, so why not replace it by canceling annual taxation.

      The best way to maximize wealth distribution is through free markets and competition, not government redistribution. You cannot make the poor wealthier by taking money from the productive class and giving it to them. That simply makes the productive class less productive, z

      By debt I meant annual spending, not the accumulated debt. Cancel all taxes and let the government print the money it needs to pay its annual bills. According to Pimeli, annual leakage is about 2.5T, which is about what we spend, so the two would offset with no inflation.

      Government redistribution of wealth may close the wealth gap, but only by making everybody poorer. Taking capital from productive people slows new technology development, productivity growth and job creation. Short term, the poor get a boost, long term they have no job.

      When you talk about accumulated wealth, you consider only dollars. You fail to include overall standard living. The poor may not accumulate dollars, but their standard of living increases through advances in technology. They get more and better stuff for the same number of dollars.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      “By debt I meant the things government pays on a daily basis, annual government spending of about 2.5T. Pimeli claims that this is the amount that leaks out of the economy each year, so why not replace it by canceling annual taxation.”

      “By debt I meant annual spending, not the accumulated debt. Cancel all taxes and let the government print the money it needs to pay its annual bills. According to Pimeli, annual leakage is about 2.5T, which is about what we spend, so the two would offset with no inflation.”

      That is a definition of “debt” that I have never heard before. (and it's PJMELI, not pi...).

      The two numbers are not related. There is no guarantee that leakage will be a consistent number - the national savings rate fluctuates quite a bit. It's better to look at this stuff qualitatively. You can lose money to savings, but those savings can also go negative, and old dollars can be re-introduced into the economy without the government doing a thing. This happened to some degree before the housing crash – people were going into debt to spend, largely on home equity. The economy didn't care – spending is spending – but after the crash, a lot of people are still paying off that debt, so they aren't spending as much as we would expect based on their earnings.

      By somewhat of the same mechanism, China could convert their bonds to dollars and go on a spending spree, and this spending would decrease (or even eliminate) the need for the government to create new dollars for a while. In normal times, China is a big net saver of dollars. Were they to go on that spending spree and flip their usual trade surplus with the U.S. to a trade deficit, net savings would decrease. The economy would welcome the business, of course, but it wouldn't know the difference between China spending $1 trillion and our government spending $1 trillion. The only difference would be that, if the government created and spend $1 trillion, there would eventually be about $1 trillion more saved by the private sector (mostly in the form of govt. bonds).

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      “The best way to maximize wealth distribution is through free markets and competition, not government redistribution. You cannot make the poor wealthier by taking money from the productive class and giving it to them. That simply makes the productive class less productive.”

      First of all, I think you meant to say “maximize wealth,” not “maximize wealth distribution,” because wealth clearly does not get distributed as much on its own. That's the whole purpose of redistribution – distributing the wealth more evenly, not less.

      You have been saying this stiff about production ad nauseum, but you don't have a speck of data to back it up. It's an article of faith with you, but I don't share that faith. Reality says otherwise. Free enterprise does a great job of putting a wide variety of stuff on the shelves, but there is no natural mechanism for distributing the wealth that commerce creates. History shows that when labor has no leverage, they lose out. And I explained earlier how people are not compensated according to how much they produce, but according to how much leverage they have.

      “Government redistribution of wealth may close the wealth gap, but only by making everybody poorer.”

      Another article of faith. Can you prove this claim? With data? Numbers? I'd even accept some realistic logic here...

      “Taking capital from productive people slows new technology development, productivity growth and job creation. Short term, the poor get a boost, long term they have no job.”

      Same as above – can you prove this? I showed you (a couple of times) studies that showed that more money in the hands of the rich didn't help the economy, and it didn't create jobs.

      “When you talk about accumulated wealth, you consider only dollars. You fail to include overall standard living. The poor may not accumulate dollars, but their standard of living increases through advances in technology. They get more and better stuff for the same number of dollars.”

      So do poor people everywhere. That does not justify workers being muscled out of fair compensation. Workers are clearly not being compensated based on their production, another quaint notion that you seem to believe in despite the obvious reality.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "According to Pimeli, annual leakage is about 2.5T, which is about what we spend, so the two would offset with no inflation.” - kendonhank

      Current total spending is about $5 trillion of which $1.1 trillion is new money.

      I estimated leakages at between $1.5 and 2 trillion, depending on savings desires and profits, which are variable.

      Neither saving nor profits are possible unless the government follows through with deficit spending.

      Here's a look at after-tax corporate profits:

      http://research.stlouisfed.org/fred2/series/CP

      Imagine what this would look like without taxes...

    • profile image

      kendonhank 4 years ago

      I really have to prove that taking capital from productive people slows technology development and job creation? Where do you think the capital to develop new technology comes from?

      "History shows that when labor has no leverage, they lose out. And I explained earlier how people are not compensated according to how much they produce, but according to how much leverage they have."

      Wages are determined by supply and demand. Period. If you want to increase real wages, you have to create new technology and industries that create a scarcity of workers. You want the government to subsidize wages by redistributing wealth from the productive to the non productive. In the long run, that simply slows job creation and creates an oversupply of labor that lowers wages.

      Look at what redistribution did for the auto industry. Through the efforts of the unions, auto profits were redistributed to workers in the form of above market wages and benefits. Worked great for a while, but over time, it made the auto makers uncompetitive and ultimately bankrupted them.

      Supply and demand determines fair compensation. Labor is a commodity, no different than any other production input. Your notion of fairness is irrelevant to the market.

      Also, you focus on the dollar value of wages, but you ignore the primary source of real wealth and increased standard of living, which is purchasing power. The faster the rate of technology development, the faster the growth in purchasing power. Wages do not have grow in order for workers to increase their real wealth and standard of living. Your redistributionist approach will put more dollars in the pockets of workers for the short term, but over the long run, it will slow the pace of technology development and those dollars will buy less. The workers will become poorer in real terms.

      Technology is the key to wage growth and real wealth, not government redistribution.

    • profile image

      kendonhank 4 years ago

      Pjmeli,

      Not sure what you are trying to prove with your graph. Would you rather that profit be zero or flat?

      2011 spending was 3.6T. 2011 tax receipts were 2.3T. That's 1.3T in new money, which you say is necessary to replace leakage and accommodate new production.

      Instead, let's cut federal taxes by 50% to 1.1T. Let the government print 2.5T in new money to cover its annual expenses.

      Leakage is 1.5T - 2.0T. That leaves 500B to 1T to cover new production assuming a growth rate of 3-6%.

      A little high, but you get the idea. The economy gets plenty of dollars without government redistribution or increased government spending on make work.

    • profile image

      kendonhank 4 years ago

      "Neither saving nor profits are possible unless the government follows through with deficit spending."

      In U.S. dollars at constant prices. That's an important distinction.

    • profile image

      kendonhank 4 years ago

      PJMELI,

      How did the economy grow during the Clinton years when we had a balanced budget? Where did the new money come from to accommodate leakage and new production. Why didn't we have deflation?

    • JohnfrmCleveland profile image
      Author

      John 4 years ago from Cleveland, OH

      “I really have to prove that taking capital from productive people slows technology development and job creation? Where do you think the capital to develop new technology comes from?”

      Yes, you do, since it's the whole basis of your economic religion. We aren't talking about stripping people of everything they own, just a normal amount of taxation. There is still plenty of accumulated money for investment, as evidenced by the giant piles of money already in the hands of the 1%. It's not like the rich invest every last cent they earn right back into production. Much of that money is hoarded, and much of that money simply goes to buy stuff. So your argument fails right there.

      “Wages are determined by supply and demand. Period. If you want to increase real wages, you have to create new technology and industries that create a scarcity of workers. You want the government to subsidize wages by redistributing wealth from the productive to the non productive. In the long run, that simply slows job creation and creates an oversupply of labor that lowers wages.”

      In the long run, productivity goes up, lowering the demand for labor. Your model only works when labor has enough leverage to demand fair compensation. This has only been the case for a short period of the world's history, and that leverage is only due to government intervention (labor laws). Otherwise, labor has always come cheap, whether you're using slaves, exploiting a cheap foreign workforce, or if you just have a surfeit of workers. And neither slaves nor Chinese laborers make enough to buy much.

      There is no difference in the value of a Chinese worker and an American worker doing the same job – if both workers assemble 10 iPads/hour, they have created the same amount of production. Their difference in pay, therefore, is not due to their difference in productivity, but due to the difference in their leverage to demand more. Period.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      “Look at what redistribution did for the auto industry. Through the efforts of the unions, auto profits were redistributed to workers in the form of above market wages and benefits. Worked great for a while, but over time, it made the auto makers uncompetitive and ultimately bankrupted them.”

      I don't deny that labor costs hurt the auto industry, but if you are going to blame their troubles solely on that basis, you probably never drove a K-car. Leverage is part of supply and demand. When ownership has leverage, they don't hesitate to use it to their advantage. The auto companies agreed to those contracts voluntarily. They didn't have to, and they may well have made a mistake in doing so, but that's free enterprise for you.

      Leverage is also part of pricing, which you won't agree with, either. But it clearly is. Companies have leverage when they own a patent or a copyright, and you pay far more, for example, before a drug has no generic version to compete with. Same product, same benefit, same demand, but wildly different pricing before and after they lose the leverage to charge more.

      “Supply and demand determines fair compensation. Labor is a commodity, no different than any other production input. Your notion of fairness is irrelevant to the market.”

      I was, and still am, completely aware that fairness has nothing to do with compensation. I use “fairness” as shorthand for “compensation based on productivity.” So it's really *your* claim that people are actually compensated according to what they produce that is irrelevant. Again, it's leverage.

      “Also, you focus on the dollar value of wages, but you ignore the primary source of real wealth and increased standard of living, which is purchasing power. The faster the rate of technology development, the faster the growth in purchasing power. Wages do not have grow in order for workers to increase their real wealth and standard of living. Your redistributionist approach will put more dollars in the pockets of workers for the short term, but over the long run, it will slow the pace of technology development and those dollars will buy less. The workers will become poorer in real terms.”

      If you have no dollars, you have no purchasing power. And as I said before, the normal increase in the standard of living is no justification for overexploiting workers. The world's standard of living has been increasing since the days of the cave men.

      Are you ever going to be able to back up your claims that redistribution actually “slows the pace of technology” and “makes workers poorer in 'real terms'”?

      “Technology is the key to wage growth and real wealth, not government redistribution.”

      I never claimed that redistribution was the key to growth and wealth. I am trying to point out that, without redistribution, all of the growth and the wealth, as well as all of the dollars, end up in the hands of a very few people, and that is certainly not the best way to go for any society. I doubt that it's even sustainable over the long run.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      Pjmeli said: "Neither saving nor profits are possible unless the government follows through with deficit spending."

      Ken said: “In U.S. dollars at constant prices. That's an important distinction.”

      We only do business in U.S. dollars. If we had a trade surplus, we would still need to create dollars. (China runs a budget deficit, for example.) If you run a trade surplus, the world will soon run out of U.S. dollars with which to buy our exports. And those dollars are going to be saved by those who earned them – unless you tax enough away to account for all government spending, the government will have to print more up. We could collect euros, or yet, or whatever other reserve currency that others could give us for our products, but then we would be left with a bunch of euros and yen. You would still have to convert that currency to dollars to buy anything here. Or, you could buy European and Japanese goods – but then, there would be no trade surplus anymore.

      If, by your “at constant prices” comment, you are suggesting that we keep the number of dollars constant while our economy grows, then you are suggesting a deflationary economy, and we have already covered the problems that brings.

      Pjmeli is absolutely correct. In our history, the government has created about $16 trillion. About $6 trillion of that is in the hands of the government, so it doesn't really count. About $1 trillion is floating around the world, buying stuff. The remaining $9 trillion is in the form of govt. bonds, owned by those who have earned it over the years. Profits and savings. Not all of the value, but all of the dollars.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      “A little high, but you get the idea. The economy gets plenty of dollars without government redistribution or increased government spending on make work.”

      Yes, the economy AS A WHOLE is doing just fine. Companies are making tons of money. BUT – less of those profits are being shared with labor, and more is going to the top 1%. And the trend is only getting worse.

      The rich save (hoard) much of their money, while the poor spend all of theirs. If you take $1000 away from a rich man, only a portion of that $1000 would have been spent (or even invested). But put that $1000 into the hands of a poor man, and the whole $1000 gets spent back into the economy, doing the economy more good. Don't you think the economy would benefit if the rich spent 99% of their money? Well, this is pretty much the same thing.

      Not to worry, though – it's all going to end up back in the hands of the rich eventually.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "Not sure what you are trying to prove with your graph. Would you rather that profit be zero or flat?" - kendonhank

      Nope. You constantly ask questions and ignore the answer.

      I posted the graph to show how profits track the National Debt and to account for where 1.5 Trillion of the $11 Trillion in net spending has gone. $5 Trillion has left the country. At least $2 Trillion more is held by the top 1%. That leaves about $2.5 Trillion for the remaining 307 million people.

      That's spreading it pretty thin and the distribution inequality is getting worse quickly. Before long, businesses won't have any customers to sell to.

      It also shows how eventually the bulk of the money created ends up at the top, even with progressive taxation. I post these things hoping you will connect the dots…government spending benefits everyone, but the rich to a much greater degree than than the average houshold.

      "In U.S. dollars at constant prices. That's an important distinction." - kendonhank

      We are always talking US dollars in this thread, and profits in cash holdings. Constant prices isn't an important distinction…prices are never constant. The arithmetic holds true no matter what currency or economy we are discussing. It's part of the nature of closed system arithmetic. Profits are a direct function of net spending by the government.

      "How did the economy grow during the Clinton years when we had a balanced budget? Where did the new money come from to accommodate leakage and new production."

      The economy can continue to grow provided there are prior savings that can be drawn upon. Prior savings are a direct function of net government spending. You will never succeed in escaping this reality.

      After the Clinton surpluses we went into a recession, which GWB had to try to overcome by increasing deficits. look at any FRED chart to see recessions.

      Here's one: http://research.stlouisfed.org/fred2/series/FYGFDP...

      "Why didn't we have deflation?" - kendonhank

      You are being obtuse…if one payment is missed the economy doesn't collapse…it takes time…the economy is like the Titanic…slow to react.

      If the budget surpluses had continued the recession would have become more severe, eventually turning into a depression, then deflation.

      Even GWB knew better than to let that happen. Thes guys always use the deficit and the budget to suit their own political purposes, Republicans and Democrats both. Right now they both think alike as far as economics is concerned. They are both incompetent.

      BTW, we have been deflating for the past 30 years…the rate of inflation has been steadily declining and is approaching the zero bound, maybe within another 10 years or so we will hit zero. I can show you this graph too if you like.

    • profile image

      kendonhank 4 years ago

      "BTW, we have been deflating for the past 30 years…the rate of inflation has been steadily declining and is approaching the zero bound."

      Then how come prices are up year after year.

      A car was $5400 in 1980, a gallon on milk $ 1.60, a house 86k. In 2011, the average car was 30k, a gallon of milk $ 2.89, and a house 210k. Over that period, deficit spending was far lower than the number you claim was needed to replace leakage, let alone accommodate GDP growth.

      Shouldn't prices be WAY down with all the leakage and increased growth?

    • profile image

      kendonhank 4 years ago

      "Profits are a direct function of net spending by the government."

      Profit is a meaningless term with respect to total wealth creation, which is what really matters. Profit only depends on net government spending because you are measuring it in dollars and the government prints the dollars. Profit is simply ownership's share of production. An infinite amount of wealth can be produced with zero profit. Conversely, the government could spend an infinite amount of money and generate an infinite amount of profit with no wealth production.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      "A car was $5400 in 1980, a gallon on milk $ 1.60, a house 86k. In 2011, the average car was 30k, a gallon of milk $ 2.89, and a house 210k. Over that period, deficit spending was far lower than the number you claim was needed to replace leakage, let alone accommodate GDP growth.

      Shouldn't prices be WAY down with all the leakage and increased growth?"

      Could you please expand on your reasoning and calculations here, Ken?

    • profile image

      kendonhank 4 years ago

      "The rich save (hoard) much of their money, while the poor spend all of theirs. If you take $1000 away from a rich man, only a portion of that $1000 would have been spent (or even invested). But put that $1000 into the hands of a poor man, and the whole $1000 gets spent back into the economy, doing the economy more good. Don't you think the economy would benefit if the rich spent 99% of their money? "

      The rich and aspiring rich also invest their money in new technology, which drives ALL real wealth creation. I'd rather productive people keep their money and use it to create new technology rather than have the government take it and give it to someone less productive who will will use it to buy lotto tickets.

    • profile image

      kendonhank 4 years ago

      "Could you please expand on your reasoning and calculations here, Ken?"

      Pjmeli has argued that in order to prevent deflation, the government must inject a sufficient amount of dollars into the economy each year to offset leakage (1.5T - 2.0T) and growth (about 500B). He further argues that we have been deflating (decelerating inflation) for the past 30 years.

      Well, prices have increased some 200-500% over the past 30 years depending on the item. Yet deficit spending over that 30 year period has been well below the amount (about 2T) needed to replace leakage and accommodate growth. In addition, we have had an enormous influx of cheap labor. and enormous gains in technology, both of which serve to depress prices. So why have prices been rising for the past 30 years?

    • profile image

      kendonhank 4 years ago

      "I don't deny that labor costs hurt the auto industry, but if you are going to blame their troubles solely on that basis, you probably never drove a K-car. Leverage is part of supply and demand. When ownership has leverage, they don't hesitate to use it to their advantage. The auto companies agreed to those contracts voluntarily. They didn't have to, and they may well have made a mistake in doing so, but that's free enterprise for you."

      The point is that you cannot be competitive when you pay higher than market wages. Wages are determined by supply and demand in a free market. Worker productivity does NOT determine wages. It is only the supply of labor at a given skill level vs the demand for labor at a given skill level that sets wages. The only leverage workers have in a free market is the scarcity of their skill. Subsidizing those wages through coercion (unions, government redistribution) makes companies less competitive and eventually puts them out of business.

    • profile image

      kendonhank 4 years ago

      "Companies have leverage when they own a patent or a copyright, and you pay far more, for example, before a drug has no generic version to compete with. Same product, same benefit, same demand, but wildly different pricing before and after they lose the leverage to charge more."

      Copyrights and patents are private property. Of course a sole supplier of a product, or one who has an advantage in the means of production, will have pricing leverage. This is no different than the laborer who possesses a unique or scarce skill. Scarcity is the only leverage workers have for increasing wages in a free market. Really, scarcity in one form or another sets all prices and wages. Supply and demand. See, isn't economics simple.

    • profile image

      kendonhank 4 years ago

      "If you have no dollars, you have no purchasing power. And as I said before, the normal increase in the standard of living is no justification for overexploiting workers. The world's standard of living has been increasing since the days of the cave men."

      Workers receive dollars in accordance with the demand for their labor, regardless of how many dollars the rich have in their bank account. What matters to the workers is what they can buy with those dollars. The best thing for workers is an economy that produces new technology at an ever increasing clip, which does two things. First, the new technology increases their purchasing power by making goods cheaper and more capable. Second, it creates new industries that require more workers, thereby making their labor more scarce and enable them to command higher wages.

    • profile image

      kendonhank 4 years ago

      "Are you ever going to be able to back up your claims that redistribution actually “slows the pace of technology” and “makes workers poorer in 'real terms'”?"

      There are entrepreneurs all over the world working on new technology in new industries. That technology and those industries make all workers wealthier by increasing their purchasing power. New industries also need more workers, which makes labor more scarce and drives up wages. In order for entrepreneurs to develop these technologies and bring them to market, they need capital. Deprive them of capital and you will slow the pace of technology and workers will be poorer for it.

      "There is no difference in the value of a Chinese worker and an American worker doing the same job – if both workers assemble 10 iPads/hour, they have created the same amount of production. Their difference in pay, therefore, is not due to their difference in productivity, but due to the difference in their leverage to demand more. "

      Supply and demand determines wages, not productivity. There are more Chinese workers than openings, so wages are low. Note that as Chinese industry has grown, workers have become more scarce, and wages have been rising. China is no longer the lowest cost producer.

      "In the long run, productivity goes up, lowering the demand for labor. Your model only works when labor has enough leverage to demand fair compensation."

      New technology does two things. As you say, it lowers the demand for labor in existing industries. However, it also creates entirely new industries that require even more workers. The faster the pace of new technology creation, the greater the scarcity of labor and the higher the wages. Slow technology development by depriving entrepreneurs of capital, and you slow new industry formation, reduce the demand for labor, and drive wages down.

    • profile image

      kendonhank 4 years ago

      "After the Clinton surpluses we went into a recession, which GWB had to try to overcome by increasing deficits. look at any FRED chart to see recessions."

      That is the failed Keynesian perspective on what to do during a recession, which is to use government meddling to repeal the business cycle and overturn the laws of supply and demand.

      Recession occurs when you have oversupply and excess inventories. Recessions end when inventories are exhausted and companies start producing again. Government attempts to inject artificial demand with deficit spending simply add debt (or in MMT terms redistributes wealth from the free market to the government), which softens the recession, but exacerbates future recessions. Eventually, the debt becomes so prohibitive that government loses its ability to employ deficit spending to finance artificial demand, and the economy stumbles along in recession in perpetuity. This is what is happening now.

      BTW, I know you reject the term debt, but I could have made the same argument in MMT terms by substituting redistribution of wealth and borrowed productivity for debt, though that more make the explanation unnecessarily more complex.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "So why have prices been rising for the past 30 years?" - kendonhank

      Cost of oil.

    • profile image

      kendonhank 4 years ago

      You can do better than that pjmeli. Is the cost of oil 100% of production cost? Even if it was, that would not account for inflation if your theory about deficit spending and leakage were to hold true.

      You have argued that we need 2.0T in deficit spending each year just to offset leakage and provide new dollars for economic growth. Yet deficit spending has only averaged 400B over the past 30 years. Meanwhile, we have had a huge influx of cheap labor and advances in technology that have served to drive prices down. Prices should be in freefall according to your theory.

      For the price of oil to undo these allegedly deflationary effects plus drive the cost of all goods up an additional 200-500%, it would have to increase more than order of magnitude.

      Looking forward to seeing your math on this one.

