Our financial system is crumbling this week.

[longhornbaseball]

Longhorn,

How should the US government fund itself?

The federal government doesn't need to fund itself. As the monopoly issuer of a currency with a floating exchange rate, the government is never constrained in its spending by revenue. It is impossible for the government to run out of money, which is what is implied by the need to "fund" itself. Dollars are endogenous to the United States. The government spends money by crediting reserve accounts at the Federal Reserve, and it taxes by debiting them. Bond auctions serve as a way to manipulate reserves and control the fed funds rate.

This is a complex topic that seems counterintuitive, but if you think about it, it makes sense logically. For a simple explanation of how the government spends money see here, and for a more technical explanation see here. Once you understand this, you understand how silly the arguments of whether or not the government can spend money are. The political debates surrounding government spending shouldn't be centered on budget deficits and whether we can afford things. Rather, they should be centered on how we are spending money and, whether our spending is resulting in positive social benefits.

[Hungary Jack]

Longhorn,

How should the US government fund itself?

The federal government doesn't need to fund itself. As the monopoly issuer of a currency with a floating exchange rate, the government is never constrained in its spending by revenue. It is impossible for the government to run out of money, which is what is implied by the need to "fund" itself. Dollars are endogenous to the United States. The government spends money by crediting reserve accounts at the Federal Reserve, and it taxes by debiting them. Bond auctions serve as a way to manipulate reserves and control the fed funds rate.

This is a complex topic that seems counterintuitive, but if you think about it, it makes sense logically. For a simple explanation of how the government spends money see here, and for a more technical explanation see here. Once you understand this, you understand how silly the arguments of whether or not the government can spend money are. The political debates surrounding government spending shouldn't be centered on budget deficits and whether we can afford things. Rather, they should be centered on how we are spending money and, whether our spending is resulting in positive social benefits.

That's Monopoly money Longhorn. I get the concept, but the dollars are used to buy things, and unchecked liquidity is inflationary in the long run. I know that inflation is in check with high unemployment, depressed demand, excess capacity, competition, etc., but you are basically prescribing a recipe for the Weimar Republic.

The currency needs to reflect the desirability and productivity of the assets in your economy. It does not have to be a gold standard, but should be in line with the demand for the things in your economy that its citizens are foreigners want to buy.

[Hungary Jack]

Longhorn,

How should the US government fund itself?

The federal government doesn't need to fund itself. As the monopoly issuer of a currency with a floating exchange rate, the government is never constrained in its spending by revenue. It is impossible for the government to run out of money, which is what is implied by the need to "fund" itself. Dollars are endogenous to the United States. The government spends money by crediting reserve accounts at the Federal Reserve, and it taxes by debiting them. Bond auctions serve as a way to manipulate reserves and control the fed funds rate.

This is a complex topic that seems counterintuitive, but if you think about it, it makes sense logically. For a simple explanation of how the government spends money see here, and for a more technical explanation see here. Once you understand this, you understand how silly the arguments of whether or not the government can spend money are. The political debates surrounding government spending shouldn't be centered on budget deficits and whether we can afford things. Rather, they should be centered on how we are spending money and, whether our spending is resulting in positive social benefits.

That's Monopoly money Longhorn. I get the concept, but the dollars are used to buy things, and unchecked liquidity is inflationary in the long run. I know that inflation is in check with high unemployment, depressed demand, excess capacity, competition, etc., but you are basically prescribing a recipe for the Weimar Republic.

The currency needs to reflect the desirability and productivity of the assets in your economy. It does not have to be a gold standard, but should be in line with the demand for the things in your economy that its citizens are foreigners want to buy.

[longhornbaseball]

That's Monopoly money Longhorn. I get the concept, but the dollars are used to buy things, and unchecked liquidity is inflationary in the long run. I know that inflation is in check with high unemployment, depressed demand, excess capacity, competition, etc., but you are basically prescribing a recipe for the Weimar Republic.

No, no, no, no, no, no, no. I'm not saying there should be no taxes (though I am saying there should be no payroll taxes, as they are simply income taxes in disguise and are regressive). I'm saying federal taxes don't actually "fund" anything.

The currency needs to reflect the desirability and productivity of the assets in your economy. It does not have to be a gold standard, but should be in line with the demand for the things in your economy that its citizens are foreigners want to buy.

I agree with this exactly. The government regulates aggregate demand through its spending and taxing. If we spend in excess of our productive capacity, we get inflation. But the government never needs to tax in order to spend, and it can never default on its debts. Once again, the political debates surrounding government spending shouldn't be centered on budget deficits and whether we can afford things. Rather, they should be centered on how we are spending money, and whether our spending is resulting in positive social benefits.

