Can we have a civil, thoughtful discussion on this?

Margaret Thatcher is 100% biased.

 

The market theory of wages says that wages are determined by the supply/ demand for wages. However, I think this is overly simplistic in a global market if we're looking how wages are paid in the context that you've laid out. Why don't people in Bangladesh make more? What is the constraint? Even if labor were to run short there, would it be possible to raise wages there to $15 an hour?

I think the answer is obvious and it has little to do with just the supply/ demand for wages. Some of it comes from the kinds of things made in Bangladesh; garments, knitwear, agricultural products, frozen food (fish and seafood), jute and jute goods, leather, compared to, let's say, South Korea; semiconductors, wireless telecommunications equipment, motor vehicles, computers, steel, ships, petrochemicals.

Think of the price difference between the kinds of goods made in Bangladesh vs South Korea. Think of the efficiency in terms of the value of the goods created. How much time, effort, and cost does it take to create components for iPhones made in S. Korea vs an equal quantity of agricultural goods made in Bangladesh? S. Korea get's more money from its exports for less time and effort spent by the people that make iPhones because there was an investment in education, technology, and an environment, both physical, political sociological that has mad it possible for the people of S. Korea to do more with less.

Bangladesh is constrained by issues of culture, environment, politics and education relative to other nations and as a result, it's people are also limited.

Having said that, when trying to determine the "value" of wages, it is possible to have any one of several forces "retard" wages either up or down.

China, for instance, could be accused of keeping the salaries of its citizens artificially low, where salaries in Saudi Arabia might be artificially high based on manipulation of political, social, environmental, cultural and geographical factors.

Saying that wages are paid relative to the value of the work provided is extremely overly simplistic.

We have dollars because the government spends them. Again, you aren't factoring thin things like changes in productivity per person and increases in population.

Promises are repaid every day. The Treasury repaid $94 trillion dollars in promises last year because it was able to sell $95 trillion dollars more. Point being that no person had their money taken from them to repay those promises. You don't understand the system of money that's in place and what constrains it.

Again, at the Federal level, there is no use of "other peoples money" as I've already pointed out. The government creates money, period. It does not need to borrow it in order to have it, the Gv taxes for an entirely different reason. However, it's not surprising that most people think as you do, given historical precedent.

All of those wants and desires are relative to the money in the economy to consume them. Today there are 100 million more people than there were about 30 years go. The economy grew with the population, but if you were to increase the population by 100 million in one day, there would be a drastic shortage of money, or if you increased the money supply by 18 trillion in a sing day (from around $2 trillion) there would be a drastic shortage of productivity to purchase with it.

The point is is that money in the economy is relative to the goods that can be purchased with it modified by the distribution of it (money). The wealthy control a lot of the money, but also, there are 10's of trillions of dollars held by people and nations outside the US. Think about how that affects our economy. If we didn't create the dollars to make up for the trillions held by other nations we'd run out of dollars. That or prices and wages would have to adjust dramatically, which in turn would make the nation much, much less stable.

 

I want to challenge this idea of rights. There are people, like Ndividual who don't recognize rights as you've defined them.

Why should anyone value rights as the UN has defined them?

It's not that I think you're wrong, I just think then when pressing the idea of rights with someone like Ndividual, you need to describe why rights matter, not who endorses them.

I think that groups, like the UN pledge to respect rights because the people that make up the UN realize the very practical outcomes of agreeing to value each other's rights and the sacrifices that mist be made by some so that those who start from a disadvantaged position have the opportunity to achieve greater levels of success. Ultimately, groups that agree that some people should be encouraged to contribute (groups that punish those that try to free-ride) to help out others are stronger than those groups who believe in strict individualism.

In other words, rights are a choice that people should choose based on positive outcomes. Rights don't come from the UN, nature or god. We grant them to each other because we realize that it's in our own self-interest to do so, not individually, but as a group amongst other groups who compete with each other.

 

Thanks for this.

And the UN was the machinery set up by a chastened global community at the end of WW2 - and the dawn of the nuclear age - in recognition and expression of this self-interest

The remaining task (apart from the formal abolition of war) is the management of economic competition between nations, by some sort of global oversight mechanism (eg a reformed IMF as suggested by Keynes), so we don't have entreched poverty in some nations, and accusations of 'foul-play' among others, eg, Trump's questionable accusations against China.

