Macro economics.

Discussion in 'Economics & Trade' started by Brett Nortje, Jan 2, 2017.

  1. Brett Nortje

    Brett Nortje Well-Known Member

    Joined:
    Nov 15, 2014
    Messages:
    1,494
    Likes Received:
    60
    Trophy Points:
    48
    It was my third foray into debating, economics. this was my third way of expressing myself, and, i found it was very satisfying, and that is why i do a little bit of this every now and then. long have i made solution after solution for state based economics, where they have been blocked by people that thought it was too much for a citizen to have such a say in the workings of the state, or, now that i am on this international forum, maybe i will have more luck?

    Anyways, people want economic solutions for the country, yes? this is because the state will be helped by gleaning a large glut of money from simple yet elusive strategies, and, benefit the country this way.

    If the state was to offer developments in areas around the city outskirts, they could develop these areas, and, gain plot revenues and development costs taxation from the development, gain asset based additions to their g.d.p. or gross domestic product, and, when the business is trading, they will be able to tax the exploits of the business as they happen, yes?

    For this to work properly, they should prepare the land for the developments then promote them, en mass. this will bring a glut of money to the state for the land, for the building taxes, remembering the longer the building takes, the more taxes they collect, but, the less taxation they get from the business owners for their business operations.

    If the business owners are serious about getting paid quicker, they will offer some incentives to the business owners and building companies for the use of them. if the state wants to see buildings built quickly, with more jobs being on offer, and, more assets to base their currency worth against, and other things, they should offer incentives too, or, conversely, implement penalties for the slow building of these enterprises.
     
  2. Brett Nortje

    Brett Nortje Well-Known Member

    Joined:
    Nov 15, 2014
    Messages:
    1,494
    Likes Received:
    60
    Trophy Points:
    48
    Another thing about macro economics is that it is easier to make money with the law on your side, or, being able to change the law, yes? this is because the state can alter laws to any degree they want, as long as the people are not too hard done by, or, severely harmed either legally, physically or financially.

    So, what else can we do from a state side of things to help the economy? the economy, in theory, has human capital and resources, and, funding. balancing the resources to be accommodated by funding to be secured with human capital investments, which are plentiful in most countries, asides from canada, is quite easy in theory, but the whole process breaks down due to pessimism and lack of attention, as this is a dividend yielding process where there seems to be more importance placed on functions, in africa, where they honor themselves.

    ~ I must ask, is not providing a greater honor than remembering the things you have done? i wrote about this this morning, as, enjoying your own fruit can become a hindrance, as, it stops you from enjoying further progressive policy making, of course.

    So, there needs to be more resources and or funding to produce more used human capital. this means, if the state was to deposit money into the regular banks, maybe with a money market account, the banks could be more optimistic with their approach to the market, as people have placed money into the bank for this reason, and, are fully prepared to deal with the consequences if there is not that much progress with the bank's trading. on the other hand, the bank will need it's own separate account, as, i have pointed out previously, if the bank does not have it's own account, then there is 'financial annihilation.' this means, when people go into overdraft, they owe the bank money, yes? then, this deficit merely reduces, with the money from the clients becoming less of a deficit, while the money is not deposited into any other account, meaning that the money is annihilated, of course.

    So, if the state was to fund the banks, the banks could fund startups. this would see the bank having a larger amount of money they are willing to risk, as there is a eighty percent chance of startups succeeding in the first year for each startup that is started. this means, if the repayments are seven percent, they will make minus twenty percent on possible failures, and of that seven percent, for each business, will garner for them fifty six percent gains that year, yes? makes sense, but the funding is not there.

    Maybe if the state was to change the laws so that niches are filled, with regulation over ventures or startups that are listed as satisfying these sectors of the market may be overruled and put into place as they are needed? this will mean, more supply for their customers, and, a growth in that sector, leading to growth in other sectors. this follows from the more people you have working, the more goods you sell, and, therefore, the more people that can be employed. i love human capital.
     
  3. Brett Nortje

    Brett Nortje Well-Known Member

    Joined:
    Nov 15, 2014
    Messages:
    1,494
    Likes Received:
    60
    Trophy Points:
    48
    The way money works, the more it changes hands legally, via business deals, the more it gets taxed. often, people exchange money for the sake of their families, where they would exchange a few dollars for their own well being. this makes it's way back to the state through sales tax and so forth, where the person buying the goods, will pay tax, and the shop or other outlet will pay tax to get new goods in, and so forth. this means that a few dollars off even the smallest trade will make it's way back to the state, where it can be collected, but, let's look at this scenario for a moment - does it yield the highest dividends possible for the sake of the country, or is there another way?

