Q. For Small Government Adherents

[ScienceRocks]

- The OP asked for a cost benefit analysis. That seems to be missing.

If asked, I can articulate very clearly the costs of a balanced budget amendment, and explain logically how destructive it would be.

Is there any argument FOR a balanced budget amendment that is based on anything other than emotion?

Balancing the budget is simple, as any common man has learned to live within his means. That, or spend recklessly and end up broken and on the streets. It's not emotional, it's realistic. How else do you address the spending? Clinton DID IT!

So, perhaps you are familiar with this paper

"Analyzing the Case for a Balanced Budget Amendment"

In it, the economists argue the benefits and drawbacks of a balanced budget amendment. Two of the main benefits of such an amendment are these:

1) A balanced budget amendment likely would inspire the government to increase savings to hedge against future problems in the broader economy.

2) An elimination of the deficit also would reduce the millions of dollars in interest that the government pays on its debt when it runs a deficit.

http://static1.squarespace.com/stat...4aeb9e4e4b088b975e88a0a/1420736996813/bbr.pdf

There are always drawbacks, (tax volatility, crisis management, social services, etc) as you are so easily given to, but you ignore the benefits. The price of success is failure. But you can't keep failing on purpose and hope to succeed.

- I explained in detail in an early post how a balance budget could be achieved, and the damage that would do.

Did you read that post? I have already answered the argument.

You may not be aware of some of the arguments going on among economists now in terms of government budgets (I don't mean that as an insult, it's just that the press and most public representations of ongoing economic arguments are very narrow, and [insultingly, I think], tailored to what writers think the public can understand).

The government is not a household. Period. Arguing that a business can balance its budget, or a household, holds no water - it depends on them being the same sorts of entities to have any logical validity, and they are not.

Let's begin with the basic proposition that a monetarily sovereign government issues its own currency, which the private sector uses.

It issues that currency as a flow of money from itself to the private sector, which is defined as a deficit. That deficit is defined as a private sector surplus. All deficits must be matched by surpluses somewhere.

To argue for a balanced budget is, ultimately, to argue that the private sector should never have a financial surplus - that is, that it should never be able to save without reducing income, that it should never be able to grow, and that it should become a zero-sum game in which the profit of one agent is the loss of another.

So if no balanced budget, then what? How is money managed?

We can balance the budget without cutting a fucking cent out of infrastructure, science, r&d and education. These areas have never caused a cent of DEBT. Clinton didn't cut shit from these areas and balanced the budget in the 1990's!

The military, your fucking wars, welfare and the healthcare system has drained this nation....Learn something or stop whining.

Geez man, how many times have you glued that broken record back together?

Focusing on America is important to me. Doesn't seem to be very important to you...Probably, why you think we can do without paying taxes to maintain our roads. lol

 

[ScienceRocks]

Its a simple matter of income and expenses. That's what it all boils down to. Even a monetarily sovereign government has them. Perhaps the reason we have so many spending problems is because of an over complicated tax system. All you need is a simple way of managing money.

- If you're not intimately familiar with the schools of economics, let me clarify this for you, as labeling becomes an issue.

Classical economics is Adam Smith et seq, leading up to the middle to late 19th century, around the time of Marx, who was probably the last of the classical greats, and was the root of Marxian economics today.

In the late 18th century, the concept of marginal utility was introduced by Jeremy Bentham (at least it's credited to him). It was really formalized in the late 1800s by three economists simultaneously, Jevons, Menger, and Walras. Their thinking inspired the "marginalist revolution", which led to two significant schools of economic thought, one of which still dominates today: the Austrian school (Menger and Jevons), and the neoclassical school (Walras and Jevons).

The next great revolution actually occurred in two schools, and occurred simultaneously. One was the publication of Keynes' general theory, the other was Hayek's development of his theory of prices as information messages, which fundamentally changed Austrian theory (and divided it, I think, as well), but had a wider impact even among those who disagreed with his conclusions.

The Austrians developed a small but devoted following, which continues today. They are better respected by the public than they are among academics, but they have made some important contributions, even though I don't think their current, mostly Rothbardian approach is going anywhere.

Keynes' name was immediately coopted by neoclassicals, who grafted it on to their theory, calling it the neoclassical synthesis. This school is called "old Keynesianism" or neoKeynesianism, and was most popularized by Paul Samuelson, and is where his nephew, Larry Summers, comes from today.

Out of this rose monetarism, which was a brilliant neoclassical critique of the Synthesis, which proved profoundly valid as a critique during the 1970s. This moved many Old Keynesians to adopt a good deal of monetarist thinking, creating what they called the "New Synthesis", or "New Keynesian", or "saltwater" [MIT, near the Atlantic, was the center of this] school (as opposed to Friedman's "freshwater [Great Lakes] school), which includes, today, people like Krugman, Bernanke, and Stiglitz. While the Old Keynesians weren't really Keynesian at all, the New Keynesians are even less.

Amongst this were a number of economists who actually read Keynes and thought he was at least mostly right. They just called themselves Keynesians, but had basically zero impact on policy, although they did offer some well-respected critiques of the neoclassical approach. Eventually they came to call themselves post Keynesians. I work from their tradition. They are a heterodox school, far from the mainstream. We were fortunate to have Bernie Sanders hire one of our own, Stephanie Kelton, as his chief economist. If you follow him, many of his recent proposals show her influence.

