Debt and Deficit in a Nutshell

  By Mystic | November 20, 2010 - 01:19 | ,

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The world’s most simple national debt and deficit explanation.
Written by: Dr. John Harvey
Adapted and Animated by: Tschäff Reisberg
Original Text: http://rommeldak.wordpress.com/2010/1…

To learn more about inflation and what we have to fear see:
http://rommeldak.wordpress.com/2010/0…

Mosler’s $100M bet that government can’t go bankrupt:
http://moslereconomics.com/2010/10/22…

F.A.Q.: https://sites.google.com/site/softcur…

This analysis applies to any sovereign, fiat, non-convertible, floating exchange rate currency issuing federal government such as Canada, Mexico, Japan, Singapore, Australia, and England not currency using governments such as California, Greece, Estonia, or Venezuela. For the government to run a deficit (a flow), it spends more than it taxes. National debt (a stock) is the accumulated deficits for a nation. For a currency issuing government to tax or borrow, it must first issue the currency. The national debt is equal to all government spent into the economy and didn’t tax away- the combined savings of everyone in the economy. The only way to eliminate the national debt is to drain the all savings from everyone in the economy. As one can imagine this would have disastrous consequences for the economy.

Thanks to Egahen for the walnut image and Adi007 for the people and city.

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Written by: Mystic on November 20, 2010.
Tagged , . Bookmark the permalink.
  • Anonymous

    I’m glad you found this within the other thread and highlighted it, Mystic… thanks to Tschäff Reisberg for originally providing it.

    Linda

  • CSArichardo

    Like the approach….but the video need the end made the important point that governments who can spend money into existence will begin liking to spend that money too much ! The issue is not whether we have the ability to spend money into existence..the issue is can governments stop the spending when inflation hits. Also under the system proposed in the video …. someone has to decide what a fair profit is !

    • Snedmeister1

      I also feel we get caught up on “Looking at it Macro”….
      Put it how they like, I am “Micro”, the link about inflation seems to say inflation doesn’t matter as if someone loses, someone gains….
      Well from my Micro point of view, this is the problem….
      I will probably be one of the people who loses, someone will win, and the overall Macro picture stays the same…!!

      In my opinion, It’s like saying “Don’t look at the damp in your subsiding wall, look at the whole wall from across the street, it looks so much better from out here”…. Until the view turns to rubble…!!

      • http://www.facebook.com/RommelDAK John Harvey

        Snedmeister1, I think the overall problem, however, is that NO ONE is looking at it from the macro perspective and we are therefore committing fallacy of composition. As a macroeconomist, that’s what I find so worrying. You can’t logically understand the debt and deficit or, as you mention, inflation, from solely (or even mostly) the micro perspective, and yet that is what we persist in doing.

        Take this comment for example: Put it how they like, I am “Micro”, the link about inflation seems to say inflation doesn’t matter as if someone loses, someone gains….Well from my Micro point of view, this is the problem….”

        Yes, but that is not the same thing as saying that we should enact government policy to address your personal problem. Perhaps the reason that you are losing purchasing power relative to other members of the macroeconomy is that you are in an industry that is no longer useful (maybe you are an expert in repairing eight-track tape players!). Then the fact that you are losing income is a signal that you should change industries. There is an underlying economic logic to that that cannot be seen at the micro level. Inflation is a zero-sum game: there are winners and losers. However, if the losers SHOULD lose, then no problem. But, if there is no economic justification for it (the OPEC oil shocks, for example), then it should be addressed.

        Not saying that micro isn’t important, but that with macro issues, macro perspectives are most appropriate (and rarely employed by the public or government).

        • Snedmeister1

          Not sure I agree here, I work in the telecoms industry, which is still relevent….
          The problem with inflation for me is whether my wages keep up….

          • http://www.facebook.com/RommelDAK John Harvey

            I guess my point here, Sned, is that the object of government inflation policy should not be to make sure that no one’s purchasing power ever falls, but that if it does so, there is a logical reason for it (one that entails market signals for that person to move to another industry). Falling purchasing power alone is insufficient grounds for government intervention to prevent it.

            That said, I would be a strong proponent of making sure there was public help available for those folks in the event that retraining or relocation were necessary.

            • Snedmeister1

              And the Gov’t is the ideal candidate to replace obsolete jobs, with more needed tasks…
              Like creating jobs building power stations for example, for all those unemployed builders….
              I’m begining to follow your perspective a bit now, John.

              • http://www.facebook.com/RommelDAK John Harvey

                Not sure if you saw it, Sned (and maybe it was in response to this that you were posting), but I have an entry on inflation:

                http://rommeldak.wordpress.com/2010/07/22/inflation-what-really-causes-it-and-what-we-truly-have-to-fear/

                • Snedmeister1

                  Not trying to catch you out John, but what caused the inflation in Zimbabwe, or were there many causes…???
                  I know they printed money, and they did not have full employment, so what went wrong??

