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Old 10-20-2011, 12:19 PM   #81
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We don't put leeches on people to heal them anymore, but we still think we can put a leech on the economy to heal it?
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Originally Posted by JasonC SBB View Post
The deficit is beginning to increase exponentially. Why would it be in foreign governments' interests to keep buying Treasury debt? Why should they continue to treat the USD as the reserve currency of the world?

The FED will stop "bailing out" the Fed Gov when we have mass inflation. What will happen to the Fed Gov's finances then?
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Old 10-20-2011, 02:18 PM   #82
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Why do you think the system in its current state is indefinitely sustainable?
Define "the system in its current state." I am not trying to be obtuse here; I am trying not to ascribe positions to you which you aren't actually holding.

If you mean large and growing government fiscal deficits forever, I do not believe that is indefinitely sustainable. The first straw man people throw up when reviewing MMS analysis is "these people think deficits don't matter!" No "MMTer" worth listening to would ever say that.

I believe that, if you have continued deficit spending which is significantly beyond productive use, you will get high inflation which is the threat I always refer to. We seem to be in agreement there; we just disagree on the mechanisms that move inflation and interest rates.

On the other hand, if by "the system," you are referring to the USA being a currency issuer (sovereign monopoly supplier of the free-float exchange currency in which its debt is solely denominated), I can think of a lot of ways in which that could fall apart but none that I think are imminent or particularly instructive at this point.


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What changed recently is we now have a deep lingering recession with no sign of ending and the gov't is increasing its spending.
Trade Balance + Net Public Balance = Net Private Sector Balance.

In the late 1990s, while running a trade deficit of about 2.5% of GDP, the Net Public Balance approached zero or went positive, depending on what math you use. As an accounting identity, we saw the Net Private Sector Balance approach zero and then move in to a deficit as the private sector took on debt to maintain their lifestyle (rather than cut their own spending and reduce their standard of living).

(-2.5) + (2) = -4.5
or, for those that reject the Clinton-era surplus: (-2.5) + (0.5) = -2

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Why would it be in foreign governments' interests to keep buying Treasury debt? Why should they continue to treat the USD as the reserve currency of the world?
Why would foreign governments buy US Treasuries? Because the USA is ~25% of the world's GDP. We are a huge market for their exports. They send us goods and services and we send them dollars (or reserves). They use those (low or no-yielding) dollars to buy US Treasuries.

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What will prevent mass inflation (10-15% p.a.), if and when the commercial banks begin to lend again ... and what do you think the size of the deficit will be at that point?
A better question might be "what will cause sustained double digit inflation?" Look at the components of inflation. There are other ways inflation can increase, particularly with volatile elements like food and energy (especially given the increasingly financialized nature of commodities), but I would assert that higher employment and wage increases will be the primary drivers. Automatic stabilizers will help reduce deficits (as growth resumes, tax receipts go up and unemployment insurance payments go down).

Jason - I have read most all of the material presented by the participants in this discussion, even commenting on most of them. I have put my money where my keyboard is regarding currency rejections. I have presented primary source material and discussed the actual operations of the system.

If you reject any of those elements, please explain what you reject and why you reject it.
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Old 10-20-2011, 02:33 PM   #83
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A better question might be "what will cause sustained double digit inflation?" Look at the components of inflation. There are other ways inflation can increase, particularly with volatile elements like food and energy (especially given the increasingly financialized nature of commodities), but I would assert that higher employment and wage increases will be the primary drivers.
Components of CPI. Under what scenario do these items move up at twice the historical average on a year over year basis for a sustained period? Housing makes up over 40% and the next largest component is transportation at 17% (including the ~5% for gasoline).

Source 1
Source 2
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Originally Posted by BLS
FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)
HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)
APPAREL (men's shirts and sweaters, women's dresses, jewelry)
TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)
MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)
RECREATION (televisions, toys, pets and pet products, sports equipment, admissions);
EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);
OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).
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Old 10-20-2011, 03:01 PM   #84
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If you mean large and growing government fiscal deficits forever, I do not believe that is indefinitely sustainable.
That's what I mean. Government has no incentive to shrink deficits. Politicians' votes depend on granting entitlements which are paid for by debt (i.e. pain is pushed out into the future). What makes you think gov't will stop enlarging the runaway deficit?

