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August 11 - October 16, 2019
inflation can be fueled even before full employment if government spending is directed toward sectors with little capacity to expand output. Hence, one response to such dangers could be to raise taxes. Another could be to cut spending.
Inflation
all you need to drive a currency is an involuntary obligation to deliver the currency – and that can be a tax, fee, fine, or religious tithe. Or even a payment to obtain water or any other necessity.
Currency concept
issues its own sovereign currency without a promise to convert at a fixed value to gold or foreign currency (that is, the government “floats” its currency),
In reality, these are functionally two entirely separate activities. Government can spend to help the poor without taxing the rich or anyone
The idea is that we do need to reduce inequality, and while taxes on the rich might help, it will be more effective to try to reduce inequality at the source: reduce the high incomes at the top, and raise them at the bottom.
Reduce income at the top. and raise income at the bottom
Warren Mosler often puts it this way: the purpose of the tax is to create unemployment. That might sound a bit strange, but if we define unemployment as a situation in which job seekers want to work for money wages, then government can hire them by offering its currency. The tax frees resources from other uses so that government can employ them in public use.
Tax create unemployment
To greatly simplify, money is a measuring unit, originally created by rulers to value the fees, fines, and taxes owed. By putting the subjects or citizens into debt, real resources could be moved to serve the public purpose. Taxes drive money. So, money was created to give government command over socially created resources.
Tax function as measurement of social resource
This is why money is linked to sovereign power – the power to command resources. That power is rarely absolute. It is contested, with other sovereigns but often more important is the contest with domestic creditors. Too much debt to private creditors reduces sovereign power – it destroys the balance of power needed to govern.
Sovereign vs domestic power
Monetization proceeds in two steps: the first is to impose a monetary tax and the second is to put a monetary price on the resources government wants.
Monetization
A tax on monetary income will not “drive” a currency unless the economy is already monetized.
You need a reasonably broad-based tax that is hard to avoid. It is easy to avoid a tax on money income if people can live without money income. So what the colonizers did was to impose either a head tax or hut tax. Everyone has a head and a hut.
Once you’ve monetized an economy such that a large portion of the members must work for money incomes in order to buy the necessities of life that are largely available only for monetary purchase, then you can move to other kinds of taxes. It is very common to use wage taxes, sales taxes, profits taxes, income taxes, and wealth taxes in highly monetized economies. These will “work” once you’ve monetized the economy, although they would not “work” in an economy that was not yet monetized.
perfection is very hard to achieve – we’ve still got smokers, and we’ll still have carbon polluters for a very long time. Still the purpose of a sin tax is to reduce sin, not to raise revenue.
Sin tax
payroll taxes, consumption taxes, and corporate taxes. Above we have implied that payroll taxes favor robots over human workers. Human workers receive less net pay and their employers have to pay more to hire them – on the margin, workers might choose leisure while employers might replace them with robots.
Payroll tax
Whenever I am asked at conferences “what should we do about corporations moving offshore to evade taxes”, I say “eliminate the corporate income tax”. When someone then asks “but how will we afford programs to help the poor?”, I respond, as Ruml, Chairman of the Federal Reserve Bank of New York did, “Taxes for revenue are obsolete” (Ruml 1946a):
Main
a gold standard in which the country not only promised to redeem its currency for gold, but also promised to make this redemption at a fixed exchange rate.
Gold standard
we will argue that a floating currency provides more policy space – the ability to use domestic fiscal and monetary policy to achieve policy goals. By contrast, a fixed exchange rate reduces policy space. That does not necessarily mean that a government with a fixed exchange rate cannot pursue domestic policy. It depends.
Floating and fixed
In the Aramaic language spoken by Christ, the word for “debt” is the same as the word for “sin”.
Why would a nation want to export its output, only to have silver and gold return to fill the King’s coffers? And why the rush to the New World to get gold and silver? Because the gold and silver were needed to conduct the foreign wars, which required the hiring of mercenary armies and the purchase of the supplies needed to support those armies in foreign lands.
