Re: fiscal deficit - Mosler addendum

["Per Gunnar Berglund" <pgberglund@xxxxxxxxxxx>]

In response to Warren Mosler:

Warren wrote:
> If I could borrow unsecured through an entity with no equity
> I would do that and never pay it back.  Said lending, if limited,
> would not eliminate the value of the currency but would be a
> 'fiscal transfer' and an inflationary bias.  'Collateral' is a way of
'securing' payment.

Per says:
No doubt it is. There is however unsecured lending as well, and most of
those loans do in fact get repaid. If I were to borrow money from and then
fail to repay your loans, your other property will serve as a kind of
'collateral' anyway. 'Never paying back' is an option only for the bankrupt!
Collateral proper is merely a way of making specific the property subject to
repossession in the event of failure, which of course serves to make loans
more secure.

Per wrote before:
> Another point: There seems to me to be no difference in principle between
> Fed lending and other lending such as private bank loans. I think it was
> Leigh Harkness who said that bank money retains its value because the
loans
> which created it must be repaid. The core point, I think, is not whether
> loans are collateralised but whether they are limited.

Warren replied:
> As above.  But note there can't be (net) fed lending in excess of
> (cash and) 'reserve needs' unless a 0 interest policy is desired.

Per says:
Yes, which again is a feature of the US system in which reserve deposits do
not pay interest. Otherwise, 'excess reserves' would push the interbank rate
down to the reserve-deposit rate.

[snip]

Per wrote before:
> Another way of looking at it would be to say that the general level of
asset
> prices is determined by the interaction between liquidity preference and
the
> stock of money. Suppose people want to hold a proportion, say x, of their
> wealth W in liquid (money) form. If the money supply is M, then we should
> have M = W.x.

Warren replied:
> How are you defining 'money?'

Per says:
There are many possible ways of defining it, many of which may be employed
in a theoretical scheme like the one I outlined.

On this note, by the way, you used to employ a concept of money (although
you, of course, used some other word for it) that in effect amounted to what
ordinary people call 'government debt'. Government would spend money into
circulation and tax it out of circulation, ergo the net injection of money
would be equal to the deficit. Excess balances that were lent back to the
government would be 'in storage' (on deposit) with the government, according
to that scheme of yours.

But now you're saying that government spends *and lends* money into
circulation. Presumably, then, it taxes *and borrows* money out of
circulation. Now this formulation results in a totally different concept of
money, namely what ordinary people would call 'high-powered money' (possibly
less required reserves).

The concept of money (or whatever word you find appropriate for what most
other people call 'money') you are using would seem to have considerable
bearing on the theory. Government debt is after an order of magnitude
greater than high-powered money. Moreover, on the 'old' concept of money =
government debt, how does one add all the 'apples and oranges' of various
debt instruments into one aggregate number expressed in currency units?
High-powered money, after all, is convenient in that its nominal value is
fixed in terms of currency units, which is not the case for bonds, bills or
any discounted instrument.

Warren wrote (regarding bank loans):
> Loans 'create' deposits so there is no 'net'M asside from govt
> deficit spending.  This demand for net M I call the net desire to
> save, etc.

Per says:
Well, now you're back to the government deficit concept of money injection.
But how about the lending and borrowing? If your money is simply what
ordinary people call 'government debt', then why bother with all this
peculiar terminology to express the old Keynesian notion that the economy
may be slack because the deficit is too small? Old wine in new bottles?

On the other hand, if you actually mean what you've been saying lately,
namely that the government spends *and lends* money into circulation, by
which token we have 'money' = HPM, how do you get that to square with the
'net desire to save' talk? Most people would call that 'hoarding' not
'saving'. If you have a theory of hoarding in mind, then wouldn't that call
for some form of portfolio choice theory to explain why people want to hold
HPM instead of other assets? Further, even with that in place, the ordinary
Keynesian issues of spending vs. saving would be left undealt with.

[snip]

Warren wrote:
> Taxes cause us to 'need' the currency to be in compliance just
> as the collection of subway tokens causes us to need the tokens.
> The city has no more use for the actual tokens it collects than
> the govt for taxes debited.

Per says:
This point, of course, was made by Abba Lerner a long time ago. Government
can burn the bills they collect in taxes if they so desire. But does that
prove the case that taxation comes after spending? Not at all. The
possibility that government can also *lend* tokens (bills) into circulation
changes the equation. Then it is no longer logically necessary for the
government to spend first. It can just as well lend first. And people can in
principle borrow the tokens they need to pay taxes. In short, the logic
breaks down.

Best,
Per

_____________________________________________
Per Gunnar Berglund
CEPA    80 Fifth Avenue, 5th floor    New York, NY 10011
Tel: (212)229-5923    Fax: (212)229-5903