Re: fiscal deficit - Mosler addendum

[Warren Mosler <mosler@xxxxxxxx>]

Per Gunnar Berglund wrote:

> 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.

Agreed.  'Collateralized' can be extended sufficiently to include collateral
that
is not directly deliverable, such as excess bank capital.  Note, however, that
this 'collateral' in whatever form is necessarily 'priced' or 'valued' by the CB

before it lends, and subsequent lending is a fraction of this 'value.'

>
>
> 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.

Agreed on 'operations.'  Only the CB can 'create' the reserves required to make
payment to the govt.  Or its designated agents on terms set by the CB.
These 'agents' and 'terms' also can play a role in 'value' of the currency.

>
>
> [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.
>

That is my outline for a currency, but not really my/a 'concept of money.'

>
> But now you're saying that government spends *and lends* money into
> circulation.

Not exactly.  We are talking about Govt. spending of $ and lending of $,
to be specific.  No need to possibly obscure things by shifting the
statement to spending/lending 'money.'


> Presumably, then, it taxes *and borrows* money out of
> circulation.

This is a pretty good example of my above concern.  'Taxing' ('involuntarily' at
the micro level)
directly reduces $ held (cash or 'demand deposit/reserve balance') by the non
govt sector.  'Borrowing' (voluntarily) exchanges a 'time deposit' (govt.
security) for cash or a $ balance (demand deposit) at a bank.

After a tax has been paid, net nominal wealth is lost.  After $ are 'lent' to
govt. net nominal wealth is
maintained but in a different form.

> Now this formulation results in a totally different concept of
> money, namely what ordinary people would call 'high-powered money' (possibly
> less required reserves).
>

ok, with exceptions, maybe

>
> 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.

Why the 'cheap shot?'   'money' seems to be defined differently by most
economists,
and this list has had endless arguments about its composition.  I simply use
more
precise terms, like cash, demand deposits, etc.  Why can being more precise be a
problem
for you???

> Government debt is after an order of magnitude
> greater than high-powered money.

?  Missed that one.

> 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?

Can't one carve out any aggregate one wishes for whatever purpose?
I usually stick to standard accounting aggregates.  For example, reserves,
cash, and govt. secs. sum to the cumulative national debt.  And those three
constitute 'net nominal wealth' as all other nominal wealth necessarily sums to
0.
What could be more conventional/mainstream?
Why is that problematic???

>
> 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.
>

They all have a maturity value (and a present value if you wish to use it for
some purpose).
Do you think an aggregate consisting of 'deposits' of varying maturities is
anything peculiar???


>
> 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?
>

Peculiar?  'Ordinary people?'  In fact, I originally got the key terminology in
'Full Employment AND Price Stability' from Paul Davidson.  Perhaps a
better word for the 'terminology' is 'forgotten?'


>
> On the other hand, if you actually mean what you've been saying lately,
> namely that the government spends *and lends* money into circulation,

Did I say 'into circulation?'  You seem to add a nuance to many of my statements

and then attribute the 'new' statement to me.  Help!!!

> 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?

Sure!  Keynes says a lot about that, doesn't he, for example?

> 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.

Thank you.

> 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.

Logically, tax liabilities in some form come first, then spending, then tax
collection
with a floating exchange rate currency.

> 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.

Yes.

> And people can in
> principle borrow the tokens they need to pay taxes.

Yes.

> In short, the logic
> breaks down.

That is an integral part of the logic.

w

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

--
Warren Mosler
Director of Economic Analysis
III Finance

http://www.mosler.org