Boy are ther a lot stupid people in Washington.

Unfortunately, I have to agree with you about that.

Either way, a Keynesian point of view is a good vent for all the other
problems in my life so thanks for that. Also, please take to heart the
slippery slope of political rhetoric as Hayek wrote about. “Deficit Terrorists”
and “the freedom to work” are not that different from Obama’s “socialist
take-over” of America when we let politics and rhetoric rule real decision
making.

Vent away! Always happy to help!

Best,

Marshall

OK, Major Tom, I’ll take another crack at it, being as specific as I can.
In any given year, I agree that we can borrow or print money in virtually
limitless quantity. In the first instance, are you saying that this
doesn’t pose risks to our cost of borrowing (and refinancing) in the future? If
not, are we not engaged in a Ponzi scheme that must end some day (as they
all do) leaving future generations to pay higher tax rates than we do. In
the second instance, are you saying that money printing (QE or whatever)
won’t at some point cause key prices (esp. oil) to rise to the point of
causing great pain to the average American, and that it isn’t likely to hasten
the day when the USD loses its privileges as a reserve currency? If not,
are we not compelled to issue still more debt rather than extinguish it via
QE?

Prices will go up when government spending is sufficiently high to fill the
output gap and reduce unemployment. A Ponzi scheme is a total
mischaracterisation of our system and demonstrates an ignorance of reserve
accounting. A Ponzi Scheme is a scheme in which a private party is issuing debts
which can only be serviced by issuing more debts to cover the interest. This is
not a constraint on a sovereign government which controls its own currency.
Never is, never will be. There is a lot of loose rhetoric about things
like Ponzi Schemes and national bankruptcy which is typically the work of
people who neither know nor care much about what they’re talking about.

QE simply shuffles numbers around on a balance sheet. It has nothing to
do with creating any kind of aggregate demand. The experience of Japan
demonstrates that. The BOJ massively expanded its balance sheet via QE from
March 2001 to Sept. 2003 and the economy did nothing until the government
stopped obsessing about “fiscal consolidation” and began to spend again. See
Richard Koo’s book on this.
Under a non-convertible floating rate monetary regime, a monetarily
sovereign government like the US and most other countries (the EU countries gave
up monetary sovereignty to the EMU) is not financially constrained. It
doesn’t have to “fund” its deficits with taxation or “finance” them with debt.
Government issuance of Treasury securities is simply to clear excess
reserves so the Fed an hit its target rate in the overnight interbank market. The
same thing could be done without borrowing at all, just by paying a support
rate equal to the target rate to prevent excess reserves from driving the
overnight interbank rate below the target rate.
All the talk about the so-called danger of the national debt and the
growing deficit are ideologically biased, based on the gold standard convertible
fixed rate currency that no longer applies in today’s world.

Either way, a Keynsian point of view is a good vent for all the other problems in my life so thanks for that. Also, please take to heart the slippery slope of political rhetoric as Hayek wrote about. “Deficit Terrorists” and “the freedom to work” are not that different from Obama’s “socialist takeover” of America when we let politics and rhetoric rule real decision making.

If I read this correctly (and I read it twice to be sure), you’re
comfortable saddling future generations with a higher tax burden, but you consider
the term “intergenerational theft” fraudulent in this context, likewise the
notion that markets determine interest rates. In what footnote or on
which planet?

Greetings earthling!

