Home > Uncategorized > Why public debt is a good thing

Why public debt is a good thing

from Lars Syll

dec3bb27f72875e4fb4d4b62daebb2fd161b36392c1a0626f00cfd2ece207d84The U.S. economy has, on the whole, done pretty well these past 180 years, suggesting that having the government owe the private sector money might not be all that bad a thing. The British government, by the way, has been in debt for more than three centuries, an era spanning the Industrial Revolution, victory over Napoleon, and more.

But is the point simply that public debt isn’t as bad as legend has it? Or can government debt actually be a good thing?

Believe it or not, many economists argue that the economy needs a sufficient amount of public debt out there to function well. And how much is sufficient? Maybe more than we currently have. That is, there’s a reasonable argument to be made that part of what ails the world economy right now is that governments aren’t deep enough in debt.

Paul Krugman

Indeed.

Krugman is absolutely right.

Why?  

Through history public debts have gone up and down, often expanding in periods of war or large changes in basic infrastructure and technologies, and then going down in periods when things have settled down.

The pros and cons of public debt have been put forward for as long as the phenomenon itself has existed, but it has, notwithstanding that, not been possible to reach anything close to consensus on the issue — at least not in a long time-horizon perspective. One has as a rule not even been able to agree on whether public debt is a problem, and if — when it is or how to best tackle it. Some of the more prominent reasons for this non-consensus are the complexity of the issue, the mingling of vested interests, ideology, psychological fears, the uncertainty of calculating ad estimating inter-generational effects, etc., etc.

In classical economics — following in the footsteps of David Hume – especially Adam Smith, David Ricardo, and Jean-Baptiste Say put forward views on public debt that was as a rule negative. The good budget was a balanced budget. If government borrowed money to finance its activities, it would only give birth to “crowding out” private enterprise and investments. The state was generally considered incapable if paying its debts, and the real burden would therefor essentially fall on the taxpayers that ultimately had to pay for the irresponsibility of government. The moral character of the argumentation was a salient feature — according to Hume, “either the nation must destroy public credit, or the public credit will destroy the nation.”

Later on in the 20th century economists like John Maynard Keynes, Abba Lerner and Alvin Hansen would hold a more positive view on public debt. Public debt was normally nothing to fear, especially if it was financed within the country itself (but even foreign loans could be beneficient for the economy if invested in the right way). Some members of society would hold bonds and earn interest on them, while others would have to pay the taxes that ultimately paid the interest on the debt. But the debt was not considered a net burden for society as a whole, since the debt cancelled itself out between the two groups. If the state could issue bonds at a low interest rate, unemployment could be reduced without necessarily resulting in strong inflationary pressure. And the inter-generational burden was no real burden according to this group of economists, since — if used in a suitable way — the debt would, through its effects on investments and employment, actually be net winners. There could, of course, be unwanted negative distributional side effects, for the future generation, but that was mostly considered a minor problem since, as  Lerner put it,“if our children or grandchildren repay some of the national debt these payments will be made to our children and grandchildren and to nobody else.”

Central to the Keynesian influenced view is the fundamental difference between private and public debt. Conflating the one with the other is an example of the atomistic fallacy, which is basically a variation on Keynes’ savings paradox. If an individual tries to save and cut down on debts, that may be fine and rational, but if everyone tries to do it, the result would be lower aggregate demand and increasing unemployment for the economy as a whole.

An individual always have to pay his debts. But a government can always pay back old debts with new, through the issue of new bonds. The state is not like an individual. Public debt is not like private debt. Government debt is essentially a debt to itself, its citizens. Interest paid on the debt is paid by the taxpayers on the one hand, but on the other hand, interest on the bonds that finance the debts goes to those who lend out the money.

To both Keynes and Lerner it was evident that the state had the ability to promote full employment and a stable price level – and that it should use its powers to do so. If that meant that it had to take on a debt and (more or less temporarily) underbalance its budget – so let it be! Public debt is neither good nor bad. It is a means to achieving two over-arching macroeconomic goals – full employment and price stability. What is sacred is not to have a balanced budget or running down public debt per se, regardless of the effects on the macroeconomic goals. If “sound finance”, austerity and a balanced budgets means increased unemployment and destabilizing prices, they have to be abandoned.

Now against this reasoning, exponents of the thesis of Ricardian equivalence, have maintained that whether the public sector finances its expenditures through taxes or by issuing bonds is inconsequential, since bonds must sooner or later be repaid by raising taxes in the future.

In the 1970s Robert Barro attempted to give the proposition a firm theoretical foundation, arguing that the substitution of a budget deficit for current taxes has no impact on aggregate demand and so budget deficits and taxation have equivalent effects on the economy.

The Ricardo-Barro hypothesis, with its view of public debt incurring a burden for future generations, is the dominant view among mainstream economists and politicians today. The rational people making up the actors in the model are assumed to know that today’s debts are tomorrow’s taxes. But — one of the main problems with this standard neoclassical theory is, however, that it doesn’t fit the facts.

From a more theoretical point of view, one may also strongly criticize the Ricardo-Barro model and its concomitant crowding out assumption, since perfect capital markets do not exist and repayments of public debt can take place far into the future and it’s dubious if we really care for generations 300 years from now.

Today there seems to be a rather widespread consensus of public debt being acceptable as long as it doesn’t increase too much and too fast. If the public debt-GDP ratio becomes higher than X % the likelihood of debt crisis and/or lower growth increases.

But in discussing within which margins public debt is feasible, the focus, however, is solely on the upper limit of indebtedness, and very few asks the question if maybe there is also a problem if public debt becomes too low.

The government’s ability to conduct an “optimal” public debt policy may be negatively affected if public debt becomes too small. To guarantee a well-functioning secondary market in bonds it is essential that the government has access to a functioning market. If turnover and liquidity in the secondary market becomes too small, increased volatility and uncertainty will in the long run lead to an increase in borrowing costs. Ultimately there’s even a risk that market makers would disappear, leaving bond market trading to be operated solely through brokered deals. As a kind of precautionary measure against this eventuality it may be argued – especially in times of financial turmoil and crises — that it is necessary to increase government borrowing and debt to ensure – in a longer run – good borrowing preparedness and a sustained (government) bond market.

The question if public debt is good and that we may actually have to little of it is one of our time’s biggest questions. Giving the wrong answer to it — as Krugman notices — will be costly:

0005397318999_621db3b6e1The great debt panic that warped the U.S. political scene from 2010 to 2012, and still dominates economic discussion in Britain and the eurozone, was even more wrongheaded than those of us in the anti-austerity camp realized.

Not only were governments that listened to the fiscal scolds kicking the economy when it was down, prolonging the slump; not only were they slashing public investment at the very moment bond investors were practically pleading with them to spend more; they may have been setting us up for future crises.

And the ironic thing is that these foolish policies, and all the human suffering they created, were sold with appeals to prudence and fiscal responsibility.

  1. Alan
    March 28, 2016 at 2:21 pm

    For more on the current UK government’s unhealthy obsession with reducing public debt and its impact on the UK economy see:

    Budget 2016: Austerity Did Not Work Then and It Will Not Work Now.

    George Osborne’s Economic Miracle is Built on a Mountain of Personal Debt.

  2. antireifier
    March 28, 2016 at 3:34 pm

    This article ignores the relationship between monetary and fiscal practices and continues the current political obfuscation between the two. Its linear focus on bond markets obscures the feedback systems and non-linear impacts. The issue is to whom the debt is owed not the amount. When public debt, held by the private sector, increases, it puts constraints on the fiscal practices often justifying austerity programmes. In Canada the current level of federal debt service charges (even in the past balanced budget) exceeded all other expenditures except for two — seniors and health care. It even exceeded defence. These huge transfers of tax dollars as interest (debt service charges) to the wealthy money-lenders exacerbate the inequality growing in our society. Public debt is part of the money supply and of course must be managed in the interest of the public. Currently public debt and elements of this article ignore public good.

    Simply stated public debt should be balanced between public and private institutions and should be primarily used to fund infrastructure needed by the country. If private pension funds need more stable portions of their portfolio, they should be allowed to purchase government bonds. If citizens are looking for more stable investments for their savings they may be encouraged to be savings bonds. When I retire I will start to write more about this but there are some fundamentals that should be noted in the meantime.

    To reiterate. It is silly to talk about public debt being too high or too low because it diverts us from looking at who actually holds the debt and its public value. Bring that issue into the discussion and we might get somewhere.

  3. louisperetzperetz
    March 28, 2016 at 4:17 pm

    I don’t agree. Why? Because of the debt is only good for banks. And very dangerous for most of people, because of austérity. It makes suffering them. And so bringing revolution, of course not in U.S.A., but into European people.

