How Balanced Budgets Create Unemployment

[Nima]

Recently I posted my summary of MMT here because I think it can help us gain a better understanding about the public debt, budget deficits, taxes, etc. and their impact on growth. Now I am reposting one more (much shorter) post that I recently wrote on BeingLibertarian.com to show how and why MMT is highly relevant in today's world, in particular in Europe where high taxes & Austerity are choking economic growth, and to a degree the same applies to the US. The main point is that in a fiat money systems routine government deficits seem to be necessary to a degree to avoid unemployment if the government in question is the currency issuer. Here is the original post:

In  a recent post I provided a summary about how today's fiat money systems function according to Modern Monetary Theory, in particular drawing from L. Randall Wray's Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems.

In chapter 7.6, titled "MMT for Austrians: can a Libertarian support the Job Guarantee?", the following paragraph caught my attention:

"The problem with a monetary economy (...) is that from inception imposition of taxes creates unemployment (those looking for money to pay taxes). (...) It is sheer folly to then force the private sector to solve the unemployment problem created by the government's tax."

To me, this has probably been one of the most eye opening statements about the fiat money system that I've heard in a long time, as I had never looked at it from this perspective before.

We know about common causes of unemployment, such as minimum wage legislation, and other measures that raise employment cost above what the market can bear, such as mandated health care, or to sum it up: government intervention.

But that doesn't mean we can't consider other potential causes.

If you've read my post about Modern Monetary Theory you'll know that in a fiat money system the government imposes a tax in a currency, and then proceeds to spend that currency which is now in demand to satisfy said tax obligation.

If you've read my post about Private Saving, deficits, and recessions you'll know that when private sector savings runs low or even declines, a recession/depression is on the horizon, and that in a fiat money system there's no other way to achieve sufficient private sector savings without government budget deficits.

According to MMT, the reason low or negative private savings cause unemployment is that the private sector is scrambling to save enough on top making the required tax payments. This, in turn, leads to systemically induced shortage in demand for goods and services in the private sector, which in turn leads to declining corporate sales, which ultimately results in corporate layoffs and unemployment, unemployment meaning that someone is looking for money but isn't getting any.

Warren Mosler has always explained this most vividly in the university lectures that I've seen him in. It goes a little something like this: He pulls out a stack of business cards and tells the audience that he's selling each for $50, which naturally nobody is interested in. Then he adds a factor to his simulation: He informs the audience that he's got a guy waiting a at the door with a 9mm who won't let anyone leave without presenting one of those business cards. He explains that now suddenly he has made everyone in the room unemployed. Everyone needs at least one business card, and nobody has one. So now Warren could find willing and able workers willing to trade labor for such a business card. But imagine he didn't follow through and didn't hire anyone, or only hired a few individuals in the room. By definition, he would have made people unemployed, without giving them a way to escape their unemployment. (Watch a clip where Warren Mosler explains this here.)

This is essentially how the fiat money system is set up: We all (or most of us) need money in order to ultimately make a tax payment by year's end. In addition to desiring money to make tax payments, the private sector also desires to save a portion of the money received. But if the agency that has imposed the tax doesn't arrange their racket in a manner where enough money is left in private sector pockets on the net, some people will inevitably remain unemployed.

Remember my explanation from "Sectoral Balances and Private Saving":

This sectoral balance identity can be observed in 

this chart

 that I've put together on stlouisfed.org:

You can see there that the private sector's surplus (blue) plus the foreign sector's surplus (green) consistently equal the inverse government budget deficit (red)

to the cent

. You may have noticed that the private sector surplus in the blue chart above is exactly the same chart as the one I presented a few weeks ago when I explained the correlation between

private sector saving and recessions

.

What do we conclude from this? In order to achieve a sustained level of net private saving, which seems to be important to the health of the domestic economy

in a fiat money system

, a country either needs to run a sustained current account surplus, or a government budget deficit, or a mix of both. In the case of the United States, which runs a current account deficit at the moment, there is in fact

no other way

to accumulate net private savings than to run a government budget deficit.

A balanced budget in a fiat money system implies not only insufficient money to satisfy saving demands, it implies that no money at all is left in private sector pockets, leading to systemically suppressed demand, which inevitably leads to systemic unemployment.

[dsayers]

What does "create unemployment" mean? It seems like a contradiction in terms.

 

I didn't want to just ask that, so I thought I'd read a bit first. I stopped when I saw government and necessary in the same sentence. That's when I decided I really wanted to know the answer to this question before I invest more time.

[ValueOfBrevity]

What do we conclude from this? In order to achieve a sustained level of net private saving, which seems to be important to the health of the domestic economy in a fiat money system, a country either needs to run a sustained current account surplus, or a government budget deficit, or a mix of both. In the case of the United States, which runs a current account deficit at the moment, there is in fact no other way to accumulate net private savings than to run a government budget deficit.

A balanced budget in a fiat money system implies not only insufficient money to satisfy saving demands, it implies that no money at all is left in private sector pockets, leading to systemically suppressed demand, which inevitably leads to systemic unemployment.

 

 

 

Are claiming that governments with fiat currency (trust-backed, rather than by a scarce commodity) create a disincentive for saving money because of inflation?

 

 

In a fiat money system, what is the disincentive to taxing more and spending less?