    For a while now i have been advocating or trying to promote lower tax rates, as they will bring in more money in the end. if the tax rate was [1] thirty three percent, then it would yield thirty three percent four times or so before all the money is accumulated by the state. if the tax rate is [2] three percent, it changes hands ten times more before all the money is back with the state, yes? this means that;

    [1] if the state was to observe that one thousand dollars [1000] divided by thirty percent [33%] comes to [1000 / 33 = 33 dollars],
    [2] then the state could observe that one thousand dollars [1000] divided three percent [3%] would equal [333 dollars] taken in.

    This means that it is more advantageous for the citizens and the parliament to lower tax rates, as it brings in more money, yes? if you were to tax people thirty three percent, then it will get you so much money, and you better believe it. ask an economist if you do not believe me?

    This is true if there are annual amounts of tax points being maxed out, as the amount of tax points equals the amount of times it is taxed at such a low rate.
     
  4. Brett Nortje

    Brett Nortje Well-Known Member

    Joined:
    Nov 15, 2014
    Messages:
    1,494
    Likes Received:
    60
    Trophy Points:
    48
    Right, what i want to do this time is cut a huge chunk of capital for the leaders of various third world states, so they invest in capital infrastructure and development of social services, among other things. i am sure they will also get the latest weapons bought for their armies, but, they should remember, if they have these weapons, they may be seized by rebels and used against them. that said, if every african nation had less weapons, there would be less for the militants to use, and, if their neighbor also has less weapons, there will be a smaller chance of any weapons falling into enemy hands, of course. maybe this is something to discuss, i am not sure.

    So, to cut a huge chunk of capital out of the economic marketplace, they could sell roads to the private sector? this will mean that the private sector could buy roads and streets, at a per capita level, with roads inside the city center being the most expensive, and, they could advertise there, and, charge people 'to ride them.' this could be done by a camera, set up by themselves at very little costs, to take photos of number plates of cars riding past, maybe at three thousand cars a day, incurring an automatic dollar expense, shown by the bill boards to warm motorists that these roads are costly, to automatically bill them for each month.

    This will have a few effects, first, that they will be taxed for charging, that they will keep the roads in good condition and that motoring inside the city will become very expensive and therefore the motorists will probably prefer to car pool? this would see the business buying the road also being able to, as i mentioned, advertise for the road, and, during elections, charge for the use of their lights as 'election posters.'
     
  5. Iriemon

    Iriemon Well-Known Member Past Donor

    Joined:
    May 12, 2009
    Messages:
    82,348
    Likes Received:
    2,657
    Trophy Points:
    113
    Capital and resources won't do much if people don't have the means to purchase what is produced.

    - - - Updated - - -

    "Supply side" has been proven to not work and result in squandering the Clinton surplus and leaving our country trillions more in debt.
     
  6. Brett Nortje

    Brett Nortje Well-Known Member

    Joined:
    Nov 15, 2014
    Messages:
    1,494
    Likes Received:
    60
    Trophy Points:
    48
    If more is being produces, then there are more people to purchase what is produced, as there are more people producing. if it covers twenty percent of the country, then there will be more jobs, for that opening month, and, each of those will be buying each other's products.

    This hillary thing is where the money that is made is wasted, but it is still there, from my side.
     
  7. Brett Nortje

    Brett Nortje Well-Known Member

    Joined:
    Nov 15, 2014
    Messages:
    1,494
    Likes Received:
    60
    Trophy Points:
    48
    Maybe there is a way to agree each other has more money, while in fact they do not? i am familiar with the banking acceleration of funds, through various means, which means money is all in the mind, unless it is physical, of course.

    So, if nigeria was to lend kenya one billion dollars, and kenya was to loan nigeria one billion dollars, there would be two more billion dollars in circulation for africa. then, you cancel these debts, as there will be no debt for the state or the people if it is written off, yes?

    To elaborate on this further, the state has a set amount of money. if it cancels it's debt to the reserve, then there is no debt - how can the state owe money to itself? is it lent from the people - why not write it off and spend more on the people?

    If the state was to lend money, from itself, it owes nobody nothing. some people may refer this to rapid inflation, but that is only when the people have access to the money, which means, if people have the money, not as services, but rather deposited into their accounts, then there will be inflation, as the people have more to spend, and prices go up. if the money does not enter circulation, but rather stays in the public sector, of course there will be no inflation and the state may 'pay for things' to be done by themselves, yes?

