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Ellis Winningham: Finding Cuts to Pay For Federal Spending is Obsolete

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Helsworth
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Post: #1
Ellis Winningham: Finding Cuts to Pay For Federal Spending is Obsolete

Source: http://elliswinningham.net/index.php/201...-obsolete/

The federal government does not “pay for” any federal spending by making cuts to other programs such as NASA, SNAP, or the military. The statement “finding cuts to pay for” errantly implies that the US Government can run out of money, which is a completely impossible condition, because the US Government is the exclusive issuer of US Dollars.

Now, I’ve discussed the gold standard at length over the years, but let’s very briefly review concepts and then relate the “finding cuts to pay for” mythology to our review.

The US Government is always the exclusive issuer of US Dollars. The gold standard didn’t change that reality. What it did do, was restrict federal spending to the supply of gold available. The US Government pegged its US Dollar to gold and agreed to exchange its dollars on demand for gold at the fixed exchange rate. The US Government had to agree to convert its dollars to gold, otherwise the system wouldn’t work. This necessitated keeping a supply of gold on hand in order for the US Government to conduct the exchange.

Because the US Government had to exchange dollars for gold at the fixed exchange rate, this meant that the US Government could run out of gold if there were more US Dollars in circulation that the gold supply could handle. In other words, if there were $500 billion in circulation, but only enough gold on hand to exchange $200 billion, then the US Government faced a very real possibility of running out of gold. In order to avoid such a situation, which would collapse the gold standard, the US Government was forced to conduct its spending in a way that would keep the amount of US Dollars in circulation consistent to the gold supply. There were two ways to do this: Federal taxation and borrowing.

Federal Taxation:

We will assume a gold standard and that there is $500 billion in circulation. The US Government taxes $50 billion out of the economy. That leaves $450 billion in circulation. Good so far? Ok.

Next, the US Government then spends the $50 billion in tax dollars that it collected, thus, injecting them back into circulation. Now, once more, $500 billion is in circulation, because:

$450 billion + $50 billion = $500 billion.

No increase in the amount of currency circulating, and so, the gold reserves are defended.

But what if the US Government wanted to deficit spend; that is, spend more than taxed?

Borrowing:

Again, let us assume a gold standard and that there is $500 billion in circulation. First, the US Government taxes $50 billion out of the economy. That leaves $450 billion in circulation. But, the US Government wants to do some infrastructure work and $50 billion isn’t enough. It must deficit spend while at the same time, defending the gold reserves.

The US Government offers US Treasury bonds for sale and collects another $100 billion. So, the US Government has removed a total of $150 billion, which leaves $350 billion in circulation. The US Government spends the $150 billion in both tax dollars and borrowed dollars back into circulation. Now, once more, $500 billion is in circulation, because:

$350 billion + $150 billion = $500 billion.

No increase in the amount of currency circulating, and so, the gold reserves are defended.

As you can hopefully understand, during the gold standard it was “tax and borrow to defend”. The US Government could always spend, with or without taxation and borrowing, because it was then and still is today the exclusive issuer of US Dollars. But how it did so during the gold standard was called “printing money”.

The concept of printing money to fund federal spending does not exist in a fiat currency regime. It is a gold standard federal spending operation. If the US Government wanted to increase the amount of US Dollars in circulation, it would print dollars and spend them into the economy. Doing so could threaten the gold supply as well as to devalue the dollar.

In the fiat currency regime that we have today, all federal spending is the manufacturing and disbursement of new US Dollars. The federal government spends by crediting bank accounts with its IOU (US Dollars). What this means in layperson’s terms is that the US Government enters a bank account somewhere and types numbers into that account, thus raising the numbers up:

The Checking Account of Bob Behunia:

Current Balance: $1,000

(Now the federal government deposits $500 in Bob’s account by typing the number 500.)

Current Balance: $1,500

End of transaction. No tax dollars are involved in that transaction, because the US Treasury is merely disbursing 500 new US Dollars from the total amount that Congress authorized to be manufactured in that fiscal year.

