Displaying 1 - 10 of 29 Forum Posts1 2 3 Next
  • Mar 11, 2016 02:50 PM
    Last: 2yr
    lonely bird Wrote:
    Carlitos Wrote:

    You can screw around with the institutional structure all you want. Government deficit still equals the non-government surplus. The funds to pay taxes and/or buy government securities still comes from government spending or lending first. Taxes are still about regulating inflation.

    What non-government surplus would that be?

    To understand this question your asking you have to understand that when government borrows, truly borrows it borrows ONLY from itself.

    Selling t-secs like bonds, is not a "borrowing" operation.

    First, think of the economy as a bucket and the water in it as a mix of the people, money, commodities and productive capacity. The higher the level of the water the greater the utilization of all of these things. If the bucket overflows then the economy is experiencing inflation.

    So the question is, if the government has to spend money to provision or maintain itself, how can it spend trillions in an economy where the bucket is almost full or full?

    Economists have long understood this problem and taxes and the sale of t-secs was created to deal with the problem.

    If you have a large glass of water you want to add to the bucket, then you get an empty glass of about the same size and remove some water first. As long as the water in the full glass has the same or less water in it, the bucket won't overflow. t-secs are like taking a glass, dipping it in and setting it off to the side, promising to pour it back in at some later time. Ideally before it's put back the capacity of the bucket will have increased.

    Ok, so what does it mean to borrow?

    Well when you go to your friend and ask if you can borrow a dollar, they must have the dollar in order to lend it to you.

    Mathematically it looks like this:

    Your Friend $1
    You $0

    You borrow a dollar

    Your friend -$1 (now $0)
    You +$1 (now $1)

    Notice that in order for you to increase $1 your friend had to go -$1 and the sum of the transaction between you was ALWAYS $1

    In order for government to create $1 who goes -$1? It's tempting to imagine it's the taxpayer or a bond holder, but one need only imagine a hypothetical government that uses a fiat system similar to our own. If it was day one of this new government and it had not created any money yet, who would it take money from? I mean, remember that all government debt and taxes are payable only in the money it creates.

    The answer to the question is; no one. No one has to go -$1 for the government to create a dollar.

    The government borrows dollars from itself.

    It looks like this

    Government creates $1
    The governments account at the Fed goes -$1 (this -$1 exists outside the functional economy).

    Note that the sum of this transaction is ZERO.

    The "debt" is simply an accounting operation.

    Now the government spends the dollar into the private sector...

    So the private sector goes +$1
    The governments account at the Fed is -$1

    The private sector is +$1, that is it's surplus because it does not hold the debt for the creation of that money, the government does. So the private sectors surplus is the governments deficit.

    When the private sector (consumer) borrows from private sector (bank), banks create the money the same way. They create an asset ($1) and a liability (-$1). They introduce the money into the economy via borrowing by consumers.

    Since banks are industries inside the economy and they have the same time constraint as consumers (loans must be repaid on schedule whether the consumer pays or the bank pays), the creation of money by banks ultimately, at a macro level, does not create new money because the sum of the transaction is zero, where government spending creates a positive in the private sector, but the negative is outside the private sector.

  • Mar 11, 2016 02:50 PM
    Last: 2yr
    Carlitos Wrote:
    Chet Ruminski Wrote: The right wing created welfare in the image of a monster so they could say: "look, there's a monster". Welfare should have been means tested and graduated so total income plus welfare would have created a living wage. The right wing wanted a no income qualifier because they knew the hate that would be created by giving people money for not working. The left compromised in order to get the program. Welfare should have been a jobs and training program for pay. The basis should have been child care and child care training. Qualificants would have gotten free child care while they worked at a welfare oriented job. Others would staff the child care facility and learn the job if needed . All welfare recipients would be required to work or get paid training then work. Welfare would then have addressed the problem and offered a solution . Compromise cost more in the long run.

    This is called "workfare" and it's not a part of the progressive agenda.