    MYTHE ET MYSTIFICATION DES DETTES SOUVERAINES
    L’argent est devenu virtuel depuis qu’il circule essentiellement sous forme scripturale. Ce qui rend les dettes souveraines irréalistes, artificielles. A l’origine l’homme travaille pour consommer ce qu’il produit. Mais depuis que des pays se sont industrialisés, l’Economie s’est profondément modifiée. La circulation monétaire s’est amplifiée. La dette souveraine est le résultat de lois qui obligent les pays à réguler cette nouvelle dynamique. Et parfois ces pays s’endettent parce que les ressources monétaires ne suivent pas l’activité dépensière. Certaines dettes sont devenues permanentes, structurelles, dans des économies modernes comme en France depuis la fin des années 1970. Ce manque de provision est appelé « déficit». La somme recherchée pour « éponger » la dette doit alors être provisionnée par une source spéciale, qui ne provient pas, du moins de façon suffisante, de rentrées habituelles telles que les taxes et impôts. Avant ces années 70, l’Etat trouvait l’argent nécessaire pour combler ce déficit par le Trésor public, organisme d’Etat qui gère toutes les sommes qui sortent et rentrent dans ses caisses . Les sommes nécessaires étaient alors fournies par un jeu d’écriture dans les comptes. Ce qui revenait à créer artificiellement de l’argent qui n’existait pas. Ce qu’on appelle par dérision le « planche à billets » revient à insuffler un argent « frais » dans la masse monétaire en circulation. Certaines dépenses sont impossibles à éviter, ne serait-ce que pour répondre à des besoins humains qu’un Etat normal est censé assumer pour l’activité du pays.
    S’il y a cumul de dettes d’Etat, depuis des décennies, c’est que quelque chose ou quelqu’un empêche de réunir les sommes nécessaires pour se débarrasser de ce qui est devenu une sorte de tricherie systémique, dans la mesure où cet argent est une richesse qui ne provient pas du travail, mais est fabriqué de toutes pièces. Le déficit pouvait survenir par insuffisance ou retard de ressources. Ou à la suite de circonstances exceptionnelles telles que l’exige une préparation à la guerre. Cette technique de fabrication monétaire a définitivement été interdite à l’Etat, en janvier 1973, par la loi. Ce type d’opération d’ailleurs, ne pouvait avoir lieu qu’avec l’accord du Parlement, ce qui, en fait, n’était qu’un simple contrôle. Dans un système démocratique il fallait surveiller qu’il n’y ait pas d’abus de la part du gouvernement.
    L’argent ainsi injecté dans l’Economie, est ainsi simplement transféré de comptes à comptes par de simples jeux d’écriture, réalisé de nos jours par un seul clic. Plus facile plus rapide et sans limite, les sommes sont alors transmises par l’intermédiaire d’une Banque centrale sur ordre du Trésor Public. Ce qu’on appelle « financer » le déficit en termes comptables, est un simple chiffrage. Il a l’inconvénient d’augmenter la masse monétaire en circulation à chaque dépense supplémentaire. Certes l’augmentation de la masse monétaire en circulation du seul fait de l’augmentation des échanges marchands. Sur le long terme il peut être dû à l’augmentation démographique : plus il a de de personnes, généralement des salariés, qui ont des moyens de dépenser dans un pays, plus la masse monétaire augmente avec leurs achats. Les conséquences sont connues : toute augmentation de la masse monétaire en circulation pour un même nombre de population, provoque mécaniquement une perte de la valeur unitaire de la monnaie. La valeur codifiée, nominale de chaque billet diminue mathématiquement avec la quantité totale émise par les transactions sur les marchés. Sous réserve toutefois que ce soit la masse salariale qui en soit la cause, ce système de fonctionnement est normal. L’inflation qui suit est enclenchée mécaniquement, par contrecoup, par une augmentation des prix dans la mesure où chaque produit évalué dans une monnaie à une certaine n’a plus à la même valeur par la suite, puisque la valeur unitaire de l’argent a baissé entre temps. Ceux qui possèdent l’argent et qui ont la possibilité d’agir sur les prix, les producteurs et distributeurs, compensent automatiquement cette perte insidieuse par une réévaluation des prix de biens produits.
    On comprend que les dépenses supplémentaires de l’Etat, vont avoir indirectement ce même effet inflationniste. Les possédants, et surtout les prêteurs, tous les organismes bancaires vont influencer l’Etat pour qu’il ne dépense pas plus que ce qu’il reçoit de façon à ne pas être obligé de récupérer la perte de valeur de la monnaie par des taux d’intérêt excessifs. Ce qui risque de bloquer les éventuels emprunteurs, donc l’activité. Il faut qu’un Etat compense, par exemple, les inégalités sociales, ce qui l’oblige quelques fois à dépenser plus, malgré un manque de ressources.
    Les emprunteurs et prêteurs que sont depuis toujours les banques, savent pertinemment, que la valeur de l’argent prêté baisse sur le long terme . Or si les prix augmentent pour compenser la baisse de valeur de la monnaie en cours, comme on vient de le voir, les possédants, et surtout les prêteurs vont tout faire pour que l’Etat limite l’inflation, qui peut d’ailleurs devenir galopante, si elle entre dans une spirale impossible à freiner, comme celle redoutée par l’Allemagne des années 1930. Il s’agissait d’une course de rattrapage ultra rapide entre la baisse de valeur monétaire et celle des moyens des salariés. La valeur unitaire de l’argent était devenue presque nul.
    Les prêteurs savent depuis toujours, qu’ils ont en général un double risque, celui de ne pas être remboursé, et celui d’être lésé dans des conditions où l’argent prêté, le capital, ne sera remboursé à terme qu’avec une valeur probablement affaiblie, sans qu’ils sachent à l’avance, avec précision, de combien sera cette perte potentielle. D’où par précaution une augmentation des taux d’intérêts qui doit être supérieure au risque d’une perte de valeur de l’argent, doublé par celui d’une perte de capital par non remboursement.
    Le lobby bancaire a donc estimé qu’il fallait au moins que la source d’inflation d’origine Etatique soit éliminée. Il a persuadé les dirigeants de l’Etat qu’ils devaient faire comme les particuliers : ne pas vivre au-dessus de ses moyens. Malgré Adam Smith qui mettait en garde ces responsables de ne pas appliquer à leur niveau le mêmes règles : « Ils sont presque fous ceux qui croient qu’un grand pays peut se manager comme un ménage »
    Et pour les contraindre pourtant à ces règles, dites réalistes, il fallait éliminer la possibilité de créer la monnaie à leur guise, en les obligeant à emprunter…aux banques. D’où, en janvier 1973, la loi « Giscard-Pompidou » qui mettait fin au « droit de tirage » de la monnaie, remplacé par l’emprunt bancaire. L’argent nécessaire sera ainsi obligatoirement contrôlé par le système bancaire privé. Dans la mesure où il fallait rembourser les sommes en question, la masse monétaire en circulation devrait revenir à un équilibre sain, ressources-dépenses, comme pour tout particulier. Mais moins dépenser n’est pas facile dans un monde dont l’activité est en progrès constant, dans un système libéral qui provoque souvent des inégalités dans la population, chaque organisme, chaque particulier qui se trouve au bon endroit, faisant fructifier l’argent qu’il perçoit, en tire profit à son niveau. L’Etat « protecteur » a, lui, une autre tâche qui l’oblige à des allocations directes ou indirectes à éviter les charges qui pèsent sur les plus démunis de la population telles que les taxes et impôts. La façon classique de rembourser, qui consisterait alors à augmenter les recettes. Mais ce n’est pas toujours suffisant, dans la mesure où, parmi les principes de la Constitution, l’égalité devant la loi ne le lui permet pas de chercher l’argent partout où il se trouve. Trop taxer les gros revenus lui est interdit
    Les remboursements des emprunts d’Etat se feront donc difficilement. Augmenter les impôts des Sociétés diminue l’activité et fait monter les prix automatiquement. Les rentrées baissent par contrecoup. D’autre part, les intérêts des sommes que dorénavant l’Etat emprunte aux banques augmentent le montant des remboursements. Sauf exception, pendant le ministère de Lionel Jospin des remboursements conséquents n’ont pu avoir lieu. Cette méthode n’a donc pu montrer, son efficacité pour éliminer l’inflation. Celle-ci ne s’est donc pas réellement arrêtée. Les dettes se cumulent parce qu’on emprunte à nouveau pour rembourser celles échues.
    En réalité, depuis la mise en application de la loi de janvier 1973 les dépenses ont continué à augmenter. Malgré les taux d’intérêts qui ne peuvent de toute façon pas être excessifs car les entreprises ont souvent besoin d’emprunter pour investir. Trop cher, l’emprunt risque de freiner l’activité générale.
    Le prétexte pour utiliser la méthode anti-inflationniste étatique, par l’emprunt, avait été que l’inflation était également défavorable à la population, principalement à ceux qui avaient le moins. Ce qui est faux dans la mesure où si les salaires augmentent de la même valeur, il n’y a pas d’appauvrissement automatique . Notamment les salaires indexés sur le SMIC permettent des réajustements équilibrés.
    Les traités de Maastricht ont généralisé cette technique, soi-disant anti-inflationniste pour tous les membres de l’U.E. Pour ceux-ci des prêts bancaires, ont été assortis de taux d’intérêt considérés comme dissuasifs. Cette méthode a été efficace à long terme que dans la mesure où les entreprises ont réussi à contenir l’augmentation de rattrapages des salaires, malgré les pressions des syndicats. Un moyen supplémentaire a été indirectement, de diminuer les charges qui pèsent sur ces salaires, qui sont en fait des salaires différés. D’où un ralentissement de l’activité, (moins d’investissements), une diminution de la croissance, avec une diminution cette fois effective de l’inflation mais au prix d’une baisse de production donc de producteurs, donc de salariés. On comprend la montée du chômage.
    Il y a dans le système monétaire, dans l’Economie d’un pays, une succession de systèmes imbriqués les uns dans les autres, depuis que des intermédiaires se sont introduits dans la production, entre celle-ci et les consommateurs. La circulation monétaire, qui traduit l’activité économique, subit des transformations quand elle passe dans les mains de ces acteurs. Vouloir supprimer l’inflation, sans baisse des revenus, est un leurre. Ce qui diminuer l’activité jusqu’à un niveau qui entraîne le flux monétaire dans une spirale cette fois déflationniste encore plus dangereuse pour la population des classes moyennes et basses, puisque dans la mesure où tout le monde restreignant ses dépenses, l’appauvrissement est quasi général. Sauf celui des banques qui ont des liquidités disponibles en compensation vont pouvoir prêter davantage, du moins pour les moins démunis pour ne pas enclencher une crise de non remboursement.
