Re: monetary systems and rationality

[Warren Mosler <mosler@xxxxxxxx>]

John Vertegaal wrote:
>
> Warren Mosler wrote in reply to the below:

(snip)>
> >NAIRU as we know it exists because all state purchases are done at
> >market prices, and therefore state spending/lending must be
> >sufficiently constrained to maintain some level of excess capacity
> >to contain prices.
>
> I pointed out in a previous post, I believe in the one you still
> haven't answered, the extent of inflation due to state purchases.
(snip 'cheap shot')

State purchases are the source of inflation.  Prices paid by the
state 'define' the value of the state's currency.  This is available
in more detail in 'Full Employment AND Price Stability' on my
website.  The point here is that the state 'thinks' it needs to
raise revenue through taxation in order to spend that revenue,
while the driving force is that (from inception) those with tax
liabilities
need the state to 'spend' or otherwise provide twintpt (that
which is necessary to pay taxes.)

By the way, I just received a copy of a talk given in 1947 by Abba
Lerner
(functional finance) in which he makes exactly that point.  I am sure
there are others.  This is not a new concept, if that matters.

>
> I'm under no illusion that I can get a bond trader to publicly
> admit that floating evermore bonds, sooner or later is bound to
> result in economic suicide.  Especially since natural resource
> limitations are unlikely to permit us the kind of growth patterns,
> our economy experienced in the post-war period; at least "us" as
> seen on a world-wide scale.

Govt bonds are a liquidity drain, not a funding operation, despite all
appearances to the contrary.  That is, the state spends first, and
then offers secs for sale to support a desired overnight rate.

Furthermore, I am on record as stating that there is no technical need
for the state to issue any bonds at all.  'Soft Currency Economics,'
also on my website, supports the idea of the Fed/state simply paying
interest on excess balances rather than issuing securities.  If you
don't think you owe me an apology for your sarcastic accusations
you simply do not understand my essays.


This is not to negate the 'excess purchasing power' that you have
focused on.
Deficit spending by any entity, including the state, transfers deposit
money
to sellers of real goods and services.  And currently, as you have
pointed
out, the total amount of such $ held is far in excess of that which is
available for sale at current prices.  And, indeed, hyper-inflation is
possible, should what I call the net desire to save suddenly shrink.
Recall,
however, that my current guess is, and has been for quite a while, that
the desire to net save the unit of account ($) currently exceeds the
amount being provided by state deficit spending, resulting in a
deflationary
bias.  And, that this will cause the next recession/depression in the
near future.

In simple terms, the man on the street generally has a net desire to
save $.  This
stems from human nature and state sponsored currency.  If the state
doesn't provide
it through something like deficit spending or lending, a
contractionary/deflationary
bias and unemployment is the result/evidence.  If the state provides it
by paying
market prices for all purchases (including transfer payments to agents
who pay
market prices) 'inflation' accelerates as/if excess capacity dries up.

The elr is an option described in FEAPS on my website that constrains
state
spending by constraining price (the elr wage), and lets the 'market'
determine
the deficit as desire to net save is allowed to equal actual net savings
at all
times.



--
Warren B. Mosler
Director of Economic Analysis
III Finance

See:

"Soft Currency Economics"
"Full Employment AND Price Stability"
=========================
And related documents:

http://www.warrenmosler.com