Modern Monetary Theory (MMT): How Fiat Money Works

[bripat9643]

Do I really need to explain the expression to you? Try a little harder to keep up please

I addressed your statement that one can't live in the past. Was that intended to make some larger point?

Yes, it means you can dwell on the fact the you don't like the fiat money (living in the past) or you can try to understand it and discuss the best ways to progress our economy (living in the present) I can't believe that I had to explain that

Getting rid of fiat money is one of the main things we need to do to "progress" our economy.

Good luck with that.

No luck required. All fiat monies eventually fail.

Have you ever heard the term "Not worth a continental"?

Unfortunately they are usually replace by other fiat currencies.

 

[SwimExpert]

The constitution mentions years, Monday, December, and dollars. Did each of these terms have meanings at the time of the ratification?

Actually, courts are still arguing over the meaning of Monday.

 

[Centinel]

I addressed your statement that one can't live in the past. Was that intended to make some larger point?

Yes, it means you can dwell on the fact the you don't like the fiat money (living in the past) or you can try to understand it and discuss the best ways to progress our economy (living in the present) I can't believe that I had to explain that

Getting rid of fiat money is one of the main things we need to do to "progress" our economy.

Good luck with that.

No luck required. All fiat monies eventually fail.

Have you ever heard the term "Not worth a continental"?

Unfortunately they are usually replace by other fiat currencies.

Good point.

The constitution mentions years, Monday, December, and dollars. Did each of these terms have meanings at the time of the ratification?

Actually, courts are still arguing over the meaning of Monday.

Can't trust that day.

 

[Slade3200]

You can live In the past or live in the now

You actually can't live in the past. You can only live in the now.

Do I really need to explain the expression to you? Try a little harder to keep up please

I addressed your statement that one can't live in the past. Was that intended to make some larger point?

Yes, it means you can dwell on the fact the you don't like the fiat money (living in the past) or you can try to understand it and discuss the best ways to progress our economy (living in the present) I can't believe that I had to explain that

I understand it. I just think it's a scam. If it weren't a scam, it wouldn't have had to be forced upon us. It would have arisen on the market. The fact that it required government force to institute is clear evidence that it's less desireable than the alternatives.

If something is forced it doesn't make it a scam, it just means the people responsible for that sector of operations decided it was the best economic option available for our country. Happy to debate the pros and cons.

 

[Slade3200]

You can live In the past or live in the now

You actually can't live in the past. You can only live in the now.

Do I really need to explain the expression to you? Try a little harder to keep up please

I addressed your statement that one can't live in the past. Was that intended to make some larger point?

Yes, it means you can dwell on the fact the you don't like the fiat money (living in the past) or you can try to understand it and discuss the best ways to progress our economy (living in the present) I can't believe that I had to explain that

Getting rid of fiat money is one of the main things we need to do to "progress" our economy.

How would that happen?

 

[Centinel]

You actually can't live in the past. You can only live in the now.

Do I really need to explain the expression to you? Try a little harder to keep up please

I addressed your statement that one can't live in the past. Was that intended to make some larger point?

Yes, it means you can dwell on the fact the you don't like the fiat money (living in the past) or you can try to understand it and discuss the best ways to progress our economy (living in the present) I can't believe that I had to explain that

I understand it. I just think it's a scam. If it weren't a scam, it wouldn't have had to be forced upon us. It would have arisen on the market. The fact that it required government force to institute is clear evidence that it's less desireable than the alternatives.

If something is forced it doesn't make it a scam, it just means the people responsible for that sector of operations decided it was the best economic option available for our country. Happy to debate the pros and cons.

If it were better, it would not need to be imposed by force. That is the proof that it is inferior in the eyes of the general populace.

 

[Centinel]

You actually can't live in the past. You can only live in the now.

Do I really need to explain the expression to you? Try a little harder to keep up please

I addressed your statement that one can't live in the past. Was that intended to make some larger point?

Yes, it means you can dwell on the fact the you don't like the fiat money (living in the past) or you can try to understand it and discuss the best ways to progress our economy (living in the present) I can't believe that I had to explain that

Getting rid of fiat money is one of the main things we need to do to "progress" our economy.