    En lançant ainsi un système opposé au système classique où l’Etat avait les moyens de réguler l’activité, on tombe dans un effet inverse à celui recherché officiellement, celui de maintenir le pouvoir d’achat de la population par l’absence d’inflation. L’effet négatif est visible par l’importance des dettes souveraines qui gonflent. Celles-ci ramenée à l’échelle individuelle font peur d’autant plus que chacun sait qu’il peut en être le dernier tributaire. Pourra-t-on rembourser un jour ses propres dettes si on est rentre dans la déflation ? Dire en permanence que la dette est importante est un effet d’annonce destiné à faire supporter les restrictions à la population. Si l’Etat peut prolonger indéfiniment et même augmenter les créances à chaque échéance avec l’aide des banques qui ne demandent que ça, il n’y a aucune raison d’en faire pâtir la population puisque l’inflation ne lui est pas toujours défavorable a priori. Seules les banques, et les grandes entreprises y ont intérêt. Ce sont les classes défavorisées qui supportent le plus le chômage et la précarité de l’emploi quand l’activité n’est plus soutenue. Les conséquences sont la perte de confiance dans l’avenir. Les dépenses d’investissements, diminuent. Le chômage augmente qui diminue les dépenses à son tour. Ce cercle vicieux ne peut être rompu que si l’on revient au système précédent où l’Etat ne dépendait pas des banques.
    Le système actuel de surendettement est l’opposé du système keynésien d’avant les années 1970 qui préconisait, lui, d’augmenter les dépenses de l’Etat, seule façon de créer la croissance alors que l’austérité la diminue. La tendance actuelle qui donne toute la puissance économique aux banques répandue partout dans le monde, est dangereuse, d’autant plus que des accords internationaux permettent aux banques de se prêter entre elles, ceci sans avoir plus de 8 % de réserve internes. Dans un cycle qui devient infernal, les dettes grossissent. D’où parfois des crises, qui diminuent la circulation monétaire en cas de non remboursement d’une grosse échéance, –comme ça été presque le cas avec la Grèce, qui éclate alors comme une hernie, ce qui a été le cas avec la crise des « subprimes » -, pour peu que la vitesse de circulation soit insuffisante pour continuer à propulser les flux monétaires.
    Ainsi, les dettes qui augmentent dans tous les comptes, même privés. Elles correspondent aux augmentations que l’inflation aurait représentées si on avait continué dans le système précédent. Ce sont des compensations comptables du déséquilibre dû à la perte d’activité en cours que le système actuel génère. L’inflation peut diminuer, certes, non pas grâce au seul système d’emprunt d’Etat, on l’a vu, inefficace si c’est le seul levier employé, mais à la baisse d’activité générée par le système actuel. La technique austéritaire récemment imposée avec force par les banques à la Grèce, est systémique. Elle mène à la déflation et au défaut de paiement pour les pays les plus démunis que tôt ou tard les autres membres de l’U.E vont avoir à supporter. C‘est l’effet de la loi des systèmes imbriqués de circulation monétaire, qu’on appelle quelques fois « effet domino ». La pression sur une baisse du pouvoir d’achat moyen a pu se réaliser que grâce à la diminution ou la stagnation des augmentations des salaires des fonctionnaires, par la pression sur les dirigeants d’entreprises privées pour qu’ils diminuent les salaires où au moins les font stagner, par le ralentissement des ajustements du salaire minimum avec le niveau de l’inflation officielle. Sans oublier la diminution des retraites. C’est le manque de moyens des acheteurs qui a tous comptes faits, à la longue, ont permis aux pays de l’U.E de diminuer le niveau de l’inflation et les taux d’intérêt à presque zéro. Jusqu’au jour où, comme on vient de le voir avec la crise des « Subprimes » il a fallu colmater, difficilement, l’ouverture de la trappe crée par les défauts de remboursements d’une partie de la population aux U.S.A. Quand il y a trop plein de liquidités à un moment, dans un réseau où elles circulent, une partie de la masse monétaire passe à la « trappe » entraîne des flux monétaires, « d’actifs circulants », qui suivent le flux général, qui disparait dans la trappe. Des grandes banques prêteuses s’écroulent. Pour colmater cette brèche dans le système, l’Etat et les banques sont obligés d’injecter les sommes perdues.
    Pour rembourser une dette souveraine, si l’Etat n’a pu trouver les ressources internes, il faut désormais qu’il réemprunte la même somme. La prolonger ne permet pas de la diminuer de façon significative. Malgré des apports importants le Japon ne parvient pas à diminuer une énorme dette souveraine pourtant essentiellement due à des banques internes. Toujours par peur de l’inflation ces liquidités ont été créées par l’emprunt. La solution que personne n’ose prendre, pour ce qui est la 3 e puissance économique mondiale, après la Chine, est celle d’augmenter les petits revenus. L’activité interne revenue relancerait la machine qui ne fonctionne essentiellement comme en Allemagne que pour l’exporte en priorité. Là où la concurrence mondiale joue entre ces pays, trois pays, si on inclue les U.S.A, important importateur s’il en fut, celui qui gagne est celui dont les prix sont les plus faibles, grâce à des salaires également bas. Le principal obstacle est donc la Chine.
    La technique d’emprunt par d’Etat aux banques, est devenue pernicieuse. On ne peut qu’en déduire qu’il vaut mieux revenir à la technique précédente, celle de fabrication de la monnaie par le Trésor public, lui-même, quitte à supporter un peu d’inflation. Inflation qui, contrairement à la thèse officielle, peut ne pas être nocive pour la population.
    Or, en U.E il n’y a plus que la technique actuelle d’emprunts d’Etat qui est utilisée. Aucun Etat ne peut se passer de la création monétaire sans passe par la B.CE. Chacun des membres doit suivre les engagements de la Banque centrale européenne, instituée par le traité de Maastricht. La conclusion s’impose, sortir non seulement de la zone euro, mais de l’U.E, afin de revoir le traité de Maastricht, qui a instauré la BCE dans cet objectif de création monétaire indépendante. Les banques ont prêté avec excès à de nombreux pays et beaucoup à la population. D’où à nouveau le risque de type « subprimes » dû à d’un défaut de remboursement majeur, ce dont elles espèrent sortir en mettant la pression sur la réduction des déficits publics, avec le risque déflationniste qui à son tour enclenche une possibilité de défaut de paiement dans la population. On voit que c’est toute la circulation de l’argent qui demande à être régulée. Par ailleurs, devant les difficultés de remboursement, les banques sont contraintes de baisser les taux d’intérêt, devenus presque nuls, et même parfois négatifs, pour les nouveaux prêts, évitant de trop augmenter l’endettement total de certains pays déjà très chargé à ce niveau. Ce qui fragilise leur propre fonctionnement. Les inégalités sociales, dues à l’austérité généralisée, renforcent les déficits publics, dans un autre cercle vicieux impossible à briser, car les Etats ne peuvent plus jouer leur rôle de redistributeur de richesses, ce que le chômage accentue. Le risque d’explosion pourrait cette fois venir de mouvements sociaux incontrôlables.
    Moins de dépenses, ou plus d’impôts pour financer les remboursements, donc ralentissement de l’activité , on ne sait où cela s’arrêtera. Chaque action a une influence sur les systèmes dont elle dépend. C’est essentiellement la diminution de la masse salariale qui a été le plus efficace pour freiner l’inflation. On peut ainsi briser le cercle vicieux déficit-chômage si cela crée la croissance. Davantage de possibilité d’investissements avec des déficits éventuels mais productifs. L’endettement de l’Etat diminue, par le retour sur investissements, tôt ou tard. A noter que créer des emplois dans la fonction publique peut être considéré comme un investissement car la masse salariale en augmentant, augmente la croissance par l’augmentation du pouvoir d’achat. L’arbitraire de l’Etat en faveur de la population est légitimé par la nécessité de l’intérêt national.
    On voit que l’argent des dettes souveraines, depuis qu’il est devenu scriptural au niveau des entreprises et de l’Etat, est fragile. Il a perdu de sa crédibilité. Selon la règlementation en vigueur qui dépend de la BCE, il ne peut plus décréter le niveau des taux d’intérêt et contrôler ainsi les flux financiers. Nos dirigeants sont les premiers acteurs de développement car ils ont la responsabilité de redistribuer cet argent dans la population, qui on l’a vu, a le premier moyen de transmission monétaire, bien que passif, de l’économie réelle en tenant compte de la circulation monétaire sur le long terme.
    Les responsabilités dans le fonctionnement du système de circulation monétaire, qui représente l’activité économique dans son ensemble, sont ainsi clairement établies. Chacun des trois acteurs en F2, F3, B, (figure 1) a une forte responsabilité liée au rôle qu’il fait jouer à l’argent (voir chapitre suivant) lors de son passage dans leurs comptes. Apporter de nouvelles richesses, tout en les entretenant, et relancer ces valeurs dans le système productif monétaire, pour maintenir ou accentuer sa vitesse de circulation serait possible si l’Etat retrouvait sa possibilité de créer directement les moyens de financer d’éventuels déficits. Pour comprendre ces actions de traitement de l’information. Il faudra mieux connaître cet outil magique ou maléfique, dont ils se servent (chapitre suivant : « le rôle paradoxal de l’argent ».
    Mais auparavant, connaissant maintenant ce qu’a de fallacieux, d’illégitime donc, une dette souveraine, nous pouvons proposer un système inédit qui, rétablissant la confiance, éliminant les risques, pourrait donner satisfaction aux deux parties, les banques prêteuses et l’Etat leur permettant de sortir du guêpier de l’emprunt étatique, pour le plus grand bien de la population dans son ensemble.