No, I'm not familiar with all the schools of economics. I'm not an economist. I don't study economics, primarily for the reason that it is overly complicated and hard to understand.

Perhaps you could simplify your responses for me. I am interested in carrying on this debate with you, but I must admit I am overwhelmed.

Yet, you want to cut, slash and fuck our government and at the end of the day wonder why we're a second rate nation. lol...You can't make this shit up!!! Yet, you don't understand what the fuck you're doing it for???

 

[TemplarKormac]

Focusing on America is important to me.

No it isn't. There's more to America than Science and Infrastructure. You are incapable of seeing a bigger picture here.

 

[Pksimon2007]

To say that government is successful if it taxes as much as it spends is like saying an oil company is successful if it collects as much oil from its customers as it sells to them.

An oil company is successful if oil flows out to its customers, and does not come back.

How does the government fund itself? I see the taxes as a means of income for our government. What else would there be for our government to draw an income from?

Through banking and balance sheet expansion.

I'm going to do this in three longish posts, but there's no really quick way to explain this. First, we have to understand how banks operate, because the federal government is doing something much the same as what banks are doing, but with some important differences.

The first thing to understand is that banks do most of their business with checks or electronic payment advice, and that cash has very little to do with anything. I'm going to ignore cash for the moment. It's a convenience, not a policy variable, and we can add it to our model later and it will change nothing.

Consider first how a bank accepts a deposit from a customer, then services that deposit. This is key to understanding how the federal government creates money.

As you work throughout the week, your employer accrues a debt to you for your wages. He discharges that debt by giving you a paycheck, which is a promise that his bank will provide you with cash.

You choose not to cash your check, but to deposit it in your account. Your bank accepts your deposit, assuming your employer's debt to you. The bank creates a deposit in your name, acknowledging its debt to you. That debt is a bank liability on its balance sheet. Your bank deposit is an IOU in which your bank promises to provide you with cash on demand, or promises to make payments for you if you write checks or use your ATM card (we will focus on this aspect, because it is more relevant).

To you, that bank deposit is money. I mentioned earlier that all money is a liability of the issuer. That's true here. The bank issued your bank deposit, and it is a liability of the bank. That deposit is money to you, but a debt to your bank. This is true of all money (except for a commodity, like gold, which is no longer used as money).

Your bank has an asset, your paycheck, which it must convert into something which it can use so that it can meet its obligations to you. To do that, it has to present your check to your employer's bank and receive an asset which is useful to it. It does that through the payments system. It presents the check to the clearinghouse, and is awarded an asset: a reserve balance in its reserve account at the Fed, which is a liability of the Fed, and now an asset of your bank.

It's important to stop here and talk about what reserves are. Reserves are very misunderstood (so much so that economists predicted that all of the reserves issued by QE would cause inflation, and now wonder why banks aren't "lending them out", but are "parking" them with the Fed). An explanation of reserves will tell you something that every senior banker knows, but which the majority of economists do not. Reserves are key to federal money creation, but they are not the money that the federal government creates.

 

[TemplarKormac]

I'm going to do this in three longish posts, but there's no really quick way to explain this.

Take your time.

 

[Pksimon2007]

To say that government is successful if it taxes as much as it spends is like saying an oil company is successful if it collects as much oil from its customers as it sells to them.

An oil company is successful if oil flows out to its customers, and does not come back.

How does the government fund itself? I see the taxes as a means of income for our government. What else would there be for our government to draw an income from?

Part two: reserves.

The name is perhaps a major source of confusion, because a reserve is conceived of as some sort of backup plan, something set aside in case of an emergency, or the "good stuff in the back room" that only the best customers get.

In accounting, a reserve is an acknowledgement of a contingent liability designed to prevent us from being caught short if that liability arises.

Reserve balances "on deposit at the Fed" don't serve any of those functions: none of them.

If your bank fails, its depositors will never see a dime of "reserves". If a bank gets into trouble, it cannot withdraw "reserves" to pay creditors. A bank cannot lend "reserves" to customers, or buy Wall Street assets with them.

What we oddly call reserves (in this context) are what are called, in most countries, "settlement funds".

All central banks provide or oversee the interbank payments system in their country, which is the system that transfers deposit liabilities from one bank to another when customers write checks or use their ATM cards.

We all use double-entry bookkeeping, so the method for clearing payments between banks is essentially the same in all modern economies.

If there are two banks in a system, each of which cashes checks from the other, then each transaction creates an obligation by one bank to pay the other. If we were very inefficient, we could send a courier from one bank to the other every time a check was deposited, to return the check to the bank on which it was drawn, and to return with a sack of cash in the amount of the check.

If we're thinking a little more efficiently, we can agree to send one courier at the end of each day, with all the checks accepted that day, and we can total up the checks deposited by each bank on the accounts of the other, then compare the totals. We will subtract the smaller amount of checks from the larger, and whichever bank had cashed the smaller amount of checks would owe one "net" amount of money to the other bank. That “deficit” bank can send a courier with a small sack of cash to settle the net amount - even though we may have cashed millions of dollars' worth of each other's checks that day, the net amount owed by the deficit bank to the “surplus” bank might be very, very small.