                  Thanks again.

                  • http://www.facebook.com/RommelDAK John Harvey

                    If I can’t answer the hard questions, then I don’t know what the heck I’m talking about–ask away!

                    Developing economies are a whole different issue. They have much deeper-seated issues than just pumping up aggregate demand. For a start, they invariably have extreme inequality in income and ownership of assets. This is a massive drag on economic growth. Ethnic, racial, and religious problems are very typical, too. Traditional macroeconomic solutions in any combination are not going to get the job done.

                    And so, you have a country with an extremely limited ability to produce goods and services, and they try to offset that by printing lots of money–that just creates inflation (particularly when that new money is simply channeled into the hands of the already rich and powerful).

                    I’ve written a paper or two on developing economies, but I find it so incredibly depressing (because they issues are so intractable) that I just stopped!

                    • Snedmeister1

                      Phew, you have cleared up a lot of issues for me here, John, and I am sure a lot more than me have learned something new….
                      My last question of the night now, assuming you are an MMT’er, is one I asked before, but was several questions up and lost between other conversations with yourself, is this….

                      Why do you think the UK Gov’t is going for austerity measures….?
                      Do you think it is because Bank of England and/or UK polititions do not understand MMT, or are there other reasons…??

                      I understand you may not have the definative answer, but an educated/ informed guess from your part would do…

                      Thanks again John, your time was appreciated….

                    • http://www.facebook.com/RommelDAK John Harvey

                      My pleasure! I saw MMT above and am unfortunately not clear on what is meant by that. Can you clear that up for me?

                      Off to go shopping so may not get back in here until tomorrow.

                    • Snedmeister1

                      My understanding is pretty much as you have explained your position to be…
                      MMT, as you will see from other posts on this site, is Modern Monetary Theory.
                      This phrase is used to cover many areas, but the one practice I was refering to, is Goverments taking the role of moderator of the economy, in as such that if the private sector takes a downturn, as it has now, the Gov’t of a Sovereign nation should take the slack, up until the point of full employment via buying services etc through the issuing of a given currency.
                      The use of taxation would then be used to pull in enough of the new currency to keep the economy running at optimum level, ie not too much money chasing goods and services etc….

                      This is my understanding, and I am in no way an authority on this, but if my understanding is correct, I have to return to my original question….

                      Why is the UK Sovereign Gov’t opting for austerity in a downturn…??
                      Is it possible both the Bank of England and Leading Conservative/ Lib Dem parties do not understand these issues, or are we naive in assuming we know better…??

                      Are we missing something, or are we being led into another depression which is exacerbated by Gov’t decisions…??

                      Look forward to your reply tomorrow, John.

                    • http://www.facebook.com/RommelDAK John Harvey

                      Oh, okay. I have known Randy, Pavlina, and Stephanie for years (in fact, I’m going to UMKC to present a paper next semester), but I’ve never called it MMT. To me, it’s Post Keynesian economics. So, yes, that’s me! Very much so. Though, I try to keep an open mind (and am currently working on a book covering contemporary schools of economic thought).

                      So, back to Snedmeister’s questions…

                      Basically, yes, I think this sums it up: “we being led into another depression which is exacerbated by Gov’t decisions.”

                      Of course, as you suggest, why? Is it that they are ignorant? Mean spirited? Have other goals? What? My view is that the reasons for this are multiple:

                      1. Confusion with private budgets: if one assumes that private and public budgets are analogous, then, obviously, there reaches a point of much debt to remain solvent.

                      2. Confusion with other national debts: if one assumes that what the US and UK face is analogous to the Greek situation, then, again, this false reasoning leads to an “obvious” conclusion.

                      3. Confusion with historical precedents: when nations did not print their own cash and really did have to raise money elsewhere for military campaigns, etc., then their budget was analogous to a personal one. The last person a bank wanted to see showing up to borrow money was the king!

                      4. Desire to appear responsible: particularly I think in the US, we paint our government officials as lazy spendthrifts. Being a deficit hawk allows them to paint themselves as responsible.

                      5. Catholic guilt: suffering makes us better people! Probably not Catholic, per se, but I’m a product of 12 years of Catholic school and that’s what it makes me think of. There is a sense that if we make “tough decisions,” then we are better people. There is so much of the whole deficit cutting thing that is deeply subconscious–it feels right, and that’s terribly dangerous. Too much emotion and not enough brain power.

