Debt and Taxes

I never took any economics courses; it sounded all math-y  to me.  😱 But I wish I had, because I see now that the discipline is more like my own undergraduate major (anthropology)—or ….not  quite, because it does  more than observe, it predicts and pontificates.  It is not “simple math”, no way!   and,  you don’t actually have to do any calculations in order to tbeorize about it.
Having no idea what I was getting into, I  conjured up Stephanie Kelton’s book The Deficit Myth.  I did it because she promised to reassure me about the deficit.  I mean, just from studying anthro I am already convinced that when a society measures value in terms of something abstract (or ubiquitous and intrinsically  valueless, like cowrie shells) instead of something tangible and finite (like gold)  then the entire economic system is artificial and precariously dependent on public confidence (or ignorance, or willing complicity.)   I don’t understand and never have understood all this doomsaying about “burdening our children with our debt“.    So overnight ( literally, just since last night! I find myself afloat on a sea of modern monetary theory (MMT).

Basically  ( I think, and I’m writing this to humblysolicit guidance from the money-Rattys) ;it’s that when a sovereign nation creates its own currency by fiat (as US has been doing since 1971) it can never go  bankrupt.  It can’t run out of money.  (It CAN get into hyperinflationary trouble, like Venezuela and Zimbabwe, if it can’t provision its own people; what both of those newly-minted dungpits did  was take land away from the farmers and redistribute it to non-farmers, so food was nonexistent and the price of it spiraled outta control.)  Taxes do not provide money the govt needs for its spending.  Taxes are instead a way of making sure there is demand among the citizenry for the currency.  Because Altho the govt could create an infinite amount of it,  if it didn’t also remove some from the system, the result again would be hyperinflation.  (Taxes are of course also useful as a tool of social policy.)
Also, as long as our foreign debt is expressed, or owed, in our own fiat currency, it could be wiped out instantly if the govt chose to do so.  Okay China: here’s  $1.1 Trillion,  newly printed!  We now owe you zilch: go suck a duck-egg!  And the govt does not have to tax us to get that money: it can simply command it into being. It doesn’t even really have to print or mint it: this is simply a matter of a few keyboard strokes.

The weak point appears to be: other sovereign nations and their currencies.   Don’t they have to believe in the dollar, too?  How does all this fit into the idea that the dollar is presently the “reserve currency”?  And who decides what the reserve currency is?

Im hoping to read your thoughts, endorsements or refutations about MMT.

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29 thoughts on “Debt and Taxes”

  1. Query:  about our foreign debt: is there some body which determines what currency that is expressed in?  Could some global council decide we owe China €3.4 T instead of $1.1T?

    (Also yes, I’m aware that Kelton is a Sanders advisor and a rad Lefty—you can’t get beyond her intro without realizing that.)

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  2. Macroeconomics – Central Planning – has never worked, nor could it ever for having positive feedback.

    https://www.theguardian.com/science/2012/feb/12/black-scholes-equation-credit-crunch
    … The Noble Prize in economics is not a boon, it is ridicule.
    https://en.wikipedia.org/wiki/Long-Term_Capital_Management

    Microeconomics – running Mom and Pop store – is quantified life and death, but only because Mom and Pop have instant honest feedback..and care about outcome.  Governments are always a day late and a Vegematic short of caring.

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  3. I’m in the same place as you regarding the study of economics. I have always viewed monetary stability as being primarily a function of the underlying productivity, that productivity being the capacity to increase wealth through producing, building, extracting or growing objects of value to the general population. The United States has seemed to me to have been very well situated to prosper in such an environment from many different angles including its modern culture, its natural resources, its people, and its market approach. So I suspect the dollar will lose its reserve currency status when we go too far in mere consumption of our wealth and neglect the production aspect.

    Recognizing that the currency is a store of value as well as a medium of exchange, an additional consideration is the real estate occupied by our country that seems to attract everyone in the world. The property value is wealth controlled by Americans and their government and the property is valuable from numerous aspects. Farming, mining, and living are just a few of those.

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  4. Printing currency and distributing it without any related production or use of natural wealth is solely consumption and seems to me a definite method of reducing the exchange value of the currency, i.e. inflation.

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  5. Bob Thompson:
    I’m in the same place as you regarding the study of economics. I have always viewed monetary stability as being primarily a function of the underlying productivity, that productivity being the capacity to increase wealth through producing, building, extracting or growing objects of value to the general population. The United States has seemed to me to have been very well situated to prosper in such an environment from many different angles including its modern culture, its natural resources, its people, and its market approach. So I suspect the dollar will lose its reserve currency status when we go too far in mere consumption of our wealth and neglect the production aspect.

    yes but Bob, do you know who or what determines “reserve currency status”?

