CBO: Federal Debt and the Risk of a Fiscal Crisis

[bpr]

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

Thanks, fixed the link.

For an economics dunce like myself, this whole thing is quite perplexing. Thanks for asking the right questions. I would've gone down the same rabbit hole you did when Rajiv asked what purpose taxation serves.

[charliebrown]

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

OK, I have read a wiki article on chartalism, which seems to be related to MMT.

What if there was only the treasury and me.

The Treasury can create as many T's as the need, but someone needs to buy them with money. I suppose if I use my bank account to buy a T, the treasury gets the cash, then they write a check to pay for my the widgets I make, and thus the money comes back to me. Now I have a T and a bank balance.

When the T matures, the gvt and I can decide to roll the T, or the gvt can tax me take money money, then pay me the money for the T. Once again the interest has not been created, so I suppose the money supply must constantly expand.

So if the gvt has an infinite balance sheet, when does the system break down?
After all they can't just send everyone a check for 1M and solve the foreclosure problem.

It seems that when I owned the T and the cash, I have twice the money I had when I started, if I could sell the T for more money. If I wanted to exchange the cash or the T for a scarce item, like a gallon of gas, this may cause inflation or a devalueing of money. I assume that once inflation becomes persistant and high the velocity of money will increase because no one wants to hold it. Oh still confused. will reflect some more in the next week.


Under this theory then is the inflation rate basically a function of the rate of expansion of gvt debt? So if we have a 13T debt, and add on 1T more in a year we will be looking at roughly a 7% inflation rate? Do we sell our gold when the gvt debt starts going down? Or when the interest rates on money exceed its creation rate?

[Rajiv]

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

What if there was only the treasury and me.?

Then there is no need for money to ever come into existence. Who is the treasury, and what social relationship does it have with you? Money is only needed to engage in trade, and is really only an accounting vehicle.

Think of the Government and treasury, as being an entity that exists to serve the needs of the entire community, and essentially comprises of it (the community). That line of thinking may answer your questions.

[charliebrown]

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

What about the money as a store of value concept? If I make and sell more widgets than I have need for widget raw materials, and my living wage, then what do I "store" my excess productivity in? I suppose I could keep extra widgets in inventory, but then do widgets become "money" as they are now units of trade, and stores of value. And we also have the problem of barter where if someone does not need widgets, I cannot trade with them.
Suppose widgets are watermelons, and they are perishable?

That is part of what is making me "sick" of this whole scheme. The "money" of the land is not a store of value.
In order to protect my wealth, (excess productivity) I have to speculate, and store my wealth in things which are not
"money", and hope that the retain purchasing power, and even if they do retain their purchasing power, because of the
capital gains tax, the fed gvt gets their fed 25% cut, and the state gets its share too.

[Rajiv]

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

Think again - Start from the perspective of a small self sustaining community, and an individual within it. How does it sustain itself, and how does it take care of the needs and desires of its members. What is it that individuals of that community need, what is it that they want, and how can the community meet those demands. Maybe that will make you understand the role of money.

You have to think of money as providing short to medium term liquidity, and not a permanent store of value.

[ThePythonicCow]

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

You have to think of money as providing short to medium term liquidity, and not a permanent store of value.

Money most importantly provides liquidity and a unit of accounting. I agree with you that it is and should be less well suited as a long term store of value. A community's long term store of value is in its developed land, capital equipment and buildings, institutions, expertise, its relations with others, and other such durable goods and arrangements such as might contribute to the future prosperity of that community.

Money provides liquidity in its physical form of paper currency bills and coins of the realm. These allow one to make small purchases with immediate payment. You get the goods and you clear your resulting debt to the vendor immediately.

Most larger transactions, from time immemorial, involve delayed settlement. You get the goods and you and the seller agree that you owe them a certain amount to be paid in some expected timely fashion. Nowadays wholesale transactions are often expecting payment within 90 days of receipt of order. I am half way through reading an interesting article on this at What is money?.

The essential unit of accounting for these credit and debit transactions is the currency unit of the realm or some other agreed to currency units. British tally sticks have been one of the many ways that this has been accomplished, without the need for the participants to read or write or pass a Certified Public Accounting exam, and without the need for physical coins or paper bills of the realm in hand.

In order to protect my wealth, (excess productivity) I have to speculate,

It is essential that long term wealth preservation requires risk taking. Ultimately it can be no other way, for our liquid wealth years from now depends in part on the general prosperity of the times years from now. Any investment scheme which purports to avoid that risk is really just hiding it somewhere, not making it go away.