  4. Peter Whipp
    March 28, 2016 at 8:13 pm

    What contemptible treachery.

    We, the people, have the right and, indeed, the duty to create our very own money and yet our rulers have devolved this power to a few select private banks to create credit that passes in lieu of money.

    When money was gold, it was well that our government borrowed it and spent lest the level of deflation caused that gold to be saved and hoarded and so withdrawn from the circulation. When gold was thankfully abandoned as money, it was well that our government created and spent the appropriate sum of new cash so as to maintain the level of demand and, additionally, in order to ensure that our increasing ability to produce was translated into economic growth. In that way, workers had the means to buy their increasing production. When, in the 1970s, our rulers allowed banks to usurp that right to create money, our government had no choice but borrow all net saving. That is the irrefutable rule of double-entry accounting (for every payment, there is an identical receipt).

    The result is exponentially increasing public debt and, with it, increasing interest paid to our usorous creditors. This interest directly impacts the level of public services that taxpayers pay for. It is disgraceful that this interest now exceeds the cost of running our schools and this situation will inevitably continue to worsen. We, the people, must retake our right to create our own money so that we ought not and need not borrow one single penny more.

    • antireifier
      November 15, 2016 at 1:36 pm

      You agree with what I wrote in my reply.

  5. March 29, 2016 at 2:35 am

    I see no mystery in the national debt. It is unnecessary for a sovereign nation to have a debt but a necessary condition for the existence of a central bank. Literature from our Federal Reserve confirms that as it has been done by economists. To those who “buy” the debt, it is really just a very safe savings account, identical to a bank CD but totally safe. I object to the national debt on moral grounds. The debt serves the same purpose, bookkeeping wise, as taxes. It removes money from circulation but the holders of the debt receive their money back plus interest while the taxes on the less fortunate are never returned one for one to the taxpayer. Therefore, I would support taxes being used exclusively to maintain price stability with no accumulation of a national debt. In that case the government would need to take on the responsibility of managing the money supply while maintaining price stability and employment, chores that now fall on the central bank. And by the way, CBs have never done a very good job of maintaining price stability and employment. I suggest they have not because the national debt is a very weak tool for those tasks while the power to spend and tax are the sledge hammers needed to manage the money supply in the economy, tools held by all sovereign nations. Noteworthy, I think, has been the ECBs incursion into controlling spending and taxing in Greece during the recent standoffs there.

    • March 29, 2016 at 11:59 am

      Debt certainly does not remove money from circulation. In some cases it may be a perfect transfer of purchasing power from lender to borrower, whereupon the borrower spends the same funds back into the economy. But in most case debt is associated with creation of more purchasing power, if the lender is a credit issuing institution, because all new credit adds to what we count as money.

      • March 29, 2016 at 4:51 pm

        The MMT school holds that selling treasuries does not remove money from the economy also, maintaining that treasury certificates are as good as money. However, I have never seen anyone buying stuff at Walmarts with treasuries plus people put money in treasuries because they don’t need it to buy or invest.

      • March 30, 2016 at 8:40 am

        In case of treasuries it is the government that does the spending. It is not the treasuries that are spent but the purchasing power exchanged for them. By buying treasuries investors relinquish some purchasing power, but the same purchasing power is returned into the economy by government spending.

      • March 30, 2016 at 2:05 pm

        Yes, which makes my point. Treasury sales and taxes serve the same purpose but create the moral issue of the wealthy, who buy treasuries, get their money back plus interest while the low incomes that are taxed do not.

      • March 31, 2016 at 12:36 pm

        Ok. I see your point.

    • April 6, 2016 at 3:03 pm

      “The fiscal assets of the government are infinite. The only real limits on government spending are availability of real resources to buy and general price stability in the economy.”

      This is I think a still not fully thought out thesis of MMT, because it can be both true or false depending on circumstances. I will explain. Clearly, the government cannot create real value by only printing more tokens of value; that would just subdivide the existing real value into ever finer units. Let us not forget that printing tokes and spending them is a kind of appropriation/Tax, and not an act of creation.

      The second sentence in a way contradicts the first sentence, but its premise can also be contested. The limit of “real resources to buy” is not fixed and can be shifted/expanded with properly directed government spending to stimulate real value creation. This can be well served by sovereign monetary expansion (money printing proper) or it can be undermined if newly printed money is misspent, what would further limit the real resources.

      Since the value of money is determined by the cleared economic output it is possible to print money without causing inflation, if monetary expansion proceeds at the same rate as real economic growth. Currently, monetary expansion is near optimally determined by credit expansion in the banking sector. If on top of that significant government money printing and spending into the real economy was taking place there could be problems with price stability and general confidence in the economic system, so these two mechanisms cannot happily coexist without some restrictions, either on one or the other.

      • April 6, 2016 at 6:49 pm

        I must disagree with this statement: “Currently, monetary expansion is near optimally determined by credit expansion in the banking sector.” The discussions of “helicopter money” and the reasonings behind the concept repudiate the statement. Additionally, our economy has suffered since the crash of 2009 with insufficient money in the economy because of the simple fact that money was being taken out of the economy by people paying off loans and not making new loans. That is why government taxing and spending should be used to manage the money supply not FOMC OMO which is not working nor the overnight interest rate which does not work anymore either. It is time for the Congress to take on the responsibility given to them by the constitution and use the relevant tools they possess to mange the money supply, maintain price stability and ensure employment and productive use of the nation’s labor force.

    • April 7, 2016 at 12:32 am

      You are right. I was too generous to the banking system by suggesting that it has found some near-optimal mechanism of monetary expansion. It is of course prone to devastating cyclical instability.

    • antireifier
      November 15, 2016 at 1:39 pm

      That makes no sense. Debt is usually new money and is used for an expenditure of some kind. Governments pay for services, infrastructure or programmes. If it is not new money it shifts the focus of government spending.

  6. March 29, 2016 at 6:42 am

    All this just emphasizes that “The economy is too important to be left to professional economists (and that includes me). As citizens, we should all learn economics and challenge what the professionals tell us to believe.” (Cambridge economist Ha-Joon Chang) It also shows just how perceptive and smart some ordinary citizens really are. In a scene in the movie “One, Two, Three” (written and directed by Billy Wilder) the main character (Jimmy Cagney) is questioned about the $10,000 being spent to fool his boss about the boss’ daughter’s new and unexpected husband and that the husband (East German) has been a “capitalist” for only one day and already owes $10,000. Cagney’s character’s response – that’s the way the American system works, everybody owes everybody.

  7. March 29, 2016 at 11:45 am

    Lars fails to note that bonds are purchased (in open market) with broad money (ie. bank issued money substitutes), not the ‘hard money’ that central banks issue. This means that bond purchases are ultimately funded with bank credit, and the ultimate beneficiaries are the banks. Why so? Because bank credit is not a true loan (a perfect transfer of purchasing power from lender to borrower) but creation of purchasing power at a cost (to the banks) being only a fraction of the nominal amount of credit issued. The banks effectively inflate the currency (what is a kind of informal tax on all money in existence) and charge interest on the same. It is a thinly veiled handover of monetary sovereignty from the people to the banks.

