Most bananas are atheists …

Over the course of this economic crisis, I have seen a lot of erroneous analysis based on the conflation of things that are not commensurate. It is getting worse as the debt hysteria mounts. These conflations are examples of category errors, which are common in monetary and macroeconomic analysis. Most of the theoretical development in macroeconomics text books used by universities fall foul of this type of error. The one thing that follows is that when you detect this type of error you should be deeply suspicious of the arguments being presented.

These conflations leads us into ontology (a place I usually steer clear off in case some post modernists come out of the woodwork) and specifically into the concept of a category error, which is:

… a semantic or ontological error by which a property is ascribed to a thing that could not possibly have that property. All (propositional) mistakes involve some sort of misascription of properties, so in a sense any mistake is a “category mistake”: putting a thing into a class to which it does not belong. But a “category mistake” in colloquial philosophical usage seems to be the most severe form of misascription, involving the endorsement of what is in fact logically impossible. Thus the mistaken claim that “Most Americans are atheists” is not a category mistake, since it is merely contingently true that most Americans are theists. On the other hand, “Most bananas are atheists” is a category error. To show that a category mistake has been committed one must typically show that once the phenomenon in question is properly understood, it becomes clear that the claim being made about it could not possibly be true.

There have been no shortage of category errors emerging from influential academics and commentators as the economic crisis has unfolded. Readers should be always alert to them because once you detect them you can almost always disregard the rest of the analysis being presented.

In this week’s Newsweek, neo-liberal Harvard economic historian Niall Ferguson writes that there is An Empire at Risk:

Call it the fractal geometry of fiscal crisis. If you fly across the Atlantic on a clear day, you can look down and see the same phenomenon but on four entirely different scales. At one extreme there is tiny Iceland. Then there is little Ireland, followed by medium-size Britain. They’re all a good deal smaller than the mighty United States. But in each case the economic crisis has taken the same form: a massive banking crisis, followed by an equally massive fiscal crisis as the government stepped in to bail out the private financial system.

I am still interested in knowing what a fiscal crisis is? At present all I am observing is net public spending rising (sharply as a percentage of GDP in some cases) as private spending plummets. In many cases, unemployment sky-rocketed which means that the net public injection was not large enough.

So I guess that is the nature of the crisis. Governments are unwilling to net spend at a sufficient scale to stop the increase in labour underutilisation. That unwillingness reflects a political constraint which is being reinforced by so-called experts like Ferguson.

He goes on to say:

As the U.S. is unlikely to default on its debt, since it’s all in dollars, the key question, therefore, is whether we are going to see the Fed “printing money” – buying newly minted Treasuries in exchange for even more newly minted greenbacks – followed by the familiar story of rising prices and declining real-debt burdens. It’s a scenario many investors around the world fear. That is why they are selling dollars. That is why they are buying gold.

Yet from where I am sitting, inflation is a pretty remote prospect … Public expectations of inflation are also very stable.

Okay so there is no insolvency issue for the US which must also apply to all sovereign nations who issue debt in their own currency. And there is no necessary coincidence between the central bank buying federal bonds as it net spends and inflation. Ferguson makes that point by reflecting on the high unemployment and appallingly low rates of capacity utilisation common around the world at present.

Note that the purchase of bonds by the central bank would not be to finance the spending. The US government is not revenue-constrained. The quaint practice of the central bank holding treasury debt – that is, the government lending to itself – reflects the neo-liberal hang ups that governments have which leads them to voluntarily impose on themselves the rule that a $ of debt issuance for each $ of new net spending. This is just an accounting entry and has no operational significance. A fraud if you like.

But if you understand Ferguson’s position then you would be puzzled a bit by some earlier statements he made. Ferguson was reported in The Independent (May 29, 2009) as claiming that:

The idea that countries don’t go bust is a joke … The debt trap may be about to spring … for countries that have created large stimulus packages in order to stimulate their economies … Ireland, followed by Italy and Belgium, and UK is not too far behind … Argentina is top of his list of shaky countries but … the argument that it can’t happen in major western economies is nonsense.

