From: "John O'Donnell" <jackodonnell@xxxxxxx>
Date: 2003/02/24 Mon PM 12:07:34 CST
To: "Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>
CC: pkt <pkt@xxxxxxxxxxxxxxxx>,
"TheNewForum@xxxxxxxxxxxxxxx"
<TheNewForum@xxxxxxxxxxxxxxx>
Subject: Re: [gang8] Re: [A-List] US Dollar Standard: Deficits Do Matter
Henry C.K. Liu wrote:
>Defiicits do matter, but only to the extend of when they
occur and how
>the money is raise and spent. Government debt is not the
only source.
> Government has the power to create money. And as long as
the rate of
>money creation is not ahead of economic expansion, even
monetarists must
>agree that it is not inflationary. Even Milton Friedman
thinks that
>steady (3%) expansion of the money supply would lead to a
3% steady
>expansion of the economy (with 4% structural unemployment.)
>
As much as I admire Milton, this is a gross error.
While it is true that "all else being equal" a 3% increase
in the
economy would result in a 3% increase in HPM [i.e. -- High
powered
money or "real money" separate from bank credit and other
money
substitutes.] if the supply of HPM is to be the appropriate
quantity to
maintain the value of the currency, "all else" is seldom equal.
The point being that the effect -- an increase in money supply
sufficient to keep the value of money constant-- is not
causal of
economic growth but economic growth/shrinkage is causal of a
need for
growth/shrinkage in the supply of HPM and all the
substitutes needed to
maintain the value of the currency. Because the growth.
shrinkage of
substitutes is not under direct control of the CB the
amount of HPM
needed to maintain the value of the currency can only be
determined by
the effect of changes in the supply of HPM on the value of
the currency.
This also explains why the recent increases in HPM have not
caused an
explosion in inflation as the appropriate amount of HPM
cannot be
determined from economic activity but only from the effect
of HPM on the
value of the currency.
What remains to be seen is what the fed will do if/when the
money
substitutes expand making the quantity of HPM excessive.
That is, will
the fed institute a sufficiently rapid decrease in the
supply of HPM to
maintain the the value of the currency or will it be
reluctant to cause
the drastic reduction in HPM needed to prevent inflation.
> Some who
>are ideologically free from monetarists fixations assert
that zero
>unemployment can be achieved with a 6% economic expansion.
To do that
>the government should print and add 7% to the money supply
every year,
>running a budget deficit equal to 7% of GDP, whicch in
todays terms,
>means $700 billion.
>
Again, this is a faulty assessment of causality. Money
supply does not
cause economic activity, growth in economic activity causes
a need for
growth in money [HPM] and money substitutes to maintain the
value of money.
>That is roughly what the US economy is doing, a $400
billlion trade
>deficit and a $300 billion budget deficit. So why is
there 7%
>unemployment? Because the money is spent on the wrong things.
>Balancing a budget when the economy is contracting is to
starve a sick
>patient, to cut taxes for the rich at a time of
overcapacity is to pour
>gasoline on fire, and to stimulate an economy with war
deficits is to
>burn one's hair to cook an egg.
>
Another fallacy of imparting causality where none exists.
Fiscal balance
is not the relevant factor for economic growth. The relevant
factor is
the FORM of taxation [and borrowing] used to maintain the
value of the
currency. Tax in a form that affects "fixed costs of
production" rather
than "variable costs" and the taxes can be adjusted to cause
the optimum
rate of economic growth "all else being equal." Eventually,
after
enough applications of conventional monetary and fiscal
economic wisdom
failing to do what is claimed for the policies, maybe
economists will
recognize the foolishness of expecting a different outcome
from applying
the same "remedies."
>
>Tax and spend is a self adjusting formula, not a fiscal
sin. Taxing
>more than spending is simply removing money from the
economy. When
>government does not spend and spend on the right things,
it should go
>out of business and let someone else do the necessary.
>
'Tax and spend" can be a rational macroeconomic policy
if/when the
effects of each are measured and adjusted in response to the
effects of
each. But it does seem unlikely that economists will ever
comprehend the
essence of effectively adjusting relevant controls in
response feedback signals.