Taxes and who payes 'em

[Braveheart81]

Gittens is plain wrong. Money has not worked that way since 1971.

Australia has a sovereign fiat nonconvertible currency. The Federal government creates money by spending it into the private sector and cancels it by taxation.

The government does not operate like a household or private business that can't create its own money.

Clearly the government doesn't wait for the ATO to collect money and then hand that money over so they can spend it on something. The principle is still the same though. The government relies on taxation revenue to cover their spending. The federal government spends real, actual dollars on things and that is paid for in the most part by taxation revenue.

Borrowing is what enables a government to smooth out their cashflow if you like (at the end of the day, government departments need money in their bank accounts so they can operate).

The reality is a government can't just produce currency without a) accounting for it and b) cancelling equal amounts otherwise it leads to inflation and devaluation of the currency.

 

[overthehill]

Clearly the government doesn't wait for the ATO to collect money and then hand that money over so they can spend it on something. The principle is still the same though. The government relies on taxation revenue to cover their spending. The federal government spends real, actual dollars on things and that is paid for in the most part by taxation revenue.

Borrowing is what enables a government to smooth out their cashflow if you like (at the end of the day, government departments need money in their bank accounts so they can operate).

The reality is a government can't just produce currency without a) accounting for it and b) cancelling equal amounts otherwise it leads to inflation and devaluation of the currency.

No. The perception isn't the reality.

The sovereign is not revenue dependent and never needs to borrow to "fund" spending. And, in reality, doesn't. Government bonds are really just privately held funds lodged with the government. They aren't spent.

Deficit spending can only cause inflation (I'm not sure what you mean by devaluing the currency) if it overspent real output growth while the private sector was at full capacity i.e. zero underemployment.

But we're a long way from that and we also have a massive private debt (bank credit) burden which can only be reduced by sovereign deficit spending. Over 95% of the money in circulation is privately created bank credit. Only sovereign money creation can reduce that without asset transfers from debtors to creditors i.e. mass bankruptcies.

The holy grail of balanced budgets just doesn't reflect the reality of the system that we actually have. It's all still dressed in jargon that went out with the gold standard and quantity of money theory.

 

[Scarfman]

overthehill, you don't make sense, man. Your point might be valid but I'm struggling to understand it. In what way is Gittens in error when the point he is trying to make concerns the way that most households receive as much in welfare as they do in tax? I think you are missing that point, but correct me if I'm wrong.

While money creation may not seem relevant to the minutiae of the tax system, when you understand the way money creation works it puts all the minutiae and argument into an entirely different light e.g. the rich to poor argument.

Taxes, in a fiat money system, don't actually "pay" for anything. The deficit, and all the hooha surrounding it, is just a number.

This seems to be your point, but I just don't get what you are saying. In what way does the government's ability to create money put the rich to poor argument in a different light? In what do taxes not pay for anything? By referring to the fiat monetary system you seem to be making a fairly abstract argument about money not being tied to anything of value. And so if money has no concrete value, then you can't use it to transfer anything of value from the rich to the poor. Except that whilst confidence in fiat money lasts, you can.

 

[Scarfman]

I'll sum up my objections:

1. You are missing the point of Gittins's article, which is at the household level.

2. Your point about fiat currency is just wrong, I suspect. Are you suggesting that Australia could print as much money as it likes without consequences? Because we're not at zero unemployment? Leaving exchange rates out of it for a second, you already acknowledge that this would cause inflation. Inflation isn't good. My basic economics training would also suggest that the relative value of the Aus dollar and other currencies would change at the same rate as inflation, meaning it devalues (which might be as good thing right now).

I think you are taking the implications of a fiat monetary system to far. I certainly don't see how it impacts our thinking about the rich giving to the poor.

 

[overthehill]

overthehill, you don't make sense, man. Your point might be valid but I'm struggling to understand it. In what way is Gittens in error when the point he is trying to make concerns the way that most households receive as much in welfare as they do in tax? I think you are missing that point, but correct me if I'm wrong.