Now if we're being even MORE efficient, we can agree that each of us would open a checking account at the other's bank - so one bank opens a checking account in the other, and vice versa - rather than having to send our courier with the sack with the net amount of cash every day, we just have the deficit bank create a deposit for the net in the account of the surplus bank. At the end of the next day, if yesterday’s deficit bank is now the surplus bank, it can just reduce the “funds” the other bank has “on deposit” with it. If that bank’s surplus is greater than the balance in the deficit bank’s account, the new deficit bank can simply create a balance in the surplus bank’s account to make things add up.

Notice that each of these banks now has funds “on deposit” with the other bank, but neither bank has actually made a deposit in the other bank. The deficit bank simply creates a deposit “out of thin air!” for the surplus bank as a method to keep score between them.

We are now using these two checking accounts to settle our affairs every day, so no money is actually changing hands between us at all, unless one of us becomes so severely deficit to the other that we agree we probably ought to settle the net in cash. But in the main, neither of us ever expects to withdraw those settlement funds so that we can lend them to anyone, or to do anything else with them. They are simply there as a scorekeeping mechanism so that we can process each others' payments. That’s pretty efficient.

Of course there are always more than two banks, so all banks have to do this with all other banks if they are going to all be able to accept each others’ checks. We could do this - have every bank create an account with every other bank for the purposes of settlement. That's certainly better than having bicycle couriers transferring sacks of checks and sacks of cash every day, but we can still see more obvious efficiencies to be had.

What if we created a banker's bank, and ALL of us opened an account with that bank? Then, rather than each bank having to have an account with every other bank in order to settle payments, it would only need ONE account, with the "central" bank.

Well, this is great! Now what we do is hire a bookkeeper (call him a clearinghouse), and we report every day to him with the number of checks we have received in deposit from accounts drawn on other banks.

We don't even care WHICH banks those checks are drawn on. As long as every bank honestly reports the total value of all checks it has cashed (which they have an incentive to do - they wouldn't under-report, because thry would short themselves, and they wouldn't over-report, because they have to provide the cancelled checks as evidence), then all we have to do is report ONE net number for all our checking transactions. We can tell the clearinghouse how many checks we accepted from all other banks today, and we can tell them how many of our canceled checks we received from all other banks, and - voila! We know instantly what we owe to "all other banks" or what "all other banks" owe to us. It’s just one net number, and it’s a lot smaller than the number of transactions we processed throughout the day.

Once the clearinghouse has a tally of every bank's net, it simply hands the list to the central bank, which begins the merry work of either reducing or increasing the settlement fund account balance of every bank in the system by the amount reported by the clearinghouse. The central bank doesn’t care who owes what to whom. All they care about is the net amount. They aren’t “transferring” a balance from bank “A” to bank “B”, they’re just going down the clearinghouse list and creating one transaction for each bank. Every surplus bank is going to receive settlement funds (or *ahem* “reserves”), and every deficit bank is going to lose them. No money is getting transferred. The central bank is simply creating or reducing deposit balances by following the list the clearinghouse provides – one lump sum addition or subtraction to each bank’s balance. The net result is exactly the same as if every bank had sent a courier with cash every time another bank accepted the deposit of one of their checks. It’s just a LOT more efficient.

There's no reason for any bank, under normal clearing, to exchange anything like cash. Now we can see that what we have done is set up a completely different system of money which has very little to do with the bank deposits of all of those bank customers. Settlement funds aren’t being used to protect depositors, or to pay them, or to make loans. We are only keeping score of the net effect of all transactions between banks. What we're really doing here is creating a sort of "mirror" at the central bank of what's going on at our actual banks. It's essentially a complete, duplicate model of our banking system - like one of those WWII strategy boards, where admirals smoking cigars have lackeys push wooden ship models around a plexiglass sea to keep track of the action in the real theater.

Our system of settlements is the plexiglass sea, and reserves are the wooden ships we push around to keep track of which banks are on the attack, and which are hunkering down for a long night of defense.

This is what reserves are. You can't put wooden ship models into battle, nor can banks lend reserves. They exist to aid in scorekeeping, so that we can create and reduce scores as needed to keep track of what's going on without actually having to send couriers around every bank with sacks of checks and cash.

 

[TemplarKormac]

To say that government is successful if it taxes as much as it spends is like saying an oil company is successful if it collects as much oil from its customers as it sells to them.

An oil company is successful if oil flows out to its customers, and does not come back.

How does the government fund itself? I see the taxes as a means of income for our government. What else would there be for our government to draw an income from?

Through banking and balance sheet expansion.

I'm going to do this in three longish posts, but there's no really quick way to explain this. First, we have to understand how banks operate, because the federal government is doing something much the same as what banks are doing, but with some important differences.

The first thing to understand is that banks do most of their business with checks or electronic payment advice, and that cash has very little to do with anything. I'm going to ignore cash for the moment. It's a convenience, not a policy variable, and we can add it to our model later and it will change nothing.

Consider first how a bank accepts a deposit from a customer, then services that deposit. This is key to understanding how the federal government creates money.