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I believe that, if you have continued deficit spending which is significantly beyond productive use, you will get high inflation which is the threat I always refer to.
Exactly.

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We seem to be in agreement there; we just disagree on the mechanisms that move inflation and interest rates.
This is my point - how do you think this system will remain sustainable? I'm saying gov't will continue its fiscal death spiral.

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On the other hand, if by "the system," you are referring to the USA being a currency issuer (sovereign monopoly supplier of the free-float exchange currency in which its debt is solely denominated), I can think of a lot of ways in which that could fall apart but none that I think are imminent or particularly instructive at this point.
Given gov't's perverse incentive to increase spending, what breaking point might be reached and when?


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Why would foreign governments buy US Treasuries? Because the USA is ~25% of the world's GDP.
And they also print their own money in order to buy Treasury debt.

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We are a huge market for their exports. They send us goods and services and we send them dollars (or reserves). They use those (low or no-yielding) dollars to buy US Treasuries.
This is actually a different point I like to make. Foreign gov't economists are modern mercantilists and Keynesians, because they are trained in the West. By mercantilist, I mean, they think hoarding USD creates wealth (modern mercantilism) - (classical mercantilism = hoard gold). By printing money to buy US Treasury, they are subsidizing their export sector and penalizing the rest of their economy. If they left the free market alone, their rising productivity would benefit their average joes and their living standards. But, by selling their goods on credit to the US consumer, they are subsidizing the US consumer and gov't. They are loaning money to a deadbeat. Here's an analogy. You and a neighbor agree to help each other in modding your cars. He however, insists that he work 10 hours for every 8 that you do. US prints money, China buys debt to subsidize their export industry. Who's the bigger idiot?

As their economies develop further, they will soon realize that the US consumer becomes a smaller and smaller % of their total market. And they will realize it's not in their interest to continue to buy Treasury debt. And the US will slowly lose status as the reserve currency of the world.

And in the meantime, as I point out, the gov't has promised a retirement for everyone wherein at some point there will be only 2 workers for every retiree. What do you think will happen to those promises?

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There are other ways inflation can increase, particularly with volatile elements like food and energy (especially given the increasingly financialized nature of commodities), ...
?????

I don't believe in "cost-driven" inflation. If prices of one type of commodity goes up (e.g. energy), more money will be spent on it, and less money will be used to bid up prices of other goods, lowering prices of other goods. Supply and demand applies to money/currency too.

Explained in Page 29 to 35 here:
http://mises.org/Books/mysteryofbanking.pdf

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but I would assert that higher employment and wage increases will be the primary drivers. (of inflation)
I reject this statement for the same reason. Inflation is a monetary phenomenon.

If and when the economy starts to recover, the banks will begin to lend (money which today are excess reserves). The fractional reserve system will expand the money supply and we will see mass inflation.
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Old 10-20-2011, 04:26 PM   #85
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[Foreign governments] are loaning money to a deadbeat.
[...]
As their economies develop further, they will soon realize that the US consumer becomes a smaller and smaller % of their total market. And they will realize it's not in their interest to continue to buy Treasury debt. And the US will slowly lose status as the reserve currency of the world.
Do you reject the position that the US Treasury bond market is only a monetery tool used by the Federal Reserve to adjust interest rates?

If you reject that position, please explain why you reject it or please explain why you support your counter position. For example, if instead, you believe that the US Treasury bond market is used to fund government spending, please explain why.

This is the fork in the road.

No hard feelings, but there is no real point in (you and I) continuing the discussion until you address that element.
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Old 10-21-2011, 10:58 AM   #86
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If you mean large and growing government fiscal deficits forever, I do not believe that is indefinitely sustainable. The first straw man people throw up when reviewing MMS analysis is "these people think deficits don't matter!" No "MMTer" worth listening to would ever say that.
Daniel Kuehn seems to think that deficits can be run indefinitely.