This seems to be your point, but I just don't get what you are saying. In what way does the government's ability to create money put the rich to poor argument in a different light? In what do taxes not pay for anything? By referring to the fiat monetary system you seem to be making a fairly abstract argument about money not being tied to anything of value. And so if money has no concrete value, then you can't use it to transfer anything of value from the rich to the poor. Except that whilst confidence in fiat money lasts, you can.

It really isn't an abstract argument. It is the core of the whole system. To the sovereign, money is just a unit of account with no intrinsic value. It doesn't have a store of $ locked away in an electronic vault and isn't physically limited in spending them in any way.

To make a rugby analogy it would be akin to limiting the points that can be scored in a game because the scoreboard might run out of points.

The wealth transfer is in interest charges. By limiting government deficit spending for ideological dogma, the productive private sector can only realise growth by borrowing money into existence from the banking sector i.e. private credit creation at interest. That interest is a direct charge on the productive private economy. It is straight out rent. That gives the creditors an enormous privilege.

That debt servicing, both interest (rent) and principal (credit cancellation) is by far the biggest drain on the rest of us. Far far far greater than taxes. And worse it is mostly only "lent" against existing assets rather than productive ventures (think housing bubble).

Since balanced budgets became the holy grail for "responsible" government, private debt levels have grown exponentially, creating an enormous drain on all of us. It is that drain that has caused the drop off in aggregate demand which is pushing us into the depression that has swept the world.

 

[Scarfman]

This is a great article, in the sense of being great amusement:

http://www.sosnews.org/library/banks/making.htm


It defends the One Nation Party's idea of printing money. Now I'm not an economist, but I think the problem is here:

Banks grow the money supply every time they claim to lend money. I say claim to lend money, because banks do not really lend money. When money is borrowed from a bank, the bank actually creates new money or credit out of nothing. It credits a loan account it has set up on its books with a deposit which can be drawn upon by the borrower. As banks must pay out deposits on demand this is a liability for the bank which is entered in the debit side of its ledger. On the credit side of the ledger, because the bank charges interest on this created money, this is an asset for the bank earning it income.

That's a slightly odd view. I mean, I get it, but we all know that our deposit money isn't really sitting there in a vault - it's off somewhere else being used to buy a house. I would say that the money in the house and land is real; it's my deposit bank balance which isn't. The banks over hold about 5% liquid reserves, right, so if there's a run on the bank, we all go down the tubes?

What this has to do with the transfer from the rich to the poor, or from the childless to families, I have no idea.

 

[overthehill]

I'll sum up my objections:

1. You are missing the point of Gittens's article, which is at the household level.

2. Your point about fiat currency is just wrong, I suspect. Are you suggesting that Australia could print as much money as it likes without consequences? Because we're not at zero unemployment? Leaving exchange rates out of it for a second, you already acknowledge that this would cause inflation. Inflation isn't good. My basic economics training would also suggest that the relative value of the Aus dollar and other currencies would change at the same rate as inflation, meaning it devalues (which might be as good thing right now).

I think you are taking the implications of a fiat monetary system to far. I certainly don't see how it impacts our thinking about the rich giving to the poor.

1) Yes but he starts with the false premise that I mentioned. That false premise compounds throughout his argument and creates a false divide, which I suspect is his purpose.

2) I didn't say without consequences and I only conceded that it could create inflation under certain scenarios which are not existing or even on the horizon.

If inflation was the key concern, we wouldn't let private banks create as much bank credit as they can find borrowers for.

We do have a sovereign fiat nonconvertible currency. That isn't wrong.

 

[overthehill]

This is a great article, in the sense of being great amusement:

http://www.sosnews.org/library/banks/making.htm


It defends the One Nation Party's idea of printing money. Now I'm not an economist, but I think the problem is here:



That's a slightly odd view. I mean, I get it, but we all know that our deposit money isn't really sitting there in a vault - it's off somewhere else being used to buy a house. I would say that the money in the house and land is real; it's my deposit bank balance which isn't. The banks over hold about 5% liquid reserves, right, so if there's a run on the bank, we all go down the tubes?

What this has to do with the transfer from the rich to the poor, or from the childless to families, I have no idea.