    In the event they contract in a building company, the company gets paid for the services rendered, and, then they merely get paid. this is not overpaying them, this is typical work turnover that, get this, they get to tax them on too.
     
  8. Iriemon

    Iriemon Well-Known Member Past Donor

    Joined:
    May 12, 2009
    Messages:
    82,348
    Likes Received:
    2,657
    Trophy Points:
    113
    That depends on how much of what is produced is being distributed to the people who work. If the people who do the work get very little of the value they produce, they won't have the ability to purchase more goods, regardless of how much capital and resources you have.

    Your analysis missed the demand side of the equation, which is crucial to economic growth.

    And a main reason why US growth has gotten more sluggish in the last few decades as more and more of the value produced is distributed to the few to proportionally don't spend it back into the economy.

    If it is not creating demand for more production it is not doing anything for the economy.
     
  9. Brett Nortje

    Brett Nortje Well-Known Member

    Joined:
    Nov 15, 2014
    Messages:
    1,494
    Likes Received:
    60
    Trophy Points:
    48
    I think you will find a surplus like that will bring prices down, to such an extent that the people that make them will be able to take them at cost price and sell them, yes?
     
  10. Brett Nortje

    Brett Nortje Well-Known Member

    Joined:
    Nov 15, 2014
    Messages:
    1,494
    Likes Received:
    60
    Trophy Points:
    48
    With my previous idea, there is potential to make money by rubbing the debt away, but, maybe there is a safer method, seeing as how nobody has done this before? this is why i am introducing, 'the triangle loan method.'

    This would be where you have three states, yes? This is where [a] loans [1000] to , who loans [1000] to [c] who loans [1000] to [a]. this would mean every one of those has a thousand, and is owed a thousand, yes? this means [1000] each has become [2000] each, to their credit, of course.

    Doing this in the private sector might also work, as, if company a has 1000 but it is actually 2000 in virtual money, they could spend [1000] and repay [1000] out of the [2000] they have, and, then use that as capital creation, of course.
     
  11. Iriemon

    Iriemon Well-Known Member Past Donor

    Joined:
    May 12, 2009
    Messages:
    82,348
    Likes Received:
    2,657
    Trophy Points:
    113
    Business won't produce goods if they're taking a loss.
     
  12. Econ4Every1

    Econ4Every1 Well-Known Member

    Joined:
    Jan 3, 2017
    Messages:
    1,402
    Likes Received:
    302
    Trophy Points:
    83
    Hello, thought I'd pop in. Reasonably new to your forum so I hope I'm not intruding.

    I wanted to share my thoughts about a few items.

    First Iriemon, you are 100% correct in my opinion when you say the problem is a lack of demand. Lot's of people encourage saving money on unnecessary budget items as a way to grow an economy. However, I'd argue that saving money, at best has a neutral effect on the economy, in that, for every dollar in savings that used to be spent, you've eliminated by an equal amount someone's income. This is because it is an accounting fact that one person's spending is another person income. That's not to say that you can't shift spending from something that provides very little return on investment to something else that provides a greater return on investment, but not spending, will not grow the economy.

    Conversely, at worst "saving money" under some circumstances can reduce the nation's GDP by more money than the amount "saved". This is because dollars change hands, every dollar actually adds more money to the economy than just a dollar. That is, in the US every dollar changes hands about 1.5 times, so if you remove $100 from the economy, you could be removing $150 worth of GDP. now I admit that's not assured because the economy is large so it really can vary, but "saving" either by not spending in the first place or removing and putting aside reduces the amount of money in circulation.

    You cannot, at the Federal Government level "save" your way to prosperity. It's impossible unless your nation (I know there are some Canadians here and some from the US) is taking in more in exports than it purchases in imports.

    Which brings me to my next point.

    You mention "squandering the Clinton surplus".

    I'd like to point out that there is no such thing as a "surplus account" within the US Federal Government. Perhaps this was done on paper for the public's benefit, but like the "Social Security Trust Fund", it's all accounting semantics.

    The government creates IOU's from nothing and spends them into the economy. Later it taxes as a way to prevent inflation, not earn income (despite the common orthodoxy).

    Think about it like this....

    If you write an IOU to a bank (let's say for $100) in the form of a contract and you swap that IOU for cash....You hold cash and the bank holds an IOU. Assuming you have good credit the bank has an asset equal to the amount you've borrowed (if the bank chargest interest, and they do :), then the bank's asset will be slightly higher.