Communicating the difference between public and private debt

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So my question to readers is - what is a good, succinct way for politicians to communicate that (1.) public debt is different from private debt, (2.) it is not fiscally responsible to cut public debt during downturns, and (3.) we can run deficits from now until the Sun burns out and everything would be just fine, so long as their magnitude is manageable over long periods.
Should I take this to mean that MMTers have abandoned the Keynesian cycle in which the budget is balanced (ie, government runs a surplus during a boom, and a deficit during a bust)?

If so, then it would seem to me that suddenly it's a "define twilight" problem. You said that deficits can continue, but can't be "large and growing." Kuehn says that they can continue, "so long as their magnitude is manageable over long periods." Call me pedantic, but I need something a little more exact than those terms.

Given the political entanglements involved in government spending (entitlements, mission creep, outright lies about funding for things like Social Security), how do we define what is economically "manageable" and implement it?
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Old 10-21-2011, 01:08 PM   #87
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Originally Posted by Scrappy Jack View Post
Do you reject the position that the US Treasury bond market is only a monetery tool used by the Federal Reserve to adjust interest rates?

If you reject that position, please explain why you reject it or please explain why you support your counter position. For example, if instead, you believe that the US Treasury bond market is used to fund government spending, please explain why.
For the purpose of moving forward with this discussion in one particular direction, let's assume that I agree with the your premise.

----------

However, I've started reading the Roche paper, and right away I disagree with several of the principles laid out on page 1:

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Originally Posted by Roche paper
Functional Finance is an economic theory based on the following principles:

The government is an entity created by the people and for the people. It exists to further the prosperity of the private sector - NOT to benefit at its expense. If this entity is allowed to exist for its own benefit or becomes corrupted by a concentration of power, it will become susceptible to dissolution via the populace's rejection of that government.
That is what gov't is supposed to be, but the reality of the nature of the dynamics of political power in a democracy is such that the above is untrue. See Brian de Mesquita's book:

The Logic of Political Survival
Amazon Amazon

Here is a terrific interview of the author:
http://www.econtalk.org/archives/_fe...o_de_mesquita/

Here is another great explanation of the dynamics of democracies:
Democracy: The God that Failed
http://mises.org/misesreview_detail.aspx?control=199


Also, the nature of psychopaths which comprise 0.8% of the population, is that they have a knack for rising to positions of power:

Political Ponerology (A Science on the Nature of Evil Adjusted for Political Purposes)
http://www.amazon.com/review/R1V2SNE...R1V2SNE18FU6XG
and
Snakes in Suits: When Psychopaths Go to Work
Amazon Amazon



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Originally Posted by Roche paper
Governments should be actively involved in regulating and helping build the infrastructure within which the private sector can generate economic growth. The economy is a complex dynamical system with irrational participants. It cannot be expected to regulate itself or behave rationally at all times. Therefore, some level of government intervention and involvement is not only beneficial, but necessary.
This statement justifies central economic planning. I thought many MMT'ers are Anti Federal Reserve? Or are they anti FedRes but not anti monopoly-central banking?

I reject central planning based on Mises' theory of Human Action, and on Hayek's essay "The Use of Knowledge in Society"
http://en.wikipedia.org/wiki/The_Use...dge_in_Society

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a centrally planned market could never match the efficiency of the open market because any individual knows only a small fraction of all which is known collectively. A decentralized economy thus complements the dispersed nature of information spread throughout society
And this is true for money and currency as well as for goods and services. That money and currency are different than other goods, is the argument between Austrian economists, and the Milton Friedman/monetarist types (and Friedman's monetarism is an extension of Irving Fisher, whose opponent was Von Mises).

The free market works because no one committee can make decisions for all individuals in said market, because said committee cannot have all the knowledge spread out among all individuals. And all centralized power is prone to corruption.

The free market is like a self-optimizing chaotic system. It is impossible to make a bunch of one-size-fits-all rules that will lead to a more optimal solution. The free market doesn't produce optimal results for every individual at all times, but central planning only makes things worse. That a committee can, is called The Fatal Conceit.

