Taxes pay for things, or do they?

Not really?

Yes they can.

Scotland - RBS & Clydesdale do.

They're authorised by parliament to do so.

Absolutely correct.

 

Yea i discovered that after posting and CBA to change it.

One thing that confused me was the wiki saying "They are exchangeable with other pound notes on a one-to-one basis" that almost sounds like they're talking about banknotes of Scotland.

 

Which is still Legal Tender.

 

Apparently not.

 

Hands up - I did not actually know that.

I now feel sorry for every London corner shop owner i've shouted out to take my grubby scottish fiver after a weekend in Aberdeen.

 

It's such a pain in the hoop when you visit from Scotland and shopkeepers refuse to take your (perfectly good) money. It was especially bad when the new plastic fivers came out - "That's not real money, get lost" was the general reaction

 

Your confusing banknotes and coins with money supply of which base money (coins and banknotes and bank reserves) make up around 3%. Credit creates deposits in the banking system which are money and are readily usable in the paying of all things including tax and bonds.

You're not picking apart anything. MMT is a heterodox macroeconomic school and the criticisms are ample and easily sought. I just thought I'd point out the views of economists across the political spectrum on this, that basically it says nothing new and the claims about the consequences of these, in fact old, statements are made ignoring much of the limitations.

We pay for wars by asking the private sector to fund the GILTs which removes that money for use in other savings and investments that would use up real factor inputs in production. Thereby the government can then use that money, without changing that money's value in terms of goods and services, to acquire real purchases within the economy or internationally to go to war.
The government has to borrow or tax from private sector money even if it is money by fiat because that money is only valuable in the real terms purchasing power of what can be bought with it.

The price of money is what controls inflation, that is the interest rate of that money, that is set by the bank of england. The government budget has no in/deflationary effects, in normal times, mostly by financing its operations through taxation and GILTs sold to the private sector rather than money financed deficits. Any inflation caused by increased consumption of real goods/services created by government activity, not offset by a decrease in private consumption, is dealt with by the BoE much like any sectors net increase in consumption of goods and services. By chanding the interest rate.

MMTs advocacy is that instead we should change our inflation targeting to be done by fiscal policy enitirely and that we should have effectively constant zero rates.

 

No, you're the one who brought banknotes, coins and money into this, i have (iirc) always been using the term currency, the distinction is a subtle but important one that you don't seem to understand as you've conflated banknotes and coins (currency) with money (intangible assets).

The only reason you can pay for things with money, the intangible asset of numbers typed into a computer by your bank, is because banks promise to exchange money for currency when needed.

Unfortunately you've offered no criticisms of it though, at least none directed at the substance of the theory itself, if anything proclaiming it's a heterodox macroeconomic school just demonstrates how your repeating the orthodox views taught to you in text books, orthodox macroeconomic teachings that havn't exactly been doing us any favors.

That's a rather complicated way of saying the currency issuer borrowed money from itself and then sold that liability to the private sector, and i would guess one of the reasons for selling that debt to the private sector was because the orthodox view of macroeconomic at the time, and still is, is that a currency issuer being in debt is bad thing. I'm sure the fact that the private sector earns interest on an IOU the currency issuer has written to itself has no bearing on the matter.

It's the equivalent of me borrowing money from myself and then selling my promise to pay myself back to third party so they can earn interest on it.

MMTs advocacy is that instead we should change our inflation targeting to be done by fiscal policy enitirely and that we should have effectively constant zero rates.[/QUOTE]

Saying the price of something is what dictates how much more it will cost tomorrow is ridiculous, if you applied that logic so any other resource you'd be laughed out of town.

Also what makes you say MMT suggests we should change our inflation targeting to be done by fiscal policy entirely and that we should have effectively constant zero rates? Because saying that makes it appear like you're parroting the orthodox macroeconomic view that i suspect other people have told you instead of thinking for yourself.

 

There is no confusion except in your insistence that the distinction between electronic money and physical currency means anything much.

No it is because the action of printing money as the alternative would devalue the currency like weimar whereas selling debt to the private sector maintains the purchasing power of the currency

Using the phrase the price of money is a simplification from the rental cost of money over a given time. It makes it simpler to explain a money supply/demand phenomena, that there is the quantity of money and the rate level. In usual economics you are dealing with the price vs the quantity. Saying the bank of England controls the price side rather than the quantity side makes it simple.
The cost of borrowing money and the opportunity cost of saving/spending changes with changes in interest rates. Saving means less in demand and borrowing means more demand for inputs, (very simplified), changing pressures on prices. The bank sets interest rates to target 2% inflation in 2 years time.

But if you want to crucify me on semantics when you complain of university level terms, your choice...
Of course the problem with dumbing down, for want of a better term, is to be careful that the dumbing doesn't make the consequent statements dumb by simplification that leads to omission and inaccuracy.