In today’s fiat system, the currency manufacturing process is both initiated and completed when Congress decides on a budget. Let us assume that Congress authorizes $4 trillion in spending and $2 trillion in taxes this fiscal year. When the President signs off on this budget, the US Dollar manufacturing process is complete. The US Government has now authorized $4 trillion new US Dollars in total to be created and spent, and it has authorized $2 trillion dollars to be destroyed during the fiscal year. Hence, the US Government will run a deficit of $2 trillion, or in other words, of the $4 trillion new US Dollars that it authorized to be created and spend, the US Government will leave exactly $2 trillion of those new dollars in the US economy, thus, increasing the amount of US Dollars in circulation by $2 trillion. The new dollars exist because Congress declared them into existence. The US Treasury is handed instructions to begin disbursing the $4 trillion.

If there is to be deficit spending, Congress demands that the US Treasury issue bonds. That demand does not, in any way, mean that the US Government is “strapped for cash”. There are two operational purposes to treasury bonds in a fiat system:

1.) To conduct monetary policy – Congress will not allow the US Treasury to supply the central bank with bonds directly, so the US Treasury auctions off the bonds to the private sector, and then the Federal Reserve can get ahold of them. This activity is what makes the public think that the US Government is borrowing from the private sector in order to deficit spend. The Federal Reserve obtains the bonds through Open Market Operations and uses them to drain off excess reserves in the banking system when interbank competition for those excess reserves threatens the Fed’s target rate. If the Fed’s target rate is above zero, the target rate must be defended. By replacing liquid reserves with treasury bonds, the Fed halts the competition and maintains control over monetary policy. This is why the Federal Reserve sets the target rate at or near zero prior to conducting QE operations. Since it will be building reserves to excess, by first setting the target rate at or near zero, interbank competition for excess reserves will not threaten the target rate, and the Fed will not need to intervene with treasury bonds.

2.) Interest-bearing savings accounts – US Treasury bonds in a fiat system act as savings accounts, which are maintained at the Federal Reserve. When you purchase a US Treasury bond, the Federal Reserve moves the dollars that you used to purchase them from your bank’s reserve account at the Fed to a securities account at the Fed. Those dollars then sit there, unspent earning interest. At maturity, the Fed simply shifts those dollars in the securities account back to your bank’s reserve account. Interest is paid to you exactly the same way as in our Bob Behunia example. Let us say that you are owed $300 in interest. The US Government enters your bank account, and simply raises the balance in your checking account upward by 300. Interest paid. No federal tax dollars involved. But, why does Congress demand that the US Treasury issue bonds when the government deficit spends?

Because bond markets and corporations demand them. Business entities use US Treasury bonds for risk management. In layperson’s terms, US Treasury bonds are a form of corporate welfare. Bonds do not fund federal spending of any kind, because there is no gold peg that would necessitate bonds to keep the currency in circulation consistent with the gold supply should the US Government want to deficit spend. In other words, US Treasury bonds do not conduct fiscal policy. By simply ordering the Federal Reserve to maintain a zero interest rate policy, the US Government could stop issuing bonds altogether and still deficit spend without inflation or any ill side effects. In a fiat system, the inflation barrier is the real production ability of the economy. The US Government can easily and safely deficit spend, increasing the amount of US Dollars in circulation up to the point of actual full employment (less than 2% unemployment, no hidden unemployment or involuntary underemployment). At maximum output, tax payments will automatically increase and, thus, the federal deficit will automatically decrease. Should the US Government deliberately and persistently increase its deficit spending when a condition of actual full employment exists, then it will be persistently spending beyond the real ability of the US economy to produce goods and services, and inflation will occur.

So, when someone says,

“You tax the rich AND cut the wasteful, bloated, military budget by 50% to pay for those things… There is no need to deficit spend, simply taxing the pig rich and cutting the military budget by 50% will put the budget in the black… When the federal government deficit spends it prints money AND treasury bonds in the same amount. Then we have to pay interest too.”

that person is talking about the gold standard and how federal spending worked in the 1920’s. That person is discussing a by-gone era of flappers, the Brooklyn Dodgers, and a gold standard – none of which exist today. That person claiming that federal taxes fund federal spending and the federal government prints money to fund spending, is akin to that person claiming that Abraham Lincoln is the current President of the United States and that General Lee’s Army of Northern Virginia is preparing to invade Maryland by January 2017.