                      6. Irrelevance of economic theory: economics has, for a number of reasons, become so obsessed with esoteric theory and advanced mathematics that you are hard pressed to find a PhD who actually knows how unemployment numbers are calculated–but, boy, can they invert matrices and take derivatives! I gave a talk to a group a couple of years after the financial crisis and pointed out that in the supposedly top journal in all economics, American Economic Review, there had not been a single article on the collapse. There was, however, a mathematical piece that showed–get this for path-breaking reseach–that people care how much their colleagues earn. No kidding. Even more telling was the fact that neither of the two authors had undergrad econ degrees–both math. Econ has become a place for mathematicians to play. Hence, at a time when the entire econ profession should be shouting at the top of its lungs about this idiotic attempt to plunge us deeper into recession, we are largely silent. I’m quite sure that many of my colleagues cling to the same layperson’s view mentioned above. There is, at least, a widespread feeling that more spending now makes much more sense than less, but this is not being pressed as it should be, and even they have this gut feeling that woe is us eventually.

                      In short, I’m depressed, and I’m generally an unreasonably optimistic person!

                    • Snedmeister1

                      I was hoping there was an option where the Gov’t had a master plan, where all would be saved by a genius Eureeka moment, something clever where by all our faith would be restored in their ability to make well informed decisions……

                      “I have a dream”……:)

                    • Anonymous

                      I liked that, ;-).

                      Linda

                    • Anonymous

                      MMT (Modern Monetary Theory)… Ah, perhaps that’s mostly a label used by others for the things you’re describing. As I recall from a conference with Bill Mitchell, Randall Wray, Warren Mosler, Pavlina Tcherneva, Stephanie Kelton, and Marshall Auerback (we talked about this a couple of weeks ago or so as can be found here http://overthepeak.com/wordpress/archives/868), I think Stephanie Kelton mentioned that what they are talking about is neither “modern” nor “theory,” so the label of MMT (Modern Monetary Theory) contains some unfortunate terms… but they have grown accustomed to the label.

                      I see you’ve brought up both Warren Mosler and Randall Wray. Am I incorrect to see you as identifying your work as being similar to theirs, and to the others mentioned as having attended the conference linked to above (to at least some extent)?

                      Linda

    • http://overthepeak.com/wordpress/ Mystic

      The world (governments and banking) have run into an insoluble problem.
      Do you imagine they will say, `Gosh, we better not start printing up money (like those MMTers say we can), because well……we might just get carried away~!`

      The finer points of `fair profit` and the like, will be like `angels on a pin-head`, when there is 30% unemployment in the world.

      Something is going to be needed to soften the blow.
      Free market capitalism is not the answer….. (nor is austerity).

      The world is hurtling towards a deflationary depression.
      What do you think the world should do~?

      • CSArichardo

        Wow …. I get to be god ! Sorry not in my mandate …
        I am not sure if the world is moving into a deflationary depression ….. there are many inflationary influences out there.

    • http://www.facebook.com/RommelDAK John Harvey

      You have hit a key issue, CSArichardo, and the one and only reason that there is any logical reason whatsoever to force governments to borrow rather than just print: it might prove to be too much fun if they realize there are no limits! And that is a realistic concern, but it’s not one we should address in the manner we do today because it is preventing us from recovering from the worst recession since the Great Depression. As Randy Wray wrote in a blog piece:

      “We don’t need myths. We need more democracy, more understanding, and more transparency. We do need to constrain our leaders—but not through dysfunctional superstitions.”

      The specific dysfunctional superstition to which he is referring is the idea that federal government budgets are akin to person ones. There are many other ways to control our politicians. Impoverishing ourselves should not be on the list.

  • Snedmeister1

    Nick, I am struggling to come to terms with the notion that Deficits = Private investment….
    Private savings yes, ( I am assuming this in my limited knowledge ) fund Gov’t deficits via Bond sales, which are bought by investors, but does it matter that the investors are not within this MMT ring fence, ie USA??
    I am refering to China for example, who are buying US Bonds, so this is then Chinese private investment isn’t it??
    Also, if the FED buys the Bonds, to not re distribute existing money, but create more, how is this private investment??
    Not trying to discredit anything here, just learn…..

    • http://overthepeak.com/wordpress/ Mystic

      It depends who is looking at it.
      Cameron says the UK government, of which he is the prime minister, runs like your household does…………….. Therefore he gets in taxes for some spending, and borrows the rest.
      MMT shows that he is wrong in his beliefs, and wrong in thinking that his governments expenditures are funded by taxes and borrowing.

      It is desperately difficult to talk about these things, unless we know from who’s point of view we are talking~!?
      Are we discussing how Cameron thinks the world works…….Or, how MMT knows the world works~?

      • Snedmeister1

        MMT, firstly please…:)
        From an MMT point of view, how does FED buying US Bonds add to private investment, and also, does it matter that some, or a lot of private investment is also private investment??

        • Snedmeister1

          Sorry, last bit should read does it matter that a lot of private investment is actualy “Foreign” investment….:)

          • http://overthepeak.com/wordpress/ Mystic

            No, sorry. I still don’t understand the question.
            I am not sure where `Fed buying US bonds` comes in to anything~? (although I am all over the place today)
            Could this be a mixing up of QE (Fed buying bonds from banks) and MMT (something different)~?

