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Stephanie Kelton Bloomberg Columnist

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    Carlitos -- Thanks for the analogy. Actually I do understand much of MMT when I concentrate, but for a senior like me it's kind of like learning a second language. The need to "think" in that second language is a major hurdle and milestone, especially when everyone around you is speaking your original language. That original language is the reality of the masses, and thinking in the MMT language requires a conscious shift out of one's comfort reality (original language). Anyway, I digress....

    If I can expand on your sink analogy, isn't there really two faucets, one that is controlled by the legislative branch (fiscal) and the other the central bank (monetary, Federal Reserve)? And they don't always work together, but rather independently of each other. The fiscal tap is probably a bigger tap, but one cannot ignore the effect of the central bank opening and closing their tap by changing the interest rates or engaging in quantitative easing (QE).

    Furthermore, your drain isn't really a drain that lets the water (money) go down into the sewer and lost forever. On a global scale it is a closed system, and much of the money that supposedly goes down the drain as leakage into China (for example)accounts actually finds its way back to the USA through one of those "pipes" to reside in the central bank drawing interest from treasury notes. I think you lectured us on that a few years ago on how global accounts have to balance.

    Also on your point about the 1950s and 60s with a trade surplus, I can certainly understand that as one of the factors that makes the 50s and 60s perhaps not a valid comparison to modern day trade and taxes. However, I am less concerned about trade imbalances or the appearances of trade imbalances simply because of the way they are calculated as assigning full value of a product to the export country. In the modern Global Value Chain, value is seen to be added in several steps and by several countries manufacturing component parts. The example often cited by economists is the Apple iPhone in which value added starts in the USA with research and design and also ends in the USA with value added in marketing. But in the way trade exports and imports are calculated, the Chinese get credit for the full commercial value of the iPhone on export, even though the assembly of the phone by Foxconn in China perhaps represents less than 10 percent of the value added in the global value chain. Anyway, I digress on that point also. It's something that Trump certainly doesn't understand.

    I am a globalist and pretty much a believer in free trade with minimal tariffs. But I also believe all of our trade agreements are in need of continual updating as market conditions and technologies change so yes there are inequities that need to be cleaned up in these agreements that weren't issues at the time the trade agreements were signed off. However, I do not believe that solving the inequality of income in our society can be achieved through tariffs on trade. Rather it has to be achieved through fiscal policies of taxation and spending. I think we were largely there up through the 1970s, but Reaganomics changed the playing field to favor the rich, and we haven't been able to get back to that playing field for many reasons.

    The number one reason for inequality is perhaps that so many people in our society do not appreciate or care to participate in our democracy by understanding the issues and voting intelligently. I met a whole hell of a lot of those people as I knocked on hundreds and hundreds of doors from 2008 to 2016. I know I keep harping on this, but the only thing really wrong with our democracy is that it is not participatory by its many citizens. And that's not really because of any government imposed restrictions but because people are apathetic, ignorant and/or take our democracy for granted. That's harsh but that's also reality.

    Anyway, going full circle and getting back to the topic of tax cuts having an immediate effect on household spending (as opposed to going through a fiscal legislative budget and spending allocation), I can certainly agree. There is a definite spending lag by going through the bureaucratic budget and spending process to build a new bridge or highway. Certainly also, as one moves up the income ladder or into the realm of corporate budgets and spending, the immediate benefits of the tax cuts are less evident. Most of the immediate benefit of tax cuts derives from poor people who live hand to mouth and immediately spend the money. But for middle class people like me (before I retired) any tax cuts didn't change our standard of living. It just accelerated my savings for retirement...adding to demand leakage.

    Of course, baby boomer retirees like me are now spending our savings in a big way, but any beneficial tax cuts just slow the rate of withdrawals from my savings.

    The point of all this discussion is that there are several factors driving our economic prosperity, and just focusing on one can detract from our grasp of the bigger global picture. It is complicated and I for one can identify many extenuating factors as I have above, but I don't know if I am making mountains out of molehills. Those are the arguments for Paul Krugman and Stephanie Kelton.

    Thanks for sharing your insight as usual. It is much appreciated and stimulates my thinking.

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    Schmidt Wrote:

    If I can expand on your sink analogy, isn't there really two faucets, one that is controlled by the legislative branch (fiscal) and the other the central bank (monetary, Federal Reserve)? And they don't always work together, but rather independently of each other. The fiscal tap is probably a bigger tap, but one cannot ignore the effect of the central bank opening and closing their tap by changing the interest rates or engaging in quantitative easing (QE).

    Remember my point about not taking the analogy too literal. :)

    You could say there are several 'government sources' of the water flowing out of the one faucet or that there are several government faucets.

    With respect to the powers of the Federal Reserve system to change interest rates:

    If the government is a net-payer of interest (interest expense>interest income), what happens when the Federal Reserve lowers interest rates, assuming all else equal?