Levity aside, the standard government intertemporal budget constraint
analysis that deficits lead to future tax burdens is ridiculous. The idea that
unless policies are adjusted now (that is, governments start running
surpluses), the current generation of taxpayers will impose a higher tax burden on
the next generation is deeply flawed.
The government budget constraint is not a “bridge” that spans the
generations in some restrictive manner. Each generation is free to select the tax
burden it endures. Taxing and spending transfers real resources from the
private to the public domain. Each generation is free to select how much they
want to transfer via political decisions mediated through political
processes. See Bill Mitchell on this:
_http://bilbo.economicoutlook.net/blog/?p=7717#more-7717_
(http://bilbo.economicoutlook.net/blog/?p=7717#more-7717)
If governments continue to try to run budget surpluses to keep public debt
low then that strategy will ensure that further deterioration in
non-government savings will occur until aggregate demand decreases sufficiently to
slow the economy down and raise the output gap. That will force greater
reliance on private debt accumulation which does act as a constraint on
spending and growth, because individuals, unlike the federal goverment, cannot
create currency and therefore must defer consumption to repay debt.
Are we still sending real goods and services back in time to 1945 to pay
off the lingering debt from World War II?
On your second point, presumably you think that “bond market vigilantes”
or “foreign creditors” can demand higher interest rates than the Fed might
want to pay. If a bond investor, or a Chinese manufacturer refuses to buy
our debt at current low interest rates paid to them, they can leave their
dollars in their cheque account. It is of no consequence to us. We don’t have
to offer them a higher savings alternative. If China says, I don’t want
to keep a cheque account at the Fed any more and wants the money in a
different currency or, say, gold? Tough luck. It’s not possible under our
current fiat currency system.
For more, read the following:
_http://neweconomicperspectives.blogspot.com/2009/11/memo-to-congress-dont-increase.html_
(http://neweconomicperspectives.blogspot.com/2009/11/memo-to-congress-dont-increase.html)
Money quote from Professor Wray:
“So here is what I propose: let’s support Senator Bayh’s proposal to “
just say no” to raising the debt ceiling. Once the federal debt reaches $12.1
trillion, the Treasury would be prohibited from selling any more bonds.
Treasury would continue to spend by crediting bank accounts of recipients, and
reserve accounts of their banks. Banks would offer excess reserves in
overnight markets, but would find no takers—hence would have to be content
holding reserves and earning whatever rate the Fed wants to pay. But as
Chairman Bernanke told Congress, this is no problem because the Fed spends simply
by crediting bank accounts.”

I am still questioning how Marshall does not incorporate into his argument
any form of the “there’s no free lunch” basis to who pays for the
government. Another postulate I’ll propose to counter the national income
accounting identity is that G = US (as in us Americans). The government on the one
side cannot go bankrupt because they have US to counter it. -1 (G) = 1
(US). Since we cannot default, we have to pay. In that case we pay either
through higher taxes, or inflation. As part of US, I will always worry
about what G does and whether or not that is going to cost ME, but ME is not a
factor to Marshall because he only worries about US collectively, and I’m
on board whether or not I want to be, so my opinion is worthless.

In tribute to Hayek, and my layman’s paraphrasing (probably naive), the
only way to attain higher G is to enforce upon ME, the rights of US. This is
what deficit spending does. It redistributes wealth. The reason I bring
this up is because of Marshall’s use of “freedom” in his rhetoric today.
I disagree that spending other people’s money in the name of freedom so
that people can still work to earn that money that was taken from others is
freedom. It is the opposite if anything.

I always thought a “free lunch” was when you gave the guy food for not
doing anything. I am trying to suggest policies which will actualy create
employment, get our pie guy working again and adding productive assets to the
economy. Why is government spending which fills an output gap, considered
to be a “free lunch”? Who else is supposed to fill that gap? Yes, some of
it can come via our trade partners “deficit spending” (i.e. running trade
deficits), but that’s not happening now and, indeed, has never occurred once
in America’s post W.W. II history. If nonbank businesses and households
cannot create the money with which to invest and spend, how do they get the
money? Perhaps some other money creating sector, like the government, must
deficit spend. The government is not spending “other people’s money”. The
government is the only entity that can create new net financial assets.
It’s spending creates the money, not your taxes.

In tribute to Hayek, and my layman’s paraphrasing (probably naive), the only way to attain higher G is to enforce upon ME, the rights of US. This is what deficit spending does. It redistributes wealth. The reason I bring this up is because of Marshall’s use of “freedom” in his rhetoric today. I disagree that spending other people’s money in the name of freedom so that people can still work to earn that money that was taken from others is freedom. It is the opposite if anything.

Here are the references

*The pie guy wants to exercise his freedom to work hard for money.

*The pie guy is stuck with over 15 million other people who would like to exercise their freedom to work hard for money.

*Over 6 million of those people have been trying to exercise that freedom for over half a year, with no luck.

*Ironically that leaves government fiscal deficit spending as the sole remaining mechanism to insure the freedom of its citizens to work hard for money.

My point:

Laborers are free to produce as many houses, cars, or Xboxes as they want. They’re free to build them until the sun goes down, but if there is not a buyer, that limits their freedom because they’ll never have enough money to keep producing. Marshall would rather force the buyer to buy rather than let the consumer be free to choose what they want. His argument may make sense, but it doesn’t make sense in what I perceive as a free society and Hayek pointed out this exact abuse of the word freedom over half a century ago. The only out I can accede to Marshall is that we are not going to pay through inflation, taxes, or bankruptcy because perpetual defaults are possible. Prove that and your name becomes Ponzi.

