Greenspan: Deficits are OK

[Vanguard]

I would further suggest a 1% surcharge, increasing 1% per month, as a penalty for any country that runs a trade surplus with the United States.

No, that would be bad. Japan and China both need to run trade surpluses with the US (or someone), so that they can buy oil from the Mideast. The US should raise taxes on people who are making a lot of money from trade and use it to reduce the deficit.

[MrBaggins]

Originally posted by Ned
Well, at least most of us now seem to agree that deficits stimulate the economy and are "good" when the economy is underperforming, when there is excess capacity and when there is underemployment. The worry about the market for treasuries depends on the real interest rate -- interest rate - inflation rate. Since inflation now is near zero, real interest rates for treasuries is pretty good even thoung they are nominally small.

Not entirely true.

There are two different types of inflation... produced and unproduced.

Produced inflation (inflation derived from an overperforming economy) is the government responding to privately stimulated fiancing, by increasing the dollar supply. (Federal reserve banks feeding private banks)

Non-produced inflation (inflation derived from debt) is the government responding to its own need for dollars (printing new money to pay back treasury debt.)

Inflation derived from debt is bad, since it increases prices without the corresponding increases in income (that led to the inflation.)

Also, you need to consider the control that you have over the debt.

Bigger debt equals bigger inflationary engine. You can stop adding to it, but not stop how much inflation that it generates. The way you reduce this is by paying down the debt, relatively.

[Ogie Oglethorpe]

Originally posted by Velociryx
Ahhh, I almost forgot! There are also a whole host of farming programs that pay farmers NOT to grow their cash crop! This stimulates demand for finished goods and services, sure, by putting money in the hands of those who will surely spend a chunk of it on...whatever it is they spend it on....and it also takes perfectly usable land OUT of circulation, decreasing the supply of certain goods (milk and tobacco spring immediately to mind here as being reverse subsidy programs I've read about recently) that could be used for viable agricultural pursuits....but of course, the government makes it more lucrative to just....sit there with a hand out.

Again....there are other, better ways of expanding demand (and thereby increasing production and supply) than this....made even worse by the fact that these programs are financed by debt instruments to begin with!

-=Vel=-

Spot on.

The net effect is the elimination of the small generational to generational farmer. As the small farmer is now incented to not put his land into production for long periods of time, he likewise will sell off machinery and other capital that is no longer needed. Net effect is the destruction of the generation to generation small farmer and the reinforcement of the agro-corporations.

[Imran Siddiqui]

Bigger debt equals bigger inflationary engine. You can stop adding to it, but not stop how much inflation that it generates. The way you reduce this is by paying down the debt, relatively.

Yep. A large debt results in less fiscal independance in the long run, because you can't control the inflation from the debt.

[Kidicious]

Originally posted by MrBaggins
Bigger debt equals bigger inflationary engine. You can stop adding to it, but not stop how much inflation that it generates. The way you reduce this is by paying down the debt, relatively.

No No people. How did you all get on this debt causes inflation so that I don't have to go back.

[MrBaggins]

Government repayment of accumulated interest of treasury issued debt requires increasing the money supply, without generating equivalent value in the economy.

This creates inflation, since every other dollar becomes less valuable, due to the increased money multiplier.

[Kidicious]

Originally posted by MrBaggins
Government repayment of accumulated interest of treasury issued debt requires increasing the money supply, without generating equivalent value in the economy.

This creates inflation, since every other dollar becomes less valuable, due to the increased money multiplier.

The interest is paid each year, unless there is another deficit.

[Kidicious]

It's paid by taxes that is, not just printing money.

[MrBaggins]

Government *spends* the money that it receives in treasury issues... not just holds onto it. Some, but not all of that money comes back, in way of taxes.

The governement has to raise increasing amounts treasury debt to pay for the last lot, where it doesn't come from taxes.

Where the t-bond market dries... they are forced to increase interest rates, to make them more attractive.

[Kidicious]

Originally posted by MrBaggins
Government *spends* the money that it receives in treasury issues... not just holds onto it. Some, but not all of that money comes back, in way of taxes.

The governement has to raise increasing amounts treasury debt to pay for the last lot, where it doesn't come from taxes.

Where the t-bond market dries... they are forced to increase interest rates, to make them more attractive.

