Economist Stephanie Kelton on The Deficit Myth

[Horatio Parker]

Including "Without the government wading into the interest rate market, the base rate would be zero. " which is ridiculous.

I don't see what's wrong with that statement. He's not claiming banks would lend at zero.

As for QE, is it not cash for interest bearing assets?

No, it is cash or bank reserves for financial assets which may or may not bear interest.

Ok, so not all QE purchases are interest bearing. But the ones that are are removed from the economy, which is his point.

 

[laughing dog]

I don't see what's wrong with that statement. He's not claiming banks would lend at zero.

So he was simply spouting irrelevancies?

Ok, so not all QE purchases are interest bearing. But the ones that are are removed from the economy, which is his point.

Which has nothing to do with deflationary policy. For example, the bank of Sweden bought US dollars in Sweden. How would that be any more or less deflationary than if they had bought Swedish gov't bonds?

 

[Loren Pechtel]

Deficits do not cause inflation. It's the printing press--when you create money in excess of need you get inflation. When you try to fund it without getting the money from somewhere you run the printing presses fast and the money supply goes up--inflation goes up. You have to keep going ever faster to keep from falling off. Hyperinflation.

I'm at a loss. I don't understand that at all. Maybe you could try to explain it.

If you ran the printing press but didn't run a deficit, how would that create inflation?

What do you mean by "need," "when you create money in excess of need"?

Isn't running a deficit the same as "try[ing] to fund it without getting the money from somewhere"?

Society has a supply of goods & services. For the sake of argument the combined value is $1B in current dollars, the people have $1B in money to buy them. The government wants 10% of this but doesn't want to tax. So they print $100M and go buy goods.

Next round: Now there's $1.1B in money, but still the same $1B in goods. People spend their $1.1B but get only $1B in goods--prices went up 10%. The government still wants 10% of the market, now they have to print $110M to get it.

Next round: $1.21B in money, prices went up another 10% for a total of 21%, the government has to print $121M.

Next round: $1.331B, another 10% for a total of 33%, the government prints $133.1M

Next round: $1.4641B, total of 46%, print $146.41M

Next round: $1.61B, 61%, $161M.

Prices double in only 8 rounds. Note that tax revenue lags, the government takes in less than the tax rate would indicate, thus they need to print even more to compensate.

I talk about "in excess of need" because the economy needs a supply of money. In this case, we had the $1B. Note that in the real world the government's control of the supply of money is limited. The government can decide how much money to print but it has only a limited control on how that is spent--but from the standpoint of inflation it's the number of spending incidents that count, not the number of dollars. The same dollar typically gets spent several times a year.

Note, also, that in times of hyperinflation dollars lose value quickly, people spend them as fast as they can--greatly increasing the rate they move around and thus the money supply. If we go from spending a dollar once a month (because the majority of our bills are monthly) to weekly the money supply goes up 4x--if nothing else changes you get 400% of inflation.

This is why the government normally doesn't try to control the money supply by printing, but by interest rates--when interest is low there is more borrowing and money moves faster. With the housing collapse we saw the government peg this control and it wasn't enough, they responded by in effect using the printing press (electronically, not physical cash) to inject more money into the system. This is a dangerous move because if the economy recovers faster than you can pull the extra back out you'll get inflation.

Debt doesn't do this because debt in effect adds another good to the market--the debt instruments. The government spends the money but pulls it back out with the bonds, the amount of money moving around remains the same and you don't get inflation.

 

[Horatio Parker]

I don't see what's wrong with that statement. He's not claiming banks would lend at zero.

So he was simply spouting irrelevancies?

I believe his point was QE works against the basic rate.

Ok, so not all QE purchases are interest bearing. But the ones that are are removed from the economy, which is his point.

Which has nothing to do with deflationary policy. For example, the bank of Sweden bought US dollars in Sweden. How would that be any more or less deflationary than if they had bought Swedish gov't bonds?

His claim isn't that it's a deflationary policy. If anything it's an expansionary policy. But it's effect and intention aren't consistent. In addition to removing the asset income from the economy, if rates are lower, then treasuries are paying less, IOW the govt is spending less on interest. How is that expansionary?

 

[laughing dog]

I believe his point was QE works against the basic rate.

Ok, so not all QE purchases are interest bearing. But the ones that are are removed from the economy, which is his point.

Which has nothing to do with deflationary policy. For example, the bank of Sweden bought US dollars in Sweden. How would that be any more or less deflationary than if they had bought Swedish gov't bonds?

His claim isn't that it's a deflationary policy. If anything it's an expansionary policy. But it's effect and intention aren't consistent. In addition to removing the asset income from the economy, if rates are lower, then treasuries are paying less, IOW the govt is spending less on interest. How is that expansionary?