Going bust is about insolvency. An entity running out of the wherewithall to service their nominal debt obligations. It is nothing more complex than that.

Note the list of countries – three Eurozone countries (where the central bank is beyond the control of each individual elected government and treasury) and, two, sovereign issuers of their own currency with a central bank aligned with their treasury in policy space (Argentina and the UK).

That is the first type of conflation we see that should immediately alert the reader that some dodgy narrative is emerging.

The Independent reports that Ferguson “believes the economists are ill qualified to analyse the current economic situation since they lack the overview of historians such as himself”. Always good to self-promote. But what exactly does he understand?

In the Newsweek article, Ferguson goes through a series of empire collapses in history which were prompted by debt explosions leading to default (Habsburg Spain; Prerevolutionary France; The Ottoman Empire) and:

… don’t forget the last great English-speaking empire. By the interwar years, interest payments were consuming 44 percent of the British budget, making it intensely difficult to rearm in the face of a new German threat.

Does he tell you that these historical epochs were marked by significantly different monetary systems? The most recent era that he cites (the interwar years)was characterised by fixed exchange rates and currency convertibility, with some variations.

I am a strong advocate of being schooled by history. But you also have to know when historical experience is applicable and when it is not.

You cannot assume that the dynamics of, for example, a fixed exchange rate, convertible currency world apply to a fiat monetary system. They do not. Governments could become insolvent and default under the former. There are not financial reasons why they ever would under the latter.

Ferguson should be more honest in his use of history. That is the second type of conflation – comparing different monetary systems that are not commensurate because the operational constraints that each places on government are starkly different.

Moving on … I have to say that the UK Guardian newspaper was formerly a source of reasonably intelligent journalism. I have noted that it is in decline these days. In the December 1, 2009 edition one Jonathan Freedland wrote what he intended to be something of a mea culpa – The debt, excess and exploitation is not Dubai’s alone. We’ve all been at it.

Freedland writes that “the glitzy Gulf state is a modern parable for a world living on tick”. So the tenor of the piece is that Dubai might be bad but the West is not much better.”

He says that:

When future generations sit their children down to tell the story of the great crash of the early 21st century, they will surely begin with the parable of a place called Dubai … [children’s story of excess sinking back into the sand follows] … Dubai is a perfect metaphor for the crisis currently crippling global capitalism … unsustainable in every sense: economically, morally and environmentally … That’s why the money men are already asking themselves who will be next: will it be Greece, wonders the Financial Times, while others fret for Latvia, Hungary and even Ireland. They all made Dubai’s mistake, if not quite at the same pace. They pulled out the credit card and went on a wild spending binge – and now the bill has fallen due. But it wasn’t just them: we’ve all been at it. Japan is on course to have a public debt twice the size of its gross domestic product next year, while the US debt is set nearly to equal the country’s economic output. The UK is not far behind, with a debt forecast at 89% of our GDP. We’ve all been living on tick.

So immediately we are conflating emirates (states with no currency sovereignty) with countries operating under fixed exchange rates and no real fiscal authority with sovereign states in the full sense (national governments with currency issuing monopolies operating under flexible exchanger rates). About the only thing these different geographic units have in common is they all have a flag of some sort.

Further, the writer is conflating non-government and government sector behaviour as if it is equivalent. It is not.

For example, he says that “Today’s regime of near-zero interest rates means that we’re trying to get ourselves out of the current hole by the very means that got us into it: spending cash that was borrowed on the cheap.”

Who is the we’re he refers too?

Is this more bubble scare journalism? Recall yesterday – in More calls for job creation – but then – I noted that Warwick McKibbon (right-wing RBA central bank board member) was whipping up hysteria in Australia about the need for sharp contraction to avoid the asset price bubble he claims is merging in world markets.

