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

["Forstater, Mathew" <ForstaterM@xxxxxxxx>]

Hi - First, just for the record, his name is Godley.  Second, I don't know
whether Wynne adheres to chartalism or not, but my point is that I don't think
it is a necessary part of his analysis.  Third, modification of the U.S.'s
fiscal stance to a budget deficit of 2.5% of GDP is hardly reason to expect
default, if that is what you are implying. You don't have to be chartalist or a
supporter of functional finance, even a deficit dove position of Eisner or
Heilbroner and Bernstein would support that.  Fourth, the Russian situation,
where enforcement of tax obligations broke down, is quite a different scenario
than the U.S. I imagine Paul Davidson's legal chartalism would make this
distinction. Fifth, it is true that often what people believe, even if wrong,
can have real effects, since people will behave in ways that reflect their
beliefs and those behaviors will have market consequences; but shouldn't part of
policy be devoted to educating people about these matters, instead of simply
accepting that the misunderstandings will always be there and designing policy
to counter the misguided behaviors? Sixth, wouldn't Ponzi have been in a very
different situation if he had been able to literally produce the means of
payment? Seventh, if fiscal policy results in a stronger economy, then this
affects tax revenues and government expenditure, in other words, don't forget
the automatic stabilizers.  The question is whether we want to deficit to emerge
as a result of lower output, income, and employment leading to lower tax
revenues and higher government spending, or whether we want to use common sense
policy to prevent a severe recession. Thoughts? -Mat


-----Original Message-----
From: Clifford Poirot [ mailto:cpoirot@xxxxxxxxxxx <mailto:cpoirot@xxxxxxxxxxx>
]
Sent: Friday, March 02, 2001 10:25 AM
To: 'pkt@xxxxxxxxxxxxxxxx' <mailto:'pkt@xxxxxxxxxxxxxxxx'>
Subject: New thread: Problems with Goodley's recommendations...


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:

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. 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. 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.

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. 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.

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.