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

["Gunnar Tomasson" <tomasson@xxxxxxxx>]

----- Original Message -----
From: "William F. Hummel" <wfhummel@xxxxxxxxxxxx>
To: <pkt@xxxxxxxxxxxxxxxx>
Sent: Friday, March 02, 2001 9:14 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
>
>