Why foreign currency and gold and silver? War
These three examples show us the problems of pegging a currency (unless the nation can accumulate huge foreign currency reserves), the probably rare but costly problems associated with defaulting on sovereign debts for political reasons, and the very real risks of default on foreign-currency denominated debts. Far better to adopt a sovereign currency with no promise to convert at a fixed exchange rate, and to avoid issuing foreign-currency denominated debt.
Fixed exchange rate
To reduce the possibility of such debt problems among EMU nations, each agreed to adopt restrictions on budget deficits and debt issue – the guidelines were that nations would not run national government budget deficits greater than 3 percent of GDP and would not accumulate government debt greater than 60 percent of GDP. In reality, virtually all member nations persistently violated these criteria.
EMU countries
in 2008, many “periphery” nations (especially Portugal, Ireland, Italy, Greece, and Spain – termed “PIIGS”) experienced serious debt problems and downgrades. Markets pushed their interest rates higher, compounding the problems: –as interest rates on government debt rose above GDP growth rates, the debt ratios rose.
Debt problem.downgrade .and higher interest rate
Nations facing debt problems were forced to adopt austerity packages – cutting spending, laying off government employees and forcing wage cuts, and raising taxes and fees.
Nations debt problem limits
when Greece joined the EMU, it gave up its sovereign currency and adopted what is essentially a foreign currency. When Japan services its debts, it does so by making “keystroke” entries onto balance sheets, as discussed previously. It can never run out of the “keystrokes” – it can create as many Yen entries as necessary. It can never be forced into involuntary default.
Greece vs japan
Germany was able to keep its budget deficits low, and its private sector savings high, by relying on its neighbors to keep the German economy growing through exports. But that meant, in turn, that its neighbors were building up debts – both public and private – and eventually markets reacted to that with credit downgrades.
EU germany and other nations
Its government ran some surpluses, and its current account balance was hugely in deficit. With the crisis, that all changed – the private sector began to run surpluses, the current account deficit fell, and the government’s deficit exploded.
Changes for the private sector and gov
Had the European governments attempted to follow the restrictions of SGP (stability and growth pact that limits deficits to 3% and debts to 60% of GDP) – an attempt that would most certainly fail because of the endogenous nature of budget deficits – they would not have been able to support their economies in the global crisis, possibly leading to a global or at least a continental depression.
SGP (stability and growth pact)wont help either
other members can put together a debt package – lending at slightly more generous terms. But what highly indebted members need is debt relief and economic growth, not more debt. With austerity demanded in order to get the proffered loans, growth turns negative, increasing budget deficits and leading to more desperate borrowing.
debt package = more debt
if it borrows from markets, interest rates rise; if it borrows from the EMU (or the IMF) the austerity is demanded in exchange, so its growth falls and tax revenue plummets.
GFC(Global financial crisis) and debt for PIIGS
One solution for a troubled country is to leave the EMU and return to a sovereign currency issued by the government – i.e., the Drachma for Greece, the Lira for Italy, and so on. The transition would be disruptive, with near-term costs. But the benefit would be to create domestic fiscal and policy space to deal with the crisis. Default on Euro-denominated debt might be necessary. Retaliation by the EU is possible.
solution for PIIGS
Crises only increase the forces of disunion or dissolution, increasing the likelihood of eventual divorce and increasing hostility. That in turn forestalls a real solution, which makes the possibility of a Great Depression “2.0”
the phenomenon of Crisis
The separation of a nation from its currency puts unnecessary constraint on fiscal policy that will almost certainly lead to a crisis.
Seperation of a nation. then should you leave for sovereign currency or should you not?
We don’t argue that no country should ever adopt a peg – rather, countries should be aware of the relative costs of doing so. Finally, pegs invite speculators – who bet that you cannot maintain the peg. That is why it is foolish to peg unless you have an unassailable foreign currency reserve.
Only peg when you have enough reserve
during a major war like WWII, government not only conscripts workers into the military, but it also redirects resources to production for the war effort. Without rationing and wage and price controls, this can lead to a general price and wage inflation. Note that it does not take a major war for this to happen. If government spending pushes the economy to, and beyond, full employment it is likely that inflation will result even without a major war.