That's where you are wrong. Loans drive deposits. There are no reserves without loans, and there is no bank capital (which is what the banks leverage rather than deposits) without so called government debt.

But all that is further on from the point I wanted to make about Gittens' article. The whole notion of government funding is specious.

 

[Scarfman]

The whole notion of government funding is specious.

I'm going to get out of this before we lose ourselves completely down the rabbit hole. But I think you are taking the consequences of the fiat monetary system too literally. Sure, it might mean that wealth is imaginary, and that if everyone called in their debts at once,we'd all be eating cans of beans while defending the bunker with a shotgun. In practice, however, until the economic apocalypse comes, all of what Gittens says is factual.

 

[Braveheart81]

Saying that banks create money out of nothing when they make a loan is true to a point but the bank also holds security to guarantee that loan.

When the security they hold ends up being valueless (or worth far less than what they lent) things very quickly unravel.

This is essentially why European and American banks collapsed during the GFC. They'd lent money against assets which were worth far less than the value of the loans they'd issued to people who ended up in a position whereby they had no way to repay the loans.

The actual credit system actually helps transfer wealth from rich to poor in that it allows people to buy an asset that they can't currently afford. If everyone had to have all the money saved to buy property then sure, property prices would be much lower because there would be far fewer people able to afford it, but ownership of property would be massively more concentrated amongst the wealthy. There would be a very small landlord class owning all the land and the vast majority of the population would have no choice but to be renters from the rich.

 

[overthehill]

I'm going to get out of this before we lose ourselves completely down the rabbit hole. But I think you are taking the consequences of the fiat monetary system too literally. Sure, it might mean that wealth is imaginary, and that if everyone called in their debts at once,we'd all be eating cans of beans while defending the bunker with a shotgun. In practice, however, until the economic apocalypse comes, all of what Gittens says is factual.

I'm not saying any of those things.

The fiat money system is literal. It is the reality. It's all the hooha about budgets and deficits and bad government spending that is the mirage.

And it works. Gittens' false conclusion and the general agreement with it is proof of that.

Anyway, my apologies. I just threw my oar in there because I blame Gittens and his kind for much of what is happening.

I don't know whether he knows better and is lying, or is just an idiot who hasn't realised it's not 1971 anymore.

 

[overthehill]

Saying that banks create money out of nothing when they make a loan is true to a point but the bank also holds security to guarantee that loan.

When the security they hold ends up being valueless (or worth far less than what they lent) things very quickly unravel.

This is essentially why European and American banks collapsed during the GFC. They'd lent money against assets which were worth far less than the value of the loans they'd issued to people who ended up in a position whereby they had no way to repay the loans.

The actual credit system actually helps transfer wealth from rich to poor in that it allows people to buy an asset that they can't currently afford. If everyone had to have all the money saved to buy property then sure, property prices would be much lower because there would be far fewer people able to afford it, but ownership of property would be massively more concentrated amongst the wealthy. There would be a very small landlord class owning all the land and the vast majority of the population would have no choice but to be renters from the rich.

The security makes no difference to the reality that each new loan is new money. The problem is that without constantly increasing new loans being taken out, short of deficit spending by the government, the aggregate "loan pool" can't be retired.

When you pay off your loan, that "money" is removed from the system.

Loans at interest transfer financial wealth from poor to rich. Debtor to creditor.

If we had 100% reserve lending property prices would be lower, we wouldn't get asset bubbles and the wealth spread would be much more equitable.

 

[Scarfman]

Well, I agree that fiat money is supported by confidence, which is another way of saying that it's a mirage.

However, it's mirage with real world consequences, such as fatprop having to give me money, and the amount of goods I can buy changing over time, and how well my industry performs as an export good, etc.

Anyway.

 

[Scarfman]

Since we're talking about interest rates and the rich and the poor (and I'm not directing this to you, overthehill), I'm surprised that more isn't made of the way that the interest rate effects a massive redistribution of income.

When interest rates are low, it transfers wealth: from owners to borrowers, from rich to poor, from old to young.