    • profile image

      kendonhank 4 years ago

      To help you get started, oil accounts for 2.6% of GDP, or 366 billion.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      Kendonhank - I'm tired of chasing you down these rabbit holes trying to make my point. Your argument strategy can never lead anywhere because there are too many variables, and you keep changing them.

      Looking at the economy from the perspective of the money system gets rid of all of the variables and makes the solution to the problem determinate. The system won't work without liquidity, so all one has to do is track liquidity. Liquidity is created on demand by the government through the issuance of state money, there is no other source, the government is the monopoly issuer.

      Any other form of money is a private creation and thus a commodity.

      I don't care to discuss mythical money systems we don't have and don't use, only the reality before us.

      This is the basis of my arguments (and Johns) because I choose to deal with the problem as it exists, not as I want it to be.

      Unless you are willing to engage on these terms don't bother. I'm not interested in trying to solve n equations with n+1 unknowns, because it can't be done (not by us anyway). These issues are peripheral anyway because nothing (significant) happens in the absence of money.

      Respectfully,

      Me

    • profile image

      kendonhank 4 years ago

      I didn't think you would be able to respond.

      Deficit spending has been a small fraction of what you claim is necessary to stave off deflation and grow the economy for the past 30 years, yet we have massive inflation over the past 30 years, not deflation, and this in the face of massive deflationary pressure from cheap labor and new technology.

      And you blame that on oil, which is only 2.6% of the economy.

      "Looking at the economy from the perspective of the money system gets rid of all of the variables and makes the solution to the problem determinate."

      Only if your model is correct, and evidently it is not, because the data does not comport with your model. Where is the deflation?

      You are like the climate scientists with their half baked models constructed on past data and select variables. The models have never predicted a single FUTURE event, yet, they know with absolute certainty they can predict events 100 years into the future.

      Do you play chess?

      Checkmate!

    • profile image

      kendonhank 4 years ago

      Until you address productivity, pjmeli, your models will be flawed and you will not understand economics.

      A dollar spent inventing a new tool is not the same as a dollar spent on a lotto ticket or a government bureaucrat. It's not just how fast money changes hands, but what gets produced as the money changes hands.

      You and your fellow central planners cannot outsmart the free market with your shell games. The free market allocates scarce resources more efficiently and productively than the government. You may prop up the poor in the short run, but we will all be po0rer for it in the long run.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "I didn't think you would be able to respond." - kendonhank

      I won't respond to any more gibberish. Money fuels the system, production won't occur without it. Your arguments become moot, so I won't waste any more time trying.

      "Until you address productivity" - kendonhank

      Productivity doesn't occur until money is spent (Arrow of Time and all that). Money comes first. Until we sort that out, there is no need to discuss productivity.

      The wages (incomes) generated by production are insufficient to purchase the production at cost, let alone at a profit. You have a math problem here.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      Ken, I've addressed productivity over and over. First of all, nothing I have said is incompatible with a free market economy, despite your unfounded claims of "socialism" and "central planning."

      Second, your "money taken out of the hands of productive people" argument fails miserably, because you never accepted that nobody invests 100% of their disposable income. In reality, reasonable rates of taxation (such as ours) do NOT interfere with investment, for this very reason. I even presented data on this, and you have never bothered to address it.

      Third, your contention that the labor made unnecessary by increased productivity and automation will simply find employment created by even more technological advancements is laughably unrealistic. That's basically the model being touted now, while the (already highly educated and skilled) middle class continues to lose both jobs and earning leverage. Earlier I tried to explain how, at some point, people become so productive that it becomes impossible to consume all of that productivity. You have no answer for that.

      Finally, you have not shown the math necessary to claim "checkmate!" I asked for this earlier, and got nothing in the way of proof. You wonder why we don't always respond to this stuff? It's because, after 300+ comments, we are getting tired of dealing with your silly Austrian arguments.

      Look at it this way - after all of this debate, the MMT position hasn't changed a bit, but yours has. You started this whole thing thinking that all new dollars caused immediate inflation, which you have since backed off on. And you used to think that the country was in actual debt, too. Right now, the only think keeping your argument alive is unrealistic assumptions about investment.

    • profile image

      Kendonhank 4 years ago

      Where is the deflation pjmeli?

      No answer?

      Oil?

      Change the subject?

    • profile image

      kendonhank 4 years ago

      "Third, your contention that the labor made unnecessary by increased productivity and automation will simply find employment created by even more technological advancements is laughably unrealistic."

      Really? We have been automating since the start of the industrial revolution. Are there more jobs now or then. New technology creates more jobs than it replaces, or else there would be fewer jobs now than 100 years ago.

    • profile image

      kendonhank 4 years ago

      "Second, your "money taken out of the hands of productive people" argument fails miserably, because you never accepted that nobody invests 100% of their disposable income."

      OK. Let's say the invest 50% of their money. You take 10% off the top, now they are investing 50% of what's left. So they are investing LESS money. Do either of you invest. Ever been involved in a startup? How can a reasonable person argue that taking investment capital from an investor does not decrease the amount he invests. If you have less to invest, you invest less. Duh. Your vision of rich people with idle cash stuffed in their mattress is fantasy. People get rich and stay rich by investing.

    • profile image

      kendonhank 4 years ago

      "Look at it this way - after all of this debate, the MMT position hasn't changed a bit, but yours has. You started this whole thing thinking that all new dollars caused immediate inflation, which you have since backed off on. And you used to think that the country was in actual debt, too. Right now, the only think keeping your argument alive is unrealistic assumptions about investment."

      Silly goose. I haven't backed off anything. I have simply for the point of argument, accepted all your terminology and rationale, and at the end of it all, tracked you to a point that you cannot escape, which is that there is NO DEFLATION. I granted you your contention that debt is savings, that deficit spending is necessary to offset leakage and grow the economy, and now, I ask you, given that your model predicts a deflationary spiral in the absence of sufficient deficit spending, and given that deficit spending (by your own numbers) has been insufficient for 30 years................Where is the deflation?

      Oil? Are you sticking with that?

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      "Third, your contention that the labor made unnecessary by increased productivity and automation will simply find employment created by even more technological advancements is laughably unrealistic."

      “Really? We have been automating since the start of the industrial revolution. Are there more jobs now or then. New technology creates more jobs than it replaces, or else there would be fewer jobs now than 100 years ago.”

      There are more people now than then, so, yes, there are more jobs. That generally happens as populations grow. I don't see why that is due to the industrial revolution.

      If new technology really created more jobs than it replaced, then there wouldn't be any unemployment problem whatsoever. It would be a perpetual-motion job-creating machine. “You're being replaced by this robot, Johnson – but don't worry, because of that, there should be 1.05 new jobs out there waiting for you.” But that is obviously not the case. At an earlier point on the curve, business was booming, yet productivity was (of course) far lower than it is today. It used to take far more man-hours to build a car, and way more than 2% of our population still worked in agriculture. Industry had to lure workers from the farms to work in the factories. That is not the case anymore.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      "Second, your "money taken out of the hands of productive people" argument fails miserably, because you never accepted that nobody invests 100% of their disposable income."

      “OK. Let's say the invest 50% of their money. You take 10% off the top, now they are investing 50% of what's left. So they are investing LESS money. Do either of you invest. Ever been involved in a startup? How can a reasonable person argue that taking investment capital from an investor does not decrease the amount he invests. If you have less to invest, you invest less. Duh. Your vision of rich people with idle cash stuffed in their mattress is fantasy. People get rich and stay rich by investing.”

      OK. Let's say that you have $100,000 of after-expense, after-tax income. You invest $50,000 of that, and with the other $50,000 you buy some luxury items and you put some of it in the bank.

      Now, the government raises your taxes so you only have $80,000 of after-expense, after-tax income. Why on earth would you invest less than you did before? When you had $100K, you felt the need to invest $50,000 of it. You are still able to do that. Why change, if investment is more important than buying those luxury items? People get rich and stay rich by investing, after all.

      Duh.

      Like most people, I do invest money. But I certainly don't cut back on my investments in order to buy stuff I don't need, or to save money in a bank. Another unrealistic assumption on your part that kills the point you were trying to make.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      "Look at it this way - after all of this debate, the MMT position hasn't changed a bit, but yours has. You started this whole thing thinking that all new dollars caused immediate inflation, which you have since backed off on. And you used to think that the country was in actual debt, too. Right now, the only think keeping your argument alive is unrealistic assumptions about investment."

      “Silly goose. I haven't backed off anything. I have simply for the point of argument, accepted all your terminology and rationale, and at the end of it all, tracked you to a point that you cannot escape, which is that there is NO DEFLATION. I granted you your contention that debt is savings, that deficit spending is necessary to offset leakage and grow the economy, and now, I ask you, given that your model predicts a deflationary spiral in the absence of sufficient deficit spending, and given that deficit spending (by your own numbers) has been insufficient for 30 years................Where is the deflation?

      Oil? Are you sticking with that?”

      Yes, I am. I have no reason to change. Oil, and the normal inflationary pressures, like interest rates, are behind our very mild inflation over the years. If the problem was too many dollars, prices would not only go up way faster, but they would go up pretty evenly across the board. Also, we would be the only ones paying more for oil (since other currencies would rise against our dollar), which is not the case.

      Your calculations are simply wrong. You are the only one who, somehow, looked at the numbers and predicted deflation. Pjmeli said that the rate of inflation was slowing – but that's still inflation. Deficit spending has been sufficient to keep our economy humming along, even as savings/hoarding has increased.

    • profile image

      kendonhank 4 years ago

      Do the math John.

      Oil is 2.6% of GDP. Or 2.6% of the price of each product on average. So, in order to inflate the price of the average product 1%, oil must move up 40%.

      And that would be if there was no deflationary pressure due to leakage and economic growth. According to pjmeli, we need 2.0T in deficit spending each year to offset leakage, fund new growth and avoid deflation. But we have averaged only 4ooB in deficit spending for the past 30 years. That leaves 1.6T in money supposedly leaving the system, or 1.6T in deflationary pressure each year. In order to offset that, oil would have to increase 1.6T each year, but total oil sales are only 466B.

      And again, that does not include the deflationary effects of cheap labor and new technology, which are enormous.

      According to pjmeli's data and reasoning, there should be no inflation whatsoever, nor should there have been any for the past 30 years. We should be in the black hole of deflationary spirals.

      The central premise of your theory is that the government must engage in massive deficit spending to offset leakage, grow the economy and avoid deflation. Yet that deficit spending has not occurred on average for the past 30 years, and we have had massive inflation. If you cannot explain that, your theory is useless.

      If you insist that it's oil, let me see your calculations.

    • profile image

      kendonhank 4 years ago

      "Like most people, I do invest money. But I certainly don't cut back on my investments in order to buy stuff I don't need, or to save money in a bank. Another unrealistic assumption on your part that kills the point you were trying to make."

      So you invest the same amount of money no matter how much money you have? That's very silly.

      I have been in the technology business for 30 years and worked with hundreds of companies including many startups, several of which I have invested in. Most are bootstrapped with founders money. Later, they get seed capital from close friends and associates, and if the technology is viable, venture capital to take it to market.

      Higher taxes reduces the money available to fund startups at all levels. Founders have less, friends and associates have less, funds have less. It is preposterous to think that taking money out of the hands of investors and reducing the return on investment does not diminish investment. What should I believe, your theory, or my first hand knowledge of the industry.

    • profile image

      kendonhank 4 years ago

      "There are more people now than then, so, yes, there are more jobs. That generally happens as populations grow. I don't see why that is due to the industrial revolution."

      So a new job magically appears every time someone is born? It has nothing to do with the invention of planes, cars, trains, cell phones, TVs, and the Internet?

      How many jobs did China, population 1.4B, create until private technology relocated there some 20 years ago? With all those people, there should have been hundreds of millions of jobs, especially with the government providing full employment. But alas, the government factories all failed, because there was no incentive to produce and develop new technology, and the economy folded, and the people lived in squalor.

      This is the strategy pjmeli would like to try in the U.S. with the government using deficit spending and make work jobs to hire 30 million people and achieve full employment.

      "If new technology really created more jobs than it replaced, then there wouldn't be any unemployment problem whatsoever. It would be a perpetual-motion job-creating machine."

      Technology is a job creating machine. The faster new technology is created, the more jobs are created. If the socialist governments of world would get out of the way and let the free market work, the pace of technology development and job creation.

      New technology is the source of ALL job creation. Not government spending, not government redistribution, not government micromanagement. Technology created in free markets.

      The amount of hours a person can work is fixed. The amount of wealth that person can produce is determined by the technology they have at their disposal. All economic growth is from new technology.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "New technology is the source of ALL job creation. Not government spending, not government redistribution, not government micromanagement. Technology created in free markets." - kendonhank

      Show us the sequence of events, laid out logically, that shows how new technology leads to money (that can only be created by the state) in the pockets of consumers (households).

    • profile image

      kendonhank 4 years ago

      Pjmeli,

      I assume you are not questioning that new technology creates jobs. If so, how many jobs did GE have prior to the invention of the light bulb, or Boeing prior to the airplane, or Ford prior to the internal combustion engine, or Intel prior to the transistor, or Google prior to the Internet.

      How does that lead to money in the pockets of consumers? Well, GE pays wages to its employees. Who buys those products? Consumers with wages and profits they have earned producing other products. Where do the extra dollars come from needed to monetize new production at constant prices? Government spending that averages 20-25% of GDP annually.

      Money does not produce anything. It is simply an efficient means of storing and exchanging production. New technology produces all economic growth and job creation through increased productivity and new applications. Government indirectly supplies the dollars needed to monetize increased production through everyday spending on necessary functions.

      You are so focused on dollars that you have lost sight of what matters, which is purchasing power. It doesn't matter how many dollars workers have, it matters what they can buy with them, and that is determined by technology-driven productivity. Workers will never have many dollars in their pocket. They spend their wages, and real wages are more or less constant over time due to the constraints of supply and demand.

      Government can take dollars from business to subsidize wages, but those dollars will buy less in the long run because business will invest less in the new technology that increases purchasing power and creates jobs. The best way to increase real wages and purchasing power is to accelerate technology development through capital investment, not diminish investment through redistribution.

    • profile image

      kendonhank 4 years ago

      Still waiting to hear how in the face of 30 years of miniscule deficit spending, far beneath the number you said was needed to accommodate leakage and growth, we are not in a deflationary death spiral.

      If you insist that it's oil, please explain your reasoning.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      Sorry for the delay. Holidays come first. :)

      "Still waiting to hear how in the face of 30 years of miniscule deficit spending, far beneath the number you said was needed to accommodate leakage and growth, we are not in a deflationary death spiral."

      How much do you think is needed to accomodate growth? You don't need to monetize growth, if that's what you're thinking.

      Basically, what the government has to do to keep things running smoothly is to make sure there are enough dollars circulating around. And as we know, dollars are functionally removed from circulation when they are hoarded – this includes buying govt. bonds and stuffing money into the virtual mattress (saving in the form of cash). Those dollars, of course, need to be replaced, as do any other dollars leaving our economy (like dollars used in international trade, etc.). You need enough dollars circulating to conduct business without dollars becoming scarce. There are about $1 trillion dollars floating around in circulation right now, and that seems to be enough. This number stays pretty steady, normally rising slowly.

    • profile image

      kendonhank 4 years ago

      John,

      According to pjmeli's theory about deficit spending and leakage, we should be in a deflationary death spiral.

      He says we need 2.0T each year in deficit spending each year to avoid deflation, yet we have averaged only 400B for the past 30 years. So where's the deflation. Instead, we have had massive inflation, as you can easily verify by comparing prices now with 30 years ago. The products I cited were up 300-500%.

      It can't be due to oil, because oil is only 2.6% of GDP, so it would take

      a 40% move in oil each year just to raise overall inflation 1%, and that would be if there was no other deflationary pressure (leakage, growth, increased productivity).

      So where's the deflation? If you cannot explain this, then pjmeli's entire theory about deficit spending, leakage, and economic growth collapses.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "New technology is the source of ALL job creation. Not government spending, not government redistribution, not government micromanagement. Technology created in free markets." - kendonhank

      kendonhank can't read, or he chooses not to. I never wrote any such thing, not even close, and I'm beginning to wonder if he is bright enough to understand the things we are talking about.

      THIS YEAR we need approximately $2 Trillion in deficit spending if we expect to close the unemployment gap.

      20 YEARS AGO (1992) the trade deficit was $45 Billion…This year it's looking like $450 Billion…10 times as much.

      20 years ago tax receipts were much higher as a percent of income than they are today.

      Over the past 20 years the rate of inflation has been declining…I call that deflation.

      Better arguments please.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "Profit is a meaningless term with respect to total wealth creation, which is what really matters." - kendonhank

      More moving of the goalposts.

      How much wealth creation do you think would have taken place if the government hadn't deficit spent and monetized profits?

      Do you think we could have growth without profit? The day we have a system where all businesses exist as non-profits and promote public purpose we will be in agreement. I don't see that happening any time soon.

      The sequence is…government net spends…profits follow. It's arithmetically impossible for it to be any other way.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      The previous comment is hosed and one following it is missing.????? The above comment should be:

      "He says we need 2.0T each year in deficit spending each year to avoid deflation, yet we have averaged only 400B for the past 30 years. So where's the deflation." - kendonhank

      kendonhank can't read, or he chooses not to. I never wrote any such thing, not even close, and I'm beginning to wonder if he is bright enough to understand the things we are talking about.

      THIS YEAR we need approximately $2 Trillion in deficit spending if we expect to close the unemployment gap.

      20 YEARS AGO (1992) the trade deficit was $45 Billion…This year it's looking like $450 Billion…10 times as much.

      20 years ago tax receipts were much higher as a percent of income than they are today.

      Over the past 20 years the rate of inflation has been declining…I call that deflation.

      Better arguments please.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "I assume you are not questioning that new technology creates jobs." - kendonhank

      Bad assumption.

      Government spending creates jobs, because businesses are chasing those dollars, competing for them. New technology helps companies be more competitive.

      You have the causation backwards. Your entire worldview has causation backwards, and that has been the goal of the right for decades now, to convince us that up is down and black is white. It's the only way the scam can succeed.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "How does that lead to money in the pockets of consumers? Well, GE pays wages to its employees. Who buys those products? Consumers with wages and profits they have earned producing other products…

      …Where do the extra dollars come from needed to monetize new production at constant prices? Government spending that averages 20-25% of GDP annually." - kendonhank

      Did you write that last part or is it a mistake? Looks like you are agreeing with me. The rest of your comment above is more jibberish and twisted non-logic.

      No one here (apparently there's only four of us) is making any claims about what is really important in the world of commerce.

      We are merely making a simple claim - none of that would happen if it weren't for government spending.

      We have a hybrid system…The government funds public purpose and provides the infrastructure needed for business and commerce to operate. Business and entrepreneurship are relied upon to innovate and produce useful products and employ workrs for the benefit of society and government spending rewards those businesses that succeed well.

      Businesses are now trying to break the contract but keep reaping the benefit of government spending and they are buying the government in order to make it happen. They don't want to hire American workers because they cost too much…basically they are running away from competition by reducing or eliminating the wage component of production. The problem is they are trying to sell their products to the same people whose wages they are eliminating.

      This cannot succeed, it's impossible.

      Government funding is the energy input that causes commerce to grow and prosper. It is possible to have a steady-state economy with no growth but businesses will have no part of it (non-profit), so they will succeed at the expense of everyone else until they can't any longer and then they will try to eliminate us.

      Or we will eliminate them and provide for ourselves.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      “According to pjmeli's theory about deficit spending and leakage, we should be in a deflationary death spiral.

      He says we need 2.0T each year in deficit spending each year to avoid deflation, yet we have averaged only 400B for the past 30 years. So where's the deflation. Instead, we have had massive inflation, as you can easily verify by comparing prices now with 30 years ago. The products I cited were up 300-500%.”

      Ken, it looks to me like you are going out of your way to misinterpret what we are saying in order to win an argument, instead of thoughtfully considering what we are saying to actually figure something out. I thought my last post was pretty clear – is there something about that very simple premise that you don't understand? You need to replace lost dollars, plus add a few more. Lately, that has taken about $2 trillion, and while that replaced the lost dollars, it still wasn't enough to bump up demand much and get people working again. 30 years ago, it took much less. (Also, you don't have to monetize inflation dollar-for-dollar.)

      “It can't be due to oil, because oil is only 2.6% of GDP, so it would take a 40% move in oil each year just to raise overall inflation 1%, and that would be if there was no other deflationary pressure (leakage, growth, increased productivity).”

      That's just a bad calculation there. Oil affects almost every industry. Assuming that oil is 2.6% of our economy, oil going up 40% would raise inflation 1% all by itself, just by being 2.6% of our measured basket of goods. But oil also affects the price of almost everything else in that basket, too. Every item that gets shipped becomes more expensive when oil goes up, as do items that use oil as a raw material, and items that are produced with energy derived from oil.

      “So where's the deflation? If you cannot explain this, then pjmeli's entire theory about deficit spending, leakage, and economic growth collapses.”

      He already explained that he meant a declining rate of inflation, not actual deflation. The theory is just fine.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      Let me see if I can't put what pjmeli is saying into different words for you.

      Government spending is necessary because money does not naturally flow downward in a free market. Money flows toward ownership, and the proof of that is in the easily observable fact that they amass lots of money. The only natural force that cycles any money from rich to poor is what the poor can demand for their labor. And despite what you claim, the market does not necessarily create enough jobs for everybody, nor does it give labor any natural leverage.

      If you eliminated government spending (which goes mainly to the lower end) tomorrow, there would be that much less exercisable demand (money in the pockets of spenders). The economy would continue to chase whatever dollars were left, and ownership would continue to save some portion of their profits. Dollars would leave the economy without being replaced. Prices would fall, the value of the dollar would go up, and the incentive to save would increase. All of this puts a larger share of the existing dollars in the hands of the already rich, and the economy would suffer greatly for it. Left to its own devices, with a fixed number of dollars, the economy would suffer for lack of a decent distribution of those dollars.

    • profile image

      kendonhank 4 years ago

      "Dollars would leave the economy without being replaced. Prices would fall, the value of the dollar would go up, and the incentive to save would increase."

      But deficit spending has been far less than what pjmeli says is necessary for the past 30 years and prices are UP, way UP. Check the price of gold lately? The only thing slowing the rise in prices is the bursting of the housing bubble, and prior to that the stock bubble.

