I want to tip my hat to Prophet again,

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Reese99
Posts: 142
Joined: Tue Jul 20, 2010 3:26 pm

Re: I want to tip my hat to Prophet again,

Post by Reese99 »

Hi Flight23,

I don't mean to sound too contrarian, as I do agree with a lot of what you're saying. We definitely need to look at the tax structure that perpetuates the 'rich get richer' meme to the degree that it currently does (I don't have a problem with the rich getting richer, but to your point, I think the tax system is excessively generous at ensuring that the ultra-rich reap giant returns with little of the same tax burden that a less rich person would incur for the same activity).

I'd love to see a flat tax (15% across the board, no exemptions, and corporations count as individuals and are taxed as such (since they're essentially a legal entity separate from the owners, in the cases of C-corps, etc.)). Yes, I know this would put a new burden on the bottom 47% of Americans, but I think everyone should have a stake in their government. Maybe if everyone is paying for it, they'll vote more often.

I'd love to see the government get out of the business of giving money to anyone, and instead spend money on programs that benefit society (roads, education, etc.) as a whole. To that end, I don't see social security as being a reasonable aspect of a federal government. In fact, I'm pretty sure social security as a federal program is unconstitutional.

If government loses the ability to hand cash directly to households, and instead must translate that 'redistribution' into the form of a service that all Americans could use (but will most likely be used more by the lower classes), taxation ceases to be 'redistribution of wealth' in the same sense that it is today. When half of America pays either no taxes or ends with a net refund from the IRS, that's redistribution of wealth. The wealthy are literally being forced to give money to the poor at gunpoint (all laws are enforced by gunpoint). My government shouldn't be in this business. In theory, a GOOD government would represent me exactly as much as it represents someone less fortunate than me. To that end, if the government is threatening me with jail time if I don't surrender some portion of my labor to a person of their choosing, that government is representing the less fortunate person more than it is representing me.

In the end, though, entitlements are swallowing this country. If you look at growth curves on SS, Medicare and Medicaid, it's not hard to imagine the baby boomers' retirement ending the American economy all by itself. After a certain point, there will be such a burden caused by these entitlement programs that no amount of taxation can make up the difference.

We can talk about taxing the rich all we want, but it's a band-aid. It will slow the bleeding, but it won't cure the patient. The disease is that entitlements are out of control.

Reese99
Posts: 142
Joined: Tue Jul 20, 2010 3:26 pm

Re: I want to tip my hat to Prophet again,

Post by Reese99 »

TSPNerd,

I read most of that article you linked, and it's an interesting mental exercise, but it fails to apply to the real world for several reasons that I can think of off the top of my head.

A private sector individual or firm's financial position is measured in cashflow, which is, simply put, revenues minus expenses. If cashflow is positive, the individual or firm has a positive "S" (or S+I, at any rate) according to your article. If, year over year, the value of my "S" improves faster than the rate of inflation, then my quality of living is improving. What your article's model fails to address is that the system described can increase in value as a whole faster than the delta of inflation. If you look at the GDP of the U.S. and compare the increase in GDP to the increase of inflation, you'll see that, in many years, GDP grows faster.

Even factoring in trade deficits, the system described is working on the principle of zero-sum economics. The idea that all money is derived by taking it from someone else. This simply isn't the case.

In fact, the U.S. is (for now) uniquely positioned in the world to "create" wealth, because the dollar is not tied to anything, and many world currencies and commodities are tied to the dollar (oil, the Chinese Yuan, etc.). We can literally print money, and the global balance sheets grow as a result, because the rest of the world takes the value of the dollar as the level-set for things like oil or other national currencies. Yes, there are currencies and commodities not pegged to the dollar, but that doesn't matter. It simply lowers the relative increase in global wealth created by printing a new dollar from a 1:1 ratio to a 1:<1 ratio. The 'less than' could be calculated by dividing the total value of all commodities and currencies pegged to the dollar by the total global GDP.

Economics isn't a zero-sum game. The very idea that a man can trade the efforts of his labor for money implies that wealth can be created. The formula described suggests that there is a fixed total value to the world's wealth and that all permutations therein are simply shifting numbers from one balance sheet column to another. This is fundamentally incorrect.

