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a dollar ceases to exist when the fed receives it that s what makes sense to me but i never saw the story told that way by somebody who really knows somebody like an economist if this is the right story then a lot of things fit together and make sense for me if a government debt ceases to exist the government shouldn t have to pay interest on that debt or to simplify the paperwork say it could continue to pay interest on that debt but then get that money back at the end of the year or whenever makes sense to me of course this all depends on accepting the view that the fed is part of the government i accept that view but some people don t see milton friedman money mischief p 206 click the page 206 link see g thomas woodward on public or private but the government still owes someone a dollar well yes and no unlike huey the fed is subject to a 100 tax on profits so the government can pay its one dollar debt to the fed and then turn right around and swoop that dollar back up again that s just as good as not owing anything in the first place the fed is subject to a 100 tax on profits almost 1 g thomas woodward writes over its history the fed has paid to the treasury approximately 95 of its earnings so it s not 100 percent it s 95 percent but that s close enough for me 2 the blogger landsburg says the fed is subject to a tax i don t think that s right i think it s an oversimplification the kind that leads to important misunderstandings down the road the fed turns it all over to the treasury not to the irs it s sorta like a husband and wife both working and they pool their funds it s not like a tax at all see g thomas woodward on where do the profits go see yahoo answers so in effect the fed is reducing the debt by 600 billion dollars does this mean taxpayers will have to cough up 600 billion fewer dollars in the future yes this is a definitive answer to an ambiguous question i think the question means is this 600b of debt that taxpayers won t have to pay back if that s the question the answer is easily a definitive yes because the federal debt never gets paid back does this come as a surprise to you it really shouldn t oh yeah clinton reduced the federal debt four times and nixon reduced it once but basically the debt never gets paid back it used to be policy these days people get all bent out of shape about it see time magazine of 31 december 1965 next to last paragraph sounds like magic why don t they just do this over and over again until all the debt is gone that s not even a reasonable question i don t think anybody would ask that except maybe somebody writing a q a anyway here is landsburg s answer because there is no such thing as magic you can t make the world a richer place just by creating dollars dollars are claims on wealth but they re not wealth you can t eat them you can t drive them you can t live in them well that s part of landsburg s answer landsburg says you can t make the world a richer place by creating dollars because dollars are not wealth fair enough but as he points out dollars are claims on wealth so there is a relation between wealth and dollars that relation has to do with making claims on wealth or as i would put it it has to do with buying and selling if they print too many dollars it makes prices go up yadda yadda so we can say with some authority that the relation has to do with the quantity of money and that too much money can be a problem now just naively one would expect that not enough money could also be a problem however that is not something one hears people say my collection of statements on money as the problem includes two from the 1600s which warn of problems resulting from a shortage of money and an observation by adam smith that an increase in the quantity of money was beneficial in scotland in the 1700s no other observations on shortage of money until mine of 1977 you cannot make the world a richer place landsburg says just by increasing the quantity of money adam smith said you can smith said when paper is substituted in the room of gold and silver money the quantity of materials tools and maintenance which the whole circulating capital can supply is increased production is increased not because the money is paper but because the use of paper permits an increase of the quantity of money smith continues i have heard it asserted that the trade of the city of glasgow doubled in about fifteen years and that the trade of scotland has more than quadrupled as a result of this increase in the quantity of money it worked because there had been a shortage of money just something to keep in mind the balance of landsburg s answer paying down debt makes the taxpayers richer but in order for taxpayers to get richer someone else has to get poorer unless the fed finds a way to create real wealth and that s not so easy paying down debt makes the taxpayers richer a bold statement could be true or the federal debtor could increase everybody s taxes and try to pay down debt that way i don t know if it would work but i do know it wouldn t make the taxpayers richer okay then who gets poorer when the fed buys huey s bond for a dollar huey goes out to buy a blueberry muffin this ever so slightly bids up the price of muffins and so ever so slightly reduces the value of everyone else s money or maybe huey lends that dollar to his cousin dewey who buys a muffin or maybe the dollar takes a more circuitous route but sooner or later someone tries to spend it drives up a price and drives down the value of existing money we can even figure out the size of that effect since the taxpayers got a dollar richer through the reduction of the national debt and since the world as a whole is neither richer nor poorer the moneyholders must have gotten exactly a dollar poorer do that 600 billion times and the taxpayers will be 600 billion dollars richer and the moneyholders will be 600 billion dollars poorer 600 billion poorer that is quite a calculation by landsburg s measure if huey spends one new dollar it ever so slightly ever so slightly reduces the value of everyone else s money but if 600 billion hueys do it moneyholders end up exactly 600 billion dollars poorer there is no such thing as magic when the fed creates dollars but there seems to be some magic in landsburg s numbers besides the sleight of hand landsburg totally discounts the effect that economic growth would have on his numbers if output has been held below its natural level by a shortage of money as in adam smith s scotland increasing the quantity of money can result in an increase of output rather than prices granted such a state of affairs is alien to our experience but the printing money causes inflation argument makes the most sense in its most complete form which includes the possibility of a shortage of money see milton friedman money mischief money usually more significant aren t the taxpayers and the moneyholders largely the same people largely but not completely bill gates pays a lot of taxes but he might not hold a lot of money odds are most of his wealth is tied up in other assets like microsoft stock the question is a general one covering many people the answer is a specific one considering only one person i cannot analyze this answer further i would point out however that pretty much everybody has their money tied up one way or another in assets or in bills or what have you are there any other downsides to all this yes the taxpayers are relieved of a 600 billion dollar debt burden