Economist Stephanie Kelton on The Deficit Myth

[Canard DuJour]

Technical point about printing money: The "money supply" is the total amount of currency, coins, and demand deposits, in the country.

And - crucially - central bank reserves.

Some economists see unused credit card limits as part of the money supply.

If I borrow $100 from a bank, I may walk out with a hundred dollar check, but the depositor whose money I now hold in my hand, still has $100 in their account. If I deposit this in another bank, the money supply just went up by $100. The second bank can now loan a portion of my $100 to another customer, who uses a debit card buy a clock radio from a store that deposits all receipts at the end of the day in a third bank. The original depositor has their money, I have my money, and the clock radio store has their money, and the original $100 in the money supply has almost doubled and no one has seen a piece of legal tender.

Some economics texts still say this, but it's misleading. Banks don't lend out depositors' money at all. They lend money into existence as so-called 'double entries' against borrowers' future income. Nor do deposits constrain lending :

https://www.bankofengland.co.uk/-/m...hash=9A8788FD44A62D8BB927123544205CE476E01654

The arithmetic gets complicated at this time, but the government does not need to print money in order to increase the available amount of money.

Right, and nearly all money in circulation is created by commercial bank lending (albeit under govt license). But only net ("deficit") govt spending creates net private sector financial assets. The money lent into circulation by commercial banks comes with a corresponding debt plus interest. Repayment destroys that money. Without deficit spending by govt, there would be more debt than equity in the private sector.

Hence govt deficits stabilise the economy - contrary to what some vested interests would have us believe.

There is an economic reality which is often glossed over, and that is the simple fact that people with access to large amounts of money are vastly outnumbered by those with very little money. Wealthy people depend upon stability to keep their wealth intact. This stability comes at a cost. It can be bought with castles, moats, and guards, or what is preferable in modern times, insuring that the lives of the less wealthy is tolerable and they feel they have vested interest in maintaining the status quo. When life becomes intolerable and the status quo is not acceptable, there are enough poor people to simply take what they want. This is a very inefficient process, as a tremendous amount of wealth is destroyed in the process.

Yep.

 

[Jokodo]

If unlimited printing of money is no problem - as some appear to say - why not do that and be done with it? Or better yet, why not build up an adequate emergency fund while times are good? Too much money being wasted?

It appears all you have is that it ought to be easy to save when times are good because there must be sufficient gov't waste.

Sounds like very wishful thinking.

Goverments have run surpluses, putting some of their surplus into an emergency fund. It can be done and has been done, at least, in Australia.

And how exactly does thay help to avoid inflation? If the government suddenly releases 500 billion in stashed cash into an economy that isn't producing any more than it did before, by the logic of supply and demand the money will be devalued every bit as much as if it had printed the same amount.

 

[Jokodo]

Unlimited printing makes the money worth zero. We'd wind up reverting to barter.





We're supposed to do something like that. We should run a deficit in bad times and a surplus in good times.

But that's hard. It's easy enough to run a deficit in bad times, but it's hard to get people to agree to cut back in good times.

But we should.

-

I think the notion of an "adequate emergency fund" is smoke and mirrors. When Spain discovered silver in the new world, that gave them an "adequate emergency fund." It was adequate enough to destroy their economy. If you spend too much, you destroy the value of money, regardless of whether the money is hard, regardless of whether you saved the money up in good times, regardless of whether a good fairy gave it to you, regardless of whether there is a "fund."

I agree with most of what you said, but like to add that an emergency fund is only supposed to be tapped when times are hard so as to avoid incurring a huge debt whenever there is a crisis. Which seems like good management.

Well, since tapping an emergency fund (in your own currency) increases the cash in circulation every bit as much as printing money, the expected effect on inflation is the same and you might as well just print money.

The only emergency fund that might be worth saving up for as a nation in control of its currency is one in solid metal or foreign currency.

 

[bilby]

If a fund is called an "emergency response fund" its purpose by definition is to be in place to deal with emergencies whenever they arise.