TSPNerd
Posts: 183
Joined: Tue Dec 28, 2010 1:59 pm

Re: I want to tip my hat to Prophet again,

Post by TSPNerd »

flight23 wrote:TSPNerd... what you wrote makes sense, logically, but then how would the government *ever* reduce the deficit? Based on what you wrote the deficit should increase every year, without question. Just the interest on the national debt is already a high proportion of government spending. If our credit rating drops and interest rates rise then we will be paying more and more to China (as our largest investor) every year just to pay for the amount of money we are borrowing, effectively sending even more money out of the country.


The govt doesn't need to reduce the deficit. Japan's debt to GDP is well over 100% and their economy is moving along just fine.

The only ways we'd ever be able to reduce the deficit is if:

A: We become a trade export nation
B: People/corporations stop saving
C: They increase taxes so insanely high that it drives the private sector into debt (which is stupid because it would crash the economy...But, hey, the govt would be 'rich'.)

Additionally...We don't borrow money from China to fund our spending. "Money that Chinese earn by sending merchandise to the United States are credits in the U.S., and these credit units are nonredeemable, so Chinese owners can do nothing with these things unless they use them to buy American products, and if they do, those units become profits for American firms....When China gets paid, the dollars go into its checking account at the Federal Reserve Bank, and when China buys Treasury securities, all that happens is that the Federal Reserve transfers the funds from their checking account at the Federal Reserve to their securities accounts at the Federal Reserve.......When they do that, it’s called 'increasing the national debt', although when it’s in their checking account it doesn’t count as national debt." (Warren Mosler)

Summed up - because of the trade imbalance, China has a massive stockpile of surplus USD. They can either leave that stockpile of USD sitting in their checking account earning 0%, or they can invest it in US treasuries. When they invest in UST, that is termed 'increasing the national debt'.

Rating agencies are such a crock. Go watch, The Inside Job, and let me know what you think of those rating agencies after you've finished watching. They gave all of the residential mortgage backed securities (RMBS) a AAA rating even up to a few days before they all collapsed from the subprime mortgage fiasco.

TSPNerd
Posts: 183
Joined: Tue Dec 28, 2010 1:59 pm

Re: I want to tip my hat to Prophet again,

Post by TSPNerd »

Reese99 - read this link and I think it may help you understand my argument a bit better. http://pragcap.com/resources/understand ... ary-system

You said, "Even factoring in trade deficits, the system described is working on the principle of zero-sum economics. The idea that all money is derived by taking it from someone else. This simply isn't the case."

All USD are put into circulation by the US Govt. Thus, all USD are derived by taking it from someone else...Namely the US govt. The sectoral balance equation MUST balance to 0. It is an accounting identity and can not be violated.

Reese99
Posts: 142
Joined: Tue Jul 20, 2010 3:26 pm

Re: I want to tip my hat to Prophet again,

Post by Reese99 »

All USD are put into circulation by the US Govt. Thus, all USD are derived by taking it from someone else...Namely the US govt. The sectoral balance equation MUST balance to 0. It is an accounting identity and can not be violated.


Right, but in a global economy, the addition of US dollars, despite being monetized by the issuance of bonds, adds more to the global GDP than "nothing", thus it is not zero sum. This works on the principle that money today is worth more than the same money tomorrow.

If your formula were true, then we could look at the global GDP from, say, 1350AD, adjust it for inflation and expect that we'd have the same number today. Factoring in population growth over that period (the global population in 1350AD was roughly 300 million, it is now around 7 billion, meaning it's grown 23-fold), I should expect my standard of living to be 23 times worse than the standard of living in 1350.

And yet, I hardly have any pox sores, and never need to borrow the blacksmith's cart to carry my chickens home from market.

TSPNerd
Posts: 183
Joined: Tue Dec 28, 2010 1:59 pm

Re: I want to tip my hat to Prophet again,

Post by TSPNerd »

Reese99 wrote:
All USD are put into circulation by the US Govt. Thus, all USD are derived by taking it from someone else...Namely the US govt. The sectoral balance equation MUST balance to 0. It is an accounting identity and can not be violated.


Right, but in a global economy, the addition of US dollars, despite being monetized by the issuance of bonds, adds more to the global GDP than "nothing", thus it is not zero sum. This works on the principle that money today is worth more than the same money tomorrow.

If your formula were true, then we could look at the global GDP from, say, 1350AD, adjust it for inflation and expect that we'd have the same number today. Factoring in population growth over that period (the global population in 1350AD was roughly 300 million, it is now around 7 billion, meaning it's grown 23-fold), I should expect my standard of living to be 23 times worse than the standard of living in 1350.