            • Snedmeister1

              No, it might be me, but I seem to remember a while back Bernanke saying that even if Bond buyers could not be found, the FED could buy them…. Maybe I got that wrong..??
              But this aside, I still do not understand the deficit = investment theory, as a lot of investment is foreign investment…. Does this matter??

              • http://www.facebook.com/RommelDAK John Harvey

                Snedmeister, I think I get your question so I’ll give it a go. The selling of US debt itself is NOT akin to private investment, only the government spending that the debt was supposed to finance. That’s very important. Regardless of to whom the debt is sold, there is only one institution that is actually doing the spending that creates jobs and income: the US government.

                The reason for the issuance of debt is for the US government to come up with the dollar bills that they want to spend, and the only reason China is a good source of these is because of the large US trade deficit with respect to them: they are accumulating dollars that they do not want to spend on US goods and services. And so they figure they’ll earn a little interest on them.

                It’s as if I’m borrowing money to start up a new restaurant: the act of borrowing itself is not the investment (and note that by the word “investment,” economists almost always mean physical and not financial–that may be another source of confusion here). And if I borrow it from you, from Mystic, from China, from my mum and dad–whomever–it’s still ME doing the investment, not them.

                Is that what you meant?

                • Snedmeister1

                  John, I appreciate your reply.
                  I think your point about the language used causing confusion is a very valid point, your right, I was confusing the selling of US debt as a whole, with selling US debt to finance deficits….
                  You seem well informed so I will ask a few more questions if I may…

                  Firstly, why do Gov’t need to issue debt to fund debts at all if they are Sovereign?

                  Secondly, we hear that surpluses are bad, but why is this? Surely if they were bad, then China, who has a surplus would be suffering would they not?

                  Thirdly, this question is linked to my second really. If there is a surplus, does this not just mean that the economy is running well and Gov’t intervention is not really needed to take up under production/ employment etc??

                  Thanks in advance.

                  • Snedmeister1

                    Also, with respect to the investment part, do you mean Deficits = Private investment, because the money from Bond sales is used to put into the economy, and this is the investment, not the initial purchase of Bonds..??
                    I was looking at it from the perspective that the investment was the act of people buying the Bonds, ie I invest $100 of my money in Bonds, thus this is $100 of private investment…
                    Please correct me John, I don’t mind being wrong, I just mind not knowing I’m wrong…..

                    • http://www.facebook.com/RommelDAK John Harvey

                      Sned: “Also, with respect to the investment part, do you mean Deficits = Private investment, because the money from Bond sales is used to put into the economy, and this is the investment, not the initial purchase of Bonds..??
                      I was looking at it from the perspective that the investment was the act of people buying the Bonds, ie I invest $100 of my money in Bonds, thus this is $100 of private investment…
                      Please correct me John, I don’t mind being wrong, I just mind not knowing I’m wrong…..”

                      Whoops, sorry, missed this one! I believe you had it correct now. The problem is that the word “investment” means two very distinct things: financial investment (buying financial assets) and physical investment (building factories, restaurants, buildings, equipment, et cetera). ONLY THE LATTER DIRECTLY CREATES JOBS AND INCOME! The former is merely a form of saving, and only stimulates economic activity if it somehow generates the latter. There is absolutely no guarantee that it will do so.

                      Hence, when the US government sells a Treasury Bill to China, this is financial investment (for China), but not physical. However, when the government then uses the proceeds to build a bridge, the latter is physical investment and it creates jobs and income.

                      Of course, the crazy part of that whole thing is that there was absolutely no reason to involve China it in at all–we are permitted to print those green pieces of paper with portraits of famous Americans on them!

                  • http://www.facebook.com/RommelDAK John Harvey

                    My pleasure!

                    *************************
                    Snedmeister1: “Firstly, why do Gov’t need to issue debt to fund debts at all if they are Sovereign?”

                    Strictly speaking, they don’t have to. There are a variety of reasons why this has evolved, but I’ll stick with the simplest one: forcing governments to finance deficits serves as a check on their power. If they were free to print cash however they liked, this could easily be abused. They could essentially capture whatever resources they wanted for themselves. But, this is a political problem, not an economic one. And, at present, this solution is acting like an albatross around our necks. It is preventing us from doing something perfectly reasonable, nay, absolutely necessary: stimulating domestic demand. This is easily within our grasp, but the myth that the federal budget is analogous to our own is encouraging decision makers not just to limit spending, but to cut it. Lord help us.
                    *************************
                    Snedmeister1: “Secondly, we hear that surpluses are bad, but why is this? Surely if they were bad, then China, who has a surplus would be suffering would they not?”

                    This is another problem of terminology. The core issue in the US at the moment is the budget deficit, but China’s surplus is a trade surplus. These are two distinct concepts. You can have any combination thereof: a trade deficit with a budget deficit; a trade surplus with a budget deficit; a trade deficit with a budget surplus; or a trade surplus with a budget surplus. This is not to say that the existence of one cannot be related to the other, but nor do they have to be (I gave a talk on this last week and before I started, my wife warned me to make sure everyone was clear on this distinction).