 

 

What does "create unemployment" mean? It seems like a contradiction in terms.

 

I didn't want to just ask that, so I thought I'd read a bit first. I stopped when I saw government and necessary in the same sentence. That's when I decided I really wanted to know the answer to this question before I invest more time.

 

Can fiat currency exist in a voluntary society?

I am sincerely curious.

 

[dsayers]

Can fiat currency exist in a voluntary society?

I am sincerely curious.

I think a more useful question would be: In a free society, would individuals choose debt as currency? Would they choose currency backed by nothing when currencies backed by something were available? Would they choose a currency somebody could hyper-inflate on a whim?

[Nima]

What does "create unemployment" mean? It seems like a contradiction in terms.

 

I didn't want to just ask that, so I thought I'd read a bit first. I stopped when I saw government and necessary in the same sentence. That's when I decided I really wanted to know the answer to this question before I invest more time.

 

Good question. Anyone who has a demand for currency, but doesn't have a job offering said currency is unemployed for the sake of this definition. If I impose a tax on you, payable in 100 NimaBucks in 1 week, along with credible enforcement, then I have essentially rendered you unemployed because you now need NimaBucks, but don't know anyone offering them. Let's say I'm the monopoly issuer of said NimaBucks. You now depend on me to give you a job that pays NimaBucks so that you can pay the imposed tax in 1 week.

 

This is essentially the fiat money system in a nutshell, if that makes sense?

Are claiming that governments with fiat currency (trust-backed, rather than by a scarce commodity) create a disincentive for saving money because of inflation?

 

 

In a fiat money system, what is the disincentive to taxing more and spending less?

 

 

 

Can fiat currency exist in a voluntary society?

I am sincerely curious.

 

There is no disincentive to save money inherent in a fiat money system. People in the private sector in a fiat money system like to save up some money as a safety cushion to be able to pay bills when they don't have work that pays that money. (IF the fiat money system becomes inflationary, in other words when government budget deficits go beyond the private sector's demand for net saving, then that can certainly disincentivize from saving.)

 

"In a fiat money system, what is the disincentive to taxing more and spending less?" < Taxing more than before and spending less than before could mean that the government budget deficit is reduced. It could also mean, depending on how large the change, that the government might generate a surplus. This essentially means that the government doesn't leave any money to the private sector to net save, which impels people in the private sector to cut spending enough to still be able to pay the tax. This can lead to unemployment via the mechanism I've outlined in the post above.

 

"Can fiat currency exist in a voluntary society?" < Great question! I think it's conceivable, but haven't thought about this much. For example a private property owner could introduce a new currency on his property only, and require rent payment in that currency instead of an arbitrary compulsory tax.

[rosencrantz]

If a government runs a surplus, the money has to come from the private sector via taxes. This means that the government takes out more money from the private sector than in invests / spends. Hence, it is a net negative on the economy. If a government runs a deficit, it can have a net positive effect on the economy. Furthermore, the debt that the government has constitutes an asset for somebody else.

Can fiat currency exist in a voluntary society?

 

 

When banks lend money, they create deposits. If the borrower spends the money, the newly created money enters the market. Private banks now create most of the money out of thin air and it is reasonable to assume that this will go on in a voluntary society. 

[dsayers]

Good question. Anyone who has a demand for currency, but doesn't have a job offering said currency is unemployed for the sake of this definition. If I impose a tax on you, payable in 100 NimaBucks in 1 week, along with credible enforcement, then I have essentially rendered you unemployed

No, you have threatened to steal from me that which I do not have, and threatened to further steal from me if I do not comply. Unemployment MIGHT be a side effect of that, but this is not the same of fabricating a void (which is a contradiction in terms). Calling it creating unemployment only serves to conceal the underlying violence. If this thread is meant to be a proof of something, precision is key. For if the next step in your proof requires the fabrication of a void to be valid, the entire proof will fall flat.

[Nima]

I think a more useful question would be: In a free society, would individuals choose debt as currency? Would they choose currency backed by nothing when currencies backed by something were available? Would they choose a currency somebody could hyper-inflate on a whim?

This is speculation as we don't really know. It's not exactly accurate that fiat currency is "backed by nothing", since the tax does create a demand on it. But we can see phenomena like Bitcoin emerging which could certainly become the payment system of a free society. The fact remains that there is lots of historical evidence that large scale monetary systems have always been fiat. Even gold coins under the Romans were essentially fiat money, and traded at a substantial premium on the gold price.

No, you have threatened to steal from me that which I do not have, and threatened to further steal from me if I do not comply. Unemployment MIGHT be a side effect of that, but this is not the same of fabricating a void (which is a contradiction in terms). Calling it creating unemployment only serves to conceal the underlying violence. If this thread is meant to be a proof of something, precision is key. For if the next step in your proof requires the fabrication of a void to be valid, the entire proof will fall flat.

 

I defined unemployed very clearly as someone who wants money but doesn't have it and is looking for a job that pays him said money. This is not an uncommon definition for unemployment amongst economists. Wikipedia says "Unemployment occurs when people who are without work are actively seeking paid work." (https://en.wikipedia.org/wiki/Unemployment).

