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This does not address the question of whether a balanced budget is even desirable. Equating the budget of the currency issuer with the everyday experience of th

This does not address the question of whether a balanced budget is even desirable. Equating the budget of the currency issuer with the everyday experience of the budget of the currency user is a fallacy. Looking at the respective balances of the three sectors of government, domestic private, and external, it is obvious that flows are conserved. Given net imports (i.e. more money flowing into the external sector than out of it), a balanced government budget can only occur if the private sector is in deficit, i.e. more money flowing out of the private sector than flowing into it. Empirically, external balances change only very slowly, unless artificial trade barriers (tariffs etc.) are raised. So in the end, the political choice is between deficits in the private sector, and deficits in the government sector (and of course a range of choices in-between).

kd0amg 15y ago
it is obvious that flows are conserved Given that government can issue additional currency, conservation of flow doesn't seem particularly obvious to me.
- nhaehnle 15y ago
  This is a flows vs. stock thing that I could have made clearer. The additional currency that is issued by the government does not disappear in a black hole (with the possible exception that, technically, dollar bills do get lost in the wash). Instead, it either ultimately flows back to government, or ends up in one of the other sectors. I think the relevant constraints are clear to everybody here, which is why I was not more explicit.
jpadkins 15y ago
What about the moral implications that deficit spending is inter-generational taxation? I think that is a clear case of taxation without representation.
- wtvanhest 15y ago
  This will most likely be fixed with high inflation, but it is a concern.
- nhaehnle 15y ago
  Inter-temporal taxation does not exist in any meaningful way. Future citizens do not send taxes to the present government. More importantly, when have you last consumed a good that was produced in the future? In real terms - and that is what ultimately matters - there is no transfer between different times (well, there is some amount of transfer from the past to the present, but this is usually not what people complain about ;)). Now what you probably meant to say is this: The existence of the debt implies that in the future, there will be interest payments. Most likely (unless the Modern Monetary Theory revolution in education takes place before then), people in the future will be lead to believe that these interest payments come from tax payers. This has potential moral implications because there is a tendency that those citizens who overwhelmingly receive the interest payments in the future are not the same as the ones who pay the taxes (also in the future). Absolutely. But this is more about equity and distribution than it is about the fact that there is a debt. I have also commented on this before: http://news.ycombinator.com/item?id=2730278 http://news.ycombinator.com/item?id=2730278 Edit: I have to correct myself. One could perhaps talk about some form of inter-temporal taxation in the context of using non-renewable natural resources. However, I personally think that it's still better to talk about that in terms of sustainability rather than taxation.
  - gaius 15y ago
    Well, not in a literal sense perhaps, but practically, if you are liable for a debt that was incurred before you were even born, let alone of voting age, how is that any different?
    - nhaehnle 15y ago
      The question is: Who are you liable to? You are never liable to some dead person, but to some other living person. If, in the future, there are people who are carrying some kind of burden because of the government debt established today, then there will also be, in the future, people who are benefiting from the government debt established today. This is why I consider it a red herring to think of the debt as an inter-temporal issue. It is, if anything, at most an distributional fairness issue among the people living at any one point in time. You might worry that in the future, the people won't have the tools at their disposal to fix those distributional fairness issues. However, since a monetarily sovereign government has the ultimate control over the interest