                    On top of that, I wouldn’t exactly call China’s economy strong. They have a high level of exports, but their consumer sector is exceedingly weak (something they have been trying to address, but without much success so far). So, they depend tremendously on state-directed investment and exports, and they are so “successful” because they couldn’t care less about polluting the environment or putting workers in mortal danger.

                    Returning to your original question but adding the proviso that we are discussing budget, not trade, surpluses, yes, they are bad. The problem is that they drain private income and wealth in a world there the latter are already insufficient to generate full employment. Think of it this way: if the government taxes more than it spends, then this must logically mean that they are a net drain on the private sector.
                    *************************
                    Snedmeister1: “Thirdly, this question is linked to my second really. If there is a surplus, does this not just mean that the economy is running well and Gov’t intervention is not really needed to take up under production/ employment etc?? “

                    I would not necessarily disagree with that, but you have to be careful about cause and effect. For example, is the high price of a product an indicator that it is terribly popular and the subject of great demand, or that it will be too expensive and therefore attract little demand? Depends–are you thinking of price as the result or cause of demand (technically, we should really distinguish here between demand and quantity demanded, but I won’t)?

                    And so in that sense, a budget surplus can certainly be the result of a strong economy. There are lots of tax revenues because everyone is working, and government spending is lower since we don’t have to pay for unemployment, welfare, etc. And this can certainly happen. But, in general, private sector demand is insufficient, sometimes catastrophically so, and so we find tax revenues dwindling and government spending rising. This creates a deficit, one that probably needs to be increased even more to supplement the private sector (as shown in the original video).

                    There’s another side to all this that I have hesitated to raise since it complicates things: as the government spends more, so it is quite possible that the total budget deficits actually declines because you generate so much more tax revenue and you spend less for support of the unemployed. I have thus far avoided mentioning this, though, as it sounds as if it is suggesting that we need the government budget to be in balance. Attacking that myth was the whole point of my original post on the blog (from which Tschäff made the video). I mention it now only because it’s related to your question.

                    John

                    • Snedmeister1

                      Thanks for your replies, John.
                      Obviously, the need to clarify exactly what each terminology means is very important here.
                      Once I have my head around what is meant by each specific phrase, it becomes a lot clearer….

                      One last question before I leave to think is, Why are the UK Gov’t going for austerity in your opinion…?

                      Is it because the polititians/ Bank of England fail to understand MMT, or is there some other reason??
                      I understand you will not have a deffinate answer, but an informed/ educated guess is good enough for me…:)

  • Anonymous

    I liked the video but some questions popped into my mind.

    The government never runs out of money – that makes perfect sense, if the government issues it’s own currency. However a government like Greece could easily run out of money, no?

    Another one is that I don’t think you can throw together the consumer and the producer like that. It’s too simple. The US does not produce most of it’s consumer products or services and it’s increasingly trending away from that. So it’s more accurately a relationship between the US consumer and the Chinese producer. Now as we know, China or India does not fall under the same currency as the US, so the analogue does not seem to match reality in a meaningful way.

    I’m probably completely wrong of course, and nothing would please me more than to be corrected.

    • http://overthepeak.com/wordpress/ Mystic

      Greece can run out of money, because it does not control its own money (it does not have `its own money`)

      I did not get your `question` about the `consumer and the producer`.
      I guess it is a problem that has arisen because details had to be blurred to get it all into ten minutes.

      Did you approve of the `overall drift` of the video~?

      • Anonymous

        Yes, very much so.

        I agree with a lot of it, and the parts that I don’t agree are just somewhat confusing, not something I actually disagree. At least not yet.

        I was talking about producers and consumers finding an equilibrium at the beginning (and the government adding to production and demand both by giving jobs to people). It makes sense only in a closed system, but I’m unable to view US that way. The US (and many other countries) are dependent on other countries for their production and services, so I find the analogue somewhat inaccurate.

        I must admit that I’m still processing this.

        • http://www.facebook.com/RommelDAK John Harvey

          Howdy, Slipcurve! You are right that it assumed away the foreign sector. I have been trying and trying to come up with an explanation of the debt and deficit that could be understood quickly and clearly by a non-economist, and this was my latest iteration. You really have to start at the most basic level and then build up from there. Once it makes sense with just a domestic economy, then you add details. All that said, I stand very much by the basic message. The terms upon which the US (which is still a relatively closed economy as compared with the rest of the world) trades with China is a separate, albeit important, issue. And it does not change the central message of the blog post upon which Tschäff based the video: the federal government MUST stimulate demand, and so long as the financing is in domestic currency then the government cannot possibly go bankrupt (as Mystic points out above, Greek debt did not fit this characterization).