How would that happen?

Through legislation. Or possibly by the Supreme Court striking down the idea of Fiat money

 

[bripat9643]

You actually can't live in the past. You can only live in the now.

Do I really need to explain the expression to you? Try a little harder to keep up please

I addressed your statement that one can't live in the past. Was that intended to make some larger point?

Yes, it means you can dwell on the fact the you don't like the fiat money (living in the past) or you can try to understand it and discuss the best ways to progress our economy (living in the present) I can't believe that I had to explain that

Getting rid of fiat money is one of the main things we need to do to "progress" our economy.

How would that happen?

The government would repeal the law making it illegal to print your own currency.

 

[g5000]

There are gigantic holes in the OP analogy.

Imagine parents create coupons they use to pay their kids for doing chores around the house. They “tax” the kids 10 coupons per week. If the kids don’t have 10 coupons, the parents punish them. “This closely replicates taxation in the real economy, where we have to pay our taxes or face penalties,” Mosler writes.

This does not resemble our economy in any way. First, you are not taxed a set amount, and you sure as shit are not taxed more than your income and punished if you don't pay it. Second, most of us earn our income from the private sector, not the government.

Right out of the gate, this analogy is fatally flawed.

For example, do the parents have to get coupons from their kids before they can pay them to do any chores? Obviously not. In fact, the parents have to spend their coupons first by paying their children to do chores before they can collect the tax. “How else can the children get the coupons they owe to the parents?” Mosler writes.

Really? Mosler is stumped how "the children" can earn money they owe to the government? Amazing!

I guess the dumb shit has never heard of the private sector.

“Likewise,” he continues, “in the real economy, the federal government, just like this household with its own coupons, doesn’t have to get the dollars it spends from taxing or borrowing or anywhere else to be able to spend them.”

Key words: "doesnt have to". While it is true the government COULD print money instead of borrowing it, this is not what actually happens. The government DOES borrow money, instead of printing all of our debt.

This guy is an idiot.

 

[g5000]

Fiat money has nothing physical to back it up. We're not on the gold standard.

Thank God.

 

[Dovahkiin]

There are gigantic holes in the OP analogy.

Imagine parents create coupons they use to pay their kids for doing chores around the house. They “tax” the kids 10 coupons per week. If the kids don’t have 10 coupons, the parents punish them. “This closely replicates taxation in the real economy, where we have to pay our taxes or face penalties,” Mosler writes.

This does not resemble our economy in any way. First, you are not taxed a set amount, and you sure as shit are not taxed more than your income and punished if you don't pay it. Second, most of us earn our income from the private sector, not the government.

Right out of the gate, this analogy is fatally flawed.

For example, do the parents have to get coupons from their kids before they can pay them to do any chores? Obviously not. In fact, the parents have to spend their coupons first by paying their children to do chores before they can collect the tax. “How else can the children get the coupons they owe to the parents?” Mosler writes.

Really? Mosler is stumped how "the children" can earn money they owe to the government? Amazing!

I guess the dumb shit has never heard of the private sector.

“Likewise,” he continues, “in the real economy, the federal government, just like this household with its own coupons, doesn’t have to get the dollars it spends from taxing or borrowing or anywhere else to be able to spend them.”

Key words: "doesnt have to". While it is true the government COULD print money instead of borrowing it, this is not what actually happens. The government DOES borrow money, instead of printing all of our debt.

This guy is an idiot.