As you work throughout the week, your employer accrues a debt to you for your wages. He discharges that debt by giving you a paycheck, which is a promise that his bank will provide you with cash.

You choose not to cash your check, but to deposit it in your account. Your bank accepts your deposit, assuming your employer's debt to you. The bank creates a deposit in your name, acknowledging its debt to you. That debt is a bank liability on its balance sheet. Your bank deposit is an IOU in which your bank promises to provide you with cash on demand, or promises to make payments for you if you write checks or use your ATM card (we will focus on this aspect, because it is more relevant).

To you, that bank deposit is money. I mentioned earlier that all money is a liability of the issuer. That's true here. The bank issued your bank deposit, and it is a liability of the bank. That deposit is money to you, but a debt to your bank. This is true of all money (except for a commodity, like gold, which is no longer used as money).

Your bank has an asset, your paycheck, which it must convert into something which it can use so that it can meet its obligations to you. To do that, it has to present your check to your employer's bank and receive an asset which is useful to it. It does that through the payments system. It presents the check to the clearinghouse, and is awarded an asset: a reserve balance in its reserve account at the Fed, which is a liability of the Fed, and now an asset of your bank.

It's important to stop here and talk about what reserves are. Reserves are very misunderstood (so much so that economists predicted that all of the reserves issued by QE would cause inflation, and now wonder why banks aren't "lending them out", but are "parking" them with the Fed). An explanation of reserves will tell you something that every senior banker knows, but which the majority of economists do not. Reserves are key to federal money creation, but they are not the money that the federal government creates.

I see, so its basically money that goes full circle, and it thusly benefits all parties involved, right?

 

[Pksimon2007]

To say that government is successful if it taxes as much as it spends is like saying an oil company is successful if it collects as much oil from its customers as it sells to them.

An oil company is successful if oil flows out to its customers, and does not come back.

How does the government fund itself? I see the taxes as a means of income for our government. What else would there be for our government to draw an income from?

- Okay, so now we have a clear picture of how a check is cleared, and what a bank deposit is.

When checks are cleared amongst people in the private sector, it results in no changes to the total quantity of bank deposits (money) in the system, nor in the total quantity of reserves. Their ownership changes, their quantity does not.

But let's change this a little bit.

Rather than your employer giving you a check, what happens when the government gives you a check, and is deficit spending?

The Fed is the government's bank. Sure, the government keeps deposits in an account at the Fed (called the General Fund Account, or the "checking account"), but how does that fit into our scheme of things? Where is the clearinghouse for the Fed? If the deposit is on the books of the Fed (making it a Fed liability) and reserves are issued by the Fed (which are also liabilities of the Fed), then our banking model in which banks have a deposit liability to a customer and a reserve asser which allows them to service it breaks down. The Fed has two liabilities here, and reserves cannot be used to balance the books for a government deposit liability in the same way that your deposit can be balanced by a reserve asset.

So it seems that there is no way to make payments for the government in the same way that you and I issue each other payments by writing checks. There are no reserves to be moves around which are associated with a government bank account. So what do we do?

We have the government issue a check ex nihilo. You receive the check, deposit it, and your bank establishes a deposit balance for you. It looks to the Fed for reserves, and the Fed cannot take reserves from any other checking account and give them to the bank, because there is no other checking account in the banking system on which the check has been drawn. The check is drawn on the Fed itself, and it is up to the Fed to provide your bank with reserves. And it does that, by creating reserves from nothing.

Now we have a new bank deposit balance (in your checking account), which did not exist until the moment you deposited your check. Your bank, at the government's request, just created money for you. We also now have brand new reserves, which did not exist until you deposited your check.

That's how the federal government creates money. Reserves are the wall at which everything stops. When the federal government spends, new reserves are created, which allows a bank to create a new deposit (which is money) for a depositor.

When you pay taxes, the reverse occurs. The Fed receives your check, your bank reduces your bank balance, and the Fed destroys a commensurate amount of reserves. Your money is actually destroyed.

Now Congress passes a budget dictating how much government can spend, and creating a tax structure which will bring it a certain amount in taxes. The Treasury will dutifully spend what it is told to spend, and the Fed will dutifully accommodate that by creating the necessary reserves. The IRS will dutifully collect tax checks and "deposit" them with the Fed - which means your bank will reduce your bank balance, and the Fed will dutifully destroy reserves. Government actually receives nothing. It is not your tax check which enables government to spend, but the Congressional order which tells it to. The Treasury and the Fed will do what Congress tells them to. If Congress says "spend $10 trillion and don't collect any taxes", then the Treasury and the Fed will do exactly that.

 

[Pksimon2007]

To say that government is successful if it taxes as much as it spends is like saying an oil company is successful if it collects as much oil from its customers as it sells to them.

An oil company is successful if oil flows out to its customers, and does not come back.

How does the government fund itself? I see the taxes as a means of income for our government. What else would there be for our government to draw an income from?

Through banking and balance sheet expansion.

I'm going to do this in three longish posts, but there's no really quick way to explain this. First, we have to understand how banks operate, because the federal government is doing something much the same as what banks are doing, but with some important differences.