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


If MMT is dependent on the first 2 assumptions, then IMO it's dead in the water.
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Old 10-21-2011, 03:11 PM   #88
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Should I take this to mean that MMTers have abandoned the Keynesian cycle in which the budget is balanced (ie, government runs a surplus during a boom, and a deficit during a bust)?
I believe that it might be more accurate to say that, while running a capital account deficit (as the USA has for the greater part of the past ~30 - 40 years), a reduction in the public sector net deficit is a reduction in the private sector's net savings. This is the "sectoral balances" I referenced above (also referred to as the macro savings-investment identity).

Real GDP can be broken down as follows:
Expenditure
Y = Real output
C = Household consumption of final goods and services
I = Private investment on housing and capital equipment
G = Government investment and spending on goods and services
X = Exports
M = Imports
Y = C + I + G + X – M

Income
Y = Real income
C = Consumption
S = Savings
T = Taxation net of transfers
Y = C + S + T

Stated another way:
C + I + G + X – M = Y = C + S + T

After a little algebraic rearrangement, you get:
(S – I) + (T – G) = (X – M)
(Net Private Sector Savings) + (Net Government Savings) = (Current Account)

See attached graph for a visual representation of how this has worked historically. Note the drastic reduction of the government sector deficit starting around 1992 and the effect on the private sector's net surplus.

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Call me pedantic, but I need something a little more exact than those terms.

Given the political entanglements involved in government spending (entitlements, mission creep, outright lies about funding for things like Social Security), how do we define what is economically "manageable" and implement it?
I think that is a very fair and reasonable questions/criticism. I am not sure how that might be answered specifically. I don't know that there is a magic number (e.g. if X trade deficit than Y public deficit to equal Z private sector surplus), but I would think it would be developed using the sectoral balances methodology combined with a focus on full employment.

I have not pushed as far in to the prescriptive elements of "MMT" oriented economists because they span the political spectrum from right to left.

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Originally Posted by JasonC SBB View Post
If MMT is dependent on the first 2 assumptions, then IMO it's dead in the water.
I would argue the references to Functional Finance are really more influences on the prescriptive aspect. The actual analysis of the operational realities of the monetary system (e.g. how the US Treasury bond market works, the difference between a currency user and a currency issuer, etc) is not at all reliant on those elements.
Attached Images
File Type: bmp Sectoral Balances_01.bmp (234.0 KB, 53 views)

Last edited by Scrappy Jack; 10-21-2011 at 03:18 PM. Reason: Forgot to include the attachment
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Old 10-21-2011, 03:18 PM   #89
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OK I will continue studying the Roach paper.

In the meantime, let's assume I accept the premise you put forth to continue the discussion.
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Old 10-21-2011, 04:54 PM   #90
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In the meantime, let's assume I accept the premise you put forth to continue the discussion.
I guess that my premise is that the below is a better description of the actual modern monetary system in the USA than what most of us were traditionally taught:
  • US Treasury bond auctions are a monetary tool used by the Federal Reserve to control (or HEAVILY influence) Treasury bond interest rates
  • US Treasury bond auctions do not fund government spending
  • US Treasury bond yields are only very marginally affected by market influences and primarily only further out on the yield curve
  • Only the US government can create net new US dollars (other than counterfeiters) which are free-float exchange (not pegged to a commodity like gold or another currency)
  • Because there is no commodity link or currency peg, the USA can never run out of dollars
  • Because the USA can never run out of dollars, the USA can never be forced in to bankruptcy like a country like Greece or a city like Harrisburg
  • Inflation, not bankruptcy, is the threat facing a currency issuer like the USA
  • Because of the current account deficit, either the US public sector or the US private sector can net save (surplus) but not both at the same time

If US Treasury yields are almost entirely controlled by the Federal Reserve and if Treasury bond auctions do not fund government spending, your scenario below does not play out.

