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Us Deficits Not A Problem, Surpluses Are

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Thanks to Bellwether on the news blog - thought this deserved wider debate, linked to another piece on Modern Monetary Theory, the main points being that for countries that issue their own currency,

- Default cannot happen (except a pseudo default via hyperinflation)

- Deficits are not an issue, in fact they are essential

- Budget surpluses are a problem as they starve the private sector of funds

- Government spending is funded neither through taxes nor bond issuance

Seems to go against most accepted wisdom on here, what do people think?

Pragmatic Capitalist

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When the government “spends,” the Treasury disburses the funds by crediting bank accounts. Settlement involves transferring reserves from the Treasury’s account at the Fed to the recipient’s bank. The resulting increase in the recipient’s deposit account has no corresponding liability in the banking system.

I stopped there.

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Very interesting link and contrary read, especially the comments. Thanks.

As for an opinion will have to wait for the "grown ups" on HPC, as I'm clueless. Maybe we are wrong. Who knows., but there is a very good chance the Chinese creditor economy will blow before the US goes "bankrupt" unsure.gif

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Dunno. Did Russia/Argentina have deficits or surpluses when they had, er, issues.

Never have i heard of a country go bankrupt because of its surpluses, anyway.

All that a deficit seems to be is an increase in the money supply. All that means is a transfer of wealth from holders of cash to holders of assets, or,given a specific tax regime, to one asset (ie housing), a transfer of wealth specifically to that demographic. It means nothing in itself, Deficits are neither good nor bad surely, depending on who you represent. Theyre only good for some people, only bad for some others. It doesnt represent growth in itself just what holders of cash call 'inflation'.

As far as i can see, our QE and deficit spending has done neither...

1) What labour (wrongly) wanted it to do - boost consumption.

2) What it should have been used to do, boost production in areas that have, or will be underinvested in in the future ie power generation, capital expenditure for private business to improve productivity and building things which we need more of (homes, roads)

What it has done is boost asset prices, without increasing the productivity or availability of those assets. Our houses cost more, but they are the same houses, we derive no greater utility value from them. Our fuel costs more, despite being of the same value, our food costs more, despite giving us no more nutrition.

How anyone other than the speculators in the banks and investment houses and the crooks we call politicians can think that is a good outcome is a mystery to me.

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Thanks to Bellwether on the news blog - thought this deserved wider debate, linked to another piece on Modern Monetary Theory, the main points being that for countries that issue their own currency,

- Default cannot happen (except a pseudo default via hyperinflation)

- Deficits are not an issue, in fact they are essential

- Budget surpluses are a problem as they starve the private sector of funds

- Government spending is funded neither through taxes nor bond issuance

Seems to go against most accepted wisdom on here, what do people think?

Pragmatic Capitalist

Is this a report from the new Gordon Brown policy think tank?

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Default cant happen?

Cameroon just tells George to stop payment.

Default...happened,

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Thanks to Bellwether on the news blog - thought this deserved wider debate, linked to another piece on Modern Monetary Theory, the main points being that for countries that issue their own currency,

- Default cannot happen (except a pseudo default via hyperinflation)

- Deficits are not an issue, in fact they are essential

- Budget surpluses are a problem as they starve the private sector of funds

- Government spending is funded neither through taxes nor bond issuance

Seems to go against most accepted wisdom on here, what do people think?

Pragmatic Capitalist

While he is mostly correct PC has the most twisted beliefs when it comes to monetary issues IMO. His views (he seriously believes that debt is wealth) are unfortunately shared by many.

He used to provide good analyses but lately the ratio of insightful economic analyses to garbage monetary advocacy pieces has been so low that I have stopped reading his posts altogether. He's lost all balance and context in his writings and has become a sort of mini Krugman.

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While he is mostly correct PC has the most twisted beliefs when it comes to monetary issues IMO. His views (he seriously believes that debt is wealth) are unfortunately shared by many.

