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View Diary: There is NO fiscal cliff. (69 comments)

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  •  Question #3 is True. (1+ / 0-)
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    The National Government borrows money from the private sector to finance the budget deficit.
    I know what he's trying to say here, and agree the rest of the statements were false, but this is just sloppy.  Yes, the government can print money rather than borrow it.  But the result of that seignorage is revenue, which goes directly to the treasury because the Fed every year turns over all of its profits.

    So if seigniorage is used, then there is no deficit.  If there is a deficit, then seigniorage was not used, and the money must instead have been borrowed from the private sector.  

    This is fundamental.  If there is a government deficit, there must be a private surplus (foreign or domestic).  

    I agree with 95% of what Randall Wray says, but sometimes he gives the impression that government spending doesn't matter at all, which isn't quite true.  Once we do get exessive overall spending in the economy as a whole, producing signigicant inflation, then we really should be pressing congress to cut deficits.  This is much preferable to the trend of the last 30 years to instead have the Fed curtail private spending through interest rate hikes.  

    •  Personally, I think the government collects (5+ / 0-)

      revenue to keep the money moving and that's why I agree the hoarders should now be taxed more.
      On the other hand, all of this only applies to the federal government. The states are in a different situation, as are the cities, because they don't issue their own currency. Indeed, the countries of Europe who have recently adopted the Euro are discovering what that's like. The citizens approve because having to change currencies is a nuisance, but the countries are finding it hard to resists the imprecations of investors who bought debt and now want to be paid interest for doing nothing.
      Getting over the idea that currency has value is going to be difficult everywhere because, as long as it was tied to relatively scarce metals, it did.

      Just think, it took just one generation for all the gold plundered by Spain from the Americas to be transferred to the Dutch vaults and sequestered as the backing for notes that were issued to finance Britain's industrial revolution, from which the Dutch benefitted without doing anything but handling money.
      There was good reason for Jesus to drive the money changers out of the temple.

      We organize governments to provide benefits and prevent abuse.

      by hannah on Sat Nov 10, 2012 at 10:19:13 AM PST

      [ Parent ]

      •  Currency does have value (0+ / 0-)

        Currency is backed by the power of the government to collect taxes.  And even to seize property.  

        So ultimately, currency is backed by the entire output of the economy.  The trick here is, if people are unemployed, and not creating output, then it really costs the government nothing to pay them to then create output.  The new currency is backed by the new output.  

    •  Wray never (7+ / 0-)

      gives the impression that spending does not matter.  In fact, he goes out of his way to stress just the opposite.  What he does say is government has the fiscal ability and responsibility to spend exactly what is needed to achieve full employment and price stability, and that deficits or surpluses are nothing more than a part of the outcome of achieving that goal and responsibility--a deficit or surplus objective is a meaningless economic goal and will only promote disaster.  The goal of economic policy is to promote employment and growth not to meet some meaningless fiscal objective.  If the economy needs stimulus to promote growth and stabilize inflation, then a deficit outcome is great.  If the economy is growing to fast with inflation, then a surplus might be in order.  It's the economy, not the balance sheet, that matters.

    •  I don't think Wray disagrees with you. (1+ / 0-)
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    •  The deficit (0+ / 0-)

      We can get lost in the words. From the standpoint of the sectoral financial balances model which you alluded to above the government deficit is defined as taxes - spending. The model doesn't take into account seigniorage profits. From the point of view of the model deficit spending would be continuing regardless of the level of seigniorage profits in any time period.

      So, for example, let's say tax revenues are at $3 T and Government spending is at $5 T, then the $2 T gap is funded by seigniorage; but the deficit still remains. This is a good thing, because the deficit is necessary for government to create that private sector surplus.

      On Randy, I think he's very clear in his writing that "deficits do matter, but not in the way you think." All MMTers hold that excessive deficit spending can produce demand-pull inflation. The question i: what is excessive? MMT says that excessive is a deficit greater than the sum of non-government savings and the trade deficit. For example, if savings desires amount to 6% of GDP and the trade deficit is 4% of GDP then if one sets up the proper regime of automatic stabilizers you'll get a right-sized deficit of 10% of GDP. That number can vary and be even greater if your deficit is made up of low fiscal multiplier spending or tax cuts, as is the case now.

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