Ideal Budget

Kushinator said:

You are confusing cause and effect.

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I've been thinking that a lot of the disagreement here may be related to assigning cause and effect. Which is which? I dunno.

JohnfrmClevelan said:

Isn't the whole specialization of trade thing kind of nullified when you don't have truly free (and more even) trade?

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Free trade is not the same as your notion of more even trade. Free trade is not a zero-sum game.

It would work great if all of those Chinese were buying our high-tech stuff as much as we are buying their low-tech stuff.

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They are.

But too many of our dollars are just sitting there, doing little for our economy. The value of the dollar should be going down, helping our exports, shouldn't it?

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They are investing in U.S. dollar denominated assets, which does a great deal for our economy. Furthermore, the dollar has been decreasing relative to the RMB for a very long time.

mmi said:

I've been thinking that a lot of the disagreement here may be related to assigning cause and effect. Which is which? I dunno.

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I do know that one cannot understand economic growth by observing accounting identities.

Kushinator said:

the dollar has been decreasing relative to the RMB for a very long time.

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But not lately, as yer chart indicates.

Kushinator said:

I do know that one cannot understand economic growth by observing accounting identities.

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Sure, but that doesn't answer the question of what's driving what.

mmi said:

But not lately, as yer chart indicates.

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That has to do with a slowdown in economic activity in China, and much of the world.

Sure, but that doesn't answer the question of what's driving what.

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The same thing that has always driven economic growth, investment based on the speculation of consumed product or services.

Kushinator said:

While i do agree to a degree, we must accept the fact that capitalism will always be plagued by poverty... and more specifically class struggle. While i agree the government can do more to alleviate poverty, it will also have to accept the reality of a diminishing role of free market economics.

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I think that's why we push for a much larger public sector. I'm not willing to let poverty happen just because the private sector doesn't address it very well.

Kushinator said:

The government issues debt for reasons other than financing a deficit. Even during the surplus years, total debt continued to grow. There was a concern at the time by Alan Greenspan.

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Those were some pretty rosy projections he had, which is one of the things MMTers point to when we push federal deficits. He was projecting steady growth on the same trajectory, so much so that we were going to pay down the debt in the next decade and reduce federal liabilities "to a minimum," whatever that is. He thought that we would be using domestic output and assets to pay down govt. liabilities. That didn't last long.

My point is that saved dollars (and dollars that buy U.S. bonds) don't get reinvested. And there are trillions held in bonds, which is essentially dead money, which are the result of trade deficits. Without deficit spending, we are asking domestic investment and output to pay for people and countries to sit on that money.

Kushinator said:

You are confusing cause and effect. Would that ton of investment have even taken place if we were not able to outsource a considerable portion of the inputs? In 1990, an Apple 2gs cost $2500 (1990 dollars) or $4,783.66 in 2016 dollars. Today, a computer 1000x more powerful and functional can be purchased for 1/3 the price. Investment can be just as sensitive to trade as consumption or government.

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Maybe there would have been less, but didn't we essentially end up outsourcing the whole industry in the process, just for cheap labor?

JohnfrmClevelan said:

I think that's why we push for a much larger public sector. I'm not willing to let poverty happen just because the private sector doesn't address it very well.

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While i certainly agree, this is another discussion entirely.

Those were some pretty rosy projections he had, which is one of the things MMTers point to when we push federal deficits. He was projecting steady growth on the same trajectory, so much so that we were going to pay down the debt in the next decade and reduce federal liabilities "to a minimum," whatever that is. He thought that we would be using domestic output and assets to pay down govt. liabilities. That didn't last long.

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Of course not! GWB put a $500 billion fiscal reversal by 2002, in the form of tax cuts and rebates... that did little to stimulate economic growth.

My point is that saved dollars (and dollars that buy U.S. bonds) don't get reinvested. And there are trillions held in bonds, which is essentially dead money, which are the result of trade deficits.

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The proceeds of U.S. bond sales are spent into the real economy.

Without deficit spending, we are asking domestic investment and output to pay for people and countries to sit on that money.

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We also invest in those countries, and have returns that far exceed that of which they receive. China receives less than 1% for a 2 year note. What is the ROI on investment in Chinese assets?