The first thing to understand is that banks do most of their business with checks or electronic payment advice, and that cash has very little to do with anything. I'm going to ignore cash for the moment. It's a convenience, not a policy variable, and we can add it to our model later and it will change nothing.

Consider first how a bank accepts a deposit from a customer, then services that deposit. This is key to understanding how the federal government creates money.

As you work throughout the week, your employer accrues a debt to you for your wages. He discharges that debt by giving you a paycheck, which is a promise that his bank will provide you with cash.

You choose not to cash your check, but to deposit it in your account. Your bank accepts your deposit, assuming your employer's debt to you. The bank creates a deposit in your name, acknowledging its debt to you. That debt is a bank liability on its balance sheet. Your bank deposit is an IOU in which your bank promises to provide you with cash on demand, or promises to make payments for you if you write checks or use your ATM card (we will focus on this aspect, because it is more relevant).

To you, that bank deposit is money. I mentioned earlier that all money is a liability of the issuer. That's true here. The bank issued your bank deposit, and it is a liability of the bank. That deposit is money to you, but a debt to your bank. This is true of all money (except for a commodity, like gold, which is no longer used as money).

Your bank has an asset, your paycheck, which it must convert into something which it can use so that it can meet its obligations to you. To do that, it has to present your check to your employer's bank and receive an asset which is useful to it. It does that through the payments system. It presents the check to the clearinghouse, and is awarded an asset: a reserve balance in its reserve account at the Fed, which is a liability of the Fed, and now an asset of your bank.

It's important to stop here and talk about what reserves are. Reserves are very misunderstood (so much so that economists predicted that all of the reserves issued by QE would cause inflation, and now wonder why banks aren't "lending them out", but are "parking" them with the Fed). An explanation of reserves will tell you something that every senior banker knows, but which the majority of economists do not. Reserves are key to federal money creation, but they are not the money that the federal government creates.

I see, so its basically money that goes full circle, and it thusly benefits all parties involved, right?

- I don't know if it benefits all involved, but that's the process. It is what it is, I'm not saying it's good or bad.

 

[TemplarKormac]

To say that government is successful if it taxes as much as it spends is like saying an oil company is successful if it collects as much oil from its customers as it sells to them.

An oil company is successful if oil flows out to its customers, and does not come back.

How does the government fund itself? I see the taxes as a means of income for our government. What else would there be for our government to draw an income from?

Through banking and balance sheet expansion.

I'm going to do this in three longish posts, but there's no really quick way to explain this. First, we have to understand how banks operate, because the federal government is doing something much the same as what banks are doing, but with some important differences.

The first thing to understand is that banks do most of their business with checks or electronic payment advice, and that cash has very little to do with anything. I'm going to ignore cash for the moment. It's a convenience, not a policy variable, and we can add it to our model later and it will change nothing.

Consider first how a bank accepts a deposit from a customer, then services that deposit. This is key to understanding how the federal government creates money.

As you work throughout the week, your employer accrues a debt to you for your wages. He discharges that debt by giving you a paycheck, which is a promise that his bank will provide you with cash.

You choose not to cash your check, but to deposit it in your account. Your bank accepts your deposit, assuming your employer's debt to you. The bank creates a deposit in your name, acknowledging its debt to you. That debt is a bank liability on its balance sheet. Your bank deposit is an IOU in which your bank promises to provide you with cash on demand, or promises to make payments for you if you write checks or use your ATM card (we will focus on this aspect, because it is more relevant).

To you, that bank deposit is money. I mentioned earlier that all money is a liability of the issuer. That's true here. The bank issued your bank deposit, and it is a liability of the bank. That deposit is money to you, but a debt to your bank. This is true of all money (except for a commodity, like gold, which is no longer used as money).

Your bank has an asset, your paycheck, which it must convert into something which it can use so that it can meet its obligations to you. To do that, it has to present your check to your employer's bank and receive an asset which is useful to it. It does that through the payments system. It presents the check to the clearinghouse, and is awarded an asset: a reserve balance in its reserve account at the Fed, which is a liability of the Fed, and now an asset of your bank.

It's important to stop here and talk about what reserves are. Reserves are very misunderstood (so much so that economists predicted that all of the reserves issued by QE would cause inflation, and now wonder why banks aren't "lending them out", but are "parking" them with the Fed). An explanation of reserves will tell you something that every senior banker knows, but which the majority of economists do not. Reserves are key to federal money creation, but they are not the money that the federal government creates.

I see, so its basically money that goes full circle, and it thusly benefits all parties involved, right?

- I don't know if it benefits all involved, but that's the process. It is what it is, I'm not saying it's good or bad.

I see

 

[Pksimon2007]

To say that government is successful if it taxes as much as it spends is like saying an oil company is successful if it collects as much oil from its customers as it sells to them.

An oil company is successful if oil flows out to its customers, and does not come back.

How does the government fund itself? I see the taxes as a means of income for our government. What else would there be for our government to draw an income from?

- Let's go one more post, because this will really wrap this up.

Treasury securities. If government doesn't need to tax to spend, it doesn't need to borrow, either. So why does it?

When your bank accepts the deposit of a government check, it gets awarded with an amount of reserves equal to the value of your check.

