A security like a bond is valued in dollars. For the value of that security to change, only one price needs to swing: the price of the security itself. But one dollar of cash is always and forever one dollar, by definition, and so for the value of that cash to change, the price of everything else in the world has to change. Obviously some prices will swing quickly. Most prices in the financial markets turn on a dime, for example foreign exchange, but foreign exchange is only a fraction of what determines the value of a dollar. There are countless other goods and services in the country itself that are priced in dollars.
The rest of the prices will be sluggish to some degree. Many domestic markets have sticky prices, most notably the labor markets which are extraordinarily sticky. Even some parts of the financial markets can get sort of sticky at zero percent interest, because the “natural” rate might be less than zero, and so the market can’t clear at the lower bound, so to speak.
The value of a dollar will necessarily change much more slowly than the value of everything else priced in dollars. This is a primary reason why the cash injected into the system is much different from the assets that it replaces. (The other reason is the lack of any yield from a dollar, but that’s no longer true of excess reserves.)
Your argument is self-defeating. Buying goods from another country makes that country more productive than your own country and causes unemployment in your country.
Look at what happened to Spain five hundred years ago. It had discovered the New World and had a monopoly on the resources of two continents. The result was Spain was the richest country in Europe.
And the result of that was Spain became the buyer of European goods. Good and silver and other valuables were taken out of America and flowed into Spain. And they then flowed out of Spain and the Spanish bought goods from other countries.
Those other countries didn’t have the access to American gold and silver that Spain had. They couldn’t just take wealth. They had to earn it. So those other countries build farms and workplaces and factories to make goods that Spain wanted to buy in order to earn Spanish gold and silver.
The result was that a hundred or so years later, all those other countries had better economies and were more productive and had better workers than Spain had. Spain had just been spending money and its economy was weakened to the point of collapse as its colonies were played out. Other European countries moved past Spain and built colonial empires of their own.
That’s the problem with the current relationship between China and the United States. China needs America right now because it needs a market for the goods it produces. But as China becomes a bigger and better producer it will eventually grow to the point where it no longer needs America as a market. America will find that having lost its role as a major producer, it no longer has a role as a major market either and it’s become a backwater in the world economy.
But the government makes the same calculations and decides that it’s benefiting from getting money now and not having to pay until later. This is like any transaction; it happens because both sides see value in it.
No, we haven’t – we would still have the $10 million, to save or to use on other things. In general, I think you’re trying to compare transactions while only looking at only one side of them.
Hellestal, I just mean that the value of dollars is going to fluctuate with the same changes in interest rates that cause the value of T-bills to fluctuate.
MMT is certainly not monolithic. There’s not even agreement about what it should be called. Some people call it “Chartalism” instead. Thes also a conflict over something called the “job guarantee”, which some insists is part of MMT; others insist its not.
No, I’m saying that’s exactly how it doesn’t work. When a mansion is built in China it’s built by Chinese people doing work. And the mansion is paid for in yuan, not in dollars. But even if the workers were in dollars, so what?
My point is that dollars are a renewable resource. If other countries want to use our dollars, they’re welcome to them. We can always make more, for our own use, if we have too few of them.
The limit to our real wealth is our total productivity, not the number of dollars. We should, as a country, “print” the number of dollars that maximizes our productivity. To say that, as a country, we don’t have enough dollars to do something is like, saying we don’t have enough numbers. There could be real constraints on productivity: the amount of oil available to power turbines, the amount lithium for lithium batteries, the number of workers available to do the work.
Which isn’t to say we should just print an unlimited number of dollars, it is to say that if we have untapped resources - unemployed workers for example - we should print the number necessary to get those people to work. When more people are producing more things, everybody’s richer.
Only if there’s some constraint on the number of things you can buy. If you can afford to buy a gizmo made in China and something made in America, both countries can be productive. My argument is if China is accumulating dollars, making us financially poorer, we should “print” the number of dollars needed to equal the difference.
