RE: New thread: Problems with Godley's recommendations...

[Clifford Poirot <cpoirot@xxxxxxxxxxx>]

 My thanks to Warren, William and Matt for responding. I'll have to give
these responses more thought. And my apologies for mispelling of Wynne's
name. It was entirely unintentional.

-----Original Message-----
From: William F. Hummel
To: pkt@xxxxxxxxxxxxxxxx
Sent: 3/2/01 6:14 PM
Subject: Re: New thread: Problems with Goodley's recommendations...

Clifford Poirot wrote.

>I am sure many of the list recipients also receive the Levy Institute
>newsletter and have read Wyne Goodley's recommendations to triple
Bush's
>proposed tax cut. For a long time I have had a deep seated uneasiness
about
>the direction taken by several people affiliated loosely around the
>Chartalist theory of money. Now I think I have finally figured it out.
Here
>are my thoughts which I may yet attempt to turn into a paper. I'd
appreciate
>any feedback or comments-especially those in defense of Goodley's
position.
>I'll try to be brief:

First, I think it is only fair to spell Wynne Godley's name
correctly.
>
>As I understand it, the Chartalist view of money is that money need not
be
>backed by anything other than government taxation. Money is complete
>endogenous and requires no savings on the part of the public to back
money
>creation. Rather, the public needs the government's money to spend. At
>present, the government is not supplying enough of its money due to the
too
>high level of taxes as evidenced by the surpluses.

There is no problem of the government not supplying enough money.
The government must supply all the money needed by the public to
pay taxes plus what is needed to provide sufficient reserves to
the banking system.  It is currently taxing more than it is
spending and providing the difference by redeeming T-bonds.  This
reciprocal flow is essentially in balance at all times.

>Goodley proposes a return
>to a deficit position through a massive tax cut and appears to say this
will
>have no impact on the rate of inflation, nominal or real interest rates
>(though it will stave off a recession).
>
>My problem with this is that it ignores the fact (or what i regard as a
fact
>at any rate) that government debt must be backed by credible promises
to pay
>timely interest and principal. Granted, this government debt can be
rolled
>over-but it cannot be rolled over indefinitely.

When you say the government cannot roll over its debt
indefinitely, you imply that it must some day be entirely paid
off.  This is simply not true.  In fact there is no reason the
government cannot increase its debt indefinitely as long as the
economy grows indefinitely.

>As I hope I have shown in my
>forthcoming paper on the Russian financial crisis, government debt can
>indeed become effectively a form of Ponzi financing (someone at the PK
>conference I don't remember who, raised the issue as to whether or not
this
>can be so but I did not have a chance to follow up this interesting
>comment). Under normal circumstances, I agree that government debt is
not
>either speculative or Ponzi financed, though it can be speculated
against by
>bond funds that take long and short positions. However, under abnormal
>circumstances, when governments run persistent BOP deficits, or when
they
>are faced with a sudden BOP deficit and a dramatic and unexpected
drawdown
>in international reserves, and/or when they must issue more short term
debt
>to meet existing debt obligations, then government finance is subject
to
>being classified as Ponzi financing.

Of course most of the BOP deficit is due to the private sector,
not the government.  But what is meant by drawing down of
international reserves?  The dollar-denominated assets held
abroad can only be used in exchange for other dollar denominated
assets.  They are not "drawn down" in the sense of being taken
away.  If a foreigner wants to sell his US bonds for yen, he must
find someone with yen who wants US bonds, or a suitable
intermediary.
>
>Thus, large and persistent fiscal imbalances are potentially
problematic,
>and more so, when accompanied by current account and/or capital account
>deficits. Either the government must resort to higher taxation to
retain
>confidence or it must take other steps.

Persistent fiscal imbalances really have nothing directly to do
with BOP deficits, and don't depend on them.  Taxes are essential
in maintaining a demand for dollars, but confidence in the dollar
does not depend on the level of taxation.  It depends on the
government controlling the price of dollar-denominated credit, a
task managed by the central bank through the control of bank
reserves.

>Thus failure to correct persistent
>fiscal imbalances, or a sudden move from a surplus position to a
deficit
>position that might result in long run persistent fiscal imbalances,
will
>require 1) higher real and nominal interest rates on government
securities
>to fund the fiscal imbalance through international bond sales or 2) a
>massive devaluation of the currency in real terms-a policy that depends
on
>Marshall Lerner conditions being met 3) attempts to attract private
>international capital.
>
Fiscal imbalances can safely grow independent of any inflow
foreign capital.  All that really matters is growth of domestic
output/income.

>The U.S. has been able to escape some of these problems by credible
fiscal
>policies allowing the U.S. government securities to play the role of a
>riskless (or near riskless asset). I am not proposing eliminating this
debt.
>But, the existence of the debt requires taxpayers to pay a portion of
taxes
>in payments of interest (effectively a transfer of wealth from
taxpayers to
>domestic and foreign bondholders). The second factor behind the U.S. is
its
>status as hegemonic power. However, a return on the part of the U.S. to
long
>term structural fiscal imbalances is potentially destabilizing.
>
It's true that the existence of debt causes a redistribution of
financial wealth because of interest payments, though not
necessarily to the net advantage of those receiving payments.
Any spending by the government causes a redistribution, not just
interest payments.   But interest payments are merely a part of a
circular flow of funds between the government and the private
sector, i.e. they are entirely recaptured through taxes, just as
all other government spending is recaptured through taxes and the
sale of debt if necessary.

William F Hummel