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There are two fundamental arguments for 0% interest rates that Warren omitted. The first is thus.
The optimum rate of interest is the free market rate (unless market failure can be proved). And it makes no sense for government to fund current spending out of borrowing (as opposed to capital spending): that’s an interference in the free market which tends to raise interest rates. (Likewise it makes no sense for a household to fund current spending out of borrowing.)
As to capital spending, the arguments there are more complicated. There’s a paper by a Swiss academic which attacks the conventional idea that governments should borrow to fund capital spending. See:
But even if government capital spending is funded by borrowing, those capital projects should be treated in exactly the same way as if they were PRIVATE projects. So it makes no difference if we classify those projects as private.
So if we adopt that classification, that means that government borrows nothing: the government / central bank machine simply issues enough liabilities (monetary base) to bring full employment. I.e. it issues enough “private sector net financial assets” (to use MMT parlance) to bring full employment, but it pays no interest on those liabilities.
In contrast, where private sector entity X wants Y to build up savings and lend those savings to X, the X will probably have to pay Y some interest for the forgone consumption (and the risk involved in lending).
A second argument for a permanent 0% rate is thus. The conventional wisdom is that the government / central bank machine should influence aggregate demand by adjusting interest rates. However there’s no logic in channelling stimulus into an economy JUST VIA extra borrowing and investment. That is, there is no reason on the face of it to think that the average recession is caused by deficient investment spending rather than a decline in consumer spending or exports. Ergo, come a recession, it’s ALL FORMS OF SPENDING that should be expanded, not just investment. Ergo central banks should leave interest rates to find their own level, while adjusting AD just via fiscal measures.
Ive been looking at this too lately trying to break down the procedures in "cash basis":
As far as "govt borrowing" I agree with your assertion the govt is not borrowing..
What we can see "cash basis" is govt maintains a positive balance in the TGA about 50b average and has a current baseline withdrawal rate of about 12B per day for the items in the "G" component of GDP and for the xfers payments, these happen on well known/ scheduled days identified/anticipated in advance so the Treasury can anticipate their "cash flow" needs for the TGA...
So as far as "capital spending" and govt "borrowing" that's manifestly not the way it works...
What happens is the contract is awarded and the govt contractor proceeds without any govt $NFA advanced to them to some point where there is some form of "progress payment" made to the contractor out of these 12b/day of baseline "cash flows" from the govt to the non-govt...
Same with the Meds, providers deliver the care and THEN they submit claims and are reimbursed out of these approx 12b/day of flow...
Since the govt must maintain a positive balance in the TGA, what govt does do IN ADVANCE of the progress payment/reimbursement is (not to "borrow"!) is that the govt REQUIRES A NON-GOVT SECTOR COHORT TO ADJUST SAVINGS CHARACTERISTICS by adjusting previously issued USD balances "from the checking account to the savings account" in advance of govt making any withdrawals from the TGA that exceed deposits into the TGA...
So govt (let's say on a 'CASH BASIS') manifestly does not "borrow" to fund itself, what govt is really doing is it requires non-govt to first adjust savings characteristics ...
So govt doesnt say: "Lets build a $1B bridge" and then go out and issue UST bonds for 1B and then put these funds in the TGA until the "bill comes due"... that's manifestly NOT the way this is working on a 'cash basis".... govt awards a contract the non-govt provisoner proceeds to build the bridge and then submits invoices for the progress and UST anticipates these "cash flow" needs and first requires a non-govt adjustment to savings characteristics "from the checking account to the savings account" if this payment takes place in a period characterized short term by TGA withdrawals exceeding TGA receipts....
Can we see some posts which clarify the libor rate manipulation which was used by banks so they would win the casino derivative swaps so credit unions and municipalities would have to pay ?
If interest rates rose then the banks were supposed to pay to the credit unions and cities like Detroit.
If interest rates fell, then the credit unions and cities like Detroit were supposed to pay.
So the banks rigged the libor so that they would win.
Now Detroit has lost and pensions are taken away from police and firemen.
The banks also increased the margins on their customer's lines of credits because they knew they would be rigging the rates to go down so they could win on ALL FRONTS.
i.e. small business lines of credit and probably home equity lines of credit :
the lines of credit rates consist of wall street prime and a margin.
Since they rigged the main rate to go down, the margin had to be fudge factored so they increased this on their products.
