Re: financing, funding, etc

[pdavidso <pdavidso@xxxxxxx>]

>===== Original Message From Bill Mitchell <ecwfm@xxxxxxxxxxxxxxxxxxxxxxx>
=====
>Bill had questioned the use of jargon that can easily take you back into a
GBC
>framework.
>
.
>
>Paul replied:
>
>>Bill, you obviously do not understand my meaning of the financing as
different
>>from funding -- I ask you to see the difference of definitions in my book
>>FINANCIAL MARKETS, MONEY AND THE REAL WORLD.
>
>Bill:
>
>I do understand it, I just don't agree with it.


>
>>BILL: >Government spending does not need to be financed.
>>
>>PAUL: oF COURSE IT MUST5 BE FINANCED.  BY FINANCE WE MEAN THAT THE SPENDER
>>MUST HAVE
>>"FINANCE", I.E.,  MONEY OR ACCESS TO MONEY SO THAT THE SPENDRE CAN DISCHARGE
>>ITS LEGAL CONTRACTUAL OBLIGATION TO PAY FOR WHATEVER IT BUYS. To not have
>>finance means to take possession of something  the seller possesses without
>>paying for it.
>
>BILL: Of-course, in that sense. But there is a fundamental distinction
>between this concept
>applied to the users of the currency and trying to use it for the issuer
>(which is a single entity).
>


AS COOL HAND LUKE SAID: "WE HAVE A FAILURE OF COMMUNICATION" Bill. But I think
the failure goes further -- but given your response aove and below it makes no
sense trying to "talk" to each other.



>In the former case the acts of spending and financing are separate and can
>be analysed
>separately. The financing constrains the spending also.
>In the case of the federal govt (issuer) this separation is problematic and
>ultimately not
>necessary. Spending and as you want to call it "financing" are the same act
>... an
>adjustment to some bank account or a cheque being mailed out.

Yes but the spender must already have financing in his/her account or must
arrange a line of credit or must borrow from someone who has available finance

Although the US Constitution gives Congress the power to control the money
supply -- as long as Congress does not want to print money directly (and if it
did[as during the US Civil war when "greenbacks were printed"] the money
printed would be an IOU of the government--

In the absence of "printing greenbacks, thendeficit spending requires the US
Treasury to issue an IOU  to some one-- be it the public or the Federal
Reserve. [Since legally the Federal Reserve Banks are private corporations
whose stockholderrs are member  private sector depository institutions, then
that someone in the private sector must receive the government issued IOU.]



>
>
>>BILL: >Using this terminology is unnecessary and misleading and brings the
>> >discussion back into the
>> >parameters set by the orthodoxy. Those parameters are not helpful.
>>

You sem to dismiss this difference between finance and funding because it
makes your explanation questionable INHO.  Again there is a failure to
communicate!! You refuse to explain why you reject the following explanation:

>>PAUL: Absolutely wrong -- by drawing a definitional difference between
>>finance and
>>funding, permits one to distinguish between the function of a banking system
>>to finance working capital loans so that the payrolls and other costs of
>>assembling expensivedurable goods can be met -- before the final buyer must
>>obtain the funds to purchase the final product.
>

>an opinion cannot be absolutely wrong ...

It can be if it rejects something that permits explicitly making a distinction
between the role of banks in financing working capital loans and the funding
necessary to permit buyers to purchase a long lived durable when the buyer
cannot "finance" the purchase out of current income flows!


>
>>BILL: If the government wishes to provide financial assets to the private
>>sector
>> >it has that choice but that
>> >is an act of monetary policy (rate support) not fiscal policy (spending).
>>
>>PAUL: That is strange condsidering Warren Mosler's argumen t that if the
>>government
>>runs a deficit [FISCAL POLICY} it is to provide financial assets to savers
>>who
>>want to increase their holdings of financial assets.
>
>Not strange at all. I think you have misconstrued the point although I will
>let Warren
>speak for himself.
>Speaking for myself, net government spending provides the basis of the
>private sector
>credit structure. Yes, this provides "financial assets to savers" but they
>do not have to be
>in the form of government debt. You can run a deficit and provide a sound
>basis for
>the non-govt credit structure and not issue a single $ of government paper.

Interesting point. Can you give an example of the federal government running a
deficit and not issuing either "greenbacks" or any other government debt
paper?


>
>>BILL: >There is no real imperative
>> >on the government to worry about the portfolio options available to the
>> >private sector. The private
>> >sector still have choices including disposal of the money stocks as
>> >spending flows, for example.
>>
>>PAUL: Yes but if the private sector wants to increase its liquidity --
>>then telling
>>it spend its liquidity (dispose of money to increase spending flows) isw not
>>the answer.
>
>excuse me? if it wants to increase its liquidity is can. bank accounts. if
>it wants
>to change its portfolio of financial assets it can. private sector debt
>underpinning
>real investment. if it is not happy with that then it can spend.

If everyone in the private sector suddenly "is not happy" with its portfolio
and they decide they want to "liquidate" , say, their stock market holdings to
obtain cash to spend on goods and services ,-- i.e., when the bubble bursts--
where does the public get these funds equal to the value of their portfolio
before the bubble bursts?  Or are you saying that if the central bank moves in
and buys up all the equities offered to sale at the last price before the
bubble burst, then it is monetary policy tha has provided the iquidity
desired.  If the latter is what you are saying, then why don't you say it?
Of course it is the function of the central bank to take care of liquidity!

paul

Paul Davidson
Editor, Journal of Post Keynesian Economics
University of Tennessee
SMC 503
Knoxville, Tennessee 37996-0550
phone # (561)369-1951; fax #(561)369-1951;
email pdavidson@xxxxxxx
http://econ.bus.utk.edu/davidsonextra/Davidson.html