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"Few know that massive borrowing began during the Reagan years after massive tax cuts."

“Please, William. Reagan has been dead a while now. He doesn't sign any more executive orders. And he isn't pushing stimulus packages or new government programs, and he isn't borrowing a penny from China right now”

You missed my point or I failed to explain my point or both. Reagan economics is a mentality of free trade, tax reductions, and what is good for global corporations is good for all Americans and this mentality has continued on since Reagan was president even in the Clinton years. This mentality of borrowing huge sums of money to offset our decline of wealth is coming home to roost in our society.

Societies like individuals often live in denial and we as a nation are in the depths of that denial. History can give us some classic examples of nations in denial but we seldom learn from history. Personal experiences as an individual or as a nation can be a much better teacher than history lessons.

My main point has been that as a nation many Americans don’t seem to mind spending trillions for our industrial military complex and bailing out wall street; these same Americans get upset if we want to provide tax funds so all Americans can have affordable access to health care insurance. This in my view is that we as a nation have succumbed to materialism. This mode of being in the world will have consequences for us as a nation.

What I find interesting is that many Americans want more of the same that helped to create this need for massive borrowing to maintain our standard of living. This is a classic example of the paradigm effect we want more of the same in spite of the evidence. Any nation that one per cent of the population has more wealth than the bottom 95% and this gap in wealth is increasing every day is in deep trouble of losing its middle class the very foundation of any stable society.

An example of this is CEO pay and bonuses have increased from the 50’s to thirty times a workers pay to now about 300 times a workers pay. This is classic capitalism in action doing its thing very well.

Look at Germany it had to fight in two world wars and be bombed out and suffer greatly before it gave up its war mongering. It had to experience the karma of those wars to understand they needed to change their mode of being in the world. The Germans used to stand in the streets and cheer Hitler on he was their hero.

Actually the universe of oneness has a better plan as the world is becoming more of a oneness in trade, wealth, technology, communication, etc. Another story.

For all the lovers of dogs and God an interesting very short video.

http://www.youtube.com/watch?v=H17edn_RZoY

“I have friends and family in Iraq and while I may not be nearly as eloquent a speaker or a master-debater (Ha ha) I can assure you that William is correct...”

I know of someone that was a sniper in Iraq and now has severe regrets and profound mental problems as to what he did in Iraq to even civilians from a great distance with his high-powered rifle that blew their heads apart like a watermelon. These are the terrible aspects of war. He may never recover fully and we must think about those families in Iraq that lost loved ones due to his and he claims others sniper activities.

My brother fought in the jungles of Vietnam and my cousin who was an only child died in that war so I have heard enough war stories to last a lifetime. My aunt grieved the rest of her life from her son’s loss. The other day I met a senior like myself and we were discussing the state of our republic and he stated the reason we are in financial trouble now was due to “those kind of people” that protested the Vietnam War. That caught my attention, as I was a Vietnam War protester after only doing two hours of research in the college library on the history of Vietnam.

I asked this elderly gentleman if he knew who the Viet Cong were because I had discovered that 90% of Americans did not know who the Viet Cong were even during the years of that war that cost the Vietnamese over one million lives and we lost over 58,000 lives. He did not know so he was one of those 90%. As I walked away I told him count yourself as one of those 90% and his wife smiled ear to ear. Interesting.

What I find interesting is that anyone that knows about systems and their influence on human behavior and these spiritual or if you prefer cosmic laws and principles must know that communism, socialism, and capitalism must self destruct. The purer the form of each the faster the self destruction.

"cosmic laws and principles must know that communism, socialism, and capitalism must self destruct. The purer the form of each the faster the self destruction."

Yes or so it would seem, I have read somewhere a quote about Revolution leading to Democracy leading to Complacency leading to a Dictatorship leading back to Revolution
or something to that effect

My Dad was in 'Nam in 68 and 69
he will not talk about it and as far as I know he has never talked about it...
believe me I have tried to get him to talk about it
My cousins Husband is in the Army and currently over in Iraq he is not liking it at all

I have a friend who got called up and he hated it over there as well

a couple of years ago when My Mom died she got to be buried at Fort Richardson (My folks live in Anchorage) because my Dad is a Vietnam Vet. I remember how solemn it was on the base as we followed the Hurst to the cemetery all the base personal would stop whatever they were doing and salute as we drove by (they obviously do this anytime they see a Hurst caravan moving to the base cemetery)
I remember walking around the graves (on subsequent visits) and seeing so many young names...20....22..29..28 it is a terrible price to ask of someone, I remember seeing a young women leaving flowers at a young mans grave. I really do hope we all get to move on in the afterlife and leave this madness behind...

“I really do hope we all get to move on in the afterlife and leave this madness behind...”

As a former almost atheist and materialist that had experienced a profound physical phenomena that defies all known physics that occurred when I was 18 this gave me a hint there might be more to this world than meets the eye. Religious beliefs did not do it for me even as a child. Much of it made no sense even illogical.

Everyday of my life I see some form of underlying meaning or reality of these phenomena we call reality. How I missed that aspect of life for 49 years until materialism ran its course in my life I know not. Now 20 years later I marvel how others appear to miss these clues of a reality that is always there but oh so hidden.