When interest rates are high, it transfers wealth: from borrowers to owners, from poor to rich, from old to young.

As the baby boomers retire, I wouldn't be surprised to see the bastards encourage a high interest rate environment.

 

[overthehill]

Well, I agree that fiat money is supported by confidence, which is another way of saying that it's a mirage.

However, it's mirage with real world consequences, such as fatprop having to give me money, and the amount of goods I can buy changing over time, and how well my industry performs as an export good, etc.

Anyway.

I'm not saying it is a mirage. Fiat money is just as real as any other money system. It is the application of the system that I'm concerned with.

If more people understood that governments don't tax to spend and don't borrow (thus there is no genuine "national debt"), then we'd approach things very differently I believe.

Instead of wringing hands about deficits (merely numbers) we'd be more concerned with real problems like unemployment and underemployment, which have enormous impacts on society at large for generations. And they don't need to be un and underemployed.

Gittens' et al are leading the class war in a way by placing the burden of blame at the victims feet while the super rich are making off like bandits in a wave of fraud unparalleled in human history.

 

[Braveheart81]

Gittens' et al are leading the class war in a way by placing the burden of blame at the victims feet while the super rich are making off like bandits in a wave of fraud unparalleled in human history.

Gittins.

I disagree completely. I think Ross Gittins argues in exactly the opposite way. His general opinion well and truly seems to be that progressive tax systems are of benefit to society because the wealthier are taxed more heavily than the poor.

In my opinion, wealth only buys so much happiness. The idea of being low taxed so you can maximize your personal wealth might help you to a certain extent but the reality is that the society around you influences your happiness and life to such a large degree.

Improving the lives of the poor/working poor etc. improves society for everyone because it reduces crime and other social problems. Having better infrastructure also improves the lives of the wealthy because it makes the place they live (outside of their home which they have control over) better.

 

[Scarfman]

Ahh, OK.

I see that I have misunderstood your criticisms. I was trying to make them rational.

 

[Scarfman]

Braveheart81 - I think OTH would prefer the global financial system to be run by an international survivalist anarcho-syndicalist proletariat (with maybe the short term necessity for a leadership group, just for a brief period, to settle everyone down after the revolution, and maybe to take charge of certain decisions until the people learn how to decide what's good for them, and also perhaps to implement some temporary security measures to prevent our glorious revolution from being poisoned by the people's enemies, and in some limited cases the biased media will need to be controlled to stop the spread of lies, and since the people's enemies continue to sabotage the revolution resulting in very slight shortfalls in food production, elections will have to be delayed until stability is restored, by order His Glorious Chairman and President for Life.)

 

[overthehill]

Gittins.

I disagree completely. I think Ross Gittins argues in exactly the opposite way. His general opinion well and truly seems to be that progressive tax systems are of benefit to society because the wealthier are taxed more heavily than the poor.

In my opinion, wealth only buys so much happiness. The idea of being low taxed so you can maximize your personal wealth might help you to a certain extent but the reality is that the society around you influences your happiness and life to such a large degree.

Improving the lives of the poor/working poor etc. improves society for everyone because it reduces crime and other social problems. Having better infrastructure also improves the lives of the wealthy because it makes the place they live (outside of their home which they have control over) better.

On Gittens, I did qualify the statement with "in a way". It's a bit more complicated than that I think. Being "progressive" is a matter of degree I guess.

On the other, I agree. Unequal societies are bad societies, for everyone in them.

 

[overthehill]

Braveheart81 - I think OTH would prefer the global financial system to be run by an international survivalist anarcho-syndicalist proletariat (with maybe the short term necessity for a leadership group, just for a brief period, to settle everyone down after the revolution, and maybe to take charge of certain decisions until the people learn how to decide what's good for them, and also perhaps to implement some temporary security measures to prevent our glorious revolution from being poisoned by the people's enemies, and in some limited cases the biased media will need to be controlled to stop the spread of lies, and since the people's enemies continue to sabotage the revolution resulting in very slight shortfalls in food production, elections will have to be delayed until stability is restored, by order His Glorious Chairman and President for Life.)

Or we could just try to be a working democracy.