    Now when you repay the IOU and the bank hands the IOU back to you, do you have more money? No of course not, you only have less debt. Even of you earn the money to repay your debt to the bank and, instead of paying back your loan, you put that money in a separate account, could you say that you have $100? You could, but when calculating your net worth, you'd have $100 and owe slight more, thus you'd still have zero or slightly less.

    Coming full circle, the government creates IOU's when it spends. It can literally create money from nothing. When it collects it's IOU's do you believe that the government has more money?

    No, because they can create money out of thin air, just as if you wanted to create more than 1 IOU, you don't need to collect other IOU's you've already created to write a new one.

    Even if the government puts that money in a separate account and tells the public "Hey look at all this money we have" it's nothing more than political and accounting semantics because the money the government taxes to create the "surplus" account is offset by the debt that created it. That is, in the US there are something like $2.8 trillion dollars in the Social Security Trust Fund, but that money was made possible by increasing the debt by $2.8 trillion dollars. So what difference does it make if the debt is $20 trillion and SS has a $2.8 trillion dollar surplus or the debt is $17.2 trillion and the SS fund has nothing in it?

    As a matter of fact, if it had nothing in it, we're actually be spending less in interest payments, because we wouldn't be paying interest on the debt that created the $2.8 trillion dollars that reside in the SS trust fund! Now, just to bring the SS story full circle, the government used the $2.8 trillion to purchase its own bonds. So the government borrowed from itself and deposited that money into the government's own account and pays interest to itself all so that it can tell a story to the US public. It's the dumbest thing ever and we're all fooled by it, myself included until I started really understanding economic several years ago.

    That is all an accounting fact, it's not some crazy conspiricy. The number are all there, though the names of the accounts are all obscured. There is just no other way around it. It's all semantics meant to show the public what they want to see.
     
  13. Brett Nortje

    Brett Nortje Well-Known Member

    Joined:
    Nov 15, 2014
    Messages:
    1,494
    Likes Received:
    60
    Trophy Points:
    48
    How are they making a loss if there is more customers? if the country was fifty percent employed, they would have full demand, yet only fifty percent purchased. with a hundred percent, they wills see one hundred percent income from one hundred percent demand 'being satisfied.'
     
  14. Iriemon

    Iriemon Well-Known Member Past Donor

    Joined:
    May 12, 2009
    Messages:
    82,348
    Likes Received:
    2,657
    Trophy Points:
    113
    No problem, that's what we are here for!

    I think in a healthy economy it is more than that, money is "multiplied" 6-7x by fractional banking (and fractionalized the same way when removed). I think the multiplier is lower now because banks are still a bit shy from the overlending in the housing bubble.

    OK

    No, the USG does not spend IOUs. It spends dollars it receives in exchange for the IOUs (USG debt). It levies taxes to receive dollars to spend.

    You are right in a sense the Govt could pass laws allowing it to create dollars (as opposed to the Fed doing it) and use those dollars, but as you point out, that would result ultimately in massive inflation.
    Think about it like this....

    I don't quite follow your point. If I borrow $100 and then repay the loan I'm back where I started.

    Well, it depends on what you mean by "government". You are speaking of "government" as if it is one entity. In our system, the federal "government" i.e. Congress and Executive, does not create money. The Fed, an independent entity set up by Congress to control the money supply does.

    See above.

    A government surplus simply means it received more in revenues than it spends. It doesn't mean money is accumulating in a account.

    Under Clinton, there was a surplus even excluding SS.

    If that were true they'd be showing a surplus every year.
     
  15. Iriemon

    Iriemon Well-Known Member Past Donor

    Joined:
    May 12, 2009
    Messages:
    82,348
    Likes Received:
    2,657
    Trophy Points:
    113
    Because if you lower price below what it costs to produce you have a loss.

    If the people who spend the money aren't being distributed much of it, there won't be the purchasing power to justify expanding production regardless of your capital and resources.

    A case in point is the recent recession. There were cheap resources and trillions of capital, yet sluggish growth. Why? The spenders -- the middle classes -- have been gutted by 30 years of "trickle down" "supply side" economics and after 2010 we had years of austerity.
     
  16. Brett Nortje

    Brett Nortje Well-Known Member

    Joined:
    Nov 15, 2014
    Messages:
    1,494
    Likes Received:
    60
    Trophy Points:
    48
    Let me tell you a story in 'maths?'