 

While it may appear overly simplistic, the reality is that the value of wages when agreed upon by both employer/employee achieve a more realistic equilibrium which results in realistic market competition, and minimal inflation.

Actually, we have dollars because the government creates them and mandates their acceptance as payment of all debt public and private.

A business employs 200 persons to produce 1000 widgets each week. The business purchases machinery which can produce 20 widgets in the same amount of time as a human employee produces one, and lays off 180 persons, allowing them to decrease the price of their widgets attracting more consumption of their now 2000 widget production each week. The productivity increase occurs as a result of machinery, NOT human labour, and the human labour now being performed is less as the machinery is now doing the work. The 180 people laid off must find other work, and increasing population may make that more difficult.

Repaid? or replaced?
Why was it necessary to create TIPS?
Constrained? In a way beneficial to the general public?

While the money was created by the government, what the public acquires as a result of their activities becomes their property. The money initially produced by government becomes other peoples money as it becomes introduced into the economy along with the consequences it produces, inflation/devaluation of the existing currency. Government, regardless of the reasons when it spends tax revenue is spending what was the property of people who paid taxes.

A bubble none the less, and inflation which does not apply equally to the people and government is a very significant, if not the primary component in growing the wealth disparity and poverty level.

 

You can dismiss my comments if you wish, but economics is simply more complicated than you give credit.

Well, now your splitting hairs so allow me to split hair in return. The government could create all the money it wants but until it spends those dollars into the private sector, there is nothing to mandate acceptance of. There are no dollars. So when I say spend that presumes creation.

Also, the government doesn't mandate acceptance of dollars. You can run a business and only take payment only in bitcoins (if state law allows, however, there is nothing that prohibits this at the federal level). By taking bitcoins you'd severely limit the people willing/ able to purchase your goods as few people deal in bitcoins.

What the government does, is to require payment of taxes in the dollars it creates. It also enforces legal disputes be paid only in dollars. If you owe or are owed compensation unless there is a legally binding contract between the payer and payee agreeing to settle a debt or make payment in something other than dollars of a specific amount, the government will require the debt be settled in dollars.

Apologies, I lost the flow of the conversation in your response. What is it you're trying to lend evidence to with this example?

Treasuries (TSY's) are liabilities of the US government. When you redeem them all the government owes you are dollars (also a liability of the US government) equal to the value of the TSY a person cashes in. So I'm not sure the distinction you are trying to make with the question.

I won't claim deep knowledge in this area, so my answer is just speculation, but if I wanted to hazard a guess I'd say that the Treasury felt it was in its best interest to create an inflation protected asset probably for people who rely on fixed incomes.

Fact: The US government can create all the money it wants, what constrains the government? Most people believe that tax receipts or the sale of TSY's are the constraint but that constraint ended in 1934 when the dollar was no longer redeemable for gold. Today few people understand the true constraint on the amount of money the government can create.

All I will say is that; the government does not need to tax in order to spend money, but it can not continue, endlessly, unless it taxes.

I know how confusing that must sound, but it is the truth.

Think of a bathtub. If it was full and you wanted to put more water in without causing it to overflow, you'd open the drain and let some water out. Now the drain isn't connected to the faucet so the water that comes out of the faucet didn't come from the tub, but you had to flush water down the drain in order to open the faucet. It's easy to imagine someone who didn't understand modern plumbing might think the water that went down the drain made it possible for water to come out the faucet. In economic terms, this is what we believe today and, just as it's silly to believe this about how a tub works, it's equally silly to believe this is how our economy works.

In other words. Government spending is like the faucet and taxes are the drain. The two systems aren't connected (the drain to the faucet), but when the economy (the tub and the water in it) is working at high levels of capacity (the water level - the debt) in order to put more water in (government spending) without causing an overflow (inflation) the government has to remove some water (taxes). The water that goes down the drain (taxes) doesn't come out the faucet (spending), but without opening the drain (taxes) the tub would overflow (inflation).

Today the water level is low (productive capacity is at 75%), we could add more water (spending) without opening the drain to compensate which would result in filling the tub (increasing the debt).

Not sure what you mean when you say "bubble", but I'll agree with most of that as I understand it, however, I don't believe that there aren't economic realities that could change the government's role and result in better outcomes.

Ultimately I blame the people. They vote for people who believe as they do and as a result, we've been applying a self-defeating economic policy for 45 years (or more).