So it was interesting to read a normally conservative Bloomberg journalist actually challenging the asset bubble scare story today. In Caroline Baum’s article Roubini’s Bubbles Float on Flimsy Credit Source we read:

Zero percent interest rates started it. A weak dollar fueled it. Speculators fanned it. And famed forecasters see it everywhere they look.

There’s only one problem with the claims that the dollar-carry trade — borrowing dollars cheaply to invest in higher-yielding assets abroad — is inflating bubbles across the globe: There is no visible credit expansion … to support them … There is no sign of excess credit creation on U.S. bank balance sheets. From October 2008 through October 2009, bank credit fell 5.3 percent. That reflects an 8 percent decline in loans and leases and a 3.4 percent increase in securities. Within the securities category, Treasuries were the clear winner, with a 13 percent increase.

At least, Wolfgang Münchau, is honest enough to admit he is conflating incommensurable constructs. He says:

After Dubai, will Greece be next? This question is technically a category error, since Dubai World is not a state but a state-owned company. But many investors rightly do not care about the difference. Last week investors started to fret about sovereign default in earnest. So what about Greece?

Note the term “category error”

Comparing the operational prospects for a government under fixed exchange rates with those applicable under flexible exchange rates is a category error.

Comparing a sovereign government (such as Japan, the US, the UK, or Australia) with Dubai, a non-sovereign state is a category error.

Comparing a sovereign government (such as Japan, the US, the UK, or Australia) with a Eurozone country such as Ireland, Belgium is a category error.

It is clear that a fixed exchange rate country could “run out of money” (which really mean’t they ran out of foreign reserves).

It is clear that a Eurozone country would need the help of the ECB if it got into trouble. Politically, I don’t see one of the Eurozone defaulting. The conditions that ECB might place on Greece or Ireland to help them remain solvent are likely to be onerous.

But it is a possibility because they are, individually, no longer sovereign in the Euro. The simple solution if one of them (like Ireland) was confronted with this dire circumstance would be to abandon the Euro and go sovereign in its own currency.

That is what Argentina did in 2001 when it abandoned the currency board it ran (peso pegged to the US dollar) and defaulted. Please read my blog – Why pander to the financial markets? – for more discussion on this point.

Going back to Freedland. The one thing I agree with him on is the foreign worker situation which brings into focus the importance of fair trade rather than free trade. He says:

Nevertheless, something else sticks in our craw about Dubai. It’s that the eye-popping luxury was built on the backs of foreign workers, toiling in a form of modern bondage. Over a million men and women from India, Bangladesh, Nepal and across Asia have turned Dubai from a sleepy village of pearl-divers and fishermen into a shimmering Arabian Las Vegas – and have been rewarded with next to no rights and meagre pay. They sleep in labour camps, each one crammed with 3,000 or more people. In the strict hierarchy of the emirate, their role is to serve the expats and wealthy natives. It is all but a slave society.

We are right to find that morally repugnant. But we should beware the mote in our own eye. For if the west enjoyed economic boom times for the 15 years that preceded 2008, it did so thanks to low inflation. How did inflation stay so low? Because labour costs were kept down, thanks to millions of Chinese workers prepared to sweat for wages we would consider close to slavery. So, yes, we can be repelled at those ladies buying Hermès bags and Manolo Blahniks by the crateload in the Dubai shopping malls. But they weren’t that different from the folks snapping up the bargains at Primark. Both groups rely on the fact that, far away and out of sight, somebody is prepared to work very hard for very little money.

But as long as we continue to support products that come from places which pay wages and offer working conditions that we would not tolerate on our own shores then the hypocracy will drive further exploitation. Capitalism has no values. Markets are without morals or values. That is why they need to be heavily regulated to reflect our sense of value.

Although the fact that we have supported governments which have allowed markets to “self-regulate” (an oxymoron if there ever was one) means that we are ultimately responsible.


Beware of those godless bananas! They are everywhere at present.

Digression: Did I miss something?

After receiving the Nobel Peace prize earlier this year I concluded President Obama must be a man of peace.

Today I read he was fast-tracking another 30,000 US troops to go to Afghanistan and slaughter the Taleban.