    • profile image

      kendonhank 4 years ago

      "Let me see if I can't put what pjmeli is saying into different words for you."

      I know exactly what he is saying, and it is far more radical than what you are saying. He is saying that not only is government spending needed to replace lost dollars, but that government spending needs to be greatly expanding to put another 30 million people to work. He believes that government spending in-of-itself (beyond the level needed to replace leakage) creates new technology and drives economic growth.

      The government prints paper and new technology magically appears to capture the paper.

      What a shame pjmeli wasn't around 50 years ago to advise China on its economic policy. The Communists didn't have to open their borders. All they had to do was print more Yuan and they would have had a thriving economy. Although I suppose there are other nations that could still benefit. Greece can just default on its debt, withdraw from the Euro, print some more Drachmas and voila, they will become the next Hong Kong. I understand Russia is still struggling as well. How unnecessary, when all they have to do is print more roubles.

    • profile image

      kendonhank 4 years ago

      "THIS YEAR we need approximately $2 Trillion in deficit spending if we expect to close the unemployment gap."

      The topic was the amount of deficit spending needed to keep up with leakage and new growth. Your number was 2.0T. We're not close to that number and never have been n the past 30 years, even if you account for the smaller economy, smaller trade deficits, etc.

      From 1997 - 2007 (11 years), total deficit spending was 1.14T. That's just 100B per year. Yet, GDP grew from 8.5T to 14.3T. And inflation averaged 3% per year, or 33% total.

      How did we get 6T of growth from 1T of deficit spending.

      Where was the deflation?

    • profile image

      kendonhank 4 years ago

      "That's just a bad calculation there. Oil affects almost every industry. Assuming that oil is 2.6% of our economy, oil going up 40% would raise inflation 1% all by itself, just by being 2.6% of our measured basket of goods. But oil also affects the price of almost everything else in that basket, too. Every item that gets shipped becomes more expensive when oil goes up, as do items that use oil as a raw material, and items that are produced with energy derived from oil."

      No John. The total amount of oil purchased was 2.6% of GDP or 466 billion. So the total contribution of oil to all finished good pricing is 466 billion. That includes the content of crude in all refined products and products that are made from refined products. That includes all the oil used for shipping. All oil. 466 billion. That is the total contribution of oil to the price of finished goods and services. That is the total content of oil in all finished goods and services. So, since oil is only 1/40 of the content of the average good or services, then it must increase 40% to inflate the price of all finished goods and services by 1%. The price of oil does not begin to explain the inflation of the past 30 years, and that does not include the deflationary effects that 30 years of sub par deficit spending should have had per pjmeli.

    • profile image

      kendonhank 4 years ago

      Over the past 20 years the rate of inflation has been declining…I call that deflation."

      Deflation is a reduction in prices, not a reduction in the rate of increase of pricing. Deficit spending over the past 30 years has been far beneath what you claimed was necessary to replace leakage, fund growth, and avoid deflation. Yet we have had inflation, not deflation. As I showed you, deficit spending from 1997 to 2007 was only 1.1T, yet GDP growth was 6T. Not only didn't we get a deflationary death spiral, prices increased by an average of 3.3%.

    • profile image

      kendonhank 4 years ago

      "The sequence is…government net spends…profits follow. It's arithmetically impossible for it to be any other way."

      Sorry, government cannot spend its way to prosperity. If so, all the governments of the world would be infinitely wealthy.

      There are plenty of dollars (circulating, savings, credit etc) to support new production at fixed prices. Over time, spending on the traditional functions of government is more than enough to replace whatever dollars are necessary to avoid deflation, as evidenced by the inflation of the past 30 years.

      Spending more dollars than is needed to accommodate existing production, doesn't get you more production, it gets you more dollars chasing the same production, which is inflation.

      Government spending does not cause new production, it allows new production to take place at constant prices.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "The topic was the amount of deficit spending needed to keep up with leakage and new growth. Your number was 2.0T. We're not close to that number and never have been n the past 30 years, even if you account for the smaller economy, smaller trade deficits, etc." - kendonhank

      The topic was estimating needed deficit spending THIS YEAR. I've clarified this at least twice and you continue pushing these goofy arguments in response to arguments THAT NO ONE HAS MADE.

      You are wasting my time. BTW, I've only read about 1% of what you write because it's mostly gibberish. It's more like a brain dump whenever you comment. It's incoherent rambling.

      This isn't college, you don't get partial credit for writing down bullshit.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      “But deficit spending has been far less than what pjmeli says is necessary for the past 30 years and prices are UP, way UP. Check the price of gold lately?”

      Deficit spending has been enough to replace saved dollars and keep things running smoothly, for the most part. You are the one applying the $2 trillion number to the 1980 economy. And prices are not UP nearly as much as you think. If you assume a very reasonable 3% annual inflation rate compounded over 30 years, you get a total of 243%. And the price of gold isn't indicative of anything except the willingness of people to buy gold.

      “I know exactly what he is saying, and it is far more radical than what you are saying. He is saying that not only is government spending needed to replace lost dollars, but that government spending needs to be greatly expanding to put another 30 million people to work. He believes that government spending in-of-itself (beyond the level needed to replace leakage) creates new technology and drives economic growth.

      The government prints paper and new technology magically appears to capture the paper.”

      The mistake you have made this whole time is believing that MMT and private enterprise are mutually exclusive, which is not the case at all. MMT is merely a description of dollar creation and flow in a fiat economy (not just our economy, BTW). The economy is the engine, and government-supplied dollars are the fuel. Neither one of us has ever claimed any differently. Our point has always been that, without new, government-supplied dollars, the engine would start to wind down and would eventually fail altogether. That's not ideology, that's simply a recognition that dollars naturally flow upward to those who own the means of production, and less than 100% of them cycle back down to labor. If you keep treating it like ideology and arguing in terms of ideology, you will never understand.

      Since less than 100% of dollars cycle back to re-enter the economy, it logically follows that, without new dollars, there will be contraction. Less monetized value flows to labor every year, so you either have fewer jobs, or less total value (same number of jobs, but lower compensation). No matter how much technological advancement you might have, the net effect would be fewer dollars flowing to labor, simply because of savings (profit-taking). That is why it is true that, without new dollars, there would be no (net) new jobs.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      “THIS YEAR we need approximately $2 Trillion in deficit spending if we expect to close the unemployment gap."

      The topic was the amount of deficit spending needed to keep up with leakage and new growth. Your number was 2.0T. We're not close to that number and never have been n the past 30 years, even if you account for the smaller economy, smaller trade deficits, etc.

      From 1997 - 2007 (11 years), total deficit spending was 1.14T. That's just 100B per year. Yet, GDP grew from 8.5T to 14.3T. And inflation averaged 3% per year, or 33% total.

      How did we get 6T of growth from 1T of deficit spending?”

      Because you don't have to monetize growth, you just have to provide enough circulating currency so that the economy is not held back for lack of dollars. That is providing for growth. You also do not have to monetize inflation, for the same reasons. Our $15 trillion economy operates just fine using somewhat less than $1 trillion in circulating dollars. If the economy demanded more, it would be provided by the Fed, and if the economy demanded less, the extra would be sopped up by govt. bonds.

      It should be obvious by now that America is worth far more than the $16 trillion or so dollars that we have created over the years. If everybody in the country tried to liquidate at once, there would not be nearly enough dollars to do so. My family, for instance, has a nice, partially-paid-for house, two paid-off cars, and some money in the bank. But at any moment, that is all represented by probably less than $1000 of M0 money – cash or electronic money – which I have on hand. My slice of M0 is far smaller than my total worth. The same is true of any business.

      “No John. The total amount of oil purchased was 2.6% of GDP or 466 billion. So the total contribution of oil to all finished good pricing is 466 billion. That includes the content of crude in all refined products and products that are made from refined products. That includes all the oil used for shipping. All oil. 466 billion. That is the total contribution of oil to the price of finished goods and services. That is the total content of oil in all finished goods and services. So, since oil is only 1/40 of the content of the average good or services, then it must increase 40% to inflate the price of all finished goods and services by 1%. The price of oil does not begin to explain the inflation of the past 30 years, and that does not include the deflationary effects that 30 years of sub par deficit spending should have had per pjmeli.”

      Again, I think your calculations are wrong. No need to rehash the same argument.

    • profile image

      kendonhank 4 years ago

      "The sequence is…government net spends…profits follow."

      Sorry, the government cannot spend its way to prosperity, otherwise all the world's economies would be infinitely rich. Production comes first, then government spending, else inflation.

      First the nose, then the tail. I think you have been chasing your tail so long with your shell games, you cannot tell which is which.

    • JohnfrmCleveland profile image
      Author

      John 4 years ago from Cleveland, OH

      "The sequence is…government net spends…profits follow. It's arithmetically impossible for it to be any other way."

      “Sorry, government cannot spend its way to prosperity. If so, all the governments of the world would be infinitely wealthy.”

      “Spending your way to prosperity” has become a conservative soundbite, and if you ask me, soundbites are a poor substitute for thinking.

      If your economy has some unused capacity to produce (raw materials, labor, energy), then all it takes to increase production is an increase in demand. And the government can certainly supply some amount of increased demand with no ill effects, simply by creating new dollars and getting them into the hands of people who will spend them. So while you cannot create an economic engine from scratch, you can definitely rev up an existing one.

      “There are plenty of dollars (circulating, savings, credit etc) to support new production at fixed prices. Over time, spending on the traditional functions of government is more than enough to replace whatever dollars are necessary to avoid deflation, as evidenced by the inflation of the past 30 years.”

      No, not at fixed prices. As I explained earlier, removing dollars from circulation will eventually result in deflation and a contracting economy. If you are suggesting that all we need to do is replace saved dollars, think about how few dollars we had circulating 100 years ago, and then think again about how well we could operate with that small amount of circulating currency.

      “Spending more dollars than is needed to accommodate existing production, doesn't get you more production, it gets you more dollars chasing the same production, which is inflation.”

      Nope. Not even close. For one, if you are only spending enough to accommodate existing production, you will never have growth. Second, more dollars demanding more production leads to.... more production. (Up to a point, of course.) But we are nowhere near the point of exhausting our productive capacity, where the amount of production necessarily tops out, and more new dollars would be chasing the same amount of goods. That would be demand-pull inflation, and we aren't there.

    • profile image

      kendonhank 4 years ago

      Pjmeli,

      You do realize that even if you doubled the tax rate on the wealthy, and they agreed to continue investing and producing at the same pace with a lower rate of return, and even if that money was given to the poor and lower middle class, the wealthy would win it back just as fast. Because the poor would still spend all their money and the wealthy would still sock away a percentage of each sale.

      The only way you can truly redistribute wealth is to tax wealth, not income. This is your objective, yes?

    • profile image

      kendonhank 4 years ago

      John,

      One trillion in deficit spending from 1997 to 2007, six trillion in growth. One trillion was not enough to fund a fraction of the leakage pjmeli talked about, let alone 6T in new growth. If you cannot explain this, your theory is bunk.

      As for conservative talking points, it is pjmeli who believes that the very act of government spending fuels all growth, irrespective of return on investment, productivity, new technology etc. So I would say the talking point is quite appropriate.

      Pjmeli is not talking about supplying enough money to replace leakage, nor even providing enough money to accommodate new production that is already in process. He is claiming that the very act of printing and spending money creates new technology and production out of thin air. If this was so, the economies of China and the Soviet Union would never have collapsed, and all the nations of the world would be wealthy beyond belief. Quite the contrary, most of them are on the verge of bankruptcy.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "The only way you can truly redistribute wealth is to tax wealth, not income. This is your objective, yes?" - kendonhank

      Yes. I believe in taxing rentier income, not regular income.

      "even if you doubled the tax rate on the wealthy, and they agreed to continue investing and producing at the same pace with a lower rate of return, and even if that money was given to the poor and lower middle class, the wealthy would win it back just as fast. " - kendonhank

      That's the whole point. That's how a capitalist system works, the result as you describe is inevitable, and I'm not implying it's a bad thing, it's a mathematical reality.

      It won't work if the government doesn't create flow by taxing/spending. The rich will quickly end up with everything, then we no longer have capitalism. We don't even have an economy.

      " six trillion in growth" - kendonhank

      Define growth. When I say growth, I mean nominal growth, meaning growth in net dollars held by the domestic non-government.

      My argument is real growth cannot occur without nominal growth. Real growth will normally occur at some multiple of nominal growth, so you have be specific about your claims before you criticize me.

    • profile image

      kendonhank 4 years ago

      I was very specific. Nominal GDP grew by 6T from 1997 - 2007, yet deficit spending only grew 1T. So how did the economy grow 6T with only 1T of deficit spending. Or put another way, how did 1T in deficit spending fund 6T in growth plus the trillions in leakage that would have occurred over that time, and still manage 3% annual inflation? By your reasoning, there should have been an enormous shortfall of dollars leading to a deflationary death spiral.

      Whatever happened to your oil justification. You don't seem eager to defend that.

    • profile image

      kendonhank 4 years ago

      "Yes. I believe in taxing rentier income, not regular income."

      Rentier income as in real estate rents? Dividends? That is not wealth. How much money do you expect to raise from that, especially after the price of real estate and stocks collapses?

    • profile image

      kendonhank 4 years ago

      "It won't work if the government doesn't create flow by taxing/spending. The rich will quickly end up with everything, then we no longer have capitalism. We don't even have an economy."

      The rich will end up with it anyway according to your theory. So what did you accomplish, other than throwing the poor a bone. BTW, what will be the motivation of the poor to work hard, educate themselves and save if you paying them such generous subsidies.

      If you think they will work hard and be productive at a government make-work job, you are very naive. Ask the Communist Chinese and the Soviets how that worked.

    • profile image

      kendonhank 4 years ago

      "The rich will quickly end up with everything, then we no longer have capitalism. We don't even have an economy."

      Well, putting aside the fact that how much workers earn in a free economy (supply and demand) has zero to do with how much the rich have in their bank account, a small clarification on definitions.

      Capitalism is the free market. Government-centric economies that control/subsidize production and redistribute wealth are neither free nor capitalistic (i.e. Solyndra, Government Motors, AIG, Fannie/Freddie).

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      “You do realize that even if you doubled the tax rate on the wealthy, and they agreed to continue investing and producing at the same pace with a lower rate of return, and even if that money was given to the poor and lower middle class, the wealthy would win it back just as fast. Because the poor would still spend all their money and the wealthy would still sock away a percentage of each sale.”

      Yes! You are starting to understand the flow of dollars. I'm truly gratified.

      It's not about punishing the wealthy, or trying to pay down the “national debt.” Govt. bonds are dollar equivalents – they are money, too. Allowing tons of dollars to accrue to a few people (and countries) is a bit dangerous, as money is power. It's going to happen, but I think it would be prudent to slow that accrual down as much as possible. The fast accumulation of dollars with the rich (and the resulting need to create dollars quickly) is also a sign that money is not being efficiently cycled back down through the economy.

      Don't forget that we are a society. This whole organization is set up for the benefit of the people, not just business. Keeping the poor fed and sheltered is a worthwhile goal. If the free market won't cycle enough dollars downward to accomplish this, then the government should step in and do it.

      “The only way you can truly redistribute wealth is to tax wealth, not income. This is your objective, yes?”

      No, not at all. The whole objective is to a) understand what is happening to dollars, and b) to use this understanding to adjust monetary and fiscal policy so as to improve society's fortunes.

      “One trillion in deficit spending from 1997 to 2007, six trillion in growth. One trillion was not enough to fund a fraction of the leakage pjmeli talked about, let alone 6T in new growth. If you cannot explain this, your theory is bunk.”

      I already explained it. What you should be looking at is deficit spending and the increase in govt. bonds outstanding (the national debt). They should closely mirror each other, and they do. From 1997 to 2007, the national debt not held by the govt. or the Fed went up by $907.671 billion. That's leakage. Over the same period, $1137.825 billion was created by deficit spending. So about $230 billion more dollars were circulating after accounting for leakage.

      Again, you do not need to monetize growth, but you do need to *enable* growth.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      “As for conservative talking points, it is pjmeli who believes that the very act of government spending fuels all growth, irrespective of return on investment, productivity, new technology etc. So I would say the talking point is quite appropriate.”

      I explained before how, without government spending, the economy would contract. So those new dollars are necessary for growth. Technology is nice, and it certainly helps, but without government spending, all technology could do would be to more efficiently chase after an ever-decreasing number of dollars in a shrinking economy. Without government spending, business would be trying to grow in the face of ever-decreasing consumer demand.

      “Pjmeli is not talking about supplying enough money to replace leakage, nor even providing enough money to accommodate new production that is already in process. He is claiming that the very act of printing and spending money creates new technology and production out of thin air. If this was so, the economies of China and the Soviet Union would never have collapsed, and all the nations of the world would be wealthy beyond belief. Quite the contrary, most of them are on the verge of bankruptcy.”

      The act of printing and spending money creates demand that otherwise would not exist. If the government hires me for $20,000, paid for with deficit spending, I now have $20,000 to spend that I otherwise would not have had - $20,000 that the economy would never have seen. As long as we have the economic engine to meet this demand (and we do), it all works out just fine.

      The mistake you continually make is thinking that this constitutes a command economy. It does not. We still have a free market economy, whereas communist China and the U.S.S.R. did not. Putting more people on the government payroll makes the public sector larger, but they aren't the ones producing goods and services for sale. If you can get past your ideological hangups, you can begin to understand why this is true.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "The rich will end up with it anyway according to your theory. So what did you accomplish, other than throwing the poor a bone. BTW, what will be the motivation of the poor to work hard, educate themselves and save if you paying them such generous subsidies." - kendonhank

      It's not a theory...it's a description of reality.

      Once the top 0.1% have all of the money, what then? There could be no commerce.

      Businesses could pay wages, but profit would be impossible, in fact losing money would be their only option. The system (capitalism) would cease to function.

      Would you be happy then?

    • profile image

      kendonhank 4 years ago

      Where was the deflation from 1997 to 2007 guys?

      1T of deficit spending, 6T of nominal GDP growth, trillions more of leakage, yet 3.3% inflation.

      Where was the deflation?

    • profile image

      kendonhank 4 years ago

      "Once the top 0.1% have all of the money, what then? There could be no commerce. Businesses could pay wages, but profit would be impossible, in fact losing money would be their only option. The system (capitalism) would cease to function."

      But the government would continue to print and spend on the necessary functions of government, injecting more than enough money into the economy to sustain commerce and profit.

      How much the rich accumulate has zero impact on wages. Wealth redistribution is not needed to provide dollars for commerce, nor to prevent the rich from capturing all the money, because the government will continually be adding new money to fund the necessary functions of government.

      Try again please.

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      kendonhank 4 years ago

      "We still have a free market economy, whereas communist China and the U.S.S.R. did not. Putting more people on the government payroll makes the public sector larger, but they aren't the ones producing goods and services for sale."

      John, the U.S. government is the largest provider of goods and services in the world. The government runs the military and is the largest provider of mortgages (Fannie/Freddie). The government runs 50% of our healthcare system (Medicare) and heavily regulates the rest. That will be expanded under Obamacare. The government is the largest provider of student loans. The government is the lender of last resort and sets the interest rate for the banks. The government is the largest land owner. The government finances new industry (Solyndra) and bails out existing industry (AIG, GM). I could go on, but the point is:

      That is not a free economy.

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      kendonhank 4 years ago

      "I explained before how, without government spending, the economy would contract."

      I have already agreed that the government needs to provide dollars to accommodate new production without deflation. That is different from saying that the government can create new production by providing surplus dollars. If that was possible, all of the nations of the world would be infinitely rich.

      "Technology is nice."

      It certainly is John, and without it you would still be living in a cave, chasing squirrels for food, and washing your clothes on a rock down at the river, regardless of how much money the governments of the world printed.

      The government provides more than enough dollars as a byproduct of everyday spending on necessary services to fund economic growth.An infinite amount of technology can be created without U.S. dollars. Zero technology is created by printing U.S. dollars.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      Ken said: "I could go on, but the point is: That is not a free economy."

      Oh, come on, Ken. You're being silly here, and you could be so close to getting it. The free market operates just fine here - and in Europe, Japan, almost everywhere you can think of now. A totally free market has never existed, anywhere, and you know it. This is your Austrian religion making you say that. It's the final argument of someone who knows they have lost.

      Winning the argument isn't important. Learning how the economy works is. Open your mind, let the wrong ideas out and the correct ideas in.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      "I explained before how, without government spending, the economy would contract."

      "I have already agreed that the government needs to provide dollars to accommodate new production without deflation. That is different from saying that the government can create new production by providing surplus dollars. If that was possible, all of the nations of the world would be infinitely rich."

      The old standby argument. We have been over this many times.

      New dollars can create new demand. What about that do you not get? The whole point of demonstrating that new dollars don't create inflation until you reach the point where the economy cannot meet the new demand comes right back to this, because it's obvious that new money - dollars that buy the same stuff that old dollars do - mean more consumer spending. The threat of inflation is the flip side of that.

      The reason that you can't create and spend money until you reach wild prosperity is that you would *eventually* create inflation. I said that long ago. But you can create *some* with no ill effects. If your economy does not have the ability to quickly meet that new demand (old China or old Russia), you would get inflation, because extra dollars would be floating around, chasing the limited amount of production that your economy can crank out. But America has no problem meeting a reasonable amount of new demand. Our businesses crave it.

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      John 4 years ago from Cleveland, OH

      "I have already agreed that the government needs to provide dollars to accommodate new production without deflation."

      I have to correct you here - they need to provide new dollars to account for savings. A sufficient supply of circulating dollars allows for normal economic functioning, including growth. What you need for growth is sufficient demand, and that is more of a distribution issue than a number-of-dollars issue.

    • profile image

      kendonhank 4 years ago

      "Oh, come on, Ken. You're being silly here, and you could be so close to getting it. The free market operates just fine here - and in Europe, Japan, almost everywhere you can think of now. "

      You stated that we have a free market and that the government provides no goods and services. To the contrary, the government is by far the dominant provider of goods and services in our economy, and heavily taxes, regulates, and subsidizes the goods and services provided by the free economy. So no, we do not have anything close to a free economy.