Bill Mitchell:

http://bilbo.economicoutlook.net/blog/?p=31696
From the horses mouth to your computer screen....

Oh BTW I think endogenous money is correct. That is heterodox, why because bloody evidence, I.e. that bank of england paper a few post ago. Trust me I know how many pointless lessons are taught in macro courses like high powered money multiplier which isn't really how base money translates into money supply. The reality barely enters a textbook.

The reality is to explain cogently and concisely what is wrong with the theory I'd need two weeks and a lot more free time and I'd put it into a paper.

 

Are you being serious? I mean you only have to look at the currency in your pocket to see what the difference is, i promise to pay the bearer on demand the sum of X amount isn't just there for fun you know, it means it has the backing of the UK treasury, money does not, if the place where those electronic numbers are being stored declares bankruptcy there gone.

It's not even been a decade since the 08 financial crisis and it already seems some people have forgotten why governments around the world bailed out the banks.

I never said it wouldn't, however you've not addressed how a currency issuer can be in debt to itself.

Saying it controls the price side rather than the quantity side may make it simpler but it's still technically wrong and doing so has wide ranging consequence, if we applied that to any other resource it doesn't make logical sense, it runs counter to everything we know about supply & demand. Yes the cost of borrowing and saving changes over time but that in essence is just controlling supply and demand.

Did i crucify you on semantics? If so i apologies but you do have a fondness for waffle, as can be seen in the length of the above quote that could have been shortened to say changes in interest rates effect the supply and demand of money.

As you're putting so much faith in his opinion then perhaps you should listen to what he says about MMT.


If the reality is to explain cogently and concisely what is wrong with the theory you'd need two weeks then why are you attempting to do so on a forum? saying that is just appealing to the stone, you're dismissing a claim as absurd without providing any proof of that absurdity.

And the 2014 paper from the BoE proves nothing as it doesn't mention modern monetary theory once, it's about money creation in the modern economy, like i said all you seem to be doing is parroting the orthodox macroeconomic view that i suspect other people have told you instead of thinking for yourself, all I'm asking or suggesting is that you think outside the box a little.

 

Because the central bank guarantees deposits and a central bank provides liquidity to a bank that is otherwise solvent (the guarantee limit is actually an EU thing BTW). If I want to pay by debit, It works the same as currency, If a bank goes bust and all deposits disappear it's a massive destruction of money, the central bank's job to sort out.

Because the currency is only of value in terms of what it can buy therefore the government has a real money (Money/Price level) constraint. In the long run MV=PYfe (in the simplest form). In the short run differences in nominal variables affect aggregate demand but once against the real terms constraint of production with current productivity (growth under current conditions) of factor inputs any additional money creates inflation which means a government has to neutralise most of the inflationary effects.
Which means governments have to sell debt instead of printing, that debt comes with an interest rate that is risk of (defacto) default (very small) and time preference that provides a return that is redeemable for real goods. If debt grows faster than growth then the government debt rises and the interest rate burden rises. If this gets too large then the government has less it can spend in an inflation neutral way, on things other than interest, so spending cuts or tax rises to reduce this eventually HAVE to happen. If the government prints to finance that debt then we're back to the MV=PY issue, also in the long run to neutralise the eventual effects of money finance stimulus (say being used in a situation like 2009) then it has to be taxed back to the point where central bank liabilities are neutralised. If it doesn't balance spending/taxation and debt growth over present and future taxation then we end up in a defacto default, where the government just devalues away the real value of the debt and people will then only lend to them in a different currency denominated debt (like a lot of the world)
The government being the originator of the FIAT only means a government can't technically go bust, but if you defacto default in any way then you're going to be using someone else's currency.

The government is constrained by what the economy can produce from its inputs (a real variable), the nominal variables can only be relative to what the real values are. The nominal interest rate means nothing to your savings if inflation makes the real rate lower than zero, government purchases mean nothing except in what can be purchased. The nominal supply of money means nothing except what that money is worth in terms of real goods at a given time. In the long run the government at least has to be run monetarily neutrally because of this. So debasing in any way isn't helpful, beyond cyclical management in extreme circumstances (maybe) or LoLR functions to banks. So governments have to behave normally and borrow to spend. The banking system creates most of the money and It has constraints usually changed by changing the interest rate (plus regulations) inflation is going to rise/fall as a result of

No that's an efficient explanation for economics, not waffle, I don't know what you don't know. It's important to understand the side that we effect money from, people get misled by macro courses like it's a 1980s monetary target model. Rental cost makes it as precise as possible.

(it's like when capital is used to refer to money invested (or just money) and capital equipment interchangeably. It'd be more technically correct to say investment funds and capital equipment.)