“Yes or so it would seem, I have read somewhere a quote about Revolution leading to Democracy leading to Complacency leading to a Dictatorship leading back to Revolution
or something to that effect”

“The first stage moves from bondage to spiritual faith. The second from spiritual faith to great courage. The third stage moves from great courage to liberty. The fourth stage moves from liberty to abundance. The fifth stage moves from abundance to selfishness. The sixth stage moves from selfishness to complacency. The seventh stage moves from complacency to apathy. The eighth stage moves from apathy to moral decay. The ninth stage moves from moral decay to dependence. And the tenth and last stage moves from dependence to bondage.” The Decline of a Nation, Kerby Anderson

I suspect that everyone that reads this quote above will have a different opinion as to what stage America is in 2010. Because there is variation in phenomena I see this nation in stages five through nine. If I were forced to pick a stage I would select stage eight knocking at the door very hard of stage nine.

"As a former almost atheist and materialist that had experienced a profound physical phenomena that defies all known physics"

Wow...me to.
two years ago, I then knew (though I suspected) that there underlies something, perhaps everything,beyond the laws of physics....speaking of which, wouldnt this
http://tinyurl.com/yg4v55d
go against the 2nd law of thermodynamics?

Anyway, I am 42 it took me 40 yrs to get over the whole "Love me or I'll burn you" aspect of what I thought spirituality was all about.
if there is no begining, then there must be no end... just endless big bangs inbetween:)

(to steal another quote)
Spiritual people inspire me
Religious people frighten me

are you sure we're not at the 9th stage allready?

Mañana republic

Sappily ever after

Hype springs eternal

Rebunked

Uncle Sham

Victor Davis Hanson offers another angle on the coming debt crisis - the threat of rising interest rates, which could immediately make the debt load unserviceable:

"We are floating huge amounts of debt at historically cheap interest. One can borrow $11 trillion at the price of what would be borrowing $20 trillion in the old days of interest, as rates hover around 2-4% rather than the old 6-10%. But this is a fool’s delusion; any spike in inflation will almost immediately turn this mortgaging into an unsustainable disaster, sort of like those old 1980s adjustable mortgages at 3% that drew buyers in to purchase enormous homes only to climb within a few years to 15% and insolvency, or like those introductory credit card offers that offer 6 months at 3% only to climb to 19% when you are maxed out."

Source: tiny.cc/7y1v4

speaking of which, wouldnt this
http://tinyurl.com/yg4v55d
go against the 2nd law of thermodynamics?

Not as long as they're receiving energy from an outside source such the sun or other organisms.

-Thank you Sam
I am curious how long it will take before science figures out how to use this to try and stop the aging process

Not that anyone would want to live on this planet forever...

William

I have been to Iraq. I am going again. You have not.

End of discussion on that subject.

I am sure you will find a new "spiritual" explanation that only you can understand on why we should throw in the towel when we have pretty much won the battle. Or do you think we should quit now when the insurgency is all but gone?

I sometimes wonder what would happen if ole so spiritual people such as yourself actually had to live the consequences of your ideas.

“are you sure we're not at the 9th stage already?”

No I am not sure of much in this life but it appears from my personal experiences and research data that we are eternal souls and this life is just one small blip in our soul’s journey. My point there is much to learn in when a nation declines in material wealth and moral values often due to selfishness from that wealth.

Now I state appears because once we become certain that we know something from our experiences which are in the realm of appearances and appearances can be so deceiving this can often lead to invalid conditioned cherished beliefs. Only a revelation that has led to a realization can give us certainty of a truth. These cherished beliefs that we are certain are valid beliefs can pretty much shut our minds down to incoming information coming into our consciousness on an on-going basis.

This “certainty” can be an obstacle to our further development to our souls and our nation. This so-called Christian cult that was becoming a terrorist organization busted recently was certain that they were right and needed to do god’s work for god. God or karma or whatever was not working fast enough for them so they decided to tamper. It appears they missed their prince of peace teachings.

“1980s adjustable mortgages at 3% that drew buyers in to purchase enormous homes”

This is the role of regulations. For several years it was possible to get a loan if you were just a warm body and stated an income that no one checked on. I know several people that made six-figure income from approving those loans. It was so easy to purchase a larger home then one can afford during those times. The temptation is great so it takes great restraint to buy a home within one’s income.

Now someone may state it is his or her loss; that is capitalism. But their loss became our loss as we left Wall Street unregulated, insurance companies unregulated, health insurance unregulated; the list is long. We opened up a Pandora’s box with our free trade and deregulations agenda where gov was the problem. My point a pure capitalistic system will not sustain itself. Human greed based in ignorance will overwhelm our level of spiritual values. It is similar to this; if we decided we don’t need to regulate speed limits and traffic lights chaos reigns.

There is a place of private ownership and there is a place for gov regulations and there is a place for gov run institutions and there is a place for not for profits institutions. Finding that balance is no easy task if even possible at this stage of human development. Health care is a basic necessity of life like fire and police protection and needs to be a not for profit approach to offering health care to all of its citizens or else we will have pre existing conditions and then even refusal of health insurance to max profits.

These CEO’s of these health insurance companies are paid huge salaries and bonuses to figure out ways to max profits such as when a person starts a new job if they have pre existing conditions that companies new insurance will not pay for those pre existing conditions. This used to be unheard of but profits over people’s needs are their agenda.

Robert J. Samuelson weighs in:

"Let's be clear. A 'budget crisis' is not some minor accounting exercise. It's a wrenching political, social and economic upheaval. Large deficits and rising debt -- the accumulation of past deficits -- spook investors, leading to higher interest rates on government loans. The higher rates expand the budget deficit and further unnerve investors. To reverse this calamitous cycle, the government has to cut spending deeply or raise taxes sharply. Lower spending and higher taxes in turn depress the economy and lead to higher unemployment. Not pretty.