 

One thing that President Trump deserves credit for is courage.......
he is willing to bring up topics and options that others won't even touch......

http://www.infowars.com/trump-calls-for-auditing-the-fed/

Trump Calls For Auditing the Fed

 

Trump has no courage. He is a disgrace as a human being and to hear you praise him is extremely disappointing. There is no moral high ground for a man who lies to deceive, who brags about sexual assault, who thinks it's ok to walk in on naked underage girls, who make's fun of the handicapped, who can't control himself and his Twitter fetish, and who lashes out like a scolded child when people question or criticise him and I suspect will be implicated in some sort of dealings with Russia.

Frankly, I don't care what he get's right if we as a nation have to pay for his success in abject moral failure.

 

I agree, economics is complicated, which is why I was focusing simply on wages.

Banks are the dominant force by which dollars are created. The actual dollars we can hold in our hands are created by the Treasury and become available for circulation in the economy through the sale of Treasury bills, bonds, notes, TIPS, and savings bonds. There most definitely ARE dollars, but what do they actually represent? Can a realistic value in dollars for an hour of time be applied to each and every form of labour, which is the real driving force behind any economy? With or without a government spending, an economy would exist. People trading with one another is all that is necessary. Money make trade much easier as the chicken farmer would find it difficult to find a car dealership willing to accept payment in chickens. Fiat money, unlike gold and silver can grow without limits. In the past, new money came into existence as a result of human labour, mining gold and silver, and new discoveries resulted in temporary periods of inflation followed by deflation as the new money became more or less distributed among the population. As a result the dollar remained quite constant in value until the creation of the Federal Reserve Act, which after elimination of the conversion of paper money back to gold allowed government to control the economy through interest rates and inflation.

That may be true for the sales side of business, but I don't believe you can legally force someone to accept bitcoins instead of dollars as payment for a debt, and if they only accept bitcoins in payment for their product they would have to buy dollars to pay their taxes. Government could also then set a value of bitcoins in dollars which might make their taxes higher, and much more complicated to figure, than if they used dollars only.

Yes, we agree on that.

You said: "Again, you aren't factoring thin things like changes in productivity per person and increases in population."
I wrote: "A business employs 200 persons to produce 1000 widgets each week. The business purchases machinery which can produce 20 widgets in the same amount of time as a human employee produces one, and lays off 180 persons, allowing them to decrease the price of their widgets attracting more consumption of their now 2000 widget production each week. The productivity increase occurs as a result of machinery, NOT human labour, and the human labour now being performed is less as the machinery is now doing the work. The 180 people laid off must find other work, and increasing population may make that more difficult.

This question?
"Repaid? or replaced?
Why was it necessary to create TIPS?
Constrained? In a way beneficial to the general public?"

If you owe person A $X and borrow $X from person B, while you may claim you have repaid your debt, in reality you have retained the debt but only changed who it is owed to.

Are fixed income earners the ones buying them? The problem with purchasing government debt is answered by who is paying the interest earned on that debt.

Banks are creating most of the money, and government only creates new money to allow banks to make loans and pay interest while maintaining their fractional reserve.

I fail to see any rational similarity to our debt, government spending, and the economy in the above.

The bubble I refer to is inflation, which does not apply equally across the board to all products, services, and labour.

I would say it goes back to the early 20th century, 1913 to be exact. And people have been voting for politicians who will give them more of something for nothing or for less which has resulted in rapid growth of debt and inflation to make it appear sustainable.

 

Where are we and how did we get here?

My opinion is we are witnessing a public uprising in criticism of regulatory authoritarianism associated with classical and Keynesian economic theory models. This is because these models are overly dependent upon calculus and pure mathematics, at the expense of logical human action and interaction. I think we got here because Austrian economists’ insights were literally sidelined by the rise of Nazism and the subsequent dispersal of Austrian economic adherents, who vehemently opposed totalitarianism, authoritarianism, socialism, and militarism.

 

Ok.

I want to make an important distinction. While I agree that banks make most of the currency we use, banks actually make credit, the government makes money. I'll touch on this a little more in a sec.

They are a unit of account used to quantify how much we are paid, which we usually gauge against the prices of goods and services we need/ want relative to the skills/ risks modified by the supply demand for work. There is more that goes into it, but that's a simple sample.

Doesn't the market determine that number?

Agreed.

And I would reply that in times of national crisis when you need the money system to work the most, commodity money cannot expand fast enough. This is why gold standards are abandoned during wartime.

