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

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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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