    [A] have jobs, do not have jobs. jobs are [c] and wealth is [d]. The more [c] there is, the more [d] there is, and, the more that becomes [a] the more [c] there is, and therefore the more [d].

    Not good enough? let's get tricky!

    the more [d] there is the more money gets spent, [e]. the more [e] gets spent, the more [c] jobs there are, as, there is greater demand, therefore;

    To get [d] wealth, you need more [a] jobs. this comes from human capital, so, if there is more unemployed turning into [a] employed, there is more [e] money being spent by those that become [a]. the more money is spent, the more [g] demand there is, and the more [a] there is, the more [h] supply there is, so;

    [d] = [a - b] * [g / h] * [c + e + a] plus i don't know what. basically, there more of any of those there is a plus, except for g and h, potentially ruining the plot.
     
  17. Iriemon

    Iriemon Well-Known Member Past Donor

    Joined:
    May 12, 2009
    Messages:
    82,348
    Likes Received:
    2,657
    Trophy Points:
    113


    But if the [d] is not spent, you have less [c] and [a] becomes .

    There's your math.

    You're making an assumption here, that an increase in [d] necessary corresponds with an equivalent increase in [e]. If that is not true, then you're entire premise falls apart.
     
  18. Iriemon

    Iriemon Well-Known Member Past Donor

    Joined:
    May 12, 2009
    Messages:
    82,348
    Likes Received:
    2,657
    Trophy Points:
    113
    Because if they have to lower the price of the good they are making below cost because people don't have the money to buy it at a profitable price, they will lose money regardless of how many customers they have.

    The level of employment does not equal the level of demand.
     
  19. Brett Nortje

    Brett Nortje Well-Known Member

    Joined:
    Nov 15, 2014
    Messages:
    1,494
    Likes Received:
    60
    Trophy Points:
    48
    Yes, everybody demands, as everybody needs. this means, the more jobs there are, the more can be spent as there is more to spend.
     
  20. Iriemon

    Iriemon Well-Known Member Past Donor

    Joined:
    May 12, 2009
    Messages:
    82,348
    Likes Received:
    2,657
    Trophy Points:
    113
    No, not relative to income and wealth.

    A person making $25k pretty much needs everything he makes and spend all his income, creating demand.

    A billionaire making $100 million does not need $100 million or anywhere near it. He saves most of his income and spends just a fraction of it, creating, proportionally, only a fraction of the demand.

    Again, you're making the assumption that the value that is produced is distributed to people who will spend it.

    If instead, what is produced is instead distributed to people who don't spend it but stick in offshore bank accounts or the stock market, then you do not achieve the same growth, regardless of resources and capital.

    Again, if resources and capital were the only issues, we would have had explosive growth in the 2010s, where we had trillions in capital and plentiful cheap resources.

    We didn't because, through a combination of "trickle down" and austerity policies, the growth in value of what was produced went almost exclusively to people who proportionally only spend a fraction of it.

    The result was anemic demand. Compare:


    Year - % chng real personal expenditures
    1982 1.4
    1983 5.7
    1984 5.3
    1985 5.3
    Average: 4.4

    1992 3.7
    1993 3.5
    1994 3.9
    1995 3.0
    Average 3.5

    2002 2.5
    2003 3.1
    2004 3.8
    2005 3.5
    Average 3.2

    2010 2.0
    2011 2.5
    2012 2.2
    2013 2.0
    Average 2.2

    Source data: http://bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=1&isuri=1
    Table 2.3.1. Percent Change From Preceding Period in Real Personal Consumption Expenditures by Major Type of Product

    With the great engine of spending -- the middle classes - gutted by trickle down and austerity, they didn't have the purchasing power to spend and buy. Without the demand, businesses don't expand as fast.

    So despite trillions in capital and plentiful cheap resources, we had anemic growth.
     
  21. Econ4Every1

    Econ4Every1 Well-Known Member

    Joined:
    Jan 3, 2017
    Messages:
    1,402
    Likes Received:
    302
    Trophy Points:
    83
    Thank you for the warm welcome. This should be a very interesting discussion. I apologize in advance if I come across as somewhat of a know-it-all. I've been studying economics for many years now and I discuss this topic with my peers quite frequently. When I come to public forums, I forget that people don't know me so people can be wary at first.

    I assume that everyone is like me and they are seeking the truth and conversations like these help us find it, either because I tell you something you didn't know, or you correct me and tell me something I didn't know.