Is there some disconnect here or what?

CofFEE Conference

Tonight the CofFEE Party is on in Newcastle with lots of modern monetary researchers in town. It is always a good time when we get together.

Tomorrow CofFEE hosts our annual conference – this year the 11th Path to Full Employment Conference/16th National Unemployment Conference. The final program is very exciting and we should have a great two days.

My blog may be late tomorrow night and on Friday I will provide a video of the MMT forum which is one of the feature sessions of the Conference.

This Post Has 25 Comments

  1. When a company issues more shares it is called dilution of existing shareholders and is normally a sign of stress.

    When government is issuing more debt AND central bank buys it by printing money you say that government is not revenue constrained. So government spending out of air is not revenue constraint because government can print even more money? Did I get your line of argument correct?

  2. Hi sn.

    Sovereign governments do not spend by prinitng money, they spend by crediting the reserve accounts that the commercial banks hold with the central bank.

    And no, they (sovereign governments) are not revenue constrained – it is they who issue the currency that we use. We need to acquire it from them through their net spending before we can hold it. They do not get it from us through taxation. Unless they net (deficit) spend first, eventually we cannot hold it at all (though the economy would slump into recession before it got this far).

    But I am just an interested ameteur – I will let someone more qualified answer your post in more detail.

  3. Hi Lefty,

    when we look at the static system then governments do not create but rather credit account as you say. However we live in dynamic world and from Period 1 to Period 999 when central bank buys government debt it is effectively government creating (via “borrowing”) money. In this sense government is NOT revenue constrained because there is always central bank supplementing revenue sources.

    Government is in essence an enterprise. My example of shareholder dilution means to me that in the process above outlined all existing shareholders (of USD) are diluted while new shareholders benefit because they get business stake at lower prices. Government, which is the agent of tax-payers, is revenue constrained and this constraint comes from taxes. As in any company, there is some balance of Debt to equity which is defined by respective costs. The argument that government can “borrow” money from central bank because it benefits employment is very much one sided because though it might benefit employment somewhere somehow but by doing so it also hurts everybody diluting their shares.

    But I am also an interested amateur and curious to hear a qualified argument why government can run endless deficits financed by central banks without hurting everybody.

  4. SN: A country sovereign in its own free-floating fiat currency does not have the constraints you describe. The issuer of such a currency is not “in essence an enterprise“ which I take to mean a private firm. Take a look at some of the many earlier blogs by Bill Mitchell on this topic. Perhaps someone could point out the most appropriate ones.

  5. Hello,

    I’ve been reading this excellent blog for a little while and waiting for an opportunity at my level to say something constructive. About

    > Take a look at some of the many earlier blogs by Bill Mitchell on this topic. Perhaps someone could point out the most appropriate ones.

    the answer is to read (multiple times) Deficit spending. So much for my constructive input but I’d like to also ask a question about

    > Comparing a sovereign government (such as Japan, the US, the UK, or Australia) with a Eurozone country such as Ireland, Belgium is a category error.

    by MMT, is it correct that Ireland revenue constrained?

    BTW here’s a well documented blog entry on Spain (not unlike Ireland as far as debt finance econ mirage) which I’m hoping will prompt some MMT reflexion,

  6. BX12, thanks for the link and I will give it a second try later and maybe I get subtle points I missed during my first read.

    I had a professor at the university who used to say: A theory which is too complex to explain to my grand-ma is a wrong one. I am sure everybody can explain basic premises of relativity theory to grand-ma but non revenue constraint is just too complex for me to understand and I am not a grand-ma (yet) 🙂

    Yes, government credits accounts instead of financing expenditures. But I am sorry, I have an overdraft on my current account. So do I create money?! Look at the american private consumption system. People have 3,5,10 credit cards all maxed out. Are they revenue constrained?! How about purchase now but pay in 6 months?! Where is the difference?

    The difference comes when we start looking at 999 periods instead of just ONE period. This is on the one hand.

