CBO: Federal Debt and the Risk of a Fiscal Crisis

[dummass]

Re: CBO: Federal Debt and the Risk of a Fiscal Crisis

I am trying to drive home a few points, that are extremely important.

If we look at the top income tax bracket post WWII, till 1964 was ~91%.

As we have discussed above, the government does not need tax revenues to fund expenditure. So why was the top bracket so high? And if it was as high as 91%, why was it not 100%? What would happen if it was 100%?

Go back also to my reply to Dummass - re Ellen Brown -- and consider what was happening in Pennsylvania.

Observe the frustrations of attempting to teach by he Socratic method to a cow and a dummass.

[ThePythonicCow]

Re: CBO: Federal Debt and the Risk of a Fiscal Crisis

I am trying to drive home a few points, that are extremely important.

Your points are likely important, for I know your posts are usually valuable.

However the nature of money is a sufficiently confused topic that I doubt I can guess which theory of the stuff you hold, and which points of that theory you are making.

Perhaps if I read many of your past posts, I could surmise to which theory of money you ascribe, and then could guess the points you wish to make.

Would it not be a more efficient use of your time and of the time of those who read your posts for you to state outright your points?

[ThePythonicCow]

Re: CBO: Federal Debt and the Risk of a Fiscal Crisis

Nothing unorthodox about it; governments have always been short sighted.

Here you go, dummass, raja, charliebrown and Rajiv, from Deficits Do Matter, But Not the Way You Think:

In recent months, a form of mass hysteria has swept the country as fear of “unsustainable” budget deficits replaced the earlier concern about the financial crisis, ...

There is an alternative view propounded by economists following what has been called “Modern Money Theory”, which emphasizes the difference between a currency-issuing sovereign government and currency users (households, firms, and nonsovereign governments). They insist that the notion of “fiscal sustainability” or “solvency” is not applicable to a sovereign government — which cannot be forced into involuntary default on debts denominated in its own currency.

Read more at the above link.

This article, and others like it (search for “Modern Money Theory”) present this heretical view in a more comprehensive manner than my posts, and a more readable manner the above article by Eric Tymoigne.

[charliebrown]

Re: CBO: Federal Debt and the Risk of a Fiscal Crisis

Thanks so much for posting this, I'm going to get this book.
I'm going to take a stab at what's wrong with the last 50 years, and say it is not the tax code, although hideous ...
It's the growth of the money supply above and beyond the productive capacity of the nation.
I am playing some games with stock market forecasting models, and am looking for my "zero" year. In looking at CPI numbers, something happened in 1965. Before this year, there were periods of below 0 or near zero CPI, but after it, I don't think CPI went below 2, except right after the dot.com crash, and this last great recession.

After the revolutionary war, the phrase "not worth a continental" was used to describe the value of the above mentioned dollar. It appears that from the above article the money supply was held in check, until the war blew money issuance up much faster than the productive capacity.

[Rajiv]

Re: CBO: Federal Debt and the Risk of a Fiscal Crisis

It's the growth of the money supply above and beyond the productive capacity of the nation.
I am playing some games with stock market forecasting models, and am looking for my "zero" year. In looking at CPI numbers, something happened in 1965. Before this year, there were periods of below 0 or near zero CPI, but after it, I don't think CPI went below 2, except right after the dot.com crash, and this last great recession.

After the revolutionary war, the phrase "not worth a continental" was used to describe the value of the above mentioned dollar. It appears that from the above article the money supply was held in check, until the war blew money issuance up much faster than the productive capacity.

See my post here -

Once it has been established that a sovereign government does not need taxation to fund its expenditure, the question remains -- what then is the role of taxation? Once you have answered that question, then in my mind, the tax cuts starting 1964 have been one of the most corrupt acts since the establishment of this country (the USA).

This has been a legacy of the failure of the Vietnam War which started becoming apparent in 1964. We went off the silver standard and decreased tax rates in 1964 in order to pursue the Vietnam War.

[big67]

Re: CBO: Federal Debt and the Risk of a Fiscal Crisis

Thanks so much for posting this, I'm going to get this book.
I'm going to take a stab at what's wrong with the last 50 years, and say it is not the tax code, although hideous ...
It's the growth of the money supply above and beyond the productive capacity of the nation.
I am playing some games with stock market forecasting models, and am looking for my "zero" year. In looking at CPI numbers, something happened in 1965. Before this year, there were periods of below 0 or near zero CPI, but after it, I don't think CPI went below 2, except right after the dot.com crash, and this last great recession.

After the revolutionary war, the phrase "not worth a continental" was used to describe the value of the above mentioned dollar. It appears that from the above article the money supply was held in check, until the war blew money issuance up much faster than the productive capacity.

I think you nail it.

To keep the economy on balance production has to be strong enough to pay for the interest on debts. Inflation helps by reducing the real interest rate.

