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View Diary: Modern Monetary Theory vs the Fiscal Cliff (65 comments)

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  •  You will not get the equivalent stimulus (3+ / 0-)
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    psyched, bunnygirl60, jellyyork
    So long as you are raising taxes on those who can afford to pay (who are essentially the same people who have a surplus of financial assets which they would otherwise be investing in things like those t-bills anyway),  then you would still get an effective stimulus.
    Defining the deficit as Government spending - tax revenues, it follows from the sectoral financial balances model that if you balance the budget, so that there is no deficit; then the foreign trade balance and privates sector savings must be equal to zero. So, if the US were to have a trade deficit of 4% of GDP, then the domestic non-government sector would have to run a deficit of 4% of GDP.

    That deficit would not be sustainable over a period of years, because no credit bubble can be sustained long-term. So, if you try to fund economic stimulus activities without deficit spending by paying for the spending with taxes, then you may create greater real wealth for awhile, but eventually the economy will collapse from the year-to-year cumulation of private sector wealth destroyed by taxation.

    So it does matter how you fund stimulus. It has to be funded with deficits; though not necessarily with debt since you could use coin seigniorage to pay for everything!

    •  Good Points (2+ / 0-)
      Recommended by:
      psyched, Letsgetitdone

      Good points. Yeah, basically acerimusdux is talking about "the balanced-budget multiplier" discussed in a billyblog, remarkably entitled What is the balanced-budget multiplier?. As you & he point out, limited relevance to an open economy like Australia, USA  today. More applicable to the postwar USA.  Or maybe if we just use budget deficits to accomodate foreign deficits.

      bunnygirl60: I really am just a physics PhD so what I know about international economics is just about enough to fill a thimble.

      Well, that puts you ahead of most economists of the last few decades, who have much more than a thimble filled with anti-knowledge.

      •  Absolutely, Cal (0+ / 0-)

        My comment was based on Billy Mitchell's work. Warren Mosler, Randy Wray, and Bill Mitchell are the MMT "fathers." They've been the main figures in development of the approach. Others who have done important work include: Stephanie Kelton, Marshall Auerback, Scott Fullwiler, Mat Forstater, Jan Kregel, Pavlina Tcherneva, Rob Parenteau, and Eric Tymoigne.

    •  I disagree (0+ / 0-)

      First off, we don't know whether a 4% trade deficit is sustainable or not.  But so long as the Federal deficit is zero, it isn't contributing to that deficit.  If there is any credit "bubble" there, it is being entirely financed by foreign capital flows.  So if foreign holders of the currency think it's sustainable, it will be.  If they eventually want to hold less dollars, then the exchange rate will adjust and the trade deficit will go away.

      However, so long as the US is wealthier than our trading partners, then maybe a small annual errosion of our relative wealth is also sustainable long term.

      Keep in mind, a trade deficit means that we are consuming more than we are producing.  But a recession means that we are producing less than we CAN produce.  

      If you do have an economy that wants to consume less than it is capable of producing, and that thus requires government deficits to achieve potential output, then the cause of that is generally an excess of financial wealth.  Financial wealth is just a way for wealth holders to delay both consumption and production to some future period.  In Keynesian economics, the output gap is caused by an excess of intended savings over intended investment.  Savings is just a single period, wealth is the result of that savings excess on the balance sheet.  Note that financial wealth passes on no benefit to future generations, it passes on both an asset and liability.  

      So why not correct that imbalance by taxing that excessive financial wealth?  Rather than just accept that you have an economy which requires perpetually high federal deficits?

      But this is really all that seignorage does, it's just another way of taxing that wealth.  The benefit of using seigniorage instead of taxation is the more direct impact on the currency, which would help lower that trade deficit.  So yes, that is preferrable right now.  But it's hard to cause inflation right now, monetary policy is impotent.  So anything that gets use there helps.  I'd put seigniorage first, taxes second, and more debt third as far as what the economy currently needs.

      But I also think the amount of currency adjustment required at this point isn't great.  I think we need both seigniorage and restored taxation on higher incomes.  The degree of seignorage should be determined by the trade balance.  

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