As we have recently observed, hidden risks can blow up even more spectacularly than known exposed risks.

[Rajiv]

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

Now that we have established, that a Sovereign government does not need to tax to fund its expenditures. Then, the automatic question arises -- What purpose then does taxation serve? Once that question is answered, then one should ask the question -- in light of the above discussion, what really has been the truly corrupt act of the last 30 years.

So now how can states, that are not sovereign issuers of currency safeguard themselves? Example the 50 US states, or the non issuing EuroZone countries.

See the North Dakota example, and the latest Ellen Brown article - What A Government Can Do With Its Own Bank: The Remarkable Model Of The Commonwealth Bank Of Australia

Virg Bernero, the mayor of Lansing, Michigan, just won the Democratic nomination for governor of his state, making a state-owned Bank of Michigan a real possibility. Bernero is one of at least a dozen candidates promoting that solution to the states’ economic woes. It is an innovative idea, with little precedent in the United States. North Dakota, currently the only state owning its own bank, also happens to be the only state sporting a budget surplus, and it has the lowest unemployment rate in the country; but skeptics can write these achievements off to coincidence. More data is needed, and fortunately other precedents are available from other countries.

One of the most dramatic is the Commonwealth Bank of Australia, which operated successfully as a government-owned bank for most of the 20^th century, until it was privatized in the 1990s. The Commonwealth Bank’s creative founders demonstrated that a government-backed bank can make loans without capital. Denison Miller, the Bank’s first Governor, was fond of saying that the Bank did not need capital because “it is backed by the entire wealth and credit of the whole of Australia.”

The Commonwealth Bank’s accomplishments were particularly remarkable considering that for its first eight years, from 1912 to 1920, it did not have the power to issue the national currency --unlike the U.S. Federal Reserve, which acquired that power in 1913. The Commonwealth Bank was thus in the same position as a state of the United States or a member country of the European Union (think Greece), which also lack the power to issue their own currencies. Operating without that power and without startup capital, the Commonwealth Bank funded both massive infrastructure projects and the country’s participation in World War I. According to David Kidd, writing in a 2001 article titled “How Money Is Created in Australia”:

“Australia’s own government-established Commonwealth Bank achieved some impressive successes while it was ‘the peoples’ bank’, before being crippled by later government decisions and eventually sold. At a time when private banks were demanding 6% interest for loans, the Commonwealth Bank financed Australia’s first world war effort from 1914 to 1919 with a loan of $700,000,000 at an interest rate of a fraction of 1%, thus saving Australians some $12 million in bank charges. In 1916 it made funds available in London to purchase 15 cargo steamers to support Australia’s growing export trade. Until 1924 the benefits conferred upon the people of Australia by their Bank flowed steadily on. It financed jam and fruit pools to the extent of $3 million, it found $8 million for Australian homes, while to local government bodies, for construction of roads, tramways, harbours, gasworks, electric power plants, etc., it lent $18.72 million. It paid $6.194 million to the Commonwealth Government between December, 1920 and June, 1923 - the profits of its Note Issue Department - while by 1924 it had made on its other business a profit of $9 million, available for redemption of debt. The bank’s independently-minded Governor, Sir Denison Miller, used the bank’s credit power after the First World War to save Australians from the depression conditions being imposed in other countries. . . . By 1931 amalgamations with other banks made the Commonwealth Bank the largest savings institution in Australia, capturing 60% of the nation’s savings.”

Harnessing the Secret Power of Banking for the Public Good

The Commonwealth Bank was able to achieve so much with so little because its first Governor, Denison Miller, and its first and most ardent proponent, King O’Malley, had both been bankers themselves and knew the secret of banking: that banks create the “money” they lend simply by writing accounting entries into the deposit accounts of borrowers.
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[charliebrown]

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

Thank you, I am in deep thought.

[charliebrown]

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

Thank you cow. That was one of the most profound and thought provoking statments on this site. I am going to think about this for a long time.

I don't want riches, but I do have two young ones to provide for. I keeps me awake at night worrying.

[ThePythonicCow]

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

Thank you cow.

You' re quite welcome. Thank-you for the kind words.

[Rajiv]

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

CB,

If you get the chance, listen to the entire Fiscal Sustainability Teach-In and Counter Conference, but especially session 4 and 5. I believe they are right on the money. Do look at their presentations as well.