When did I ever say that GDP was 0? So you're arguing that an ACCOUNTING IDENTITY is false? Basically, you're arguing against this. http://en.wikipedia.org/wiki/Twin_deficits_hypothesis

This is the equation for GDP: C+I+G+NX. Another equation for GDP is: C+S+T

So rewritten, we have:
C+I+G+NX = GDP = C+S+T

C: Consumption
I: Investment
G: Government
NX: Net Exports
S: Savings
T: Taxes

And rewritten further, we have:

(G-T)=(S-I)-NX

Since both equal GDP, they must balance to 0. I NEVER said GDP was equal to 0.

Reese99
Posts: 142
Joined: Tue Jul 20, 2010 3:26 pm

Re: I want to tip my hat to Prophet again,

Post by Reese99 »

Yes, I read the article, as well as the first article it was based on.

I also never said that GDP was equal to 0. Re-read what I said:
Right, but in a global economy, the addition of US dollars, despite being monetized by the issuance of bonds, adds more to the global GDP than "nothing"


Look, I can see we're arguing in circles here, and I'm starting to think this might be a religion to you. In that case, I mean no offense to your religious beliefs. I don't agree with them, but you're welcome to them.

Enjoy your weekend.

User avatar
flight23
Posts: 1342
Joined: Mon Jul 26, 2010 10:47 am

Re: I want to tip my hat to Prophet again,

Post by flight23 »

TSPNerd wrote:The govt doesn't need to reduce the deficit. Japan's debt to GDP is well over 100% and their economy is moving along just fine.


Japan's economy is hardly moving along just fine. They were stagnant for so long as a result of their monetary policy that countries use what they did as an example of what to avoid.

Regardless of that though the idea that the country never needs to reduce the deficit is ridiculous. As it stands interest on the national debt will be 15-20% of our current tax revenue. If we suffered a major recession and GDP dropped significantly then the interest from our current national debt alone could become an even higher %. It just doesnt make sense that we can just indefinitely continue to increase that number without significant economic growth.
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TSPNerd
Posts: 183
Joined: Tue Dec 28, 2010 1:59 pm

Re: I want to tip my hat to Prophet again,

Post by TSPNerd »

flight23 wrote:
TSPNerd wrote:The govt doesn't need to reduce the deficit. Japan's debt to GDP is well over 100% and their economy is moving along just fine.


Japan's economy is hardly moving along just fine. They were stagnant for so long as a result of their monetary policy that countries use what they did as an example of what to avoid.

Regardless of that though the idea that the country never needs to reduce the deficit is ridiculous. As it stands interest on the national debt will be 15-20% of our current tax revenue. If we suffered a major recession and GDP dropped significantly then the interest from our current national debt alone could become an even higher %. It just doesnt make sense that we can just indefinitely continue to increase that number without significant economic growth.


Japan has low unemployment and their GDP keeps on increasing. Seems to be just fine to me. The area they failed is by cutting off the govt stimulus too soon. But my point is that they have a debt to GDP ration of over 100% and nobody is freaking out that they are insolvent and can't pay their debts.

With regard to the US deficit. Like I said above, there is no way possible to reduce the deficit since we are a trade import nation...Especially not in a recession. Plug as many #'s into the GDP equation from before as you want...You just can't run a govt surplus without the private citizens/companies going into debt. In an economic boom, the govt may want to generate more in taxes than they spend into the economy to keep inflation at bay (for a short period of time); but generally, the govt should run a deficit.

If we were a trade export nation - well that's a different story entirely.

You seem like you have an open mind. Read the 2 or 3 links I posted above. I hope that if you read them with an open mind, they will change your thinking. Until this year, I was a gold standard proponent...But I kept an open mind and read the MMT links and they changed my thinking.

It's nice to live in a world where I don't have to be afraid that the sky is falling all of the time, and where I can dismiss the doom and gloom predictions (you know the ones - where the USD collapses and rampant hyperinflation is the word of the day).

But anyway, I've done my part in this discussion. It's hard to persuade people that all the fear mongers are, in fact, wrong...And although they think the US budget works the same way their household budget works, they were wrong. Fear sells.

I've posted the important links and those links can direct you to other links which talk more in depth about the way modern money system in the US actually works. If you want to know more, feel free to PM me.

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