Since the prime rate was rigged, then that means the Federal Reserve helped.
What happens is that the revenue collected from taxes goes into TT&L accounts initially and then is transferred into the TGA. When revenue funds are insufficient to meet payments, then tsys need to be auctioned.
There is close cooperation between Fed and treasury in coordinating fiscal and monetary operations so that Treasury payments are made as they come due and if the Fed is not paying IOR, the level of rb facilitates the Fed hitting its target.
1) Fiat should ONLY be spent or equally distributed into existence since lending by the monetary sovereign is inherently discriminatory. Remember redlining anyone? Moreover, the lending of purchasing power into existence builds in deflation since the principal must be repaid even at 0% interest.
2) But IF the monetary sovereign lends purchasing power into existence then the loans should be at the HIGHEST interest the market will bear and both the interest and principal distributed equally to the population as they are received because: a) It is the population's purchasing power that has been borrowed. Therefore the interest rightfully belongs to the population. b) To preclude deflation. The distribution should be equal, and not per quota, to help reverse the unjust wealth equality caused by our present system,
3) Any government backing for banks violates Equal Protection Under the Law since the ability to repay stolen purchasing power plus interest (so-called creditworthiness) to the thieves, the banking cartel, is irrelevant to EPUTL.
So zero percent lending by the monetary sovereign = FAIL. As does Open Market Purchases too since the monetary sovereign overpays to drive down yields.
What part of money creation must be ethical so eludes people? Instead, the prevailing bias seems to be that money creation MUST be unethical. Explain that to God, will you?
Ignorance or TINA is no longer a valid excuse because by now the MMT leaders should know ethical money creation is possible.
It's still welfare, Franko. I'm for welfare when necessary but it should be proportional to one's needs, not one's savings. Plus, investment is the Biblical ideal, not savings beyond one's legitimate liquidity needs or in order to buy an investment.
Wrt "ethical", I read in the Epistles today two references to "unprincipled men" and they weren't positive.
7 comments:
There are two fundamental arguments for 0% interest rates that Warren omitted. The first is thus.
The optimum rate of interest is the free market rate (unless market failure can be proved). And it makes no sense for government to fund current spending out of borrowing (as opposed to capital spending): that’s an interference in the free market which tends to raise interest rates. (Likewise it makes no sense for a household to fund current spending out of borrowing.)
As to capital spending, the arguments there are more complicated. There’s a paper by a Swiss academic which attacks the conventional idea that governments should borrow to fund capital spending. See:
http://euroframe.org/fileadmin/user_upload/euroframe/docs/2004/session2/eurof04_kellermann.pdf
But even if government capital spending is funded by borrowing, those capital projects should be treated in exactly the same way as if they were PRIVATE projects. So it makes no difference if we classify those projects as private.
So if we adopt that classification, that means that government borrows nothing: the government / central bank machine simply issues enough liabilities (monetary base) to bring full employment. I.e. it issues enough “private sector net financial assets” (to use MMT parlance) to bring full employment, but it pays no interest on those liabilities.
In contrast, where private sector entity X wants Y to build up savings and lend those savings to X, the X will probably have to pay Y some interest for the forgone consumption (and the risk involved in lending).
A second argument for a permanent 0% rate is thus. The conventional wisdom is that the government / central bank machine should influence aggregate demand by adjusting interest rates. However there’s no logic in channelling stimulus into an economy JUST VIA extra borrowing and investment. That is, there is no reason on the face of it to think that the average recession is caused by deficient investment spending rather than a decline in consumer spending or exports. Ergo, come a recession, it’s ALL FORMS OF SPENDING that should be expanded, not just investment. Ergo central banks should leave interest rates to find their own level, while adjusting AD just via fiscal measures.
Ralph,
Ive been looking at this too lately trying to break down the procedures in "cash basis":
As far as "govt borrowing" I agree with your assertion the govt is not borrowing..
What we can see "cash basis" is govt maintains a positive balance in the TGA about 50b average and has a current baseline withdrawal rate of about 12B per day for the items in the "G" component of GDP and for the xfers payments, these happen on well known/ scheduled days identified/anticipated in advance so the Treasury can anticipate their "cash flow" needs for the TGA...
So as far as "capital spending" and govt "borrowing" that's manifestly not the way it works...