    So, what you're are describing is called "loanable funds theory" or as you put it, fractional reserve banking.

    I'll spare you the explanation as I'm sure you are aware of the orthodox view of FRB, however, I'm here to tell you, that it's simply not true.

    The concept behind FSB rests on the idea that banks are constrained in lending by the amount of reserves they hold, that is, a bank must check it's reserve levels first before they make loans, if they don't have the reserves they can't make the loans without borrowing first.

    This ended in 1971 when dollars were completely disconnected from gold.

    First, banks don't lend customer deposits to other customers. All customer deposits are added to the bank reserves. Banks don't lend reserves (exept to other banks within the FRS).

    Second, banks are not operationally limited by the amount of reserves they hold when making loans.

    This is because, before 1971 FSB was true, which meant that "customer deposits created the opportunity to lend". Today it's exactly the opposite. Today "lending creates the opportunity for a new customer deposit". In the case of deposits, I say opportunity because a person doesn't have to deposit money in a bank that's part of the Federal Reserve System

    When people take loans, the money (most of it anyway) created will end up somewhere in the banking system as a deposit. All customer deposits are treated as reserves. That means that a bank knows that it will ALWAYS be able to fund it's loans because when it creates money out of thin air, it's creating the reserves it needs (actually it's creating 90% more) to "cover" the loan. This is why reserves do not constrain lending, thus the "fractional reserve theory" is now irrelevant.

    Said another way, banks make oans during the day and finds the reserves (if necessary) after the fact. If that's true, then reserves do not constrain lending and FRB is inncorect as a theory.

    Even if the banking system runs out of reserves (something that can happen as the Fed manipulates the level of reserves to control interest rates) and a bank makes a loan it's can't cover because it's unable to borrow through the interbank lending market, it can still obtain the funds from the Fed's discount window.

    So when I talk about a money multiplier, what I'm talking about is the velocity of money, not FSB....

    Here are a few sources if you'd like to read them that validate my claims with respect to FSB.

    Here is a paper that was done to show that banks, can, in fact, create money from nothing. Really, if we're being technically correct, banks don't create "money" they create "credit", but the distinction is transparent to the public.

    http://www.sciencedirect.com/science/article/pii/S1057521914001070

    Here are a few links to papers that show the FSB as it's commonly taught is no longer true.

    http://www.bankofengland.co.uk/publ...lletin/2014/qb14q1prereleasemoneycreation.pdf
    https://www.kreditopferhilfe.net/docs/S_and_P__Repeat_After_Me_8_14_13.pdf


    Hope that helps.


    apologies in advance if I'm sharing information, some of which I'm sure you already know. Please consider, at least some of this information for other readers who are following along may not know

    Ok, so, I'm going to disagree.

    The Treasury creates a bond (which is a debt, what I'm calling an IOU) and auctions them to the nation's 15 largest banks (called primary dealers). The proceeds from those sales are deposited at the Fed in the US government account. Primary dealers, in turn, sell those bonds to the non-government (foreign and domestic) and the government is responsible for repayment.

    https://www.newyorkfed.org/aboutthefed/fedpoint/fed41.html

    The interesting part of all this is that the Government creates and approves the national budget before it sells debt or collects taxes. In order words, the government spends first and collects taxes and sells bonds later. now it's extremely difficult to see the consequences of this order of events because of the cyclical nature of government spending, taxes and bond sales. You have to go back to a hypothetical beginning to understand what I'm trying to explain.

    If the US government had just started today, and it hadn't created any money yet, then how could it fund its spending via taxes and bond sales? Since taxes and bonds are only sold in US dollars, it would be impossible to "fund" debt by taxing or selling bonds to the public for the obvious reason that the public wouldn't yet have any dolalrs to tax or purchase bonds.

    Now to the point I think you were making, the government has chosen, voluntarily, to place the Fed between itself and the public sector. There are some good reasons for this, but best saved for another post.

    On day one, in order for the government to make a purchase from the private sector, let's say the money to build the Whitehouse. On day one, here are the steps;

    1) Create a bond equal to the cost of the Whitehouse (-bond)
    2) Transfer the bond to the Fed (Fed +bond)
    3) The Fed now having the asset which is the bond, creates and deposits the "cash" in the US government's account (Fed -cash)
    4) The Government marks up the accounts of the builders (in the private sector) equal to the cost of the Whitehouse. (priv sec +cash)
    5) The builder uses cash to obtain resources and labor to build the Whitehouse (Prive sector -real resources and labor)
    6) Our government takes possession of the Whitehouse (US Gov + 1 Whitehouse)

    Ideally, everything in parenthesis is equal.