Seems to lend evidence to the fact that gold standards cannot meet the needs of a functional economy.

You appear to value stability of the money system of the results it's capable of producing.

If you were to duplicate the US and run one using commodity money and another under fiat and the two nations were to compete economically and military, I assert that fiat would out-compete any sort of commodity standard. Like most Austrians I talk to, you appear to value the idea of systems and process over actual outcomes.

Yes, I totally agree, which also kept salaries about the same and limited overall growth. Today, it's exactly the opposite. We can look out into our economy and decide how much to spend based on available real resources and labor. A much more practical system. Though, most people are still applying gold standard era thinking to our fiat economy which is why it's not working as well as it could.

Plus, there is nothing that prevents anyone from taking their pay in dollars the moment they obtain it and purchasing commodities if that is how they wish to store their wealth.

I agree, however, if two (or more) parties contractually mutually agreed to deal in bitcoins then they can enforce the contract.

As far as taxes, yes, they would have to sell bitcoins for dollars.

Come on, you seem like an intelligent person. You are smarter than that (I'm not being patronizing). The government doesn't set exchange rates from dollars to bitcoins, the market does, and I find it hard to believe you don't know that.

Ok, sure, I see.

I will agree that productivity increases are largely the result of machine labor. Exactly how much we can debate, but here's the thing. So what? You are talking like a typical Austrian who things that productivity is pushed by increases in technology rather than pulled by the desires of people who demand and consume that productivity pulling it along.

It is the fact that there are people who desire and capable of consuming that productivity that make the circle complete....The system will naturally favor producers and they will, if not restrained, shift money into the hands of few people and consumption will slow. That's where we are today. The plutocrats are their own worst enemy. There isn't any need for productivity if people don't have the means to consume it. This underlies the weakness of a purely capitalistic system. What's good for the individual isn't good for the group. The group has to see the big picture and understand that our fortunes are linked.

That's just it, the government doesn't "borrow" from anyone. It creates money ex-nihilo. In the case of Treasuries, you are correct, but the system is an anachronism. It's antiquated and unnecessary under a fiat standard. It's a relic of the gold backed system and the reason the entire thing appears so perverted. The problem is that people can't see that fact.

The government does.

I agree, but the Fractional reserve is a system only for controlling interest rates. Today, banks aren't EVER prevented from creating money because they can always acquire the reserves they need. Even if it means acquiring those reserves from the Fed because other banks can't or won't lend (basically it's an overdraft account at the Fed). When a bank borrows from the Fed it simply factors that in when determining the cost of the loan. That means the price charged to the borrower is the constraint on money creation, not the quantity of money. It also means that borrowers determine the amount of money borrowed, not the Fed.

The value of money is determined in some sense by what can be bought with it. If there is very little money in circulation and lots of goods and services, then the value of money is high. In my tub analogy, the size of the tub is analogous to productive output. The water level is analogous to the money people have to purchase that output.

Conversely, if there is lots of money relative to what can be bought the value of each dollar declines. In the analogy that would be the tub overflowing.

Now you add banking which makes the analogy a bit more complicated. So the faucet, government spending, adds water to the tub, say about 1/10 of the way full (base money). Then you add some bubble bath and stir the whole thing up. The tiny bubbles are analogous to the loans made and the endogenous money in the economy. If the government turns on the faucet and adds just a little more water, that amplifies consumption (as people earn government spending as income) and people's ability to borrow increases (modified by their desire at the prevailing rate).

I leave banking out only because it makes the analogy more complicated. The point is the government does not fund spending through taxes or bond sales because it can create all the dollars it wants. The government's constraint on dollar creation is inflation. That is the nation's productive capacity.

Now this will naturally lead to a conversation about the causes of inflation and it's effect. I'd argue that government spending results in demand-pull inflation (dollars exceed supply). Markets react by trying to fill that demand. The best modern example is gas/ oil prices over the last 10 years. Energy output in oil and gas skyrocketed because the price of oil inflated to extremely high levels from 2006-2013. We all paid a price for it, but today, when accounting for inflation, I'd imagine gas prices are about the same as they were in 2006, except today we have increased the number of people working in gas and oil and even solar (sorry coal). Even with the losses in coal, we still have more net productivity in energy than we did 10 years ago.

No, but that fact is driven by improved manufacturing techniques, decreases in telecommunication and shipping and fluctuations in the supply/ demand and even the availability of money to borrow to make purchases and lots more.