    There are at least two solutions to this problem. By nationalising all credit issuing institutions; or by the State funding all expenditures via sovereign monetary expansion combined with a ban on fractional reserve baking (to prevent banks from further expanding the money supply by leveraging the new sovereign funds; or even self-funding by credit-to-self if major banks coordinated their self-funding operations).

    • March 31, 2016 at 2:47 am

      Lars fails to note that bonds are purchased (in open market) with broad money (ie. bank issued money substitutes), not the ‘hard money’ that central banks issue. This means that bond purchases are ultimately funded with bank credit…

      He fails to note this, because this is not true. Banks – or anyone else in the modern world- have to settle purchases of government bonds with state currency / reserves / cash, not their own credit.

      I have quibbles with some of Syll’s statements, but not there: Keynes & Lerner’s views on public debt were much more refined than suggested, than just “public debt is a good thing”. They anticipated & refuted the (pseudomathematical) stupidities of the 60s & later.

      • Peter Whipp
        March 31, 2016 at 11:14 am

        By state currency I presume that you mean cash. All other “money” is bank credit. A credit balance in an account with the central bank is still quaintly known as reserves. Only the government and banks have accounts with the central bank. If you or I buy government bonds in the open market, we will find it very difficult to do so with cash. We would use bank credit. If a bank buys bonds in the open market, it will indeed settle with its own credit because this credit passes as money and is what we generally (but wrongly) refer to as money. If a bank buys newly issued bonds from the Treasury, then this purchase may (and normally will) be settled through the central bank as both the Treasury and the bank have accounts with it.

        A government borrows bank credit because, nowadays, it spends bank credit. If it spent its own credit (called cash)’ then it would have no need to borrow. That is to say that governments are only required to borrow because they foolishly allowed bank credit to usurp cash as our accepted medium of exchange. Cash is the people’s money and there is absolutely no reason why it cannot be recorded in digital form just as is bank credit. Bank credit usurped legal cash in about 1980. Our government allowed this with no public consultation, no parliamentary debate and no legislation. Bankers have become rather rich and we are now finding out how much it has cost us.

      • March 31, 2016 at 12:52 pm

        I often refer to bank credit as a “hole” waiting for money to fill it. The true nature of bank credit can be conceptualized by assuming the government changed the official medium of exchange then following what would occur in a gedanken experiment.

      • April 5, 2016 at 3:00 am

        Lars Syll made no mistake. Claiming he did is a mistake. Again, these ideas are false. They describe an alternate reality. Of course anybody can buy anything else from anyone on their own credit if the other guy agrees. If you have a bond, I could possibly buy it from you with an IOU.

        But the government only accepts its own money (currency= cash or reserves) in return for its own bonds (which are just another kind of money). It doesn’t agree. The “open market” can only get government bonds from the government; it is not a source of magic. Sure, a government do otherwise. Some bank’s credit in some era might be more universally accepted than some government’s, that government might be happy to trade its bonds so it could get some SuperBank credit. But these days governments are in the driver’s seat. Banks “go bust” – or are bailed out by governments. Not vice versa.

        And other banks “don’t agree” either. Most interbank transactions are cancelled against ones going the other way, but without magical coincidences there will always be uncancelled ones, which need to be settled otherwise – by reserves, government money, not bank credit. Banks don’t let other banks build up indefinite balances against them forever. So bank money is not what banks use to settle with each other.

        A government borrows bank credit because, nowadays, it spends bank credit. No. Governments spend their own credit. Governments create money when they spend.

        Charles3000: I often refer to bank credit as a “hole” waiting for money to fill it. All money is credit money, whether bank money or state money. The only difference is that the bank is not the state. It’s holes all the way down.

      • April 5, 2016 at 8:10 am

        “the government only accepts its own money (currency= cash or reserves) in return for its own bonds”

        Proof to the contrary:
        Australia has exactly $70 billion cash on issue (most of it in circulation with the non-bank sector) and the Australian banks have $37 billion of deposits at the Reserve Bank of Australia. Ref: http://www.rba.gov.au/statistics/frequency/stmt-liabilities-assets.html. Total currency and currency equivalents are therefore $107 billion AUD.The Federal government has $369 billion of treasuries on issue (http://aofm.gov.au/files/2015/10/Table-H12.pdf), so, the total amount of ‘real’ money (issued by the central bank) is 3 times less than the amount of government treasuries. Also, the government does not take taxes in currency but in bank credit, so recirculating of the same cash is not taking place. The government uses bank credit only for its expenditure.

        “Most interbank transactions are cancelled against ones going the other way, but without magical coincidences there will always be uncancelled ones, which need to be settled otherwise – by reserves, government money, not bank credit. Banks don’t let other banks build up indefinite balances against them forever. So bank money is not what banks use to settle with each other.”

        Absolutely true. That is why credit to self is possible and financially attractive for the banks only if done in unison, or independently but in relatively small amounts. And yet 97% of money used in trade and commerce (M3) originates as bank credit (debt to banks).

        “Governments spend their own credit. Governments create money when they spend.”

        Only the central bank can issue money in Australia (See Currency Act and Reserve Bank of Australia Act) and it does so in quantities far smaller than government expenditure. See here: http://www.rba.gov.au/statistics/tables/xls/d03hist.xls

        “All money is credit money, whether bank money or state money. The only difference is that the bank is not the state.”

        credit or debt money is commonly used to signify all means of payment originating as debt to banks (M3). Government can self finance via RBA but that is precisely what it does not do. Instead it is financed through taxation and allows commercial banks to control the money supply.

      • April 6, 2016 at 5:56 am

        (1/2) This is confused conceptually, which was my point. Syll made no mistake. The criticisms are based on unfortunately very common conceptual confusions and falsehoods. The proof to the contrary proves nothing:

        the total amount of ‘real’ money (issued by the central bank) is 3 times less than the amount of government treasuries.

        But nothing follows from this. It in no way refutes “the government only accepts its own money (currency= cash or reserves) in return for its own bonds”. Warren Mosler once noted it could be just one penny of state money. And a zillion $ of government bonds ( or none), and a zillion zillion of bank credit out there, or none at all. This is like saying that “There are only 10 $1 bills & 100 $10 bills “out there” (in real life or in a Monopoly game) refutes “The only (monetary, banking) way to get a $10 bill from the issuer is with 10 $1s.” Which it doesn’t at all, which I hope is more obvious.

        Also, the government does not take taxes in currency but in bank credit, so recirculating of the same cash is not taking place.
        The premise is false. Governments most certainly do take taxes in their own currency – and demand settlement only in their own currency. A person may write a check on their bank account to pay their taxes. But the bank doesn’t just mark down the customer’s account. It is acting as an agent for the central bank and the tax authority. So it has to pay that same amount in reserves to the CB – the CB marks down the bank’s reserve account and marks up the government’s account at the CB. The whole thing is exactly the same as if the person had taken cash out of an ATM & delivered it directly to the tax office.

        The government uses bank credit only for its expenditure.
        No, government money is the only thing the government uses. Governments spend “out of” their reserve account at the central bank. For simplicity, consolidate the government and the CB; separating the two is pointless self-torture that confuses most.

        Only the central bank can issue money in Australia (See Currency Act and Reserve Bank of Australia Act) and it does so in quantities far smaller than government expenditure.

        It doesn’t matter what the act says. What matters is what the governments and the banks do & can do. If the Act said 2+2 = 5 and water freezes when heated, would that make it so? An act could say “only the CB can “issue money”” But if what the government does every day by spending is correctly described by the English phrase “issuing money”, then it is issuing money, even if there is some misapplied or mistakenly narrowed definition being used in some Act or in some mistaken interpretation of some Act. Again, the quantities have nothing to do with it. Australia has an account at its CB & spends “out of it”, no? Like the TGA in the US? When the US gov writes a check “on” the TGA, it is creating/issuing money. Period.

      • April 6, 2016 at 6:00 am

        (2/2)“All money is credit money, whether bank money or state money. The only difference is that the bank is not the state.”
        credit or debt money is commonly used to signify all means of payment originating as debt to banks (M3).

        This is a confusing and incorrect conceptualization, which causes even good economists to tie themselves into knots when they think about money. I agree, people often differentiate between bank credit & government credit in crazy ways. They’re both real money, they’re both credit. Government money is just better money, more moneyish, just as the US dollar was “better money”, more acceptable than the Argentine peso, even when (especially when) it was pegged.

        Creditary economists, circuitists, chartalists, MMTers, some institutional and Keynesian economists (including Keynes, mostly) do it right. They don’t use “credit money” in that “commonly used” confused way. The right way that makes everything clear, simple and obvious, the only way to not tie yourself into knots, is (a) to realize that all money is credit/debt – to a state, to a bank, to whatever. & (b) to then carefully understand what credit/debt is – the primary dictionary definition is fine.