    Today, the government spends 1 out of very 4 dollars in the private sector, so it must first create "fiscal space" in order to spend. that is, if the government didn't sell bonds to remove cash and tax to remove cash, the government would create inflation.

    What I'm trying to tell you is that bond sales and taxes don't fund spending, they make room for it. This is because the government can always create more money. It can do it via the bond process, but this is not a true constraint. The government does it this way voluntarily. There is nothing that prevents the US government from creating the cash directly, except that when the system changed from gold backed to fiat, much of the "process" was maintained (just as you've rightfully pointed out below). I think this was done so that the government could manage its books in much the same way it always had and I suspect that it felt it was creating an operational constraint against too much money creation. So, it simply swapped out gold for bonds and the rest is history. The problem is that the system appears to function so much like the old system that ideas, like Fractional Reserve Banking, are still taught, but are in fact, just not operationally true. Worse, it's these kinds of misunderstandings that are holding back the true potential of our economies.


     
  22. Econ4Every1

    Econ4Every1 Well-Known Member

    Joined:
    Jan 3, 2017
    Messages:
    1,402
    Likes Received:
    302
    Trophy Points:
    83
    Putting the "Whitehouse" example in a graphic might look like this:

    [​IMG]

    Notice the order of operations. Also, notice that for the private sector it have +cash the government must go -bond (red circles.

    In order to repay "debt", the bonds, the private sector mist go -cash.

    Here it is aggregated across the entire economy. This is called, Sectoral Balances. Notice how the government and private sector closely mirror each other? They aren't exact because of the foreign sector. So, Gov spending is equal to Private sector surplus minus forein sector surplus.

    Notice what happens around the year 2000 when the government goes into surplus? The private sector falls below the line and goes into deficit. A year later the economy goes into recession.

    Again, this is all simply accounting. It's not a political point-of-view.

    [​IMG]
     
  23. Iriemon

    Iriemon Well-Known Member Past Donor

    Joined:
    May 12, 2009
    Messages:
    82,348
    Likes Received:
    2,657
    Trophy Points:
    113
    I've never heard it called that. Any reason why the conventional label is a problem?

    Well, the bank must meet reserve level requirements periodically. They are permitted to dip into them temporarily.

    News to me.

    Deposits are simply an account which is a liability of the bank. Banks never lend "deposits". They lend reserves.

    I think to have a discussion we first need to get an understanding and agreement of terminology.

    "Reserves" are actual cash money and the electronic equivalent of cash, which are deposits at an account at a Federal Reserve Bank. An FRB account can be readily exchange for actual cash and vice versa.

    "Money" has many different meanings. I use "base money" to mean reserves. Various definitions of money can also include deposit accounts and other things.

    When a bank makes a loan, it may or may not immediately pay out reserves. It maybe that the borrower has an account at the bank, and the bank simply credits his deposit account. However, once the money lent is used to buy a car or whatever, the bank pays out reserves to the payee.

    So when the bank makes a loan, it must ultimately have the reserves to cover the loan.

    They are, because borrowers usually don't keep the money lent at the bank that lent it. The spend the money borrowed, at which time the lending bank must have the reserves to transfer to the payee (or more accurately, the payee's bank for the payee's account). That ultimately limits what a bank can lend.

    Otherwise, Podunk Bank of Bum(*)(*)(*)(*) could make a trillion dollar loan.

    Lending by a bank has alwasy created a new customer deposit. That was true before an after. Nothing changed in 1971.

    You're being sloppy with your terminology. When people take a loan, they will use the loan proceeds and spend it. The lending bank uses its reserves to transfer to the payee's bank for the payee's account. The payee will deposit the payment received into his account, increasing the payee bank's reserves.

    Not necessarily. Bank accounts are not reserves. If a customer gets a loan from his bank and it gets deposited to the customer's account at the same bank, no reserves are transferred.

    Again you are being sloppy with terminology.

    A loan creates a new deposit in a bank account (i.e. increase a deposit account) out of "thin air" It does not create "base money" or reserves out of thin air.

    Only the Fed can create base money or reserves out of thin air.

    That is why reserves are very relevant to what a bank can lend.

    Banks are allowed to temporarily dip below the level or required reserves but they must acquire the necessary reserves by either additional deposits or loans from other banks. However, that in no way means reserves do not constrain lending, because a bank will be limited in how much deposition it can a acquire or borrow from other banks.

