Wednesday, January 02, 2013
Economic Insights
Tony says:
The US government doesn’t borrow from the FED, that’s a commonly held myth. The government doesn’t borrow that which it creates. The FED doesn’t buy US Treasuries, it is prohibited by statute from doing so and doesn’t need to.
Flows of incomes/spending accrue to stocks. We can use two sectors: the public sector and private sector. The only reason the private sector can accrue net financial assets over the duration of a year is due to the fact its spending is less than its income over that same period of time. At the end of the day, the private sector has been saving, thus allowing it to accrue financial assets as a stock of wealth. These financial assets, in both the private and public sectors, are government liabilities, which exist as currency and bonds. The aforementioned IOUs can only accrue if the government spends more than it gets back in the form of taxes. This government deficit accrues to a stock of government debt which is the same amount as the the financial wealth accrued by the private sector during the same time period.
In the event the government ran balanced budgets, the private sector would have financial wealth of absolute zero. By the same token, in the event the government runs surpluses, whereby it spends less then the total amount of tax receipts, the private sector’s net financial wealth would be negative. The private sector would actually be in debt to the public sector.
Zimbabwe is a bad example, since they had most their debt denominated in US dollars and had 80% of their industrial capacity destroyed by civil war and corruption, which is what caused their hyperinflation.
The Panic of 1920 was the result of being on a gold standard among a whole host of factors. Also, the US military demobilized and factors had to retool from war time productions.
Tony says:
von Mises, lol. The only Austrian taken seriously is Carl Menger and his work with marginal utility. I read that piece by Thomas Woods, it’s glaringly apparent he doesn’t even understand macroeconomics, the same as Murray Rothbard. He typically misrepresents characteristics of the Panic of 1920, Woods also seems to miss the fact the the FED played a key role and he overemphasizes Harding’s fiscal policy. He also doesn’t seem to understand basic monetary policy. I tried to explain it in detail but there’s a character limit, so I can do it spurts if you want.
The is part of the government as a central bank, but can exercise independence, because of morons in Congress who still refer to the the US ‘monetizing the debt, which is impossible, since we’re no longer on a gold standard. Do you really want idiots like Clinton and Ryan anywhere near fiscal policy?
Yes, the US was a gold standard and it was a disaster, giving us a depression/recession every decade in 19th century, and the Panic of 1920 and the Great Depression, so yes, a fiat system is better, since money is nothing more than a social unit of account. This is the glorious period that the Austrians would have us go back to. Thanks, we’ll pass.
Tony says:
What about the panic of 1920? That was one of the many problems caused by the gold standard among many other variables which I’d be happy to discuss. Factories had to close their doors and retool and we a had a massive demobilization after all those soldiers returned home. A massive amount of money was put into the hands of Americans because of the deficits the government ran up in 1918, around 12% of GDP in 1918 and 17% of GDP in 1919. This created a huge stimulus which helped to usher in the Roaring Twenties by the time Harding cut spending. At the the time, the FED seem preoccupied with the the exchange rate under the gold standard as opposed to any type of domestic policy.
By the way, the Great Depression was a deflationary hell and lasted around 132 months. All of that actual spending – manufacturing, war production, the New Deal, etc – created real capital and real incomes for businesses and people, which is why we had post-WW2 economic boom.
Cutting deficits will worsen the private sector – and economy in general – because you’re removing dollars from the economy which are a net asset. Those deficit reductions have the effect of shrinking the private sector’s surplus in the aggregate.
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Tony says:
First of all, businesses aren’t wealth creators, that is complete BS. Labor is an input cost, so firms won’t hire unless there’s increased sales or an expectation of an increase in orders. Consumers create demand not businesses.
Secondly, taxes don’t fund expenditures, all taxes do is create a demand for currency. If the government takes in one trillion in tax receipts, and it needs 3 trillion, the government deficit spends, which is the only way for us to obtain dollars to being with. A reduction in deficits is the SAME as a tax increase because you’re removing those dollars from the economy, which simply impacts a lower-to-middle-income group.
The government should increase spending in order to stimulate demand. The notion of a fiscal cliff is a myth because US debt is denominated in US dollars, so the federal government could pay it off tomorrow of it wanted to. Also, the US government largely sets the interest at which it accrues debt. Federal spending is virtually costless for the US government, despite the right-wing, crackpot theories of people Jim Roger, Peter Schiff and even the Pauls. If this whole thing was so serious, it would be a comedy hour for any serious economist.
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