    On the second hand, government IS people, isn’t it? In democracy if government does not serve people’s interests it will be gone next elections. You might go to the link and say that “is not the same thing as acknowledging self imposed (political) constraints” but then we go to the problem of Period 999. In a single period nobody is revenue constrained: nor government, nor households. But from period 1 to period 999 everybody is revenue constrained.

  7. Dear sn

    I had a professor at the university who used to say: A theory which is too complex to explain to my grand-ma is a wrong one. I am sure everybody can explain basic premises of relativity theory to grand-ma but non revenue constraint is just too complex for me to understand and I am not a grand-ma (yet) 🙂

    What is difficult about saying that a government that issues the currency clearly has no revenue constraint whereas a non-government body (household, firm) that uses the currency has to get it before it can spend? That seems to be more straight forward than relativity theory to me.

    Yes, government credits accounts instead of financing expenditures.

    Good then you know it is not revenue constrained.

    But I am sorry, I have an overdraft on my current account. So do I create money?! Look at the american private consumption system. People have 3,5,10 credit cards all maxed out. Are they revenue constrained?! How about purchase now but pay in 6 months?! Where is the difference?

    All private agents are revenue constrained. The government could (if it wanted) net spend without any further consequences. You and all the maxed out Americans have to pay it back – always!

    The difference comes when we start looking at 999 periods instead of just ONE period. This is on the one hand.

    This statement has no meaning in the context of your worries.

    On the second hand, government IS people, isn’t it? In democracy if government does not serve people’s interests it will be gone next elections. You might go to the link and say that “is not the same thing as acknowledging self imposed (political) constraints” but then we go to the problem of Period 999. In a single period nobody is revenue constrained: nor government, nor households. But from period 1 to period 999 everybody is revenue constrained.

    No the government is not people. It is a separate institution that people have created and bestowed under a fiat monetary system with powers that individual persons do not enjoy. That does not negate the proposition that we can vote a specific government out.

    Period 999 and 1 is not a valid construct. At all time periods, a non-government unit is revenue constrained in a fiat monetary system – you cannot just spend without arranging the finance. The bank will only let you take an overdraft as part of a prior arrangement. That sort of constraint does not apply to a government of issue in period 1, 2 or 999. If it issues its currency it is never revenue constrained.

    It is not rocket science.

    best wishes

  8. Zimbabwe tried to prove your argument until it was forced to drop it is own dollar and switch to USD

    I can only repeat. In any single period neither government NOR private household is revenue constrained. I can go out and spend out my overdraft and all credit cards without any intention to repay it, can’t I? Do I need to get currency before I spend it? The answer is clear NO. If you say that I have to have arrangement with my bank before I go shopping, then we talk multi-period. If government wants its newly printed money to accepted in exchange for goods then we also talk multi-period. If I say that I am government and want to exchange my color printer paper for goods and services then I will realize that somehow nobody will accept it. So the claim that bank overdraft is subject to my arrangement with the bank applies to the government who wants AND hopes that people use its printed money (and there are lots of examples in history when people transact in foreign currency and avoid domestic money). Hope or distrust come from previous periods. So government can surely print money as long as it is allowed to (and not want).

    And if you do not buy the argument of multi-period constraints, then your theory should explain the reality of Zimbabwe, Weimar Republic or post-WWII Hungary. All of these real life facts ended with new government and new currency. It is sufficient to go through this page and count how many countries ended up with currency reform. But surely in one period set-up there are no revenue constraints. It is only when it lasts for some time before this “non constraint approach” hits the wall.

    I am sorry but however short the history of fiat money is it tells us a completely different story.

    But again I am just an amateur.

  9. However, at the end of the day it boils down to the definition of constraint. I define it as unsustainability of status quo

  10. Dear sn

    Please read and understand – Zimbabwe for hyperventilators 101.