But your comment still is stuck relying on a false premise. It ignores the gains from trade and how they impact both consumption and investment.

Maybe there would have been less, but didn't we essentially end up outsourcing the whole industry in the process, just for cheap labor?

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Do you want to pay $4300 for your laptop? How many less smart phones would be sold if they were, as Trump desires, to be manufactured here in the U.S.? What other production would we forgo, in order to produce a product at a more expensive price.

You are continuing to ignore the gains from trade, and that they benefit (not impede) the U.S. economy.

JohnfrmClevelan said:

My point is that saved dollars (and dollars that buy U.S. bonds) don't get reinvested. And there are trillions held in bonds, which is essentially dead money, which are the result of trade deficits. Without deficit spending, we are asking domestic investment and output to pay for people and countries to sit on that money.

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Kushinator said:

The proceeds of U.S. bond sales are spent into the real economy.

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But this isn't re-investment of existing funds, it is just more deficit spending. The Chinese held a pile of x dollars, and now they hold a pile of x bonds; meanwhile, once the proceeds are deficit-spent into the economy, it is the government's net position that has changed, not China's.

It is easier to see if you imagine the Fed buying those bonds instead of the Chinese - everybody is in the exact same financial position, and it is now clear that the dollars that are spent back into our real economy came from our government increasing it's own liabilities. The only difference is that instead of the Chinese holding bonds, the Fed holds bonds. Our dollars lost to trade deficits really don't come back at all, and they aren't reinvested in our economy.

Now, if you remove deficit spending (past and present) from that example, the funds that end up in China's hands must come from our domestic economy. And those dollars come from active bank loans, so if China, Japan et al sit on, say, $6 trillion of our national debt, then our private sector must be paying interest on $6 trillion in bank loans that aren't doing anything productive. Even the interest is leaving the country. And it never gets "paid off", not unless we start running trade surpluses.

Kushinator said:

You are continuing to ignore the gains from trade, and that they benefit (not impede) the U.S. economy.

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No, I just think they are two distinct issues.

I understand that if we export $3 trillion and import $4 trillion, we are employing more people than if we export $1.5 trillion and import $2.5 trillion. I'm not saying that international trade is not a good thing on balance. But still, in each case, $1 trillion of our national income is leaking out of the economy, and isn't being spent on domestic production. It's still a gap that must be filled. If new investment fills that gap, great, we still grow. But as I said above, $1 trillion is being held outside of our economy, and it isn't doing any good for our economy, and there are maintenance costs related to that money.

JohnfrmClevelan said:

But this isn't re-investment of existing funds, it is just more deficit spending.

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Almost all of the dollars obtained from trading real goods and services to the U.S. are reinvested, either in the form of financing our deficit or purchasing private dollar denominated assets. In the event that the dollars actually leave our economy, it will occur in the form of foreign exchange conversion, which weakens the dollar and strengthens our ability to export.

The Chinese held a pile of x dollars, and now they hold a pile of x bonds; meanwhile, once the proceeds are deficit-spent into the economy, it is the government's net position that has changed, not China's.

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You're still ignoring the reason they have these dollars to begin with, they traded us real goods and services, which of course is a change in China's position. Investment, government, and consumption are all affected by trade.

It is easier to see if you imagine the Fed buying those bonds instead of the Chinese - everybody is in the exact same financial position, and it is now clear that the dollars that are spent back into our real economy came from our government increasing it's own liabilities. The only difference is that instead of the Chinese holding bonds, the Fed holds bonds. Our dollars lost to trade deficits really don't come back at all, and they aren't reinvested in our economy.

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The Fed buys bonds without having to produce goods or services in order to obtain the dollars necessary for their purchase. It isn't easier at all, it is just an instance of misunderstanding. Your entire premise ignores the aspect of trade, and that it occurs due to a mutually beneficial arrangement. When the Fed purchases the bonds, they are in essence monetizing the debt. The situations are entirely different.

Now, if you remove deficit spending (past and present) from that example, the funds that end up in China's hands must come from our domestic economy.

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The funds are traded for the goods! How is this such a difficult concept to understand? You are acting as if we are just sending money to China for nothing.