We know that banks don't need that many reserves - you're not going to spend all your money in one day, and the Fed only requires that it keep 10% of the value of its transaction accounts (checking deposits) in reserve balances.

So 90% of the reserves your bank received for your bank deposit are excess - your bank does not need to keep them, and would like to invest them somewhere that they earn some interest. Since your bank is not allowed to "withdraw" reserves, it really doesn't have any options, unless the Fed will sell them something that pays interest.

The Fed will, indeed, do that. It will sell your bank Treasuries in exchange for reserves, and Treasuries pay interest. Your bank will, of course, buy as many Treasuries as it can, keeping its reserve balance as close to the 10% requirement as possible, in order to earn the most possible interest on reserves.

Why would the Fed do this? Why would the Fed gratuitously sell bonds which obligate the government to pay interest?

The Fed has the mission of controlling inflation (among other things). After decades of experimentation, the Fed decided in the 1980s that the best way to do that was to control interest rates, which they felt operated inversely with inflation.

Their thinking is based on the theory of the term structure, which holds that all interest rates pay the same, no matter what the maturity of the loan. If I lend you money overnight, or over thirty years, I want the same rate of return. That means to get it I have to charge you a higher rate of interest for a longer term loan than for an overnight loan, because my inflation risk is higher.

There ought to be a logical structure of interest rate terms, a curve on which the interest rates for all maturities lie. If the interest rate for 10 year loans were suddenly to become more profitable than for other loans, lenders would start trying to sell more ten-year loans, and that would make the price fall through arbitrage so that all interest rates were again equally profitable.

In other words, if it's possible to control one interest rate, it should really be possible to control them all.

That meant the Fed had to control just one interest rate. The problem is that the Fed is not allowed, by law, to dictate any interest rates. Their solution was to create a market for loans of a certain type where they could control the interest rate by controlling what was bought and sold in the market, and by controlling the currency which was used to buy what was bought and sold.

By requiring banks to keep a certain percentage of the value of their deposits in reserve accounts at the Fed, the Fed realized that it could force banks to borrow reserves from each other, if it could convince banks to leave themselves in positions where they might run short of reserves.

The Fed, by selling interest-bearing Treasuries, is inducing banks to reduce their reserve balances as much as possible. That leaves banks at risk of running short of the reserve requirement, which forces them to borrow reserves from other banks, on an overnight basis.

The Fed, having induced banks into a lending market which it could control, now needed a way to control the interest rate at which banks lent each other reserves - thus, in theory, controlling all interest rates by inducing arbitrage throughout the term structure. The Fed did this by offering Treasuries for sale, or offering to buy Treasuries, almost on a daily basis, to create excesses or shortages of reserves which would change the interest rate that banks charged each other for loans of reserves.

That's the role that Treasuries have played. That's why government has needed to issue them - not because it needs to borrow money, but because it needs its central bank to be able to conduct monetary policy, which largely means controlling interest rates.

In fact, as you can see, Treasuries are issued AFTER spending has taken place in order to sop up the excess reserves created by federal spending, not before spending to enable it.

Two notes. The system is in fact a little more complex than this. Because the federal government does not receive and spend money on an even daily basis, tax days would cause large reductions in reserves which would push interest rates up, and paydays would create large amounts of reserves which would push interest rates down. This is called the "reserve effect". In order to buffer it, the Fed and Treasury coordinate to hold Treasury money balances in commercial banks, in accounts called Treasury Tax and Loan accounts. By depositing tax receipts into TTL accounts, it prevents large reserve drains, which can be eased out over time as the government slowly "deposits" those tax receipts with the Fed over time.

Second, after QE, this whole scheme became largely meaningless. Banks are stuck with tons of excess reserves, because the Fed created a shortage of Treasuries by buying so many of them. Banks no longer borrow reserves, and the fed funds rate is meaningless as it was formerly constructed. The Fed's approach has been to pay banks interest on reserves directly. This creates an opportunity cost for banks to lend out reserves - they won't do so unless they can get more interest than the Fed pays them, so the fed funds rate is established that way. When Yellin talks about raising interest rates, what she will actually do is raise the interest rate she pays banks on their reserves.

So where does that leave Treasuries, since they are no longer needed for borrowing, and no longer needed to control interest rates? It's an open question. Most economists who understand the system still think there will be a policy role for Treasuries in the future (if QE is unwound, for example), but many don't, and see no more need to issue Treasuries.

I think the Fed will continue to issue them, because they serve a role in enabling financial stability. They are a safe and liquid investment, and serve a vital role in money markets. They also help induce international trade - foreign banks are more likely to be happy accepting US dollars (which don't pay interest) if they can swap them for Treasuries (which do). Any privately produced substitute for Treasuries would probably be deeply destabilizing. The 2008 crisis was largely, I think, triggered by something very like this. With high trade deficits, foreign banks were hungry for Treasuries, and there simply weren't enough. The financial markets offered these very highly rated bonds based on collateralized mortgage debt as a substitute, and the rest is history.

 

[Wry Catcher]

I'd rather spend my money helping Americans than nation building around the world.