  • Ivo

    Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay its creditors.
    If a goverment can print its own money it can never go bankrupt cause it can always pay. However…
    It can affect the point how others in the world see and feel about it.It therefore can have large effects on the value of the currency.

    • http://www.facebook.com/RommelDAK John Harvey

      You are right, Ivo, it can have such an effect on the value of the currency, but only because of the widespread ignorance regarding this issue. But, we should not let the irrationality of the financial sector straight jacket us in our attempt to recover from the worst recession since the Great Depression.

  • Ivo

    Can i disagree on the printing dollar raising volumes thingie:
    Printing dollars does not always raise the volumes of produced goods and services inside the US. It makes it more profitable for international companies. Cause it can raise volumes abroad and contracts from homeland. It is added up in GDP (cause the companies are on wallstreet) but it has “outsourced“ more and more manufacturing and services eventually leaving an empty shell.
    If to many dollars flow out of the US u can expect deflation inside even if you print,print and print.

    • Snedmeister1

      Quite right I feel.
      MMT could be used to fulfill full employment, but if the goods produced are not as good as foreign goods, then the money is not spent back into the economy in question….
      This is a problem not really addressed yet….
      Also, people have to be confident to spend money, instead of saving, and likewise, companies must be confident of a prosperous future before they increase output….

      • http://rommeldak.wordpress.com/ J Harvey

        Snedmeister1, I am the author of the original blog post upon which Tschäff based the video. You are quite right that a) any leakage in the form of foreign goods is important and b) I did not address that in this particular post. With respect to the latter, I had done a couple of other wherein I tried to talk about everything at once. Not surprisingly, they were confusing! My whole goal is to explain in terms a non-economist can understand, and I finally realized that I wasn’t going to achieve this unless I could make people consider only part of the picture in isolation of the others. So I decided to leave imports completely out of it (though, if you look elsewhere on http://rommeldak.wordpress.com/, you’ll see it mentioned).

        That said, however, I stand firmly by the contentions that a) it is essential that the government supplement private sector demand and that this is a win-win situation for domestic workers and producers and b) there is no real burden from deficit spending if it is borrowed (not that it need be–why should the US have to ask China for dollar bills?) in your own currency.

        Should the US worry about the leakages from imports? Absolutely, but this is a concern whether the federal budget is in surplus or deficit, and it is in no way addressed by cutting federal government spending. Hence, spend more, but, to address your very real concern, do so in a way that limits leakages.

    • http://overthepeak.com/wordpress/ Mystic

      Please explain exactly what you mean by `printing dollar`~?
      Do you mean QE, or MMT~?
      (We cannot really run away into interesting conversations unless we have the basics nailed down)

      • Ivo

        I was refering to the money as in “Dept and deficit in a nutshell“.
        In my perspective money is always a piece of value that will always go for more pieces of value.
        Wether it be MMT or QE is not that relevant but you can expect in MMT that most money stays “indoors“.

  • labadee

    The money-loop explained in this video looks good until you introduce the variabel ‘time’.

  • http://www.facebook.com/RommelDAK John Harvey

    As the author of the blog post upon which Tschäff based his excellent video, I sure hope it is clear. I have been maintaining a blog for a while now, and my goal has been to explain the recession, health care, inflation, the debt and deficit, etc., in terms that non-economists can understand. There is so much ignorance out there regarding these key issues, and the problem is not that people are stupid, but that no one bothers to treat them otherwise and given them a careful explanation. I hope I can, in some small way (at least among my friends!), fix that.

    FYI, here are the posts on other issues (some summarized into pdfs so that they no longer go over multiple pages):

    ROOTS OF THE FINANCIAL CRISIS:
    http://www.econ.tcu.edu/harvey/blog/summary.pdf

    HEALTH CARE REFORM (big deal in the US, anyway!):
    http://www.econ.tcu.edu/harvey/blog/summary2.pdf

    INFLATION:
    http://tinyurl.com/2fuh4pl

    DEBT AND DEFICIT:
    http://rommeldak.wordpress.com/2010/11/14/debt-and-deficit-in-a-nutshell-the-video/
    http://rommeldak.wordpress.com/2010/07/13/debts-deficits-and-dummies/
    http://rommeldak.wordpress.com/2010/07/15/government-deficits-as-necessary-to-capitalism/

    • Anonymous

      Thanks, John, for taking the time to address us. I’ll add your blog to my regulars – I’m sure it’s going to be helpful to me as I continue to try to learn about this… (and many of the related issues).

      Linda

  • Jay1p

    I just watched the “Nutshell” video and am on my way out, but can’t wait to return to explore the rest of this post and links. Thanks for this. I’ve become interested in understanding all of this because the folks that are supposed to understand it argue constantly and I’d like to discern the BS myself.

  • Nwalt2

    Can someone here explain how much deficit spending it would take to create unemployment of 5% currently in the USA. How High would unemployment be if the goverment deficit was not 1.6 trillion greenbacks roughly the last several years? Which tool is better for job creation, monetary or fiscal policy? How do you prevent distortions in the marketplace with either of these tools?