I agree with you that if - and I don’t necessarily know this is the case - we no longer have any factories capable of making clothes, or some other essential thing, we should take steps to ensure that we never become completely dependent on outsiders for something that’s essential that we be able (if we needed to) to make those things ourselves. We should avoid becoming completely dependent on other countries for things that are essential for our own economy. Oil is a good, historical example of that. We got ourselves sort of fucked, in the 70’s by becoming too dependent on too few countries for a resource we depended on.
Anything is possible. But if you look at the biggest, most innovative, most important companies in the world, you’ll find a disproportionate number of them are American. Google, Microsoft, Apple, and Amazon come to come to mind. I’m sure there’s others. We still make cars, for heaven’s sake, and the quality of our cars is better than it’s ever been.
Normally, I’d say that the interests of a country and the interests of its government are the same. But this can be an exception. Sometimes a particular set of politicians currently in power can do things which benefit them disproportionately. And deficit spending is often an example of this. It makes it easy for politicians to get the credit for building the bridge now while defraying the cost of that bridge to some future politician.
John Smith gets to build bridges and lower taxes and everyone thinks he’s a genius. Of course, he’s financing this by borrowing. Twenty years later, Smith’s out of office. Bill Jones is now in office and he’s faced with the difficulty of collecting the taxes needed to pay off that old debt and not having any money to build bridges either. Jones ends up looking like a political failure due to Smith’s policies. And while Jones paid the obvious cost, the country as I noted before had to pay more for that bridge than it would have if it had been paid for it back when Smith was in office. So Smith benefited at everyone else’s expense.
But dollars only have value because there are real assets behind them. If you start printing up dollars with nothing to back them up, they’ll quickly lose their value.
I agree it’s a good idea to print enough money to rise to the size of your productivity - assuming otherwise is the error the goldbugs make. But you can’t make the mistake of thinking that increasing the amount of money will cause productivity to rise. The tail doesn’t wag the dog like that.
If you want to read what people who are world renown experts and leaders in their fields have to say, I would suggest instead going to a site like Project Syndicate. Here their list of contributors. Look at their bios and and pick the ones you want to read then subscribe so that when they have new articles you’ll be notified. Then go back and read their old articles.
Honestly though, depending on who you pick, some of these folks write at a pretty high level and isn’t for everyone, but if you want short, thumb nail sketches of current economic issues written by some of the smartest people on the planet including Nobel Laureates, this is better than reading some blog.
Not exactly. We aren’t on the gold standard anymore, so there isn’t anything “real” behind them, other than that the government issues US dollars and accepts them as payment for your tax obligation. Also the fact that those dollars are also backed by the worlds largest economy helps.
You are correct that printing dollars (which is basically what the government does when it takes on debt) has the potential to lead to rampant inflation. However, since inflation is still very low, the government could theoretically take on more debt in order to reduce unemployment.
Another important fact is that the US dollar is the world’s reserve currency. That in and of itself creates a strong demand for US dollars.
I suspect that rich Republican 1%ers don’t really like the idea of increasing government debt and inflation because of it’s effect of devaluing the dollar. Devaluing the dollar reduces debt by reducing the real value of that debt. Good news for the borrower, but not so great for the lender.
The government can run a surplus and the number of central bank dollars held by the public can remain exactly the same. Money that goes into the Treasury account from a surplus does not have to stay in the Treasury account.
This is not correct.
There have been countless countries in history that ran massive budget deficits, which were self-financed by the government, and this had the effect of getting massive amounts of paper in the hands of the people while simultaneously impoverishing the country. There is nothing inherent in a deficit that makes the people richer. It is a possibility in certain circumstances, but that is something that would have to be argued instead of merely asserted.
This is not correct.
A bank meeting payroll is creating money without debt. Banks can also extend loans without creating any money, depending on the portfolio preferences of the public.
There are probably half a dozen other criticisms I can make, but the core of it is probably this:
This is not the correct equation for S. The real equation is S = I + (X-M). This is an identity. It’s a matter of definition, and we don’t just get to change definitions in mid-conversation.