And those dollars come from active bank loans, so if China, Japan et al sit on, say, $6 trillion of our national debt, then our private sector must be paying interest on $6 trillion in bank loans that aren't doing anything productive. Even the interest is leaving the country. And it never gets "paid off", not unless we start running trade surpluses.

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Trade partners purchasing dollar denominated assets is far from non-productive. As of recently, foreign entities own $31 trillion in U.S. assets, which bear interest and/or return on investment in the form of asset appreciation.

No, I just think they are two distinct issues.

I understand that if we export $3 trillion and import $4 trillion, we are employing more people than if we export $1.5 trillion and import $2.5 trillion. I'm not saying that international trade is not a good thing on balance. But still, in each case, $1 trillion of our national income is leaking out of the economy, and isn't being spent on domestic production. It's still a gap that must be filled. If new investment fills that gap, great, we still grow. But as I said above, $1 trillion is being held outside of our economy, and it isn't doing any good for our economy, and there are maintenance costs related to that money.

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You are entirely missing the point! $1 trillion isn't being held outside our economy, as our economy now has an additional $1 trillion of goods or services, it wouldn't have had, in the absence of trade. This is why you will never be able to understand economic growth via the observation of accounting identities, because it ignores the entire premise of how or why an economy grows to begin with. As stated, for the nth time, all we can really observe given these identities is that the U.S. has a trade deficit due to a low savings rate. We are not discussing something difficult or outside the realm of basic economic language. The U.S. gets goods in exchange for dollars, which are then reinvested in the U.S. economy. Of course, being the reserve currency allows for such a high rate of reinvestment, but there is absolutely no way you can consider our reality a "demand leakage".

Kushinator said:

Almost all of the dollars obtained from trading real goods and services to the U.S. are reinvested, either in the form of financing our deficit or purchasing private dollar denominated assets....

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This is the crux of our disagreement.

The purchase of U.S. bonds doesn't finance anything. It does not enable our government to deficit spend (even Greenspan said this), it only shifts the makeup of govt. liabilities. If the Fed bought those bonds instead of the Chinese, we would still have the Chinese goods and services that we purchased. The only difference would be that the Chinese would be holding dollars instead of bonds. And our government would still be able to deficit spend. That is where the investment is actually coming from - a government deficit. The fact that this is "monetizing the debt" really makes no difference. What has increased in each case are the government's total liabilities.

JohnfrmClevelan said:

This is the crux of our disagreement.

The purchase of U.S. bonds doesn't finance anything. It does not enable our government to deficit spend (even Greenspan said this), it only shifts the makeup of govt. liabilities. If the Fed bought those bonds instead of the Chinese, we would still have the Chinese goods and services that we purchased.

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You are speaking in a hypothetical. In order for the Fed, and not foreign investors, to purchase Treasuries, the Fed would have to purchase these securities far in excess of the neutral market price. In other words, your counter example requires quantitative easing, which is monetary stimulus.

Furthermore, it ignores the instances of other dollar denominated low-risk debt, such as bonds from state and municipal governments, GSE structured credit, etc.... If the Fed eased to the point where foreign purchasing of U.S. Federal debt is zero, it would likely lead to negative yields, asset inflation, and greater magnitudes of foreign exchange volatility.

And this ignores the fact that monetary policy of this magnitude has the ability to severely distort asset prices.

Regardless, the U.S. does trade dollars for goods and services, and foreign entities use the proceeds to reinvest in the U.S..

The only difference would be that the Chinese would be holding dollars instead of bonds. And our government would still be able to deficit spend. That is where the investment is actually coming from - a government deficit. The fact that this is "monetizing the debt" really makes no difference. What has increased in each case are the government's total liabilities.

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It makes considerable difference. The data shows that the U.S. economy can expand when there is a trade deficit in excess of the fiscal deficit, and contract when the fiscal deficit is in excess of the trade deficit. Trying to sell this idea that we can only expand if we run fiscal deficits is bad economics!

I repeat... you cannot understand economic growth by observing accounting identities. This is simply a matter of fact!