    We should have a job guarantee, but that doesn't mean we shouldn't have social welfare programs. The old, young, sick, and homeless need to be protected. Furthermore, should the government fail to guarantee a reasonable job opportunity in the public sector to all those able and willing to work, there needs to be a safety net to support those people.

    Forcing poor people to work 'or else no social welfare' and disregarding issues, such as, labor immobility, family-household structures, and the failure of the government to provide reasonable job opportunities in the public sector, could be quite cruel to those on the margins, while making the macro economic problem worse.

    What Conservative Republicans were successful at doing was convincing everyone that their tax dollars paid for welfare, making it a socialistic robbing Peter to pay Paul scheme to redistribute wealth in the society from the haves to have nots. In reality, social welfare helps stabilize corporate profits given the large multipliers associated with it. That's basically what the government counter cyclical policies do, as opposed to stabilizing employment. Taxes regulate inflation; they don't give the government the funds to spend. Hardworking Joe is not paying higher taxes because of the food stamps used by his lazy next door neighbor Bum, but because of Deficit Terrorists in power who don't understand how the currency works.

    Uh, yea that ^
  • Jul 10, 2016 12:13 PM
    Last: 4yr
    Chet Ruminski Wrote:

    As they say, intuitively obvious to the most casual ovservation. Besides the inn keeper being a theif I wonder why uncommon didn't directly reference that double entry accounting shows zero balance across the board.

    I would point you to the post above where, essentially, I've done just that :)
  • Jul 10, 2016 12:13 PM
    Last: 4yr
    Schmidt Wrote:

    The Stimulus Story is nothing more than an illustration of temporary credit or a "loan" and the velocity of money in paying off personal debts in society. You could have taken out all the actors except two and the tourist, and the result would have been the same.

    In realty, banks interject money into the system with loans, and that money circulates in society, being spent again and again, thereby having a stimulative effect on the economy.

    I think what the story tells us is that, because everyone was in debt. No one was in debt. They could have just as easily solved the problem by agreeing to forgive each others debts.
  • Jul 10, 2016 12:13 PM
    Last: 4yr
    Schmidt Wrote:

    Uncommon cents -- Good analysis. Americans seem to be obsessed with federal government debt, and it clouds their thinking on monetary policy. We had a similar discussion on this website back in 2010. This is copied from my post, the Stimulus Story, at the time.


    I received the Stimulus Story below in one of those circulating e-mails so I can't credit the author. Maybe others have seen it as well. The story is about money, but another "stimulus" might be how it stimulates your thought process...your critical thinking skills. I could share my thoughts but will hold off for now and let others chime in. Any takers?

    Stimulus Story

    It is the month of August, on the shores of the Black Sea. It is raining, and the little town looks totally deserted. It is tough times, everybody is in debt, and everybody lives on credit.

    Suddenly, a rich tourist comes to town. He enters the only hotel, lays a 100 Euro note on the reception counter, and goes to inspect the rooms upstairs in order to pick one.

    The hotel proprietor takes the 100 Euro note and runs to pay his debt to the butcher.

    The butcher takes the 100 Euro note, and runs to pay his debt to the pig grower.

    The pig grower takes the 100 Euro note, and runs to pay his debt to the supplier of feed and fuel.

    The supplier of feed and fuel takes the 100 Euro note and runs to pay his debt to the town's prostitute that in these hard times, gave her "services" on credit.

    The hooker runs to the hotel, and pays off her debt with the 100 Euro note to the hotel proprietor to pay for the rooms that she rented when she brought her clients there.

    The hotel proprietor then lays the 100 Euro note back on the counter so that the rich tourist will not suspect anything. At that moment, the rich tourist comes down after inspecting the rooms, and takes his 100 Euro note, after saying that he did not like any of the rooms, and leaves town.

    No one earned anything. However, the whole town is now without debt, and looks to the future with a lot of optimism.

    Haha, that's extremely clever. I love it. Thanks for sharing. I'll give that some thought.
  • Jul 10, 2016 12:13 PM
    Last: 4yr
    Chet Ruminski Wrote: Instead of antiseptically excised discussions of monetary policy what about a real discussion of the outcome of the wide and widening income gap. So far Hillary is treating it as a normal innocuous development. I see it as portending more violence.