 

What I described is exactly how fiat money systems emerged and functioned for millennia as per historical evidence. Look up "Split Tally Sticks" for example: https://en.wikipedia.org/wiki/Tally_stick#Split_tally: "The most prominent and best recorded use of the split tally stick (or "nick-stick"^[5][6]) being used as a form of currency was whenKing Henry I initiated the tally stick system in or around 1100 in medieval England. He would accept the tally stick only for taxes, and it was a tool of the Exchequer for the collection of taxes by local sheriffs (tax farmers "farming the shire") for seven centuries."

[dsayers]

This is speculation as we don't really know.

Yes, we do. Ask a person if they'd rather have one leg or two and the answer is obvious.

 

It's not exactly accurate that fiat currency is "backed by nothing"

I haven't said anything about fiat currency here.

 

since the tax does create a demand on it.

This is not what "backed by" means. Backed by means representative of. A dollar backed by gold is a note that is representative of the gold. Backed by comes before a currency and demand for comes after. Making the suggestion that demand after makes something backed by before logically impossible.

 

As for the rest, I'll bow out. As somebody who understands how destructive obfuscation can be, I don't want to try and follow a proof where step one requires specialized definitions of words. I am employed, though I do not have a job that pays me in Yen. According to your definition, I am unemployed. This is not a meaningful definition and I don't have the time to continue to push back for somebody who will not consider that may have erred.

[Matthew Ed Moran]

If a government runs a surplus, the money has to come from the private sector via taxes. This means that the government takes out more money from the private sector than in invests / spends. Hence, it is a net negative on the economy. If a government runs a deficit, it can have a net positive effect on the economy. Furthermore, the debt that the government has constitutes an asset for somebody else.

 

When banks lend money, they create deposits. If the borrower spends the money, the newly created money enters the market. Private banks now create most of the money out of thin air and it is reasonable to assume that this will go on in a voluntary society. 

 

Just responding to the first part. I don't understand how surpluses can be a bad thing and deficits a good thing if prices are allowed to fluctuate freely (i.e. no minimum wages, no price controls, etc.). When I think of "good for the economy" or "bad for the economy," I think in terms of who is controlling resources. If the government taxes money, but does not spend it, then there are more resources in private hands which is a good thing. If prices can move freely then they will adjust to the new money supply and there will be deflation, i.e. an increase in purchasing power, for private citizens.

 

If the government runs a deficit, then this is inflationary and it puts more resources into the hands of government employees. This seems like the worst possible situation.

[rosencrantz]

I will take a simple model to explain my position. 

 

The private sector produces 1000 units of value. 
Taxrate is 10%, so the taxes are 100 units of value.
900 units of value remain for the private sector.

 

The government spends 80 units of value.
The government gets 100 units of value.

There is a surplus of 20 units of value for the government.

Lets see what happens when the government doesn't run a surplus.

 

The government spends 100 units of value.
The government gets 100 units of value.
There is no surplus. 

Now here is the important part. Where do the 20 extra units of value go to? They have to go to the private sector.
That changes the calculation from above to:

The private sector produces 1020 units of value (The 1000 + 20 from the government)
Taxrate is 10%, so the taxes are 102 units of value.
918 units of value remain for the private sector (18 more than if the government ran a surplus).

In reality, it's much more complex, but my example shows that running a surplus is not necessarily a good thing in a mixed economy.


 

[Nima]

Just responding to the first part. I don't understand how surpluses can be a bad thing and deficits a good thing if prices are allowed to fluctuate freely (i.e. no minimum wages, no price controls, etc.). When I think of "good for the economy" or "bad for the economy," I think in terms of who is controlling resources. If the government taxes money, but does not spend it, then there are more resources in private hands which is a good thing. If prices can move freely then they will adjust to the new money supply and there will be deflation, i.e. an increase in purchasing power, for private citizens.

 

If the government runs a deficit, then this is inflationary and it puts more resources into the hands of government employees. This seems like the worst possible situation.

 

Think of the most simple, extreme scenario for illustrative purposes: Let's say there is me and 10 others in the room. I impose a tax on those 10 people in NimaBucks (NB), everyone owes me 10 NB within the next 24 hrs, and if they don't pay the tax my guy with 9mm gun at the door won't let them leave the room.

 

Now imagine I don't proceed to spend said NimaBucks into existence. Nobody will have them in this mini private sector of 10 people. In fact, in within the next 24 hrs everyone is in debt to me and I get to begin expropriating things they actually have on their person to settle their debts.

 

This is the simplest example of a "balanced budget" in an economy where I am the sovereign issuer of the currency. The private sector ends up being in debt to the public sector! Yes, you may have deflation, but it doesn't matter, there is no clearing price that can create full employment in this scenario because there's simply not enough tokens in the economy to pay the tax I've imposed.

 

See this clip for a nice illustration in lecture format: 

 

If the government runs a deficit it's only inflationary if the deficit is larger than the private sector's demand for net saving of NB's. Remember: Without foreign trade, the the public sector's deficit equals the private sector's net saving, and net saving seems to be highly correlated with recessions/depressions/unemployment etc. (See evidence here: https://beinglibertarian.com/private-sector-saving-recessions/)

[Matthew Ed Moran]

I will take a simple model to explain my position. 

 

The private sector produces 1000 units of value. 