Now having said that, lots of things have decreased in cost when factoring for inflation and those things that have risen give opportunities to innovate. Though Healthcare and Education are completely screwed /sigh.

Who cares about debt? So what? The debt exists outside the private sector. The government's debt, the government liability IS the money we use in the economy. The "National Debt Clock" measures government debt, but it also measures private sector savings. They are EXACTLY the same thing. This is something that Austrians are totally blind to because of their fetish for commodity based standards. There is a reason the ENTIRE world stopped using gold as a standard to back their currency. because it doesn't work in a highly competitive global economy.

As far as the Fed. Times were a lot worse than people realize before the Fed. A fact that's largely forgotten. You know what they say. If you forget history you are doomed to repeat it. Forgetting how expensive it was to conduct transactions across long distances before the Fed. When banks nickled and dimed everyone to death. When exchanging from one currency to another added to the costs of doing business.

No thanks.

 

While I'm not strictly Keynesian, I don't need "pure math" to defend my post-Keynesian ideas.

 

I would instead say that banks are a source from which credit can be obtained based on ones abilities to repay, or provide adequate collateral to cover the remaining debt owed if unpaid. The money we can actually hold in our hand is created by the government.

It would, could, should.

How did the gold standard enter into this? I thought we were talking about wages being paid relative to the value of the work being performed.

And if you look, you will see that bitcoin value is quite volatile compared to the dollar, varying about $300 during the previous day. Do you fail to see any complexity resulting from exchanging to/from bitcoins and dollars at various dates and times in determining the actual dollar value of profit and/or losses to be applied to ones taxes?

"Who cares about debt? So what?" How utterly unreasonable and irrational.
Debt exists when value is transferred from one entity to another deferring payment.
The entity can be an individual, group of individuals, a small business, a large corporation, a bank, a local, State or Federal government, a foreign nation, etc.
Governments debt is the publics liability. While government can print money, it cannot pay its' bills simply by printing money. Germany post WW I, Hungary post WW II, and Zimbabwe most recently come to mind.
Per the St Louis Fed, private sector savings Q3 2016 equaled $3,824.6 billion.
Also from the St Louis Fed, the total Federal(aka total Public) debt Q3 2016 equaled $19,573 billion. ........EXACTLY THE SAME?
Did you mean to compare the monetary base with private savings?
Per the St Louis Fed once again, the monetary base on June 22nd was about $3,874 billion. You can't save something that doesn't exist.

Wages? 1 hours labour value?

 

Ok, ok, that was a bit tongue and cheek, but the truth is the absolute value of the debt is meaningless.

The Debt is a measure of private sector savings, where private sector saving as “net accumulation of financial assets”.

Bonds and dollars are assets to the private sector and liabilities to the government. Debt is held outside the private sector. You can dismiss the assertion and I'd be happy to justify my explanation in the context of why you think it matters that the government has a debt.

Not necessarily. Can a king impose a debt (tax) upon his subjects without transferring anything of value? In fact, it is the transfer of value, in this case, that extinguishes the debt, does it not? No deferred payment.

Now we don't live in a medieval monarchy, but we're a lot closer to that system then you might believe.

The US government imposes taxes upon everyone, just like the king, except there are a few interesting distinctions between the king and the US government.

A king usually demanded payment in real resources, whereas the Federal government demands payment in dollars.

The king has nothing to do with the creation of the resources he expects his subjects to make payment in, whereas the US government not only creates the dollars it accepts as payment but the only way anyone can make payment in the government's dollars is for the government to spend them. If there is unemployment, it is because the government isn't spending enough dollars into the economy or money is not circulating between consumers and producers in a way that makes reacquisition of dollars possible. Examples are when consumers spend and producers save (savings removes dollars from the economy) or the wealthiest in society have so much money they no longer use their money to demand goods and services.

With all due respect, you really need to understand history in the context of economics.

Let me see if I can explain.

I think most people would agree that inflation results when; there are too many dollars chasing too few goods.....Agreed? I mean certainly, that's the situation in the examples you gave. And it's true that things ended up that way, but money creation was not the CAUSE of hyperinflation, it was the result.