"Greece is experiencing such a crisis. Until recently, conventional wisdom held that only developing countries -- managed ineptly -- were candidates for true budget crises. No more. Most wealthy societies with aging populations, including the United States, face big gaps between their spending promises and their tax bases. No one in Congress could be unaware of this."

tiny.cc/hggrc

United States congress reminds of a teenager that has been given a new credit card and the parents don’t put any regulations on how much the teen can spend and charge on the card.


We are a Republic and congress is a reflection of its voters. If that does not concern Americans nothing will. Check history both parties love to spend others money just like most teens that have never had to experience the labor of working for it.

Oriental philosophy believes that Out of crisis come great opportunities to learn.

As far as our future my view is we are heading straight for second world status. I.e. see link below.

“Many Americans are still burying their heads in the sand, pretending it's the country it always was, but that's not true”. Cassandra James.

http://www.associatedcontent.com/article/1884636/why_the_united_states_will_fall_to.html

Recent report below by information and innovation foundation says it all about our future.


“A report by the Information Technology and Innovation Foundation looked at the progress made over the last decade in the area of innovation. Out of the 40 countries and regions it examined, the U.S. ranked dead last.”

http://www.itif.org/files/2010-restoring-innovation-leadership-testimony.pdf

Our decline of wealth continues being sold as just a recession by our politicans. They know they cannot tell us what is happening in america or they would be voted out of office come next election. Kill the messenger phenomenon. Voters like positive thinkers even in spite of the evidence.

But hey there is always hope. Hope wins elections not the facts. Reagan and Obama were the best communicators about giving Americans hope.

No nation can stay on top of the wealth mountain forever as the top is covered with people that have subccumed to arrogance, over confidence, pride, denial, decline of resources, apathy, etc. History tells us this has often happened maybe even we can state has always has occurred.

Karma would be nonexistent if America was not in a decline. It is a blessing from the universe that nations do decline due to a whole host of factors.

Micheal,

We went through this once before. Suffice it to say, while I am as pessimistic about the future as anyone (social collapse, peak oil, etc. etc.), the national debt is simply a non-issue for a sovereign currency issuer in a floating exchange rate world.

Here's a link to an Australian economist who can explain it better than I can:

http://bilbo.economicoutlook.net/blog/?p=332

You're right, Jimbo, and for a while I was intrigued by the theory you cite. But now I just don't buy it. I'm not an economist, and maybe I'll all wet, but it seems to me that as the debt rises to 100% of GDP, interest rates must inevitably rise, which, as Samuelson says, will only make it harder to service the debt, inaugurating a vicious cycle. Even if the debt itself is not enough to trigger a rise in rates, the downgrading of the USA's credit rating would drive rates higher.

I agree that the national debt is not a problem if the economy is growing fast enough to outpace the growth of the debt. But given the rate at which our debt is growing, and given the economic slowdown which shows no sign of ending soon, I am not optimistic that we can grow ourselves out of the debt.

Besides, even if the "debt doesn't matter" economic theory is correct, it's irrelevant politically, since the public will not tolerate the debt going to higher and higher levels. There will be calls to "do something," and with the present mindset in Washington, "something" could end up being a VAT tax, which would depress economic growth still further.

I'm not worried about peak oil, but I do think the debt is a ticking bomb.

I don't think you ever were intrigued by the "theory" (which is not really a "theory" anyway, just a simple explanation of how the monetary system works), since you never really grasped it in the first place.

I agree that "debt is not a problem if the economy is growing faster" for someplace like a U.S. state, or a country under the Euro. In both cases, they are currency users, who must first obtain money, by taxing or borrowing, before it can spend it. In this they are no different from any corporation, or you or I for that matter. In fact, up until August 15th, 1971 (when Nixon closed the gold window), that was how the U.S. government operated (although the rules were self-imposed limitations that were suspended in wartime).

What I was trying (and failing) to get across before was that the rules are completely different for a currency issuer. So different, in fact, that an attempt by one to operate according to the principles of "sound finance" are almost certainly doomed to failure.

As a matter of operational reality, the U.S. government (and any government operating a fiat currency) must spend money into existance first first BEFORE it "borrows" or taxes it. The mechanics involved are precisely analogous to those of subway tokens, which must first be sold to the public before they can be collected at the turnstiles. Imagine, if you will, if the NY subway grew concerned by it's ominous "token deficit" and resolved to henceforth "balance it's budget" by only issuing new tokens as it collected old ones. The system would soon break down, since anyone who wanted to keep a few extra in his pocket would find it impossible to find them.

The reason I put "borrow" in quotation marks above is that a currency issuer never actually needs to "borrow" it's own currency of issue (why would it?). What looks like a "borrowing" operation is, in fact, an interest rate maintainence operation. If the Treasury didn't sell bonds, interest rates would drop to 0, since the only way to rid the banking system of excess reserves (which pay no interest, at least until last year) is to exchange them for interest bearing securities. All you have to do is observe Japan in the 90s-00s and us now to see this in operation. Due to the Fed's "Quantitative Easing" (in which it buys securities on the market and exchanges them for reserves) there are a vast amount of "excess reserves" in the system, which caused the interest rate to drop to zero, since no bank would bid for reserves when it already had as man y as it needed. Japan did the same thing the in 90s, when rates stayed at 0 despite years of deficits as big or bigger in terms of GDP as we are running now.