You seem to be saying that large debts are helpful, until inflation takes
off. We all agree on that. Some of us just want to be sure inflation
doesn’t, because, once it does it will be a hard train to stop.

It’s a hard train to stop if you use interest rates to do so, just like
it’s harder to conduct surgery with a butcher’s knife, rather than using a
scalpel.

I believe in using fiscal policy to curb aggregate demand and diminish
inflationary pressures, not interest rates. We have this mythical fear of
inflation, but I find it hard to find the likelihood of this occurring in the
context of 17% under and unemployment.

Let’s discuss again when Japan defaults in a couple of years.

Okay, but we’ve been waiting 20 years and counting…

I have one question, isn’t private sector debt (and by this I mean
intra-private sector debt not private sector holdings of government debt) what in
the end puts a limit under the ability of government’s to run deficits. As
although governments can control the short-end of the yield curve, even
with a fiat currency they cannot control the yield curve much out beyond 2
years.

Once the yield on 10 year risk-free government debt gets to a level that
it forces the yield on risky private debt to rise beyond the debtors ability
to pay there will be increasing private sector defaults?

There is no reason at all why the central bank needs to offer longer term
dated debt. The central bank sets the price of reserves but stands ready
to provide whatever volume of reserves are required to support the credit
structure.
Second, as Bill Mitchell, Scott Fulwiller and Randy Wray have all pointed
out, there is a close connection between short-term interest rates and the
level of reserves and this drives central bank operations. When there are “
excess” reserves – that is, levels that exceed reserve requirements (if any
exist) and the minimum levels required by banks to satisfy clearing needs –
then there is always downward pressure on rates unless the central bank:
(a) pays a support rate on excess reserves; or (b) drains the excess
through bond sales. The central bank can always induce the reserve movements they
desire to maintain control of their policy rate by setting the price of
reserves relative to any bond sales or purchases they deem appropriate.
There is no reason for central banks ever to offer long dated bonds, once
we understand that the true purpose of them is purely defensive – helping
the central bank maintain a reserve rate, rather than being used to “fund”
something. When you recognise the initial premise, the idea that we should
be gifting rentiers with a higher yield simply because they ask for it is
absurd.
Read Randy Wray’s piece: _http://www.newdeal20.org/?p=6571_
(http://www.newdeal20.org/?p=6571)
And Scott Fulwiller:
_http://neweconomicperspectives.blogspot.com/2009/11/what-if-government-just-prints-money.html_
(http://neweconomicperspectives.blogspot.com/2009/11/what-if-government-just-prints-money.html)

It has occurred to me that quantitative easing may be innocuous all
competing currencies do it at the same time, maintaining a relatively reasonable
balance between one another. This balance will naturally occur because no
currency can be allowed to get too strong. Such simultaneous quantitative
easing would allow economic stabilization without inflation. What you think
of this idea?

No, quantitative easing merely involves the central bank buying bonds (or
other bank assets) in exchange for deposits made by the central bank in the
commercial banking system – that is, crediting their reserve accounts. The
aim is to create excess reserves which will then be loaned to chase a
positive rate of return. So the central bank exchanges non-or low
interest-bearing assets (which we might simply think of as reserve balances in the
commercial banks) for higher yielding and longer term assets (securities). It
shifts things on a balance sheet, but does nothing in terms of creating new
aggregate demand.
It’s just an accounting adjustment in the various accounts to reflect the
asset exchange. The commercial banks get a new deposit (central bank funds)
and they reduce their holdings of the asset they sell.

I have one question, isn’t private sector debt (and by this I mean intra-private sector debt not private sector holdings of government debt) what in the end puts a limit under the ability of government’s to run deficits. As although governments can control the short-end of the yield curve, even with a fiat currency they cannot control the yield curve much out beyond 2 years.

Once the yield on 10 year risk-free government debt gets to a level that it forces the yield on risky private debt to rise beyond the debtors ability to pay there will be increasing private sector defaults?