    While I agree that the income gap is a huge problem, understanding how money works is the first step in solving the problem.

    For example, what does it mean when the government "borrows"? Most people see borrowing as an operation where one entity loans something that exists to another entity...Mathematically most people think of borrowing like this:

    Lender starts with 1 and lends it to borrower and ends up with zero.

    1 - 1=0

    Borrower starts with none and borrows 1 from lender and ends up with one.


    The sum of this transaction will ALWAYS be 1, it can never be zero

    Repayment is just the opposite and will still end in 1.

    But what does it mean when the government "borrows"?

    Who is -1?

    In the economy today it would appear that someone in the private sector must go -1 for the government to be +1, but this is FALSE and believing that someone in the private sector must be -1 in order for the government to be +1 is the fundamental misunderstanding of macro economics and until this is understood, we cannot close the income gap.

    The government creates money from nothing. It's not "borrowing" from someone else. One need only think of government on day 1, before a single dollar has been created, who would the government borrow from?


    Now it doesn't have to borrow from itself, it could simply choose to create without any accountability. However accountability is important and when the government borrows it is accountable.

    So it would look like this:

    Borrowing: 0+1=1 where the government starts with zero and creates 1

    However, when the government "borrows" is creates a record of that borrowing in the form of a liability that is exactly equal to it's borrowing.


    Now the government has 1 and -1 and it's sum is zero. When it spends it's 1, the private sector is +1 and the government is -1.

    To repay the government would have to take the 1 from the private sector.

    Private sector -1 government +1

    So now the government has 1 and -1


    Remember at the top the sum was 1? When the government repays it's debt the sum is always zero.

    Trying to address "income gaps" or Hillary's fiscal and monetary policy is a waste of time as long as the vast majority don't understand what I just wrote.

    Sorry if this is kinda derailing your thread, but you seemed a little miffed we were discussing things that seem a little more abstract rather than dealing with real human issues, but I think understanding the abstract nature of our money system is the only way to affect real change that can defend itself from those that profit from the system we have today.

  • Jul 04, 2016 01:36 PM
    Last: 5yr
    lonely bird Wrote:

    carlitos, perhaps you can explain why volcker allegedly "broke the back of inflation" when he raised rates in the '80's in response to inflation.

    on a side note mrs. bird and i bought our first house in 1986 and we were thrilled to get a flat 10% on a thirty year mortgage. fast forward to 2014 and we refinanced the house we live in now to a 10 year mortgage at 2.75%. interesting.

    If you don't mind I'll take a poke at this....

    In economics the financial system utilizes double entry accounting. That is, for every transaction there are two entry's when accounting. Assets and Liabilities. I'm certain you already know this, so consider this a reminder for those that might not know that.

    Similarly, you can attack most fiscal issues from more than one side.

    In an economy experiencing inflation, you can attack the problem by raising interest rates which in turn reduces spending (as Volker did) or you can increase production and or costs in order to drive prices down on whatever it is (in this case oil), or offer lower priced alternatives, though admittedly reducing costs and creating alternatives takes time. Volcker's approach was in my opinion, a very blunt solution to the problem as it didn't target the areas of the economy that were causing prices to rise.

    In the end the value of the dollar was considered more important than the suffering people endured during that same period. Unemployment hit a peak of 11% and industries that relied on finance were hit hard, especially banking.

    Of the top of my head, what if the government had some how subsidized costs for higher fuel costs (perhaps a tax credit) for 3 years and carried the liability on it's balance sheet, while at the same time funding research to lower consumption, increase supply, and create incentives for alternatives.

    Because the inflation of the 70's was largely cost driven, helping the average family maintain that cost would have prevented the inflation that followed.

  • May 01, 2016 12:42 PM
    Last: 5yr
    Chet Ruminski Wrote:

    "Uncommon Cents Wrote: Interesting analogy. I like it. I'll give that some thought!"