He used to provide good analyses but lately the ratio of insightful economic analyses to garbage monetary advocacy pieces has been so low that I have stopped reading his posts altogether. He's lost all balance and context in his writings and has become a sort of mini Krugman.

strange view...bankers are supposed to monetise wealth, but when you create credit based on a house, based on an MBS, based on a CDO, based on a derivative and a CDS...then debt far outweighs wealth....hence, the credit crunch,

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I think that blogger has clashed with Denninger over this theory.

Sounds quite like the ideas scepticus has on his blog, but looks like it applies to the US only because of reserve status of $. In the end it comes down to the full faith and credit of the government.

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Thanks to Bellwether on the news blog - thought this deserved wider debate, linked to another piece on Modern Monetary Theory, the main points being that for countries that issue their own currency,

- Default cannot happen (except a pseudo default via hyperinflation)

- Deficits are not an issue, in fact they are essential

- Budget surpluses are a problem as they starve the private sector of funds

- Government spending is funded neither through taxes nor bond issuance

Seems to go against most accepted wisdom on here, what do people think?

Pragmatic Capitalist

1. Think Zimbabwe had the same fiat system and they did not 'default' either. However, I will not lend them another penny for obvious reason.

What TPC is saying is what we already know - the government can repays its debt by printing money (or QE if that sounds more 'friendly').

2. To be fair, TPC does say inefficient spending leads to mis-allocation of resources and inflation. What he is advocating here was exactly

what the communist blocks of country did - the governments 'allocated resources' through central planning committee (rather than deficit spending

which is not that much different as it also involve a group of people sitting in a cushy office deciding what capacities of the economy they are going to 'buy up').

The result wasn't pretty though.

3. Budget surplus alone does remove financial resources from the public. What government should do with surplus is to invest them via Sovereign Wealth Fund

for the benefits of future generations. To visualise this paradox is easy. Basically, when the banks publish M1/2/3/4 numbers, they are describing the amount

of money the 'private sectors' have to spend. IF government runs deficit (and everything else be equal), the M1/2/3/4 number will go up. If the government

tax it back and store the money in its central bank account, then M1/2/3/4 will go down.

4. TP theory relies on government's gun powered ability to 'tax' the money back. This is not always possible. TP has never explained how the government

can 'tax' back money it handed over to China/German central banks via trade deficit.

4. Anothing TPC missed is that economy is about expectation, if most people (and investor) think deficit is bad then they will behave accordingly.

With that, things can get out of hand pretty quickly (Zimbabwe).

So, basically, while MMT sort of explain the nitty gritty of the monetary system, the end results is exactly the same as 'conventional thinking' - deficit leads

to ruin and MMT led ruin is not any less painful than a 'conventional' ruin.

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I think one of the most interesting graphs was in the comments, which seemed to show the US Gov's deficit mirrored by a corresponding rise in private sector cash. So would running a US Gov surplus result in the corporates becoming indebted?

I suppose it will depend what the corporates will do with their cash hoard. At the moment its going into a world pool of savings and not earning much yield (I assume). This is largely a flight to safety in uncertain times.

Then you see how the Chinese are spending their surpluses, stealth jets and ghost cities.

Still not sure what the point of all this is except that governments running up deficits, so that private enterprises can acquire surpluses which at some point get spent or invested in a more efficient manner?

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I think one of the most interesting graphs was in the comments, which seemed to show the US Gov's deficit mirrored by a corresponding rise in private sector cash. So would running a US Gov surplus result in the corporates becoming indebted?

I suppose it will depend what the corporates will do with their cash hoard. At the moment its going into a world pool of savings and not earning much yield (I assume). This is largely a flight to safety in uncertain times.

Then you see how the Chinese are spending their surpluses, stealth jets and ghost cities.

Still not sure what the point of all this is except that governments running up deficits, so that private enterprises can acquire surpluses which at some point get spent or invested in a more efficient manner?

