Trump's desire to reduce the deficit. Can someone explain to me how this is a good thing?

Yeah. I'm not somebody who believes that money velocity is a magic bullet that makes everyone's lives better forever.

Are you?

 

What does velocity have to do with this? I mean you realize you can increase taxes on the wealthy and increase spending on things that benefit the middle class. Thus it is possible to simultaneously possible to increase taxes on the wealthy and increase the amount of money in the economy via deficit spending.

 

Yes. You were going to explain how overcharging the citizens is the same as charging only what is needed to fulfill the requests the citizens are willing to pay for.

 

Everything. The idea that "taking money out of the economy" is inherently bad is based on the belief that money velocity is inherently good. That money, "in the economy," being used instead of saved, is what drives economic growth.

Sure. I also believe that savings and investment are, in the long run, better for everybody, including the middle class.

Now driving down the debt isn't exactly a driving force of mine. If I were given command of the economy I'd probably increase spending in the short run. But I do see running budget surpluses as a laudable medium-term goal, and a vital long-term goal.

I don't care about having more money "in the economy."

More isn't always better, you know.

 

We aren't talking about just spending here, we are talking about borrowing also.
Deficit spending.

And the same problem exists every time, the same decision as yours is always made. Increase borrowing in the short term.

But it all adds up. Short term+ another short term+ another short term = long term.
In fact it equals indefinite and endless borrowing.

Which = fail. Economic collapse. Greece.

 

Not really surprising is it?

Since you are going to argue the ridiculous if anyone mentions it.

When a bank issue a cheque, it does not create money. It creates an obligation to pay money. An IOU.

It is no more "money" than this is.

I owe you £100.

By writing that statement I have not created any money. No wealth, no resources and no pounds.
And indeed you will have difficulty exchanging that for anything of value to you.
Because the IOU I created for you is not backed by any resources. I do not have £100.

Velocity of money, the more it goes around, creates money for those people who take a skim of every transaction. A %.
So velocity of money makes you richer if you are a bank or a taxman.
But it makes the others poorer.

I don't want resources to keep going round. I want them to get to me and then stop going round.

 

If Trump can "reduce" the deficit by taxing the rich (including himself) what's not to love.

 

Yes, that's what I said.

Yeah, that's what I said.

False. Dollars are created in three ways: 1) the treasury creates them by printing them. 2) The federal reserve creates them by adding them to the accounts of member banks. 3) A bank issues a bank check.

 

First, banks create credit, the Federal government creates dollars. While Roon disagrees with me on this point, the distinction is that the government can maintain it's credit indefinitely, money borrowed in the private sector lasts only as long as the term of the loan that created it.

A bank owing $1 (being -$1) when it creates +$1 in the net creates nothing within the private sector. That's not to say that borrowed money isn't real or does not create the appearance of increased dollars and ultimately productivity within the private sector, but they are timed and creates a volatile system where, if the money supply is to say the same, there has to be people taking loans at an equal or greater rate than the rate at which they are repaid. In 2009-2010, people were repaying loans at a faster rate than they were creating new credit

The government goes -$1 and the private sector goes +$1. The negative is created outside the private sector.

If you don't understand the nuances of these distinctions and their consequences, you don't understand the economy.

 

You're not being very clear. Are you talking about a bank creating money when it lends?

When a bank makes a loan, it writes a check for the loan amount. The borrower then deposits this check into his bank account. His bank balance increases by that amount. Bank balances are money, specifically M1. Therefore, when the bank makes a loan, it creates money.

 

When a bank makes a loan, it issues a check for the loan amount. The borrower takes that check and deposits it into his bank account. This increases his bank balance. Bank balances are money, specifically M1. So when the bank makes a loan, it increases the amount of money in existence.

 

Your call.

 

See if this helps you understand what I'm trying to say, then let's discuss the implications.

 

I understand that you are talking about the net. I understand that the bank debits cash and credits loans receivable. I understand that when it creates the money an IOU is also created.

I, however, was simply describing the three ways in which money is created: 1) printing by Treasury, 2) Creation by Fed when it buys assets from primary dealers, and 3) When a bank issues a check as a loan.

 

Ok, fair enough. I recognize that you've been more educated on this topic than others in this thread, though I won't point anyone out.

Having said that, if the government repaid its debt, what do you think would happen in the diagram I posted. Would it stay the same or would it somehow put pressure on the private banking system?

 

I don't think it would change the diagram you posted in any way. Banks would still create dollars when they issue a check associated with a loan.