        The problem is that economics/ finance etc often uses incoherent, unintelligible meaningless “definitions” of credit or debt or money. Much of it is worthless and worse. It leads to people having much less understanding than someone who never studied the subject at all. Accountants do it right, but they usually just learn rules. As Geoffrey Gardiner notes, they don’t know why they do what they do; why there’s no other way of doing it.

        If one understands & does the accounting, one understands why the unfortunately common belief: “Government can self finance via RBA but that is precisely what it does not do. Instead it is financed through taxation and allows commercial banks to control the money supply.” is not just wrong, but impossibly wrong.

      • April 6, 2016 at 1:37 pm

        Americans suffer from a falsehood that permeates our political system. Many in politics are surely aware of this falsehood but I have never heard it mentioned by anyone in active political life. The falsehood is that taxes are needed to pay for government programs. It is totally obvious that the government cannot extract taxes to operate the government before spending money into the economy. The government must first create the money and spend it into the economy before it can be redeemed for taxes. Taxes have a number of functions but paying for government operations is not one of them.
        It is not a new idea. The Virginia colonial government was totally aware of this fact in March 1760 when they passed the paper money act, creating money, and in the same legislation, arranging to place tax liabilities on the public to take back a portion of the money and, in their words, “… to preserve the credit of the paper currency…” The legislation required that the certificates that were redeemed “… to be burnt and destroyed.” Taxes do give value to paper currency but they are not used to pay for government operations. The notion that taxes are needed to pay for government expenses is a figment of the imagination of book keepers but it is totally divorced from reality.
        In January 1946, in a periodical named “American Affairs”, Beardsley Ruml, Chairman of the Federal Reserve Bank of New York at that time, published an article entitled ” TAXES FOR REVENUE ARE OBSOLETE” in which he explains why taxes do not pay for government operations. As explained in the paper, it started in 1933 when, under FDR, fiat currency was introduced and gold money and gold certificates were all redeemed for the new currency. Noteworthy is the fact the new currency spent by the government was not obtained by taxing. It was printed and spent into the economy to buy gold and gold certificates.
        The misunderstanding of the function of taxes in our monetary system is very harmful for two basic reasons. First, it detracts from discussions and action related to the actual function of taxes plus it constrains government actions that are needed and worthwhile.
        The actual function of taxes is to maintain price stability (i.e. prevent inflation) and secondly, it enables the government to move money around in the economy by taxing “A” and spending to “B.” Tax policy has obviously been one factor in the movement of wealth from the middle class to the 1% over the past few decades.
        Additionally, taxes can be a very efficient economic tool. We saw that feature used very sparingly in recent years with the FICA tax holidays which put money in the pockets of consumers who represent the major portion of our economy. It was used very sparingly because of the book keeping fairy tale that the FICA/SS trust fund “pays” social security to seniors, the same fairy tale as the one that taxes pay for government operations. Book keepers can put numbers in columns and add and subtract them but their actions have zero effect on the realities of money. The reality is that all legal money is created by the US Treasury in their Bureau of Engraving and Printing (BEP) and their mints where coins are struck. The fiscal assets of the government are infinite. The only real limits on government spending are availability of real resources to buy and general price stability in the economy.
        But what about the national debt? We hear a lot about the debt but again, most that we hear is either untruthful or, like taxes paying for government spending, just a fairy tale. First, having a national debt is a choice that was made by the congress. It is necessary to have a national debt as a tool for our central bank, the Fed. The Fed buys and sells the national debt to manage the money supply. The national debt also serves as a very safe parking place for idle money held by individuals and organizations.
        We often hear the cry of anguish that our grandchildren will have to pay for this huge debt that we have. Those who peddle this notion are either deliberately untruthful or just do not understand the mechanisms of the national debt. The fact is no taxpayer has ever paid a cent to retire the national debt. When treasury bonds becomes due, the bank account of the bond holder is increased by a computer by the principal amount plus interest and then that amount is added to bonds available for sale by the US Treasury. The debt is continuously rolled over in that way. The debt can be retired in thirty years, the longest term of a treasury bond, at any time the congress wishes to do so. All congress needs to do is prohibit the sale of additional treasury bonds. The other way to retire the debt can be done by the executive branch under current law. The treasury could mint a few multi T$ coins as proposed by Joseph Firestone. With say 50T$ added to the treasury’s account at the Fed, the treasury can spend all the money the congress and the president wish to spend without borrowing any more.
        Bottom line: Our nation and our economy should not be run by bean counters (accountants) but by people who understand economics and sovereign monetary systems.

      • April 6, 2016 at 10:38 am

        Repeating over and over that my position is wrong, without providing empirical evidence to the contrary, is not evidence of me being wrong but rather, evidence that you lack evidence to support your claim. If that is not the case please show evidence, as I would like to change my understanding if I am mistaken.

        For my part, I will restrict myself to one claim you make and show that this claim cannot possibly be true:
        “Governments most certainly do take taxes in their own currency – and demand settlement only in their own currency.”

        I have already shown evidence from RBA that the total amount of currency in existence is $70 billion AUD. The total taxation revenue collected in a year is approximately $500 billion AUD: source http://www.abs.gov.au/ausstats/abs@.nsf/mf/5506.0

        It is clearly impossible to collect taxes in currency if the amount of taxes due exceeds the total amount of currency in existence.

      • April 7, 2016 at 1:37 am

        Charles3000, you;re quoting Ruml & Joe Firestone. So I take it your position is basically MMT here. What I am saying is MMT – I was quibbling above that some of your statements above weren’t exactly consistent with MMT.

        Michael Kowalik:

        These are errors of logic – not the kind of thing that empirical evidence is used for. I agree that that statement is the crucial one. But the evidence you provided just isn’t relevant to anything, and doesn’t demonstrate or refute anything.

        I said: “Governments most certainly do take taxes in their own currency – and demand settlement only in their own currency

        You noted that there is $70 billion in currency, and that the AU govt takes in $500 billion in taxes per year. Granted. (Surely there’s a lot more in bonds than currency outstanding, but no matter.)

        Then you say:
        It is clearly impossible to collect taxes in currency if the amount of taxes due exceeds the total amount of currency in existence.

        The problem is that this isn’t “clearly impossible”. It is perfectly possible, and is what happens in fact. This is saying the criterion of possibility is “Do taxes in some period exceed existing currency?” But this criterion is wrong as a matter of logic. My point in short is that the criterion/argument is confused about stocks and flows.

        In one place there’s the “amount of currency in existence” in one place. For simplicity just say that that is the law, that there is always exactly $70 billion outstanding & a perfectly balanced budget.

        The suggested problem comes from the fact that the 500B taken in every year > 70 B in currency.

        But from this criterion, the AU government taking in only $50B a year, when it had $70B outstanding is perfectly reasonable and possible because 50 70, the same criterion using decades instead of years says that this is impossible. But it also said it was possible! This contradiction shows the criterion, the “clearly impossible” is wrong, not the situation, not my statement that taxes must be “paid in” currency.

      • April 7, 2016 at 1:58 am

        Calgacus, I view MMT as apologists for the existing monetary system and, to their credit, pointing out policy that takes best advantage of the system as it exists. Personally, I see the federal government holding the real tools for monetary control, taxing and spending, while the CB is given the responsibility with tools, OMO and federal funds rate, which have proven to be very weak and ineffective. I think, therefore, the congress should assume these responsibilities, supporting full employment and using taxes to maintain price stability and distribution of money in the economy, dropping the myth that taxes pay for government operations. There are significant details and the two best approaches I have seen are embedded in Ellen Brown’s Public Bank proposals and the trust banking approach described in http://www.realmoneyecon.org. By the way, MMT does not support the latter approach.

      • April 7, 2016 at 1:53 am

        Sorry, bad editing, Last para should be:

        But from this criterion, the AU government taking in only $50B a year, when it had $70B outstanding is perfectly reasonable and possible because 50 < 70. But if it takes in $50B/ year, it takes in $500B/ decade. The criterion using decades instead of years says that this is impossible.

        So the criterion says this situation is both possible and impossible. This contradiction shows the criterion, the “clearly impossible” is wrong, not the situation, not my statement that taxes must be paid in currency.

      • April 7, 2016 at 7:07 am

        I understand your point about stock and flow, and that it is theoretically possible to pay off annual debt of 500B with 70B of currency, given that the same amount of currency is taken 7.14 time per year. What I’m saying is that it is practically impossible. We are already talking about prohibitive velocity of money, every dollar being spent 7.14 times per year (estimated velocity of M1 in the US is currently around 2.1, and obviously much lower for M2), but if only a fraction of the 70B currency were used to pay taxes the velocity would have to be even greater by the inverse of this fraction. Given such a discrepancy between what we know about velocity and what you allege I find your argument safely dismissed, even if one would account for payments in bonds which happens rarely anyway since most treasuries are tied up in superannuation and privately held investment funds.