      The question is not whether we have a free economy, but whether there is sufficient freedom for the economy to function, and how much government is necessary for optimal performance. Those who believe in free markets and Constitutional limited government would argue that the freer the economy (the closer we limit the scope of government to that provided for in the Constitution), the more productive the economy will be and the greater the wealth production for all.

      Socialists, progressives, and liberals believe that the government should have a heavier hand in the economy, that government knows better than free markets, and that the heavy hand of government can produce more wealth with more equitable distribution than the free market.

      Of course, this question has already been answered. The economies with the greatest government control and least freedom (Communist China, Soviet Union) have failed, and the freest economies with the least government interference (the U.S.) have prospered.

      As the western democracies and U.S. trend toward more government control and less freedom, production is decreasing and wealth is concentrating. Meanwhile, economies like China that are allowing more freedom are expanding and creating more wealth for all.

    • profile image

      kendonhank 4 years ago

      "The reason that you can't create and spend money until you reach wild prosperity is that you would *eventually* create inflation."

      As soon as you increase the ratio of circulating, readily spendable dollars to available goods and services, you have inflation. The question is when, if and under what conditions prices will increase.

      Spare production capacity can for the short term soak up small amounts of surplus dollars without inflation, but that would be on the order of a few tens of billions, not the trillions that pjmeli envisions, certainly not enough to grow the economy in a meaningful way.

      What happens to auto incentives when sales increase. The car makers have plenty of capacity to provide the extra cars. The dealers can get as many as they order, but as sales increase and inventories decline, what happens? The incentives and discounts dry up. The sticker price never increases, but the real price of the car increases.

      New technology and productivity drive the economy, not government printing surplus dollars and rearranging the deck chairs. The faster the development of new technology through capital investment, the more an economy can produce. The dollars needed to monetize the new production at constant prices come for free as a byproduct of government spending on the necessary Constitutional functions of government.

      Government supplies dollars to stabilize new production at constant prices, not drive new production.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      No, that's not the question, that's a side discussion. The question at hand is, how are dollars created, and how do they flow through the economy? Whether or not you think there is too much regulation or not doesn't change how our economy works. MMT is just there to explain it.

      Some people also think that interest rates should float, and they can argue all day long about how that works. But in our system, they don't float, the government controls interest rates, and it's far more useful to understand how that works than to understand how some imaginary system would work. Likewise, it makes little sense to opine about how things would be better if business was completely free to self-regulate, because that is not how our system works, either.

      China, BTW, is only "expanding the freedom" of businesses to pollute and exploit workers. That's a choice that societies make. If people have any say in the matter, they usually choose a balance - labor laws, environmental regulations, legal redress, etc. If people have little or no say in the matter, you often come to one extreme or the other - and China's pendulum has swung like that. I'm in no hurry to emulate China's economy. But that's another topic.

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      John 4 years ago from Cleveland, OH

      "Spare production capacity can for the short term soak up small amounts of surplus dollars without inflation, but that would be on the order of a few tens of billions, not the trillions that pjmeli envisions, certainly not enough to grow the economy in a meaningful way."

      OK, so you finally agree that extra dollars won't necessarily cause price increases. It logically follows that those extra dollars that get spent without increasing prices must be met with some new production. So I am correct. The amount is something we can quibble over, but that's not nearly as important as understanding and accepting the premise that new dollars can bring forth new production without inflation.

      Now, on to how much of this we can do - the theory goes, we can create and spend without inflation until we are limited by our available resources, including labor. And some MMT proponents (myself included) think that it is a worthwhile goal to spend enough to employ everybody that wants to work, instead of paying for welfare, unemployment comp., etc. When you subtract those things from the cost of directly employing those who cannot find private sector jobs, it's really not that much extra. And I believe we already produce enough food, housing stock, utilities, etc. to absorb that extra demand.

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      kendonhank 4 years ago

      "OK, so you finally agree that extra dollars won't necessarily cause price increases."

      I have always argued that new dollars in excess of new production is inflation. How and when that affects prices, depends on many factors. For example, after the housing bubble burst, we went into recession, which caused the price of housing and everything else connected to decrease, despite the fact that the government was printing surplus dollars. Of course, the market understands the underlying inflationary forces, even if you do not. Hence, the price of gold.

      "Now, on to how much of this we can do - the theory goes, we can create and spend without inflation until we are limited by our available resources, including labor."

      You are limited by you immediately available inventory and resources. Plus, as soon as vendors see increased demand and inventories decline, they will start to raise prices, even if they can satisfy demand. You see that with commodities. Prices rise in anticipation of shortages. They don't wait until inventories are depleted. Also, you cannot just plug in new labor. That requires paperwork, training, management, more government bureaucracy, etc.

      And of course, you transition shamelessly from what we agree on, which is that very small amounts of surplus dollars can be accommodated without inflation, to what we do not agree on, and what is false, which is that trillions of new dollars can be accommodated without inflation. That is the cost of hiring the 30 million who are currently unemployed. Not to mention that once the government starts hiring the unemployed, they will be unavailable to the free economy, thereby driving the cost of all goods and services up.

      Nice try John. The devil's in the details. A little bit of surplus printing and a lot a bit of surplus printing are two entirely different things.

      If you were correct, inflation would have been zero for the past 30 years, and we have not spent a fraction of what you pjmeli would like to spend.

      Still waiting for your explanation of why we did not deflate from 1997-2007 with deficit spending far below leakage and growth. That's the problem with your theories John. They don't measure up to the real data.

    • profile image

      kendonhank 4 years ago

      "China, BTW, is only "expanding the freedom" of businesses to pollute and exploit workers."

      Tell that to the workers John who are making 5x what they made ten years ago in their government factory jobs. Tell that to the workers who lived in run down tenements with one bathroom per floor, who lived a bare subsistence living, who now own new homes, cars, iPhones, etc.

      How did their wages grow? By redistributing money from producers to workers? Nope. China let the free market work, production increased, and a shortage of labor drove up wages, just as I described earlier. But hey, don't let the data get in the way of your money printing theories.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "How much the rich accumulate has zero impact on wages. Wealth redistribution is not needed to provide dollars for commerce, nor to prevent the rich from capturing all the money, ...

      ...because the government will continually be adding new money to fund the necessary functions of government." - kendonhank

      The first part of your argument contradicts the second, where...

      ...you've pretty much conceded to our argument here. What have you been arguing about all this time?

    • profile image

      kendonhank 4 years ago

      pjmeli,

      The argument has not been about whether new dollars are needed to monetize new production without deflation.

      It has been about whether injecting additional money above and beyond what is needed to support production that has already occurred at current prices will create new production without inflation. In very small amounts, perhaps. In the large amounts (trillions) you proscribe to provide full employment, no. Look at the massive deficit spending of the past 5 years. Where is the economic growth and employment?

      The other side of the argument has been about wages. You claim that the government needs to take money from the rich and give it to the poor, else there will not be enough money for profit and wages. That is false. The amount the rich have has nothing to do with profit and wages. The dollars needed to monetize new production and profits come for free after the fact as a result of government spending on the necessary functions of government. The government does not have to take dollars from the rich or spend on welfare and make work in order to obtain sufficient dollars.

      A third area of discussion has been technology and productivity, which you do not even consider in your model. You think they spring from government spending, that entrepreneurs with five year horizons invest in new technology because the government prints some extra dollars. I have given up explaining technology and productivity to you because you fundamentally don't understand it, nor do you wish to because it complicates your one-dimensional view of the economy, which is the printing of money.

      Your theory is the tail wagging the dog, and it does not stand up to real data, which is why you cannot explain the 6T in growth and 3% of annual inflation that occurred from 1997-2007 with just 1T in deficit spending. This totally contradicts your theory that trillions in deficit spending are needed to prevent deflationary death spirals and grow the economy.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "The argument has not been about whether new dollars are needed to monetize new production without deflation." - kendonhank

      Yes, it has.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      "OK, so you finally agree that extra dollars won't necessarily cause price increases."

      “I have always argued that new dollars in excess of new production is inflation. How and when that affects prices, depends on many factors. For example, after the housing bubble burst, we went into recession, which caused the price of housing and everything else connected to decrease, despite the fact that the government was printing surplus dollars. Of course, the market understands the underlying inflationary forces, even if you do not. Hence, the price of gold.”

      What recession were you experiencing? Because in the one I remember, the price of gas went way up, and the price of groceries followed. What the market “understands” is the price of oil, over which we have no control. The market has no idea how many dollars are in existence at any one time, it only knows when they are being spent. And the price of gold has nothing to do with anything except people's desire to hold gold – even if this desire is based on their misunderstanding of economics.

      You cannot simply print up more dollars to escape a recession. Those dollars have to go to the right places before they will help. The dollars spent buying toxic assets from the banks was a waste, because most of those dollars never got into the hands of consumers and were never spent. The recovery was slow because very little of the stimulus money made its way into the pockets of people who needed it.

      "Now, on to how much of this we can do - the theory goes, we can create and spend without inflation until we are limited by our available resources, including labor."

      “You are limited by you immediately available inventory and resources. Plus, as soon as vendors see increased demand and inventories decline, they will start to raise prices, even if they can satisfy demand. You see that with commodities. Prices rise in anticipation of shortages. They don't wait until inventories are depleted. Also, you cannot just plug in new labor. That requires paperwork, training, management, more government bureaucracy, etc.”

      It wasn't too long ago that you argued that if a business lowered its labor costs, they would immediately lower the price of their goods, not take the increased profits. Now, you argue the exact opposite – vendors will raise prices even if they can satisfy demand. What happened to their competition? That same competition that would have somehow forced them to lower their prices, even though nothing else had changed?

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      John 4 years ago from Cleveland, OH

      “And of course, you transition shamelessly from what we agree on, which is that very small amounts of surplus dollars can be accommodated without inflation, to what we do not agree on, and what is false, which is that trillions of new dollars can be accommodated without inflation. That is the cost of hiring the 30 million who are currently unemployed. Not to mention that once the government starts hiring the unemployed, they will be unavailable to the free economy, thereby driving the cost of all goods and services up.”

      You need to think this stuff through. The increase in demand brought about by full employment wouldn't be as much as you think it would. What we are really talking about is the difference between what people get on welfare, unemployment, and other types of assistance and what they would get from a minimum-wage government job. Let's call the difference $10,000, which I think is pretty generous, but it's easy to calculate. For 50 million people, that would come to only $500 billion. About 3.3% of our economy. You don't think our economy could meet that new demand? I think it could. And even if that did bring about a bit of inflation, it would be well worth it.

      “Nice try John. The devil's in the details. A little bit of surplus printing and a lot a bit of surplus printing are two entirely different things.

      If you were correct, inflation would have been zero for the past 30 years, and we have not spent a fraction of what you pjmeli would like to spend.”

      Inflation has been very low for the past 30 years, no matter what you say. And what little inflation we have experienced has not been due to an excess of dollars.

      “Still waiting for your explanation of why we did not deflate from 1997-2007 with deficit spending far below leakage and growth. That's the problem with your theories John. They don't measure up to the real data.”

      And I'm still waiting on your explanation of why you think our deficit spending didn't keep up with leakage, let alone be “far below” it. By my calculations, we added about $230 billion dollars over that span, over and above replacing leakage. And again, you do not need to monetize growth. I don't know how many times I have to explain that to you, but you keep on trotting it out as if it meant something.

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      John 4 years ago from Cleveland, OH

      "A third area of discussion has been technology and productivity, which you do not even consider in your model. You think they spring from government spending, that entrepreneurs with five year horizons invest in new technology because the government prints some extra dollars."

      Ken, these are not mutually exclusive theories. Advances in technology and productivity happen it the right environment, such as ours. We have a good infrastructure, an educated workforce, plenty of materials, laws and regulations are generally obeyed, and there is plenty of money to be made. There should be no argument about this, right? Everybody already understands the importance of technology and productivity. (Most people, anyway.)

      What we are saying is that government spending is a necessary component to that environment. And I'm not just talking about infrastructure and education - I'm talking about the dollars. Government spending makes enough dollars available to do business smoothly, and it provides enough so that people can save some of their profits. Without that deficit spending, the economy would deflate and collapse.

      Our view seems one-dimensional because the lesson here is that the economy needs government spending to move forward, and it doesn't mean that we are in debt. That is all we are trying to explain. You didn't think so coming in, but now you understand it, to some degree. That is the nugget that so many people just don't understand. Christ, look around at the other hubs here - idiocy abounds. 99% of the voters in this country thought that the U.S. government actually owes the rest of the world $16 trillion. They look at deficit spending the same way they look at using a credit card. If people weren't voting to reduce the deficit, they were at least worried about it. And every one of them was wrong.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "A third area of discussion has been technology and productivity, which you do not even consider in your model. You think they spring from government spending, that entrepreneurs with five year horizons invest in new technology because the government prints some extra dollars." - kendonhank

      K, you are conflating several things here that don't fit the argument you are trying to make. You won't admit (although you already have) that the system requires funds in the hands of consumers to function, and it is mathematically impossible for businesses to fulfill that need…they extract more than they inject. If that weren't true they wouldn't bother investing.

      Productivity is one of the Paradoxes, like the Paradox of Thrift. Once we've reached the point where we can produce more than we can consume (we have), increasing productivity increases unemplyment. We then have to provide for those that are left out.

      Technology is wonderful, but if consumers don't have the funds to purchase the fruits of technology, there would be no reason for entrepreneurs to develop it.

      Entrepreneurs are chasing dollars, the government "chums" the system by purchasing labor, goods and services. This provides the funding necessary so that businesses can innovate and compete for the profits. It's a grand system that you want to dismantle.

      So yes, these things are in our model, we just have the causation right. If you get your way, the system will contract and we will end up with massive unemployment, businesses will suffer greatly, the only ones left in a good position will be the super-rich.

      That's what guillotines and hanging ropes are for.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "The argument has not been about whether new dollars are needed to monetize new production without deflation." - kendonhank

      K, In a nutshell, yes, it has.

      And deflation, or inflation are not really a part of th argument, you just keep making it so. These things are a consequence of poor economic management. They have little to do with the system itself.

      You have been erecting straw men, misunderstanding or mischaracterizing our argument from the get-go, and we have been consistently pointing out that you have been doing so.

      You either didn't "get" our argument or are too ideologically-bound to consider what amounts to observing the laws of arithmetic.

      All of the things John and I have been discussing are inter-related, but at the root all we are claiming is that government spending funds a capitalist economy and deficit spending increases the persistent money supply to account for growth, leakages, savings and profits (which are essentially savings).

      It isn't very complicated once you "see" how all this is related.

    • Ralph Deeds profile image

      Ralph Deeds 4 years ago from Birmingham, Michigan

      A little economics lesson from Nobel Prize economist Paul Krugman:

      http://www.nytimes.com/2012/11/26/opinion/krugman-...

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "A little economics lesson from Nobel Prize economist Paul Krugman:"

      Looks like Krugman is now fully on board with MMT although he may never admit it...it would be career suicide for him.

      He will claim he knew these things all along. The status quo will continue running the show.

    • Ralph Deeds profile image

      Ralph Deeds 4 years ago from Birmingham, Michigan

      My understanding is that Krugman's neo-Keynesian theories are pretty much orthodox economics as taught in most universities which is not true of MMT. I majored in economics and took economics courses in a good graduate school, and I don't recall anyone mentioning MMT.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      Did you learn about chartalism? Because that's pretty much the same thing.

    • Ralph Deeds profile image

      Ralph Deeds 4 years ago from Birmingham, Michigan

      Never heard of it until I read your hub.

    • profile image

      RGO 4 years ago

      Is that the same Krugman who thinks that the best way to spur economic growth is to extend unemployment benefits and spend trillions more on crony stimulus? As for the Nobel prize, didn't Obama win one of those before he even took office for promising to do peaceful things at some time in the future?

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      "Is that the same Krugman who thinks that the best way to spur economic growth is to extend unemployment benefits and spend trillions more on crony stimulus?"

      Do you think it's better for economic growth if we let every unemployed person end up homeless? The homeless don't buy anything.

    • profile image

      kendonhank 4 years ago

      "Productivity is one of the Paradoxes, like the Paradox of Thrift. Once we've reached the point where we can produce more than we can consume (we have), increasing productivity increases unemplyment. We then have to provide for those that are left out."

      That same argument could have been made 100 years ago, and 200 years ago, and 300 years ago. There is no limited to the products we can develop and consume. Do we have personal spacecraft? Do we have time machines? Do we have fusion reactors? Do we have pharmaceuticals that can reverse all forms of cancer? These and other things will be created by new technology, employ billions of people, and have absolutely zero to do with how many dollars the government prints and redistributes. Do you really thing the next big technological breakthrough and job creator is waiting for the government to mail out a new batch of welfare checks for purchases of lottery tickets and Doritos?

    • profile image

      kendonhank 4 years ago

      "The increase in demand brought about by full employment wouldn't be as much as you think it would. What we are really talking about is the difference between what people get on welfare, unemployment, and other types of assistance and what they would get from a minimum-wage government job. Let's call the difference $10,000, which I think is pretty generous, but it's easy to calculate. For 50 million people, that would come to only $500 billion. About 3.3% of our economy. You don't think our economy could meet that new demand? I think it could. And even if that did bring about a bit of inflation, it would be well worth it."

      $ 10,000 net to hire someone at minimum wage? Too funny. If the government is doing the hiring, you have to figure at least 100k each for that minimum wage job? And that doesn't include the millions of government bureaucrats that would be hired at all levels to manage the process. And if you are only paying minimum wage, then they would keep most of their welfare benefits. And once you got them on the government dole at minimum wage, the clamor to increase the minimum wage would begin, and before you know it, they would be making more than engineers in the private sector. Very naive.

      Take that number and multiple 10 and you will have a good starting point.

      BTW, why would you only pay them minimum wage? If new workers with spendable cash drives the economy, why not pay them double minimum wage? Triple? Quadruple. Imagine how fast the economy would grow.

    • profile image

      kendonhank 4 years ago

      "It wasn't too long ago that you argued that if a business lowered its labor costs, they would immediately lower the price of their goods, not take the increased profits. Now, you argue the exact opposite – vendors will raise prices even if they can satisfy demand. What happened to their competition? That same competition that would have somehow forced them to lower their prices, even though nothing else had changed?"

      I never argued that John. I said any increase in profit due to access to cheap labor (or materials) would be short lived, as other producers would have access to the same low cost resources and competition would soon drive profit and prices down. It is the consumer who ultimately benefits from lower production costs through lower pricing, which is the reason that new technology drives all REAL wealth production and standard of living. Let's not dwell on technology and productivity though, because as we all know, it is government printing and spending that drives all innovation.

    • profile image

      kendonhank 4 years ago

      "And I'm still waiting on your explanation of why you think our deficit spending didn't keep up with leakage, let alone be “far below” it. By my calculations, we added about $230 billion dollars over that span, over and above replacing leakage. And again, you do not need to monetize growth. I don't know how many times I have to explain that to you, but you keep on trotting it out as if it meant something."

      John, you and pjmeli need to get on the same page. According to pjmeli, in order for economic growth to occur without deflation, the government must deficit spend an equivalent number of dollars. In addition, the government must print enough dollars to replace leakage, which he estimated at 1.5 trillion this year.

      Well, the economy grew by six trillion from 1997 to 2007. In order for that to happen the government would have had to deficit spend six trillion new dollars, plus trillions more to account for the leakage over that 11 year period. Yet, the government only deficit spent 1.1 trillion over that 11 year period, some 10 trillion less than what pjmeli says would have been needed to stop a deflationary death spiral. Well, not only didn't we have a deflationary death spiral, we averaged 3% inflation for 11 years. So tell me John, and pjmeli, where was the deflation?

    • profile image

      RGO 4 years ago

      "Do you think it's better for economic growth if we let every unemployed person end up homeless? The homeless don't buy anything."

      Subsidizing unemployment gets you more unemployment. What I would rather see is the private sector hire them, which they will do as soon as the government gets off their back.

    • profile image

      kendonhank 4 years ago

      "And deflation, or inflation are not really a part of the argument, you just keep making it so. "

      You made deflation the argument pjmeli. If deflation is not a concern, then the government need not supply dollars to the economy. As production increases, and the ratio of dollars to goods and services declines, existing dollars would simply increase in purchasing power, fewer dollars will be chasing available goods and services, and prices will decline. You argued that this was unacceptable, that it would cause a deflationary spiral, and that the government needed to supply enough new dollars to accommodate new production (and additional dollars to accommodate leakage) such that prices would not decline.

      I am not disagreeing, just pointing out that it was YOUR argument.

      Meanwhile, John has been arguing that printing and government spending was ultimately limited by inflation. I assume you agree with that, but with you I never know, as you think technology springs spontaneously from government spending. If you believe that, then anything is possible.

      Back to inflation though, while John indicates in one breath that too much printing and spending could cause inflation, he says in the next breath that the government can hire 50 million people without causing inflation. Evidently, he does not believe that would be too much, and if so, I can't imagine that he would consider any amount of spending to be too much.

    • profile image

      kendonhank 4 years ago

      "The market has no idea how many dollars are in existence at any one time, it only knows when they are being spent. And the price of gold has nothing to do with anything except people's desire to hold gold – even if this desire is based on their misunderstanding of economics."

      What the market knows is that the governments of the world, especially ours, are printing trillions of new dollars in excess of new production, and that eventually that will cause massive inflation. They also know that that the governments of the world have promised tens of trillions in health care and retirement benefits that it will not be able to pay without printing even more money. That is reflected in the price of all commodities. Traders deal in the real world John, not MMT theories and fantasy.

    • profile image

      kendonhank 4 years ago

      "All of the things John and I have been discussing are inter-related, but at the root all we are claiming is that government spending funds a capitalist economy and deficit spending increases the persistent money supply to account for growth, leakages, savings and profits (which are essentially savings)."

      I have already agreed that the government needs to provide dollars to account for present growth and leakage. That is different than saying the government can drive substantial additional future growth by providing dollars above and beyond that needed to account for existing production and leakage. That is what you would be doing by having the government hire tens of millions of new people. That will cost trillions above and beyond current production.

    • profile image

      kendonhank 4 years ago

      "Looks like Krugman is now fully on board with MMT although he may never admit it...it would be career suicide for him."

      Why? How do you differ? Krugman thinks the government needs to print some more trillions and send it to the unproductive to get the economy going, and so do you.

      Is the big distinction that he doesn't call the debt national savings? So what?