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The scenario by which the Fed Gov goes insolvent is this:

- politicians are incapable of cutting spending, and increase it <- the past few months has proven this incapacity
- deficit widens and debt increases exponentially
- foreign purchasers of Treasury debt start to realize they're loaning money to a deadbeat (this lowers the Fed Gov's credit rating)
- Treasury debt interest rates rise
- the % of the Fed Gov budget that goes to paying interest on the debt, increases, further increasing the deficit
- the FED buys more Treasury debt which makes inflation increase
- repeat, until we get mass (not hyper) inflation, at which point the FED stops inflating
- the deficit widens, nobody will lend to the Fed Gov but at very high interest rates, and the Fed Gov is teetering on insolvency. It either needs to make drastic spending cuts, or partially default, or both
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Old 10-21-2011, 05:14 PM   #91
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Let me ask you this. If the Fed Gov keeps on increasing the deficit, by not controlling spending, what will happen?
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Old 10-21-2011, 05:51 PM   #92
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Let me ask you this. If the Fed Gov keeps on increasing the deficit, by not controlling spending, what will happen?
You might hate this answer but it's my go-to: "it depends." That is, deficits and spending are contextual. If we blew the deficit out to 12 or 15% (or some other number that would give Glenn Beck an a brain aneurysm) by way of a broad tax cut (like elimination of the payroll tax or a broad reduction in marginal income tax rates in exchange for eliminating most all deductions), we might see much faster deleveraging of the household sector (which has much less flexibility to do so versus the corporate sector which has largely cleaned up its collective balance sheet).

As consumers faced reduced debt burdens, their discretionary income should pick up which should translate in to increased demand for goods and services which - I would argue and research seems to support - is the primary driver for increased hiring. Reduced unemployment should also translate in to increasing tax receipts and lower welfare payouts (i.e. fewer people on foodstamps, unemployment insurance, Medicaid, etc).

You would need some sort of mechanism to reduce the deficit (but not elminate it unless we return to sustained trade surpluses) as unemployment dropped and you approached much higher productive capacity or you would see sustained higher core inflation. That sustained higher core inflation would cause the Federal Reserve to raise interest rates which could cause a slowing effect.


If, on the other hand, the government increased the deficit by propping up various favored corporations or trying to pick winners and losers in the marketplace (e.g. ethanol subsidies, unsecured loans to solar panel and electric car producers, etc) you could end up stretching out the recession and "wasting" the deficit on malinvestment.
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Old 10-21-2011, 09:32 PM   #93
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So you don't agree that this gov't is a train wreck heading towards ever-larger deficits?
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Old 10-22-2011, 04:40 PM   #94
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So you don't agree that this gov't is a train wreck heading towards ever-larger deficits?
[Emphasis mine]

I suppose I would say that I would place a low probability on deficits as a percentage of GDP continually growing larger, but I generally accept that predicting outcomes a quarter out is difficult. Reasonable accuracy a year out is very difficult.

Useful accuracy in predictions through the foreseeable future? Probably as useful as the economic models that predicted the Clinton near-balanced budget would produce surpluses through 2025.
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Old 10-22-2011, 05:58 PM   #95
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Just look at the incentive system and the near-universal belief in Keynesianism (gov't spending is good, more is better).

The masses *want* more gov't spending bec they each want their dole outs. Even the Tea Partiers aren't willing to give up their SS/Medicare.

Politicians can promise more by increasing deficit spending. They get votes in exchange for promises. More inflation.

Even if they didn't increase it, just look at the fact I keep repeating:
The Medicare/SS system will have 2 workers for every retiree. Unsustainable. Something's gotta give. We'll get broken promises. Aka default.
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Old 10-22-2011, 11:53 PM   #96
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Originally Posted by JasonC SBB View Post
Just look at the incentive system and the near-universal belief in Keynesianism (gov't spending is good, more is better).

The masses *want* more gov't spending bec they each want their dole outs. Even the Tea Partiers aren't willing to give up their SS/Medicare.

Politicians can promise more by increasing deficit spending. They get votes in exchange for promises. More inflation.

Even if they didn't increase it, just look at the fact I keep repeating:
The Medicare/SS system will have 2 workers for every retiree. Unsustainable. Something's gotta give. We'll get broken promises. Aka default.
I don't like or plan on receiving Medicare or SS when I retire, I also don't like affirmative action. But, one of the few things old people like to do is vote, and if anybody so much as thinks about getting rid of MC/SS then they will not be elected.
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Old 10-24-2011, 10:41 AM   #97
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Just look at the incentive system and the near-universal belief in Keynesianism (gov't spending is good, more is better).
I think you (A) mis-state the Keynesian position on government spending and (B) over-state the popularity of the belief in more government spending is better. What did the Congressional vote on the initial fiscal stimulus program look like? Why did the (confused) debt ceiling debate go down to the last minute? Why does a Tea Party exist?