Taxrate is 10%, so the taxes are 100 units of value.

900 units of value remain for the private sector.

 

The government spends 80 units of value.

The government gets 100 units of value.

There is a surplus of 20 units of value for the government.

 

Lets see what happens when the government doesn't run a surplus.

 

The government spends 100 units of value.

The government gets 100 units of value.

There is no surplus. 

 

Now here is the important part. Where do the 20 extra units of value go to? They have to go to the private sector.

That changes the calculation from above to:

 

The private sector produces 1020 units of value (The 1000 + 20 from the government)

Taxrate is 10%, so the taxes are 102 units of value.

918 units of value remain for the private sector (18 more than if the government ran a surplus).

 

In reality, it's much more complex, but my example shows that running a surplus is not necessarily a good thing in a mixed economy.

 

 

 

 

The inaccuracy is you're using "unit of value," which is not an objective or tangible measurement. Money is not a unit of value. It is a unit of account. It measures relative costs of different things, but it doesn't measure the value people get from consuming those things - which is purely subjective (which is why there can be no objective units to measure it with).

 

The point of an economy is ultimately to consume, so when resources are directed in a market, by definition they are allocated towards consumption. When they are directed by government, there is no principle that would direct resource allocation towards consumption. Rather, since they are forcibly redistributed from a free market allocation which maximizes consumption over time, government spending is creating negative value for the economy.

 

So when you change the "unit of value" to being dollars in your example, then you have a more realistic understanding of what is happening. If the government runs a surplus, there is less money for the market, but there are more resources.

 

Whatever maximizes the amount of resources in private hands maximizes consumption over time. 

 

So if the purpose of an economy is consumption, then what is better for the economy is more resources in private hands, but not necessarily more money. 

 

I'm sure you get this, but let me know if I'm missing something.

[Nima]

I will take a simple model to explain my position. 

 

The private sector produces 1000 units of value. 

Taxrate is 10%, so the taxes are 100 units of value.

900 units of value remain for the private sector.

 

The government spends 80 units of value.

The government gets 100 units of value.

There is a surplus of 20 units of value for the government.

 

Lets see what happens when the government doesn't run a surplus.

 

The government spends 100 units of value.

The government gets 100 units of value.

There is no surplus. 

 

Now here is the important part. Where do the 20 extra units of value go to? They have to go to the private sector.

That changes the calculation from above to:

 

The private sector produces 1020 units of value (The 1000 + 20 from the government)

Taxrate is 10%, so the taxes are 102 units of value.

918 units of value remain for the private sector (18 more than if the government ran a surplus).

 

In reality, it's much more complex, but my example shows that running a surplus is not necessarily a good thing in a mixed economy.

 

 

 

 

I think you get the gist of things, but the only thing I would add is that as per historical evidence a fiat economy doesn't begin with the private sector producing units of value, it begins with a sovereign imposing a tax.

[Matthew Ed Moran]

I think you get the gist of things, but the only thing I would add is that as per historical evidence a fiat economy doesn't begin with the private sector producing units of value, it begins with a sovereign imposing a tax.

 

I'm still having some trouble understand Rosen's example, but I'll check out that video and probably the book.

 

One question I have: if in Rosen's example the government must spend the fiat before it can be taxed, then is it even possible for the government to run a surplus? If the government only spends 80 fiat notes, how can it collect 100?

 

Edit:

 

The video is really interesting... 

[Nima]

I'm still having some trouble understand Rosen's example, but I'll check out that video and probably the book.

 

One question I have: if in Rosen's example the government must spend the fiat before it can be taxed, then is it even possible for the government to run a surplus? If the government only spends 80 fiat notes, how can it collect 100?

Yes over all time that is correct. But once the private sector has accumulated some savings you may have certain years where more money is destroyed via taxation than is generated via spending, aka running a budget surplus for the year. Generally this has been a good depression indicator by the way. 6 out of 7 times the US budget went into surplus a depression followed. The 7th was the great recession.

[Nima]

Yes, we do. Ask a person if they'd rather have one leg or two and the answer is obvious.

 

I haven't said anything about fiat currency here.

 

This is not what "backed by" means. Backed by means representative of. A dollar backed by gold is a note that is representative of the gold. Backed by comes before a currency and demand for comes after. Making the suggestion that demand after makes something backed by before logically impossible.

 

As for the rest, I'll bow out. As somebody who understands how destructive obfuscation can be, I don't want to try and follow a proof where step one requires specialized definitions of words. I am employed, though I do not have a job that pays me in Yen. According to your definition, I am unemployed. This is not a meaningful definition and I don't have the time to continue to push back for somebody who will not consider that may have erred.

 

You are not subject to much taxation in Yen I presume, so Yen doesn't even come into the picture. You are subject to dollar taxation or to whatever fiat currency regime you live under. Thus, for liquidity you generally mostly seek the token that is accepted in said taxation, either directly, or by proxy in that you don't owe taxes yourself but know that many others in your territory do, in the US that would be bank reserves plus cash currency in circulation for example.

 

The video is really interesting... 

 

I agree!

[ValueOfBrevity]

...the private sector has accumulated some savings you may have certain years where more money is destroyed via taxation than is generated via spending, aka running a budget surplus for the year...