      BTW, if I buy 5T in treasuries from the government, that belongs to me, not the country generally. The government owes ME that money. So how is that national savings.

    • profile image

      pjmeli 4 years ago

      Are you going to explain why we had no deflation from 1997 - 2007 despite having 6T in new growth, trillions more in leakage/savings, and only 1T in deficit spending.

      Oil? Numbers please.

      Your silence is deafening.

    • profile image

      RGO 4 years ago

      An excerpt from the Krugman article.

      "This sounds plausible to many people, because it’s roughly speaking what happened to Greece. But we’re not Greece, and it’s almost impossible to see how this could actually happen to a country in our situation.

      For we have our own currency — and almost all of our debt, both private and public, is denominated in dollars. So our government, unlike the Greek government, literally can’t run out of money. After all, it can print the stuff. So there’s almost no risk that America will default on its debt."

      So the only difference between the U.S. and Greece is that they don't print their own money. My goodness. Then why doesn't Greece just drop out of the Euro, print up some trillions of Drachmas, pay off its debts, spread some more around, and they'll all be rich.

      Meanwhile, the U.S. can never default because it prints its own dollars. Well yeah, they can print up all the trillions they need, but they won't be worth anything? They will be repaying the debt with devalued dollars. Is that a technical default? Maybe not, but ask any serious investor what they think? Ask China why they are dumping U.S. dollars.

      Seriously, this guy won a Nobel prize?

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      “That same argument could have been made 100 years ago, and 200 years ago, and 300 years ago. There is no limited to the products we can develop and consume.”

      This is easily disproved: You can produce 24 hours a day; then, you will not have enough time to consume all of that production.

      Only 200 years ago, just about everybody worked in agriculture. Now, it's about 2%. Things are changing fast. I have no trouble envisioning a future in which almost all production is automated. Then, you are going to have to rethink your “people are rewarded according to their production” theory even more than you need to rethink it already.

      “Do we have personal spacecraft? Do we have time machines? Do we have fusion reactors? Do we have pharmaceuticals that can reverse all forms of cancer? These and other things will be created by new technology, employ billions of people, and have absolutely zero to do with how many dollars the government prints and redistributes.”

      Really? Because most if not all of those technological advances you just mentioned are going to come from basic research – the kind that the government funds because the private sector doesn't find it immediately profitable. You can trace most breakthroughs back to government-funded research in medicine, basic sciences, and defense spending.

      “Do you really thing the next big technological breakthrough and job creator is waiting for the government to mail out a new batch of welfare checks for purchases of lottery tickets and Doritos?”

      I think that businesses are waiting for people, including those without employment, to buy stuff, and nothing is going to move forward until that happens. And that isn't going to happen unless the government creates some new money and spends it on things like keeping people afloat.

      You keep talking about technological breakthroughs employing everybody. When can we expect this to happen?

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      “$ 10,000 net to hire someone at minimum wage? Too funny. If the government is doing the hiring, you have to figure at least 100k each for that minimum wage job? And that doesn't include the millions of government bureaucrats that would be hired at all levels to manage the process. And if you are only paying minimum wage, then they would keep most of their welfare benefits. And once you got them on the government dole at minimum wage, the clamor to increase the minimum wage would begin, and before you know it, they would be making more than engineers in the private sector. Very naive.”

      The thinking is that a job guarantee would replace much of the current web of social safety nets.

      “BTW, why would you only pay them minimum wage?”

      A job guarantee at minimum wage would itself act as a wage floor. Ideally, a private sector job would be a bit more attractive than a guaranteed job, so that one would naturally look to move to a private sector job if they could. Would you rather hire someone who was unemployed for the past year and did nothing, or someone who was working in a crap job for the last year?

      “If new workers with spendable cash drives the economy, why not pay them double minimum wage? Triple? Quadruple. Imagine how fast the economy would grow.”

      Wow. I'm sorry, Ken, I grossly overestimated your understanding of this stuff earlier. Maybe I've been wasting my time all along.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      “Are you going to explain why we had no deflation from 1997 - 2007 despite having 6T in new growth, trillions more in leakage/savings, and only 1T in deficit spending.”

      Ken, I went back and read the whole comment section – a lot of work – and nowhere in there does pjmeli say what you claim he said. You have been harping on this for way too long, and it's all based on your own misunderstanding. The only one of us who has claimed growth needs to be funded dollar-for-dollar was you, in your widget analogy. You were wrong then, and you are wrong now.

      Now I'm sure I've been wasting my time.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      RGO: "Meanwhile, the U.S. can never default because it prints its own dollars. Well yeah, they can print up all the trillions they need, but they won't be worth anything? They will be repaying the debt with devalued dollars. Is that a technical default? Maybe not, but ask any serious investor what they think? Ask China why they are dumping U.S. dollars."

      RGO, while I appreciate participation in the discussion, this stuff has all been covered, and kendonhank has nearly exhausted my patience for teaching remedial economics.

      There is no need to "pay off" the debt, but if we decided to do so, we would have no trouble printing up the necessary dollars. And as bonds are freely exchangeable for dollars right now, there would be no effect on inflation. There is about $9 trillion worth of dollars and bonds in private hands right now, and if they cashed all of those bonds in, there would be about $9 trillion worth of dollars in private hands. Same purchasing power, no inflation.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "Your silence is deafening." - kendonhank

      You've already conceded to our argument. There will be no backtracking.

      I'm done here. At least with you.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "They will be repaying the debt with devalued dollars." - RGO

      RGO, did you start reading this thread at the end? This absurd statement has been refuted already dozens of times.

      Actually, if we were re-paying the debt, paying it in devalued dollars would be a feature not a bug. Alas, repaying the debt makes no sense and can never happen. It would be impossible.

      The "debt" is an accounting abstraction, it is the government side of the record of money creation. You've heard of double-entry accounting I assume. If the government doesn't spend money into the economy, there is no money. You are welcome to work for and get paid in bank debt if you choose. I will only work for net dollars.

      The non-government holds $11 Trillion in net dollar assets as dollars and bonds. We earned every penny of it, why would we have to pay it back?

      The government "holds" a number on a balance sheet. Not very heavy.

      The interest the government pays is voluntary (and set by the Fed), and Congress could put an end to anytime it wished.

      The idea that we have to pay it back is absurd. If we paid it back, there would be no net dollars left in the world. That doesn't make any of sense.

      The amount of net money in existence is directly related to how much goods and services we produce. Our production is constantly rising, yet many think it is smart to fix the level of funds needed to consume that production and that will "force" prices down. It will only "force" a decrease in production.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "My understanding is that Krugman's neo-Keynesian theories are pretty much orthodox economics as taught in most universities which is not true of MMT." - Ralph Deeds

      Ralph, what you say is true, but the things he is now writing about in his recent articles, and these are on the opinion pages not his blog, are in direct contradiction to orthodox economics. He is coming closer and closer to MMT, and from here he can't retreat. It isn't surprising, one of his good friends is Jamie Galbraith who is full-on MMT, although he never uses the word. Galbraith is the economist that introduced me to the writings of Warren Mosler, the father of MMT, and for me the rest is history. MMT observes the laws of arithmetic and systems, which conventional economics does not do.

      Krugman has adopted positions now which are consistent with MMT and opposesd to orthodox economics…MMT rejects the Quantity Theory of Money, Ricardian Equivalence, IS/LM, the Loanable Funds theory and several others…rejected because they don't rely on how the world works in reality and don't obey the laws of arithmetic except under certain unrealistic assumptions.

      By admitting that the Fed sets interest rates on bond sales (not the market) and that the government is the issuer of the currency and can thus never "run out of money" he has stepped firmly onto MMT ground.

      How would you characterize this about-face?

      BTW, nearly everything taught in orthodox economics is untethered from reality and as such, useless. Recent events provide plenty of evidence. Orthodox economics persists because of false credentialism.

      Credentialism is the enemy of the 99%. We have a pay-to-play system and those in positions of authority (academics and politicians) have sold out in order to have a chance to grab the gold ring. An academic or politician that goes against the grain…against those that fund them…will have a short career indeed. Most conventional wisdom cannot be trusted…one does so at his own peril.

    • profile image

      kendonhank 4 years ago

      "The thinking is that a job guarantee would replace much of the current web of social safety nets."

      Not at minimum wage it wouldn't John. It would just add another layer of welfare to the system. Presently, private sector workers who make far more than minimum wage collect an array of welfare benefits, including the EITC, food stamps, phones, fuel subsidies, education subsidies, housing subsidies, etc. Your government job would have to pay big bucks to wean the government dependents off their welfare and into real work.

      And of course it would take hundreds of thousands if not millions of government bureaucrats to manage 30 million new workers.

      You are not dealing reality.

    • profile image

      kendonhank 4 years ago

      "By admitting that the Fed sets interest rates on bond sales (not the market) and that the government is the issuer of the currency and can thus never "run out of money" he has stepped firmly onto MMT ground."

      He has stepped further into the abyss of absurdity.

      The government only sets rates as long as it buys a big chunk of its own bonds. No different than any other auction where the seller tries to bid up the buyer. Smart buyers know the true market value of the item and go elsewhere. Investors will not buy government bonds forever at artificially low rates.

      True the government can never run out of money. But the money they print in excess of real production will be worthless. No investor will continue to invest when they are repaid with devalued dollars.

    • profile image

      kendonhank 4 years ago

      "You've already conceded to our argument. There will be no backtracking."

      Because you cannot explain it. 6T in growth from 1997 to 2007, yet only 1T in deficit spending and no deflation. In fact, we had 3% inflation per year. Where was the deflation? There was no deficit spending, not nearly enough to support 6T in growth, let alone replace leakage.

      You argued that it was due to oil, but then you ran when I asked you for your calculations.

      Weak.

    • profile image

      kendonhank 4 years ago

      "Ken, I went back and read the whole comment section – a lot of work – and nowhere in there does pjmeli say what you claim he said. "

      That is b.s. Pjmeli has stated many times that deficit spending is the source of all economic growth. He has stated that dollars must be provided to replace leakage which he estimates at 1.5T this year. Without these dollars, he claims there would be deflation and that consumers would horde dollars, creating a deflationary spiral.

      Well, we had 6T in growth between 1997-2007 plus leakage, yet only 1.1T in deficit spending. So unless you're telling me that 1T in deficit spending is sufficient to support 6T in growth plus trillions more in leakage, then I ask you, where was the deflation? In fact we had 3% INFLATION per year.

      Both you and pjmeli argued initially that it was due to oil, but when I asked you back that up with numbers, you changed the subject.

      Like I said before, checkmate, and knocking the board over won't change the result.

    • profile image

      kendonhank 4 years ago

      "You can trace most breakthroughs back to government-funded research in medicine, basic sciences, and defense spending."

      That is a liberal myth. Government does contribute to basic science and provide some seed technology, but government's overall contribution to technology is infinitesimal compared to private industry. Would you like to go down a list of inventions and their origins.

      "You keep talking about technological breakthroughs employing everybody. When can we expect this to happen?"

      Compare the technology and the number of jobs now with 100 years ago John. Technology breakthroughs and job creation happens everyday, and they would happen faster if government would get out of the way and stop inhibiting/penalizing entrepreneurship.

      "I think that businesses are waiting for people, including those without employment, to buy stuff, and nothing is going to move forward until that happens. And that isn't going to happen unless the government creates some new money and spends it on things like keeping people afloat."

      Taking money from those who earn it (through taxation or printing/inflation) and giving it to those who do not does not grow the real economy. You can get away with a bit of new printing without inflation, but not the trillions you envision.

    • profile image

      kendonhank 4 years ago

      "You can produce 24 hours a day; then, you will not have enough time to consume all of that production."

      Perfect illustration of your lack of understand of production and technology.

      I could write thousands of lines of code all day developing new cloud technology and not diminish by one femto second my ability to use or consume it.

      Production is more than Doritos, lottery tickets, and paper dollars John.

      Until you understand technology and production, you are wasting your time studying economics. The real world is driven by production. Of course you need dollars to facilitate efficient exchange and storage, but production and innovation come first.

      If I double the amount of oxygen, will you run twice as fast. Perhaps when you have very little oxygen. But how about when you have a normal amount. You may run a little faster, but after that you just get light headed. Same thing with dollars. You need enough to maintain constant pricing for new production, but adding more dollars above and beyond current production does not get you substantially more production, just inflation. The 50 million workers you would like to put on the government payroll would create massive inefficiency and inflation with very little real production.

      We would be the old Soviet Union and Communist China in short order with government spending and make work factories crowding out the private sector.

    • profile image

      kendonhank 4 years ago

      John,

      Why doesn't Greece drop out of the Euro and go back to the Drachma. Poof! No more debt and no more need for silly austerity. They could print as many Drachmas as needed to pay off their debt, or default if their creditors would not accept Drachmas. Then they could print some more Drachmas and put everybody back to work in a government job and get the economy humming. Production and innovation would immediately increase in pursuit of the new Drachmas. Who knows what technology breakthroughs that would lead to. Yes?

    • profile image

      kendonhank 4 years ago

      John,

      50 million new jobs at net 10k per job?

      As John McEnroe once said, "You cannot be serious."

      Total detachment from the real world of production.

    • profile image

      kendonhank 4 years ago

      John,

      I can just imagine pjmeli and his MMT friends steaming along in the Titanic when suddenly it is struck by an iceberg and begins to sink.

      Prior to getting hit by the iceberg, pjmeli and his friends had been discussing the origin of the ship and ships generally, noting that without deck chairs, there would be no ships. After all, if there were no check chairs, there would be no passengers (where would they sit), and thus no demand for the ships.

      Anyway, the ship gets hit and the captain tells the passengers to abandon ship. The engineer who helped design the ship agrees that the ship cannot survive the massive breach and will sink.

      Meanwhile, the MMT theorists are undeterred. Noting that the ship could not exist without deck chairs, they set to work on a new algorithm for rearranging the deck chairs that will stabilize the ship.

      The engineer is skeptical, but the MMT theorists present ironclad proofs, the centerpiece of which is the revolutionary insight that the ship is not a ship, but a manifestation of deck chairs. The engineer reluctantly agrees to test the new algorithm and the MMT theorists go busily about rearranging the deck chairs. But the ship continues to sink.

      When pressed by the engineer, the MMT theorists insist that the ship is not sinking, but actually rising in the water, or at least not sinking as fast as it had been. But the engineer sees otherwise and the captain orders the evacuation.

      The MMT theorists are of course incredulous and refuse to abandon ship, preferring instead to fine tune their algorithm and offer treatises on its correctness. They also take time to scoff at the engineer for not understanding ship building and the passengers for buying into the conventional wisdom.

      As the passengers and crew sail off in the lifeboats, the MMT theorists jeer them and recline in their deck chairs, until finally the ship does the unthinkable, and in violation of all settled deck chair science, plunges into the depths.

      Sorry to boor you. Political satire is my hobby.

    • profile image

      kendonhank 4 years ago

      "BTW, nearly everything taught in orthodox economics is untethered from reality and as such, useless."

      Any economic theory that ignores production, productivity, innovation, and human behavior is untethered from reality, and yes, useless.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "Any economic theory that ignores production, productivity, innovation, and human behavior is untethered from reality, and yes, useless." - kendonhank

      MMT is not untethered from those things, it just understands that those things don't happen without CAPITAL, hence the name capitalism, and the government provides the capital.

      Something you are apparently not bright enough to understand.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "Well, we had 6T in growth between 1997-2007 plus leakage, yet only 1.1T in deficit spending" - kendonhank

      If we had $1.1 in deficit spending, then the growth in nominal (net dollars) wealth was $1.1 Trillion. Period. Impossible to be otherwise. It's simple addition.

      If the growth you are talking about is growth in GDP, you are more confused than I thought. GDP growth is a measure of the flow of dollars (transactions) over a years period. Many dollars get spent several times before they are saved, this is a measure of economic activity. Spending a dollar multiple times doesn't increase the number of dollars.

      Of course, as always, 6x GDP growth over that period could not have occurred if we hadn't spent the extra $1.1 T. In addition, people had to,spend down savings.

      And don't forget, the government spent way, way more than that $1.1 T through the magic of progressive taxation. Probably several times that.

    • profile image

      kendonhank 4 years ago

      "Of course, as always, 6x GDP growth over that period could not have occurred if we hadn't spent the extra $1.1 T. In addition, people had to,spend down savings.

      Well, that's better than your oil explanation. But what about leakage? Surely there would have been several trillion in leakage over that 11-year period. Where was the deficit spending to cover that? BTW, the savings rate over that 11-period period was never negative.

      "And don't forget, the government spent way, way more than that $1.1 T through the magic of progressive taxation. Probably several times that."

      But taxation doesn't add new dollars to the economy. So how would that provide dollars for growth and leakage. You estimated leakage to be 1.5T for this year alone. What was it from 1997-2007.Probably less than 1.5T, but even if only half, that would still be 8T over 11 years. Where was the deficit spending to cover this?

    • profile image

      kendonhank 4 years ago

      "MMT is not untethered from those things, it just understands that those things don't happen without CAPITAL, hence the name capitalism, and the government provides the capital."

      Capitalism is private ownership and control of the means of the production. The government owns and controls huge swaths of our economy and increases that ownership and control year upon year.

      The dollars for a capitalist economy come from the government, but the allocation of those dollars to particular production is done by the private market. Again, in our economy, the government has enormous control over the allocation of dollars, and that is not capitalism.

    • profile image

      kendonhank 4 years ago

      "MMT is not untethered from those things, it just understands that those things don't happen without CAPITAL."

      Of course it is untethered, hence your recent statement:

      "You can produce 24 hours a day; then, you will not have enough time to consume all of that production."

      Total ignorance of production and technology. People consume all that they produce, or else they would not produce it. There is no limit to what can be produced or consumed, unless of course you are talking about Doritos and paper clips.

      Or how about John's statement:

      "You can trace most breakthroughs back to government-funded research in medicine, basic sciences, and defense spending."

      Again, false. Government is a minor player in new technology development.

      These and similar statements throughout this thread show a total disregard for production, productivity, and technology, which are the true drivers of any economy.

    • profile image

      kendonhank 4 years ago

      "MMT is not untethered from those things, it just understands that those things don't happen without CAPITAL, hence the name capitalism, and the government provides the capital."

      So you cannot have capitalism without government or government printing of money?

    • profile image

      kendonhank 4 years ago

      Money is like electricity at a concert. Yes you have to have enough of it to power the lights and speakers, but the quality of the production is determined by the musicians, not the electricians. Providing more electricity than is needed to power the stage and sound system does not make the musicians sound any better.

    • profile image

      kendonhank 4 years ago

      Pjmeli,

      By your narrow definition of wealth, which is the number of dollars in the economy, and given that the government provides all dollars, I will have to concede that you are correct in your analysis that all wealth comes from government deficit spending.

      By your definition, production, technology and productivity are indeed irrelevant. The government prints more dollars and we are all wealthier by that amount, regardless of how productive we are, how much our dollars can purchase, and what is produced.

      I was speaking of real wealth, which is the amount of goods and services we all accumulate, and the purchasing power of the dollars we accumulate. In this regard, MMT is indeed untethered from the real economy.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "So you cannot have capitalism without government or government printing of money?" - kendonhank

      Not under current institutional arrangements - the kind of which are the basis for most if not all world governments.

      How would you handle money-issuance?

      No matter how one does it, there must be enough spending in place to purchase all production, or nearly all, otherwise production will go unsold and unemployment will follow.

      "I was speaking of real wealth" - kendonhank

      I'm not oblivious to real wealth. My (and John's and the MMT) argument is that real wealth will not increase without an increase in nominal wealth.

      Keeping the money supply constant will result in serious deflationary pressures. Businesses often invest in product development that takes years to recoup. If the value of dollars are increasing as prices decrease businesses will not be able to satisfy their financial obligations. They will fail, consistently.

      Government spending (the only way known to introduce net money into an economy other than a helicopter drop) helps everyone.

      Inflation is nothing more than a safety valve, maintaining headroom so the system doesn't begin to deflate. It isn't possible to maintain a zero inflation, no entity has that kind of control over a system as big and complex as the world economy, and deflation is much more destructive than inflation. This is accepted wisdom throughout the field of economics save for a handful of contrarian opinions.

    • pjmeli profile image

      Paul Meli 4 years ago from Mount Dora, Florida

      "By your definition, production, technology and productivity are indeed irrelevant." - kendonhank

      This is an absurd interpretation of what John and I have been saying.

      These things are very important but a shortage of these things IS NOT THE PROBLEM.

      The problem is not enough spending, and as wonderful as technology and production are in increasing our quality of life they cannot create net money.

      Businesses and everything they do can only move money around within the economy…they cannot increase the supply, nor can banks, contrary to conventional wisdom, which apparently sees only the asset side of debt.

      Government spending makes it possible for businesses to succeed simply because without it businesses will not have many customers, and the number of customers available would approach zero over time.

      Also, productivity is irrelevant once we reach the point where we are capable of producing more than we can consume…we passed that point decades ago.

    • JohnfrmCleveland profile image
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      John 4 years ago from Cleveland, OH

      Ken, your arguments are just repeats at this point. We have addressed all of your posts, despite the repetition, and the discussion is not moving forward. Move on, please.

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      Great Blog, John. I'm a retired quantitative psychologist who got interested in MMT 5 years ago and have been trying learn as much as I can about it. I've been making comments based on MMT on yahoo news, because the general public needs to know that they have much to learn about how our federal economy works. If you don't mind, I want to add here something I wrote earlier this year:

      Modern Monetary Theory is the description and theory of fiat money systems and their management by a central government sovereign in its control of the money supply. The central government justifies its existence by establishing justice, insuring domestic tranquility, providing for the common defense, promoting the general welfare and securing liberty for all. In the economic realm it seeks to maintain stable prices and full employment as required by the general welfare.

      Money is representations (tokens) issued by the government in units of account of debt obligations between parties in the economy. Money is not a commodity as such. It is a measure of obligation. Money concerns a social obligation. The government has exclusive power to decree what money is in its realm and to regulate its value and its value with respect to foreign money. By requiring that all taxes, fees, and fines be paid in the government's money, it establishes a need for the citizenry to acquire and use that money, which they do in exchanges in the economy. The government will vigorously oppose and punish counterfeiting to prevent fraud and maintain its monopoly on the money supply.

