Mr. Coburn,
I wrote you a letter recently criticizing your views on the federal deficit and the debt.
I am now writing with a short idea (which I have read from numerous economists) that I thought you might like to think about. I certainly have.
If you are worried about the United States' debt, why not have the Treasury cease to sell securities? Then deficit spending (the amount put into the economy by the government that is more than the amount taken out through taxes) would accumulate in reserve accounts at the Fed (the Fed's "checking" accounts) instead of in Treasuries (the Fed's "savings" accounts).
What is perceived as an accumulating debt that has to be "paid back" is really just the accumulation of savings at the Fed. The national "debt" is really the world's dollar savings. After all, the government’s deficit equals non-government savings of financial assets to the last penny.
Issuing Treasuries has no real function anymore since our government uses a floating currency. The money is printed out of nothing. Then the spending is offset by taxation to avoid too much liquidity in the system. Taxation and bonds do not operate as revenue generators. How could they? The money used to buy those bonds and pay those taxes came from the government originally, and it was printed out of nothing. It is illogical to say that money can start with tax revenues and bond sales. Where did that money originate? So despite what many people think and say about it, operationally, in absolute reality, taxes and bond sales do not serve the purpose of generating revenue for the federal government.
The only constraint on deficit spending is the possibility of inflation. But that is not a worry right now. In fact, deflation is still a worry, which means that the government is not deficit spending enough - since private credit is not generating enough growth right now and the world still wants to sit on dollars. Where else can new demand be generated except by federal fiscal stimulus? Inflation would probably be good right now, as it might encourage people to get off some savings and spend/invest it.
If we do get to a point where demand is too hot, we will be at a position of full employment with a booming economy. Then "demand-pull" inflation could begin to take effect. At that point, it would be wise to raise taxes in order to drain the excess demand out of the system. Or the Fed can tighten credit markets.
Thanks for your consideration of these issues. I know that you are a passionate, intelligent individual with the best interests of the nation at heart. I hope that you will look into the issues like I have. I am not an economist, I am a musician. But I believe that economic illiteracy is a huge danger to our nation right now, so I am reading up. And I still have a long way to go.
sincerely,
Steven Stark
You go, Steven!
ReplyDeleteGood luck on changing minds on this.. and hearts.
Hey Steve, you left out the word "an" before the word "economist" in your line near the end that should read as "I am not AN economist". Just wanted to let you know.
ReplyDeleteAlso, I think the letter is really interesting and a neat idea to mail to Tom Coburn. You might try to dim it down just a little bit for him though. Maybe use a parable or something? It is a bit much to grasp in one sitting. I read it and I feel like I understand everything you are saying, but, then I start thinking about a foreign government buying $500 billion in U.S. Treasury Bonds we issued, and I can't help but look at that $500 billion as a debt the U.S. has. I understand your points about us pulling those bonds out of thin air, but, what I don't understand is the exchange among countries. If China bought $500 billion in U.S. Treasury Bonds today, and the interest was 3%, for 10 years till maturity, then would we not have $500 billion dollars from China sitting somewhere? and, would we not owe China 3% of $500 billion each year for 10 years as an interest payment? This part is still confusing to me.
So, basically, I understand your comments about taxation, inflation, printing money, etc.. I get the abstract, but I am having a hard time understanding how to put it on paper (pardon the pun!)
Hey John,
ReplyDeleteThanks, I will fix the "an".
" If China bought $500 billion in U.S. Treasury Bonds today, and the interest was 3%, for 10 years till maturity, then would we not have $500 billion dollars from China sitting somewhere?"
In a theoretical way, yes that 500 billion is sitting somewhere...but in reality, it is nowhere except as a number on a computer screen. And yes, we would pay interest on that amount (by changing the number on the computer screen up a little bit over time).
The thing about China is that they have already been paid the dollars that they want for their goods. They are not really owed money, anymore than I see my bank as owing me money (since I "loaned" it to the bank by depositing it).
The dollars they are owed will sit in Treasuries (like a savings account), and when those Treasuries mature,then the money is transfered from the Treasuries into reserve accounts at the Fed (like checking). Every bank and country has a reserve account at the Fed. If you and I have money in a commercial bank, that money is in a reserve account at the Fed, because that is the bank's bank account.
So if we did not issue Treasuries, China's money would be in a bank checking account. China could spend it's money at any time, but they don't want to. They want dollars.