You'll get no argument from me there. But what the hell, why not demand that people like George Soros and Al Sharpton pay what they owe in taxes? Soros? an estimated 12 BILLION - that's right BILLION. and Al Sharpton nearly 10 MILLION.

Here's a clue. If you or I owed that kind of money - we would be holding down a cell in Leavenworth.

If true, they should. But ... BUT your have no evidence to prove you're not lying. Provide it, or STFU!

Watch, like most of the New Right Wing, this clown will cut and run.

Hey guess what, Randall is right.

George Soros reportedly could face up to 7B tax bill after delaying payment for years Fox News

http://www.nytimes.com/2014/11/19/n...column-region&region=top-news&WT.nav=top-news

And while Randall is off $5 billion and $5.6 million respectively, they both owe tons of back taxes.

And you can shut your mouth.

No. I won't, and you can't make me (even if we stood toe to toe)

Really? Are you threatening me? Notice how you were quiet all that time, then came back like a small child and said

"nuh-uh, you can't make me! Nananana boo boo!"

Quite pathetic. For the sake of your credibility (or what's left of it) you should really heed my advice.

Hardly a threat, but I've never walked in a coward's shoes, so I understand how you might feel threatened. My comment was based on my experience, making arrests of dishonest punks, just like you.

 

[TemplarKormac]

Hardly a threat, but I've never walked in a coward's shoes, so I understand how you might feel threatened. My comment was based on my experience, making arrests of dishonest punks, just like you.

Really? And what law did I violate? More rather, what of your sensibilities did I offend? A coward flouts his past as a law enforcement official in attempts to intimidate other people on a forum.

Your so called "experience" in law enforcement means jackshit here. You'll need more than your badge and sidearm if you want to hold your weight in a debate with me. Pure and simple. Only cowards call other people cowards, and then run when they prove otherwise.

And how am I dishonest, exactly? Did I destroy your argument that badly?

 

[S.J.]

You'll get no argument from me there. But what the hell, why not demand that people like George Soros and Al Sharpton pay what they owe in taxes? Soros? an estimated 12 BILLION - that's right BILLION. and Al Sharpton nearly 10 MILLION.

Here's a clue. If you or I owed that kind of money - we would be holding down a cell in Leavenworth.

If true, they should. But ... BUT your have no evidence to prove you're not lying. Provide it, or STFU!

Watch, like most of the New Right Wing, this clown will cut and run.

Hey guess what, Randall is right.

George Soros reportedly could face up to 7B tax bill after delaying payment for years Fox News

http://www.nytimes.com/2014/11/19/n...column-region&region=top-news&WT.nav=top-news

And while Randall is off $5 billion and $5.6 million respectively, they both owe tons of back taxes.

And you can shut your mouth.

No. I won't, and you can't make me (even if we stood toe to toe)

Really? Are you threatening me? Notice how you were quiet all that time, then came back like a small child and said

"nuh-uh, you can't make me! Nananana boo boo!"

Quite pathetic. For the sake of your credibility (or what's left of it) you should really heed my advice.

Hardly a threat, but I've never walked in a coward's shoes, so I understand how you might feel threatened. My comment was based on my experience, making arrests of dishonest punks, just like you.

Ooh, you're so macho and manly!

 

[The Rabbi]

That is simply incorrect in your claim. Both the Capital Gains and Inheritance Tax come to mind for taxes that aren't regressive.

You are being dishonest in your use of language. I don't support making all taxes regressive, or instituting a regressive tax in place of the income tax. I want no replacement. I just support removing the income tax, which is progressive. These are two different things.

- Capital gains taxes are barely progressive at all, and account for a small amount of the $1.6 trillion you mention - most of which are very much regressive, such as FICA.

It isn't "barely progressive". It is either progressive and rates are based on income like the income tax. Also, you characterization of me "making all taxes regressive" is not only false, but it is dishonest. It implies I am imposing more taxes on those with less income, or imposing a tax on them in place of the income tax, when I am reducing the tax burden on all.

- The top rate is 28%, and is achieved at a low bracket. FICA is flat, with a cap - clearly regressive.

You are absolutely imposing more taxes on those with less income, and advocating a regressive tax regime.

If you disagree, then propose how you would restore the progressivity to the taxes which you removed by removing the income tax.

We both know you won't do that, so let's be frank: it is not me being dishonest here. The lady is protesting too much over there - trying to slide your proposals within the Overton Window so they don't seem as savage as they are.

I don't think you understand what progressive means. The capital gains tax is progressive because it increases based on income level. Just because you don't like the top tax rate doesn't mean it isn't progressive.

But now, you are getting off track. We aren't talking about FICA. No one contended that it wasn't a regressive form of taxation.

I have not advocated adding a single tax on those with less income, or anyone for that matter. I have advocated removing the income tax, which reduces the burden of low income and high income individuals alike.

As I said before, learn to read what I actually write and stop engaging in shrill liberal hyperbole.

- You advocated leaving FICA in place, because you claimed $1.6 trillion in revenue, a majority of which would have to be FICA.

FICA is a regressive tax, so yes, you proposed regressive taxation.

You have not yet answered my question: how would you restore the progressivity you have removed?

As I suggested, we both know the answer: you wouldn't, but want to pretend that you don't want to make taxes regressive, so you evade answering.