War time wage and price
high domestic employment and income can – under some circumstances – lead to a trade deficit (as domestic demand for imports rises relative to foreign demand for exports – discussed in the previous chapter). This might then pressure exchange rates (although the correlation between trade deficits and exchange rate depreciation is far from certain).
Gov spend and exchange rate
Claims are sometimes made that a “free market” economy comprised of individuals seeking only their own self-interest can act “harmoniously”, as if guided by an “invisible hand”. While modern capitalist economies are often characterized as “market” economies, it must be admitted that much or even most economic activity takes place outside markets.
Wow.Invisible hands. And outside of market
In fact, economists had rigorously demonstrated by the 1950s that the conditions under which even a highly stylized and simplified economy could reach such a result cannot be expected to exist in the real world. In other words, there is no scientific basis for the claim that “free markets” are best.
Interesting
What is the public purpose? It is not easy to define or to identify. One of the basic functions of any social organization is to provide the necessary food, clothing, shelter, education, health care, legal framework, and socialization for survival of the society.
Public purpose
We usually think of the economy as the main part of the social organization that is responsible for provision of the material means of survival: the food, clothing, shelter, and so on. However, the economy is always embedded in the social organization as a whole, affecting and affected by culture, politics, and social institutions.
Economy is embedded in Social organisation
The public purpose is an evolving concept. The national government must play an important role in society as it helps to identify the public purpose and to establish a social structure within which individuals and groups will work toward achieving the social (public and private) purpose.
Everchanging public purpose
conservatives tend to define the public purpose in narrow terms, desiring to constrain government. Liberals generally see a bigger role for the government to play in securing the public purpose. While economics can shed some light on this issue, it cannot provide a conclusive answer.
Conservatives and liberals
if domestic income is too low, government needs to spend more (relative to taxes). Unemployment is sufficient evidence of this condition, so if there is unemployment it means government spending is too low (or taxes are too high).
Unemployment= gov low spend
if the domestic interest rate is too high, it means government needs to provide more “money”, in the form of bank reserves, to lower the interest rate.
if government issues too many bonds, it has by the same token issued too few bank reserves and cash. The solution is for the Treasury and central bank to stop selling bonds, and, indeed, for the central bank to engage in open market purchases (buying treasuries by crediting the selling banks with reserves). That will allow the overnight rate to fall as banks obtain more reserves and the public gets more cash.
that is what any bank does: it makes a loan to you by holding your IOU while crediting your demand deposit so that you can spend.
we must note that it is not possible for all nations to run simultaneous current account surpluses: Asian net exporters, for example, rely heavily on sales to the United States, which runs a current account deficit to provide the Dollar assets the exporters want to accumulate. We conclude that at least some governments will have to run persistent deficits to provide the net financial assets desired by the world’s savers. It makes sense for the government of the nation that provides the international reserve currency to fill that role. For the time being, that is the US government.
Some surplus some deficit
they can favor policy that generates employment and development without increasing imports (import substitution policies, for example). They can create jobs programs that are labor intensive (so that foreign-made capital equipment is not needed) or programs that provide the output that the newly employed workers need (so that they do not spend their new incomes on imports).
What gov generated money can do. Or keystrokes
exports are a cost and imports are a benefit from the perspective of a nation as a whole. The explanation is simple. When resources, including labor, are used to produce output that is shipped to foreigners, the domestic population does not get to consume that output or use it for further production (in the case of investment goods). The nation bears the cost of producing the output, but does not get the benefit.
Export is cost import benefit
However, note that for every export there must be an import; for every trade surplus there must be a trade deficit. Obviously it is not possible for all countries to simultaneously grow in this manner;
Ones deficit is another’s surplus
Still, a nation does not need to export to enjoy the multiplier effects. Higher government spending also increases employment and sales. More of the benefits of growth remain in the domestic economy as compared with export-led growth. In other words, even if we take account of multiplier effects, a nation is better off if it creates jobs to produce for domestic consumption – not for consumption by foreigners.
Export not needed for prosperity in a nation