That's all correct, but that's not saying that the debt causes inflation, only that the deficits do.

[MrBaggins]

Originally posted by Kidicious


That's all correct, but that's not saying that the debt causes inflation, only that the deficits do.

The money to refund the treasury issued maturities comes from additional issues of treasury bonds, not from taxes. Trillions of dollars worth of bonds each year reach maturity. Taxes can't keep up.

Its actually rare for government to allocate money solely towards funding T-bond payouts. Thus budgetary surplus or deficit isn't relevant. They just don't throw money at the system.

Thats why the deficit has reached $7TN... because government treats T-bonds, bills and notes as a bottomless pit.

The bigger the debt... the bigger the additional interest required to borrow for.

Thats "solved" by printing new money, which is definably inflation.

[Kidicious]

Originally posted by MrBaggins
The money to refund the treasury issued maturities comes from additional issues of treasury bonds, not from taxes. Trillions of dollars worth of bonds each year reach maturity. Taxes can't keep up.

This has no impact on the supply of money as long as other factors haven't changed.

Originally posted by MrBaggins
The bigger the debt... the bigger the additional interest required to borrow for.

Thats "solved" by printing new money, which is definably inflation.

I'm missing something here. How do you get to the point where the money supply increases?

[MrBaggins]

Originally posted by Kidicious
I'm missing something here. How do you get to the point where the money supply increases?

*sighs*

Right now, every day, the government conjures 2 billion dollars out of thin air... It simply prints new money.

Take a peek at the debt clock...

[Kidicious]

Originally posted by MrBaggins


*sighs*

Right now, every day, the government conjures 2 billion dollars out of thin air... It simply prints new money.

Take a peek at the debt clock...

That's the budget deficit. The money is injected into the economy only once.

[MrBaggins]

Its not the "budget deficit". A large proportion is the the financing of treasury maturity... refi's effectively.

Financing treasury maturity isn't in the budget. Currently that is done by refinancing, entirely.

[Kidicious]

Originally posted by MrBaggins
Its not the "budget deficit". A large proportion is the the financing of treasury maturity... refi's effectively.

Financing treasury maturity isn't in the budget. Currently that is done by refinancing, entirely.

Interest on the debt is in the budget.

[MrBaggins]

Originally posted by Kidicious


Interest on the debt is in the budget.

On a reporting basis only.

If you look at the last Treasury daily... at http://fms.treas.gov/dts/04031501.pdf you'll notice the tranactional management of Treasury issues and redemptions (Table III A and B)... not through tax receipts, but through new issues.

The "Net Change in Public Debt Outstanding" *is* the inflationary effect, thats been discussed.

[Ned]

Mr. Baggins, I am not following you. To me, inflation is when the average price of goods and services goes up. This will happen only by demand exceeding supply. If the economy has excess capacity and also has unemployment, demand increases can lead to increased production without inflation. Increasing demand does not always lead to inflation.

The presence of debt has nothing to do with demand. The payment of interest has nothing to do with demand. A steady-state deficit does not increase or decrease demand. It stays the same does it not? If the economy can meet the demand because it has excess capacity, how do deficits cause inflation?

[MrBaggins]

Printing money is inflationary, because it reduces the relative value of each dollar, versus other currencies and/or real goods...

I.E.

Money is essentially a good, so as such is ruled by the axioms of supply and demand. The value of any good is determined by its supply and demand and the supply and demand for other goods in the economy. A price for any good is the amount of money it takes to get that good. Inflation occurs when the price of goods increases; in other words when money becomes less valuable relative to those other goods. This can occur when:


The supply of money goes up.
The supply of other goods goes down.
Demand for money goes down.
Demand for other goods goes up.

The key cause of inflation is increases in the supply of money. Inflation can occur for other reasons. If a natural disaster destroyed stores but left banks intact, we’d expect to see an immediate rise in prices, as goods are now scarce relative to money. These kinds of situations are rare. For the most part inflation is caused when the money supply rises faster than the supply of other goods and services.

Hence the money supply is a critical component in determining inflation. In the case of debt, its non-produced inflation (I.E. demand-pull inflation.)

You're just concentrating on the inverse, which is produced, or cost-push inflation.

[Ned]

Mr. Baggins, the supply of money affects interest rates. Inflation is related to the price of goods and services.