    Recognizing that the currency is a store of value as well as a medium of exchange, an additional consideration is the real estate occupied by our country that seems to attract everyone in the world. The property value is wealth controlled by Americans and their government and the property is valuable from numerous aspects. Farming, mining, and living are just a few of those.

    yeah that’s what MMT  sez: the govt does not need our money, because it is itself the source of all money!  But it does need our work so it can, as you say, provision itself.  It coulD  simply buy all citizens everything we need—but  if it did, why would they work to produce anything? Taxes mean they have to work, to farm and mine and make, in order to pay their taxes.

    What you say about physical area of a nation is…almost too interesting to me, since I’m not sure I’m thinking of all aspects of it.  Obviously it is not a tangible to which the value of currency is linked.  I reckon in MMT its main value is as a locus for agriculture or industrial facilities.  When we think of mining though, land does have intrinsic worth.  If Hitler had had access to oil, instead of having to convert coal at ruinous   expense, maybe Americans would be ripping down statues of Hitler today!

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  6. “... something tangible and finite (like gold) ...”

    An Einsteinian thought experiment:  assume someone builds a time machine capable of sending inanimate material back to the past.  The UN decides to right the wrongs of the past by sending a large supply of gold bars back to our cave men ancestors.

    The cave men wake up one morning to find bar after bar of shiny gold sitting outside their cave.  What do the cave men do with it?

    They can’t exchange the gold for food — because no-one in their hunter-gatherer society grows food.  Similarly for iPhones and TV sets.  About all the cave men could do with the gold bars is use them to build a wall at the cave entrance to keep the lions & tigers out.

    There is a Real Economy where human beings produce goods & services and trade them with each other.  And their is a Financial Economy, which at its best facilitates the Real Economy.  At its worst, the Financial Economy gets in the way of the Real Economy.

    For students of financial history, Spain acquired (stole) massive amounts of gold from the inhabitants of the New World following the crossing of the Atlantic.  That gold created inflation in the Spanish Empire, and contributed to Spain falling behind its European competitors.  Remember, Production must precede Consumption;  money in any form can be a means of exchange (eg cigarettes in Post WWII Europe), but is rarely a store of value.

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  7. I once heard a quote: “An economist is a person who can tell you everything there is to know about sex. Only trouble is (s)he’s never had any”. As water for fish, we bathe in a world of artifice. I don’t have the facility to draw a graph here, but if I could, I would draw one I have seen. It superimposes two graphs on one axis. Actual growth in value of goods and services is a straight line with a positive slope over time. The graph of the nominal value of paper claims on wealth, on the other hand, is an exponential curve upward. Paper money represents nothing more than a paper claim against that wealth. Economists can muddy the waters with all the mathematical theories they like. They, in effect, believe they can design a perpetual motion machine; that they can conjure energy out of smoke and mirrors. They may even make it appear to work, temporarily. In the long term, at the risk of offending the most learned and imaginative economists, there  simply is no free lunch. In that reality, I have con-fidence. Shocking, isn’t it.

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  8. Gavin Longmuir:
    “... something tangible and finite (like gold) ...”

    An Einsteinian thought experiment:  assume someone builds a time machine capable of sending inanimate material back to the past.  The UN decides to right the wrongs of the past by sending a large supply of gold bars back to our cave men ancestors.

    The cave men wake up one morning to find bar after bar of shiny gold sitting outside their cave.  What do the cave men do with it?

    They can’t exchange the gold for food — because no-one in their hunter-gatherer society grows food.  Similarly for iPhones and TV sets.  About all the cave men could do with the gold bars is use them to build a wall at the cave entrance to keep the lions & tigers out.

    There is a Real Economy where human beings produce goods & services and trade them with each other.  And their is a Financial Economy, which at its best facilitates the Real Economy.  At its worst, the Financial Economy gets in the way of the Real Economy.

    For students of financial history, Spain acquired (stole) massive amounts of gold from the inhabitants of the New World following the crossing of the Atlantic.  That gold created inflation in the Spanish Empire, and contributed to Spain falling behind its European competitors.  Remember, Production must precede Consumption;  money in any form can be a means of exchange (eg cigarettes in Post WWII Europe), but is rarely a store of value.