I am saying everything I say is going to be a but this, you forgot this even though "this" has been addressed, and we're just addressing tautologies in some areas.
I'm saying that is what he's said. I'm sayin others have dealt significant criticisms you haven't bothered to look for and evaluate. It'd take me two weeks to write the same in a water tight way.

The 2014 paper on the bank of england explains how money is created endogenously by the operations of the banking sector (not MMT) plenty of heterodox theories use endogenous money without it being MMT, RBC with endogenous money, post keynsian etc. THAT IS A HETERODOX BLOODY THEORY IN MACRO. I think it is true because it has evidence.

And he exactly does say that the theory idealises fiscal control of inflation/unemployment/money supply and zero rates.

That's a big change BTW and they make extraordinary claims advocating for extraordinary policy change from the simplest of known realities of FIAT money. That requires extraordinary evidence on their part.

BTW he just sounds like an ideologue who's come up with a theory that suits his political beliefs. (actually like most economists)

 

The only reason the central bank guarantees their deposits is because private banks have central bank accounts where they store the liquidity issued by the central bank in the first place, along with other liabilities and assets.

The only guarantee you and i have against deposits is with the FSCS and that's a limited guarantee that only cam into force at the start of this year.

What's with the small text.

Yes the currency issue has to neutralise most of the inflationary effect, no one said they didn't, however it appears (i didn't read all of it as it's hurting my eyes) you're addressing how to neutralise most of the inflationary effects and not my original question of how a currency issuer can be in debt to itself.

I suspect, from reading the last sentence, that you agree with me that as a fiat currency issuer can't be in dept to itself and can't bankrupt itself, that when politicians and others talk about the debt and deficit being bad things that they're nothing of the sorts, that they're part of a normal modern monetary system as long as the underlying factors such as inflation, interest rate, employment, etc, etc, are within acceptable norms.

In other words we shouldn't be targeting X amount of debt or deficit like our politicians seem so fond of doing but using monetary policy, the supply and demand of currency, to effect a desired outcome

I was with you all the way until you said in the long run the government at least has to be run monetarily neutrally and governments have to behave normally and borrow to spend.

In the long run I'd say the currency issuer (including the government) doesn't want to run a neutral monetary policy, it want's to run a monetary police that sees slow and steady (2%) expansion, and in the short run it needs to either increase or decrease the supply of currency depending on what the private sector is doing, as it was forced to do with QE, the opposite of what the government was doing at the time, it was almost like the government and the BoE were working against each other, one increased the supply of currency in the system while the other was decreasing it.

No, it really was waffle, it would have been an efficient explanation for economics if you had been talking another person who'd been involved in economics all their life, but you're not.

Yes it's important to understand the side we effect money from but pretending it's not a supply and demand model when that's a commonly understood model is not being efficient, it's being obscure.

I'll try to keep this short as i don't want this turning into yet another quote for quote point scoring exercise, having said that i disagree that others have dealt significant criticisms and that i haven't bothered to read and evaluate them, they haven't and i have.

Take your example that MMT theory advocates zero interest rates and never selling bonds, i had read similar claims before you posted it and dismissed them as it was obvious the person making such a claim was stupid.

I CBA to respond to the other points you've raised as not only do i want to get a bit of Sunday night gaming in but you seem to getting annoyed and rather emotional.

 

Neither can I.
The Example was from the horses mouth, the organ grinder it's biggest advocate: Bill Mitchell.
I said look, google.
Or just read: http://www.the-lighthouse.net/debunking-modern-monetary-theory-mmt-understanding-it-first/
I would bet a £ to a fly's faecal matter you wont change your mind, you want it to be some kind of revelation that deficits don't matter (ever)but the reality is that to operate in such a way has never been implemented. Real variables matter; real wealth, real money balances, real productivity.
Aggregate demand management doesn't improve potential national income and growth, what the government can operate within can only be in relation to using those REAL things.

On MMT: An ideology wrapped in a strawman

 

Whoa there, i never said that deficits don't matter (ever), i said, or am trying to say that running a deficit is nothing to be scared of that as the link you posted mentions that an ever-increasing number of people are convinced is unsustainable.

That link also makes many spurious claims BTW such as claiming MMT proponents say any attempt at paying off the national debt would result in there being no more money, that whatever the exchange rate is, surely a country can print whatever amount of their own currency is needed to buy the foreign currency, and having stopped reading after discovering whoever wrote it doesn't understand what (s)he's talking about, they probably go on to make many more false statements as if they were facts. That's the problem with posting someone else's opinion, it's their opinion and not yours and as such they often come with bias and factual errors that are impossible to countenance as they're not your biases of factual errors.

If you're not willing to offer you own opinions and thoughts on a subject then there's little point in debating the topic as all you're doing is accepting what you've been told if it happens to reinforce your preconceptions, and rejecting anything that challenges those preconceptions.

 

That's a bit rich