And as for the "U.S. Credit rating", that's another absurdity. A credit rating, if it to have any meaning whatsoever, must be a rating of a person's or corporate entity's ability to pay. But a currency issuer makes payments by changing numbers in bank accounts. It doesn't "get money" from anywhere, just as the NY subway doesn't "get" the credits it puts on your metro card from anywhere. Government checks don't bounce. So the whole idea of rating a sovereign's debt in it's own currency (again, we're not talking Argentina, which owed dollars, or Greece, which owes Euros) is ridiculous. Again, Japan is an example: Japan's debt was rated lower than Botswana's - and Japan went right on issuing Trillions of Yen debt at essentially 0%.

Jimbo

I am impressed, I certainly hope you're right!
I have wondered why no one ever seems to "Call us" on our "Debt"...

The Repubs give the impression, that we are knocking daily on the door of foreign banks, hat in hand, asking for loans...

maybe this is the impression that needs to be out there lest the value of our "Tokens" drop to next to nothing.

"Government checks don't bounce."

Only because the government can inflate the currency to near-worthless levels. Creditors get paid all right, but they get paid in debased dollars.

"But a currency issuer makes payments by changing numbers in bank accounts."

But if those numbers don't reflect real value, then those payments are meaningless. The government could pay off the national debt tomorrow, but only by rendering the greenback essentially worthless.

"as for the 'U.S. Credit rating', that's another absurdity."

Most economists seem to disagree, since there is a lot of concern about a possible downgrade of the USA's credit rating.

Here's a typical report:

tiny.cc/yka1k

Moody's, which presumably knows something about credit ratings, has issued the same warning:

tiny.cc/7u1ce

If the people who keep track of these things for a living are worried, I'm worried too.

congress should love jimbo and his theory.

Marty: I got this bridge to sell you real cheap and as long as you pay me in euros you can have a 10% discount.

dont be too impressed marty if we print enough money it wont be worth the paper it is printed on.

voodo economics has been around forever maybe even for the hunters and gathers.

I believe an economist and their theories about as much as I believe a fundamentalist relgious person or a politican.

we in america are going through a massive decline of wealth of a nation; the evidence is all around us. bet rome hid its head in the sand and called their decline a recession like we are doing.

now dear old england still thinks they have a high standard of living even though only greece is lower in their standard of living.

that is the power of nationalism. another one of those ism's in action.

Hmmm, would that be the same Moody's that rated baskets of half-million dollar mortgages to people making $15,000 a year at Starbucks as "AAA"?

Oh, yeah, they know ratings.

Did you read what I wrote? They downgraded Japan. All the same predictions of apocalypse were made. And Japan made all payments, and just kept on issuing debt at 0% like nothing had happened - because nothing had.

Oh, and in all those years that Japan was spending like a drunken sailor, racking up similar size deficits to us now - they were suffering from continuous deflation.

But of course, Japan has nothing to do with us, because, well - because!

Those who don't understand the monetary system (and I'm afraid that includes 99% of the economic profession) are doomed to talk nonsense.

I'll link to the following sites that you can use to educate yourself. I realize you won't read them, but some of your readers might find them helpful:

http://moslereconomics.com/
http://bilbo.economicoutlook.net/blog/
http://neweconomicperspectives.blogspot.com/

There are open comment threads on all of them, and most of the authors will eagerly answer any questions you might have.

""I believe an economist and their theories about as much as I believe a fundamentalist relgious person or a politican.""

Ha! good point

""I'm afraid that includes 99% of the economic profession are doomed to talk nonsense""

William and Jimbo agree
at least regarding most Economists and their theorys

""if we print enough money it wont be worth the paper it is printed on.""

You may be right William,
I remember reading about Germanys wheel barrows and loaves of bread..
I have always wondered how we were able to print our own money and then "Borrow it"??

I simply am hoping for the best
yet I expect the worst

My wife is Native American and a practicing Shamen (Lakota tradition)
she believes that if you think about something enough you can "manifest it" so

in other words thinking negatively or positivly can and will have an effect on things

I am trying to stay *cough*positive about this *Cough* even though its waaaay out of my sphere of control...:)

"Those who don't understand the monetary system (and I'm afraid that includes 99% of the economic profession) are doomed to talk nonsense."

I'm afraid I'm going to have to align myself with 99% of the economics profession. Sorry.

Yes, I trust Moody's and other professional rating services to have some idea what they're talking about. They're not infallible, but when they warn us of a coming catastrophe, we should listen.

Wasn't Weimar Germany a sovereign currency issuer? They ended up with hyperinflation.

Incidentally, I don't think Japan offers very good support for your thesis, because Japan's economy has been in very bad shape for two decades now. They may not have suffered a budget crisis, but they have seen their growth rate drop so low that they now talk of "the lost decades."

I don't pretend to understand the more technical aspects of the issue in question, but I do understand that when you characterize government spending as mere numbers on a computer spreadsheet which can be manipulated at will without consequences, you're missing the all-important point that those numbers must be backed by real-world value.

Or so it seems to me - and to 99% of economists, apparently. I hope I'm wrong and you're right, because we are clearly not going to reduce the deficit anytime soon.

I looked at the three links jimbo provided in his last comment. In the third link, there's an article about Social Security, which includes these words:

"Social Security is a federal government program. Government pays Social Security benefits by crediting bank accounts. It can continue to do this even if payroll taxes fall to zero. The payment is an entry on the balance sheet of the Social Security recipient's bank."