Sectoral financial balances show us that the government always needs to run a deficit in order for the private sector to net save (unless you run a sufficiently large current account surplus), but the size of this deficit should be dependent on a number of factors. Spending optimization is what needs to be debated, not BS solvency risk.

[Hungary Jack]

Sectoral financial balances show us that the government always needs to run a deficit in order for the private sector to net save (unless you run a sufficiently large current account surplus), but the size of this deficit should be dependent on a number of factors. Spending optimization is what needs to be debated, not BS solvency risk.

How does one explain massive consumer debt and public debt (at all levels) through sector balances? The obvious answer is burrowing from abroad. Those debts have to be repaid, which means less money for domestic consumption or investment.

I agree that solvency is a false issue right now. Liquidity is plentiful. But continued borrowing at high levels almost guarantee future tax increases, taking money out of consumer pockets.

[greenback44]

Sectoral financial balances show us that the government always needs to run a deficit in order for the private sector to net save (unless you run a sufficiently large current account surplus), but the size of this deficit should be dependent on a number of factors. Spending optimization is what needs to be debated, not BS solvency risk.

How does one explain massive consumer debt and public debt (at all levels) through sector balances? The obvious answer is burrowing from abroad. Those debts have to be repaid, which means less money for domestic consumption or investment.

I agree that solvency is a false issue right now. Liquidity is plentiful. But continued borrowing at high levels almost guarantee future tax increases, taking money out of consumer pockets.

One of the things that amazes me is how much focus has been placed on government debt and how little focus has been placed on the trade deficit, which is really what you're talking about here.

Tariffs were a common response during the Great Depression, and I remember a lot of ugly anti-Japanese news clips during the previous Great Recession of the early 80's. Nothing like that now that I can see. I don't know if this change represents a good thing (end of nationalism?) or a bad thing (elites exploiting labor arbitrage?). Probably something of both.

[cards2468]

Sectoral financial balances show us that the government always needs to run a deficit in order for the private sector to net save (unless you run a sufficiently large current account surplus), but the size of this deficit should be dependent on a number of factors. Spending optimization is what needs to be debated, not BS solvency risk.

How does one explain massive consumer debt and public debt (at all levels) through sector balances? The obvious answer is burrowing from abroad. Those debts have to be repaid, which means less money for domestic consumption or investment.

I agree that solvency is a false issue right now. Liquidity is plentiful. But continued borrowing at high levels almost guarantee future tax increases, taking money out of consumer pockets.

One of the things that amazes me is how much focus has been placed on government debt and how little focus has been placed on the trade deficit, which is really what you're talking about here.

Tariffs were a common response during the Great Depression, and I remember a lot of ugly anti-Japanese news clips during the previous Great Recession of the early 80's. Nothing like that now that I can see. I don't know if this change represents a good thing (end of nationalism?) or a bad thing (elites exploiting labor arbitrage?). Probably something of both.

Bingo. You can cut spending all you want, you can increase taxes all you want, but if we can't fix the trade defecit, we're going no where. This is why we need to seriously look at cutting corporate taxes (replace it with income tax or something of that variety) and raise tariffs. It's not about nationalism, but rather ending the trend of our nation moving towards being a service economy when we have great abilities to produce products.

[cpebbles]

Every time I flip past C-SPAN while they're broadcasting some conservative event I find something new and puzzling about the Republican party, but I was still surprised to see an auditorium full of them applauding Hank Paulson (It's still airing right now). What exactly did he do to earn their applause? He eased the requirements for net capital that led to the bailouts, he lied about the mounting crisis until everyone stopped believing him, and then he spearheaded the billions in bailouts of almost everyone who made the crisis happen, even forcing some of them to take the bailout money. That is the sum of his career in the public sector. I'm sure there were a couple of people who personally benefited from his actions, but conservatives and liberals alike have ideological grounds to spit on the man, not cheer him. Did the attendees look any further than that he served under a Republican president?

[Hungary Jack]

Hank saved the bankers from themselves. He deserves a Nobel prize, Knighthood, and an audience with the Dalai Lama.

[vinsanity]

Cool Buffet Op-Ed in NYT

My Favorite Parts:

Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.

Since 1992, the I.R.S. has compiled data from the returns of the 400 Americans reporting the largest income. In 1992, the top 400 had aggregate taxable income of $16.9 billion and paid federal taxes of 29.2 percent on that sum. In 2008, the aggregate income of the highest 400 had soared to $90.9 billion — a staggering $227.4 million on average — but the rate paid had fallen to 21.5 percent.

Along with the second clip, apparently there's a school of thought that low taxes actually discourage investment in a business. Business will lay people off and take a 'short term' position and make as much money as possible while taxes are low for fear they will be higher in the future. If you have higher rates business will take a longer term view and invest in more R&D and developing quality employees to make sure you have sustainable success and growth vs making a quick buck.