Simply put, that person is discussing US history.


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02.12.2016 21:37
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yangusbeef
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Post: #2
RE: Ellis Winningham: Finding Cuts to Pay For Federal Spending is Obsolete

Helsworth Wrote:
Source: http://elliswinningham.net/index.php/201...-obsolete/

The federal government does not “pay for” any federal spending by making cuts to other programs such as NASA, SNAP, or the military. The statement “finding cuts to pay for” errantly implies that the US Government can run out of money, which is a completely impossible condition, because the US Government is the exclusive issuer of US Dollars.

Now, I’ve discussed the gold standard at length over the years, but let’s very briefly review concepts and then relate the “finding cuts to pay for” mythology to our review.

The US Government is always the exclusive issuer of US Dollars. The gold standard didn’t change that reality. What it did do, was restrict federal spending to the supply of gold available. The US Government pegged its US Dollar to gold and agreed to exchange its dollars on demand for gold at the fixed exchange rate. The US Government had to agree to convert its dollars to gold, otherwise the system wouldn’t work. This necessitated keeping a supply of gold on hand in order for the US Government to conduct the exchange.

Because the US Government had to exchange dollars for gold at the fixed exchange rate, this meant that the US Government could run out of gold if there were more US Dollars in circulation that the gold supply could handle. In other words, if there were $500 billion in circulation, but only enough gold on hand to exchange $200 billion, then the US Government faced a very real possibility of running out of gold. In order to avoid such a situation, which would collapse the gold standard, the US Government was forced to conduct its spending in a way that would keep the amount of US Dollars in circulation consistent to the gold supply. There were two ways to do this: Federal taxation and borrowing.

Federal Taxation:

We will assume a gold standard and that there is $500 billion in circulation. The US Government taxes $50 billion out of the economy. That leaves $450 billion in circulation. Good so far? Ok.

Next, the US Government then spends the $50 billion in tax dollars that it collected, thus, injecting them back into circulation. Now, once more, $500 billion is in circulation, because:

$450 billion + $50 billion = $500 billion.

No increase in the amount of currency circulating, and so, the gold reserves are defended.

But what if the US Government wanted to deficit spend; that is, spend more than taxed?

Borrowing:

Again, let us assume a gold standard and that there is $500 billion in circulation. First, the US Government taxes $50 billion out of the economy. That leaves $450 billion in circulation. But, the US Government wants to do some infrastructure work and $50 billion isn’t enough. It must deficit spend while at the same time, defending the gold reserves.

The US Government offers US Treasury bonds for sale and collects another $100 billion. So, the US Government has removed a total of $150 billion, which leaves $350 billion in circulation. The US Government spends the $150 billion in both tax dollars and borrowed dollars back into circulation. Now, once more, $500 billion is in circulation, because:

$350 billion + $150 billion = $500 billion.

No increase in the amount of currency circulating, and so, the gold reserves are defended.

As you can hopefully understand, during the gold standard it was “tax and borrow to defend”. The US Government could always spend, with or without taxation and borrowing, because it was then and still is today the exclusive issuer of US Dollars. But how it did so during the gold standard was called “printing money”.

The concept of printing money to fund federal spending does not exist in a fiat currency regime. It is a gold standard federal spending operation. If the US Government wanted to increase the amount of US Dollars in circulation, it would print dollars and spend them into the economy. Doing so could threaten the gold supply as well as to devalue the dollar.

In the fiat currency regime that we have today, all federal spending is the manufacturing and disbursement of new US Dollars. The federal government spends by crediting bank accounts with its IOU (US Dollars). What this means in layperson’s terms is that the US Government enters a bank account somewhere and types numbers into that account, thus raising the numbers up:

The Checking Account of Bob Behunia:

Current Balance: $1,000

(Now the federal government deposits $500 in Bob’s account by typing the number 500.)