Did you get that? Social Security will not be insolvent even if payroll taxes fall to zero. No taxes are needed! The government can just "credit bank accounts."

One reader responds intelligently to this claim:

"So let's repeal every bit of all FICA taxes since they seem totally unnecessary to paying out benefits.

"Even if Wall St. takes it over and loses every dime, the government can still credit the bank accounts.

"And while we are at it, why bother with the income tax? I assume all government employees' payroll can just be 'credited'.

"And interest on those treasury bonds can just be 'credited' to whatever bank account.

"Better yet, just credit everyone a $500k stimulus check to pay off their mortgage or buy a new house...

"Sorry to be so impish, but you really deserve it for failing to properly address the issue - there is no free lunch, and the 'trust fund' is going negative, and the revenues have to come from somewhere, and I don't think Zimbabwe is a good alternative."

The blogger responds by saying that he does indeed think we should abolish payroll taxes and probably the income tax too, but that a tax on living space (in square footage) should be substituted. Why do we need taxes at all, when the government can just "credit accounts"? The blogger says we need taxes to "drive money." I don't know what that means, but I always thought we needed taxes to, um, pay for government services.

Silly me.

This rather odd approach to finance goes by the name of Modern Monetary Theory. (So I was right in calling it a theory, wasn't I?) It is also known as chartalism. Google either of these terms, and you can find a variety of articles supporting and criticizing the theory.

“Did you get that? Social Security will not be insolvent even if payroll taxes fall to zero. No taxes are needed! The government can just "credit bank accounts."
“One reader responds intelligently to this claim:”
"So let's repeal every bit of all FICA taxes since they seem totally unnecessary to paying out benefits.
"Even if Wall St. takes it over and loses every dime, the government can still credit the bank accounts.
"And while we are at it, why bother with the income tax? I assume all government employees' payroll can just be 'credited'.
"And interest on those treasury bonds can just be 'credited' to whatever bank account.
"Better yet, just credit everyone a $500k stimulus check to pay off their mortgage or buy a new house...
I look forward to the response from jimbo on these comments. If I have learned nothing else in life it is to try to keep an open mind no matter how foolish the information coming to us appears to be. History gives us many examples of the rejection of new innovative ideas that later proved to be very beneficial to the world.

I put economists, ultra skeptics, religious fundamentalists, atheists, Wall Street, congress, white house, supreme court, lawyers, banks, and politicians in the same suspect basket. In fact I put everyone in the same suspect basket as to his or her believability except you and I and I am not so sure about you. Sorry Bill Crosby tape done years ago to prove a point.

I await my stimulus check in the mail from congress and while at it congress just increase the size of my social security check by two fold and credit it any bank account.

Taxes "drive money" in the same way that turnstiles "drive subway tokens". People buy tokens not because they want them, but because they want to ride the subway and if they don't deposit one at the turnstile the transit cops will arrest them. But the Transit Authority doesn't collect them because it needs them, either - it collects them so that people will have an incentive to buy them, and provide the transit authority with the resources it needs to maintain the subway.

Yes, taxes are necessary - but not because the Federal government needs "revenue". It needs to tax in order to give value to it's currency, so that people will accept it return for the real resources the government wants to buy. After all, anyone can issue currency - the trick is getting people to accept it. Declaring that people will have to pay, on penalty of prison, a certain amount of the currency you issue is a very good trick.

So the point is: it's not revenue that constrains governments. There does not need to be a one-to-one relationship between how much is spent and how much is taken in, any more than there has to be one token collected at the turnstile for every one sold. What counts, as you have noted, is inflation.

A currency issuer uses taxes to manage the value of the currency. If it doesn't collect (or finds itself unable, due to a breakdown of government authority to collect) enough, the value will go down. But what happens when demand for the currency goes up? What if, as has happened in the last few years, people would rather hold on to currency (or money in bank accounts) than spend it?

The only source for U.S. dollars is U.S. government spending. If there is a net desire on the part of the non-government sector to hold some, the only way it can happen is for the U.S. government to tax less than it spends. If there is a demand for savings, there is no danger of inflation since the demand still exceeds the supply.

Are you with me so far?

Ultimately, the "price" of the currency is determined by what

Oops. Ignore that last fragment - it was a left over edit. I've got to start using the "preview" feature...

"Incidentally, I don't think Japan offers very good support for your thesis, because Japan's economy has been in very bad shape for two decades now."

Yes, it's economy has been in bad shape. But My thesis is not that they managed their economy well (they didn't) but that the deficit spending that they did (and continue to do) showed in rather dramatic fashion that there is no solvency risk for a sovereign currency issuer, nor do such deficits have any effect on the interest rates such governments pay.

The story of Japan in the 90's is the same story that played out here in the 30's and is depressingly set to replay over the next few years. The Japanese government would offer limited "stimulus packages" or infrastructure spending. When they started to work, fears about the non-existant effects of deficits would resurface and attempts would be made to return to "fiscal responsibility". This would cause the economy to tank again. Lather, rinse, repeat. They only really started to recover when their exports really picked up again in the mid-2000s and they were able to "export" their savings to other countries.

In the U.S. in the 30s, FDR came into office promising to balance the budget. Fortunately, he had no principles and he was abel to be convinced to run modest deficits, which were enough to create a large recovery (he also went off the domestic gold standard, which made that possible.) However, once he was safely reelected, he decided to balance the budget again in 1937 (the fact that the SS tax started that year, several years before any benefits would be paid out, didn't help.) The result? Another recession, almost as bad as the first, that almost wiped out all the gains that had been made. The economy didn't really recover until the war made massive deficits politically feasible.