The only way QE reduces interest rates is by bidding UP asset prices (i.e. capital gains) which ought to stimulate spending since asset holders are wealthier.

If interest rates for treasuries are lower, then there is more gov't income for spending/less need for gov't borrowing. So the effect on spending is not contractionary.

 

[Horatio Parker]

I believe his point was QE works against the basic rate.



His claim isn't that it's a deflationary policy. If anything it's an expansionary policy. But it's effect and intention aren't consistent. In addition to removing the asset income from the economy, if rates are lower, then treasuries are paying less, IOW the govt is spending less on interest. How is that expansionary?

The only way QE reduces interest rates is by bidding UP asset prices (i.e. capital gains) which ought to stimulate spending since asset holders are wealthier.

How does that lower rates? Is not the expectation that the Fed makes QE purchases to stimulate the economy? Which would tend to lead to higher rates?

I thought rates were low because the system was flooded with reserves.

If interest rates for treasuries are lower, then there is more gov't income for spending/less need for gov't borrowing. So the effect on spending is not contractionary.

If it's spent. If it's not, and total govt spending is reduced, then its contractionary.

 

[Canard DuJour]

Society has a supply of goods & services. For the sake of argument the combined value is $1B in current dollars, the people have $1B in money to buy them. The government wants 10% of this but doesn't want to tax. So they print $100M and go buy goods.

(etc)

Then they shouldn't. Unless there's slack capacity in the economy, it'll cause inflation. No economic theory says otherwise and no hyperinflation has been initiated by thinking otherwise.

 

[laughing dog]

How does that lower rates? Is not the expectation that the Fed makes QE purchases to stimulate the economy? Which would tend to lead to higher rates?

I thought rates were low because the system was flooded with reserves.

Expansionary monetary usually reduces yield rates and interest rates unless it spooks inflationary expectations.

Buying bonds involves bidding the price of the bond up which reduces its yield rate (a rate of return which is a substitute for an interest rate).

If it's spent. If it's not, and total govt spending is reduced, then its contractionary.

Since when is it NOT spent?

 

[bilby]

Society has a supply of goods & services. For the sake of argument the combined value is $1B in current dollars, the people have $1B in money to buy them. The government wants 10% of this but doesn't want to tax. So they print $100M and go buy goods.

(etc)

Then they shouldn't. Unless there's slack capacity in the economy, it'll cause inflation. No economic theory says otherwise and no hyperinflation has been initiated by thinking otherwise.

And there is almost always slack capacity in the economy. So the scenario presented is unrealistic - after adding $100M to the $1B economy in year 1, the assumption that it's still a $1B economy in year 2 is unfounded and vanishingly improbable.

Which we know, because we observe that most of the strongest economies in the world today have significant deficits, and yet are unable to spark inflation despite the best efforts of their central banks.

When observation is at odds with theory, it's not the observation that is wrong.

If there are $1B of goods in the economy, and the government buys $100M of goods with newly minted cash, then the cash inspires industries to make more goods. Inflation is a 'last resort', seen in an economy that cannot increase productivity as fast as the money supply can grow. As long as primary production and imports are not constrained, more money just means a bigger economy. If your primary production crashes, or if you are forced to export goods without payment for them, then you are in trouble - but if neither of these things apply, inflation is not only not inevitable; it might not happen at all.

In the last decade, governments and central banks have struggled to cause any inflation at all. How come thay have been so unsuccessful, if it is so easy to cause inflation by simply printing money?

 

[Wiploc]

Deficits do not cause inflation. It's the printing press--when you create money in excess of need you get inflation. When you try to fund it without getting the money from somewhere you run the printing presses fast and the money supply goes up--inflation goes up. You have to keep going ever faster to keep from falling off. Hyperinflation.

I'm at a loss. I don't understand that at all. Maybe you could try to explain it.

If you ran the printing press but didn't run a deficit, how would that create inflation?

What do you mean by "need," "when you create money in excess of need"?

Isn't running a deficit the same as "try[ing] to fund it without getting the money from somewhere"?

Society has a supply of goods & services. For the sake of argument the combined value is $1B in current dollars, the people have $1B in money to buy them. The government wants 10% of this but doesn't want to tax. So they print $100M and go buy goods.

Next round: Now there's $1.1B in money, but still the same $1B in goods. People spend their $1.1B but get only $1B in goods--prices went up 10%. The government still wants 10% of the market, now they have to print $110M to get it.

Next round: $1.21B in money, prices went up another 10% for a total of 21%, the government has to print $121M.

Next round: $1.331B, another 10% for a total of 33%, the government prints $133.1M

Next round: $1.4641B, total of 46%, print $146.41M

Next round: $1.61B, 61%, $161M.

Prices double in only 8 rounds.