 

Ok so let me try to understand this and maybe you all could clarify. As long as we defecit spend we are good, untill our debt and interest payments catch up to a point where one government could have access to more dollars than whats floating in the US. We're delaying the inevitable so to say.

 

I also would like to say if we continue on this path the Fed will have to envoke draconian laws in the future. I just don't understand how binding the next generations to this is constitutional or patriotic.

 

OK, so this is where the line of causation breaks for you. I really need to take this one step at a time. If I lay out the whole thing, we'll get lost in fighting over individual points......So

Let's see if I can explain.

True or false.

Deficit spending adds money to the economy, surpluses remove it?

 

False. Money is added to the economy in only three ways: 1) The treasury prints money, 2) The fed credits the accounts of primary dealers, and 3) a bank issues a check associated with a loan.

 

I think the issue is a matter of perspective; are deficits or surpluses preferable?

If we apply the question to ourselves as individuals, does our answer differ? Would you prefer to have lots of debts or plenty of unspent money in your accounts?

Is the answer different for governments, why?

 

It depends.

Let's address this. The best way to address it is via an analogy.

You have a small above ground pool for your family to swim in. Obviously, you want to keep it filled close to the top.

Something like this:



Let's say it has a drain at the bottom and water is going down the drain lowering the water level.

Now, fixing the drain or wasting water aside (let's imagine you can't fix the drain), if you wanted to maintain the water level, how would you go about that?

You get a hose and add water.

How much should you add?

The first day you turn the hose up all the way and when you come out the next morning, the pool is overflowing.

The next day you leave it off and when you come out to check, it is a foot low.

So in order to keep the water level just right, you have to match the output (the drain) with the input (the faucet). Now you are savvy, so you set up a meter on the drain so you know exactly how much is going down and then you set the faucet to match. You want a balanced Input and output.

This works for a while, but soon you realize that the pool's level is slowly declining.

How is this possible?

Then you realize that some water is lost to evaporation and when your kids are in the pool they splash and some ends up outside the pool losing, even more, thus the output isn't equalling the input and the level is declining. Thus when measured against the output (drain) the input is slightly more. The output in this analogy is taxes and the hose is spending.

Now imagine that the pool is the economy. And the water level is the money level. Too little and economy cannot adequately use the potential it has (the sides of the pool represent it's potential) and unemployment results. Too much water and pool overflows (inflation sets in). Balancing the hose to the drain is the equivalent of running a balanced federal budget. The amount of water in the pool will decline if you balance spending to taxes, why? Because the US is a net importer. We trade our money for things of real value. That money leaves our economy and is held by foreign interests. We measure this loss of financial assets as the trade deficit. This is the "spillage". However, unlike the pool analogy where the water would be wasted, in the economy, we trade the money that flows out of the economy for things of real value.

The government failing to deficit spend is like failing to make up for the water that evaporates or is splashed out of the pool. What most people are suggesting is that we balance the flow between hose and drain, not the system as a whole.

We don't need to balance the budget, we need to balance the economy!

What people are effectively asking for, in the boundaries of this analogy is that instead of filling up the pool, they want to lower the sides of the pool to match the amount of water in it.

Some economies, like Germany and Japan, are export based economies. This would be analogous to an external source that adds water to the pool, rather than losing it. So imagine that it rains (predictably). If everything else were the same as my last example except there is rain, the amount going down the drain would be more, not less than coming out of the hose.

These economies are Exporting things of real value and trading them for dollar credits. Who is better off? China and Japan has accumulated trillions in credits and we've accumulated trillions in things of real tangible value. This is called "The real terms of trade". I'd argue that we are MUCH better off than they are.

Germany needs to run a surplus the US needs to run a deficit. The point is, it depends on prevailing economic conditions.

It will never, ever, ever happen. The government's "debt" is not in Chinese dollars or Japanese Yen. Our debt is denominated in money we create. Now if you've paid attention, you know that I don't think that deficits are "good", they depend on the situation.

As far as interest payments, Why do you think interest is a problem?

What is it you think is inevitable?

 

So I'm clear, deficit spending doesn't add money to the economy?

 

Yes, the government's deficit is the private sector's surplus.

People have a tendency to look at the economy from the government's point of view, which is where the problem starts.

 

No. Money is created in only the three ways I described above: 1) The treasury prints money, 2) The fed credits the accounts of primary dealers, and 3) a bank issues a check associated with a loan.