        As a matter of fact not a single dollar of tax is actually paid in cash, and I know you say that doesn’t matter because the banks settle in reserves held with the RBA. But those reserves in Exchange Settlement Accounts at RBA are just retained profits made in bank-issued-credit-money (as opposed what you call government-issued-credit-money, which I think is a misnomer, but it has no consequence for my argument so I’m happy to play along) and deposited with the RBA. It is still money created by the banks.

        In absence of some empirical evidence to support your claims I am losing interest in arguing against your convictions.

      • April 8, 2016 at 4:59 am

        “My” statement is universally accepted. It is the way it works everywhere. It is the only way it could work. It is in – or presumed as basic, common knowledge – in any book on finance and taxation. The idea that it is false leads to logical contradictions.

        Note:[I believe “velocity” as usually calculated doesn’t consider these kind of purely monetary transactions, which may involve bonds too – banks want to get interest from the gov until they need to settle with reserves.]

        Accounts at RBA are just retained profits made in bank-issued-credit-money .. and deposited with the RBA. It is still money created by the banks.

        This confusion is the heart of the problem. That is not what reserves / RBA accounts are. Any book or source would say that this is the reverse of the definition of reserves in central bank accounts.

        The RBA creates those balances, not the banks. A central bank is a bank for banks, bearing the same relationship to them as a bank to an individual. What you are saying is equates to saying that when you go to the bank, you created the money that you deposit in it. No, the bank created the bank credit / money which constitutes your bank account.

        I think that if I did not have these convictions, and came to the bank with money I had created, I would earn a conviction pretty soon. Similarly for the bank’s officers, if a bank tried to deposit “money created by the banks” in an RBA account. :-)

  8. louisperetzperetz
    March 29, 2016 at 8:30 pm

    To prevent crisis, to be offsoverine debt for any country, there is a solution : two moneys, one for people, and the other for banks. That is clear on my book( Economy, how to flip the table off” (Amazon)

  9. March 29, 2016 at 10:54 pm

    First a big thanks for the dialog:

    *To charles3000, “To those who “buy” the debt, it is really just a very safe savings account, identical to a bank CD but totally safe.”

    EXACTLY, why China will not convert its $3.5trillion and be happy with USTBB – and we will no longer have to give them @ $200billion of new money.

    *To Ken Zimmerman, “All this just emphasizes that “The economy is too important to be left to professional economists (and that includes me).
    As citizens, we should all learn economics and challenge what the professionals tell us to believe.” (Cambridge economist Ha-Joon Chang)

    MAY I quote,”Believe nothing merely because you have been told it…But whatsoever, after due examination and analysis,you find to be kind,
    conducive to the good, the benefit,the welfare of all beings – that doctrine believe and cling to,and
    take it as your guide.”- Buddha[Gautama Siddharta] (563 – 483 BC),

    *To Michael Kowalik, “Because bank credit is not a true loan (a perfect transfer of purchasing power from lender to borrower) but creation of purchasing power at a cost (to the banks) being only a fraction of the nominal amount of credit issued. The banks effectively inflate the currency (what is a kind of informal tax on all money in existence) and charge interest on the same. It is a thinly veiled handover of monetary sovereignty from the people to the banks.
    “There are at least two solutions to this problem. By nationalising all credit issuing institutions; or by the State funding all expenditures via sovereign monetary expansion…”

    *To all, PERHAPS, maybe there is a K.I.S. Solution:

    “Capitalism is the “best” system to date devised by mankind. As it is administrated, perhaps, is where the “flaw” is manifested. If capitalism used its Central Bank properly,that is for the betterment of the common good, with equality and justice for all, capitalism could be the greatest achievement of mankind.” “Where We Went Wrong-“In God We Trust”.
    READ MORE: http://bit.ly/MlQWNs

    • March 31, 2016 at 4:28 am

      What do you mean that “Capitalism is the ‘best ‘system to date devised by mankind?” Best for what purposes. Certainly not for human happiness or, to use Maslow’s term “self actualization.” So what do we get from capitalism that, for example socialism would do better in providing? After all socialism combines democratic decision making, with the protection of individual rights, and focus on the welfare of the whole community.

      I acknowledge and consider correct the comment from Ha-Joon Chang for precisely the reasons you give. That decision is based both on my own experiences and that of others, as well as the knowledge that creating an economy and economic actors is a process more complex and subtle than can be encompassed by any scientific study alone.

  10. John Bragin
    March 30, 2016 at 9:53 pm

    For more on this topic see:
    Steve Keen: “A thought experiment on budget surpluses”, FORBES (on line), March 13, 2016. http://www.forbes.com/sites/stevekeen/2016/03/13/a-thought-experiment-on-budget-surpluses/#217ad8c131b1

  11. April 4, 2016 at 4:56 am

    An article that suggests the Ricardian equivilance system was was not accepted by David Ricardo is that of Gerald P. O’Driscoll, Jr., entitled , “The Ricardian Nonequivalence Theorem,” Journal of Political Economy 85, no. 1 (Feb., 1977): 207-210.

  12. April 4, 2016 at 7:45 pm

    Economists changed their theology in the mid 70s to one where the dominant commandment was “Thou shalt maximize shareholder value ahead of all other considerations.” In that scenario (government) debt must be held by the financial sector rather than the public sector (central banks). Debt is not so much the issue as who holds the debt.

  13. Postkey
    November 15, 2016 at 9:13 am

    “In the 1970s Robert Barro attempted to give the proposition a firm theoretical foundation, arguing that the substitution of a budget deficit for current taxes has no impact on aggregate demand and so budget deficits and taxation have equivalent effects on the economy.

    The Ricardo-Barro hypothesis, with its view of public debt incurring a burden for future generations, is the dominant view among mainstream economists and politicians today. The rational people making up the actors in the model are assumed to know that today’s debts are tomorrow’s taxes. But — one of the main problems with this standard neoclassical theory is, however, that it doesn’t fit the facts.”

    I thought that the ‘standard neoclassical theory’ proposed that output was ‘supply determined’?
    And yet R.B. , through the Barro/Ricardo equivalence proposition, is discussing the determination of output by changes in aggregate demand? ie output is ‘demand determined?

    They want their cake and eat it?

  14. November 16, 2016 at 12:19 am

    Where We Went Wrong: In God We Trust by JUSTALUCKYFOOL
    After 5000 years; an answer.
    Yes Virginia, banks do create money “Out of Thin Air.”
    “Verified by Empirical Evidence”
    ****Can banks individually create money out of nothing? – The theories and the empirical evidence ☆***by Richard A. Werner
    http://www.sciencedirect.com/science/article/pii/S1057521914001070

    ABSTRACT:
    This paper presents the first empirical evidence in the history of banking on the question of whether banks can create money out of nothing. The banking crisis has revived interest in this issue, but it had remained unsettled. Three hypotheses are recognized in the literature. According to the financial inter mediation theory of banking, banks are merely intermediaries like other non-bank financial institutions, collecting deposits that are then lent out. According to the fractional reserve theory of banking, individual banks are mere financial intermediaries that cannot create money, but collectively they end up creating money through systemic interaction. A third theory maintains that each individual bank has the power to create money ‘out of nothing’ and does so when it extends credit (the credit creation theory of banking). The question which of the theories is correct has far-reaching implications for research and policy. Surprisingly, despite the longstanding controversy, until now no empirical study has tested the theories. This is the contribution of the present paper. An empirical test is conducted, whereby money is borrowed from a cooperating bank, while its internal records are being monitored, to establish whether in the process of making the loan available to the borrower, the bank transfers these funds from other accounts within or outside the bank, or whether they are newly created. This study establishes for the first time empirically that banks individually create money out of nothing. The money supply is created as ‘fairy dust’ produced by the banks individually, “out of thin air”.

    ” This study establishes for the first time empirically that banks individually create money out of nothing. The money supply is created as ‘fairy dust’ produced by the banks individually, “out of thin air”.
    AFTER more than 80 years-Vindication for the “crank” Frederick Soddy.
    ” It is important to realize that whichever way it works it is a case for the bank of
    ” Heads I win, tails you lose “…”…(U)sually by some such lying phrase as ” Every
    loan makes a deposit ”
    “Genuine and Fictitious Loans.
    For a loan, if it is a genuine loan, does not make a deposit, because what the borrower gets the lender gives up,
    and there is no increase in the quantity of money, but
    only an alteration in the identity of the individual owners of it. But if the lender gives up nothing
    at all what the borrower receives is a new issue of money and the quantity is proportionately
    increased. So elaborately has the real nature of this ridiculous proceeding been surrounded with
    confusion by some of the cleverest and most skilful advocates the world has ever known, that
    it still is something of a mystery to ordinary people, who hold their heads and confess they
    are ” unable to understand finance “. It is not intended that they should.”(The Role Of Money)

    “Where We Went Wrong-“In God We Trust”.