If a ministry is called "The Ministry of Truth", it's purpose by definition is to tell us the truth, whatever that may be.

 

[Axulus]

Goverments have run surpluses, putting some of their surplus into an emergency fund. It can be done and has been done, at least, in Australia.

And how exactly does thay help to avoid inflation? If the government suddenly releases 500 billion in stashed cash into an economy that isn't producing any more than it did before, by the logic of supply and demand the money will be devalued every bit as much as if it had printed the same amount.

The government would need to be investing its savings, purchasing assets. During good times, this increases business investment which increases the production capacity of the country. Inflation would be mitigated when those assets are sold and the resulting money spent by the government during bad times since the economy is able to produce more output. Additionally, savings can be invested internationally, which will tend to increase exports. During bad times those savings can be cashed in to bring in imports, which is another way to reduce the inflation you are talking about since we are effectively utilizing the output capacity of other countries when we buy imports.

Even if the money is put into a commercial bank account and available for lending during good times, that will also increase business investment to an extent and mitigate inflation in the manner I described.

If the money is simply put in some government run bank account and just sits there, you are right that it wouldn't do much to help avoid inflation when it is later spent.

 

[Canard DuJour]

Goverments have run surpluses, putting some of their surplus into an emergency fund. It can be done and has been done, at least, in Australia.

And how exactly does thay help to avoid inflation? If the government suddenly releases 500 billion in stashed cash into an economy that isn't producing any more than it did before, by the logic of supply and demand the money will be devalued every bit as much as if it had printed the same amount.

The government would need to be investing its savings, [blah blah etc]

What are the government's "savings"?

 

[laughing dog]

Goverments have run surpluses, putting some of their surplus into an emergency fund. It can be done and has been done, at least, in Australia.

And how exactly does thay help to avoid inflation? If the government suddenly releases 500 billion in stashed cash into an economy that isn't producing any more than it did before, by the logic of supply and demand the money will be devalued every bit as much as if it had printed the same amount.

The government would need to be investing its savings, purchasing assets. During good times, this increases business investment which increases the production capacity of the country. Inflation would be mitigated when those assets are sold and the resulting money spent by the government during bad times since the economy is able to produce more output. Additionally, savings can be invested internationally, which will tend to increase exports. During bad times those savings can be cashed in to bring in imports, which is another way to reduce the inflation you are talking about since we are effectively utilizing the output capacity of other countries when we buy imports.

Even if the money is put into a commercial bank account and available for lending during good times, that will also increase business investment to an extent and mitigate inflation in the manner I described.

The federal gov't using a private commercial bank (or banks) for deposits creates an advantage for those banks and opens up an avenue for corruption since those banks now have access to more loanable deposits. Which in turn, means that the supply of money will increase to the extent those deposits are lent. In otherwords, there is a very real risk of inflation from gov't saving.

 

[Wiploc]

If a fund is called an "emergency response fund" its purpose by definition is to be in place to deal with emergencies whenever they arise.

If a ministry is called "The Ministry of Truth", it's purpose by definition is to tell us the truth, whatever that may be.

 

[DBT]

Goverments have run surpluses, putting some of their surplus into an emergency fund. It can be done and has been done, at least, in Australia.

And how exactly does thay help to avoid inflation? If the government suddenly releases 500 billion in stashed cash into an economy that isn't producing any more than it did before, by the logic of supply and demand the money will be devalued every bit as much as if it had printed the same amount.

What happens when the money is just printed and released into the economy? We have people telling us that it isn't a problem. And given our experience with recent stimulus packages - up to a point - it doesn't create a problem to the scale you are alluding to.

 

[DBT]

Goverments have run surpluses, putting some of their surplus into an emergency fund. It can be done and has been done, at least, in Australia.

What makes you think that there will a sufficient balance in an "emergency fund" to deal with a downturn or an emergency?

What would the federal gov't do with those truly surplus funds that would go into an emergency fund? Buying equity is socialism and runs the risk of capital losses. Buying private debt is running the risk of a default.
So, the only viable options are to either sit on cash/deposits or buy the sovereign debt of other nations.