What you were intending to go for is S[sub]private[/sub], private saving instead of national saving, but even then the equation is botched. The identity for private saving is S[sub]private[/sub] = I + (G-T) + (X-M). That’s not a huge deal, though, because you seem to have been following M&M’s lead.
The real issue is your phrase here, the key phrase, “If we set I to zero”. Another way to say this: “If we assume that my idea is correct…” That kind of goes without saying. If we assume the idea is correct, then we must naturally conclude that the idea is correct. But why would anyone believe that? Even if people were predisposed to believe you, they don’t have any rational basis to believe this statement. That variable cannot be set arbitrarily to zero. Investment is “endogenous”, in the same sense that broad money is endogenous. It’s low because of “aggregate demand”? Okay. Now what is aggregate demand? How is it measured? How do we know it actually exists? Any term you haven’t yet defined is nothing more than magic. That’s not the only magic term. Demand for savings? What’s that? How do we know it exists? You assert it, but asserting it doesn’t make it true.
This argument isn’t even good enough for a person who would want to agree with you.
What’s even worse is that your logic doesn’t follow. People could “accumulate net financial balances” very easily if the government started throwing Franklins out of helicopters. No government spending necessary. That’s politically impossible, but it’s not outside the laws of the universe, and even more important, it’s not violated by the identity equation that you cited. There is nothing inherent in your identity that demands that net financial balances must be increased with government spending.
Identities don’t imply any causal relationship. Identities don’t imply any causal relationship. Identities don’t imply any causal relationship.
They are definitions, and definitions only, and the relationship between the variables has to be handled separately. I have seen this problem countless times. People see an equation, and immediately their minds want to grasp after some cause and effect, as if the equation conveys some sort of understanding automatically. It doesn’t. It’s just an identity. An identity is always true, as a matter of definition, and that makes it totally useless by itself. The equation might allow a nice framework, a vessel into which understanding might later be poured, but the identity by itself, out of context, without some solid causal idea behind it is simply worthless. I can define myself to be Superman. Therefore, I am Superman. But that doesn’t tell me anything about what powers I actually have. Such a definitional problem is easy to see when it’s an English sentence, but somehow when it’s put into equation form, people’s minds get blinkered. There was an example from a GQ thread not very long ago, where the very first reply to the thread made a false assumption based on an identity. Seductive but wrong. Post number 4 had to point out the error.
Our identity here is S[sub]private[/sub] = I + (G-T) + (X-M). You want to set I to zero, and accept our trade deficit, and then say that the only way to create private saving is for the government to run a deficit. But I could, with exactly the same amount of justification (i.e. none) say that the change in investment will always be set at -2(G-T), so that every dollar of deficit spending takes away two dollars worth of investment. With that particular relationship between the variables, the best way to increase private saving would be to drastically cut government spending. Seem silly? Well maybe it is, but there are people in positions of power who actually believe that sort of thing. Without some notion of causation, we don’t have any justification to choose one idea over the other.
Now here’s something that is very likely to be true in certain circumstances: the change in investment will be approximately -(G-T). The deficits don’t do anything by themselves. Is that true? I could make a good argument for it, which would take an extraordinarily long time to explain because causation isn’t simple. But for the idea that deficit spending by itself is sufficient, I don’t need an argument against it. I just need evidence from around the world. The Spanish deficit has been about 10% of GDP for years, and their economy is in the shitter. The Greek deficit has been about 10% of GDP for years, and their economy is in the shitter. Iceland has been strongly cutting their budget deficit and they’re in much better shape. And the US example? Our strongest recent period of disinflation was the 1980s, at the exact same time that the deficit was exploding under Reagan. Huge deficits, with much lower inflation.
This isn’t about the size of the deficit. The big factor here, in every case, is monetary policy from the central bank.
China buys dollars to (a) reduce the relative price of their own currency, making Chinese products cheaper to buy, and (b) to create a glut of yuan in world markets. Ultimately, yuan is legal tender in only in China, so it creates a market for those who have yuan, and are looking for something to buy.