And about those WWII deficits: the U.S. government run deficits of over 25% of GDP for 4 years running. What happened to interest rates at that time, you ask? They stayed at 1.25%, where the Fed set them in December 1941. Inflation was a problem, since the economy was running up against capacity restraints. It was solved by a combination of methods: taxes were raised (although not nearly enough to "pay for the war"), there were wage and price controls imposed, and "War bond" drives gave workers something to do with the money they were making that they couldn't spend on consumer goods. Neither the bonds sales nor the taxes "financed" the war, at least not directly. Both simply reduced consumer spending, "making room" for the massive purchases by the government.

"Yes, taxes are necessary - but not because the Federal government needs 'revenue'. It needs to tax in order to give value to its currency, so that people will accept it return for the real resources the government wants to buy. After all, anyone can issue currency - the trick is getting people to accept it. Declaring that people will have to pay, on penalty of prison, a certain amount of the currency you issue is a very good trick."

I'm afraid I just don't see it. If this theory were true, we could reduce taxes to a token amount (no pun intended!), just enough to "drive money." Maybe a 1% flat tax on income. This wouldn't generate much revenue, but supposedly taxes aren't needed for revenue.

As I see it, two things give currency value: 1) the perception that there is real value backing the currency (formerly gold, now the total assets of the government and, by extension, of the nation), and 2) a general agreement to accept the currency as legal tender.

It's true that anyone can issue currency. A store can issue coupons that serve as a kind of currency; collect enough coupons and you can redeem them for merchandise. In that case, the coupons are backed by the value of the merchandise offered by the store, and are accepted as "currency" by mutual agreement of the store owner and the customers. They are not accepted in other venues, so they have a limited role as currency. The only distinction of legal tender is that it's accepted pretty much everywhere -- it's rare to find a store saying, "We don't take cash," though some company stores in the old days used to maintain this policy; they only took company scrip.

Now suppose that the store offering the coupons decides it's such a good promotional gimmick, they're going to distribute millions of coupons. After all, if hundreds of coupons help boost sales, millions will work wonders! So they flood the market with coupons. Result: every Tom, Dick, and Harry flocks to the store demanding free merchandise. Suddenly the strategy doesn't look so good. The store is giving away all its inventory, and getting nothing but coupons in return. Eventually the shelves are bare. The coupons are now worthless (backed by no value) and the store is out of business.

Now, you will probably say the analogy fails because the store doesn't buy its inventory with coupons, and if the store did pay for its inventory with coupons, then there would be no problem. But is that really true? Even if the store could replenish its inventory by paying its suppliers in coupons, the suppliers would quickly realize that the store is printing massively more coupons than it used to, so each individual coupon is worth much less than it was before. The suppliers will demand many more coupons for the same goods. The store will have to print and distribute more coupons to pay for merchandise. Eventually the coupons will be so debased that they are worthless in almost any quantity.

The trouble with the subway token analogy is that there is a potentially unlimited number of subway rides. A better analogy, I think, would involve tokens that can be exchanged for goods that exist in limited supply, as in the coupon example.

Another problem with the subway token analogy is that passengers pay for the tokens with legal tender. The subway is not just collecting tokens; it's collecting the cash that riders put into the machines to buy the tokens. And the cash is what funds the system. If the subway were giving away tokens for free, there would be no revenue and the system wouldn't work. It works because the tokens are really just placeholders for cash, and the cash is backed by real-world values.

I think if you separate currency from the real-world value that backs it, you're asking for trouble. It's not just numbers in a spreadsheet that can be credited or debited to accounts. The numbers must have some relationship to actual, tangible wealth.

“After all, anyone can issue currency - the trick is getting people to accept it.”

That is a trick indeed especially if one prints money that will purchase less and less with that printed money. Being the largest consumer nation in the world with a free trade policy and the dollar as the world currency we Americans have been buffeted from massive inflation at least for a time.

We cannot compare the massive spending and the after effects of that spending of World War II with today’s reality as after the war we were the only industrialized nation not bombed to bits. We were so to speak the only ball game in town and people came to us for their needs. We must look deeply into what creates the wealth of a nation and it is not to my knowledge printed and borrowed money; it is quality and economical goods and services.

Japan made a lot of foolish mistakes when they were buying up the world’s corporations paying huge prices and they paid the price. Wealth breeds arrogance and arrogance breeds’ self-destruction.

But if I have learned nothing else in this life be very careful of what one rejects so I will read your words and try my best to see your point. Apparently it goes against everything this materialistic world has taught me but that does not make it wrong. It looks like and feels like a free lunch and they are very hard if not impossible to find.

The Subway is exchanging tokens for a commodity. Instead of exchanging them for stuff like steel, locomotives, etc. it exchanges them for a generally accepted commodity - cash.

The U.S. government, on the other hand, has the advantage of being able to directly create cash. So it exchanges it directly for commodities like labor, tanks, aircraft carriers, etc. Nice work if you can get it - but to get it, you need an IRS at the ready to give value to this intrinsically worthless stuff, with some men with guns to back them up.

Here's a true story: the British Empire, when it conquered some African countries, wanted to use the native populations to do mining, etc. (After all, empires are expensive.) Being "civilized", they didn't want simply enslave them; they wanted to "employ" them.