      To maintain the general welfare of stable prices and full employment the government must insure that there is sufficient money in circulation to sustain the vast number of debt obligations occurring in the economy, be prepared to take steps to remove excess money from circulation to prevent inflation and to create and spend new money into the economy to overcome deflation in the economy.

      MMT sees the central government's budget making process as requiring attention to more than taxes and spending. All sources of the nation's inflow and outflow of money to and from circulation must be considered with the aim to seek balances among all these sources to the advantage of the people. Among sources of inflow are deficit spending (which leads to money creation and expenditure), tax-based government spending, buying of bonds by the central bank, exports or sales of goods and services to foreign nations, investments which draw out savings to grow and expand productive capacity, and loans of banks .

      Sources of outflow of money from circulation are taxes paid to the government, sales of bonds by the central bank to banks, imports (which send money out of the country to pay for foreign made goods and services), savings which take and retain money out of circulation, and redemption (payback) of bank loans.

      The primary limitations to the money supply when considered in terms of the government's general aims are the availability of material and productive resources and workers to do the work at stable prices and wages.

      Several consequences follow from the above.

      (1) Government does not absolutely need taxes to spend.

      (2) Government uses taxes to withdraw money from circulation.

      and to make citizens acquire and use the government money.

      (3) Deficit spending leads to new money creation and spending.

      There is a time and a place for everything:

      (4) In recessions government must cut taxes, increase deficit spending to retain and introduce new money in circulation, since recessions occur when not enough money is circulating to sustain the full production and purchase of goods and services, leading to unemployment. Government must invest in education, build up and modernize defensive forces, renew and expand the nation's infrastructure and public security forces.

      (5) In inflations--when excess money in circulation is pursuing available goods and services--government must do some combination of the following: spend less, reduce deficit spending, raise taxes to withdraw money from circulation, sell (through the central bank) bonds and securities to banks to drain money from the reserves of the banking system, encourage imports by eliminating or lowering tariffs, encourage private savings, raise interest rates on loans.

      (6) The central government cannot go into bankruptcy, be insolvent, unless through ignorance the government constrains its powers to create and spend money. In a proper fiat money system, the government routinely pays off its debts by use of newly created money.

      (7) The following equality holds:

      (T - G) + (S - I) + (X - M) + (L- R) = 0

      T - taxes

      G - Government expenditure

      S - private savings

      I - investments

      X - exports

      M - imports

      L - bank loans

      R - loan redemptions

      The national debt gets paid off all the time when the Fed buys Treasury securities from banks with money it creates out of thin air. The banks give up the securities to the Fed in return for additions to their reserves equal to the value of the securities. This adds new money into the banks' reserves and potentially will increase money in circulation because banks will have more reserves to back more loans. The Treasury then has debt free money that it got from the banks, so deficit spending is indirectly equivalent to the creation of new money for the spending. The Fed in this case acts as a government entity created by Congress and governed by Congressional law. Thus it does not have to be paid for the complete value of the securities it holds. It just has to be paid 6% of the interest on each security as a transaction fee to fund the Fed's operations. The securities held by the Fed are "retired" or "in limbo" until they are sold again to someone outside the Fed. The Fed swaps mature securities for new securities with the Treasury. The Fed needs securities to sell to banks to drain money from their reserves and constrain lending. They buy securities during deflations (recessions and depressions) which puts newly created money into the banks that previously held them.

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      Stan - thanks for the comment. That post could be your first hub, and I'd be happy to have another MMT voice here at the insanely conservative Hubpages.

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      "ALL new money in any form (cash, credit or contracts) in excess of real production IMMEDIATELY devalues all existing money. When and how that shows up in prices is another matter. " - Ken

      This strikes me as trying to prove something in the real world by definition, a tautology. It is true that much of Neo-Classical and maybe even Austerian economics is a grand tautology, reasoning from definitions. This concept is static, not dynamic, non causal, unscientific, tautological. MMT wamts to assert a causal relation that when there is more money than money needed to clear all goods and services at stable prices this is the cause of higher prices. When there is not enough money in circulation to clear all goods and services offered for sale, this leads to falling prices, unemployment. MMT seems at this time to be focused on how fiat money, created out of nothing, implies that the government will be able to pay any debt, if it is unfettered by ignorant politicians and voters. The Austerians see this as leading inevitably to inflation, by definition. They are focused on maintaining stable prices and ignore full employment. That fits the European case, which lacks a sovereign central government with a mandate to seek the general welfare of its citizens by seeking not only stable prices but full employment. Our Central bank has the mandate from Congress to seek stable prices and full employment. The European Central Bank only is mandated to maintain stable prices, and so ignores the severity of the impact of its austerity programs on the welfare of its people.

      Now I'm in for it....

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      I doubt you're in for it, Stan. KenDonHank hasn't been around for 10 months, and he (they) are not members here. I argued with him on the Yahoo boards and invited him here to debate in a better environment. And debate we did - those Austrians don't have any quit in them. They don't have much "learn" in them, either. Also, some of my positions have changed a bit since those arguments. I've only been into MMT for about two years, and there is still much to learn (and unlearn).

      But let's talk about your post. I agree with most of what you said, but I don't agree that excess dollars need to be siphoned off by bond sales in order to prevent inflation. I don't think that the mere presence of dollars (as opposed to bonds) in one's pocket leads to more spending. Bonds are pretty liquid - if a bondholder wanted to buy something, he could easily do it, and the paltry interest wouldn't be much of an incentive not to spend. At best, bond interest is probably break-even with inflation. I think that holding bonds is simply preferable to holding dollars *if you would otherwise just hold dollars,* and not buy stuff or invest your money.

      Inflation is the big question in all of this, and usually the first thing we have to explain to those who cling to the quantity theory of money (whether they know what it's called or not).

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "…I don't agree that excess dollars need to be siphoned off by bond sales in order to prevent inflation…"

      I tend to agree with this John. The question is, in the abscence of bonds what would holders of large amounts of cash do with it? If Apple were to try to put it's $150B cash hoard in savings accounts it would require 600,000 accounts…unmanageable.

      Bond holders want safe storage for their financial assets and bonds are the only such vehicle available to them.

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      rumblemacro 3 years ago

      Great thread. I've been following mmt for several years now.

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      Paul - welcome back.

      rumblemacro - welcome, period. Always good to see another MMTer, especially here.

      I don't know if it's the debt ceiling thing or what, but I've been getting a lot more traffic lately. Even a few comments after a 10-month hibernation. I may even be inspired enough to write another hub.

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      You and Pimeli need to not focus just on one method used to counter inflations and deflations. The systemic approach of MMT requires that you consider the many inputs into circulation of money and the many outgoes or drains. The Fed is only one of the government's tools for dealing with inflations and deflations. It's buying and selling of securities is designed to effect the reserves of banks by draining them during inflations and augmenting them during deflations. That effects the interest rate at which banks lend to one another and make loans. Taxes are another tool, government can use to drain money from circulation during inflations. Cutting government spending is another. The government can also consider trade policy, can raise tarrifs during deflations to cut down on imports to keep money in the country or to lower them during inflations to send money from circulation in the home country via increased imports. Look up http://answers.yahoo.com/question/index?qid=200812... and also Federal Reserve FAQ's and descriptions of the purposes and methods of their Open Market Operations. My description of the inputs and outgoes from circulation is only broad brush and not intended to be exhaustive and complete.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      stanfrommarietta…first, welcome to the discussion, or what had been masquerading as a discussion with kendonhank. Most if not all of his arguments were regurgitations of Austrian-school dogma, so trying to apply logic and reason based on real-world systems would be pointless.

      As to your comment above:

      "You and Pimeli need to not focus just on one method used to counter inflations and deflations."

      …I don't see where we were doing that. What method are you referring to?

      As to your discusssion of the Fed's tools, my perspective is that the Fed cannot add or subtract to Net Financial Assets in the non-government, it can only change the composition of existing assets (cash and bonds) and the rates of interest they earn.

      Thus, the Fed has very limited tools to create an expansion unless borrowers have the headroom to increase their indebtedness. Any such expansion will not result in an increase in NFA, because credit nets to zero (actually it results in a negative because the sum of payments is greater than the original balance).

      Over the past 4 to 5 years there has been no expansion of consumer debt (CMDEBT), in fact the outstanding balance has declined by $1T since it's peak before flattening.

      WRT sources of money inputs, there are only two, public investment/spending and credit expansion (reversing the trade deficit is off the table for the time being) and credit expansion is a direct function of public spending.

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      @Stan - a lot of the tools you mentioned for fighting inflation - raising taxes, cutting spending, draining reserves, etc. - are only going to be used at an extreme point on the curve, when the economy is so theoretically hot that we start to reach our limits and shortages become an issue. I personally don't think that we will ever get there with regard to materials or energy; the realistic hope is to get there with full employment, and in that case inflation will still be held in check by a relatively low wage floor.

      Let's say we reach full employment with a job guarantee program - now we have reached our limit on labor, and production hits a plateau. The private sector can still draw any needed labor from the pool of minimum-wage govt. job employees, so the cost of labor shouldn't go up. And since the private sector has been left alone, with only a bit of new demand to deal with, there is no reason to think that they are facing any shortages of materials or energy, so prices of goods and services should not go up. Demand-pull inflation is nowhere on the horizon, and cost-push is the same as it ever was, pretty much all due to the price of oil.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      " draining reserves, etc"

      I would have to say that "draining reserves", being an off-balance-sheet operation, would have next to zero effect on inflation.

      What would the transmission mechanism be?

      Inflation (demand-side) is essentially trying to buy more than you can produce.

      Spending (or not-spending) on actual goods and services is about the only way to directly affect inflation. Here I'm referring to demand-side inflation rather than supply-side. Not much we can do about lack of resources or monopoly pricing using fiscal (or monetary) tools.

      Money (dollars/bonds) is not a limited resource, unless you run your monetary system as a gold standard, which is pretty much what we (but Europe more-so) have been doing.

      So we have the POTUS making statements like "we are out of money" or we "have to borrow from the Chinese" or the like.

      I have yet to see a Yuan, Yen or Euro in the wild.

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      "I would have to say that "draining reserves", being an off-balance-sheet operation, would have next to zero effect on inflation."

      You're right, Paul, my mistake.

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      John and pimeli: "I would have to say that "draining reserves", being an off-balance-sheet operation, would have next to zero effect on inflation."

      Where do you see the government actually using its unlimited powers to create money to counter inflation and deflation (like now). How do you see it paying off the debt?

      I get the impression that many MMTers talk about how we have a fiat money system and can pay off any debt we have. But the details in, say, Fed operations are not spelled out and it seems that you, in particular, are saying that the Fed's open market operations to implement monetary policy to manage depressions and inflations is totally ineffective. So, if the Fed can't add new money into the economy by buying Treasury securities, what other agency of our government can do that, and with what tools?

      I grant that QE2 had no effect, but the problem was that banks were not lending to nonbank businesses and individuals. They had the reserves to back up increased lending, but no one was borrowing because businesses didn't see increased customers with money buying their products, and did not expand, hence did not borrow from the banks. The Congress had to deficit spend on things like infrastructure to create the customer demand in the workers that would build the infrastructure. Our Congress wasn't doing that, so we muddled along in recession.

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      John and Pimeli: "Demand-pull inflation is nowhere on the horizon, and cost-push is the same as it ever was, pretty much all due to the price of oil."

      Is there a difference between inflation when the rise in prices is due to an off-shore vendor of, say, oil, versus when the vendor is on-shore and spending its income within the country in circulation. The Saudi's are not major buyers (other than for arms) of US products; they stash the dollars they get for oil in securities bought from the Fed. That takes most of those dollars out of circulation for the time being.

      The point is that although prices are rising, the money in circulation to pay for it is leaving the country, reducing demand for the goods in question. See, I look at this systemically as the question of whether there is sufficient money in the circulating pool to sustain a given level of production, given the net effect of inputs from various sources and outgoes which subtract money in circulation. MMT is a monetary theory.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "Where do you see the government actually using its unlimited powers to create money to counter inflation and deflation (like now). How do you see it paying off the debt?" - stanfrommarietta

      Stan, the government creates money when Congress passes bills that include spending. It changes the rate of money destruction (among other things) when passing a bill altering tax rates. Anything in-between (operations) is accounting, and will be done by the people hired to do it or heads will roll. In other words operations play no part in money creation, any more than the paymaster at a business creates money when he writes a check paying a bill.

      I don't see it as paying off the debt (assume you mean public debt)…ever, because that is not a goal of the system, in fact it would destroy the system.

      "if the Fed can't add new money into the economy by buying Treasury securities, what other agency of our government can do that, and with what tools?"

      The only tool remaining is fiscal policy…public investment…meaning the government must increase it's spending. Monetary policy is only effective at the margins…like trimming a bush…pointlees if the root is sick.

      "the problem was that banks were not lending to nonbank businesses and individuals."

      Banks aren't lending to individuals because individuals (the ones pre-disposed to borrowing) can't afford to take on more debt…the system is effectively saturated. They aren't lending to businesses because without adequate demand the prospects for growth (and thus repayment) are bleak, because the businesses customers can't afford to buy their increased production.

      Here I turn the idea that banks create money when they make loans on it's head…the loan process is initiated by the borrower…thus the borrower is in effect "creating the loan"…the borrower must pass all kinds of tests before being allowed to take on debt…banks cannot "push" money out the door, unlike the government when it spends, wherein the government initiates the process. True, the bank can refuse to make the loan, thus refuse to "create" the money, but it doesn't get to decide if the dynamic is in play in the first place. In refusing to make the loan presumably the bank is just doing it's job…it's main responsibility…underwriting…which banks failed to do prior to this crisis.

      "Is there a difference between inflation when the rise in prices is due to an off-shore vendor of, say, oil, versus when the vendor is on-shore and spending its income within the country in circulation."

      Yes…one of the two is not related to money creation…it's a monopoly…with monopoly pricing…a different causation.

      "See, I look at this systemically as the question of whether there is sufficient money in the circulating pool to sustain a given level of production, given the net effect of inputs from various sources and outgoes which subtract money in circulation"

      I agree with most of what you have written in your last comment but I see the system a bit different than what you are describing.

      There is circulation in a sense, but the net flow is always uni-directional…towards the top of the income spectrum, so the circulation you are describing is a decay function that approaches zero unless something is done to maintain the flow. This can only be done by the fiscal authority through public spending or investment.

      An analogy would be a circulating water fountain where the water squirts out the top and makes it's way to the pool at the bottom. Now imagine people with buckets catching the falling water and removing it from the fountain. Gradually the flow declines and will approach zero. The only way to maintain the flow is to add water to the fountain as it is removed. This requires an external source of water.

      In the case of the economy the only sustainable source is net public spending, ie deficit spending. Saving, in the broad sense, is modeled by the pails removing the water from the system.

      The Fed does not have the capacity to do this…it is only allowed to buy and sell existing financial assets and change the rate of interest payed on those assets. The Fed controls price, not quantity.

      Interest payments are made through the Treasury.

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      @pimeli: "Stan, the government creates money when Congress passes bills that include spending. It changes the rate of money destruction (among other things) when passing a bill altering tax rates. Anything in-between (operations) is accounting, and will be done by the people hired to do it or heads will roll. In other words operations play no part in money creation, any more than the paymaster at a business creates money when he writes a check paying a bill."

      That is a rather idealized vision of our fiat money system as an MMT position. You do not seem to recognize that Treasury has created and issued securities to get money from banks to cover the deficit. Why do they do that?

      I hope you don't feel insulted if I say your idea that Congress creates the money when it passes a bill authorizing spending is a bit like Ken's idea that inflation is by definition when the ratio of money in existence (in circulation and in bank vaults and in the back yard) to the goods and services purchasable at stable prices is greater than 1.00. You are simply saying that by definition Congress has created money and everything else is accounting. Money is always accounting, even Congress's authorization of money being spent, but it gets represented in physical forms (electronic bits, paper bills, coins, bookkeeping entries, notched sticks, wampum). I don't see a spelled out chain of physical causation beyond Congress's authorization in your definition. Because Treasury cannot simply create the money to cover the deficit, it issues securities, which banks buy with money in circulation. They expect to get that amount of money back. There is a debt, for awhile. How does it get paid off and new money created and issued into the economy, which makes the money Treasury got from banks, now debt-free after Fed buys securities from banks, equivalent to the newly created money received by the banks from the Fed. Reality has these physical chains of events as money gets passed around and circulates, and our system is just one of many similar but distinct fiat money systems.

      You do not see the Fed as playing any important role in controlling the amount of money in circulation? Tell that to the Fed.

      My aim is not to deny that in some fiat money theories, what you say might make sense if Congress eliminated the Fed and Treasury as the money creator. If Congress authorized the creation and deposition of the authorized money in an account of the Treasury at the Fed (central bank, all of this being book-keeping entries, but physical nontheless) from which Treasury would draw to do physical spending for Congress , then that would be a physical system like what you describe. But what about our current system? The Fed is by law the creator of most new money. How can we show that the system we actually have functions as a fiat money system? I think we can do that, but it is a bit more complicated than the simple system you describe in which Congress creates the new money and has it deposited in an account of the Treasury. Congress has passed laws that complicate the picture, specifying certain institutions and prohibiting certain actions between them, like the Fed cannot create and buy securities directly from the Treasury, with the securities now just orders for money and not IOU's. (They can't be IOU's or the system collapses if every security is paid back with money in the economy (which you recognize) draining all money out of the economy.) Banks are the needed middlemen between Treasury and Fed that allows them to work together to introduce new money into the economy, or to drain some of it.

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      pjmeli@: ""the problem was that banks were not lending to nonbank businesses and individuals."

      "Banks aren't lending to individuals because individuals (the ones pre-disposed to borrowing) can't afford to take on more debt…the system is effectively saturated. They aren't lending to businesses because without adequate demand the prospects for growth (and thus repayment) are bleak, because the businesses customers can't afford to buy their increased production."

      "Here I turn the idea that banks create money when they make loans on it's head…the loan process is initiated by the borrower…thus the borrower is in effect "creating the loan"…the borrower must pass all kinds of tests before being allowed to take on debt…banks cannot "push" money out the door, unlike the government when it spends, wherein the government initiates the process. True, the bank can refuse to make the loan, thus refuse to "create" the money, but it doesn't get to decide if the dynamic is in play in the first place. In refusing to make the loan presumably the bank is just doing it's job…it's main responsibility…underwriting…which banks failed to do prior to this crisis."

      As an engineer, I appreciate your attempt to keep in the physical world.

      As I understand it, when the economy crashed in 2007-2008, the banks ended up with so many "toxic" assets, which they were liable for, that they dared not admit it. They knew other banks were in the same boat, so when it came for the need for interbank loans, needed to keep reserve requirements satisfied, the banks just stopped lending and borrowing--to everybody. Businesses shrank and laid off workers. So the system sort of stabilized at a point after which there were lots of people out of work and lacking in income to buy goods from the businesses. So, the businesses did not see consumers for all the goods they could produce, and they scaled back, until there were just enough people with incomes to still buy goods. Some businesses didn't scale back; they went out of business. So, you are right, businesses needed new customers to justify expanding, and expansion would require loans (new money injected into circulation). So, without businesses trying to expand, the banks didn't see any applications for loans. The businesses may also have had a lot of money in savings at the banks, hoping to ride out the recession until business picked up again. So, you have a point that banks can't push new money out the door, they need demand for loans which creates new money. Bernanke didn't seem to see that. Most of the Fed's open market operations assume business as usual. When banks are lending because businesses and individuals are borrowing, then their operations to drain or augment the reserves of the banks do control inflation and moderate deflation. But the Fed can't do it alone. There are other operators in the system that get involved in fighting inflation and deflations. The main one is Congress and the central government.

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      “You do not seem to recognize that Treasury has created and issued securities to get money from banks to cover the deficit. Why do they do that?”

      You make it sound like the Treasury is in need of dollars, and needs to go fishing for them before we can spend. But the spending is happening all the time, and securities are being exchanged for dollars all the time – as long as the Treasury account keeps a positive balance, they can create dollars and spend them.

      What pjmeli was saying, I believe, is that only spending, an act of Congress carried out by the central bank, increases the number of NFAs (dollars + bonds) in the economy, while Fed actions like QE do not (they can only change their composition).

      “You do not see the Fed as playing any important role in controlling the amount of money in circulation? Tell that to the Fed.”

      Do you mean the amount of dollars as opposed to the amount of bonds? (That's the question I'm going to answer, anyway.) The amount of dollars remaining in circulation is a product of demand. Nobody is forced to buy bonds. Federal spending starts off at the bottom – paychecks, goods and services, etc. - and it works its way through the economy until it gets hoarded by some rich party (China, a corporation, banks, etc.). It's those parties, the ones with large piles of dollars saved up, that want to exchange their dollars for bonds. The faster the rich suck dollars out of play, the faster bonds sell. (And for that matter, the faster the government needs to replace dollars with deficit spending.) Does that explanation make sense?

      I don't like to get into the nitty-gritty of Fed-Treasury mechanics because I find it unnecessarily complicated and a distraction from the bigger picture. The net effect is that together they work like a prototypical central bank, even though private banks are involved. Bonds are another distraction, but it's hard to escape talking about them, because most people enter this conversation due to their worries about the national debt. But if you want to describe a simple fiat economy, bonds are not necessary at all.

      “(They can't be IOU's or the system collapses if every security is paid back with money in the economy (which you recognize) draining all money out of the economy.) Banks are the needed middlemen between Treasury and Fed that allows them to work together to introduce new money into the economy, or to drain some of it.”

      Operationally, every security could be redeemed, because bonds are not a necessary part of a fiat currency economy. Most directly, we could change a couple of laws and simply allow for direct issue of currency. But even within our current system, we could simply mint enough trillion-dollar coins (no debt required for those) to increase the Treasury's balance above $17 trillion. There is no reason all $17 trillion in NFAs could not be all dollars and no bonds.

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      “So, you have a point that banks can't push new money out the door, they need demand for loans which creates new money. Bernanke didn't seem to see that.”

      I don't know what to think about Bernanke. On one hand, his attempts to spur lending through QE make him look like a hopeless monetarist. But on the other hand, what else could he do? The economy needed spending, and there is nothing he can do about that. The economy needed a shovel, and he had a screwdriver. I guess he felt obligated to do something anyway.