 

Can you please expand on this? 

[Nima]

Can you please expand on this? 

 

Let's imagine we start from day 1 of the initiation of the very first fiat transactions: I become sovereign through some conquest with no foreign trade yet and I impose a total tax of 100 NimaBucks (NB) to be collected per year and hire public sector workers for 1000 NB throughout year 1. So for year 1 we have a public sector deficit of 900 NB and a corresponding private sector net saving of 900 NB (meaning 900 NB are left in private sector bank reserves or cash currency). Now let's say for year 2 I raise the total tax to be collected from the private sector to 500 NB but spend only 200 NB. This means in year two we have a public sector budget surplus of 300 NB and a corresponding private sector deficit (net dis-saving, see end of Clinton era for contemporary example) of 300 NB. At the end of year two there will only be 600 NB left in private sector bank reserves/cash.

[Matthew Ed Moran]

Think of the most simple, extreme scenario for illustrative purposes: Let's say there is me and 10 others in the room. I impose a tax on those 10 people in NimaBucks (NB), everyone owes me 10 NB within the next 24 hrs, and if they don't pay the tax my guy with 9mm gun at the door won't let them leave the room.

 

Now imagine I don't proceed to spend said NimaBucks into existence. Nobody will have them in this mini private sector of 10 people. In fact, in within the next 24 hrs everyone is in debt to me and I get to begin expropriating things they actually have on their person to settle their debts.

 

This is the simplest example of a "balanced budget" in an economy where I am the sovereign issuer of the currency. The private sector ends up being in debt to the public sector! Yes, you may have deflation, but it doesn't matter, there is no clearing price that can create full employment in this scenario because there's simply not enough tokens in the economy to pay the tax I've imposed.

 

See this clip for a nice illustration in lecture format: 

 

If the government runs a deficit it's only inflationary if the deficit is larger than the private sector's demand for net saving of NB's. Remember: Without foreign trade, the the public sector's deficit equals the private sector's net saving, and net saving seems to be highly correlated with recessions/depressions/unemployment etc. (See evidence here: https://beinglibertarian.com/private-sector-saving-recessions/)

 

If you don't spend the NimaBucks into existence, then sure you may start physically taking things from people, but how is that different from a situation in which you spend the NimaBucks into existence, and then tax them? In the former situation there is no inflation. There is simply a net loss for the economy in real terms. In the latter situation there is inflation when NimaBucks are spent, and then later when the bucks are taxed the inflation is removed from the market. 

 

There is no actual market demand for NimaBucks. When you say deficits only cause inflation when there isn't a larger demand for NimaBucks then there are in existence, that has nothing to do with market demand for money. As soon as the government begins spending NimaBucks into existence and forces people to accept them as payment, any demand for NimaBucks is the opposite of market demand. It is destroying savings every single time they are used.

 

You can call a situation in which taxes can't be collected via fiat exchange a situation of unemployment, but that is so deeply insane (edit: sorry just to be clear I'm not saying you're insane) that you have completely removed yourself from discussing the economics of the situation. You're just using economic terms which rely on market demand to discuss what is the demand of violent force. If someone wants to force me to work for them, and I don't, that is not unemployment. 

 

(edit: sorry this is a non argument I made without realizing ^)

 

I am not an expert, so maybe I am completely wrong, but MMT is not describing economic transactions. It is describing a method of accounting for taxes over time. As soon as government receives goods for nothing (for violently imposed fiat - this is nothing), you are accounting this as private savings, but in economic terms this is monetary inflation and a net loss of savings.

 

When you say balanced budgets create unemployment, all you're saying is government can't collect as many taxes as it did in the past. You're using language very different than I have seen in Austrian economics, which would never define unemployment as not engaging in slave labor.

[dsayers]

You are not subject to much taxation in Yen I presume, so Yen doesn't even come into the picture. You are subject to dollar taxation or to whatever fiat currency regime you live under. Thus, for liquidity you generally mostly seek the token that is accepted in said taxation, either directly, or by proxy in that you don't owe taxes yourself but know that many others in your territory do, in the US that would be bank reserves plus cash currency in circulation for example.

So employment is defined as violence-driven demand when it supports your case, but not when it doesn't?

[ValueOfBrevity]

Let's imagine we start from day 1 of the initiation of the very first fiat transactions: I become sovereign through some conquest with no foreign trade yet and I impose a total tax of 100 NimaBucks (NB) to be collected per year and hire public sector workers for 1000 NB throughout year 1. So for year 1 we have a public sector deficit of 900 NB and a corresponding private sector net saving of 900 NB (meaning 900 NB are left in private sector bank reserves or cash currency). Now let's say for year 2 I raise the total tax to be collected from the private sector to 500 NB but spend only 200 NB. This means in year two we have a public sector budget surplus of 300 NB and a corresponding private sector deficit (net dis-saving, see end of Clinton era for contemporary example) of 300 NB. At the end of year two there will only be 600 NB left in private sector bank reserves/cash.

Hire public sector workers? How does this add wealth to the society?

 

Surely, if Nima didn't steal money from the private sector to employ government bureaucrats, the money would have been better allocated in the private sector which faces the market. 

[Matthew Ed Moran]

Is it fair to say the government is giving people debt that they must pay in the future in exchange for their goods and services?