that s 600 billion dollars worth of good the moneyholders see the value of their money reduced by 600 billion dollars that s 600 billion dollars worth of bad so far at least from the perspective of the world as a whole that washes out but there are additional costs for one thing people will scurry around trying to convert their money into other assets so they re not holding money when it loses value that s a lot of effort that serves no real social purpose for another it s harder to do financial planning when the value of the currency is subject to unpredictable change so on balance the world is actually a poorer place not according to adam smith well that s terrible compared to what in the absence of this fed action we d still have to pay that debt off someday we d do it by raising 600 billion in taxes with all the accompanying disincentive effects that s kind of terrible too it s not clear whether the fed s action is better or worse than the alternative oh there ya go it s not clear whether the fed s action is better or worse than the alternative landsburg must be an economist he cannot reach a conclusion are there any ways in which printing dollars can enrich the world well maybe if people are sufficiently idiosyncratic take huey s uncle scrooge for instance unlike huey who like most of us values money only for what it can buy scrooge values money as a thing in itself he likes to fill his vault and swim in it i said earlier that dollars aren t wealth because you can t eat them drive them or live in them but they re wealth if you like to nuzzle them buying bonds from scrooge increases the world s stock of nuzzlables and that makes the world a richer place where does the extra wealth go well not to scrooge really because he s got to trade away his bonds to get those beloved dollars but consider when the fed buys scrooge s one dollar bond it retires a dollar of debt and makes taxpayers richer just like buying huey s bond but scrooge unlike huey never spends his new dollar so prices never get bid up and our money retains its value that s a gain for the taxpayers at no cost to anyone by creating something of value a dollar for scrooge to cherish the fed can make the taxpayers a dollar richer at no cost to anyone so landsburg is saying what we need is a way to reduce the federal debt but without increasing the quantity of money this interests me because landsburg apparently sees an imbalance between the quantity of federal debt and the quantity of money i see a similar imbalance between the quantity of total debt and the quantity of money of course there are differences i see the imbalance as a recurring long term trend that repeatedly results in depression landsburg sees the imbalance as a problem because it makes our taxes high there is a problem with landsburg s view because his focus is on the federal debt the problem arises because our money is backed by federal debt every dollar the fed puts into circulation gets there because the fed uses that dollar to buy some federal debt so how can they take federal debt out of the economy without putting money in 1 the fed can buy federal debt but this means the fed is putting money into the economy it s what they usually do but landsburg doesn t like it 2 the fed can buy non government debt as opposed to federal debt and interestingly that is exactly what they did in the first quantitative easing but again the fed is putting money into the economy 3 at some point perhaps the fed can swap the non government debt it bought during qe1 for federal debt held in the private sector this will reduce the federal debt without increasing the quantity of money that might satisfy landsburg it does not satisfy me because i don t think federal debt is the problem i think private sector debt is the problem that holds our economy down so buying a bond from huey means paying down the debt at the expense of the moneyholders while causing some auxiliary damage that might or might not be greater than the auxiliary damage you d cause if you tried to pay down the debt some other way but buying a bond from scrooge means paying down the debt at no expense to anyone correct at no expense to anyone okay i m rememberin that one i m gonna say stuff like anyhow as landsburg says it doesn t really cost anything when the fed spends money sounds like we need more scrooges do they exist outside of comic books probably not too often more s the pity more s the pity wow my differences with landsburg until now have been minor this one is huge uncle scrooge is hoarding money landsburg is telling us we need more hoarding i m saying we don t hoarding is a problem in a normal economy hoarding is what the fed does when it sells something it doesn t spend the money it receives in exchange it hoards that s the real reason we say that money is out of the economy when the fed has it in today s economy hoarding is what the banks are doing with their vast quantity of excess reserves the fed put all that extra money into the economy but the banks are sitting on it like uncle scrooge so that money is effectively out of the economy if the fed is putting trillions of dollars into the economy maybe the only way to avoid inflation is to increase the hoarding but that doesn t help the economy recover but all that hoarding that is the reason the fed has been increasing the quantity of money to keep the quantity in circulation from dropping as hoarders snatch money out of circulation and stuff it under the mattress or into reserve accounts i think our true objective is economic recovery preventing inflation by cloning scrooge the hoarder may be better than hyperinflation but recovery is better yet anything else we should know keynesian economists like paul krugman have various theories about how buying bonds from guys like huey could help get us out of the recession i m skeptical of those theories though you should treat my skepticism with a grain of salt because i am not really an expert on macroeconomics though neither come to think of it is paul krugman but even if those guys are right i m largely unimpressed because i don t think recession fighting is a terribly important goal compared to enriching the world in the long run and as far as that goal goes i think i ve covered the key issues here though i m sure readers will let me know if i ve left something out i don t think recession fighting is a terribly important goal compared to enriching the world in the long run sentences like that always make me thing about the dark age and i have to wonder whether the guy who says it thinks the fall of rome somehow enriched the world posted by the arthurian at 4 02 am 2 comments sunday november 28 2010 green lines posted by the arthurian at 9 22 am 0 comments if you pray at the great recession peter murray posts a graph of total u s debt relative to gdp it s a version of the graph we ve seen before but peter has labeled the high points i show this graph because it highlights the same high points that i used to stare at looking for meaning eventually i had a useful thought notice how the two run ups to peak are different the recent peak peter s 360 is fast but it seems to be an accelerating trend by contrast the older peak is a sharp spike quick up and quick down a departure from the trend the older peak is a spike generated by the collapse of gdp during the great depression we have not had anything like that yet this time around the second graph is a duplicate of the first b...
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