    Your repetition shows you have: (a) not read the entirety of the material here; and (b) that what you have read you do not fully comprehend. In lieu of that you are continuing to rehearse the standard arguments that are erroneous. I suggest, before you comment again that you accomplish (a) and then if (b) is still an issue you ask a question then.

    best wishes

  11. Might not a better analogy be that a company issues (new) shares to make its purchases and pay salaries, and withdraws shares when it is paid in cash by its customers.
    One could imagine a corporate treasury operating daily in the money markets and the equity markets to perform this.

    If the company produces ‘nothing of value’ – or rather consistently produces net negative value – then one could imagine persistent issuance leading to reduced company value – increasing net share issuance and declining price.
    The Company is theoretically constrained by the fact that its current shareholders have to allow new issuance.
    If this constraint did not exist, it would not be impossible to imagine a company still going bankrupt – or rather having worthless but plentiful shares and being incapable of trading with its suppliers and customers.

    Monetary (legal tender) value and productive value can only disconnect for so long. The Company – if unconstrained by shareholder’s rights – could theoretically employ more workers and forcibly pay them in shares, but if they produce little of value the company and its currency would eventually disappear. The scheme would tend to a pyramid scheme.

  12. Deal! I have printed those articles and will try to digest. However to provide more food could you answer the following question:

    Mr. Z has two bank accounts both with overdrafts and two credit cards. His revenue is defined by the salary he gets onto one of his bank accounts. You may assume it is weekly or monthly but lets say it is weekly on Friday. Is he revenue constrained to spend more than his salary next week? And a related question: how does revenue constraint fits into mortgage-financed house purchase?

    Now I shut up and hide reading while hoping to get answer to this simple monetary question

  13. Hi Sn,

    Mr. Z is revenue constrained by how much money he can earn, borrow, beg, or steal. The key point is that he cannot create his own money, but must get money from someone else in the economy. In this sense he is constrained in a way that the government is not. A corollary of this constraint is that during downturns when people no longer want to hire, lend, or give to Mr. Z, then he is out of luck and will be an idle resource.

    Government is constrained only by what is offered for sale — i.e. no matter how much money the government supplies, it cannot buy more real output than what the economy can produce, and of course if it buys too much output, then it is preventing the private sector from consuming that output, as well as causing inflation. Clearly government will never cause inflation or hurt private sector consumption by employing idle resources.

    So the constraints on the government sector and the non-government sector are *different*, and a clear understanding of this difference is necessary to moderate the business cycle. Then you can get into all sorts of discussions of the right manner of government deficit spending, but an understanding of this difference is key.

  14. I am very sorry but the question was whether Mr. Z or government is REVENUE constrained. So you say neither is constrained because constraint is defined by borrowing or printing capacity.

    I never argued that government is REVENUE constrained. Its spending is limited by printing capacity and willingness of another party to finance it. It is not the size of economy or number of printers. It is the other party that accepts bonds or willing to transact in the printed currency or even use it for savings. If people REFUSE holding government money then any size of printing or economic output will not help. This argument should be clear and history proved it so far.

    So both parties are NOT revenue constrained in any single period because they can clearly spent MORE than revenue for that period. The question who creates money is irrelevant. When I go into overdraft, it is me who starts the chain of new money, right?

    The rest of the clear as well. Sooner or later any printing comes to the abrupt end as well as any endless borrowing. How long it lasts depends on previous periods arrangements and not future ones. And this is the same rule for government and private households. I have not heard any argument objecting this claim. And my position is that such argument does not exist because current monetary thinking is one period equilibrium focused. What happened before and will happen afterwards is irrelevant. However economy is never in equilibrium because if it was then there would never be any growth. By extending your arguments one can easily arrive at conclusion that the only thing needed in the economy is government printing press. So far none of my arguments was answered and instead I am referenced to some vague concepts of business cycle and accounting sequences of transactions between central bank and ministry of finance. Just print it! Then economy can grow steadily forever. Why do we need anything else to have all associated problems?!