    Think of money as a store of value or maybe a placement of value facilitating exchange. We have reached a stage in our modern financial operations where that does not even require a physical form, record keeping suffices. So it is obvious that intrinsic value is not a requirement as long as the processes we have in place are functioning.

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  9. Hypatia:
    yes but Bob, do you know who or what determines “reserve currency status”?

    I don’t know exactly how this works but I suspect it’s a function of stability and strength of the economy underlying the currency. And the world has experienced rapid change in economic practices and knowledge of resources and capabilities so how a reserve currency gets assigned probably changes as well. Remember at one time physical gold was very important to a stable and strong economy. Productivity and the ability to sustain and defend it is a big factor.

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  10. Ok so @gavinlongmuir: yes I can’t understand why people think they should hoard gold for emergency.  Ya can’t eat it.  And if ya shave off a bit to buy food, then everybody knows you have it and they’ll come take  it, right?  Wouldn’t you?  And yes gold is a damned slippery substance; as you say it just passed right on through Spain’s fingers.
    And back to my comment 5: wait a Gotterdammerung  Minute!  the Reich was a sovereign currency issuer too, right?  At first, the currency or one species of it (they had Reichmark and Rentenmark) was tied to interests in land, but then they  abandoned that.  If MMT is correct,  how come this didn’t work for Hitler?
    Yeah, so….given that this is a Sanders et al doctrine, maybe it’s just a plot to ruin our economy, and then, in the ruins, he and his “friends abroad” will intone, like the scorpion in the folktale: “What did you expect?  You knew what I was when you let me on your back!  I Told you I wanted to eliminate “inequality “—and thanks to you I’ve done it: everybody is equally wretched.  Serves you right.”

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  11. Hypatia:
    do you know who or what determines “reserve currency status”?

    There are some formal definitions by groups such as the International Monetary Fund, the Bank for International Settlements, and bank regulators which specify which currencies a government, central bank, or merchant bank can count as its reserves, which ultimately determine how much they can borrow or leverage their assets, but mostly “reserve currency” is a de facto matter of which currency other countries and banks wish to back debt they issue, and in which currency a large fraction of world trade is denominated.  For example, for many years (with some recent exceptions), almost all of the crude oil trade was in dollars.  A crude exporter or importer therefore receives or must pay in dollars, and hence has a need for them.

    Before World War I, the British pound served this purpose.  Backed by gold, it was common for trade between, say, the United States and Argentina, to be settled in British pounds.  Outside the Eastern bloc, the dollar played this role after World War II.  The original postwar monetary system, “Bretton Woods”, formally enshrined the dollar as a reserve asset as good as gold, and stayed in place until Nixon and Connally wrecked it in 1971.

    Once in place, a reserve currency tends to stay on top through a combination of inertia and the network effect.  As soon as holders of it for reserves and those using it in international trade begin to mistrust its ability to hold its value, it becomes vulnerable to being displaced by a better-managed currency.  Ever since 1971, as Jim Rickards likes to say, the dollar has been “the best horse in the glue factory”, as there is no other currency with the liquidity to replace the dollar which is perceived as being better managed.  However, that doesn’t mean exponentially growing debt can go on forever without something breaking.  China has been accumulating a huge hoard of gold, both overtly and covertly, for more than ten years, and part of their plans for regional and then global hegemony might well be a gold-backed international yuan explicitly intended to displace the dollar.

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  12. “Modern Monetary Theory” is simply a low-faltuin’ way to say “funding the state by issuing exponentially growing debt, then monetising it by printing money when nobody will lend you any more, even to meet the cost of servicing the debt”.  This has been going on ever since Babylonia, and we have around forty centuries of experience with how it eventually ends.  I call this latest incarnation, which is one of those things so stupid only an intellectual could believe it, “Magical Monetary Theory”.

    Although it’s been going on since antiquity, the eternal truths remain the same, and it doesn’t just happen in famously poorly-governed countries or socialist dictatorship “paradises”.  When it happened in Rome in A.D. 32 during the reign of Tiberius, a housing bubble and crash almost exactly like the one in the U.S. ending in 2008 happened, as described by Tacitus in Book VI of The Annals.  At the time, Rome was a hyper-power without any serious challenger, and its money circulated from central Europe to all around the Mediterranean.  And yet it all blew up due to Ancient Monetary Theory which is identical to what they’re pushing today.