      But regardless of what might have been happening with interbank lending, banks always have the discount window, so they could have made loans.

      “When banks are lending because businesses and individuals are borrowing, then their operations to drain or augment the reserves of the banks do control inflation and moderate deflation. But the Fed can't do it alone. There are other operators in the system that get involved in fighting inflation and deflations. The main one is Congress and the central government.”

      Why do you think the level of reserves affects inflation? Or even spending? Look at the Japanese – they can't drum up inflation no matter what they try.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      Stan, I'm an engineer also…mechanical.

      "That is a rather idealized vision of our fiat money system as an MMT position. You do not seem to recognize that Treasury has created and issued securities to get money from banks to cover the deficit. Why do they do that?"

      Because of a law passed by Congress in 1917 requiring that bonds be issued to the public equal to the amounts spent in excess of taxation.

      This was purportedly done because they believed that issuing new money this way would be less inflationary than merely printing it. This idea has no empirical support but Congress and most others seem to subscribe to it. Even so, bond issuance causes no harm to the system and provides a safe store for excess liquidity. Contrary to popular belief, the Fed controls interest rates (price, not quantity) not the market. If the market refused to buy bonds the Fed could buy them through the Primary Dealers. This is unlikely to occur because the more money in existence the greater the demand for a safe store, so bonds are in great demand.

      Banks do not "create" money, they are allowed as franchises under the purview of the Fed to decide which willing borrowers are qualified to get loans. Saying the government has to borrow from banks has the hierarchy of power backwards…banks exist as a subordinate agent of the Federal Government, through the Fed which is between the government and the banks in the hierarchy. If they weren't an agent of the government they would not be able to make loans in state money… by law no entity but Congress has the power to create state money (Article I Section 8 of the Constitution).

      The law created in 1917 was completely voluntary, comparable to tying ones hands behind the back, and operationally-speaking created no mathematical or financial constraint on spending. The only constraint is political.

      Just like when we have been on the Gold Standard, when money needs to be spent, like for financing wars, the so-called constraint is abandoned, but it is also ignored on a regular basis as the Primary Dealers are able to buy bonds from the Treasury and then sell them to the Fed, which ends up holding them. In this way the government buys it's own debt which is held by the Fed and not by the public. One-third of our so-called "debt" is held by the Fed.

      Even so, it is Congress that creates money by passing spending bills…if they did not do so there would be no (net) money created. The Treasury and the Fed do not make the decision to create money and cannot, Congress and borrowers make those decisions.

      The money that borrowers create nets to zero however because they come attached to equal liabilities, thus only Congress can create net money or NFA, the (I-S) component of the sectoral balances identity on which MMT is based.

      The amount they end up creating is unknown however until after tax receipts are settled against spending.

      It is difficult to attempt to control deficit spending without disrupting the economy one way or the other, because the deficit is nether a thing or a budget item, it is an ex-post event that is the result of a complex interaction between the money system and the economic system.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      “You do not see the Fed as playing any important role in controlling the amount of money in circulation? Tell that to the Fed.”

      The Fed can only alter the composition of existing net financial assets between dollars and bonds...it does not and cannot increase or decrease the level...it controls price, not quantity.

      What the Fed thinks is irrelevant, and the evidence is that the Fed does not have the ability to stimulate the economy, at least in this environment. Politically Bernanke is not permitted to admit this. The idea of an independent Fed is nonsense.

      At the end of the day the Fed can only perform the function of a shock absorber, smoothing out the humps in economic activity. It cannot produce net wealth.

      It can and does however influence the flow of funds from the 99.9% to the top 0.1%.

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      @pjmeli: O.K., I think we agree that you are proposing that new legislation be passed by Congress to direct Congress to create and deposit money in the Treasury's account at the central bank for deficit spending. I agree that would be the most elegant and direct way to implement a fiat money system. But right now I don't think politically that would be easy to get. There are some minor problems also with your suggestion, since I don't think Congress knows exactly how much tax revenue is available to the Treasury to offset the contribution by Congress known as the deficit. It is more likely that the Treasury would be in a better position to assess how much taxpayer money has been collected and is available to cover a portion of the spending at the time actually spending occurs. Also, it is important to set up the system so that taxes can be collected and held to drain money from circulation during inflation. Treasury is the logical and current collector of taxes. There would also need to be mechanisms analogous to the Fed's open market operations to modulate the flow of money in circulation to counter inflation and deflation.

      Now, my position is that we look to see what our current system allows, and to what extent is it already a fiat money system. I think it is. It does not require new legislation, I believe, but simply recognition of the facts and their implication. The Fed already redeems the government's debt to the banks every time it buys a security from the banks. That is because the Fed is a government entity, the Fed buys with government money it creates as a government entity to purchase the security, the banks give up the securities to the Fed in return for the money created out of thin air. This increases the potential money supply in circulation equal to the face value of the security. The security is not extinguished until it gets back to the Treasury in a swap of immature securities for return of the mature security (which is done without money changing hands between Treasury and Fed). The Treasury now has received what amounts to debt-free money from the banks equal to the security value. The Treasury can then take the mature security and extinguish it, because the Fed's purchase with new money it created out of nothing is what the Treasury should use to credit its account for the security. The mature security has face value as money and is the collateral for the swap. It's a book keeping problem, and not a legal one. The important thing for everyone is to realize that the Fed and the Treasury are both the government of the United States. The security is backed only by the full faith and credit of the United States government and not the Treasury per se nor the Fed. I admit that our current system is a kind of Rube Goldberg fiat money system, but it works, and if it ain't broke, don't fix it. Just see it for what it is.

      BTW have you seen the booklet put out by the Fed at Chicago called "Modern Money Mechanics: A workbook on Bank Reserves and Deposit Expansion", available at monques@myhome.net. Just google or yahoo a search for "Modern Money Mechanics" and download a copy.

      Congress needs to explicitly inform taxpayers that their money is not needed for spending, but it is needed via taxes to insure use of government money and to drain money out of circulation during inflation. And using taxpayer money to fund part of government spending, helps keep a balance between money spent and money drawn from circulation. Other sources of draining may be needed to get a better balance, although it is best not to reduce all savings to zero, because savings is a source of money for deflationary times. Households may cut back but also draw down from their savings during recessions, preventing the recession from getting worse.

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      @pjmeli: "The Fed can only alter the composition of existing net financial assets between dollars and bonds...it does not and cannot increase or decrease the level...it controls price, not quantity."

      When the Fed purchases the securities with new money it creates out of thin air for the purchase, that makes the money Treasury got from the banks debt free, and it can be treated as the augmenting money in circulation, while the money given the banks from the Fed just restores the banks' reserves. There is no direct connect here between the Fed's money and the banks' money given Treasury, but there is a fungible equivalence here that allows us to see the Treasury as deficit spending with new debt-free money.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      Stan, your last comment makes more clear the ideas on which we haven't come to agreement, although I don't think we really disagree on much in principle. We are kind of talking past each other. All I am trying to do here is present my view of how the system works so a reader can identify my premise(s) and question the logic if they think it is in error.

      "When the Fed purchases the securities with new money it creates out of thin air for the purchase, that makes the money Treasury got from the banks debt free, and it can be treated as the augmenting money in circulation"

      Yes. That's what I said in my last post basically…The Fed can buy bonds from Treasury and create new money…spending…by the Treasury initiated by Congress, or it can buy bonds from other government agencies and hold them, creating intra-governmental debt which doesn't alter the level of NFA in the non-government.

      Rarely are either of the cases described above done…they are not necessary in order to sell bonds, which are in high demand so they are done for other reasons, likely political, for example funding WWII, when the National debt increased 550% over 3 years. As I said earlier, I don't think bonds or no bonds is an important issue except as it is seen politically.

      We can always afford to pay the interest, but all the interest does is make rich people richer. It may affect pension funds in a roundabout way but the gains by the rich are out of proportion to any gains realized by the rest of us, and it doesn't create much if any economic flow.

      In any case these are Rube Goldberg-type schemes that don't matter in any real-world way…they are accounting abstractions.

      Essentially someone somewhere in the process (a worker bee) is initiating a transaction into the otherwise closed system that takes numbers that are not part of the existing system and puts them into existence in that system…something from nothing…adding nunbers to real-world balance sheets…using keystrokes. A scorekeeper.

      No one cares how the scorekeeper puts the points on the board…only that it gets done.

      Once that occurs, if it is as a result of a spending bill Congress created, a number equal to that transaction is spent onto a non-government balance sheet (or sheets) and voila!!…there is new NFA in the system.

      The new NFA is almost always in the form of bonds…the Fed can alter that composition any time it needs to…that is, in effect, the only tool in it's pouch other than the ability to control interest rates, which is related to the other tool.

      Altering the composition of bonds/dollars is occurring in both directions simultaneously so that the level of dollars in the system are changing very little…the main result is that the portfolio interest rate is being altered.

      One additional tool the Fed has that it isn't supposed to use is the one where it buys toxic assets from banks using reserves, making their balance sheet look like they aren't insolvent. This is also likely political (and dictatorial) in nature and belies the notion that the Fed is an independent entity.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "Congress needs to explicitly inform taxpayers that their money is not needed for spending…"

      Stan, with all due respect, this isn't ever going to happen. Ideas like that have been intentionally withheld from the public for centuries. These things are not allowed to be taught in schools or universities, funding sources guarantee that…so we only see a handful of schools that teach these kinds of alternate economic theories.

      As far as Congress is concerned, every member (plus the President) plus everyone else working in government was educated in the system that doesn't teach this stuff…so they don't understand or believe it. This is by design…the elites that guide the system make sure of it and have been successful for centuries.

      We will have to educate ourselves and try to convince anyone that will listen until we reach some critical mass and the ideas become a part of the debate.

      Personally I don't see how any economist in the world would be capable of understanding how the interaction between the money system and the economic machine works without having a foundation in an engineering systems curriculum…particularly Thermodynamics and especially the concepts behind the 2nd Law and Entropy.

      Some people without such a backgroundare able to understand these things because they are curious, have learned to think abstractly and critically, and are not handicapped by ideology. You can't very easily quit smoling if you don't want to.

      The people controlling the system are not interested in alternative theories…they are quite happy with the one they believe…and profit from…and the moment they try to push back against the conventional dogma they will be expelled from the game, relegated to obscurity.

      It's going to be a tough slog. Welcome to the game…on the outside looking in. We need you with us.

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      Again, I like your engineering orientation. Have you read Steve Keen's "Debunking Economics"? He works with nonlinear dynamic models which are inherently unstable. He argues that this is the way our economy is, rather than the naive (I call it the current astrology) neoclassical economics that derives everything rationally, but from premisses that do not mirror reality, and believes in stability and equilibrium for the market. Neoeconomics doesn't seriously test its premisses, like physicists do.

      That said, you said: "In any case these are Rube Goldberg-type schemes that don't matter in any real-world way…they are accounting abstractions."

      That's like saying understanding our economy is like saying all you need to know to understand a Subaru Outback is generally how a SUV automobile works. Everything begins with the driver turning the ignition switch to start the motor. After that it is all mechanical abstractions.

      My view is that we need to understand how our particular economy works monetarily, from Congress's actions, through to Treasury, the banks, the Federal Reserve, and back to the Treasury. If we can show it works like a fiat money system, then we need to make that known, and why there is no debt problem (I didn't say there was no debt, but the Fed redeems it all the time. We don't have to make $10 Trillion coins and buy back the securities at the Fed to eliminate the debt. In fact it is probably illegal to do that because there is no Congressional authorization to buy back something the government has already bought back, meaning paying twice for it. The Fed has already redeemed the debts to the banks associated with the securities it holds in the very act of buying them with money created out of thin air (government money). The mature securities in the possession of the Fed are like million dollar bills. If it swaps these securities for new ones at the Treasury, that pays for them and should cancel the debt implied on the Treasury's books for the securities. But that debt is not the debt to the banks, but the general debt of any dollar bill between government and the people, to accept the money as payment for taxes and goods and services of the government, which it is obliged to give back for the money.

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      @pjmeli: "The people controlling the system are not interested in alternative theories…they are quite happy with the one they believe…and profit from…and the moment they try to push back against the conventional dogma they will be expelled from the game, relegated to obscurity."

      Someone has to say out loud in public, "But he isn't wearing any clothes!"

      The system at some point will begin to have stress fractures, and that is when having these alternative ideas can serve to get the public aroused to abandon the false ideas the people in power use to bilk the public. I'm not a Marxian, and I think he had some bad ideas, but he still had an impact, especially during the 1930's and the depression. He provided a seemingly reasonable and realistic theory about all the woes people in capitalist societies had, and those ideas competed with the received view. He would have been more successful if he had been more in touch with reality and tested out his ideas empirically. Astrology was not discredited until a science of stars and planets had developed. But neo-classical economics is the current analog of astrology.

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      "My view is that we need to understand how our particular economy works monetarily, from Congress's actions, through to Treasury, the banks, the Federal Reserve, and back to the Treasury. If we can show it works like a fiat money system, then we need to make that known, and why there is no debt problem..."

      Fair enough, but I differ with you on the need to delve into the details instead of just going with a simplified model. It's hard enough to get people to listen to this stuff *without* the details. It's also hard enough to get those few listeners to grasp the basics of fiat money, let alone learn the ins and outs of our particular system. People already understand that we have a fiat currency, they just don't know what that means.

      "We don't have to make $10 Trillion coins and buy back the securities at the Fed to eliminate the debt."

      Lesson One, in my opinion, is that a country does not go into debt when it creates its own money. The fact that we issue bonds and call it "debt" is a complication that has to be explained away. I think the Trillion Dollar Coin idea serves to illustrate that fiat money can be directly issued, because people inherently understand that a coin isn't really worth $1 trillion - it's an obvious gimmick. But it's a gimmick that would take the place of $1 trillion in bonds, which hopefully shows people that those bonds aren't the problem that they have been made out to be.

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      @JohnfrmCleveland: "fair enough, but I differ with you on the need to delve into the details instead of just going with a simplified model. It's hard enough to get people to listen to this stuff *without* the details. It's also hard enough to get those few listeners to grasp the basics of fiat money, let alone learn the ins and outs of our particular system. People already understand that we have a fiat currency, they just don't know what that means."

      The reasons I do this is because the political arguments for austerity are based on the idea that the nation is deep in debt and about to go bankrupt. To counter such arguments we need to show how the system actually works already to routinely pay off the debt, and does so by the government creating money. Some of my interest in this stems from trying to get leaders like the President and the Secy of Treasury and the people at the Fed to recognize that there is no debt. The President and Geithner almost bought the argument for the trillion dollar coin, but were turned back by the Fed. If it quacks like a duck and waddles like a duck, it's a duck. I show that when the Fed as a government entity buys the securities from the banks with money created out of thin air (government money) and the banks give up the securities in return for the money in their reserves, that is a case of government paying off a government debt to the banks. What else could it be? Since this goes on all the time, it must not be a problem. So Congressman Ryan is full of nonsense when he talks about our country being on the verge of bankruptcy.

      On pjmeli's point that bonds were sold in World War II, that was not to fund the war, but to drain the excess money from circulation to counter inflation. When the Chinese are encouraged to park their dollars in bonds at the Fed, that also serves to counter inflation by keeping them out of circulation in this country. That did support the war effort....

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      "On pjmeli's point that bonds were sold in World War II, that was not to fund the war, but to drain the excess money from circulation to counter inflation. When the Chinese are encouraged to park their dollars in bonds at the Fed, that also serves to counter inflation by keeping them out of circulation in this country."

      I'd still like to hear why you think "excess" money in circulation would lead to inflation. This runs counter to MMT thinking.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "That's like saying understanding our economy…"- stanfrommarietta

      I haven't said anything about the economy, which is a very complex machine. I view the economy as a black box for my purposes. For the most part the economy works very well. Everything I have written has been wrt the monetary system, the money-creation machine, not the economy.

      For me personally the problem with the economy is primarily the mis-management of the money system and its interaction with the economy. Thus that is the problem I choose to solve, or understand. It's like solving a puzzle, from which I get great enjoyment.

      Anyway in physics, F=ma from which all of mechanical physics can be derived. I don't see the need to memorize the details of all of the ways the equation can be used if I understand the basis of the solutions, so I don't go down those rabbit holes…it becomes a distraction in discussions and also in understanding the root of a system. If a shrub has a diseased root system it doesn't help to trim the leaves…its solving the wrong problem.

      In the same way, I know from accounting and how operations between the government, the Fed and the Treasury are arranged, that when Congress appropriates money, that money will be spent through Treasury regardless of any of the steps in between. The outcome is known, so a solution is uninteresting (to me). The only part of that process that means anything to you and I is the transaction where something (spending, and thus new NFA) is entered into the system from thin air.

      Further, I know that the Fed cannot increase the level of dollars + bonds in the system (the part of the system real people use), so it has very little control over aggregate demand. Basically the Fed can influence spending if things are already going well, but that is psychological…the Fed can't do anything operationally to make it happen. It can only influence the movement of existing funds from one place to the other, and such movement is not spending (it could lead to some spending, but the evidence shows not very much), nor can it induce growth because growth requires increased NFA.

      In fact, neither the Treasury or the Fed can do anything…the Treasury reacts to funding initiated by Congress…they are conduits.

      ***********

      I am familiar with Steve Keen but he seems to think that credit drives economies, rather than public spending. I may be misinterpreting him since I haven't read a great deal of his stuff. I got interested in "economics" and made the decision to base my view of it strictly from an engineering perspective. Then I determined that the problem with the economy centered around the money system so that's where my interest lies.

      At it's root a money system is a very simple mathematical machine. One can add all kinds of operations to it to make the system perform ancilliary functions, making it appear opaque to the casual observer but the fact remains that it's base function is quite simple. Elegant even. Elegance is what excites me.

      In convincing others I believe we have to keep things simple, so that's my approach. Unfortunately most people appear to be trapped in the world of semantics, so that approach isn't working as well as I had hoped. With folks like you and John it works because you are curious, and willing (or equipped) to examine other ideas…the majority of others?…not so much.

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      "johnfrmcleveland: I'd still like to hear why you think "excess" money in circulation would lead to inflation. This runs counter to MMT thinking."

      I thought I was simply echoing MMT in regard to "excess money in circulation" causing inflation. Excess means that more money is in circulation than would be needed to purchase all the goods and services produced at full employment and stable prices. The excess money thus means that those with the additional money can pay higher prices and acquire the goods and services.

      Why do you think what I am saying is not MMT. How do you see it?

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      "Why do you think what I am saying is not MMT. How do you see it?"

      I think that we are nowhere near our productive capacity. Our economy can easily produce more to meet new demand. I can't think of any shortages we are facing right now (plenty of labor, plenty of energy, and plenty of raw materials, etc.), so there is no reason to believe that prices would rise. For one, we are not at 100% employment.

      The idea of increasing taxes or otherwise lowering aggregate demand to cool off an overheated economy is not something we have ever had to do, except maybe during the World Wars. Fear of deficit spending has kept our economy in low gear for as long as I can remember.

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      @Johnfrmcleveland: "I think that we are nowhere near our productive capacity. Our economy can easily produce more to meet new demand. I can't think of any shortages we are facing right now (plenty of labor, plenty of energy, and plenty of raw materials, etc.), so there is no reason to believe that prices would rise. For one, we are not at 100% employment."

      John, I agree with what you say. I think you are misunderstanding me. Hold productive capacity constant and govt. spending low, then increase taxes and hold tax rates high for several years. What will be the result?

      I think you will have a surplus year after year, and deflation will result (as long as there are not other inflows that compensate for the loss of money in circulation). This is an MMT idea. Warren Mosler argued that govt. does not need taxes to spend. It needs taxes (1) to get people to use the govt.'s money to pay their taxes in.

      It needs taxes when there are inflations (serious, usually) because taxes drain money out of circulation in the economy. So do savings, bond buying, buying imports.

      I know we are nowhere near our limit of productive capacity and full employment. We do not now have inflation (other than maybe 3% per annum, which is desirable because people will not be inclined to save excessively unless they earn more interest of profit than inflation). But remember that right after WW II, taxes rose to 90% on the highest income group. They have since been dropped to around 35%. There were fears of inflation resulting after the war, because everyone had saved, bought war bonds, and were buying new homes and cars and washing machines, and radios with their savings. But inflation did not result. Taxes can serve to drain money out of the economy. Taxing to get a surplus is generally a bad idea unless you have other sources of inflow bringing in much dollars, which taxes would compensate for so that there would be no inflation. Taxes drain money from circulation and would accumulate as unspent or even destroyed dollars year after year, and there would be less and less money flowing out into circulation through government spending. Often we don't raise taxes because we are under the illusion that taxes are needed for federal govt. spending. Cullen Roche lists his equations of inflows and outflows from circulation in the economy. Taxes are an outflow. I make the distinction between circulation and what is out of circulation but still in existence, like savings, imports spending, buying govt. bonds.

      And I think economists need to look in detail at the balance or effect of the levels of all these inflows and outflows and the resulting circulating money (M0).

      We have the same views on inflation and deflation. You are just misreading me.

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      @pjmeli:" I haven't said anything about the economy, which is a very complex machine. I view the economy as a black box for my purposes. For the most part the economy works very well. Everything I have written has been wrt the monetary system, the money-creation machine, not the economy."

      Well, that's fine for your interest. But my understanding of MMT is that it is about not just money creation but money flows. That leads to understanding what inflows and outflows effect circulation where buying and selling of goods and services occurs and where money is spent on energy and material sources and their implementation in production. Just so we understand where we have different focuses of interest.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "…my understanding of MMT is that it is about not just money creation but money flows." - stanfrommarietta

      Money creation (public spending) generates the flows…without it flow would be negligible. MMT is a description of how those flows fund savings, of which profit is a subset represented as retained earnings and distributions.

      Everything else is based on how we apply that information, which is not part of the MMT literature.

      MMT rejects the quantity theory of money, Ricardian Equivalence, the Efficient Markets hypothesis, and all of the other fallacies neo-classical economics is based on.

      Regarding something you wrote in response to John above, there is little relationship between the level of dollars "circulating" in the economy and economic flows. The bulk of dollars (and bonds) in the economy are savings, liquidity, part of accumulated wealth, which is a stock.

      That stock just keeps getting larger, so there is negligible flow generated by it.

      The net change in those stocks is a result of flows created by government spending (and credit expansion), less taxes.