And why would you think that if the US gov't ran persistent surpluses during good times that there wouldn't be successful attempts to reduce taxes/increase spending?

Gov't finance is not analogous to household or personal finance.

Even if there isn't sufficient funds in the emergency fund to deal with the crisis, it mitigates the size of debt at the end of it.
Otherwise why bother to go through the exercise of setting up an emergency fund?

Just more Economic Kabuki Theatre? Smoke and Mirrors to ease the public mind?

 

[laughing dog]

Goverments have run surpluses, putting some of their surplus into an emergency fund. It can be done and has been done, at least, in Australia.

What makes you think that there will a sufficient balance in an "emergency fund" to deal with a downturn or an emergency?

What would the federal gov't do with those truly surplus funds that would go into an emergency fund? Buying equity is socialism and runs the risk of capital losses. Buying private debt is running the risk of a default.
So, the only viable options are to either sit on cash/deposits or buy the sovereign debt of other nations.

And why would you think that if the US gov't ran persistent surpluses during good times that there wouldn't be successful attempts to reduce taxes/increase spending?

Gov't finance is not analogous to household or personal finance.

Even if there isn't sufficient funds in the emergency fund to deal with the crisis, it mitigates the size of debt at the end of it.

No, it basically the shifts the debt to some other entity, since the "savings" have to be parked somewhere. If in a bank, those funds are lent out. Or the US buys debt from the private sector or other countries.

Otherwise why bother to go through the exercise of setting up an emergency fund?

Just more Economic Kabuki Theatre? Smoke and Mirrors to ease the public mind?

That appears to be the appeal of the emergency fund.

 

[Canard DuJour]

Edit : what LD said.

 

[DBT]

So it all comes down to Smoke and Mirrors and Kabuki Theatre....?

 

[J842P]

So it all comes down to Smoke and Mirrors and Kabuki Theatre....?

If that's what you want to call it. Of course, that isn't literally what's going on, that just seems like a value judgement from you, but if you actually want to understand what's going on it isn't "smoke and mirrors". It's just not the same as what people would naively assume. Especially with regards to debt. But there's a lot of "folk economics" that has little to no bearing on actual economics.

 

[laughing dog]

So it all comes down to Smoke and Mirrors and Kabuki Theatre....?

If that is how you wish to misunderstand it, then yes.

 

[Horatio Parker]

So it all comes down to Smoke and Mirrors and Kabuki Theatre....?

As opposed to what? A voice from a burning bush?

 

[DBT]

So it all comes down to Smoke and Mirrors and Kabuki Theatre....?

If that is how you wish to misunderstand it, then yes.

It was sarcasm. The government goes to the trouble of setting up a emergency fund for a reason, a fund that is available to the government to draw on when an emergency arises. The point of the exercise is clearly not just Kabuki theatre or presenting an image for the public.

 

[Wiploc]

Goverments have run surpluses, putting some of their surplus into an emergency fund. It can be done and has been done, at least, in Australia.

And how exactly does [that] help to avoid inflation?

It takes money out of circulation. It reduces demand.

If the government suddenly releases 500 billion in stashed cash into an economy that isn't producing any more than it did before, by the logic of supply and demand the money will be devalued every bit as much as if it had printed the same amount.

Right. When government spends, it doesn't matter whether that money comes from an "emergency fund."

But it is good for the government to run a surplus (spend less than it takes in) during boom times. That cancels out some of the inflation caused by government running at a deficit during bad times.

 

[DBT]

So it all comes down to Smoke and Mirrors and Kabuki Theatre....?

As opposed to what? A voice from a burning bush?

Sarcasm?

 

[Horatio Parker]

So it all comes down to Smoke and Mirrors and Kabuki Theatre....?

As opposed to what? A voice from a burning bush?

Sarcasm?

Only partially. You seem to expect the economy to rest on some bedrock. If the govts promise to accept its currency as payment for taxes and fees is smoke and mirrors, what would you call secure?