    “Capitalism is the “best” system to date devised by mankind. As it is administrated, perhaps, is where the “flaw” is manifested. If capitalism used its Central Bank properly,that is for the betterment of the common good, with equality and justice for all, capitalism could be the greatest achievement of mankind.”
    ” Did Soddy get it right ?”
    “Give Soddy his just due.”
    .”Money is a concept” when ‘coined’,’printed’,or digital form (an entry on a balance sheet) it is a physical representation.
    As Soddy stated,
    “Money now is the NOTHING you get for SOMETHING before you can get ANYTHING” ,
    Frederick Soddy (The Role Of Money”.
    Economists mention the “Fatal Flaw”,” BOOM & BUST” yet do not ‘see it coming’
    ASK again, ” Did Soddy get it right ?”
    The “Fatal Flaw” is the ability of mankind to exponentially create more “Fictitious” money then “Genuine ” money;when unrestrained
    you have-inflation-systemic failure, or monetary collapse.

    There exists in this world, this universe more wealth than mankind could possibly use. Man has been given dominion
    over this wealth. Mankind can not create any wealth and must distribute that which already exists.
    Wealth is SOMETHING of value.
    ALL Wealth on earth and in the universe exists and is expanding.

    “As the worlds population has gone up, the total amount of product available per capita…has gone up.
    …exactly the opposite of what…predicted. Indeed, the correlation of increased population with increased
    per capita product is so strong that any scientist examining these data would immediately suspect causality..
    .(S)o the more people there are, the faster the rate of technological progress, which multiples product per capita,
    and whose are cumulative.
    So the more of us there are, the more there will be to go around.”(The Human Factor, Robert Zubrin…2015)

    We now no longer believe “In God We Trust” as having created all wealth that is needed by mankind.
    Yes, we have loss our TRUST In God; now We Trust In Man to create “wealth” from nothing.
    ” All smoke and mirrors.
    All designed with ONE intention: ‘ To Hide The Issuers Alchemy ‘. It does not matter how the ‘money’ is coined, printed, or digitized – It is not wealth. When one understands this basic universal law, they will know of this deceit.”(SODDY)
    Wealth is SOMETHING of value.
    ALL Wealth on earth and in the universe exists and is expanding.

    Money now is the NOTHING you get for SOMETHING (a created value)
    before you can get ANYTHING (a created value).
    Money is a receipt for SOMETHING (a value given up).
    Money can not create ANYTHING (an exchangeable value).
    “The Role Of Money”
    Frederick Soddy,
    “The Monetary System Impedes the Flow.
    Since, in all monetary civilizations, it is money that alone
    can effect the exchange of wealth and the continuous flow of goods and services
    throughout the nation, money has become the life-blood of
    the community, and for each individual a veritable licence to live at all.
    The monetary system is the
    distributory mechanism, and this reading of
    history therefore supports up to the hilt the con-
    clusions of those who have made a special study
    of what our monetary system has become. It is
    the primary and infinitely most important source
    of all our present social and international unrest
    and for the failure, hitherto, of democracy.

    A very slight knowledge of our actual existing
    monetary system makes it abundantly clear that,
    without democracy knowing or allowing it, and
    without the matter ever being before the electorate
    even as a secondary or minor political issue, the
    power of uttering money has been taken out of
    national hands and usurped as a perquisite by
    the moneylender. Practically every genuine
    monetary reformer is unanimous that the only
    hope of safety and peace lies in the nation
    instantly resuming its prerogative over the issue
    of all forms of money, which, legally, it has never
    surrendered at all.”

    So how is this, to most people not understood, that money is wealth while at the same time
    money can not increase wealth, but merely store or exchange what has already been
    given up.
    What is the “basic flaw” ?
    Why is that flaw not understood ?
    Soddy answered these questions, ““So elaborately has the real nature of this ridiculous proceeding been surrounded with confusion by some of the cleverest and most skillful advocates the world has ever known, that it still is something of a mystery to ordinary people, who hold their heads and confess they are ” unable to understand finance “. It is not intended that they should.”

    As Frederick Soddy has stated as an axiom:
    “**** THE THEORY OF MONEY. VIRTUAL
    WEALTH….

    “WHAT is Money ? Let us commence our
    study of the role of money by a compre-
    hensive definition of what modern money is.

    Money now is the NOTHING you get for SOMETHING
    before you can get ANYTHING.

    Our task is to understand all that this implies.
    The definition is, of course, an economic one
    referring to ordinary transactions such as earning,
    buying, and selling among ordinary folk generous
    uncles and other voluntary benefactors not being
    under contemplation and the nothing, something,
    and anything of the definition refer to things of
    real value in themselves, usually termed goods and
    services, or simply wealth, unless hair-splitting
    or purely technical distinctions turning on the
    precise definition of wealth are involved. More-
    over, it refers to ordinary people,
    in the sense of those who neither have the opportunity nor the
    power of uttering money themselves. ”

    Nowhere is there a mandate to create wealth (money),
    the “giving up of SOMETHING before you can get ANYTHING (money).”
    The Fatal Flaw is that we do not recognize that MONEY AS WEALTH must be in existence before it can be created (issued). We are flawed in calling…bank issuance MONEY when that issuance is made “out of thin air.” BTW, that has been empirically proven as being ‘credit money’. The same “word”-“money” is used with two opposite meaning. One as a receipt or a value of wealth that is to be redeemed at a future time for wealth. The other use is a copy of a receipt (made out of thin air,’Fairy Dust”), a copy of wealth already owned by someone else.
    ALL wealth has already been created, the entire expanding universe.
    A Monetary Sovereignty can not create wealth. A MS can by law ‘coin or print’ transferable receipts of wealth in a transferable measured form for its sovereignty.
    A Monetary Sovereignty should be allowed to “borrow” from the wealth of the entirety
    at zero cost, use that ‘borrowed’ money to help fund “a more perfect union.
    Remembering that it must put that money back into its secure holdings so the lawful owners may redeem their individual value upon demand. A Monetary Sovereignty should use for the betterment of all the members of the community, this just method to produce a revenue stream; to charge interest to fund the sovereignty!
    We must go back to “IN GOD WE TRUST”.
    We have dominion over this universe, all its wealth. As mankind exponentially grows so does the universe; a perfect system.
    Only we can screw it up!
    Our forefathers understood what “In God We Trust” meant
    An HONEST CENTRAL BANK can not, or shall not create wealth.
    An honest Central Bank is the guardian of the wealth given up,
    …the sole and only entity that may issue receipts on the community wealth,
    …must operate with transparency,
    …be held accountable.

    “THEY” have used the same words to create different meanings!
    “MONEY”as a receipt of wealth; “MONEY” as a creation of wealth “out of thin air”.
    Nowhere is there a mandate to create wealth (money), the “giving up of SOMETHING
    before you can get ANYTHING (money).”
    The Constitution allows Congress
    …TO BORROW
    …TO ‘Coin’
    …TO punish counterfeiting.
    This is clear in that borrowing,coining,or printing
    is authorized of that which is already “wealth given up” and this is also clear
    “other then that is ‘counterfeit.”

    *** U.S. Constitution.
    ARTICLE . 1. ..SECTION. 8.
    “The Congress shall have Power …(A). To borrow Money on the credit of the United States;
    …(B).To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;
    The Congress shall have Power …(C).To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;…”
    What the Constitution declares:
    ****(A) “TO BORROW”. It may not ‘create’ Genuine money; that is SOMETHING already owned by individuals and the community.N.B.,There is no reason (or request) to pay interest when borrowing from your own sovereign wealth.
    **** (B) “TO COIN MONEY, REGULATE.It may either by printing, making stamped tokens, digital dots maintain and control that standard of Weights and
    Measures,i.e., the physical representative form of Genuine Money.
    **** (C)”To provide for the Punishment of counterfeiting…”
    No entity may “create out of thin air” and turn it into SOMETHING that is guaranteed to be redeemable as Genuine money.

    SODDY, “Let us right from the start get the signs right.
    The owner of money is the creditor and the issuer of it is the debtor, for the owner of money gives
    up goods and services to the issuer. In an honest
    money system the issuer of money who gets
    for nothing goods and services would do so on
    trust for the benefit of the community. In
    a fraudulent money system he does so for the
    benefit of himself. It makes no difference whether
    he passes off the money and puts it into circulation
    himself or lends it at interest for others to pass off
    for him. In every case what he so gets to spend or
    lend is given up by someone else. Ex nihilo nihil
    fit. Nothing comes from nothing..”
    “Capitalism is the “best” system to date devised by mankind. As it is administrated, perhaps, is where the “flaw” is manifested. If capitalism used its Central Bank properly,that is for the betterment of the common good, with equality and justice for all, capitalism could be the greatest achievement of mankind.

    THE K.I.S. SOLUTION TO DECREASE INEQUALITY GAPS, POVERTY, and NATIONAL DEBT.
    ONE SENTENCE -A CAPITALISTIC ECONOMY WITH A HONEST CENTRAL BANK.
    AN HONEST CENTRAL BANK (GUARDIAN) THAT BORROWERS MONEY FROM ITS LAWFUL OWNERS, LENDS IT AND CHARGES INTEREST (TAX) TO SECURE AN INCOME STREAM TO TURN OVER TO CONGRESS TO USE FOR THE BETTERMENT OF ALL.

    Read more:
    https://bestsolutionsfl.wordpress.com/

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