Current Balance: $1,500

End of transaction. No tax dollars are involved in that transaction, because the US Treasury is merely disbursing 500 new US Dollars from the total amount that Congress authorized to be manufactured in that fiscal year.

In today’s fiat system, the currency manufacturing process is both initiated and completed when Congress decides on a budget. Let us assume that Congress authorizes $4 trillion in spending and $2 trillion in taxes this fiscal year. When the President signs off on this budget, the US Dollar manufacturing process is complete. The US Government has now authorized $4 trillion new US Dollars in total to be created and spent, and it has authorized $2 trillion dollars to be destroyed during the fiscal year. Hence, the US Government will run a deficit of $2 trillion, or in other words, of the $4 trillion new US Dollars that it authorized to be created and spend, the US Government will leave exactly $2 trillion of those new dollars in the US economy, thus, increasing the amount of US Dollars in circulation by $2 trillion. The new dollars exist because Congress declared them into existence. The US Treasury is handed instructions to begin disbursing the $4 trillion.

If there is to be deficit spending, Congress demands that the US Treasury issue bonds. That demand does not, in any way, mean that the US Government is “strapped for cash”. There are two operational purposes to treasury bonds in a fiat system:

1.) To conduct monetary policy – Congress will not allow the US Treasury to supply the central bank with bonds directly, so the US Treasury auctions off the bonds to the private sector, and then the Federal Reserve can get ahold of them. This activity is what makes the public think that the US Government is borrowing from the private sector in order to deficit spend. The Federal Reserve obtains the bonds through Open Market Operations and uses them to drain off excess reserves in the banking system when interbank competition for those excess reserves threatens the Fed’s target rate. If the Fed’s target rate is above zero, the target rate must be defended. By replacing liquid reserves with treasury bonds, the Fed halts the competition and maintains control over monetary policy. This is why the Federal Reserve sets the target rate at or near zero prior to conducting QE operations. Since it will be building reserves to excess, by first setting the target rate at or near zero, interbank competition for excess reserves will not threaten the target rate, and the Fed will not need to intervene with treasury bonds.

2.) Interest-bearing savings accounts – US Treasury bonds in a fiat system act as savings accounts, which are maintained at the Federal Reserve. When you purchase a US Treasury bond, the Federal Reserve moves the dollars that you used to purchase them from your bank’s reserve account at the Fed to a securities account at the Fed. Those dollars then sit there, unspent earning interest. At maturity, the Fed simply shifts those dollars in the securities account back to your bank’s reserve account. Interest is paid to you exactly the same way as in our Bob Behunia example. Let us say that you are owed $300 in interest. The US Government enters your bank account, and simply raises the balance in your checking account upward by 300. Interest paid. No federal tax dollars involved. But, why does Congress demand that the US Treasury issue bonds when the government deficit spends?

Because bond markets and corporations demand them. Business entities use US Treasury bonds for risk management. In layperson’s terms, US Treasury bonds are a form of corporate welfare. Bonds do not fund federal spending of any kind, because there is no gold peg that would necessitate bonds to keep the currency in circulation consistent with the gold supply should the US Government want to deficit spend. In other words, US Treasury bonds do not conduct fiscal policy. By simply ordering the Federal Reserve to maintain a zero interest rate policy, the US Government could stop issuing bonds altogether and still deficit spend without inflation or any ill side effects. In a fiat system, the inflation barrier is the real production ability of the economy. The US Government can easily and safely deficit spend, increasing the amount of US Dollars in circulation up to the point of actual full employment (less than 2% unemployment, no hidden unemployment or involuntary underemployment). At maximum output, tax payments will automatically increase and, thus, the federal deficit will automatically decrease. Should the US Government deliberately and persistently increase its deficit spending when a condition of actual full employment exists, then it will be persistently spending beyond the real ability of the US economy to produce goods and services, and inflation will occur.

