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“I give no credibility to those who say a sovereign nation can always issue more debt in their own currency, particularly when there are large voting blocs in society that will oppose inflation, or the fear of higher taxes from additional indebtedness.”
This statement seems overly brash. First, you are leaping directly from debt issuance to inflation, without providing any data supporting this notion (or at least supporting the notion that it would apply to the U.S.’s situation). Of course massive inflation is a form of default – duh! But you provide no rationale as to how massive inflation could possibly manifest within the confines of our current economic reality.
Cullen Roche over at http://pragcap.com has done extensive work on this. A summary of his work on the subject might read like this: ‘Inflation becomes destructive when we spend in excess of productive capacity.’
If you read his arguments, and then conclude that you give him “no credibility”, then your credibility will plummet from my perspective (from a current place of extremely high regard).
Not that David cares but if David gives Cullen Roche credibility then David’s credibility with me will plummet.
From Pragmatic Capitalism (www.pragcap.com) : About MMT
“What gives fiat money its ?value?? What backs these notes we created? What gives them value? Ultimately, these notes represent some amount of output and productivity that can be purchased. The notes in and of themselves have no intrinsic value, but serve as a medium of exchange that allows the citizenry to exchange various goods and services.”
On the surface this seems eminently reasonable. What follows isn?t.
“There is one important fact here that cannot be overlooked, however. In order for the citizenry to transact in my currency (and ultimately pay their taxes) I must spend some amount of currency into existence FIRST. This is important to understand because I must issue notes BEFORE I can tax.”
Actually taxation occurred well before any fiat currency. The tax was taken ?in kind?. This idea that society and government and money and taxation never existed until a fiat currency is a flaw in the MMT concept.
“If my government becomes corrupt, spends well in excess of productive capacity or mismanages the economy then there is an increasing chance of currency collapse (hyperinflation). In essence, this occurs when the citizenry lose faith in the nation?s currency and slowly refuse to transact and produce in that currency. As I?ve previously described, hyperinflation is a very different phenomenon from inflation. Hyperinflation is a disorderly economic progression that leads to complete psychological rejection of the nation?s currency. It is not merely a monetary phenomenon, but a political phenomenon as well. This full blown rejection of state money is, in essence, a collapse in the state.”
Exactly as happened before when governments printed, borrowed and spent with abandon. So when our government prints, borrows and spends currency well in excess of our productive capacity ? as it is now doing and has been doing for decades ? there is clear and obvious inflation as well as a growing probability of hyperinflation.
“The bogey here is inflation which is constantly moving up and down with the amount of money in the system based on my tax rate, spending, borrowing, etc. Thus, government cannot just spend and spend and spend or the extra dollars in the system will chase too few goods and drive up prices. It?s important to understand that government cannot just spend recklessly. This is important so I?ll say it again. This does not give the government the ability to spend and spend and spend. If they spend too much and tax too little they can create mal-investment and inflation.”
This is the internal conflict within MMT: If government mismanages its printing, borrowing and spending it will cause inflation and risk hyperinflation. But government cannot ?run out? of money thus it can spend without constraint.
“Because there is no solvency concern in the USA (as there is in the revenue constrained European nations) the only concern is inflation and with record low inflation rates there is no fear of the deficit resulting in hyperinflation which would be a pseudo form of default.”
It appears that MMT not only requires a well managed government in order for deficit spending not to create inflation or hyperinflation but simultaneously permits that government to spend as necessary to maintain a well functioning economy and all of this is under the umbrella that nothing existed prior to government and fiat money. No wealth, no taxes, no services, nothing until government created ?notes? to spend thus enabling it to tax. The contradictions are disheartening from such brilliant people.
Many fallacies in RedSt8r’s rant. Let’s try to hit a few:
– ?This idea that society and government and money and taxation never existed until a fiat currency is a flaw in the MMT concept.?
Actually, nowhere in the pragcap.com quote that you present does it come close to insinuating that ?society and government and money and taxation never existed until a fiat currency?. All the quote suggests is that in order for citizens to be able to transact in the currency, that currency must first be spent into existence. What the quote does NOT argue is that ?society and government and money and taxation never existed until a fiat currency?. Therefore, that assertion is precisely wrong.
– ?So when our government prints, borrows and spends currency well in excess of our productive capacity ? as it is now doing and has been doing for decades ? there is clear and obvious inflation as well as a growing probability of hyperinflation.?
In this quote, you seem to be insinuating that 1) U.S. borrowing is approaching or even exceeding our productive capacity, and that therefore 2) hyperinflation is a possibility in our current economic reality. This view does not correspond to reality, demonstrated by a few quick numbers. First, the world is facing a legacy of debt outstanding upwards of $50 trillion (public + private), prior to the collapse in asset prices beginning a few years back. This is massively deflationary. Then, compare the U.S. productive capacity of around $13-15 trillion with money supply outstanding of $9-10 trillion and recent quantitative easing of approximately $2 trillion. With so much slack (excess capacity) in the domestic economy, meaningful inflation will be VERY hard to come by ? much less a hyperinflation scenario. Thus it is precisely wrong to suggest that the U.S. gov?t ?prints, borrows and spends currency well in excess of our productive capacity?.