    In the twentieth century alone, three developed, industrialised countries: Germany, Austria, and Hungary, all experienced hyperinflation due to monetising debt by money printing.  Germany was one of the leading industrial powers in the world at the time, with a democratic, liberal government, and look at how it ended up for them.

    Money printing, whether by coin clipping and debasing the coinage metal in antiquity, printing paper money in the French revolution and Weimar Germany, or today’s central banks electronically creating “money that isn’t worth the paper it isn’t printed on” always eventually blows up.  If it doesn’t this time, then truly “this is time is different”, but that’s not the way to bet.

    If you aren’t an intellectual, it’s really pretty easy to understand.  Suppose you were at an auction and everybody was bidding on something they all wanted.  Now a helicopter flies in and doubles the amount of money in everybody’s wallets.  What do you think the selling price will be compared to what it would have been without the helicopter?  That’s all that’s going on when you increase the supply of money without increasing the quantity of goods and services it is being used to purchase.  In the real economy, it’s more complicated since newly-created money flows through the economy in a series of stages, usually first bidding up the price of liquid financial assets, then hitting producer and consumer prices, and finally wages, and all with time delays and rationalisations and outright lies by politicians and central bankers about what is really going on, but when the dust settles, all prices will have risen by about the fraction the money supply has increased.

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  13. Gavin Longmuir says:

    Spain acquired (stole) massive amounts of gold from the inhabitants of the New World following the crossing of the Atlantic. That gold created inflation in the Spanish Empire, and contributed to Spain falling behind its European competitors.

    The Spanish Inquisition purged 16th century Spain of its Moors (Berbers) and Jews. What sort of fool keeps one set of books?  España   Sephardic Jews fled to the Byzantine Empire that then proceeded to conquer the southern ancient world, then expelled its Jews and steeply declined.

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  14. Yeah, thanks JW, that’s PRET-ty much what I thought…😜!

    ok so like socialism itself,  we don’t have to speculate, it has been tried and failed.  The example of Germany did occur to me.  I will search the book to see if the author mentions it: nah, no mention of Germany before 2000.

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  15. I have a neighbor who works as a international insurance adjuster. He was telling me he recently was reviewing a claim from Madagascar. It was for over $ 400 million Madagascar currency. His heart fluttered until  he looked up the exchange rate, 0.00026. The claim was $6800 US.

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  16. Hypatia:
    Yeah, thanks JW, that’s PRET-ty much what I thought…😜!

    ok so like socialism itself,  we don’t have to speculate, it has been tried and failed.  The example of Germany did occur to me.  I will search the book to see if the author mentions it: nah, no mention of Germany before 2000.

    Excellent books about the reality and dynamics of hyperinflation (links are to my reviews):

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  17. Bob Thompson:
    Remember at one time physical gold was very important to a stable and strong economy.

    Richard Nixon took us off the gold standard and thus created an unstructured and wobbly economic system that permitted massive inflation.

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  18. EThompson:

    Bob Thompson:
    Remember at one time physical gold was very important to a stable and strong economy.

    Richard Nixon took us off the gold standard and thus created an unstructured and wobbly economic system that permitted massive inflation.

    I don’t know whether that was a good idea in the long run, or rather the long, looong run, since (2020excluded) the last 50 years were generally ok.  We were in Merano, Italy when Nixon did that.  We woke up and suddenly our money was no good, we couldn’t change dollars to lire.  We had no idea what had happened, Thought maybe our country had been bombed overnight or sump’n,  till we got to Lichtenstein where there was a Rothschild bank which had posted a notice in English.

    one of the problems in the Great Depression, I remember hearing, was that  US currency WAS s’posed to be backed by gold, and we didn’t have very much of it at all.  FDR, that “traitor to his class” called in everybody’s gold coins.  My grandfather hid his.

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  19. Hypatia:

    EThompson:

    Bob Thompson:
    Remember at one time physical gold was very important to a stable and strong economy.

    Richard Nixon took us off the gold standard and thus created an unstructured and wobbly economic system that permitted massive inflation.

    I don’t know whether that was a good idea in the long run, or rather the long, looong run, since (2020excluded) the last 50 years were generally ok.  We were in Merano, Italy when Nixon did that.  We woke up and suddenly our money was no good, we couldn’t change dollars to lire.  We had no idea what had happened, Thought maybe our country had been bombed overnight or sump’n,  till we got to Lichtenstein where there was a Rothschild bank which had posted a notice in English.

    one of the problems in the Great Depression, I remember hearing, was that  US currency WAS s’posed to be backed by gold, and we didn’t have very much of it at all.  FDR, that “traitor to his class” called in everybody’s gold coins.  My grandfather hid his.