Yes, it does resemble our economy. Oh, don't harp on silly details. You know damn well the point he is trying to get across. In the real economy, we have to pay taxes, or face penalties. He is not saying that in the real economy we're taxed more then in our incomes. What is the sovereign issuer of the currency? The government (consolidating fed + treasury) Sure, bank loans create deposits, which creates new money within the domestic private sector, but the private sector cannot continually go on like this. There's a reason we don't run a net surplus in relation to the government sector draining dollars. You obviously have a flawed understanding of how the private sector acquires dollars in the first place. (Not including bank created money, which always has a liability that comes along with it.) First of all, when the government runs a deficit, the private sector acquires assets, the liability staying with the government. The government will accept its own currency to handle tax payments. Mosler isn't stumped on how children can earn money at all. Look at his example and think about it. The sovereign currency issuer has to spend before it can take back it's own issued currency. Do you really believe that the government is "borrowing money?" I suppose one could call it that, but here's the reality:
China earns us dollars in their account by trading with us. When we "borrow" from china, they're simply converting their accumulated dollars into bonds, which serve as a way to earn a tiny bit of interest. We have self imposed constraints left over from the gold standard days when it seems like this is "borrowing" but in reality, we're simply using keystrokes to credit their initial account when the bond matures. The national debt is the savings of the foreign/domestic private sector in the form of bonds. The government runs a net deficit, it spends by crediting accounts and taxes by debiting.

(Going back to you claiming mosler "ignores the private sector" in what world does the government tax dollars it hasn't spent first?)

 

[g5000]

Interesting read... I am curious though, I hear plenty fear mongering by the conservatives about the debt cliff and other arguments that are so lopsided that it is hard to take seriously. I'd like to hear from somebody from the other side who see's the benefits of economic stimulus and deficit spending... What are the cautions and possible negative effects that can happen from having an extremely large debt? Is there a breaking point and how is it measured? and what is a healthy goal for spending and debt levels to have a sustainable and flourishing economy?

The negative effects of extremely large debt are several. I will list three in this post.

First, if the interest payments on the debt exceed revenues, the you have a death spiral. Japan is on the brink of this event.

Second, the greater the debt, the less confidence creditors will have on your ability to repay, which results in their demanding a higher interest rate when lending you money, and then you are caught in another death spiral. This loss of confidence and spike in interest rates usually happens suddenly, without warning.

Third:

U.S. government debt now stands at 103% of GDP. If private debt is included, the ratio climbs to about 370% of GDP. Scholarly studies indicate that real per capita GDP growth should slow by about one-quarter to one-third from the long-run trend when the total debt-to-GDP ratio rises into the range between 250% and 275%. Since surpassing this level in the late 1990s, real per capita GDP has grown just 1% per annum, much less than the 1.9% pace from 1790 to 1999.

These results indicate that the relationship between debt and economic growth is non-linear, or progressively negative, as debt advances to higher levels, a pattern confirmed by academic research (Chart 2). The latest information further supports this relationship. The current expansion began in 2009, and since then real per capita GDP growth has been 1.3%, less than half the 2.7% average growth in all expansions from 1790 to 1999.

http://www.hoisingtonmgt.com/pdf/HIM2015Q3NP.pdf


Public-private debt hit the magic 275% line in 2000. LFPR has been declining ever since.

Not a coincidence.

 

[Dovahkiin]

Fiat money has nothing physical to back it up. We're not on the gold standard.

Thank God.

So how about you explain how a sovereign currency issuer borrows its own money? Government bonds can only be purchased with government money.

 

[g5000]

There are gigantic holes in the OP analogy.

Imagine parents create coupons they use to pay their kids for doing chores around the house. They “tax” the kids 10 coupons per week. If the kids don’t have 10 coupons, the parents punish them. “This closely replicates taxation in the real economy, where we have to pay our taxes or face penalties,” Mosler writes.

This does not resemble our economy in any way. First, you are not taxed a set amount, and you sure as shit are not taxed more than your income and punished if you don't pay it. Second, most of us earn our income from the private sector, not the government.

Right out of the gate, this analogy is fatally flawed.

For example, do the parents have to get coupons from their kids before they can pay them to do any chores? Obviously not. In fact, the parents have to spend their coupons first by paying their children to do chores before they can collect the tax. “How else can the children get the coupons they owe to the parents?” Mosler writes.

Really? Mosler is stumped how "the children" can earn money they owe to the government? Amazing!

I guess the dumb shit has never heard of the private sector.

“Likewise,” he continues, “in the real economy, the federal government, just like this household with its own coupons, doesn’t have to get the dollars it spends from taxing or borrowing or anywhere else to be able to spend them.”

Key words: "doesnt have to". While it is true the government COULD print money instead of borrowing it, this is not what actually happens. The government DOES borrow money, instead of printing all of our debt.