  15. Dear SN

    You are asserting your original position again without understanding the detail. It is clear that you can enter an overdraft facility with your bank and spend more than your income. But you cannot spend $1 million more if your overdraft limit is $1000. And if you use your credit card you cannot spend $1 million if your limit is $10,000. You are thus revenue-constrained at all times without exception.

    A government can spend as much as it likes without regard to any pre-determined limit (unless it voluntarily imposes some financial constraint on itself).

    Further your statement that “Its spending is limited by printing capacity and willingness of another party to finance it” is technically wrong. Governments do not spend by printing anything nor do they have to wait for another party to finance its spending.

    There is no common rule for households and governments.

    By the way, you can define a dynamic equilibrium path in a growth environment. Equilibrium is not confined to static situations.

    Finally, the fact that you consider the articles you were referred to as “some vague concepts of business cycle and accounting sequences of transactions between central bank and ministry of finance” suggests more about your level of comprehension than anything else.

    Unless you can refute this logic by closely explaining an alternative position which is ground in the operational reality of the monetary system I don’t think we are going to get very much further on this tack

    best wishes

  16. I see. It is getting utterly senseless. My comprehension might be weak but it looks that yours is even weaker. If my revenue is $1k, is my spending constrained by $1k? Is it so difficult to answer this question? Does it sound like 2+2 or you have different math? No I can spend $2k. I can even spend $3k. I can even spend more. How do you know that I did not hide another credit card? Or why does it matter? I am NOT constrained by my revenue. If I am Bill Gates then I can spend more and LONGER than my revenue compared to Zeng Li. If I am USA then I can print more and LONGER than (you name another country you like here). Is it so difficult? It is all based on trust. If private household spending is really revenue constrained then how the %&$ is that we have credit crisis? So please do not hide behind your wall of academic arrogance and just argue for this simple question. I do not need to understand the mechanics of Zimbabwean output or accounting of public finance to easily refute your constraint story. But simply because you refuse to give any one sentence argument of your position I assume that you have none.

    Good luck.

  17. Dear SN

    I am sorry you cannot understand this. An overdraft is possible but only because you have income that the bank knows (expects) will cover the overdraft. You will never get credit without backing.

    At any rate, this is the final word and you have exhausted your welcome. If you want to continue commenting please read the Comments Policy and adhere to it. I will delete further comments that do not satisfy the policy.

    best wishes

  18. I think SN is arguing that governments MUST finance their spending by issuing bonds – that would be inaccurate SN. They can certainly spend without doing so if they choose. The currency units are their sole creation.

    If you relax a little and try not to excercise too many pre-conceived notions while sounding out the arguments, you might find that the somewhat head-spinning concept of a fiat monetary system comes a little easier.

    A sage once said to a learned man who kept interrupting whith “but what I was taught was…” and other such statements – “if you do not first empty your cup, how can you taste my tea?”

  19. I think I understand the concept of non-revenue constraint in case of the government because it can print fiat money and use that to finance expenditures in any given period. There is nothing complex about it.

    However, what I am completely missing is the idea that this can last forever. Our history is limited by nature and any claim that something can last forever is completely unprovable and speculative. Therefore there can be (is) a period when government money printing ability of expenditure financing becomes constrained.

    Bill can argue that there is a lot of arbitrariness in choosing 80% of Debt to GDP but claiming that the difference between 20% and 80 is the same as between 80% and 320% is absolutely unfounded on the same grounds. However everybody’s gut feeling will tell that it is not the same. Rational economic models try to describe behaviour of irrational economic agents and economist profession is to believe in these models. No model takes as input absolute level of government debt or money printed. And that is not even mentioning that notion of trust is not subject of study. And that is where my problem comes.

    I tried to argue about private household only to stress the focus of single period logic which is faulty

  20. Dear SN

    I would suspect that the ratio could never get to 320 per cent anyway given the automatic stabilisers and the limits of real capacity. We have never gone near that limit anywhere.

