The Surplus's effect on money supply

Doug Henwood dhenwood at panix.com
Wed Aug 29 13:27:59 PDT 2001


James Baird wrote:


> > When a government taxes, it takes money that would
>> have either have
>> been saved, invested, or consumed by private actors
>> and puts it to
>> its own uses.
>
>No, it doesn't. That's what it seems like, but it
>isn't. When you or I or GM spend money, we have to
>get it from somewhere - either cash under the
>mattress, or a loan, or what have you. When the
>government wants to spend money, it just does it - the
>money doesn't "come from" anywhere.

A government, or its central bank, can create money out of the air. But if it does too much of that - creates money more rapidly than an economy's capacity to deliver goods & services - it creates inflation. Just because right-wingers say this doesn't mean it isn't true.


> Taxation happens
>after the fact - and it ONLY has to happen in order to
>give value to the money the gov. creates (people
>accept government money because they have to pay
>taxes, and money is the only thing the government
>accepts as payment).

This is the Mosler/Bell religion, but I think it's a load of crap. It completely neglects all the private social relations that make money valuable - the claim over labor time, ultimately. Money arises in societies with minimal government, after all. See if your landlord or mortgage banker will accept anything but money.

Take a look at the Monthly Treasury Statement <http://www.fms.treas.gov/mts/index.html>. The USG has income and outgo accounts just like you, me, or GM.


> > But the money is valuable
>> because it represents
>> a claim on goods and services produced by human
>> labor - the money is
>> merely a claim on that real value.
>
>Again, no. Money is valuable because the government
>says it is valuable, and backs it up trough the power
>of taxation.

But there are plenty of examples where governments have said money is valuable and it turned into worthless paper. The government of Zambia says kwacha are valuable, but the banknotes would be almost worthless outside Zambia. Dutch guilders are valuable outside the Netherlands - because you can buy real stuff with it. There's no difference in the two currencies' legal status though.

Gold has long been as good as money, sometimes better. Why? What government accepts tax payments in gold? Why do people run from money in an inflation and buy gold?


> Everyone has to pay taxes, and the
>government only accepts it's own money as payment of
>those taxes. To say that a soverign power needs to
>collect money (which it has issued) from its citizens
>before it can spend it gets it exactly backwards - it
>needs to spend it before it can collect it. Where
>would it come from otherwise? I know that this seems
>like pure semantics - but it's crucial, and it seems
>to me to get to the heart of what Keynes was saying.
>
> It seems
>> completely fanciful to me
>> that you can avoid messy issues of the distribution
>> of wealth and
>> income and the allocation of social resources
>> through dreamy theories
>> like Bell's.
>
>Its not avoiding anything. Taxation still needs to
>happen - "borrowing" still needs to happen - and those
>functions have real and messy effects on the
>distribution of wealth and resources. It's not as if
>the gov. can just spend an infinite amount of money
>without ever taxing anyone.

Why not? It's the government, and I thought its word was what made money valuable. The reason is it can spend an infinite amount of money without taxing anyone is because such money would quickly lose its value - its value ultimately being the amount of human labor it can command.


> But by realizing that
>what's happening when the government spends money is
>fundamentally different from what's happening when any
>other entity spends money, we can begin to really
>assess it's effect on the larger economy.

Well, governments are far bigger than you, me, or GM. They also have monopolies over legal force, can take your property, and put you in jail

Speaking of which, a very interesting point by Martin Wolf, in response to that canard that GM is the x biggest economy in the world, bigger than some major countries <http://www.prospect-magazine.co.uk/highlights/opinions_july_01/>, which segues into an important difference between GM and governments:


>Do corporations dominate the world? To support this claim, Hertz
>cites an analysis which concludes that "51 of the 100 biggest
>economies of the world are now corporations. The sales of GM and
>Ford are greater than the GDP of the whole of sub-Saharan Africa."
>This is gross abuse of statistics. The study measures the size of
>companies by sales. But national economies are measured by GDP.
>Since GDP is a measure of value added, one must compare it with the
>value added of companies, which is the difference between the value
>of their sales and the cost of the inputs they purchase from
>suppliers. Last year the sales of GM were $185bn, the same as
>Denmark's GDP. But the value added of GM was only a fifth of its
>sales. So, this company's "economy" is not the world's 23rd largest
>but 55th, after Ukraine.
>
>But the comparison between corporate and national economies is
>intrinsically absurd. They are as different as apples and
>artichokes. A corporation has to attract the labour and capital it
>employs from competitive markets. Its ability to survive depends on
>the returns it offers to those free to go elsewhere. Countries are
>governed by a coercive territorial power. States tax and regulate,
>companies buy and sell.

From Wolf back to me, then Baird:


> > But this sort of
>> thing can only work in the short term; if it deficit
>> spends forever,
>> it's going to have a debt problem. And, as Jim
>> O'Connor says
>> somewhere, public debt increases capital's power
>> over the state; when
>> you need to borrow new money just to pay off
>> maturing debts, your
>> creditors get to call the tune.
>
>Only if you let them. Again, this fundamentally
>misreads the nature of government "debt". The
>government NEVER (sorry to shout, but it seems
>important and I have no access to italics...) "needs"
>to borrow money. Why would it? If it spends more
>than it retires in taxation, it just increases bank
>reserves.

If its central bank agrees. But you did concede there's a limit on this process, when you said it couldn't spend without taxing forever.

Sorry to shout, but A GOVERNMENT THAT FINANCED ITSELF THROUGH THE PROMISCIOUS PRINTING OF MONEY WOULD RENDER ITS CURRENCY WORTHLESS PRETTY QUICKLY.


> As long as those reserves aren't sloshing
>around the banking system, they have no particular
>inflationary effect, and you can control how much they
>slosh around through regulation of interest rates.
>The selling and buying of bonds, again, is NOT a
>funding operation: it is the means by which the
>government regulates interest rates.

Why was the USG borrowing $250b a year during the Reagan era then?


> This is not to
>say that bondholders don't hold undue power in our
>system, but their power is one of perception (and
>campaign contributions), not of reality.

Unhappy bondholders sell old bonds and refuse to buy new ones, driving up interest rates. That's a very considerable power.


> Say the
>govenment wants to sell some bonds and the bond market
>doesn't want to buy? Again, so what? The government
>doesn't need the money. As long as there is someone
>out there willing to take dollars in exchange for
>goods and services, the government can never "run out
>of money".

The reason that people are willing to take dollars is because they have a reasonable faith that the damn things will be worth something not only tomorrow, but next year.


>Mat says it better than I can :
>
>http://www.levy.org/docs/wrkpap/papers/272.html
>
>Again, I don't want to be overly contentious here, and
>I may come off as having something of a "new convert's
>zeal" problem. But, in my reading about economics in
>general over the last few years, I've always had some
>nagging problems with the whole question of governemnt
>finance and the nature of money. It seemed to be the
>crucial question, but every time someone seemed to get
>near an answer, things just got fogged up (incuding,
>I'm afraid, in your "Wall Street", which I was just
>rereading last night.)

Snake oil usually goes down easily.

Doug



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