Re: budget defecit

["John O'Donnell" <jackodonnell@xxxxxxxx>]

Warren Mosler wrote:
>
> MATTHEW JOHNSON wrote:
>
> > Warren,
> >       i have just read some of your 'comments on the budget debate' and was
> > wondering if you could clarify a few things for me.  running a surplus,
> > reduces reserves.
>
> Sort of.  Since reserves are always at the level the banks think they
> need,

Nonsense. Banks neither create nor destroy reserves. That
task is in the hands of the public and the CB. The public
can reduce reserves by demanding cash and the Fed can reduce
or increase reserves at will. However, because there is no
limit to the ability of the CB to create reserves, the
ability of the public to reduce them is trivial.

> net tax collections, in the first instance, result in an 'overdraft'
> at the Fed by at least one bank.  This increases borrowed reserves
> as an overdraft is a loan.

More nonsense. Tax collections tend to increase the value of
the currency but because adjusted reserves are always
substantially greater than required reserves no bank is
necessarily in an "overdraft" condition. [i.e. -- Forced to
the discount window.] See:
http://www.stls.frb.org/images/publications/mt/page7.gif for
a plot of adjusted and required and reserves.

> So 'running a surplus' could only reduce
> reserves if there were excess reserves in the banking system.

No, it would be true only if there were no excess reserves
in the system but there always is and whenever the need for
more arises the CB creates more.

> This
> would be evidenced by a 0 bid fed funds rate, as is the case in Japan
> today.

No, a zero bid for fed funds is evidence that there are
enough reserves at all banks to meet their needs. Without a
need for reserves over and above a bank's holdings there is
no reason to borrow more.

> >  i have the impression this does not neccessarily reduce
> > the ability of the economy to function,
>
> True.

One right, not bad for a banker.

> > as financial institutions simply
> > leverage more inside currency
>
> Yes, they can do that but it is arguably not 'sustainable.'

Just what is this "inside currency" that banks can leverage?

> > of the now reduced stock of reserves.  [this
> > is what i want clarification on]
> >
>
> Reserves will grow as loans create deposits and reserve requirements
> grow, as above.

Reserves grow as the CB creates them, not as loans increase.
The CB _MAY_ accommodate loan increases by creating more
reserves but it is not obligated to do so and it cannot
force an increase in loans by increasing reserves.

> > therefore is it possible, so long as there is one dollar more than the
> > govt. is taxing, that the economy will continue to function
> > 'normally'(reserve requirements are assumed to away).

Taxes are a repeating, ongoing flow of payments; reserves
and / or cash are a stock of the medium used to pay those
taxes and any other obligation for which they are used. But,
yes, an economy will continue to function with or without
taxes and / or reserves. It's just that without acceptance
for taxes, or some other use, the value of a fiat currency
becomes zero and without a viable currency an economy will
not function as well as it would with a viable currency.
However, such an instance is trivial except when a
government takes the opposite approach [i.e. -- Insufficient
taxes.] and inflates its currency and reduces its viability,
sometimes even to uselessness.

> The $ to pay taxes can always be obtained by bank loans, which result
> in more borrowings from the Fed by the banking system.

Taxes can be "obtained" by bank loans, but reserves cannot
be created by bank loans. Obtaining the reserves to pay
taxes from a loan decreases the quantity of reserves on hand
[Unless, of course, the CB creates more to compensate.] just
as does paying from any other source.

> Problems begin
> when the net desire to save exceeds the amount of net savings provided
> by the govt when it deficit spends.

"Savings" can be accomplished with any substance of value,
money is not needed. The only "commodity" provided by
government is money.

<<SNIP>>
			-- jbod

		Tax Privilege, Not People
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