Assuming you know what happened in Zim and Weimar (loss of farming output and war respectively) then you know that there was a massive loss in productivity that preceded the increase in money creation. Thus it was the level of productivity that dropped resulting in too many dollars chasing too few goods, not because the government began recklessly creating new money, but factors external to dollar creation CAUSED inflation as the amount of money stayed the same, but the goods and services that could be purchased with them declined. Now, it's true that the governments of both nations used the only policy tool available to them, and they created more money, which, in some cases might work, except in both Zim and Weimar both nations carried a large burden of debt denominated in foreign money. So the creation of money didn't create enough productivity within the nation because so much of it was created and sent outside the two countries.

Per the St Louis Fed, private sector savings Q3 2016 equaled $3,824.6 billion.

No dude, LOL, you can't look one-quarter and compare it to the debt. You have to look at total money added to the private sector via spending and graph it over total public savings. Now there are obviously some variables (like the fact that we are a net importer which means there is a few of net assets out of the country) which change the numbers slightly over time, especially in the run up to the GFC. This, obviously is not limited to base money, but includes broad money as well, as the amount of broad money is related to Government spending as government spending increases the level of reserves and depending on the policies of the Fed can lead to increased (or decreased) borrowing. But I fear I'm over complicating the question you asked.



The rest of the questions you ask are explained by the graph above.

 

Your original post stated "The government's debt, the government liability IS the money we use in the economy. The "National Debt Clock" measures government debt, but it also measures private sector savings. They are EXACTLY the same thing."
Your graph does not show the governments debt but instead shows the budget outlays which exceed the total gross private savings.

So what you really were saying is that governments spending is approximately the same as the amount of money in circulation? I think it should be quite obvious that no matter how you spin it, government could not pay off its' debt by confiscating all the private savings, in fact all the private savings could not be withdrawn at one time without massive printing of new money which would result in massive and rapid devaluation and hyper-inflation.

 

First, I'm not trying to spin anything. I'm telling you that the government creates the condition of unemployment by requiring the people to pay taxes. Period. Let's imagine today is the very first day of the US government. It creates a currency called the Washington. It requires you pay taxes in the Washington. If you own property or a business, the government requires you pay a certain percentage of your work or value in your property as a tax. As of today, there are no Washingtons in circulation. How would the government acquire Washingtons to pay the tax? Could the government borrow them? Could it tax them from the citizens? Could it sell Bonds to acquire them? No, because no one has any Washingtons to tax yet. As a point of order, the government MUST create and spend Washingtons into the economy so people can have them in order to pay taxes. When it creates 1 Washington and spend it into the private sector, the government is now -1 Washington and the private sector now has 1 (or it is +1).

Can you see the order of operations? The government doesn't "borrow" anything. It creates the currency. Period, full stop. Everything we see today in taxes and bond sales are not done so the government can acquire the currency. These operations take place to control inflation, but that is another story entirely.

Here is what it looks like visually.



So for example:



The government has no need or desire to repay its debt because, as you point out, this would remove dollars from circulation** and people would be unable to repay their taxes. The government's deficit is the private sector's surplus. Each dollar the government creates is the government's liability. Each dollar earned or acquired in the private sector is someone's asset.

Now, ironically, there have been people throughout US history that have believed that repayment of debt was a good idea. In order to pay down debt, the government must first go into surplus. This is where the government takes more money from the private sector than it spends into it. This has happened 7 times, here is the result;

1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.

The last time was 1998-2001. Federal debt was reduced just 6% and the result was two recessions withing 8 years, one being the largest recession ever.

Why do you believe the government's debt must be repaid?

**Coming back to the removal of dollars.

If the government were to stop creating new dollars and wanted to repay all the dollars it borrowed, and it wanted to do it without creating new dollars it could begin to tax away people's money. This would result in financial calamity, but let's say it's possible and follow it through to its logical conclusion.

First, about 1/3 of the debt is held by the government. Which is hilariously bizarre when you stop and think about it. It's the functional equivalent of you writing yourself an IOU and slipping that IOU into your right pocket and convincing yourself that now that you have the IOU, an asset, you can create a dollar, so you create a dollar and slip it into your other pocket, promising to repay your debt at some point in the future. A week later you take the dollar out of your pocket, you tear it up (at's repayment) and then you tear up the bond you slid in your pocket.

