Re: Mosler seminar: Tax-driven currency

[bill mitchell <ecwfm@xxxxxxxxxxxxxxxxxxx>]

Per wrote (also a line expressed by others):

that a tax-driven explanation for currency demand misses the mark.
Ed also indicated some problems.

>In a country like Sweden, where the government debt is some 30 percent of
the GDP and taxation amounts to 60 percent of the GDP, it seems reasonable
to suppose that the public would willingly accumulate that half year's
worth of taxes. But in a country like Italy, where government debt is
perhaps 120 percent, and taxation is 40 percent, of the GDP, it doesn't
seem reasonable to explain the public's willingness to hold government
securities (to "store currency" in Warren's terminology) with the needs for
future tax payments. Why should they accumulate three full year's worth of
"tax tickets"? That story just doesn't hold.
....
>
>A "primitive" tax-driven currency must presuppose a balanced, or nearly
balanced budget, simply because there is no willingness, on behalf of the
public, to accumulate substantial amounts of currency for the sole purpose
of future tax payments.

I disagree with this view. You could have added another nation - turkey.
they have no trouble
turning over state debt in a high inflation environment.

The discussion can also be motivated by the case of a freak-out country
like Indonesia.

Impose a high domestic budget deficit. Buy all the unemployed labour with
the fiat money.
the exchange rate drops as there is a capital flight. the demand for
imports dries up.
exports are highly sort after as they are cheap. the multinationals who
fled realise
that unless they set up and trade in local currency they will lose access
to this
market. they have an incentive to stay in other words and hedge by setting
up locally.
instead of exporting into the market they have an incentive to become import
competitors. after a period of disruption there is a demand for local
resources
(including labour) again. then the companies have to pay tax. they also have
excess reserves from day to day in the local banks. they have to deal in
the local currency in other words. they get a positive rate by demanding
bonds. as long as their operations are landlocked they will demand local
currency. if they cannot pay the taxes (assuming compliance) they cease
to trade. if they cease to trade and try to import in they lose market
share. there is a compelling reason to get fiat currency. further, there is
a motivation to hold their local wealth in the local currency b/c it is
already depreciated against home currencies.

that is why high debt nations can keep turning it over even though the
currency is worth only twopence on forex mkts.

kind regards
bill
         ####    ##        William F. Mitchell
       #######   ####      Head of Economics Department
     #################     University of Newcastle
   ####################    New South Wales, Australia
   ###################*    E-mail: ecwfm@xxxxxxxxxxxxxxxxxxx
   ###################     Phone: +61 49 215065
    #####      ## ###      Fax:   +61 49 216919
                           Mobile: 0419 422 410
                  ##

WWW Home Page: http://econ-www.newcastle.edu.au/economics/bill/billeco.html