In Post 427 you claimed FICA was a flat tax. Now it's a regressive tax. Do you even know what these terms mean?

 

[The Rabbi]

It isn't "barely progressive". It is either progressive and rates are based on income like the income tax. Also, you characterization of me "making all taxes regressive" is not only false, but it is dishonest. It implies I am imposing more taxes on those with less income, or imposing a tax on them in place of the income tax, when I am reducing the tax burden on all.

- The top rate is 28%, and is achieved at a low bracket. FICA is flat, with a cap - clearly regressive.

You are absolutely imposing more taxes on those with less income, and advocating a regressive tax regime.

If you disagree, then propose how you would restore the progressivity to the taxes which you removed by removing the income tax.

We both know you won't do that, so let's be frank: it is not me being dishonest here. The lady is protesting too much over there - trying to slide your proposals within the Overton Window so they don't seem as savage as they are.

I don't think you understand what progressive means. The capital gains tax is progressive because it increases based on income level. Just because you don't like the top tax rate doesn't mean it isn't progressive.

But now, you are getting off track. We aren't talking about FICA. No one contended that it wasn't a regressive form of taxation.

I have not advocated adding a single tax on those with less income, or anyone for that matter. I have advocated removing the income tax, which reduces the burden of low income and high income individuals alike.

As I said before, learn to read what I actually write and stop engaging in shrill liberal hyperbole.

- Now if you want to backtrack and claim you would get rid of FICA as well, then you have to abandon your claim of sufficiency in revenues, and we have a very different problem evident in your proposal.

I never talked about FICA, stop changing the issue.

The issues here are your claim that the income tax is the only progressive tax and that I want to impose more regressive taxes on the poor. You are wrong on both counts.

Look, if you disagree with getting rid of the income tax, that's fine, we can have an argument on the merits of the position. But to keep lying and saying I want to add more taxes on the poor when I clearly state I want to remove the income tax and replace it with nothing is dishonest and I won't have it. That is not a debate.

To debate, you have to counter the argument of your opponent, not ignore his argument and create your own strawman.

There's another aspect that you haven't considered (I find it amazingly rare that anyone does).

Think about the effects of systems of taxation not in relation to each other, but in relation to the null hypothesis - no tax at all.

In such a scenario there is some basic income required for bare survival. Assuming similarity in location, age, and medical condition, that income required is the same or every one.

Let's call that mandatory income, all of which must be spent for the person's survival.

Let's call the remainder of one's income discretionary income (because there is no tax, disposable income is meaningless). This income can be spent, saved, or invested in any way one likes.

It represents your economic freedom.

It also represents the o my income which can be taxed, because taxation of mandatory income result, in extremis, in your death.

So what constitutes "fair"? If we tax 10% of everyone's income, what is the impact?

If your income is the mandatory income, we are literally taxing you to death.

If your income is 10% above the mandatory income, we are taxing 100% of your economic freedom.

If your income is 11 times the mandatory income, we are taxing 19% of your economic freedom.

A flat tax, then, has a disparate income on the liberty of the people it taxes, leaving more liberty to those who earn more, taxing all liberty from those of modest means, and barely impacting tehe liberty of the wealthy.

If you disagree that taxes impact liberty, then the argument of taxation becomes purely utilitarian, and the rhetoric of libertarians and the Tea Party become meaningless sophistry.

The only way to create a system which impacts the liberty which all have earned in equal measure is to Prevatte the bottom so that mandatory income is not taxed at all, and to impose highly progressive income taxes on everyone else.

Money is fungible. You are veering into jargon and incoherence.

 

[Wry Catcher]

Hardly a threat, but I've never walked in a coward's shoes, so I understand how you might feel threatened. My comment was based on my experience, making arrests of dishonest punks, just like you.

Really? And what law did I violate? More rather, what of your sensibilities did I offend? A coward flouts his past as a law enforcement official in attempts to intimidate other people on a forum.

Your so called "experience" in law enforcement means jackshit here. You'll need more than your badge and sidearm if you want to hold your weight in a debate with me. Pure and simple. Only cowards call other people cowards, and then run when they prove otherwise.

And how am I dishonest, exactly? Did I destroy your argument that badly?

Bull Ring - TemplarKormac vs. Wry Catcher on Envy Rhetoric and wealth inequality Page 4 US Message Board - Political Discussion Forum

Dishonest 'cause you are a liar and are exactly like a cowardly punk - a sunday puncher who cuts and runs.

 

[rightwinger]

By small government, conservatives mean a Government that won't help poor people, a government that won't get involved in business practices, a government that doesn't care about the environment

 

[ScienceRocks]

By small government, conservatives mean a Government that won't help poor people, a government that won't get involved in business practices, a government that doesn't care about the environment

A government that won't invest in infrastructure or science. This government would watch China blow pass us in every area just to make a bunch of fools happy about living in the wild west.


Like I said,,you can't have a first world power house without investment. What we had in the 1780's before the current constitution and without a strong banking system = big trouble for the idea of being a leader.

 

[gipper]

By small government, conservatives mean a Government that won't help poor people, a government that won't get involved in business practices, a government that doesn't care about the environment

Must you ALWAYS resort to partisan foolishness?