    The government's interest expense declines and less comes out of the faucet.

    What happens when the Fed raises interest rate, all else equal?

    The interest expense increases and more comes out of the faucet.

    In short, when interest rates change, that much you can count on. How these changes impact borrowers and lenders is more ambiguous, and depends on other factors. The research shows that marginal changes tend to have the opposite impact that is expected. Lower rates tends to cool the economy; whereas, raising rates heats things up.

    With respect to coordination between the Federal Reserve and US Treasury:

    The Federal Reserve and US Treasury have to coordinate or neither would be able to achieve their policy mandates. The Fed can't achieve its US Congress determined mandate of full employment and price stability without accommodating the US Treasury, which has its own US Congress determined mandate.

    With respect to QE:

    QE was just the Federal Reserve changing the composition of US dollars held in the economy from US Treasury securities and US Treasury guaranteed mortgage securities (both of which earn interest income) to non-interest earning deposits. Interest income was drained out of the sink and piped back to the faucet by the Federal Reserve, which transferred its profits to the US Treasury by law, reducing net-government spending (i.e. lowering the government deficit). That can't be printing money. :)

    Furthermore, your drain isn't really a drain that lets the water (money) go down into the sewer and lost forever. On a global scale it is a closed system, and much of the money that supposedly goes down the drain as leakage into China (for example)accounts actually finds its way back to the USA through one of those "pipes" to reside in the central bank drawing interest from treasury notes. I think you lectured us on that a few years ago on how global accounts have to balance.

    So as savings are 'drained', they don't vanish in the real world. Your point is correct. To help account for this in the analogy, we might add secondary sinks, representing domestic and foreign total savings, respectively. These sinks would be connected to the first sink by pipes that controlled the direction and quantity of the flow of water. These secondary sinks might also be connected to the government faucet(s) directly.

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    Huffington Post, May 20, 2018: Stephanie Kelton Has The Biggest Idea In Washington

    This article by Zach Carter on Stephani Kelton in the Huffington Post pretty well says everything that Carlitos has been preaching about her. It's a good complimentary article and worth reading. The sub heading to the article:

    "Once an outsider, her radical economic thinking won over Wall Street. Now she’s changing the Democratic Party."

    "Kelton’s core idea ? that the government can’t run out of money or go bankrupt, no matter how much it spends ? hasn’t really changed since the days when Buiter and Krugman were trashing her thinking. But it seems the world has. Today she is a full-fledged member of the American power elite, juggling television bookings with MSNBC’s Chris Hayes and Bloomberg TV’s Joe Wiesenthal, writing op-eds for The New York Times and being quoted in The Wall Street Journal.

    "Pod Save America and Financial Times want her on their podcasts. She’s got a book deal with Public Affairs, and Bloomberg View has signed her up as its newest columnist ? but she isn’t sure that gig is worth the time, given her packed speaking schedule. In May alone, she’s being flown to Las Vegas to debate a former International Monetary Fund chief economist before heading to Monaco to moderate a panel on artificial intelligence. After that, the House of Lords in London.

    "Everybody wants a piece of Kelton these days because a simple, radical idea she has been workshopping her entire career is the next big thing in Democratic Party politics. She calls it the job guarantee ? a federal program offering a decent job to every American who wants to work, in every county in the country, at any phase of the business cycle."

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    Carlitos, of course, has been promoting the Job Guarantee for a long while in this website. Looks like it is catching on. There is much more in the HP article for those so interested...

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    Thanks for revisiting and posting the new Huff post article.

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    "a federal program offering a decent job to every American who wants to work, in every county in the country, at any phase of the business cycle."

    Don't need another program that won't work. What will work is the trillions maybe quadrillion dollars stagnated as security in the world economy being invested in producing jobs. The simple analogy is whether a factory or a casino benefits society.

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    What's Stephanie say about Venezuela ???

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    Stephanie quote:"She sees a world where the federal government can build a big, beautiful social safety net, strengthen the military and, for good measure, cut taxes on the rich."

    Somebody needs to straighten her out.

    What do you say Dutch??

    ozy.com/rising-stars/this-economist-wan...

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    Chet Ruminski Wrote:

    What's Stephanie say about Venezuela ???

    Don’t borrow in foreign currency. Float the domestic currency. Invest state net export proceeds in domestic production. Keep govt limited to public purpose.
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    Carlitos Wrote:
    Chet Ruminski Wrote:

    What's Stephanie say about Venezuela ???

    Don’t borrow in foreign currency. Float the domestic currency. Invest state net export proceeds in domestic production. Keep govt limited to public purpose.
    They are probably in trouble for neglecting domestic production. The same predicament the USA is in. How can domestic production be inspired? Making products to sell a super priority is what I say is the way to prosperity and trends toward world peace.