rate that it pays on its debts (and the flows of interest payments are what is most relevant), this is not a concern. I realize that this last part is very counter-intuitive if you're used to thinking only in terms of options available to the currency user. Read about how interest rates and liquidity operations of the central bank actually work: http://pragcap.com/resources/understanding-modern-monetary-system http://pragcap.com/resources/understanding-modern-monetary-s... The bottom line is: If the political will to do it is there, those distributional issues can always be fixed in the medium term by manipulating the interest rate. One might have to switch over to using fiscal policy for inflation control, and capital constraints to limit runaway bank lending, but some economists argue that this is preferable anyway.
amalcon 15y ago
Well, post-Keynesian economics (the only school that even asks this question) seems to be underrepresented on the Internet to nearly the extent that the Austrian school is overrepresented. I agree that it is silly (from a fundamental standpoint) to make such a big fuss over the federal budget deficit while completely ignoring the trade deficit, but I understand why people do it. If the powers that be were monolithic, it would be easy to fix the budget deficit. The trade deficit is more of an emergent property that people don't understand that well. Since in reality, it's all smoke and mirrors either way, I can see why people go with the easier story to tell.
- chrismealy 15y ago
  Also, private debt. The Great Depression and the recent global financial crisis were caused by an explosion of private debt. And nobody pays any attention at all to aggregate private debt.
wtvanhest 15y ago
Capital flows between groups is an interesting way to look at it, but it doesn't consider efficiency of what money is used for, invested in, spent on. You could have identical capital inflows and outflows (i.e. money coming in to the US from the international community) but it could be wasted on things it shouldn't. 3% of GDP is very reasonable unless extreme circumstances were present. In that case, politicians might just have to resign after their term.
rsbrown 15y ago
Buffett wasn't suggesting we mandate a balanced budget, simply a cap on deficit spending proportional to the nation's GDP.
cheez 15y ago
This line I see on the Internet with the excuse that government cannot go bankrupt is complete rubbish. This is what you are implying with differentiating the issuer with the user. The only reason the US is able to print money is because it is a de facto world currency. How many years do you think it takes to replace a de facto currency for international trade? Not many. Russia and China are already trading in their own currencies instead of the USD. I'm sure Brazil wants to follow. There are some political thinkers who theorize that the Libyan and Iraqi wars are meant to prop up the dollar. The Libyan dictator wants a gold-backed currency for Africa and Iraq and Iran want(ed) to trade in Euros. I think the Libyan connection is pretty far fetched but I am not in the know so who really knows? If any of those transitions had happened 10 years ago, the USD would be severely diminished today, reducing the power of the US. Less countries would need the currency and I believe you would see even more real inflation. So yes, the government of the US can effectively go bankrupt if no one wants the currency anymore. And that includes its own people. It happened in the Great Depression because some people realized it was the money system that was a large cause of the depression. The wild card? That the US actually embarks on the "Everyone must use USD or end up like those other guys" rampage. For what it's worth, I hold a shitload of USD-denominated assets because I believe in the American system more than any other. But man, that belief being tested hard these days...
lhnn 15y ago
It sounds absurd to me that you say the private sector MUST be losing money if the government has a balanced budget. That is absolute hogwash.
- jcarreiro 15y ago
  If the government has a balanced budget, _and_ there is a trade deficit, then the private sector must be losing money -- otherwise, where is the money that is being transferred to the external sector coming from?
  - lhnn 15y ago
    As a note, this reply makes clear an assumption you made in your original post: That we have a trade deficit. I now understand.