[Kuciwalker]

... which is related to the relative supply of money to that of said goods and services ...

... which is related to the supply of money!

[MrBaggins]

Originally posted by Ned
Mr. Baggins, the supply of money affects interest rates.

Nope.

The inflationary and deflationary effects of changes in the supply of money, often (but not always) lead to interest changes, due to political desire to minimize adverse deflation or inflation.

Inflation is related to the price of goods and services.

Inflation is related to the relative value of goods and services. The US economy runs on a fiat system. The dollar is just another defacto good, involved in that same supply and demand system.

[Ned]

Originally posted by Kucinich
... which is related to the relative supply of money to that of said goods and services ...

... which is related to the supply of money!

The supply of money will not cause inflation if the interest rates are set appropriately.

[Kontiki]

Ned, you'd best learn a little more about economics before getting into this arguement.

Try a Macro- 101 level text - it should cover off how monetary policy and the money supply in general works.

[MrBaggins]

Originally posted by Ned


The supply of money will not cause inflation if the interest rates are set appropriately.

You're confusing composite inflationary effects... with a singular effect. Interest rates changes effect more than just the treasury issued debt. They also effect corporate and personal debt, which has other, different inflationary effects.

The effect of changing treasury debt interest rates, in isolation, only effects demand for treasury issued debt. T-Note, Bill and Bond redemption always cost the government more value than they received. To pay, the government prints more money... I.E. increases the money supply... -> which reduces its value relative to other goods and services.

The public debt is a perpetually inflating system, effecting the dollar-fiat system, unless the government introduces money to directly reduce it.

[Ned]

Originally posted by Kontiki
Ned, you'd best learn a little more about economics before getting into this arguement.

Try a Macro- 101 level text - it should cover off how monetary policy and the money supply in general works.

Thanks, Kontiki. The problem I have with people making statements like this is that they are neither willing to explain or think. They merely instruct and will not tolerate dissent.

Am I wrong?

If I am wrong, I would like a more detailed explanation that simply stating that I am wrong.

I know, for example, that monetary policy alone could not and cannot get Japan out from its more than decade long stagnation. Why? Because interest rates were too high even at zero. In other words, no matter how much Japan wanted to expand it money supply, it could not do so if its interest rates were too high.

So when I say that the the supply of money is affected by the interest rates or that interest rates affect the supply of money, and you say I am wrong, I would like an explanation.

[MrBaggins]

Originally posted by Ned
So when I say that the the supply of money is affected by the interest rates or that interest rates affect the supply of money, and you say I am wrong, I would like an explanation.

Interest rates serve as a control for demand and supply, throughout the economy (private and public interest rates are their own competitive environoment.) In terms of treasury issued debt, interest rates effect the supply of money... that is the supply of money grows by the current interest rate, when a debt is redeemed and subsequently when a new debt is issued (money is printed to fund this, unless the government introduces money into the treasury debt system I.E. pays down the debt.)

Interest rates aren't direct results of inflation... they are policy changes which bankers enact, to counteract inflationary forces.

Interest rate changes also aren't direct controls: they have lag time, because debts mature over a period of time.

[Kontiki]

Well, Ned, MrBaggins is explaining it to you, so I don't feel the need to jump in and restate the same thing.

If you need more help, let's start here: Do you understand the mechanisms of monetary policy - that is, what actually happens behind the scenes that causes the end results?

[Kidicious]

Originally posted by MrBaggins


On a reporting basis only.

If you look at the last Treasury daily... at http://fms.treas.gov/dts/04031501.pdf you'll notice the tranactional management of Treasury issues and redemptions (Table III A and B)... not through tax receipts, but through new issues.

The "Net Change in Public Debt Outstanding" *is* the inflationary effect, thats been discussed.

I don't really get what you're on to, but the "net changte in public debt outstanding" is what is called the deficit. The govt reports that as the deficit, no?

[MrBaggins]

The deficit is the gap between the budgeted expense and the taxation income of the government.

The "Net Change in Public Debt Outstanding" is specific to treasury issued debt and includes both additional revenue AND refinancing of the interest of prior issued debt

The "Net Change in Public Debt Outstanding" (Both the additional revenue and the refinancing) are not covered by taxation... they are covered by increasing the money supply. That is solely inflation. Printing money is inflationary, period.