This guy is an idiot.

Yes, it does resemble our economy. Oh, don't harp on silly details

Don't harp on "silly details"? BWA-HA-HA-HA!

You mean the fatal flaws which collapse the analogy.

 

[Slade3200]

Do I really need to explain the expression to you? Try a little harder to keep up please

I addressed your statement that one can't live in the past. Was that intended to make some larger point?

Yes, it means you can dwell on the fact the you don't like the fiat money (living in the past) or you can try to understand it and discuss the best ways to progress our economy (living in the present) I can't believe that I had to explain that

I understand it. I just think it's a scam. If it weren't a scam, it wouldn't have had to be forced upon us. It would have arisen on the market. The fact that it required government force to institute is clear evidence that it's less desireable than the alternatives.

If something is forced it doesn't make it a scam, it just means the people responsible for that sector of operations decided it was the best economic option available for our country. Happy to debate the pros and cons.

If it were better, it would not need to be imposed by force. That is the proof that it is inferior in the eyes of the general populace.

If the executives of a company decide to close a division to cut costs and then to take on debt to develop a new potentially ground breaking product, do you think they leave it up to the employees to vote on? Would it be fair to assume that the general population wouldn't like the move? Would it also be fair to assume that the move wasn't necessarily a scam but rather a strategy decided by the leadership, by the most informed people with the intent of making the company prosper? Americans just like employees often have their own self interests at the forefront and don't always see the big picture which is why we have elected officials that are supposed to be responsible to lead the agenda.

 

[g5000]

Fiat money has nothing physical to back it up. We're not on the gold standard.

Thank God.

So how about you explain how a sovereign currency issuer borrows its own money?

Countries like China lend it to us. Did you not know this? Weird!

Also, the Federal Reserve monetizes the debt (prints money), but the part you deliberately fail to mention in every single topic you have started about money is that same money is destroyed when the Federal Reserve sells the bonds it used to monetize the debt.

 

[Dovahkiin]

Interesting read... I am curious though, I hear plenty fear mongering by the conservatives about the debt cliff and other arguments that are so lopsided that it is hard to take seriously. I'd like to hear from somebody from the other side who see's the benefits of economic stimulus and deficit spending... What are the cautions and possible negative effects that can happen from having an extremely large debt? Is there a breaking point and how is it measured? and what is a healthy goal for spending and debt levels to have a sustainable and flourishing economy?

The negative effects of extremely large debt are several. I will list three in this post.

First, if the interest payments on the debt exceed revenues, the you have a death spiral. Japan is on the brink of this event.

Second, the greater the debt, the less confidence creditors will have on your ability to repay, which results in their demanding a higher interest rate when lending you money, and then you are caught in another death spiral. This loss of confidence and spike in interest rates usually happens suddenly, without warning.

Third:

U.S. government debt now stands at 103% of GDP. If private debt is included, the ratio climbs to about 370% of GDP. Scholarly studies indicate that real per capita GDP growth should slow by about one-quarter to one-third from the long-run trend when the total debt-to-GDP ratio rises into the range between 250% and 275%. Since surpassing this level in the late 1990s, real per capita GDP has grown just 1% per annum, much less than the 1.9% pace from 1790 to 1999.

These results indicate that the relationship between debt and economic growth is non-linear, or progressively negative, as debt advances to higher levels, a pattern confirmed by academic research (Chart 2). The latest information further supports this relationship. The current expansion began in 2009, and since then real per capita GDP growth has been 1.3%, less than half the 2.7% average growth in all expansions from 1790 to 1999.

http://www.hoisingtonmgt.com/pdf/HIM2015Q3NP.pdf


Public-private debt hit the magic 275% line in 2000. LFPR has been declining ever since.

Not a coincidence.

Japan is not on the brink of a death spiral at all in relation to bonds. Try again. Japan's problem is they can't get inflation and keep going for stupid like shit raising the sales tax at a time when they desperately need people to spend. They need to encourage spending! They're a sovereign currency issuer, they can always make payments.
What makes you think a sovereign currency issuer with debt denominated in its own currency on a floating exchange/without pegging will ever have trouble crediting the account of a bond holder when it matures?