As economy grow, the economy needs more cash to transact so it is OK for government to run a deficit (or just print money without borrowing) at around the nominal GDP growth rate. This is the reason we are in a constant cycle of inflation. Otherwise, price probably will fall abit as the economy becomes more productive while the total number of cash/M0 stays the same (assume velocity does not change). Even during the gold standard time, the total amount of available gold increases overtime.

In some countries (e.g. HK,SG), their system is an extension of the US (and EUR/JPY) system and so when they run a surplus, it means US/EuroZone/Japan is running a deficit.

Normally, government (or US government) surplus gets recycled into private sector so that the surplus gets back into the private sector. The catch here is whether the recycling is productive. If the surplus is recycled into a government owned Soverign Wealth Fund Inc which invest wisely, then it is good. If it is then used to give civil servant unwarranted payrises

or favour buying, then the result will be the same as deficit spending.

But running a deficit at 11% of the GDP with a 4% nominal growth is a totally different cattle of fish.. The point is that creating too much money in the private sector with no corresponding increase in productive capacities will lead to disaster and those with index linked pension or close to the 'source' will be smiling initially at everybody else expenses.

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As economy grow, the economy needs more cash to transact so it is OK for government to run a deficit (or just print money without borrowing) at around the nominal GDP growth rate. This is the reason we are in a constant cycle of inflation. Otherwise, price probably will fall abit as the economy becomes more productive while the total number of cash/M0 stays the same (assume velocity does not change). Even during the gold standard time, the total amount of available gold increases overtime.

In some countries (e.g. HK,SG), their system is an extension of the US (and EUR/JPY) system and so when they run a surplus, it means US/EuroZone/Japan is running a deficit.

Normally, government (or US government) surplus gets recycled into private sector so that the surplus gets back into the private sector. The catch here is whether the recycling is productive. If the surplus is recycled into a government owned Soverign Wealth Fund Inc which invest wisely, then it is good. If it is then used to give civil servant unwarranted payrises

or favour buying, then the result will be the same as deficit spending.

But running a deficit at 11% of the GDP with a 4% nominal growth is a totally different cattle of fish.. The point is that creating too much money in the private sector with no corresponding increase in productive capacities will lead to disaster and those with index linked pension or close to the 'source' will be smiling initially at everybody else expenses.

If the economy grows, then more WEALTH can be monetised. If the growing economy is just money movements...as in GDP, then the economy might grow in formula terms, but not at all in wealth terms.

There is no need for government to overspend its income...which is what a deficit is. you dont need a deficit for money supply to grow.

Indeed, if all things were fixed in reality...then your "money" would simply buy more as the wealth grew....indeed, this is where all the supposed extra leasure time was going to come from...a more efficient woroker would produce more in a given time...could take time off.

Instead, with deficit spending and banking leaching, that extra time is taken and spent not with the man who produces it, but by those that would steal it off him.

Edited by Bloo Loo

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Thanks to Bellwether on the news blog - thought this deserved wider debate, linked to another piece on Modern Monetary Theory, the main points being that for countries that issue their own currency,

- Default cannot happen (except a pseudo default via hyperinflation)

- Deficits are not an issue, in fact they are essential

- Budget surpluses are a problem as they starve the private sector of funds

- Government spending is funded neither through taxes nor bond issuance

Seems to go against most accepted wisdom on here, what do people think?

Pragmatic Capitalist

Theory OK, but the volume of debt has to be controlled. Otherwise any amount must good which it clearly is not. Inflation is the only result eventually...

If we had an annual budget deficit of £30bn and a national debt of £200bn, then it would be clearly managable. At £155bn annual deficit and a national debt of £1 trillion it clearly is not!

Edited by plummet expert

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http://blogs.ft.com/gavyndavies/2010/12/22/the-most-important-graph-of-the-year/

Next, observe the link between the private sector financial balance and the government balance. They are almost mirror images of one another. In fact, by definition, they are exact mirror images, except for the behaviour of the foreign sector balance. This relationship is therefore almost a tautology, but it still reminds us that one of these balances in effect “causes” the other.

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  • 312 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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