Dollars have no real assets behind them. They’re value comes from the fact that you need dollars to pay taxes, and the fact that you need dollars to repay loans.
Dollars do indeed have the potential to raise productivity. Suppose traffic congestion costs $100 million per year in lost productivity in Los Angeles. A public transportation system would cut the cost in half, but costs $50 million. Los Angeles, nevertheless, fails to build the public transit system? Why? Because of lack of money.
The lack of money is costing Los Angeles $100 million a year, why?
Not because there’s not enough people who are able and willing to do the work. (Assuming there are unemployed people in Los angeles, who are able to do the work.) Only because the money’s not there. It’s lack of money that’s costing Los Angeles $100 million per year in lost productivity.
Now there might be any of number of reasons why Los Angeles shouldn’t have a better public transit system. Maybe people just like sitting in their cars in traffic. Or maybe there’s just something about Los Angeles that makes public transit a bad idea. But if its money, and only money, that stands in the way,then that’s a bad reason not to do it, because money, unlike labor, or oil, is not a limited resource.
We can make whatever quantity is necessary to get the work done. And we should.
I believe this too. Unemployment keeps wages down, and if you’re kind of person who drinks a lot of margaritas poolside at the Four Seasons, the fact that the guy bringing you the margaritas is desperate to keep his job is kind of a good thing.
China trades more with the EU than the US, so it would make more sense for them to buy Eurozone debt rather than US then. There was probably more of an imbalance between those currencies as well, though I’d have to check.
Do you know what the Forex markets do? They value currencies with respect to other currencies. How do you imagine they do that? Seriously, tell me how you imagine that process works.
Now, given the process you just described, tell me how the Forex markets would value the currency of a country that suddenly decided to double the total nominal value of its money supply. Pick whichever version of the money supply you think is appropriate for the example - MZM, MB, M0, M1, M2 or M3.
Your example suggest payback in 6 months. This is ridiculous, for transit, or for almost any other public investment.
Except for New York City, America is too spread out to get good public transit paybacks. And even there, the uncertainty of ridership projections is such that it would be rash to estimate the payback period for something as sensible as the Second Avenue Subway.
As someone who prefers not to drive and takes transit every day, I don’t like it, but government rail investments, even good ones, have unknown, and often negative, payback.
As for why America is too spread out for most big transit projects to be money-makers, I strongly recommend:
What he says about sprawl on Long Island making transit projects questionable must also apply to LA.
Reducing road congestion results in people buying houses that are further from where they work. And the resulting spread-out population then cannot be efficiently served by transit.
Congestion encourages people to live near where they work and not travel much, both positives to me. I wouldn’t fight commuter-related congestion. Then, I also know I wouldn’t be elected to public office
I’m not saying it’s a direct 1:1 correspondence but dollars have something real behind them in the sense that they’re backed by a stable government with a sound economy.
I’m not sure what you’re suggesting. Los Angeles, obviously, does not have the power to issue money. So if Los Angeles is lacking money for some project it needs to either raise it by taxation or borrow it (which is just deferred taxation).
Now the federal government has a third option. It could theoretically just call up the mint and tell them to run off a hundred million dollar bills. But if it did that with no taxes or loans to back that currency, the value of the currency would drop.
Issuing a hundred million dollars worth of currency with nothing to back it up would not increase productivity a hundred million dollars worth.
As you noted, money is not an inherently limited resource. But if you treat it like it’s an unlimited resource, it ends up having no value.
I think you agree with me, but your insistence on talking about “money” gets in the way. (In another thread you spoke of “money,” “real wealth”, and “financial wealth” with, IIRC, the first two synonyms and the third a stranger.)
Don’t focus on “money.” Focus on political will and credit. The money is already there: there are literally trillions of dollars “burning holes in the pockets” of commercial banks.
Hellestal will explain why that money is not being made available, but I think his views can be rephrased in terms of political will and credit. The Federal Government lacks the political will to take positive steps to grow the economy. The banking system’s credit is still in doubt because capital destroyed by the 2008 crisis has never been replaced.