So, when someone says,

“You tax the rich AND cut the wasteful, bloated, military budget by 50% to pay for those things… There is no need to deficit spend, simply taxing the pig rich and cutting the military budget by 50% will put the budget in the black… When the federal government deficit spends it prints money AND treasury bonds in the same amount. Then we have to pay interest too.”

that person is talking about the gold standard and how federal spending worked in the 1920’s. That person is discussing a by-gone era of flappers, the Brooklyn Dodgers, and a gold standard – none of which exist today. That person claiming that federal taxes fund federal spending and the federal government prints money to fund spending, is akin to that person claiming that Abraham Lincoln is the current President of the United States and that General Lee’s Army of Northern Virginia is preparing to invade Maryland by January 2017.

Simply put, that person is discussing US history.


Congress does not authorize all productions of the dollar... Otherwise, the dollar would never be produced. Rather, the BoG creates money by acting as a debtor: essentially purchases the money of creditors in the private sector to service debt. The United States _does not_ print money to pay all debts. The inflation as a result of that would be obscene, and the dollar would quickly devalue due to high supply, collapsing the economy. Most of it is serviced through A) taxation and B) bond sales, of which there are always purchasers because the private sector creates huge amounts of money every year through interest. The rest is indeed serviced through printing money. Hypothetically, for every dollar yearly dollar it receives from the fed, it creates 3 dollars. The gold standard did one thing right: it made the dollar extraordinarily stable in value, because it restricted its creation and trade. But, you are correct in saying the gold standard is unsustainable with a large deficit. Famously, often times the private sector would have to bail the gold standard out in times of stress and panic. At times of large deficit, gold literally flows in droves to foreign countries. Once the reserve amount of gold reaches zero, the gold standard is over. And full employment doesn't mean a budget surplus or balance, that theory has disproven itself many times.

03.12.2016 22:05
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Helsworth
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Post: #3
RE: Ellis Winningham: Finding Cuts to Pay For Federal Spending is Obsolete

When the Fed Gov does debt payments, the FED moves negative numbers from the Gov's savings account to its checking account. The mirror thing happens to the NongGov sector owners of the debt. They see positive numbers moved from their saving accounts at the FED to their checking accounts. Bond issuance is a reserve drain operation. It's part of monetary policy, not fiscal policy. If the US Government would cease issuing T-bills to cover the fiscal deficit, the excess reserves (which enter the economy as a matter of accounting) would put downward pressure on the overnight rate - which could reach the bottom of the corridor (i.e. zero), if the FED doesn't pay any interest on reserves (i.e. on its checking accounts, which it does, and it's a 0.25% figure).
Banks create and destroy money all the time endogenously, that is, by changing numbers on their ledgers. They don't create net financial assets. They don't create HPM (high powered money, aka Gov debt). The banking system doesn't create cash, reserves, or t-bills. The Consolidated Government sector does that (i.e. the Treasury + the CB). The CB can only loan reserves to the system. The Treasury (via the Gov's net fiscal positions) adds or drains net dollars in the system in liquid form (cash & reserves) or less liquid form (t-bills).
In order to sustain the private term structure, the nonGovernment sector requires higher equity (aka higher Gov debt), and or higher money velocity. The system is inherently unstable, particularly when there are no asset side regulations for the banking system and when rent seekers are allowed to depress the real economy with their (needless and unjust) overhead.

As for your concluding remark, you're arguing a straw man. Nobody made such a claim. QTM is bs. The math is solid, but its based on a premise that doesn't correspond to reality. Money velocity is NOT always stable. Output is NOT always capped. Demand is NOT always sufficient to buy all that is offered for sale. If the USA "paid off" its national debt via fiscal surpluses, the economy would face a profound recession, NOT hyperinflation. You would be eroding nongovernment sector equity. If you beef up the balance sheets of low MPC households, the extra money doesn't go out chasing extra output. It just sits there.


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This post was last modified: 05.12.2016 20:37 by Helsworth.

05.12.2016 17:37
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VineFynn
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Post: #4
RE: Ellis Winningham: Finding Cuts to Pay For Federal Spending is Obsolete

Is MMT just reasoning from accounting identities?


I'm leaving and probably never coming back, so thanks for the interesting discussions I guess, dunno why im writing this nobody even irl gives a toss about me anyway
06.12.2016 23:30
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