Saturday, August 6, 2011

The Best of Mosler

Not that I''ve read much, but this is absolutely the best I've read from Warren Mosler:

Why there is a deficit
Posted by WARREN MOSLER on July 26th, 2011

The main reason we have a large budget deficit is because of all the tax advantaged savings plans- pension funds, IRA’s, insurance and corporate reserve.

All of these financial assets, which compound continuously, represent unspent income.

And unless they are offset by some other agent spending that much more than his income, the dollars won’t be there to be saved in these tax advantaged entities.

Pension plans, IRAs, insurance and corporate reserve. Tax-advantaged savings plans. Encouragements to save. Encouragements to remove money from circulation.
(But I don't think they compound "continuously". That's a technical term.)
To live life as we know it, we need money and we need it circulating. That's how we shop, and how we eat, and how we buy our toys, and how we get paid.

Never thought about that? When you receive your paycheck, money is circulating.

If not enough money circulates to us, sometimes we borrow a little. We are, each of us, little versions of the Federal Reserve, creating money by spending it into circulation.

But we do it by borrowing and spending it into circulation. So does the government, actually. Only the Federal Reserve doesn't have to borrow before it puts money into circulation. Apparently, however, the Fed is allowed to circulate it only to people who already have money. Unfortunately, that doesn't fix any problems.

So anyway, with all these tax-advantaged encouragements to save, we lost circulating money and gained sedentary money. Then, to continue living life as we know it, we increased our borrowing and made up for the shortfall that way.

And wasn't it convenient -- There was plenty of sedentary money just waiting to be borrowed.

If you stop and think about it, you might notice that the problem, really, was caused by tax-advantaged encouragements. In other words, the problem was created by Congress. The Federal Reserve, poor bastards, take the blame while Congress points the finger. But most of the problem lies with Congress. And they ought not be allowed to get away with it.

The long and short of it is this: There is an imbalance in the money. An imbalance between circulating money and sedentary money. An imbalance between the quantity of money we receive as income and the quantity we have to pay interest to use. An imbalance between low-cost money and high-cost money. There is an excess of interest cost relative to the amount of spending we do. This is the central problem.

In the process of creating all those tax advantaged savings plans that Warren writes about, we also created a shortage of circulating money and an excess of money in savings. So we have to pay interest to use the money. That extra cost is killing us.

Note that in five lines of text, Warren manages to use the words "tax advantaged" twice. You might take that as a clue as to what the solution requires.


Jazzbumpa said...

This is the paradox of thrift, and pure Keynes.

And it's a deep problem. If I spend my retirement savings today, what am I going to live on tomorrow?

A solution has to include some sort of a plan to give financial security to seniors. I can assure you that SS by itself is far from adequate - and I get within a few dollars of the theoretical maximum for one starting withdrawals at age 62.

The other thing it points out is the dirty little secret of capitalism - it is totally dependent on consumption. That's why recessions are almost always caused by demand shortfall. The only oversupply recessions occurred after the two WW's. I discussed the post WW II situation yesterday.


The Arthurian said...

The "paradox of thrift" is that when everyone tries to save more, their actions create a decline of income that undermines the effort to save. There is none of that in this post.

This post is about the imbalance in the money, the imbalance between circulating and sedentary money. An imbalance created by policy.


Greg said...

I think Jazz is right Art. Its implicit in Warrens analysis.

He's explaining that the reason we have been running such "large" budget deficits is that the private sector has been saving, encouraged by congress. The paradox shows that no ones saving desires will be met if all within the private sector try to save more UNLESS the govt spends more. The govt deficit allows us to realize our savings desires, its very simple sectoral balances stuff.