Think about it, the government creates dollars, when it borrows it's own dollars via bond sales what happens when it repays? Can the government really have dollars? No, it can ONLY have less debt. Anything else is just political semantics. In the real world, it would be like you taking a $10k loan and depositing in your bank. You have $10k and you owe $10k and when you repay it you will be back to zero. The government has "borrowed" it's own IOU's and now "owes" itself $6.5 trillion. When it repays it, will there be $6.5 trillion somewhere in the economy? No, that money will vanish because the government created a debt to create that money. So for every $1 in debt, there is -$1 liability. When the government taxes that money from you or I and it acquires $1, we can say the government is +$1, but it also owes that dollar to itself so:

+$1-(-$-1)= Zero

So when government repays its own debt, the money literally vanishes.

Now, the reason this gets confusing is that 2/3rds of the "debt" are held outside the government.

Another approx 1/3 is held by people (approx $7 trillion), companies, the states and various other entities inside the US. When the government taxes it takes money away from everyone and repays it to the people that own US Treasuries (TSY's) People like me that hold TSY's as a small part of my 401k, but most of them are held by people and companies with huge sums of money looking to protect their dollars from inflation. So there would be a transfer between those that hold dollars to those that hold bonds.

Now all of this could be done electronically so that the money never leaves the banks. All that will have happened is that those with enough wealth to save in TSY's will now have dollars. The banks hold the dollars as reserves and make loans to everyone with them, except, when the government taxed away everyone's money to repay the debt, the only people that would still have money are the bond holders. Lower income people would still have NOTHING. However, all of the dollars left in the economy will have been created from bank loans. Things like mortgages, car loans, and credit card debt. The amount of remaining personal debt would be about equal to the amount cash held by those that held bonds. Let's just say for the sake of argument that everyone that owes money could acquire it from those that have money. let's say they do work and earn it. Every payment on the remaining debt would destroy dollars. Because banks hold negative liabilities.

You may already know that banks don't lend cash the receive in deposits, they create the money they lend out of thin air. So when it is repaid, it literally destroys the money created. Just like when the government obtains a dollar when a bank gets a dollar from repayment of a loan, it applies that dollar to the debt it owes to itself....+$1-(-$-1)= Zero

Now, making this even more confusing is the fact that the bank would extinguish the principle, but earn money in interest. That interest is used by the bank to pay salaries and operating expenses. All expenses of the bank are earned by someone else as an income which would eventually be destroyed in payment somewhere else.

Now, of course, this all assumes that borrowers can earn money from those that have dollars. The reality is that most people would declare bankruptcy as those in debt would be unable to find work as the money supply shrank. Many of the people that would hold money would be investors in banks and they would lose their capital investment when people began to default AND of course, long before all money was repaid the economy would have crashed.

The last 1/3 of the nation's debt is held by foreign investors. Repaying them simply swaps bonds (the government's liability) for dollars (also the government's liability) and nothing really changes except we don't pay interest on those liabilities anymore.

This is probaly already too confusing...So I'll stop here. You will undoubtedly wish to challenge my assertions. I look forward to questions you might have.

-Cheers

 

Are you arguing that paying back the debt causes recessions and depressions? Paying the debt down caused the 2000 recession and then...impacted the recession beginning in December 2007?

 

Of course. Paying back the debt means removing money from the private sector.

Let's just look at the year 2000....Here is a slide I made to illustrate.



The faucets represent money added to the economy (the pool).

The drains represent money removed from the economy.

Federal spending adds money to the private economy as the government's spending is earned by someone in the private sector as income.

Exports are goods and services sold by the US private sector to the rest of the world. This adds money to the Us private sector.

Taxes are money removed from the economy. This results in money being taken from the US private sector.

Imports. When we import goods and services we export our dollars, this results in fewer dollars in the US economy.

Now just do the math....

All in trillions

(Spending $1.79 + Exports $0.781) - (Taxes $2.03 + Imports $1.22) = -$0.707. That's $707 billion dolalrs removed from the US private sector.

That means the US economy was reduced by $707 billion dollars.

The result was a spike in private sector borrowing and a reduction in savings (I'm calculating for just the year 2000 as an example, but actually it was 1998-2001)

The chart below shows household borrowing before and after the 1998-2001 surplus period. Look how borrowing spikes and then goes negative. It was the initial borrowing that delayed the worst and one reason the recession took 6 years to fully materialize.



Here we see the decline in spending and how people, as a result, depleted savings.




So yes, running a surplus causes recessions or worse.

 

In a global economy, regardless of the many opposing economic models, simple justice requires universal above poverty-level participation in the economy
(aka the social contract)

No welfare required. No military industrial complex required. A public sector that can complement insufficient private sector activity, in order to maximise sustainable use of available resources including labour.
(Non inflationary public sector money printing, not beholden to the private sector, will be required. Note: there is limitless, non resource using, socially useful activity that can employ labour not required by the private sector).