In the Philadelfia example by Rajiv the money to pay the interest on loans came from the government in the form of spending. But I suppose conditions were such that the effect of 1$ of gov spending on the output of the economy was amplified... you see, flashback to 1700... a lot of productive infrastructure is badly needed ;)

At present time this is not holding true, even with zirp: production is struggling to pay debts, inflation is "subdued", the effect of 1$ gov spending on the GDP is quite low.

[dummass]

Re: CBO: Federal Debt and the Risk of a Fiscal Crisis

Here you go, dummass, raja, charliebrown and Rajiv, from Deficits Do Matter, But Not the Way You Think:
Read more at the above link.

This article, and others like it (search for “Modern Money Theory”) present this heretical view in a more comprehensive manner than my posts, and a more readable manner the above article by Eric Tymoigne.

More readable, but no more convincing.

Insolvency is not possible when one spends by a simple keystroke. The critic then quickly changes the subject: Weimar! Zimbabwe! You are a destroyer of the currency! Yes, but it was your scenario, not mine. And even in your worst case scenario, the government cannot be forced to default. Instead, Krugman argues “the government would decide that default was a better option than hyperinflation”. In other words, Krugman veers off into politics — government “decides” to default — because the economics does not give him the result he wants.

Yes, he can print, but if the "economics does not give him the result he wants" it's still bad policy.

Second. Your scenario is highly implausible. As budget deficits rise, this increases income (government spending exceeds tax revenue, thus adds net income to the nongovernment sector) and wealth (nongovernment savings accumulated in the form of government debt) of the nongovernment sector.

There are far too many historical examples for this scenario to be "highly implausible," as the author suggests. Next, he confuses fiat currency (pieces of paper) with "wealth" and "income." That's a big jump! Market participants will ultimately determine the value of fiat currency as it is exchanged for goods and services. When market participants lose faith in a currencies ability to store wealth and hold value, there is no benefit to creating more.

Eventually, this causes private spending and production to grow. As the economy heats up, tax revenue begins to grow faster than government spending or GDP.

"Private spending"... as in exchange those pieces of paper for something of value, quick, while you can. How does this increase production? The author doesn't say, but some how it leads to increased tax revenue.

I thought that Governments didn't need to tax?

[Jay]

Re: CBO: Federal Debt and the Risk of a Fiscal Crisis

Given the delightful and well documented rebuttals above (thanks, dummass and charliebrown) I would be hard pressed to claim that unconstrained money printing cannot be associated with hyperinflation. However rather than claim that the printing caused the inflation, I would say rather that hyperinflation (due perhaps to supply side shocks) precipitated a great amount of money printing.

It looks to me that part of the answer to this conundrum is whether the fiscal multiplier of a sovereign debt issuer is really stuck at less than one. If it is, and part of that argument would include the "crowding out effect" of government monies on private investment, then I can see a moderate to high inflation and a decreasing real GDP in the years to come for America. If government stimulus in the form of temporary fiscal deficits does in fact "prime the pump" and create real sustained growth then the MMT crowd could be correct. They argue that crowding out does not occur, and I haven't figured out yet how they are so sure.

Insert peak oil debate here to further muddy the waters.

[c1ue]

Re: CBO: Federal Debt and the Risk of a Fiscal Crisis

I'd also note that Tymoigne is primarily responding to the CBO report as opposed to talking about the overall picture.

I don't have a clear sense on who/what Tymoigne is, but one weakness of Dr. Hudson which iTulip/EJ have spoken to is the concept of what the existing external dollars will do.

I cannot recall the link, but I do seem to recall that a statement was made that money printing wasn't necessary to launch a new bubble and/or generate inflation - that all of the dollars necessary for that (even today!) already exist in the hands of foreigners.

Part of this is the CB dollar reserves, the other part lies in the trade float.

An untoward devaluation of the dollar absolutely risks a repudiation such that one or both of these spheres sees a switchover to a different currency.

The resulting flood of dollars coming home itself can raise inflation/exacerbate existing dollar weakness.

This isn't spoken to by either the CBO or Tymoigne in his response to the CBO.

Indeed, a formal repudiation itself isn't necessary. The formation of regional trading blocs, for example, would itself cut into the trade float as well as some of the dollar reserve float - examples of these are already visible with China in its trade pacts with various Asian and South American nations.

The erosion of the petrodollar standard, as another example, for European/Russian energy trade would also have such an effect.

This other side of the sword of the dollar being a reserve currency is one aspect in particular which I have not seen spoken to anywhere else than iTulip.

[ThePythonicCow]

Re: CBO: Federal Debt and the Risk of a Fiscal Crisis

I thought that Governments didn't need to tax?

They don't need to tax to balance their books. They find taxing quite useful for other purposes.