      There would be flow if those levels were declining, but they never do. The net flow of funds is always to the top, always has been, and always will be. That is a consequence of saving and profit, thus is guaranteed mathematically as long as we have a capitalist system..

      The only solution to that dynamic is to remove funds from the savings at the top (of the income spectrum) through taxation, or to increase wages so that wage-earners receive a proportionate share of profits before distributions so that incomes maintain constant in proportion. Even so those funds end up as stocks.

      The economy doesn't get much "circulation" from that stock of wealth.

      The level of dollars "circulating" from this stock has little, if any, effect on inflation.

      Circulation is a direct function of public spending and by proxy private credit.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      From an earlier comment…

      "On pjmeli's point that bonds were sold in World War II, that was not to fund the war, but to drain the excess money from circulation to counter inflation" - stanfrommarietta

      Stan, this is not an accurate description of why bonds are sold. I explained it in an earlier comment.

      Bonds are sold because the law passed in 1917 decreed it. TPTB may have thought that this reduces the chance of inflation, but there has been zero empirical evidence since that it does.

      At the root, bonds are a financial instrument that provides a safe store of financial wealth…it is the lone vehicle available that offers that. Any other vehicle in existence carries the risk of nominal loss.

      Bonds are dollars that pay interest. In effect they are savings accounts for the rich.

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      @pjmeli: It would help if you could cite your source that the Fed's buying and selling of bonds and Treasury securities has no effect on inflation or deflation. The Fed says it does, and considering the size of the money going back and forth this way, it would seem that selling securities draws a lot of money out of bank reserves and constrains their lending. They have to have 10% of their deposits. Often they don't wait to get them before lending to a good loan, but they will scramble to get reserves to back themselves up, often by borrowing from other banks, or from the Fed itself. But if you take a lot of money out of circulation, you will have impact on inflation. It also allows the Fed to set an interest rate compatible with the market to modulate the amount of money in circulation. Savings is one of the ways the flow of money in circulation is diminished.

      Right now after having so many toxic assets each bank knew other banks had them too, and did not trust to lend money to another bank and vice versa. So banks were paralyzed to lend. But the Fed is not selling bonds much these days, except to those foreign and private investors who wanted to store some of their dollars for awhile to earn a little certain interest. And once the dollars are paid to the Fed for the bonds, the Fed does not find a vault to store them somewhere. They are recorded and likely, if cash, burnt. Then when the Fed needs to redeem the securities at maturity they just create the money on the spot and put that money in the investors' checking account at the Fed.

      If you are not an MMTer, then I understand, but don't claim to be one because this is a view of most MMT theorists. Remember we look at flows and not just money creation.

      The ostensive reasons for selling bonds during WW II was to fund the war effort.

      But if the government could create any money it needed to fight the war, why did it need the bonds? Why create savings bonds then? I remember it was a big deal with bond drives when I was a kid. I bought a few for $18.75 a bond. Bonds were needed to counter inflation from all the government deficit spending. You don't have many bond sales these days, despite the wars in Iraq and Afghanistan. Why?

      I think the reason is that heavy imports are doing the work of savings bonds in drawing money out of circulation. If China turned around and bought things with all their surplus dollars, we'd likely have inflation if we did not cut back with deficit spending. But because they don't want inflation to devalue their dollars, they buy government bonds at some interest, which helps keep the amount of money in circulation more or less constant.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "It would help if you could cite your source that the Fed's buying and selling of bonds and Treasury securities has no effect on inflation or deflation. The Fed says it does…" - stanfrommarietta

      I have cited my evidence…using mathematical logic. There is no opinion that can trump that. What the Fed says it does or people think it does is of no consequence…that has no bearing on reality. If logic and math show something is impossible or very unlikely, I tend to take that as reality.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "it would seem that selling securities draws a lot of money out of bank reserves and constrains their lending." - stanfrommarietta

      Bank lending is not constrained by reserves…banks can always make loans to qualified customers if they come through the door. This is a fundamental insight of MMT, which leads me to believe you do not understand MMT as well as you have let on. If you had read any of the MMT literature you would know this, it's part of the core.

      The money that is affected through the buying and selling of securities is not "circulating"…it's savings. The savings just changes hands and the portfolio composition changes very little. It follows that this does not affect spending in any significant way.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "But if the government could create any money it needed to fight the war, why did it need the bonds? Why create savings bonds then? I remember it was a big deal with bond drives when I was a kid."

      Because it's the law…I've noted that several times now.

      Our leadership believes (and always has believed) we have to borrow to spend. As a result, this idea has been programmed into our citizens over the decades (or longer). Reality is not comfortable for them.

      Further, this lack of understanding is on purpose…it maintains power in the hands of bankers and elites. It was said by one of these elites (can't recall his name) that "he who controls the money controls the power". They maintain control through politics, propaganda and money.

      There is a reason functional finance (MMT) is taught in only a couple of universities in America, and has been generally riduculed by mainstream academics. I'm hopeful they are beginning to lose the argument.

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      @Stan - since the purchase of bonds is voluntary (and very low yield), chances are that bond purchasers weren't going to buy anything with their dollars. If bonds were used to actively suck excess dollars out of circulation for some purpose, I would expect higher interest, because you would need to entice people away from buying something instead, right? What we are seeing is just the normal supply/demand relationship of dollars and bonds - if you have a large pile of dollars that you aren't going to spend on anything else, you might as well buy bonds, even if the interest is low.

      As for the banks, their lending is never reserve constrained. (Especially now, after QE, because banks are swimming in reserves.) Even without interbank lending, they always have the discount window.

      WWII - I think inflation was the result of so many goods going to the war effort, not any excess of dollars. The whole "excess dollars" or "easy money" theory of inflation strikes me as illogical, anyway. "Easy money" refers to credit, not a situation where money is being liberally sprinkled over the country. People and businesses still have to earn their dollars, so the flow of "easy money" is under the same restrictions as any other money is. Big reserve balances and easy credit do not automatically translate into extra money in my pocket.

      Finally, I think the reason the Chinese don't spend their dollars on American goods is because they don't want to hurt their domestic production of the same stuff. Countries that are always running trade surpluses just sit on those foreign reserves - otherwise, they wouldn't be running yearly surpluses.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "If you are not an MMTer, then I understand, but don't claim to be one because this is a view of most MMT theorists." - stanfrommarietta

      What you have written is hardly a view of most MMT theorists, and again I have to wonder if you have read what you have led us to believe. Please bring some comments from Bill Mitchell or Randy Wray to back up your claims.

      Your ideas (the ones you've been presenting here) are monetarist in nature, and monetarism is 180 degrees opposite the insights of MMT.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "Finally, I think the reason the Chinese don't spend their dollars on American goods is because they don't want to hurt their domestic production of the same stuff…" - JohnfrmCleveland

      Exactly…Japan has been trading cars and electronics for paper (colloquial term for ones's and zero's on balance sheets) for over 60 years. Wonder why they did, and continue to do that?

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      pjmeli: What you have written is hardly a view of most MMT theorists, and again I have to wonder if you have read what you have led us to believe. Please bring some comments from Bill Mitchell or Randy Wray to back up your claims.

      Your ideas (the ones you've been presenting here) are monetarist in nature, and monetarism is 180 degrees opposite the insights of MMT.

      I have read Wray's Modern Money Theory, most of Bill Mitchell's blogs, Cullen Roche's blogs and papers, Scott Fulwiller's papers, Warren Mosler's 7 frauds.

      What makes you say that my position is "monetarist" as opposed to MMT?

      By the way Wray's Modern Money Theory uses the bathtub analogy. And he

      distinguishes stocks from flows. Savings is a stock. But the act of saving is a

      flow from circulation. Money in actual circulation for me consists of trillions of flows between individuals, but you can get measures of the aggregate. How do they

      measure flows versus stocks in Systems Theory?

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      "What makes you say that my position is "monetarist" as opposed to MMT?"

      Stan - where I differ with you is on your apparent belief that excess money causes inflation. Also, the bit about selling securities to draw money out of banks to constrain lending doesn't fit in with my understanding.

      Bernanke is a monetarist. He thinks that QE - increasing reserves, making banks cash-rich, etc. - will spur lending. It hasn't worked, obviously. So why would we think that drawing off reserves will constrain lending? Especially when banks can always borrow reserves from the discount window.

      On inflation - the way I see it, there is a point where too few dollars will not be enough to service the economy, and you risk deflation; and there is a point where too many dollars (in the hands of people that would spend them - demand, really) can lead to inflation, because such demand would outstrip our economy's ability to meet that demand. But in between is a *large* (I believe) range where more dollars means more production with no demand-pull inflation, because we can meet demand all along that part of the curve. So I don't think there is any inflation-related reason to attempt to draw off any "excess" dollars by bond sales. (The only reason I can think of to draw off excess dollars at all is because you want to push interest rates higher, so you flood the market with more bonds, hopefully lowering their auction price.) And, due to wrongheaded fears of inflation, I think we are at that point of the curve just above "too few dollars." I think we could (and should) increase deficit spending quite a bit in order to rev up the economy. So I obviously don't see any need to draw off excess dollars, either.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "What makes you say that my position is "monetarist" as opposed to MMT?" - stanfrommarietta

      Because the focus of your arguments is with the Fed and it's money creating operations.

      "By the way Wray's Modern Money Theory uses the bathtub analogy. And he distinguishes stocks from flows. Savings is a stock. But the act of saving is a flow from circulation" - stanfrommarietta

      I look at it in exactly the same way. Technically saving is a residual…money isn't "taken" out of "circulation"…it isn't spent…savings is income not spent, but this is a minor point that doesn't bear on our discussion. Flows and stocks are the same everywhere…math is God's language.

      Where my view differs largely from yours is that I don't see the flow of funds as "circulation". I see it as a linear pass-thru…funds enter the spending chain through public spending and the spending diminishes over time across several transactions as savings (and profits) are taken from the chain…until there is no more flow from that rush of spending.

      How would funds flow back to the individual if there is saving (friction)? Those funds no longer flow. The fact that the level of savings continuously gets bigger tells us that the flow does not go back-and-forth. Saved funds generally move in a way that does not create spending. Spending is flow that includes the purchase of a new (additional) product or service. Buying your friends car does not add to GDP.

      The charge in a battery moves (in the net) in one direction…it is never observed going the opposite way (entropy…charge flows from a position of higher potential to a lower potential. In the same way, spendable income from consumers flows (in the net) to a small subset of the population, and unless those folks lose money in the aggregate it is impossible for funds to flow in the opposite direction.

      Take for an analogy the rapids on the Nantahala River in NC…twice a day the dam releases a volume of water and that water running downhill creates the rapids. Without that "spending" the river is docile. The Nantahala rapids are uni-directional. Water doesn't flow uphill. In the case of spending, uphill is towards the consumer.

      It can be shown mathematically (simply) that the net flow of funds from the 99.1% to the top 0.1% is uni-directional…there is no possibility of funds flowing in the other direction as long as the system is functioning…the net result being that capitalism drains the financial resources from the 99.9% to the 0.1% and essentially kills the host (us) unless the government keeps spending…spending at a rate that employs all of us that want to work.

      In addition, despite the fact that most monetarists believe it does, it is impossible for a credit system alone to drive an economy…that would be the money system (mathematical) equivalent of perpetual motion. The friction in that system is saving. Perpetual motion is impossible in real-world systems.

      I know the ideas I present here, which are my own, do not mesh with conventional economic theory…that is by choice. Économics is not science…at least not yet. The money system is, and that is where the insights from MMT are focused. I am confident that none of the ideas I have expressed here are contrary to the core of MMT. Bill Mitchell et al come to varying conclusions based on the core principles. They rarely are in conflict…that is the xpected result if one bases his arguments on logic and math, or any known principals.

      Any errors that might result come from defining or solving the wrong problem. Once a problem is properly defined, a solution is generally easy.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "I think we could (and should) increase deficit spending quite a bit in order to rev up the economy." - JohnfrmCleveland

      John, I think it is more accurate to say we should increase spending…whatever the deficit ends up being is unknown…it's an ex-post picture of how the interaction between the money system and the economy has worked out.

      The deficit is, in simple terms, how much money agents in the non-government have chosen to save. It is an unknown until the final numbers are in and we have little direct control over it…although MMT'ers have a pretty good idea what influences it.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "http://mikenormaneconomics.blogspot.com/2013/10/ve...

      How could that be possible with record levels of reserves? :-)

    • Ralph Deeds profile image

      Ralph Deeds 3 years ago from Birmingham, Michigan

      Excuse my jumping in at the end without having read all the comments above. Seems to me the country's problem continues to be high unemployment and inflation that's a bit too low. And there are plenty of infrastructure projects awaiting attention, not to mention other programs that would pay dividends in the future, e.g., universal public pre-school, improved pre-natal and post-natal care, adoption of Medicaid expansion by a number of recalcitrant red states.

      Longer-term, deficits deserve our concern because of increases in the retired population relative to the work force and skyrocketing health care costs which, if un-contained, will make Medicare unsustainable in its present form. (The problem is not with Medicare but rather with a health care industry that is in the dark ages-too much pay for procedures and tests, necessary and unnecessary, too much for-profit medicine, parasitic health care insurance companies, too many futile, costly, end of life "hail Mary" procedures.

      The health care industry is where the U.S. auto industry was 20 years ago before it began to adopt lean manufacturing, Kaizen, teamwork, better coordination between design, engineering and manufacturing and the belated adoption of W. Edwards Deming's statistical quality control principles 30 years after they were embraced by Toyota.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      Hi, Ralph, welcome back.

      "Longer-term, deficits deserve our concern because of increases in the retired population relative to the work force and skyrocketing health care costs..."

      The federal deficit is not what determines our ability to support our retirees. The real question is, can our private sector produce enough goods and services to meet the demand of the whole population? When you look at it like that, I don't think there is any question about our ability to meet the needs of our whole population. We produce far more than we need with a smaller and smaller portion of our available labor force already. That's the real question, because the government can always come up with the dollars.

      Look at where we are today - there is obviously enough food and housing for everybody in the country, and then some. There are enough hospitals, enough doctors, enough cars, etc., and, if needed, we could come up with more of any of that in short order. The only thing needed to put all of those resources into action is money, and the government could pick up the whole tab without breaking a sweat. And, without inducing inflation, raising interest rates, crowding out industry, or any other excuses conservatives can come up with.

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      JohnfrmCleveland replied to this remark from Stan:

      Stan said: “When banks are lending because businesses and individuals are borrowing, then their operations to drain or augment the reserves of the banks do control inflation and moderate deflation. But the Fed can't do it alone. There are other operators in the system that get involved in fighting inflation and deflations. The main one is Congress and the central government.”

      "Why do you think the level of reserves affects inflation? Or even spending? Look at the Japanese – they can't drum up inflation no matter what they try."

      I've been rethinking this, John. I think I was looking at the wrong thing. All the Fed does by restoring the reserves of the banks that lent money to the Treasury is restore the status quo (as far as the banks are concerned). They may or may not go on to lend.

      The significant thing is that by buying the securities from the banks with new money created out of thin air, the Fed has eliminated the government's debt to the banks. And further since the amount of new money created equals the amount restored to the reserves of the banks and the amount of money lent to the Treasury, this increases the money supply in circulation when the Treasury spends it for Congress. Money is fungible. So despite the law that says the Fed cannot buy securities from the Treasury, the Treasury ends up with newly created money just as if the Fed had directly given it to the Treasury. The banks are just back to where they were in the first place. And the Fed never gave a dime directly to the Treasury.

      This new money equal to the deficit of Congress, now in circulation, may or may not be inflationary depending on conditions. All those Tsecurities bought by the Fed from banks in QE also have eliminated the government's debt to the banks for them. While those dollars may have been created by deficit spending, they are already circulating in an economy that is in recession, so QE does not have an inflationary impact until the banks start lending again.

      As for the Fed's selling securities, that looks to me more like they do drain money from the economy. Those sold directly by the Fed to investors like the Chinese do have the effect of taking those dollars out of the economy. Otherwise they might come back and start buying with their dollars, and depending on conditions, that might be inflationary since it increases exports.

      Taxes probably could be more effective at draining money from circulation.

      Here is what Warren Mosler says about taxes:

      " Taxes serve to make us want that [government] money -

      we need it in order to pay the taxes. And they

      help regulate total spending, so that we don’t have more total

      spending than we have goods available at current prices -

      something that would force up prices and cause inflation. But

      taxes aren’t needed in advance of spending - and could hardly

      be, since before the government spends there is no money to

      tax." Warren Mosler, "Seven deadly innocent frauds of

      economic policy". p. 2

      "The government taxes us and takes away our money for

      one reason - so we have that much less to spend which makes

      the currency that much more scarce and valuable. Taking

      away our money can also be thought of as leaving room for

      the government to spend without causing inflation. Think of

      the economy as one big department store full of all the goods

      and services we all produce and offer for sale every year. We

      all get paid enough in wages and profits to buy everything in

      that store, assuming we would spend all the money we earn

      and all the profits we make. (And if we borrow to spend,

      we can buy even more than there is in that store.) But when

      some of our money goes to pay taxes, we are left short of the

      spending power we need to buy all of what’s for sale in the

      store. This gives government the “room” to buy what it wants

      so that when it spends what it wants, the combined spending

      of government and the rest of us isn’t too much for what’s for

      sale in the store." Warren Mosler, Seven deadly innocent frauds..."

      p 27

      "What matters is that the purpose of taxes is to balance the economy

      and make sure it’s not too hot nor too cold. And federal

      government spending is set at this right amount, given the size

      and scope of government we want." p. 28

      "To prevent the government’s spending from causing that

      kind of [hyper]inflation, the government must take away some of our

      spending power by taxing us, not to actually pay for anything,

      but so that their spending won’t cause inflation. An economist

      would say it this way: taxes function to regulate aggregate

      demand, not to raise revenue per se. In other words, the

      government taxes us, and takes away our money, to prevent

      inflation, not to actually get our money in order to spend it."

      Mosler, p. 30

      So taxes as a means of draining money out of circulation in the economy

      is an MMT position.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      Stan - when Mosler is talking about the need to tax to cool off a hot economy, he's talking about a (theoretical) situation where the economy is running at full speed. But when he talks about our current situation, he always points out that we are nowhere near full employment, so there is still a need for the government to spend. He's constantly calling for an end to FICA taxes (on both ends) and other tax cuts.

      "As for the Fed's selling securities, that looks to me more like they do drain money from the economy. Those sold directly by the Fed to investors like the Chinese do have the effect of taking those dollars out of the economy. Otherwise they might come back and start buying with their dollars, and depending on conditions, that might be inflationary since it increases exports."

      Selling securities does drain *dollars* (but not Net Financial Assets) from the economy, but the impact on the economy is zero. The entities that exchange their dollars for bonds probably weren't going to buy anything anyway - that tiny bit of interest isn't going to sway anyone's decision whether to buy goods or buy bonds. And large institutions simply prefer to hold bonds over dollars. Bonds are used in large transactions all the time. So whether one's assets are in the form of dollars or bonds, it makes very little difference to one's ability to spend.

      I suppose China has enough dollars to cause inflation, if they were to spend them all in short order, but there is no reason that an increase in exports should otherwise cause inflation. I also do not see why an increase in bank lending should lead to inflation, either. By what mechanism do you think either increased exports or increased lending lead to inflation?

    • Ralph Deeds profile image

      Ralph Deeds 3 years ago from Birmingham, Michigan

      John, we're not far apart. I agree that the U.S. economy is capable of producing enough to satisfy everyone's foreseeable needs, including Social Security and Medicare. However, that doesn't mean this will happen since the richest Americans' share of wealth and income continues to grow. Secondly, is it not true that eventually we will reach an amount of debt that will cause our borrowers worry about getting paid and cause interest rates to increase? Of course, the best way to avoid this is to increase the growth rate in our country's productivity and output. If we were growing faster the proportion of debt to GDP would decline without any reduction in our national debt???

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "that tiny bit of interest isn't going to sway anyone's decision whether to buy goods or buy bonds." - JohnfrmCleveland

      Exactly. Look at it this way…rich people don't ordinarily spend out of savings…they spend out of income…rich people don't spend all of their income, otherwise they wouldn't be rich. If one can spend out of income why would dis-saving occur?

      It follows that savings always increases and the "spending down of savings" ie dis-saving, does not contribute to aggregate demand wrt the rich.

      Everyone else…us…will not spend out of savings unless we have to, or unless we are saving up to buy something. The money we save for an unforeseen shock to our finances or for our future is not on the table unless we have no other options.

      Bottom line…virtually all spending and all saving originates with public spending, which provides both the flows and stocks necessary for capitalism to work.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "is it not true that eventually we will reach an amount of debt that will cause our borrowers worry about getting paid and cause interest rates to increase?" - Ralph Deeds

      No. the ability of a government sovereign in it's own free-floating non-convertible currency is unconstrained mathematically.

      The U.S. government can always afford to pay any bill denominated in it's own currency because that government alone has the power to create that currency at will (see Article I Section 8 of the Constitution).

      The U.S. government does not "borrow" and it does not have to "borrow to spend", not in terms of what private borrowers think of as borrowing…paying back principal and interest.

      The government does not pay back debt from income, because the government does not need income. Plus the government pays only interest (voluntarily) not principal.

      The government is not "borrowing" when it creates Treasuries out of thin air and exchanges them for dollars…it is providing safe storage for large holders of dollars…they can't put those dollars in regular savings accounts (insurance limitations) and investing in anything else is risky, and illiquid. Bonds are cash equivalents.

      Further, the Fed sets interest rates, not the market, and interest rates could be set at zero if the Fed chose (yes, the Fed is subordinate to the Federal Government, contray to popular mythology. Unfortunately lately the Fed and the Government have become subordinate to the rich).

      As Warren Mosler (and other MMT scholars) often points out, the natural rate of interest is zero.

      The only constraint on government spending is political…there is no mathematical constraint.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "If we were growing faster the proportion of debt to GDP…" - Ralph Deeds

      Comparing Debt to GDP is comparing a stock to a flow…meaningless in any context. it's a major fallacy in economic discourse.

      If you want to compare something compare each annual deficit number to GDP…a flow compared to a flow…much less scary but more accurate. now we are looking at a ratio of .0625 or 6.25%.

      Look at that ratio over several budgets…

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