    • http://www.facebook.com/RommelDAK John Harvey

      Howdy, Nwalt! I’ll give a shot at answering.

      “Q1. Can someone here explain how much deficit spending it would take to create unemployment of 5% currently in the USA.”

      I’m not sure anyone knows the answer to that question, although it’s a key one. Double what was actually spent? Triple? And then, too, some forms of government expenditure are much more useful in this regard than others. But, the good thing about this is that we don’t actually need to know the exact number any more than you have to know how many gallons you need to fill a bucket from your garden hose: you just start up the hose and watch until you see that the bucket is full. Likewise, you fire up spending until you get 5% unemp. I am by no means saying that there won’t be problems along the way, but these are minor compared to the millions of unemployed. It is an incredible, avoidable, unjust waste of resources and lives.

      “Q2. How High would unemployment be if the goverment deficit was not 1.6 trillion greenbacks roughly the last several years?”

      Again, I don’t know. There are econometric studies, but these are hardly foolproof. 15%?

      “Q3. Which tool is better for job creation, monetary or fiscal policy?”

      Finally one I know! Fiscal without question. Monetary is terribly weak. Entrepreneurs are holding back on hiring and investing not because the cost of finance is too high (could it be much lower?), but because they fear–rightly so–that if they take such a risk, no one will buy their output. Fiscal policy needs to create the income necessary to make the production of goods and services by entrepreneurs profitable.

      “Q4. How do you prevent distortions in the marketplace with either of these tools?”

      I’m not quite sure what you mean by a distortion. This seems to imply that the market = logical or reasonable, and I would raise an objection to that. After all, it is the market that has given us the worst recession since the Great Depression–is it a distortion of the market for us to try to lower unemployment by non-market means?

      That said, I do think it important for the government, in the pursuit of fiscal policy, to avoid doing things the market already does quite well. For instance, no point in making a chain of government restaurants. If it is profitable, they will be built. They should instead focus on non-profitable undertakings that have social benefit: libraries, parks, roads, bridges, long-term research, schools, et cetera, et cetera. In that sense, yes, I think it important to prevent distortions. But you asked how to prevent it: an educated voter. Raise objections to inappropriate projects, and endorse those that are appropriate.

      • Anonymous

        Ah, and I can see that John is clearly a fellow Texan (I’m in Houston)… and if you’ve come from outside the state to TCU, then you’ve taken to it well… “Howdy” right back at ya! ;-)

        Wow! Mystic’s gotta feel good to come around and see this overall interaction… He’s clearly not on his own in this one…

        (and great questions!)

        Thanks again, John…

        Linda

        • http://www.facebook.com/RommelDAK John Harvey

          Another Texan?! Yeah, not from here (born in London, grew up east of the Mississippi), but “howdy” is so incredibly useful!

          • Anonymous

            (lol) Isn’t it, though? My dad really took to it, too, said it all the time (and the man was from California, ;-)). I’m a native, however.

            Linda

  • Nwalt2

    Thanks John Harvey, Just a side note, I am an anesthesiologist in Ft. Worth. I apprecitate your input.

    • http://www.facebook.com/RommelDAK John Harvey

      Wow, what a small world! Go Frogs!

  • Maiyana

    This puts a whole new spin on the situation. I must admit, it makes a lot of sense. But didn’t Argentina print its own money? And although the United States can’t go bankrupt, other countries can certainly lose confidence in our currency.

  • Stevo

    The video persentation is a decent attempt at trying to promote the MMT concept that “deficits don’t matter”. And as expected, with more clarity in what is being offered, the response and interest grows.

    So what are the issues in what is being proposed. There are three that came to mind.

    1. Everything was going reasonably well until I heard the term “soaked up” being used to explain what happens to the increase in the money supply. Now what does “soaked up” really mean. Does it mean the money is non-perishable and remains in the money supply indefinitely, or does it mean that money is eventually destroyed by returning it to the issuer through taxation. Has the money supply been permanently increased? Whoever holds it will not want to lose it. They will want to place in something which provides a return. To provide that return either requires more money to be issued or it comes by persuading others to hand over their share of the money supply.

    2. If I am a factory worker being paid $20k and I see my neighbour the school teacher earning $30k then why would I want to be a factory worker? I can earn $30k with printed money. So I re-train as a teacher. The entrepeneur now has raise the salary of the factory worker to fill my place. That means they have to charge more for their products if the gap cannot be filled by productivity. If they charge more, I now want more as a school teacher to buy the equivalent number of products from them. I think this is called inflation.

