Re: Mosler seminar: Tax driven currency (fwd)

[Mathew Forstater <forstate@xxxxxxxx>]

>From Warren.

---------- Forwarded message ----------

---Per Gunnar Berglund  wrote:
>
>
> Perhaps I should clarify that I don't think that
>the assertion that currencies are tax-driven on the
>one hand, and that they are credit-driven on the
>other, stand in contradiction to one another. There
>may be several motives for private agents to hold net
>financial asset balances, negative or positive. The
>question is more of degree than of kind, that is to
>say.
>
> As long as there is no peg between private bank
>money and State currency, the tax motive ought surely
>to be predominant in the demand for the currency

'Predominant' may not be a a good choice, as that
implies most transactions have that motive.  I generally use
terms like 'underlying motive.'  I am certainly open
to a word that more nearly describes the case.

>But when there is a permanent peg, making the
>currency and the bank money functionally similar from
>the private agents' perspective, the tax motive
>becomes mixed up with the general motive(s) for
>holding net financial assets.

My point is that if the tax motive is severed  there
is a 'disconnect' and that currency is likely to soon
be worthless.


> Suppose, for instance, that a man borrows in a bank
>to buy a house. If there is a peg between State and
>Bank money, that man effectively borrows currency.
>What reason, then, is there to suppose that he
>borrows this currency due to his future expectations
>of tax payments? In my view, there is little or no
>reason to suppose that the tax motive plays any
>significant part in the decision.

Correct.  As stated above.

>Rather, the borrower is driven by his urge to use a
>piece of real property (the dwelling), which his net
>worth is insufficient to provide for.

Yes.  But here we can continue 'up the chain' and ask
why the seller of the house desired that currency, and so
on back to at least one taxpayer somewhere.

>That, it seems to me, is the prime motive for going
>into net indebtedness.

Yes, and that's where the draft attempts to add to
that  element of circuit analysis.  As it stands, without
either a tax or 'conversion' motive of some sort, the logic
is a non starter.

>The fact that this move may be reflected in the
>government net financial asset position is of no
>importance for the borrower's decision.

True, but such horizontal expansion is a net 0 for
H(nfa).

>It is more of an unintended consequence of the
>borrowing. The same argument may be applied for any
>borrowing or lending transaction. The motives for net
>borrowing or net lending, thus, have no direct link
>to the need to provide for future taxes.

Of course, there can't be any  net borrowing in the
private sector, in the sense that every loan is accounted for
by an entry such as a bank deposit to another's
account.

>If that motive plays any part at all in the game,
>one would need to formulate that role in indirect
>terms. I doubt such a story can be formulated in a
>sensible and credible way, but then that is not my
>problem is it?
>
> Again, I believe it is the "homogeneisation", so to
>speak, of private bank money and State currency that
>provides real scope for Keynesian Functional Finance
>budget and debt management. I see nothing in the
>quotes provided by Mat to contradict this view. Do
>you?

I don't think so, in the sense that vertical activity
and influence by the state will influence the horizontal component.
And though the source of much volatility is in the
horizontal component, the state can create it own chaos by
disruptive vertical activity (like today's deficit reduction).
And the fact that the state's tax policy mixed with the expansion
is the cause of the deficit reduction does not excuse it from
responsibility.

Your other post questioned how Italy for example, can
have a higher net desire to save than other nations,
and therefore be able to run a higher deficit/debt.
Implied of course is an 'inflation rate' equal to the
others,as well. Of course, this latter point was not always the case.
But that aside, I think the concept of desired savings
must hold, by definition.  (It is only an accounting
identity, after all!) So perhaps a deeper examination would reveal Italy
has higher mandatory pension contributions, for example, etc?

Thanks,

Warren


>
> Kind regards,
> Per
>