Second, the greater the debt, the less confidence creditors will have on your ability to repay, which results in their demanding a higher interest rate when lending you money, and then you are caught in another death spiral.

Not a problem for a sovereign currency issuer, where the government controls the interest rates. Bonds aren't even needed to fund spending, and they don't.

Scholarly studies indicate that real per capita GDP growth should slow by about one-quarter to one-third from the long-run trend when the total debt-to-GDP ratio rises into the range between 250% and 275%. Since surpassing this level in the late 1990s, real per capita GDP has grown just 1% per annum, much less than the 1.9% pace from 1790 to 1999.

Private debt is the problem, not public debt. The private sector cannot go on without government deficit spending to help boost it up. Anyways, what study do you pull that from? Debt increases when the economy goes downhill, automatic stabilizers which automatically increase the deficit.
Dude, LFPR is decreasing because people are retiring and more people are going to school, etc..
Anyways, let's throw your claim out the window:
Japan Labor Force Participation Rate | 1953-2016 | Data | Chart | Calendar
And this is at a time when they have a problem encouraging spending/virtually no inflation/etc.. Ain't that something!
The paper you've sent doesn't demonstrate any evidence related to government debt slowing growth, as it ignores the fact that debt increases automatically when the economy goes downhill, and a deficit is needed to boost it up again. And if debt were really so bad, and killed growth, Japan should be under water. Its problems aren't related to its bonds.

 

[Dovahkiin]

Fiat money has nothing physical to back it up. We're not on the gold standard.

Thank God.

So how about you explain how a sovereign currency issuer borrows its own money?

Countries like China lend it to us. Did you not know this? Weird!

Also, the Federal Reserve monetizes the debt (prints money), but the part you deliberately fail to mention in every single topic you have started about money is that same money is destroyed when the Federal Reserve sells the bonds it used to monetize the debt.

They do? We run a trade deficit, which is a part of the reason we're the worlds reserve currency, and china exports products to us, accumulating dollars in their account. They decide they want to earn a bit of interest and purchase bonds. It's essentially like a savings account at a bank. I'm not sure what your point is, the dollars have to come from government spending first before taxation. If the government ran a surplus instead of a net deficit, the private sector would be drained of all dollars.

 

[g5000]

I'd like to hear from somebody from the other side who see's the benefits of economic stimulus and deficit spending...

Economic stimulus and deficit spending are most commonly associated with John Maynard Keynes. But what most people do not realize is that Keynes recommend that policy only during severe economic downturns. They are ignorant of the fact that he also strongly recommended cutting back on government spending and paying down the debt during boom times.

There is a formula for determining how much government spending should be to prevent a recession: GDP = C + I + G + (Ex - Im)

C is total spending by consumers.

I is total spending on goods and services by businesses

G is total spending on goods and services by the government

Ex - Im is net exports (Exports - Imports


During an economic downturn, we might see C and I decline, and so to keep GDP in balance (avoid a recession), we need to increase G. This formula is the basis for stimulus spending.

 

[Dovahkiin]

I'd like to hear from somebody from the other side who see's the benefits of economic stimulus and deficit spending...

Economic stimulus and deficit spending are most commonly associated with John Maynard Keynes. But what most people do not realize is that Keynes recommend that policy only during severe economic downturns. They are ignorant of the fact that he also strongly recommended cutting back on government spending and paying down the debt during boom times.

There is a formula for determining how much government spending should be: GDP = C + I + G + (Ex - Im)

C is total spending by consumers.

I is total spending on goods and services by businesses

G is total spending on goods and services by the government

Ex - Im is net exports (Exports - Imports


During an economic downturn, we might see C and I decline, and so to keep GDP in balance, we need to increase G. This is the basis behind those who argue for stimulus spending.

Keynes also lived during a time when we were on the gold standard and "paying off the debt"/running a surplus would actually be useful. That's no longer the case.
Hell, decreasing G will harm GDP either way, especially when there's no "crowding out" occurring. Have you seen any supply shortages around here?