    Which rarely happens because its expensive and meant to be a last resort.

    Velocity is how fast money exchanges hands and increases the effective money supply but does not multiple the amount of deposit accounts as bank lending does.

    Based on what you are saying, I'm pretty sure I already have.
     
  24. Iriemon

    Iriemon Well-Known Member Past Donor

    Joined:
    May 12, 2009
    Messages:
    82,348
    Likes Received:
    2,657
    Trophy Points:
    113
    What they are doing is just the first step. The borrower gets a loan, his account is increased, and the amount of reserves does not change, so they are concluding that lending is not constrained by reserves.

    But they are not going to the ultimate step of the loan proceeds being spent, which is when the reserves are required.

    Again, only looking at the creation of the deposit, not applying proceeds of the loan.

    This is just making the observation that after the recession, banks are not lending out their potention based on their reserves -- not explaining how lending is ultimately limited by reserves.

    It is consistent with what I've said. But when a loan is made, even if the bank does not need immediately the reserves to credit the deposit, it must have the reserves to fund the use of the loan proceeds.

    Otherwise a bank with $1000 in reserves could make a trillion dollar loan. You're not suggesting that, are you?
     
  25. Iriemon

    Iriemon Well-Known Member Past Donor

    Joined:
    May 12, 2009
    Messages:
    82,348
    Likes Received:
    2,657
    Trophy Points:
    113
    OK, but I don't see how that disagrees with what I said. The USG does not spend "IOUs." It spends dollars it receives in exchange for the IOUs (USG debt). The primary dealers (not necessarily banks but also other financial brokers) are the brokers that buy the bonds from the Govt and gives them dollars, which is what the USG spends. The primary dealers then sell the bonds to whoever wants to buy them, and gets dollars from them.

    You're confusing budgeting with spending. A budget is not an expenditure, but a plan for expenditure.

    The Govt, like anyone else, cannot make an expenditure without having the dollars.

    The Govt would print dollars and distribute them for whatever was used as the means for exchange.

    OK.

    The government can just print money initially instead of going through all that.

    Or to put it another way, if the Govt just printed up more money it would cause inflation.

    The USG cannot create money. As you acknowledge, the Fed does that.

    But a government can create cash (assuming it has its own monetary system, unlike, say, Greece). And yes, created the Fed to prevent over creation of money which will eventually lead to inflation.

    So how does that show the factional reserve multipler is wrong?

    No they don't. They government takes the money and spends it out. And a lot more, unfortunately.

    Of course. Money is added by the Fed. Has little to do with taxes.

    Taxes are a way the USG gets dollars to spend.

    So you're claiming that the 3 trillion in tax revenues the Govt collects are simply destroyed?

    The Govt collects $3 trillion in taxes, borrows $0.7 trillion, and spends $3.7 trillion.

    If the $3 trillion is destroyed, where is the Govt getting the other $3 trillion that it spends?

    None of those things add to the overall money supply, unless what is spent is money that was "horded" (i.e. not in the economy)

    Drains

    Taxes do not remove money. Imports move money to the foreign seller, but does not remove money. Savings can remove money if the money is "stuffed under the mattress" as opposed to put in a bank.
    Maybe some other time.

    No. Dollars are created by the Fed, usually in exchange for a not payable (like Govt debt). The dollar in my pocket does not create a debt to anyone.

    They might. They might barter for anything. That doesn't make my IOU a dollar.

    It's not the same at all. Of course the Govt has more money when it collects taxes, which it spends. That is why it has less debt.

    Disagree with premise for reasons stated above.

    The US Govt doesn't create money. The Fed does.

    Why would you need to?

    USG spending creates no money.

    If it borrows money, it gets the money from a lender and then spends it. What money has been created?
    If it taxes the money, it gets the money from a taxpayer and then spends it. What money has been created?

    It doesn't sound like I believed that at all.

    Based on the false premise that he Govt creates money.
    It's not my definition. Its the standard and accepted definition of a government surplus. As anyone who studied macroeconomics would know.

    The SS taxes were created well before 1983. It was dumb because the government is allowed to raid the SS surplus payments for its general expenditures, in exchange for more debt.

    Agreed. SS taxes, a regressive tax on the working folks, were squandered to essentially fund tax cuts that mostly benefited the richest.

    The sheriff of Nottingham would have been amazed and the size and audacity of the theft by the rich from the poor.

    Why would that matter?
     

Share This Page