    Further, mainstream economic models focus on rational maximising agents not irrational ones. The fact that mainstream models do not use the MMT notions reflects their failure not the other way around.

    best wishes

  21. Government does not spend by “printing fiat money” sn, it simply credits bank accounts.

    An asscociate of Bill’s -Warren Mosler – describes the fiat system as being likes points in a bowling alley. Does the alley have to collect up points scored by playes each day before the next day’s games can be played? Does the alley get worried if a bus load of real crackerjack bowlers turn up, in case they score all the points that exist, leaving no more? Can the alley ever run out of points?

    I think we would all conclude that as long as players desire to keep playing, there is no limit to the number of points that can be scored in sum total. The points do not represent anything real in the physical sense – they are an ABSTRACT CONCEPT.

    In days gone by, currencies were backed by and pegged to something physically real – gold – at fixed rates. Australian dollar, US dollar, British pound, Swiss franc, Japanese yen – these were just different names for different amounts of gold (my interpretation). But last version of this system ended in 1971 and we moved to pure fiat money systems. Our currencies are no longer just representations of certain weights of a soft yellow metal, they exist in their own right and represent only themselves.

    Going back to the bowling alley analogy, if gold IS money, it is clear that I can only hold as much as I can dig up or ship in. But if the points themselves – the abstract concept – are now money, there is no operational limit to how many I can bring into existence. I am now imagining one million “Lefty units” and sending them to you.

    1 000 000.

    There you go. That simple. And what is to stop me from imagining a billion or a trillion or a googleplex or any number at all? There are sensible limits as to how much should be issued into the economy (but this limit will vary with the situation) but there are no ACTUAL limits.

    Ergo, a government sovereign in it’s own fiat currency can never “run out” of that currency. Unless they voluntarily choose to do so.

  22. Dear Lefty

    But can you impose a tax obligation on any of us that will force us to use the newest (proposed) currency in the World – the Lefty Unit?

    You could start local – tell your kids (if any) that they can earn Lefty Units by working in the garden. They will say whatever …. And then you say that they cannot live in the house unless they pay X Lefty Units per week in tax. Then they will say … where is the rake or the hose? Instantly, you will have a system that is transferring private labour (kids) into the public sector (home garden) to pursue public purpose.

    Congratulations on your new currency unit … I hope it spreads and we can slowly undermine the AUD sovereignty of the (stupid) federal government. Sooner or later all workers will be living well in jobs and earning Lefty Units.

    Crash X&%4@# … that was me crashing back into the reality of Wednesday morning.

    best wishes

  23. Regrettabley Bill, I fear that I will be unable to impose any such obligation outside my own household. This could seriously impact upon the prospect of the Lefty unit as a broadly accepted currency since it isn’t much more than otherwise worthless tokens created from thin air by me.

    But I have heard that there are entities that can do just this. Maybe if I went looking in Canberra or Washington D.C. or No.10 Downing street.

    But I also hear that for some reason, they all seem to want to pretend that Richard Nixon never dismantled Bretton woods and that nothing fundamentaly changed in 1971.


  24. It is not fair to say that you can institutionalize “Lefty units” tomorrow and have your free lunch associated with printing your units forever. One big problem I have with fiat money is the experience of many countries where regular residents chose to transact in foreign currency. And it is not only big-ticket items where foreign currency might be a simple convenience but also basic consumption goods (well, besides milk and bread of course). This means that in the fiat money system currency in itself has value. For me this value is trust in the government and its institutions. This is exactly the reason why US/JAP/AUS etc. can print money for much longer than any third world country. This implies that the wall for these currencies comes much later than for any Republic of Bananas.

    Bill, I have a related question for you. You advocate unlimited budget deficits and guaranteed employment and all “financed” by the government. However all government support of the economy sounds like treatment of cancer with pain-killers. Clearly in case of external shock to the economy it is fair for the government to step in and take the hit. However in the case of structural issues (and this is the case of many countries today and first of all USA) pain-killers will not solve the problem but delay it. Of course it is a super difficult task to find the balance between pain and pain-killers but it is clear that government should not shoulder all of the pain and leave some for the economy.

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