There was a problem, though: when the British offered to pay the natives, the natives weren't interested in taking their money. They lived in self-sufficient villages - what did they need with British money?

So what did the Brits do? Simple - they required each native household to pay a tax. This tax, of course, was only payable in British money. The natives had to pay the tax or faces the wrath of the Brits, and the only way they could get it was by working "voluntarily" on British projects.

Of course, once the money is in circulation, it acquires other uses - it can be used for transactions between individuals. And the more it's used in that way, the better off the government issuing it is - since it creates more demand for it.

I think part of your problem (and the problem of a lot of people I talk to about this) is that you have a psychological block - your mind rebels against the thought that money (the stuff that, if you're like most of us, you spend most of your waking life trying to get, or spend, or save, or what have you) is just "numbers on a spreadsheet" It's got to be more than that, it just has to! Which is why we still pretend we're on the gold standard, even though we haven't been for almost my entire life. So can understand the logic of subway tokens, but somehow there has to be something "real" behind it all.

Another thing: your coupon analogy breaks down because you posit a store that just issues "millions" of coupons, willy nilly.

But I'm not saying the government can just cut taxes to nothing and spend like there's no tommorrow. There are limits. But we are nowhere near those limits.

If there is a (net) demand by the non-government sector for savings, the only way it can be filled is for the government to run a deficit. Note that I said "net" - since all financial assets sum to 0 (your asset is someone else's debt), if more people want to hold money than people willing to are willing to go into debt, there is a generally shortage of savings.

Since savings can't be manufactured, the only way to make the ends meet is for the government to step in and provide the savings. By definition, this is money that is NOT being used to purchase anything in the economy. It is not adding purchasing power, and so it is not bidding up prices.

If the government printed up $100 Billion, cash, and gave it to you and you trucked it out to a warehouse and stored it there, would it have any effect on the economy (except maybe giving some warehouse guards a job?) No - no one would notice it.

The situation is exactly the same if it gives you check for $100 Billion. If you deposited it in your bank account, your bank would in turn deposit it in their account at the Fed, and the Fed would adjust the numbers upward. Until you actually spent it, nothing else would happen.

OK, one more, then I'm done for the day.

It looks like and feels like a free lunch and they are very hard if not impossible to find.

It's not a free lunch. The real wealth of the economy is the real stuff that it can produce. You need to separate in your mind the real wealth from the merely financial.

If a country has 15-20% of it's workers sitting around doing nothing, and many of it's factories sitting idle, it is not producing as much as it can. If the government creates money out of thin air to put them to work doing something useful, it is only adding to the real wealth of the nation, not subtracting from it.

You still need taxes, and you still need to spend government money wisely (spending on pointless wars, even if does put people to work, wastes real resources). A currency issuer still faces constraints. But they are not financial constraints. They are not the same constraints that you or I face, who need to get money from someone else before we can spend it. They are the constraints of the real economy that is willing to exchange it's good and services for the money the sovereign creates.

“It's not a free lunch. The real wealth of the economy is the real stuff that it can produce. You need to separate in your mind the real wealth from the merely financial.”

Communication using symbols such as words is so interesting. This is exactly what I thought I stated about producing quality goods and services that the world desires.

“We must look deeply into what creates the wealth of a nation and it is not to my knowledge printed and borrowed money; it is quality and economical goods and services.”

What part of creates the wealth of a nation by its quality and economical goods and services was missing? I left out the word producing maybe that was the miscommunication. I assumed people world know I meant produce quality and economical goods and services. The old assume thing again. I taught “own error training” and 80% of errors that lead to defects and miscommunication are assumption errors. Ouch on my part.


The appearance of a free lunch is merely financial, which Wall Street does and does not produce a thing except service and one begins to see that service has become a very destructive service to the nation overcome by greed which is the hallmark in history of a wealthy nation. Now they have a lot of help from those willing to invest in these hedge funds etc.

Very little comes into our experiences uninvited even Wall Street greed, congress, and the Supreme Court whether it is at an individual, national or world level. Materialism has so become part of the American psychic that global corporations are not considered persons and money is the same as free speech. And we consider ourselves a Christian nation what happened there????????

I'm with you MP. Jimbo's "don't worry be happy" approach reminds me of that guy who, before he was sent to prison, wrote a book and gave seminars on how to legally NOT pay your taxes.

this is a test

I don't know why I keep returning to this, except for the frustration: once you understand this stuff it's all so bleeding obvious, but explaining it is difficult because people's preconceptions get in the way - and I'm not good enough at explaining, at least in the written medium, to counteract them. I don't usually have as many problems face-to-face, because I can immediately respond to people's objections and walk them through ideas step by step, but in blog-type discussions you are at the mercy of other people's willingness to read what you wrote. (Interestingly, I find the same problems in discussing the paranormal.)

It's not a "don't worry, be happy" approach; there's plenty to worry about, but most of those things would be the result of deficit phobia that will prevent us from doing the things that need doing and create needless misery because of phantom fears.

So, I will leave you all with some predictions: the economy will eventually start to recover. Employment will inch up, not very strongly but enough to get things moving again. As it does, the defict will go down, and it will eventually fade from public consciousness (as it did in the 80's, in the 90's, and in the 00's...). The scary predictions about national bankruptcy and hyperinflation will remain, pushed out a few more years (as they always are). Unemployment and underemployment will remain high, since we have convinced ourselves that we "can't afford" to have people do productive things and instead they must remain idle. Doom will always be around the corner, but will never seem to quite arrive.