    Have you given any thought to regulating the economy to being a continuous institution rather than focused on an end?

    Of course.
  • Jul 01, 2016 10:25 PM
    Last: 5yr
    Chet Ruminski Wrote:

    "I can tell you, with 100% certainty that eventually someone will win."

    And that is the problem with financial risk assessment. They operate on the theory that the most remote inevibility won't happen. The same fallacy exists in construction standards. Homes are built to withstand not a possible wind/storm intensity but a probable wind/storm intensity. By building the lesser construction that denies the possible. The only reason to compromise construction is profit and risk is denied. The defense for the loss of life and property, the reason to justify profits and the excuse to deny risk is "reasonable". To explain away the forbidding mysteriousness of statistics a designed patronizing appeal to subjectivity appears in the form of "what an average person would do". So risk is not only denied it is authorized by the customer. My very last sentence is totally consistent with your's and Smith's description of the failure of ethics and morality when they confront profits.

    The penny example wasn't meant to be compared to complex financial systems they way you are. When a penny lands on it's side there are no apparent set of cascading situations that have to line up just right in order for it to happen.

    Look at large man made disasters. There is rarely a simple explanation. Chernobyl didn't melt down because someone pushed the wrong button. Of course not, the consequences of failure are much to high. Many preventative systems are put in place and people have to ignore obvious warning signs. They have to shut systems off, or convince others they aren't important. This is precisely what happened.

    It is the same in the financial world. It's not like the things that lead to failure happen in a vacuum, they happen where others can see. The only way they are missed is if people are to ignorant to understand or to self interested to care.

    For what good it does, I try to share what I know, because understanding the warning signs is the best defense against fiscal crisis. Well, that and preventing the aggregation of to much wealth in too few hands, but that is more a symptom of the problem than the cause.

    In the end, everything comes with risk. I'd guess you have about the same chance of throwing a handful of pennies on a floor and having one land perfectly on it's edge as you do of stepping out your front door and being hit by a meteor. Some risks are considered acceptable. We need to get our finantial system to a point where the risks to everyone taken by the few are acceptable.

    As for as morality and ethics, I believe these things are cultural ideals and I would agree with you, much has been eroded, but the answer to fix it is the same as it was to break it. People simply have to care. The have to think differently and I think the first step is understanding that the government's limits are not the same as the average person. The governments job isn't to "win", its to maintain balance. The problem is and always has been that those who should be subject to the most change are the ones most capable of defending themselves from it.

  • Jul 01, 2016 10:25 PM
    Last: 5yr
    Carlitos Wrote:

    This is a fantastic discussion and thread.

    Warren Mosler (who has owned a "bank") likes to say that "banks" (and note the use of quotations) are "designated" agents of the government and that "banking" is a public-private partnership for public purpose.

    You could think of "banks" as like outsourced, private vendors of a government supplied object, i.e. dollars.

    That's what FDIC insurance, Federal Reserve membership, and government bank charters mean.

    So why do we enlist private banks for public purpose?

    We want a flexible dollar supply for the private sector, but not something so flexible inflation is an issue. It would be crazy, for example, if the government just gave funds to anyone and everyone and in unlimited amounts on account of their word alone to repay, and without further consequence to the individual or responsible entity if they do not. So there have to be some standards. There have to be rules pertaining to credit analysis or the ability and willingness of borrowers to repay, and there has to be work done to verify information about borrowers and the assets they seek to purchase. We don't want that entire process politicized. So the government "designates" private entities as agents of the government, and outsources some of that work to them, integrating public sector and private sector processes, while creating markets of new buyers and sellers. "Banks" are insured and funded by the government to make the loans their regulators deem legal for them to make. It's the government's job to make sure their agent-vendors comply with the rules they have set. "Banks" are dynamic, fluid examples of public-private partnerships that transform our willingness and ability to pay in the future for dollars now into deposits in our account today that we can spend for authorized purpose(s).

    It's late and I'll comment on the replies in the morning, I just wanted to ask if you got my PM?