 

It's like if I went and took your house, and then I gave you debt in return saying you owe me more resources in the future.

 

So it is a process of accounting where assets are artificially turned into liabilities. 

 

So when there is a gov't deficit, in real terms, the government is being starved of assets. If the gov't has accounted to make purchases in the future by having a flow of assets that have been cut short due to its mismanagement, then the only two options I see are inflation or deflation. Inflation is the gov't destroying the value of all assets in the economy by destroying the structure of production to meet the needs of the gov't short term consumption. Deflation is making the assets more valuable, by investing in them for longer term consumption, at the expense of gov't accounts defaulting on their purchases.

 

I will try and show an example of how I am trying to apply this analysis to social security.

 

Social Security was essentially a ponzi scheme. It traded people liabilities for their assets, in the promise that in the future their liabilities would be something they could live off of. The assets we know are destroyed by government mismanagement, so it's not like the government is going to come back and give SS recipients NEW assets. The gov't can't hand out food to people, or medical care, unless it is taking them from elsewhere.

 

The assets are gone, and in their place are liabilities. 

 

So when people are handed out tons of new liabilities for social security, that's like putting a piece of paper in a vault saying "better get some resources," and expecting people to be able to live off that. 

 

What is the solution to that? It seems to me either it is deflation or inflation. Inflation destroys the structure of production by making it more focused on near term consumption. Deflation lengthens the structure but requires less present consumption. So for people expecting SS benefits, the only way to pay them is to create consumption assets at the expense of the next generation's standard of living.

 

Sorry if I'm rambling, but I'm interested does MMT recognize this (if what I'm saying is accurate) and what are its prescriptions? Thanks for the time you're investing here.

[Nima]

So employment is defined as violence-driven demand when it supports your case, but not when it doesn't?

 

I didn't define employment, I quoted from very common definitions of unemployment.

[Nima]

Hire public sector workers? How does this add wealth to the society?

 

Surely, if Nima didn't steal money from the private sector to employ government bureaucrats, the money would have been better allocated in the private sector which faces the market. 

 

I was just describing how the fiat money system functions, not claiming that it adds wealth to society, so I'm not sure I understand that question.

 

If Nima didn't steal any of the induced fiat money AT ALL from the private sector via taxation, then there would be no initial demand for the NB to begin with and the entire fiat economy wouldn't form to begin with. There has actually been some research into hyperinflation under the Continental Dollar, identifying the lack of a tax to drain the money supply as one of the main causes.

 

But this is important to note: The private sector in a fiat economy would not have ANY bank reserves or cash (aka net saving) in its possession unless the fiat government ran a deficit at some point and didn't drain the entire private sector net saving via future budget surpluses.

 

Is it fair to say the government is giving people debt that they must pay in the future in exchange for their goods and services?

 

It's like if I went and took your house, and then I gave you debt in return saying you owe me more resources in the future.

 

So it is a process of accounting where assets are artificially turned into liabilities. 

 

So when there is a gov't deficit, in real terms, the government is being starved of assets. If the gov't has accounted to make purchases in the future by having a flow of assets that have been cut short due to its mismanagement, then the only two options I see are inflation or deflation. Inflation is the gov't destroying the value of all assets in the economy by destroying the structure of production to meet the needs of the gov't short term consumption. Deflation is making the assets more valuable, by investing in them for longer term consumption, at the expense of gov't accounts defaulting on their purchases.

 

I will try and show an example of how I am trying to apply this analysis to social security.

 

Social Security was essentially a ponzi scheme. It traded people liabilities for their assets, in the promise that in the future their liabilities would be something they could live off of. The assets we know are destroyed by government mismanagement, so it's not like the government is going to come back and give SS recipients NEW assets. The gov't can't hand out food to people, or medical care, unless it is taking them from elsewhere.

 

The assets are gone, and in their place are liabilities. 

 

So when people are handed out tons of new liabilities for social security, that's like putting a piece of paper in a vault saying "better get some resources," and expecting people to be able to live off that. 

 

What is the solution to that? It seems to me either it is deflation or inflation. Inflation destroys the structure of production by making it more focused on near term consumption. Deflation lengthens the structure but requires less present consumption. So for people expecting SS benefits, the only way to pay them is to create consumption assets at the expense of the next generation's standard of living.

 

Sorry if I'm rambling, but I'm interested does MMT recognize this (if what I'm saying is accurate) and what are its prescriptions? Thanks for the time you're investing here.

 

I'm not sure I understand the notion that a deficit starves a government of its assets. If we want to introduce the accounting notion of assets into my example the only "asset" the government has initially is the future tax liability it has imposed upon the individuals living in its territory. The money that it then spends into existence is essentially a subsequent liability of the government, in that the government promises the money holder a discharge of any imposed tax debt over a certain amount printed on the token. Discharging said tax liability reduces the private sector's tax obligation by the amount discharged and thus constitutes a reduction on the liabilities side of their balance sheet. The number of money tokens surrendered is the corresponding accounting reduction on the private sector's asset side of the balance sheet. On the government balance sheet all that happens is that the public's tax liability is reduced on its asset side, and the act of extinguishing money tokens held in private hands reduces the government's liability side accordingly. I could literally use standard accounting T-balance sheets to illustrate this. But I'm not sure why we'd want to get that wonkish for the sake of this discussion?