Kushinator said:

You are speaking in a hypothetical. In order for the Fed, and not foreign investors, to purchase Treasuries, the Fed would have to purchase these securities far in excess of the neutral market price. In other words, your counter example requires quantitative easing, which is monetary stimulus.

Furthermore, it ignores the instances of other dollar denominated low-risk debt, such as bonds from state and municipal governments, GSE structured credit, etc.... If the Fed eased to the point where foreign purchasing of U.S. Federal debt is zero, it would likely lead to negative yields, asset inflation, and greater magnitudes of foreign exchange volatility.

And this ignores the fact that monetary policy of this magnitude has the ability to severely distort asset prices.

Regardless, the U.S. does trade dollars for goods and services, and foreign entities use the proceeds to reinvest in the U.S..

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You are complicating a simple issue here. The net (monetary) effect of a trade deficit is an increase in U.S. financial assets held by the exporting country. If we run a $500 billion trade deficit with China, then China is holding $500 billion in dollars and/or bonds at the end of the deal. And the net monetary effect of the Chinese buying our bonds (and the subsequent deficit spending) is still an increase in the deficit/debt. Whether it's the Chinese or the Feds buying the bonds, the stimulus comes from deficit spending. I'm not suggesting that the Fed should do this, I'm just trying to illustrate that the spending comes from our government's deficit, not from the Chinese "reinvesting" in our bonds. If you removed our government's deficit spending, what good has this "reinvestment" done for our economy?

Also, the difference in price that you predict is miniscule in comparison with the trade deficit itself.

Kushinator said:

It makes considerable difference. The data shows that the U.S. economy can expand when there is a trade deficit in excess of the fiscal deficit, and contract when the fiscal deficit is in excess of the trade deficit. Trying to sell this idea that we can only expand if we run fiscal deficits is bad economics!

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You misunderstand me. I understand that sufficient investment can overcome the trade deficit, and I also understand (for the same reason) that it is possible to grow without running a fiscal deficit. But it is far more difficult, and in the long run it is not sustainable, for the reasons I previously stated. It is asking the private sector to finance savings, which runs into the trillions.

JohnfrmClevelan said:

Help me understand what you are saying here, Kush - it makes no sense to me that savings is the moving force behind anything. People don't just up and change their savings habits.

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They absolutely do change their savings habits in response to major life events (such as the stock market collapsing in 1929 or in 2008).

Gaea said:

They absolutely do change their savings habits in response to major life events (such as the stock market collapsing in 1929 or in 2008).

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Yeah - in response to other things. That's my point. 1929 and 2008 weren't caused by people changing their saving habits, saving habits were changed by the crashes.

JohnfrmClevelan said:

Yeah - in response to other things. That's my point. 1929 and 2008 weren't caused by people changing their saving habits, saving habits were changed by the crashes.

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Right - but to address your point - "it makes no sense to me that savings is the moving force behind anything":

Whether increased savings caused the recession to begin in 1929 isn't in dispute. It didn't start the recession. HOWEVER, it was directly responsible for the Great Depression as a whole.

The 1929 market crash sent a shockwave through the economy which caused people to dramatically cut spending and increase savings. This resulted in a decline in prices for goods and services - due to lack of demand. This decline in prices caused people to save even more (why buy a new car this year that costs $30,000 if you can get a new model a year from now that only costs $28,000?)

It's a positive feedback loop - and it caused the 1929 recession to devastate the economy for more than a decade.

JohnfrmClevelan said:

You are complicating a simple issue here. The net (monetary) effect of a trade deficit is an increase in U.S. financial assets held by the exporting country. If we run a $500 billion trade deficit with China, then China is holding $500 billion in dollars and/or bonds at the end of the deal. And the net monetary effect of the Chinese buying our bonds (and the subsequent deficit spending) is still an increase in the deficit/debt.

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It is a deficit in terms of the trade balance, as we have purchased more than we have sold. However, we did receive that value in terms of goods and services plus we get the added value, due to being the reserve currency, of reinvestment.

Whether it's the Chinese or the Feds buying the bonds, the stimulus comes from deficit spending. I'm not suggesting that the Fed should do this, I'm just trying to illustrate that the spending comes from our government's deficit, not from the Chinese "reinvesting" in our bonds. If you removed our government's deficit spending, what good has this "reinvestment" done for our economy?