    3. If the newly issued money is “soaked up” by the entrepeneur they can either give the money back to the issuer to pay the shool teacher and policeman or they can keep it themselves. I suspect they will attempt to keep it. So to pay the school teacher and police office next month the government has to issue more money which eventually ends up in the hands of entrepeneur who decides to keep it. So essentially it is a means by which at the end of the day most of the money issued ends up in the hands of one entrepeneur. Unless the government takes the money back at which point the enterpeneur thinks “well what’s the point of running a factory to get it in the first place, I might as well just get a job as school teacher”. i.e. it leads to apathy which is what you get under communism.

    • http://www.facebook.com/RommelDAK John Harvey

      Howdy, Stevo!

      I will address your questions in order:

      “1. Everything was going reasonably well until I heard the term “soaked up” being used to explain what happens to the increase in the money supply. Now what does “soaked up” really mean. Does it mean the money is non-perishable and remains in the money supply indefinitely, or does it mean that money is eventually destroyed by returning it to the issuer through taxation. Has the money supply been permanently increased? Whoever holds it will not want to lose it. They will want to place in something which provides a return. To provide that return either requires more money to be issued or it comes by persuading others to hand over their share of the money supply.”

      Excellent question since I don’t remember saying “soaked up.” Let me watch it again and see what that was all about. I, too, am confused!

      Stevo, I listed to the whole thing again and couldn’t find it. I’m sure I’m just missing it, but actually the blog post on which Tschäff based this is here:

      http://rommeldak.wordpress.com/2010/11/07/world%E2%80%99s-simplest-explanation-of-the-debt-and-the-deficit/

      It doesn’t have it there, either. If you could please point out where you heard this in the video, I’d be glad to address it. Otherwise, I’m afraid I share your confusion on what it means!

      “2. If I am a factory worker being paid $20k and I see my neighbour the school teacher earning $30k then why would I want to be a factory worker? I can earn $30k with printed money. So I re-train as a teacher. The entrepeneur now has raise the salary of the factory worker to fill my place. That means they have to charge more for their products if the gap cannot be filled by productivity. If they charge more, I now want more as a school teacher to buy the equivalent number of products from them. I think this is called inflation.”

      I think you are dead right. If we decided to pay all of the government workers, say, 10x as much as the private sector ones, then this would absolutely create inflation. I gave a talk based on this post to a local group last weekend and I raised this very point. However, my goal in the blog post (and Tschäff’s in making a video of it) was to address the issue of the debt, per se, and the essential role that the government must play. But what you raise is most certainly among the secondary questions that would have bo be asked.

      “3. If the newly issued money is “soaked up” by the entrepeneur they can either give the money back to the issuer to pay the shool teacher and policeman or they can keep it themselves. I suspect they will attempt to keep it. So to pay the school teacher and police office next month the government has to issue more money which eventually ends up in the hands of entrepeneur who decides to keep it. So essentially it is a means by which at the end of the day most of the money issued ends up in the hands of one entrepeneur. Unless the government takes the money back at which point the enterpeneur thinks “well what’s the point of running a factory to get it in the first place, I might as well just get a job as school teacher”. i.e. it leads to apathy which is what you get under communism.”

      I’m not sure what you mean by soaked up here (which is obviously related to the problem I raised above), but why would the entrepreneur get the new government money first? It goes straight to the teacher and police officer, and it is they who pay the entrepreneur for goods and services. The entrepreneur will then use that money to pay for workers, raw materials, capital investment, etc. for the next round. I do agree that the government will have to pump in a new round of money to the teacher, police officer, etc., but that’s what they are supposed to do. Every round of production and consumption requires expenditures on the part of all parties, which keeps the money in circulation.

      Am I completely missing your point on this one? I feel as if I may be.

  • Matt James_smith

    MMT proponents recommend deficit spending to close that gap. But you can’t spend at will under MMT; eventually the output gap closes and inflation becomes a big problem.

  • Warren Mosler

    Good stuff!

    For me the starting point is always that the currency is a (simple and ‘pure’ no substitution possible, etc.) public monopoly.

    It’s defined by the govt when it tells you what qualifies for payment of taxes and other fees, fines, etc.

    Tax liabilities create the ‘demand’

    ‘Supply’ comes from govt spending and/or lending.

    And, of course, that makes the govt ‘price setter’ just like any other monopolist.

    So the price level is necessarily a function of what the govt pays at the point of exchange.

    Warren
    http://www.moslereconomics.com

    • Snedmeister1

      Warren, I feel I’m beginning to make sense of this a bit, but I still have some reservations…

      With regard to full employment, how can we ever achieve this realistically.?

      No matter how many projects etc are tendered into an economy via Gov’t spending, we still have, ( at least in the UK ) the problem that many choose not to work…
      This then has a knock on that allows immigration to fill jobs that many Brits feel beneath them, while still leaving the unemployed …. Unemployed….

      The longer this goes on, the more unemployable they become, and we now have households with three generations where no-one has ever had a job…!!

      Would the solution then be for Gov’t to create jobs for them, just for the sake of a job, whether productive or not…??