kd0amg 15y ago

it is obvious that flows are conserved Given that government can issue additional currency, conservation of flow doesn't seem particularly obvious to me.

nhaehnle 15y ago
This is a flows vs. stock thing that I could have made clearer. The additional currency that is issued by the government does not disappear in a black hole (with the possible exception that, technically, dollar bills do get lost in the wash). Instead, it either ultimately flows back to government, or ends up in one of the other sectors. I think the relevant constraints are clear to everybody here, which is why I was not more explicit.

jpadkins 15y ago

What about the moral implications that deficit spending is inter-generational taxation? I think that is a clear case of taxation without representation.

wtvanhest 15y ago
This will most likely be fixed with high inflation, but it is a concern.
nhaehnle 15y ago
Inter-temporal taxation does not exist in any meaningful way. Future citizens do not send taxes to the present government. More importantly, when have you last consumed a good that was produced in the future? In real terms - and that is what ultimately matters - there is no transfer between different times (well, there is some amount of transfer from the past to the present, but this is usually not what people complain about ;)). Now what you probably meant to say is this: The existence of the debt implies that in the future, there will be interest payments. Most likely (unless the Modern Monetary Theory revolution in education takes place before then), people in the future will be lead to believe that these interest payments come from tax payers. This has potential moral implications because there is a tendency that those citizens who overwhelmingly receive the interest payments in the future are not the same as the ones who pay the taxes (also in the future). Absolutely. But this is more about equity and distribution than it is about the fact that there is a debt. I have also commented on this before: http://news.ycombinator.com/item?id=2730278 http://news.ycombinator.com/item?id=2730278 Edit: I have to correct myself. One could perhaps talk about some form of inter-temporal taxation in the context of using non-renewable natural resources. However, I personally think that it's still better to talk about that in terms of sustainability rather than taxation.
- gaius 15y ago
  Well, not in a literal sense perhaps, but practically, if you are liable for a debt that was incurred before you were even born, let alone of voting age, how is that any different?
  - nhaehnle 15y ago
    The question is: Who are you liable to? You are never liable to some dead person, but to some other living person. If, in the future, there are people who are carrying some kind of burden because of the government debt established today, then there will also be, in the future, people who are benefiting from the government debt established today. This is why I consider it a red herring to think of the debt as an inter-temporal issue. It is, if anything, at most an distributional fairness issue among the people living at any one point in time. You might worry that in the future, the people won't have the tools at their disposal to fix those distributional fairness issues. However, since a monetarily sovereign government has the ultimate control over the interest rate that it pays on its debts (and the flows of interest payments are what is most relevant), this is not a concern. I realize that this last part is very counter-intuitive if you're used to thinking only in terms of options available to the currency user. Read about how interest rates and liquidity operations of the central bank actually work: http://pragcap.com/resources/understanding-modern-monetary-system http://pragcap.com/resources/understanding-modern-monetary-s... The bottom line is: If the political will to do it is there, those distributional issues can always be fixed in the medium term by manipulating the interest rate. One might have to switch over to using fiscal policy for inflation control, and capital constraints to limit runaway bank lending, but some economists argue that this is preferable anyway.

amalcon 15y ago

Well, post-Keynesian economics (the only school that even asks this question) seems to be underrepresented on the Internet to nearly the extent that the Austrian school is overrepresented. I agree that it is silly (from a fundamental standpoint) to make such a big fuss over the federal budget deficit while completely ignoring the trade deficit, but I understand why people do it. If the powers that be were monolithic, it would be easy to fix the budget deficit. The trade deficit is more of an emergent property that people don't understand that well. Since in reality, it's all smoke and mirrors either way, I can see why people go with the easier story to tell.

chrismealy 15y ago
Also, private debt. The Great Depression and the recent global financial crisis were caused by an explosion of private debt. And nobody pays any attention at all to aggregate private debt.

wtvanhest 15y ago

Capital flows between groups is an interesting way to look at it, but it doesn't consider efficiency of what money is used for, invested in, spent on. You could have identical capital inflows and outflows (i.e. money coming in to the US from the international community) but it could be wasted on things it shouldn't. 3% of GDP is very reasonable unless extreme circumstances were present. In that case, politicians might just have to resign after their term.

rsbrown 15y ago

Buffett wasn't suggesting we mandate a balanced budget, simply a cap on deficit spending proportional to the nation's GDP.

cheez 15y ago

This line I see on the Internet with the excuse that government cannot go bankrupt is complete rubbish. This is what you are implying with differentiating the issuer with the user. The only reason the US is able to print money is because it is a de facto world currency. How many years do you think it takes to replace a de facto currency for international trade? Not many. Russia and China are already trading in their own currencies instead of the USD. I'm sure Brazil wants to follow. There are some political thinkers who theorize that the Libyan and Iraqi wars are meant to prop up the dollar. The Libyan dictator wants a gold-backed currency for Africa and Iraq and Iran want(ed) to trade in Euros. I think the Libyan connection is pretty far fetched but I am not in the know so who really knows? If any of those transitions had happened 10 years ago, the USD would be severely diminished today, reducing the power of the US. Less countries would need the currency and I believe you would see even more real inflation. So yes, the government of the US can effectively go bankrupt if no one wants the currency anymore. And that includes its own people. It happened in the Great Depression because some people realized it was the money system that was a large cause of the depression. The wild card? That the US actually embarks on the "Everyone must use USD or end up like those other guys" rampage. For what it's worth, I hold a shitload of USD-denominated assets because I believe in the American system more than any other. But man, that belief being tested hard these days...

lhnn 15y ago

It sounds absurd to me that you say the private sector MUST be losing money if the government has a balanced budget. That is absolute hogwash.

jcarreiro 15y ago
If the government has a balanced budget, _and_ there is a trade deficit, then the private sector must be losing money -- otherwise, where is the money that is being transferred to the external sector coming from?
- lhnn 15y ago
  As a note, this reply makes clear an assumption you made in your original post: That we have a trade deficit. I now understand.