What happens is the contract is awarded and the govt contractor proceeds without any govt $NFA advanced to them to some point where there is some form of "progress payment" made to the contractor out of these 12b/day of baseline "cash flows" from the govt to the non-govt...
Same with the Meds, providers deliver the care and THEN they submit claims and are reimbursed out of these approx 12b/day of flow...
Since the govt must maintain a positive balance in the TGA, what govt does do IN ADVANCE of the progress payment/reimbursement is (not to "borrow"!) is that the govt REQUIRES A NON-GOVT SECTOR COHORT TO ADJUST SAVINGS CHARACTERISTICS by adjusting previously issued USD balances "from the checking account to the savings account" in advance of govt making any withdrawals from the TGA that exceed deposits into the TGA...
So govt (let's say on a 'CASH BASIS') manifestly does not "borrow" to fund itself, what govt is really doing is it requires non-govt to first adjust savings characteristics ...
So govt doesnt say: "Lets build a $1B bridge" and then go out and issue UST bonds for 1B and then put these funds in the TGA until the "bill comes due"... that's manifestly NOT the way this is working on a 'cash basis".... govt awards a contract the non-govt provisoner proceeds to build the bridge and then submits invoices for the progress and UST anticipates these "cash flow" needs and first requires a non-govt adjustment to savings characteristics "from the checking account to the savings account" if this payment takes place in a period characterized short term by TGA withdrawals exceeding TGA receipts....
rsp,
Thank you Matt.
Can we see some posts which clarify the libor rate manipulation which was used by banks so they would win the casino derivative swaps so credit unions and municipalities would have to pay ?
If interest rates rose then the banks were supposed to pay to the credit unions and cities like Detroit.
If interest rates fell, then the credit unions and cities like Detroit were supposed to pay.
So the banks rigged the libor so that they would win.
Now Detroit has lost and pensions are taken away from police and firemen.
The banks also increased the margins on their customer's lines of credits because they knew they would be rigging the rates to go down so they could win on ALL FRONTS.
i.e. small business lines of credit and probably home equity lines of credit :
the lines of credit rates consist of wall street prime and a margin.
Since they rigged the main rate to go down, the margin had to be fudge factored so they increased this on their products.
Since the prime rate was rigged, then that means the Federal Reserve helped.
What happens is that the revenue collected from taxes goes into TT&L accounts initially and then is transferred into the TGA. When revenue funds are insufficient to meet payments, then tsys need to be auctioned.
There is close cooperation between Fed and treasury in coordinating fiscal and monetary operations so that Treasury payments are made as they come due and if the Fed is not paying IOR, the level of rb facilitates the Fed hitting its target.
1) Fiat should ONLY be spent or equally distributed into existence since lending by the monetary sovereign is inherently discriminatory. Remember redlining anyone? Moreover, the lending of purchasing power into existence builds in deflation since the principal must be repaid even at 0% interest.
2) But IF the monetary sovereign lends purchasing power into existence then the loans should be at the HIGHEST interest the market will bear and both the interest and principal distributed equally to the population as they are received because:
a) It is the population's purchasing power that has been borrowed. Therefore the interest rightfully belongs to the population.
b) To preclude deflation.
The distribution should be equal, and not per quota, to help reverse the unjust wealth equality caused by our present system,
3) Any government backing for banks violates Equal Protection Under the Law since the ability to repay stolen purchasing power plus interest (so-called creditworthiness) to the thieves, the banking cartel, is irrelevant to EPUTL.
So zero percent lending by the monetary sovereign = FAIL. As does Open Market Purchases too since the monetary sovereign overpays to drive down yields.
What part of money creation must be ethical so eludes people? Instead, the prevailing bias seems to be that money creation MUST be unethical. Explain that to God, will you?
Ignorance or TINA is no longer a valid excuse because by now the MMT leaders should know ethical money creation is possible.
F.
UST interest is not going to "welfare" it is going to savers many of whom are middle class retirees who need the income in retirement...
ethical/schmethical: both are non-scriptural terms....
rsp,
It's still welfare, Franko. I'm for welfare when necessary but it should be proportional to one's needs, not one's savings. Plus, investment is the Biblical ideal, not savings beyond one's legitimate liquidity needs or in order to buy an investment.
Wrt "ethical", I read in the Epistles today two references to "unprincipled men" and they weren't positive.
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