A system representing a type of combination of the best aspects of both Capitalism and Communism (neither of which functions satisfactorily by themselves, as we have learnt from experience).

I don't agree with the Austrian school's dictum that money must be backed by gold. Resources, technology and labour are the real wealth, and these exist in sufficient quantity to eliminate global poverty now.

The gold standard is merely a device to avoid international political, economic and trade co-operation, of the type envisioned by Keynes at the 1944 Bretton Woods conference ( and rejected by the Americans out of self-interest, in true capitalist style).

Back to the drawing board, for an economic model?

 

So the dot com bust was caused by paying off the debt huh? OK...

 

This thread has gone off in so many tangents I've forgotten what was originally being discussed.
I think I was trying to reach some agreement on equality of opportunity, which does not exist in nature or human societies. It usually boils down to simply being first come first served, or best qualified gets the job.
Government, produces what we seem to accept and call our money supply, and it would seem many believe that creating more money is what drives our economy.
From 1913 until my birth the cumulative rate of inflation was 38.4%, over the next 22 years it was 105.1%, the next 22 years 158.4%, and the following 22 years 143.8%, and the last 16 years 37.2%, which leaves me feeling some massive inflation may be just around the corner.
The total cumulative inflation over my life to date has been 1672.5%.
Living abroad where I lived 50 years ago while in the military, cumulative inflation seems to be about 250%, while in the U.S. over the same period of time it was 627.1%, and unemployment is well under 1%. The vast majority of the population live within their means, and I know very few who have loans to repay, yet own their homes and all other possessions. The only taxes most people pay is on their bank interest earned which is a fixed percent and handled by the bank when interest is applied to the account. Sales taxes are collected only by large stores, and people are pretty much on their own as to providing for their and their families needs, yet there are not people dead along the roads or elsewhere. The current minimum wage is about $8.60 per day or $1.07 per hour, and there is talk of raising it to $8.86 or to about $1.11 per hour. The government debt per citizen is about 90% of a years income relative to the lowest income earners. The company I worked for in the U.S. had operations here and about 25-30 years ago was paying over $3 an hour to their employees, with additional benefits as well, while I was earning nearly $30 an hour in the U.S. or about 10 times as much and with much greater and costlier benefits while working and after retirement. Luckily, my job was not one easily exported, but had it been I would have happily moved with it along with the pay cut. Maybe the solution would be for the U.S. to only import poor quality products in order to grow the number of service related jobs as it is continuously growing more difficult to compete with the production capacity of emerging nations at an affordable price.

 

Of course human society, unlike other species, can choose between life-promoting policies, or nature's ordained survival of the fittest and luck of the draw policies) . I have not seen any "agreement on equality of opportunity" in your contributions, which are designed to promote individual rights above collective security.

The current reality:

According to UNICEF, 22,000 children die each day due to poverty. ... In 2011, 165 million children under the age 5 were stunted (reduced rate of growth and development) due to chronic malnutrition.

This in a world which pays farmers not to produce food, as well as promoting profit-driven manufacture and consumption of unhealthy food.

Economics: the dismal science.

BTW, the US is c.5% of global population. You can choose an ever-expanding military industrial complex, confirming Eisenhower's graphic image of humanity hanging on a cross of iron, or you can choose reform of the UNSC, to enable a life-promoting balance between individual freedom and collective security

 

Human societies, just like all other social species make life promoting choices. Unlike other species, we humans sometimes allow emotions to prevail over reason.

I very much do promote individual rights, and also collective security, but when you use the term "equality of opportunity" it would appear that it is "outcome" and NOT "opportunity" that you are really talking about.

Let's try to stick to "equality of opportunity" before going off on tangents.

 

Where did I say that?

No, the borrowing that took place delayed the recession larger recession along with the GFC.

I suspect that these bubbles were made worse because of the underlying financial instability caused by the surplus.

There are a few ways to increase the amount of lending a bank does. Lower interest rates or lower lending standards (increase risk). As a nation we increased risk and we all know how that worked out.

 

So there isn't really any connection between the dot com bust and the subsequent recession? This is all new to me. So when Democrats take credit for a balanced budget under Clinton, they are really saying that Clinton was to blame for the recession. Hmm good to know.