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You are ignoring the actual goods and services we received, and how that has impacted consumption, investment, and government expenditure.

Also, the difference in price that you predict is miniscule in comparison with the trade deficit itself.

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No idea what you're talking about.

You misunderstand me. I understand that sufficient investment can overcome the trade deficit, and I also understand (for the same reason) that it is possible to grow without running a fiscal deficit. But it is far more difficult, and in the long run it is not sustainable, for the reasons I previously stated. It is asking the private sector to finance savings, which runs into the trillions.

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This is false. The trade deficit is in terms of accounting for GDP. We did receive goods, at a price that was beneficial to the purchasers, which allowed us to consume outside of our productive capacity. Trade benefits us via expanding choice and via comparative advantage, where we are now able to produce a better set of goods and services that reflect the productivity of the U.S. worker.

Kushinator said:

It is a deficit in terms of the trade balance, as we have purchased more than we have sold. However, we did receive that value in terms of goods and services plus we get the added value, due to being the reserve currency, of reinvestment.

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OK - let's say we decide to run a balanced budget. We still run a $500 billion trade deficit with China, and they turn around and buy $500 billion of U.S. bonds. Explain how those dollars re-enter our economy without deficit spending.

Kushinator said:

You are ignoring the actual goods and services we received, and how that has impacted consumption, investment, and government expenditure.

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I understand that we got lots of stuff for our $500 billion, trade is good for the economy, etc. But you still have to account for the dollars leaving the economy via savings (that includes China).

Kushinator said:

No idea what you're talking about.

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Just saying that the market forces you were talking about aren't going to account for the whole $500 billion.

Kushinator said:

This is false.

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What is false? That a buildup of savings at our present pace is not sustainable without the government carrying most/all of the liabilities?

Kushinator said:

The trade deficit is in terms of accounting for GDP. We did receive goods, at a price that was beneficial to the purchasers, which allowed us to consume outside of our productive capacity. Trade benefits us via expanding choice and via comparative advantage, where we are now able to produce a better set of goods and services that reflect the productivity of the U.S. worker.

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Yeah, we get great value for our spending. But you still have to account for the flow of dollars. There is no natural equilibrium at work here; trade doesn't balance out as the dollar weakens, and dollars don't flow back in trade. In reality, there is a one-way, net flow of dollars into the hands of savers, both foreign and domestic.

JohnfrmClevelan said:

OK - let's say we decide to run a balanced budget. We still run a $500 billion trade deficit with China

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Let's stop right here. We run a trade deficit... which leaves U.S. consumers with less dollars and more goods. Why are Americans demand so many foreign goods and services?

and they turn around and buy $500 billion of U.S. bonds. Explain how those dollars re-enter our economy without deficit spending.

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They choose to purchase Treasury securities for a variety of reasons... one being minimizing the risk of currency re-balance. Even in the event that they didn't re-invest any of that currency, the U.S. is no worse off due to the affects of mutually beneficial exchange. We received an additional $500 billion in goods or services.

Unless you are arguing that trade is a zero-sum game?

I understand that we got lots of stuff for our $500 billion, trade is good for the economy, etc. But you still have to account for the dollars leaving the economy via savings (that includes China).

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Nothing is leaving the economy, unless dollars are exchanged for foreign currency AND we send the goods right back to the foreign manufacturers.

Just saying that the market forces you were talking about aren't going to account for the whole $500 billion.

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Completely unsupported, especially when we consider that your main source of information is an identity used to calculate the dollar value of domestic production.

What is false? That a buildup of savings at our present pace is not sustainable without the government carrying most/all of the liabilities?

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That a trade deficit is or a budget surplus is a demand leakage. They all impact each-other in ways that are simply not understandable using calculation methods.

Yeah, we get great value for our spending. But you still have to account for the flow of dollars. There is no natural equilibrium at work here; trade doesn't balance out as the dollar weakens, and dollars don't flow back in trade. In reality, there is a one-way, net flow of dollars into the hands of savers, both foreign and domestic.