    Except that money printing disguised inflation and ended up hurting families. Look at the two most important purchases in a life- a house and a college education for your kids.

    Glad I have only one expense to worry about!

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  20. One of the economists who advises Congress wrote a description of MMT last year at https://fas.org/sgp/crs/misc/R45976.pdf . I can’t say it’s easy to understand (although it was written for average Americans who happen to be in Congress), but it gives an orthodox economist’s view of MMT. If MMT means “print money to pay the government’s bills,” then it will invariably lead to inflation, as Mr. Walker has said. MMT advocates make two claims that they believe change everything: (1) the government would spend its new money on things that would expand the economy, and (2) there could be automatic taxes levied by someone other than Congress or a politician to “soak up” any extra money to prevent inflation.

    The problem with the first claim is that, by and large, the things MMT advocates want to spend money on are widely seen as costs, not investments. And, there’s no reason the government couldn’t spend money on things to grow the economy without adopting the other tenents of MMT.

    The problem with the second point is that, aside from the impracticality of these taxes, it’s not clear why the taxes needed to soak up extra money would be significantly less than the taxes currently collected to pay for the government.

    I find economics interesting, but I’m certainly no expert. The annoying part is that the experts all generally agree about how markets function well, but disagree about what to do when markets don’t function properly ( http://daviddfriedman.blogspot.com/2010/09/living-dead-thoughts-on-macro-and.html , especially the postscript). Economists are largely as useful as doctors that can only help you when you’re healthy, or mechanics who can’t actually fix a car.

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  21. Max Lybbert:
    (1) the government would spend its new money on things that would expand the economy

    The private sector expands the economy but the govt merely redistributes wealth; it produces nothing.

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  22. EThompson:

    Max Lybbert:
    (1) the government would spend its new money on things that would expand the economy

    The private sector expands the economy but the govt merely redistributes wealth; it produces nothing.

    Hypothetically, at least, the government could build a road that unlocks economic opportunities (e.g., lowers shipping costs, makes logging accessible). In practice, we’re much more likely to get bridges to nowhere than profitable stretches of road. And, of course, it could be possible to get the road without the government.

    When somebody, say, Reagan, suggests that the government should make budget decisions based on economic benefits, at least half the country believes it’s obviously the wrong approach. They generally believe that the government should redistribute wealth without regard to economics; or perhaps should solve inequality by taking from economically productive uses to give to economically unproductive uses.

    So in practice it’s always a mixed bag. We get defibrillators, the ARPAnet, 480 million copper needles in space ( https://en.wikipedia.org/wiki/Project_West_Ford ), and Tang. My understanding of government budgeting, at least in the US, doesn’t give me much hope spending will ever be prioritized for things that actually look like good economic bets, because that’s never an input into spending decisions. But we’re often told that if we just double the size of a city, state, or even national budget for whatever the big issue is (health care, Green New Deal, etc.), “it’ll pay for itself.”

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  23. Max Lybbert:

    EThompson:

    Max Lybbert:
    (1) the government would spend its new money on things that would expand the economy

    The private sector expands the economy but the govt merely redistributes wealth; it produces nothing.

    Hypothetically, at least, the government could build a road that unlocks economic opportunities (e.g., lowers shipping costs, makes logging accessible). In practice, we’re much more likely to get bridges to nowhere than profitable stretches of road. And, of course, it could be possible to get the road without the government.

    When somebody, say, Reagan, suggests that the government should make budget decisions based on economic benefits, at least half the country believes it’s obviously the wrong approach. They generally believe that the government should redistribute wealth without regard to economics; or perhaps should solve inequality by taking from economically productive uses to give to economically unproductive uses.

    So in practice it’s always a mixed bag. We get defibrillators, the ARPAnet, 480 million copper needles in space ( https://en.wikipedia.org/wiki/Project_West_Ford ), and Tang. My understanding of government budgeting, at least in the US, doesn’t give me much hope spending will ever be prioritized for things that actually look like good economic bets, because that’s never an input into spending decisions. But we’re often told that if we just double the size of a city, state, or even national budget for whatever the big issue is (health care, Green New Deal, etc.), “it’ll pay for itself.”

    The govt can help the economy by what it prohibits- excessive regulation, high corporate taxes, trade deficits. In other words, I am a devoted sTRUMPet.

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