[ThePythonicCow]

Re: CBO: Federal Debt and the Risk of a Fiscal Crisis

It looks to me that part of the answer to this conundrum is whether the fiscal multiplier of a sovereign debt issuer is really stuck at less than one. If it is, and part of that argument would include the "crowding out effect" of government monies on private investment, then I can see a moderate to high inflation and a decreasing real GDP in the years to come for America.

My gut sense is that that "fiscal multiplier" is at best a sometimes interesting correlation, rather than an important causative mechanism.

People have not stopped investing in creating or growing businesses (theirs or others) because Treasuries are such a hot deal; rather they stopped investing because we're in the midst of a monster debt collapse and most investments, after discounting their risk, look worse than stuffing Dollars in the mattress.

[ThePythonicCow]

Re: CBO: Federal Debt and the Risk of a Fiscal Crisis

Yes, he can print, but if the "economics does not give him the result he wants" it's still bad policy.

I think we're making progress here, dummass.

You and I agree they can print. You and I likely agree that it is possible to put too much, or too little money in circulation. If too little money is in circulation, there simply not enough credits or coins or bills floating about to support normal business activity. If too much money is in circulation, it becomes as Zimbabwe confetti.

So these questions arise.

• What determines the right amount of money to have in circulation?
• What policy responses (whether monetary or fiscal or regulatory or guillotines) are recommended now?

I would claim that the right amount of money to have in circulation is not determined by the (rather ornately deceptive) Treasury or Federal Reserve accounting books, but rather by the level of economic activity.

I would suggest (hat tip to MMT) that a useful policy response would be to fund a guaranteed minimum wage level of income to everyone who lacks a better alternative. Those who are able bodied have to work for it; the rest get it in lieu of their other pension or Social Security payments, if they so choose.

(Meanwhile, repeal 80% of the laws on the books, vote every Congress critter out of office, close 80% of our foreign military bases, and layoff 80% of Federal government workers -- they can take advantage of the above guaranteed minimums if they choose.)

I might have to peel off the Reagan, Bush, and Palin bumper stickers from my old car and attach an FDR sticker.

[ThePythonicCow]

Re: CBO: Federal Debt and the Risk of a Fiscal Crisis

[What's wrong is] the growth of the money supply above and beyond the productive capacity of the nation.

Well said.

Well, not the only thing wrong. But one of them.

[metalman]

Re: CBO: Federal Debt and the Risk of a Fiscal Crisis

Outstanding article. Thanks for posting, Rajiv.

Eric Tymoigne really takes the CBO to school on this one. Much of what passes for economics in the discussions on this and other forums is shredded by Tymoigne's comments.

Look up that phrase in the last sentence, the endogeneity of the money supply. It's worth some searching and studying. Printing money does not cause inflation in a credit-based monetary system such as we have. Rather rising prices are caused by such things as supply shocks or rising demand.

fred just posted this...

Establishment economists may want to review the theory that inflation and unemployment cannot rise together: Inflation in India increased from 8% to 11% between 2009 and 2010 as unemployment increased from 7% to 11%.

[ThePythonicCow]

Re: CBO: Federal Debt and the Risk of a Fiscal Crisis

Establishment economists may want to review the theory that inflation and unemployment cannot rise together:

I agree with FRED on that one. There are several things that can cause inflation.

• If business volume falls below what the level the system is optimized for, those players that will remain alive have to raise prices to cover fixed expenses (often including debt service.)
• If business volume raises above the level the system is optimized for, then less efficient processes or more expensive resources have to be called in to play to meet the demand, raising average price.
• If production demand raises enough to cause a labor shortage (high employment) then wage demands can push prices up.
• If the government hands out free money to, or takes less money from, those who would spend it if they had it, then those spenders will spend more, which if it raises the level of economic activity enough, can cause the other price pressures listed above.
• If bankers relax credit standards to those who would borrow more if they could, then those borrowers will borrow, and likely then spend, which if it raises the level of economic activity enough, can cause the pressures listed above.
• If asset prices (such as stocks or real estate) rise, then those owning those assets will spend some of that anticipated additional wealth, which if it raises the level of economic activity enough, can cause the pressures listed above.
• If users of a currency begin to lose so much confidence in that currency that they fear a noticeable loss of purchasing power between the time they get money and spend it (a rather short time for half the population) then they will spend faster, and whats more, they will prefer a somewhat higher price today to the possibility of saving a little tomorrow.
• If some critical resource comes into short supply, people will start bidding up the price and hording the resource. This can ripple down to other prices that depend indirectly on that resource. In the case of oil, that ripple looks like Niagara Falls.

I'm sure I left some out. (*)

I only see employment levels listed once above.

What fool would say that the only way to get inflation is via the wage pressure from high employment levels?

(*) Well, duh. I left out the one EJ explained to us recently in Inflation versus Deflation Tournament Game 3 - Part II: Will history repeat?. Thanks metalman for the reminder at Post #65 of "The risk, if not the probability, is that deflation lies ahead." 7/10/2010. This method depreciates a currency by using it to purchase foreign Treasuries.