Re: fiscal deficit - Mosler addendum

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

In response to Warren Mosler:

First let me say that I'm not writing these comments in order to make 'cheap
shots' but to try to make some sense out of your ideas.

I believe we agree on all the collateral business so can take that off the
table.

I am still at loss as to how you define money (or 'currency' or 'net nominal
wealth' if you prefer that).

I see two definitions, both of which are based on how that stuff (which I
will keep calling 'money') enters the system: by spending alone or by
lending and spending. Clearly for the sake of symmetry, if money is injected
only by spending then it must be withdrawn only by taxation (including fees,
etc.). Similarly, if money is injected by spending or lending, then it
should be withdrawn by taxation or borrowing.

Let's for the sake of the argument call the 'spending only' concept MA, and
the 'spending and lending' concept MB. The change by transaction in the
amount of money will be given by

\delta MA = Govt Spending - Taxation

\delta MB = (Govt Spending + Govt Lending) - (Taxation + Govt Borrowing)

Cumulating (integrating) these over time, and adjusting for any valuation
changes in the outstanding stock of instruments, we get the stock of MA and
MB respectively.

MA corresponds to what is normally called 'government debt', so if this is
the concept you have in mind, I'd urge you to call it 'government debt'
instead of 'net nominal $$' or something like that. It would simplify
communication. (You may want to confine your accounts to the
dollar-denominated part of government operations, but that is a relatively
minor point.)

Now, MB corresponds pretty closely to what is normally called 'high-powered
money' HPM (the difference consists of reserve deposits at the CB), or even
more precisely 'circulating currency'. So if that is what you mean, perhaps
you should call it HPM or circulating currency.

Warren wrote in part:
> '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.

Per says:
Well this is the point. If 'net nominal wealth' is the concept, then you are
working with MA. 'Net nominal wealth' cannot be lent into existence or
borrowed out of existence - it results from spending and taxation.

Another question, which was debated extensively in the economic literature
some decades ago, is whether it is right from an accounting point of view to
regard government debt as 'net wealth' for society as a whole. The usual
accounting convention is to add government debt to private wealth, and
subtract it from government wealth, so that in the aggregate, it adds
nothing. It sounds like you're making the point that the subtraction part
should not be made. Fine with me - in fact I am in the same business myself.

Convincing others may be harder, though, since it violates the principle
that only 'real stuff' (structures, equipment, etc.) is net wealth to
society as a whole and that financial assets (including government-issued
ones) are wealth to the creditor but negative wealth to the debtor, so
cancel out in the aggregate. What you are arguing, I sense, is that that
'currency' is somehow 'real stuff' even though it is intangible so we can't
touch or see it. I think you are right but what you do by accepting that
principle is you open up a Pandora's box (which I, incidentally, have spent
a good deal of time unpacking) since the same principle must apply to all
sectors. I don't think you can say that what the government issues is 'real
stuff' but what GM issues is not.

Some miscellanea:

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

Warren asked:
> ?  Missed that one.

Per says:
What I said is simply that the dollar amount of MA is a lot greater than the
dollar amount of MB.

Per wrote before:
> > 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:
> 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???

Per says:
In a sense it is peculiar, although I am just pointing to a general problem
in dealing with non-negligible maturities. If you were to define money in
terms of cash and demand deposits, this aggregation ambiguity would vanish
since their maturity is zero. Otherwise, I'd advise you to look into the
literature on 'Divisia indices' of monetary aggregates (Barnett and Serletis
have a recent book on that).

Per wrote before:
> > Further, even with that in place, the ordinary
> > Keynesian issues of spending vs. saving would be left undealt with.

Warren wrote:
> ???

Per says:
Saving and hoarding are not the same thing. If you work with MA you will be
dealing with saving; if you work with MB you will be dealing with hoarding.
A theory explaining hoarding does not explain saving, and vice versa. So it
all depends on your conceptual framework.

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

Per says:
We agree that tax liabilities (not 'taxation', which is too imprecise since
it does not distinguish between accruals and disbursements) come first. But
in the second step, there should be 'spending and lending', not just
'spending'? And 'tax collection' should read 'tax collection and government
borrowing'?

Best,
Per

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