1.In your opinion, is there a level of public debt which is deleterious?
YES, WHEN IT BECOMES INFLATIONARY. I’M NOT CONCERNED ABOUT A NUMBER PER
SE, BUT THE EFFECT, AS ABBA LERNER USED TO ARGUE

2. What do you think of Rogoff’s latest, indicating that high levels of
debt slow economic growth?
ROGOFF’S DATA IS INCOMPLETE AND I DON’T THINK HE SPENDS SUFFICIENT TIME
DISTINGUISHING BETWEEN COUNTRIES WHICH OPERATE PEGGED RATE REGIMES OR CURRENCY
BOARDS, VERSUS FREE FLOATING NON-CONVERTIBLE CURRENCIES. GOES BACK TO AN
EARLIER POINT I MADE. IF YOU WANT PRIVATE SECTOR DEBT DELEVERAGING, THEN
SOMEONE ELSE HAS TO ACCOMMODATE THAT. EITHER THE FOREIGN SECTOR (UNLIKELY, AS
THE US HAS NEVER RUN A TRADE SURPLUS IN THE POST-WAR PERIOD), OR THE
GOVERNMENT SECTOR. IT’S AN ACCOUNTING IDENTITY, PLAIN AND SIMPLE. ROGOFF’S
ANALYSIS HAS RELEVANCE IN THE US ONLY TO THE EXTENT THAT OUR POLICY MAKERS
REFUSE TO ALLOW PUBLIC SPENDING TO ACCOMMODATE THAT PRIVATE SECTOR DEBT
DELEVERAGING.

Yeah, deficits are great. Who would you rather be right now, China or
Japan?

Right now, probably Japan. If with its so-called “problems” and “lost
decade”, Japan’s unemployment rate is 5.7%. They can do better, but it beats
anything we’ve seen in the US, UK, or euro zone. China looks ready to
experience an abrupt reversal of growth. China is able to handle a large
fiscal surplus because it is running such a huge current account surplus. You
can also sustain a full employment policy if some other countries are
willing to deficit spend, but it does leave you open to protectionist threats and
I also think it is socially undesirable to be exporting all of your
economic output instead of letting your workers enjoy the fruits of their hard
work.

So, the govt can just print money and spend away in abandon as long as its
debt is issued in its own fiat currency? So, why doesn’t everyone just do
that and put an end to the charade of issuing debt and repaying iot with
printed money? Why not just give free money to every citizen of the US and
get it over with? And if indeed what you are saying is easily doable w/o any
consequences, then just printing money and using it can circumvent economic
growth – why bother with productive economic growth etc., just print more
money and spend it? What about inflation – is that the problem (that you
don’t even mention) that prevents something as silly as this to be carried
out? Debase your currency enough so that its utility as a store of value is
gone? In a limited way, fiscal deficits may work, but eventually you need
true economic growth to power a country’s future, not just handouts of pieces
of paper which can be excahnged for real goods for now, but increasingly
won’t! Otherwise, everyone would do it.

Well, you don’t give free money because ultimately it’s inflationary and
you do need the taxation function to call forth public goods and services.
Let me repeat what I said earlier:

The primary reason the public accepts what we call “fiat money” is because
it has tax liabilities to the government. If the tax system were removed,
the government would eventually find that its fiat money would lose its
ability to purchase goods and services on the market. In the words of Abba
Lerner (one of the architects of “Chartalism”): “The modern state can make
anything it chooses generally acceptable as money…It is true that a simple
declaration that such and such is money will not do, even if backed by the most
convincing constitutional evidence of the state’s absolute sovereignty.
But if the state is willing to accept the proposed money in payment of taxes
and other obligations to itself the trick is done.”

Ultimately the fiscal deficits do create the growth that you desire and
they REDUCE the debt as we get employment and output increasing. If you got
inflation, that would be from too much aggregate demand and a too small
output gap.
That would mean that fatefull day would be an economy with maybe 4%
unemployment and 90%+ capacity utilization and an overheating economy in general.
Sounds like that’s the goal of deficit spending to me. And if we get to
that happy state of affairs, we can raise taxes to cool things down some
day. In fact I suggest that we start with a tax on interest income if we want
to cut payments to bond holders.
Regarding the supposed default alternative to inflation, in the full
employment and high capacity utilization scenario that might call for a tax
increase to cool it down, I don’t see how default fits in or why it would even
be considered.
In fact, with our countercyclical tax structure, strong growth that follows
deficits automatically drives down the deficit, and can even drive it into
surplus, as happened in the 1990’s. In that case one must be quick to
reverse the growth constraining surplus should the economy fall apart as
happend shortly after y2k.

$3 T in Federal deficits in this administration’s first 2 full budget
years is caught in the talons of the deficit hawks?

And how much overt Fed money-printing to buy MBS and Treasuries?

Look at government spending relative to GDP. It’s virtually unchanged over
the past 10 years if you check out the BEA’s latest numbers.

And how much overt Fed money-printing to buy MBS and Treasuries?

This is a tres extreme POV. This is NOT WW II where the prize was world domination.