They'd double faster than that, unless people were extraordinarily stupid.

But how is that an example of NOT running a deficit?

 

[Loren Pechtel]

Society has a supply of goods & services. For the sake of argument the combined value is $1B in current dollars, the people have $1B in money to buy them. The government wants 10% of this but doesn't want to tax. So they print $100M and go buy goods.

(etc)

Then they shouldn't. Unless there's slack capacity in the economy, it'll cause inflation. No economic theory says otherwise and no hyperinflation has been initiated by thinking otherwise.

I was showing how the printing press leads to inflation. You're agreeing with me.

 

[Loren Pechtel]

Society has a supply of goods & services. For the sake of argument the combined value is $1B in current dollars, the people have $1B in money to buy them. The government wants 10% of this but doesn't want to tax. So they print $100M and go buy goods.

Next round: Now there's $1.1B in money, but still the same $1B in goods. People spend their $1.1B but get only $1B in goods--prices went up 10%. The government still wants 10% of the market, now they have to print $110M to get it.

Next round: $1.21B in money, prices went up another 10% for a total of 21%, the government has to print $121M.

Next round: $1.331B, another 10% for a total of 33%, the government prints $133.1M

Next round: $1.4641B, total of 46%, print $146.41M

Next round: $1.61B, 61%, $161M.

Prices double in only 8 rounds.

They'd double faster than that, unless people were extraordinarily stupid.

But how is that an example of NOT running a deficit?

See any borrowing in my numbers?

 

[Wiploc]

See any borrowing in my numbers?

So, in your usage, spending more than you take in is not a deficit unless you also borrow money.

Do I have that right?

 

[Canard DuJour]

Society has a supply of goods & services. For the sake of argument the combined value is $1B in current dollars, the people have $1B in money to buy them. The government wants 10% of this but doesn't want to tax. So they print $100M and go buy goods.

(etc)

Then they shouldn't. Unless there's slack capacity in the economy, it'll cause inflation. No economic theory says otherwise and no hyperinflation has been initiated by thinking otherwise.

I was showing how the printing press leads to inflation. You're agreeing with me.

But you're not disagreeing with anything. No one's advocating "the printing press" per your little homily.

 

[Horatio Parker]

How does that lower rates? Is not the expectation that the Fed makes QE purchases to stimulate the economy? Which would tend to lead to higher rates?

I thought rates were low because the system was flooded with reserves.

Expansionary monetary usually reduces yield rates and interest rates unless it spooks inflationary expectations.

Buying bonds involves bidding the price of the bond up which reduces its yield rate (a rate of return which is a substitute for an interest rate).

OK it lowers yields, but the basic rate? Thats usually managed through open market operations. I assume the QE cash negated that need.

 

[Jason Harvestdancer]

Then why did you bring up your "wonderland" definition?

I didn't bring up a "wonderland" definition - you employed one with your "In the 20th Century, the US government "defaulted" twice.'' claim.

Can you identify the two defaults?

 

[laughing dog]

Then why did you bring up your "wonderland" definition?

I didn't bring up a "wonderland" definition - you employed one with your "In the 20th Century, the US government "defaulted" twice.'' claim.

Can you identify the two defaults?

I believe I can identify the two instances you think are defaults.

 

[Loren Pechtel]

See any borrowing in my numbers?

So, in your usage, spending more than you take in is not a deficit unless you also borrow money.

Do I have that right?

Borrowing and the printing press are two completely different means of obtaining money. You have to repay borrowing, there's nothing to repay with the printing press.

 

[Wiploc]

See any borrowing in my numbers?

So, in your usage, spending more than you take in is not a deficit unless you also borrow money.

Do I have that right?

Borrowing and the printing press are two completely different means of obtaining money. You have to repay borrowing, there's nothing to repay with the printing press.

I notice that you didn't answer my question.

 

[bilby]

See any borrowing in my numbers?

So, in your usage, spending more than you take in is not a deficit unless you also borrow money.

Do I have that right?

Borrowing and the printing press are two completely different means of obtaining money. You have to repay borrowing, there's nothing to repay with the printing press.

They are NOT different in any important way IF YOU ARE A CURRENCY ISSUING GOVERNMENT.

If the US government owes someone US dollars, then they could repay that debt at any time, by simply printing dollars.

Or they could just print dollars to begin with, and skip the accounting convention of referring to it as a debt.

There's really no difference at all. Debt is money. Money is debt. Governments can never be unable to pay a debt denominated in the currency that they issue.

This is completely unlike the way money works for non-currency issuing entities; Every understanding you have of how borrowing works, based on your own experience, is valueless in this situation (unless you have experience working for a reserve bank or national treasury).

Government debts are not like household debts. Government debts are not like corporate debts. Government debts are not like personal debts.