When people say "We have to pay China back", the only way that CHina will actually REALLY be paid back, is if they spend their dollars on our goods and services. Right now, they are basically sending us their goods and services and not wanting anything in return.
So what would happen if CHina, or anybody owning Treasuries that gather interest, started wanting to actually be paid back? Our economy would go into high gear, with job creation everywhere, as we tried to meet the demand for goods and services.
ANd the potential problem is inflation. If the amount of money being spent begins to overwhelm the capacity of our economy to produce, then prices would start to rise. So what we would need is to control over-stimulated demand. And how do we do that? By taxation, which does not operationally provide revenue to the US, but serves the purpose of draining the system of funds after the government spends them. Or the Fed can change interest rates to cool down credit and slow down economic expansion.
By the way, as a side note, taxes serve one other purpose besides draining the economy of a lot of the money put there by the government. It is also the tool that a government uses to insure that its currency is used in the exchange of goods and services. Why do we see pictures of dead presidents as representatives of value? Because the government requires taxes to be paid with them - so they are in demand.
Fascinating stuff.
Burk,
ReplyDeleteThanks, man! I have discovered a lot of this information because of your writing and the references you link on your blog.
Sorry the Thunder beat your Warriors last night (not really!). You guys have a couple of incredible guards. I couldn't believe Curry's play. Wow.
Steven,
ReplyDeleteI think your ideas have credence, but only if we view the US as a stand-alone entity. In today's economy, the value of the dollar is largely theoretical; however, its tangible value is that relative to international currency values. Debt is indeed meaningful as we cannot inflate our dollar without ramifications on an international scale. We could, in effect, even out our internal economy by devaluing the dollar, but foreign trade depends upon some consistency.
Randy,
ReplyDeleteI am not suggesting inflating our dollar necessarily. Inflation can be controlled by taxation or through Fed action, even if China spends their dollars on our products and provides us with a huge fiscal stimulus (which we currently need in some form).
Now if we are talking about the dollar in relation to other currencies, if the dollar decreases in value then US manufacturer's have a chance again. We could produce things here instead of being used by the world as their consumers (because they simply want dollars and to have a reason to build up their infrastrucuture).
In fact, people constantly complain about China's currency manipulation. They are artificially keeping the dollar too strong. Most see that as a big problem, so a weaker dollar (at least against the yuan) is almost universally desired.
Having viewed several of Coburn's pieces, I think he would argue simply that we can enact programs that would not require changing the value of the dollar. You cannot restructure interest rates or mint extra funds without impacting the dollar. Forget about the political ramifications with China... just think about the unnecessary overhead associated with these changes. It's staggering and it's money that can be used elsewhere. Not only that, but by continually tweaking the dollar, we are creating permanent overhead. If we lose the debt and build our society at the individual level, we can address problems like unemployment with a minimum of overhead and we can respond to these needs quickly using the freed assets.
ReplyDeleteThis comment has been removed by the author.
ReplyDeleteSorry, needed to clarify a couple of things so previous comment erased..
ReplyDelete"mint extra funds"
We mint extra funds every time the government spends more than it destroys with taxation. But this deficit spending is the only way to create new net financial assets. Private credit is the only other way to expand the economy, but new credit is offset by the corresponding liability, so no actual, new asset is created. There are other ways to temporarily expand the economy (China spending dollars?), but only the the government and banks can create purchasing power out of nothing, and only the government's created money is a new net asset.
We can't not have a debt, because the economy requires deficits to get dollars. The problem is that our "debt" is equated with the kinds of debts that we have in our households, which is inaccurate, because we need income to buy things and pay down debt and the government does not.
No one that I have read, who is critical of our debt and deficit, thinks the government cannot have debt - rather they argue that the size of the debt as compared to GDP is too big. I disagree because there is not enough money, which is required for spending and therefore growth, to have our economy work at full capacity right now.
"unnecessary overhead associated with these changes"
I am not sure what you mean by these massive overhead charges. What do you mean by permanent overhead?
What do you mean by building society at the individual level? I am all for job training, etc. but the economy grows because of more spending. So if the government does not deficit spend then:
1. Do we extend greater private credit ( which is private deficit/debt)? We are coming off a credit bubble, so that is probably not going to happen too quickly.