Another article warning of a coming debt catastrophe:

tiny.cc/h7neh

More gibberish. They conflate the U.S., which exists in a floating exchange rate regime, with countries that were either trying to maintain a peg (Sweden) or don't have their own currencies (Ireland) The explanation for Japan - that it's debt is owed internally - doesn't really wash either: if you own a debt, why should you car who you owe it to? What does it matter, functionally? The reason Japan has been able to get away with what all the conventional economic wisdom insists it shouldn't be able to get away with is simply because it issues it's own currency and does not maintain convertibility to any other currency. As such, there is no functional difference between it's currency and it's debt (they are both unbacked liabilities of the state).

Put it this way: in my subway example, the subway can issue all the tokens it wants, and even do things like give free rides to schoolchildren, because tokens are a one-way transaction: you pay (say) 2 dollars at the window for the token, but the subway is under no obligation to buy it back for any amount. It promises to take it at the turnstile, but that's it. It can't face "token insolvancy", because it can always stamp out more if people want to buy them or if it needs to fulfill any obligation to give them away (of course, if it issues too many free tokens, it might have trouble selling them for $2, but that's an inflation problem, not a solvency issue)

But if the subway suddenly announced that it would buy back it's tokens for the same $2 you paid for them, it would have to maintain enough reserves of cash to meet redemptions. It would face a "run on the token" if there was a sense that its reserves were inadequate. In those circumstances, it might have trouble keeping it's promises to the schoolkids, since it would have to raise money to cover the tokens it issued. It would face a solvency issue.

The point is not that a country can run any deficit it wants, under any circumstances, with no ill effects. Under circumstances of an overheated economy, with full resource utilization causing inflationary pressures, a surplus to withdraw purchasing power from the economy is in order. But in no case can a currency issuer in a floating rate regime face insolvency (i.e., the inability to pay it's debts) in it's own currency. It is simply nonsensical once you understand the mechanics involved.

(And I said I was going away. You made a liar of me...)

"But in no case can a currency issuer in a floating rate regime face insolvency (i.e., the inability to pay it's debts) in it's own currency."

I understand that, but I think when people talk about insolvency, what they mean is that the government will not be able to cover the interest payments on the debt without recklessly debasing the currency.

So yes, the government will always be able to print more money to get itself out of debt, but in the process the money itself will become increasingly worthless.

And as the money is debased, interest rates will rise - leading to even more monetization of the debt - which means interest rates will rise still higher - leading to still more monetization ... in a vicious spiral.

Isn't this basically what happened in Weimar Germany? Why can't it happen here?

“Doom will always be around the corner, but will never seem to quite arrive.”

This is denial in action. History tells us that every country that was going through a decline of wealth stayed in denial and many of those countries reached third world status. The indicators are all around us but we refuse to see them for a variety of reasons. When one per cent of our nation’s population is showing signs of obtaining 99% of the wealth of that nation this is the very essence of third world status.

Come and visit Scottsdale az to see the future of America with its gated communities with cheap labors doing the yard work and housework during the day. Better yet visit some countries in South America to see the future of this nation.

As far as the wealth of this nation what did it get us? Our prisons are overflowing, our elementary and secondary educational systems are in shambles and the past presidents including this one are using a pay for performance approach based in ignorance not in an understanding of variation as it applies to the relative phenomenal world. I.e. systemic causes of variation.

We spend trillions on our wars for profits for the few, we have a meltdown of deregulated wall street and banks to big to fail, the infrastructure of America is crumbling, we have political polarization in wash, we have congress, white house, media, and now the supreme court in the pockets of corp America, open borders not out of compassion but for cheap labor, etc.

Now the good news we have the opportunity to learn as a nation these spiritual lessons in life that all is oneness and the universe is a cosmic mirror, as wealth can be as harsh of teacher as poverty.

With wealth often comes arrogance and with arrogance it inhibits our ability to respond in a valid way. Our self-importance creates a denial of reality. We see not or hear not.

Words like "insolvency" and "default" and "bankruptcy" have specific meanings, and under the normal meaning of the words none are possible for a currency issuer.

"Isn't this basically what happened in Weimar Germany? Why can't it happen here? "

No, it isn't what happened to Weimar. Bill Michell has a good explanation of the Weimar inflation, as well as the more recent Zimbabwe episode, here:

http://bilbo.economicoutlook.net/blog/?p=3773

A quote:

"If we think about the Weimar Republic for a moment, the problems for them began long before the hyperinflation, which really went off in 1923. Following World War I the reparations payments required under the Versailles Treaty squeezed the German government so badly that they eventually defaulted. The Treaty was just a bloody-minded pay-back by the victors of the war and brought so much subsequent grief to the World in the 1939-1945 War that you wonder what was going on in their heads.

Anyway, for historians, you will recall that the French and Belgian armies then retaliated after the German default and took over the industrial area of the Ruhr – Germany’s mining and manufacturing heartland. The Germans, in turn, stopped work and production ground to a halt. The Germans kept paying the workers in local currency despite limited production being possible and you can imagine that nominal demand quickly started to rise relative to real output which was grinding to a halt. The crunch came when the export trade stalled and the only way the German Government could keep paying their treaty obligations etc was to keep spending. The inflation followed."

In other words, it was a massive supply shock. Real output went down, but demand stayed the same. Today, we are suffering from the opposite: a demand shock, in which people's ability and willingness to buy the output of our economy is severely compromised. Under those conditions, a government deficit is the only way to prevent massive economic contraction.

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