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The flow of dollars isn't the deterministic factor for economic growth! Consumption and investment drive growth. Dollars do not need to flow back in trade... as i have alluded to on multiple occasions, they allow the U.S. to consume (and invest) beyond our domestic capacity. Paying $1000 for a computer allows greater consumer utility than paying $4000, as this same consumer now has an additional $3000 to consume other goods or services. Additionally, production is allowed to shift to more efficient (advantageous) trajectories.

It is worth noting that in order to maintain this productive advantage, more investment is going to be required going forward. And yes, budget deficits (at this stage) can help in this capacity... if they are applied wisely.

Kushinator said:

Let's stop right here. We run a trade deficit... which leaves U.S. consumers with less dollars and more goods. Why are Americans demand so many foreign goods and services?

They choose to purchase Treasury securities for a variety of reasons... one being minimizing the risk of currency re-balance. Even in the event that they didn't re-invest any of that currency, the U.S. is no worse off due to the affects of mutually beneficial exchange. We received an additional $500 billion in goods or services.

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The answer is that those dollars do not re-enter our economy without deficit spending. The govt. has made an even exchange of liabilities, bonds for dollars. If they choose not to spend those dollars, then they aren't buying anything.

Kushinator said:

Unless you are arguing that trade is a zero-sum game?

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No, I am arguing that the dollars themselves matter. They don't just appear and disappear as we need them for trade. When $500 billion dollars goes to China and $500 billion worth of stuff comes to America, the dollars (and their corresponding liabilities) will still exist long after the stuff is gone. And they will continue to build up, as long as a trade deficit exists. It makes no difference if China holds dollars or U.S. bonds - they are both liabilities to us. The only difference that matters is whether it's the government or the private sector holding (and servicing) those liabilities.

Now, the government can (and does) create liabilities and hold them indefinitely without a problem. But when the private sector creates liabilities, they must either be paid back or serviced indefinitely.

Kushinator said:

Nothing is leaving the economy, unless dollars are exchanged for foreign currency AND we send the goods right back to the foreign manufacturers.

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Yes, financial assets are leaving the economy. We get a lot of stuff for it, but like I explained above, China holds the assets while we hold the liabilities. And that's forever, or until those dollars come back to us via a trade surplus.

You are focusing on the advantages of trade, which are all true. But dollars lost to a trade deficit and saved by the exporter aren't reinvested - you are simply counting on further private sector debt to make up for it.

JohnfrmClevelan said:

The answer is that those dollars do not re-enter our economy without deficit spending.

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So? Can you show me, using data, that economic growth is less when deficit spending doesn't counteract the level of the trade deficit? Of course not! I will show you the opposite.

No, I am arguing that the dollars themselves matter. They don't just appear and disappear as we need them for trade. When $500 billion dollars goes to China and $500 billion worth of stuff comes to America, the dollars (and their corresponding liabilities) will still exist long after the stuff is gone. And they will continue to build up, as long as a trade deficit exists. It makes no difference if China holds dollars or U.S. bonds - they are both liabilities to us. The only difference that matters is whether it's the government or the private sector holding (and servicing) those liabilities.

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It doesn't matter at all, and i will explain to you exactly why... again. When the economy is growing, imports increase, exports increase, and the deficit decreases. When the economy is shrinking, imports decrease, exports decrease, and the deficit increases. The data supports this statement:

Now, the government can (and does) create liabilities and hold them indefinitely without a problem. But when the private sector creates liabilities, they must either be paid back or serviced indefinitely.

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Doesn't matter.

Yes, financial assets are leaving the economy. We get a lot of stuff for it, but like I explained above, China holds the assets while we hold the liabilities. And that's forever, or until those dollars come back to us via a trade surplus.

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Doesn't work that way. I have already shown you this:

You are focusing on the advantages of trade, which are all true. But dollars lost to a trade deficit and saved by the exporter aren't reinvested - you are simply counting on further private sector debt to make up for it.

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I have shown you that they are either reinvested, foreign exchange will re-balance, or yes... the private sector will expand. I have also explained that when the economy behaves in the manner in which you deem beneficial, economic growth declines, and we typically go into recession. Which is one of the valuable tenants of MMT!