 

Now I don't understand the whole part about SS honestly, maybe you can rephrase or make your question a bit more concise?

 

Edit: Maybe one thing to just throw out there is that in a fiat money system the government never really has nor doesn't have money. So to say that there was some kind of SS trust fund that was then raided is not really accurate from an MMT perspective. You have to look at a fiat government more as a monopoly bank. Nobody ever wonders how much money the monopoly bank has or doesn't have. It's just like a scorekeeper. It just so happens that one aspect of the scorekeeping involves picking initial recipients of money tokens via government spending. However, what the private sector does from there with the net saving left in private hands is up to them. So re/ SS: The government can always decide how much money to spend on SS in any given year. It's a political/budgeting decision that people are supposed to make, since the money directed towards that spending will obviously ultimately direct private sector resources away from others and towards SS recipients.

[rosencrantz]

The private sector in a fiat economy would not have ANY bank reserves or cash (aka net saving) in its possession unless the fiat government ran a deficit at some point and didn't drain the entire private sector net saving via future budget surpluses.

 

That's factually wrong. 

 

http://www.monetary.org/wp-content/uploads/2016/03/money-creation-in-the-modern-economy.pdf

[Nima]

That's factually wrong. 

 

http://www.monetary.org/wp-content/uploads/2016/03/money-creation-in-the-modern-economy.pdf

 

You have to be precise with terms.

 

What your link refers to is checking account money creation. Checking account money is not bank reserves, it's a claim upon bank reserves, and it's created within the private sector by creating a bank loan (a liability of the borrower) and a checking account markup (a liability of the bank to deliver bank reserves upon clearing or cash upon demand), but it nets out to zero within the private sector.

 

The fact remains: There is no other way in a fiat system to induce private sector bank reserves and cash (aka net saving, a private sector claim upon the public sector) without a preceding government deficit. It's true that after the fact some choose to convert the bank reserves into government bonds to earn interest, or the Fed intervenes and sells treasury bills to keep the interbank rate from dropping to zero, but those things happen after the fact in terms of sequence. See https://beinglibertarian.com/mmt/where I've defined these terms in detail and laid out the empirical sequence of events.

[rosencrantz]

 it's a claim upon bank reserves, and it's created within the private sector by creating a bank loan (a liability of the borrower) and a checking account markup (a liability of the bank to deliver bank reserves upon clearing or cash upon demand), but it nets out to zero within the private sector.

 

 

When a bank grants a loan, it creates money. Every loan is created to a deposit which is then used to purchase goods or services. Once this is done, new money is created. Getting reserves and money creation via loans are two different operations. The only way it 'zeros out' is when the loan is not used to purchase anything which is pretty rare. 

 

See page 2 at the pdf-document and Appendix 1 at http://www.privatedebtproject.org/view-articles.php?Are-We-Facing-a-Global-Lost-Decade-14for a more formal proof.

[Nima]

When a bank grants a loan, it creates money. Every loan is created to a deposit which is then used to purchase goods or services. Once this is done, new money is created. Getting reserves and money creation via loans are two different operations. The only way it 'zeros out' is when the loan is not used to purchase anything which is pretty rare. 

 

See page 2 at the pdf-document and Appendix 1 at http://www.privatedebtproject.org/view-articles.php?Are-We-Facing-a-Global-Lost-Decade-14for a more formal proof.

 

Sorry, I'm not sure which point exactly you're arguing now? I'd just add that it always zeroes out, even if the money is used to purchase something: The purchase operation doesn't change private sector net saving at all. It reduces the buyer's bank's reserves and increases the seller's bank's reserves by that exact same amount.

[rosencrantz]

It reduces the buyer's bank's reserves and increases the seller's bank's reserves by that exact same amount.

 

How are bank reserves / private sector net savings and loans connected? It zeroes out, when the loan is paid back. This is necessarily the case when you have a look at the accounting mechanics of loan creation. 

 

Banks don't act as intermediaries, as classical textbooks would have you believe, rather they create first accounting money which is then turned into 'real money' by creating a deposit which is used to purchase goods and services. 

[Nima]

When a bank grants a loan, it creates money. Every loan is created to a deposit which is then used to purchase goods or services. Once this is done, new money is created. Getting reserves and money creation via loans are two different operations. The only way it 'zeros out' is when the loan is not used to purchase anything which is pretty rare. 

 

See page 2 at the pdf-document and Appendix 1 at http://www.privatedebtproject.org/view-articles.php?Are-We-Facing-a-Global-Lost-Decade-14for a more formal proof.

 

Ah maybe I understand better now what you're trying to convey, and I don't think I disagree. Of course getting reserves and money creation via loan are two separate operations. That was precisely my point when I said that (a) new money induced via loan creation is different from (b) new money induced via new bank reserve creation. Private banks can do (a), not (b). The treasury and the Fed are the only entities that can do (b). Only (b) adds net saving to the private sector, where net saving means private sector claims upon the public sector, while (a) creates a new claim upon a bank in the form of the loan recipient's checking account markup, counterbalanced by a new claim upon the loan recipient, in the form of a loan on the bank's books. Both occur in the private sector and cancel each other out. There is no new net claim upon the public sector generated anywhere in this case.