2. Do we convince China to spend dollars? I am not sure we can.
3. Do we get rich people to get off some of their savings and massively spend?
4. Do we allow our economy to remain weak, along with the corresponding lack of investment in education, science, infrastructure, etc. that this entails? And why? to prevent inflation? Even though the economy, as we write, is moving towards deflation?
And none of these options create net financial assets. Rather, they redistribute (except the last) - which would be great of course...
Anyway, thanks for the thoughts, I am just not sure what you are suggesting?
Steve, can you refresh me on what is "in it" for the U.S. to have China give us $2 trillion dollars by putting it in our bank account and us having to pay China interest? What is in it for us, if we don't need the $2 trillion, since we could just print it anyway. I understand the value to a bank of me putting money in a savings account as they can re-loan my money to someone else for a profit. I get interest on my loan to them, but they get more interest of their loaning my money to someone else. However, with your explanation here, I am still lost as to why we would want China to deposit $ into our savings account if we dont need their money to re-loan to others since we can just do whatever we want with our currency by printing more, etc. -- I am getting lost on that. Thanks!
ReplyDeleteHey John!
ReplyDeleteI don't think there is anything in it for us to have China put their dollars in a Fed savings account. I have heard it described by one economist as a "sterile hoard."
What is in it for us, is that China has sent us lots of goods without asking any goods back from us. We speculate that they are building up their infrastructure, and they need us to consume their products since they still do not have enough domestic disposable income for the required demand to build their industries.
So if China continues to send us goods without wanting goods back, then the debt (savings account) will grow. If they choose to actually redeem their dollars (which is what "paying China back" actually means"), then they will have to buy things from US manufacturers, which would greatly stimulate our economy.
Basically, China has to spend its dollars to actually redeem them. If it spends them here, great. If it spends them in another country, then the dollars simply move from China's account at the Fed to the other country's account. If China does not want their money in Treasuries, they can sell them, and then their money would be in reserve accounts at the Fed, but since Treasuries pay a lot more interest than reserves, they will probably keep them there, just sitting around forever.
By the way - banks don't actually require deposits to loan. Rather loans create more deposits. A bank loans whenever it sees fit to do so, then they worry about their reserve levels later. They can adjust them by borrowing from other banks or from the Fed. And of course any loan that they make will find its way into other bank accounts and increase reserves there.
However all this lending does not increase net financial wealth, because each new loan, each new creation of money, is offset by the corresponding debt. It is owed back. But federal deficit spending does create new net wealth, even though the government still issues debt securities. If the government spends $10 more than its tax "revenues", then has issued ten extra dollars into the economy. Then it sells a security for $10 which kind of "de-liquidifies" that money. So ten in and ten out - but the Treasury bond remains, a new net asset.
And people receive interest on those bonds and they can easily borrow against them, so they are fairly liquid.
Plus the process takes $10 from someone looking to save it, by buying a bond, and gives it to a more active area in the economy, since the government spend it on goods and services. So it is stimulative.
I think I seriously need you to go over this sometime with me when you have a pen and paper and you can draw me some pretty pictures. Seriously.
ReplyDeleteAlso, I need to read some of the books you have been reading, etc, to get a better grasp on this. It still isn't clicking for me. I especially dont' understand how China simply deposits $2 trillion dollars into a U.S. Savings account (treasuries). I see a Chinese dude wiring $2 trillion dollars to us. You talk about how they do it be giving us goods for free. I am getting lost. We should chat about it sometime! Thanks for trying to explain.
http://moslerforsenate.com/wp-content/uploads/2010/06/7DIF.pdf
ReplyDeleteThis is free, online book that I have been working through. He is a succinct, good writer.
I think that when we buy products from China, they tend to invest the monies they receive in U.S. Treasuries. I think that is pretty much it. Dollars are the world's universally accepted currency, pretty much, so many, many countries have enormous buildups in savings that they keep in dollars.
One helpful thing to consider is that dollars reside at the Fed. Unless there are some paper dollars out there (which really can't be used outside the country). So anyone who owns dollars has them in a bank with a reserve account at the Fed, or in Treasuries. Apparently, each country has an account as well - though I don't understand this well yet.
When I say they send us stuff for free, I simply mean that they don't use the dollars we send them.
What are dollars? They are IOU's. so if you never trade your IOU for a real product, you really haven't redeemed it. So essentially they are sending us real, tangible goods (clothes, etc.) and not taking any real goods back, at this point.
That wording does make much more sense to me. Thanks man!
ReplyDelete