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Originally Posted by JasonC SBB View Post
The masses *want* more gov't spending bec they each want their dole outs. Even the Tea Partiers aren't willing to give up their SS/Medicare.

Politicians can promise more by increasing deficit spending. They get votes in exchange for promises. More inflation.
What you are describing (promises for votes) is nothing new in politics (American or otherwise) but I would argue that we have not seen "ever increasing" fiscal deficits. Looking at the historical data, the deficits seem to vary with business cycles. They are larger in aggregate in times with trade deficits compared to the earlier decades when the USA was more manufacturing-oriented and ran trade surpluses, but they certainly seem to vary over time.

I am also not sure that there is a direct causation between increasing deficit spending and inflation. Look at the USA over the past 3-4 years or Japan over the past 20. I believe it is more nuanced than that.

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Originally Posted by JasonC SBB View Post
Even if they didn't increase it, just look at the fact I keep repeating:
The Medicare/SS system will have 2 workers for every retiree. Unsustainable. Something's gotta give. We'll get broken promises. Aka default.
I am not an expert on the accounting of the Social Security and Medicare programs, but it is my understanding that even minor adjustments for future recipients have a large impact on the projections.

I would think if you polled the average voter between 30 and 50 years old, they would tell you they are not planning on receiving Social Security or Medicare or they expect to recieve a "reduced benefit" (however that is defined). See Gearhead's post for just one example. If, instead, those people were told they would have to wait a few more years to receive their benefit, I expect that would be plenty palatable to most voters.
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Old 10-24-2011, 12:50 PM   #98
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I am also not sure that there is a direct causation between increasing deficit spending and inflation. Look at the USA over the past 3-4 years or Japan over the past 20. I believe it is more nuanced than that.
I thought we'd already established that increasing deficits gave us two options: intentional default, or money printing (virtual or otherwise). Throwing out intentional default as an undesirable result, we are left with money printing.

Are you arguing that money printing isn't inflationary?
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Old 10-24-2011, 02:22 PM   #99
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Originally Posted by Scrappy Jack
I am also not sure that there is a direct causation between increasing deficit spending and inflation. Look at the USA over the past 3-4 years or Japan over the past 20. I believe it is more nuanced than that.
I thought we'd already established that increasing deficits gave us two options: intentional default, or money printing (virtual or otherwise). Throwing out intentional default as an undesirable result, we are left with money printing.
I think we may be talking about two different things. I am interpreting you above to mean "ever increasing deficits." That's not what I am talking about. Go back to the sectoral balances charts above. The fiscal deficit rises and falls throughout recent history. It is not a linear progression.

I am saying that I do not believe there is a direct causal link between the fiscal deficit and inflation. That is, I believe you can have an increasing deficit and face deflation and you can have a shrinking deficit and face inflation. I believe the correlation is quite low although I have not yet run the actual numbers.

For example, I believe (but don't have the data set handy) that the average fiscal deficit was higher in the 1980s than it was in the 1990s and average core inflation was higher in the 1980s than in the 1990s. That is, higher deficit with higher inflation. But, the average fiscal deficit was higher in the 2000s than it was in the 1990s and inflation was lower. Higher deficit and lower inflation.

Quote:
Originally Posted by mgeoffriau View Post
Are you arguing that money printing isn't inflationary?
I am not trying to be a pain here, but I am also not sure what you mean by "money printing" since all government spending is "money printing" (or "keystroking" if you prefer). I want to make sure we are discussing things in the same context. If you are asking if I think government spending without limit or in excess of productive capacity is inflationary, my answer is yes.
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Old 10-25-2011, 04:04 PM   #100
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For anyone who is working through this MMT stuff like me, I recommend doing the following.

Read Warren Mosler's Soft Currency Economics.

Then read it again.

Then read a couple critiques from Bob Murphy (because they are critiques, but also because they contain some instructive examples that make MMT clearer).

The Upside-Down World of MMT

Aren't Deficits Another Name for Saving? Nope.
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