[Nima]

How are bank reserves / private sector net savings and loans connected? It zeroes out, when the loan is paid back. This is necessarily the case when you have a look at the accounting mechanics of loan creation. 

 

Banks don't act as intermediaries, as classical textbooks would have you believe, rather they create first accounting money which is then turned into 'real money' by creating a deposit which is used to purchase goods and services. 

 

"How are bank reserves / private sector net savings and loans connected?"

 

Each private bank has a checking account and a securities account at the fed. The money that's in this checking account at the Fed is the bank's "bank reserves". The Treasury also has such a checking account at the Fed. Bank reserves together with cash currency form what's referred to as high powered money (HPM), it is the ONLY money the treasury will accept in settlement of tax obligations. Banks shift some of their bank reserves into their securities account at the Fed to obtain government bonds that pay interest instead. You could roughly look at it like shifting money from checking into savings.

 

Private sector net saving is the sum of all cash currency + bank reserves + government bonds.

 

A loan occurs when a bank marks up your checking account with them, which means the bank owes you HPM (cash currency upon withdrawal or bank reserves upon writing a check to another person at another bank or to the government) on demand, and adds a loan on their books, which means you owe the bank checking account money in the future to repay the loan (note how this inherently creates a demand for checking account money, anyone owing money to a bank needs a checking account markup to pay the loan, much like taxes inherently create a demand for HPM). I've laid out the empirical sequence of events and definitions of these terms in my post https://beinglibertarian.com/mmt/starting under "The Central Banking System".

 

Does that make sense?

[Sima]

Best way to get rid of unemployment, is to make a law that all holes in the ground have to be digged out with a spoon. 

[Nima]

Best way to get rid of unemployment, is to make a law that all holes in the ground have to be digged out with a spoon.

 

... or just cut taxes "big league"

[WorBlux]

I will take a simple model to explain my position. 

 

The private sector produces 1000 units of value. 

Taxrate is 10%, so the taxes are 100 units of value.

900 units of value remain for the private sector.

 

The government spends 80 units of value.

The government gets 100 units of value.

There is a surplus of 20 units of value for the government.

 

Lets see what happens when the government doesn't run a surplus.

 

The government spends 100 units of value.

The government gets 100 units of value.

There is no surplus. 

 

Now here is the important part. Where do the 20 extra units of value go to? They have to go to the private sector.

That changes the calculation from above to:

 

The private sector produces 1020 units of value (The 1000 + 20 from the government)

Taxrate is 10%, so the taxes are 102 units of value.

918 units of value remain for the private sector (18 more than if the government ran a surplus).

 

In reality, it's much more complex, but my example shows that running a surplus is not necessarily a good thing in a mixed economy.

 

 

 

 

This just shows the silliness of using GDP as a figure. The government giving 20 units back the the people they took it from doesn't add to national wealth, but you did just add 20 unites to the GDP.

 

 

Hover MMT actually states the 20 units is simply destroyed, with actually leaves about 91.84% or the remaining money in private account or remaining purchases made from such accounts.  The Austrian theory then predicts a case induced decrease in prices and subsequent decrease in demand for cash holdings (by about 2%). There in fact will likely be unemployment in the adjustment as individuals come to adjust to the new conditions.

 

And supposing that extra government spending (possibly via a rebate)  adds to the private sum or production is ridiculous. Again the meaning of GDP is should be regarded with caution. To criticize the linked article ""Sectoral Balances and Private Saving": I'll quote from it here.

 

 

You can see there that the private sector’s surplus (blue) plus the foreign sector’s surplus (green) consistently equal the inverse government budget deficit (red) to the cent. You may have noticed that the private sector surplus in the blue chart above is exactly the same chart as the one I presented a few weeks ago when I explained the correlation between private sector saving and recessions.

What do we conclude from this? In order to achieve a sustained level of net private saving, which seems to be important to the health of the domestic economy in a fiat money system, a country either needs to run a sustained current account surplus, or a government budget deficit, or a mix of both.

 

Not quite true, you need to adjust for capital account transactions. See 2-31. In the NIPA method, it's a double entry where net lending or borrowing (-) and capital account transfers must balance the current account.  This doesn't really tell you much, as net lending, must be to or from foreign trade, as private to public lending (FA365000905  and FA835000905  https://www.federalreserve.gov/releases/z1/current/accessible/f4.htm) balance out the only source or sink left is the foreign one.

 

Thus the demonstration is not unique to fiat systems, by any nation you analyze with the NIPA method.

 

And even if we assume net government lending is zero, and there is zero of the current account. Yes it would mean that private net lending is also zero. However all this really means that individuals in the economy are borrowing the same amount of money they are lending. So far I see nothing here that is problematic to allow individuals to gain savings, so long as some other people are spending savings (retirement, large expenses, unemployment)

 

Or net savings can be increased by reducing total expenditures or consumption. Yet this also is not a big deal as lowers the demand on higher-order goods, tending to lower the prices on all goods. However this is a negative feedback control for savings as the point of saving is to purchase particulars goods and services in the future. At some point it would balance out with people generally consuming less, but decreasing the cost of capital resource acquisition, which is the seed and driver of future wealth.