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Comment by hugh3 | Hacker News Reader

He's a bit of a partisan, but in this case I think Krugman's analysis is basically correct, that real questions of debt sustainability aren't +/- $4trillion in the next 10 years, but longer-term insufficiently funded liabilities in healthcare and pensions:

Krugman is a Democrat partisan, but complaining about unfunded liabilities in healthcare and pensions is exactly what the Republicans are doing too. If Krugman and the Republicans agree that it's a big problem then... damn, it must be a big problem.

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Modern Monetary Theory reveals the entire premise of this issue to be false. The private sector does not fund the public sector in the way that most people believe. Non-convertible floating FX currency regimes (ie fiat money) such as the US,UK, and Japan can meet any and all financial obligations by issuing currency. Thus: 1) Taxes do not fund government. ( they 'back' the currency) 2) Treasury securities do not fund government. ( they are a tool to control interest rates) 3) Social security is solvent and we are not creating a financial burden for our grandchildren. (we are creating a burden by not upgrading and investing in infrastructure such as roads,highways,mass transit,etc) 4) Medicare is solvent ( though we have to clean up the fraud) 5) Private sector savings do not fund investment. ( banks create loans out of thin air)

The public is being lied to by politicians( on both sides of the aisle) who are selling a false need for government austerity when in fact what we need is the government to invest more. Much more.

People stop believing the bullshit from mainstream media bought and paid for by the plutocrats. Spend a bit of time to educate yourself on Modern Monetary Theory. It will change your political outlook. Its an earth is round vs earth is flat type of revelation. You can Google the following list of founders and well known MMT advocates in academia and the blogosphere.

Warren Mosler - www.moslereconomics.com Dr Randal Wray - UMKC neweconomicperspectives.blogspot.com Dr Stephanie Kelton - UMKC neweconomicperspectives.blogspot.com Dr Scott Fullwiler Wartburg College neweconomicperspectives Dr Bill Mitchel - U of Newcastle, Australia. http://bilbo.economicoutlook.net/blog/ Marshall Auerback http://www.newdeal20.org/ Dr James K Galbreath UT - Austin Mike Norman Fox Business Analyst www.mikenormaneconomics.org ( Mike takes a beating on Fox -bless him)

Sure, if you choose to look at it that way. But if you're going to make "Non-convertible floating FX currency regimes (ie fiat money) ... can meet any and all financial obligations by issuing currency", then you've got to consider that entire reference frame.

Issuing currency is identically equal to inflation, which is itself nothing more than a tax levied against those holding assets denominated in that currency. Using this option makes continued borrowing increasingly expensive, because those holding the debt wind up not getting repaid in actual value, only in nominal currency.

So when you look at the world from your perspective, the result is still that, long term, continually increasing deficit and debt is unsustainable.

> Issuing currency is identically equal to inflation

That's the main dogma of monetarism, but the empirical evidence for it is fairly contested (especially by neo-Keynesians). Measured inflation in many cases doesn't seem to actually move in line with what changes in the money supply would predict; for example, we should have much higher inflation currently than we do. Some monetarists did predict significant inflation, or even hyperinflation, two years ago, in the wake of stimulus spending and quantitative easing, but it didn't materialize. But I suppose I'll keep reloading http://www.hyperinflatingyet.com periodically just to be safe...

Sure, it can cause inflation, but it is incontrovertible that governments can always replay local currency debt by issuing currency (except the EURO, where priting money has been offloaded to an external entity). Which is why sovereign debt in local currency is always the risk free credit, by definition. And the US is in the enviable position where, due to the nature of the dollar being the global reference currency, all (most?) of its debt is denominated USD.

So I'm left puzzled at the recent debate about the US debt.

In the USA the printing of currency has also been offloaded to an external entity (the Fed), and the amount of currency to circulate has been fixed by Congress. Thus while in theory it is possible to just print money, in practice it is a lot more difficult than that.

Yes they can.. unless an angry mob whose life savings they just stole does not overthrow them. There are limits on how much you can do this and stay in power, they don't figure in the economics calculations but they do exist in real life.

Yes, in the long term, printing money will lead to an inflationary spiral. The expectation of that will cause higher interest rates. But the fact remains, that in an emergency, it is a possibility. And the possibility of creates greater safety/willingness to lend.

Moody's in its latest assessment says:

"The global role of the dollar, which underpins continued demand for U.S. dollar assets, .... provides unmatched access to financing, meaning that the U.S. government can support higher debt levels than other governments"

http://economix.blogs.nytimes.com/2011/08/08/moodys-why-the-...

You have to define what printing money means? The term doesn't apply to modern fiat money. And naturally I should define what modern fiat money is. But in a broad sense the government should continue issuing currency( by increasing spending -preferably on infrastructure- or reducing taxes) which increases aggregate demand until spare capacity ( which includes unemployment) is exhausted in the economy.

No, an increase in the money supply directly leads to inflation (other things being equal, notably the velocity of money).

It's right there in the terminology: money supply. What happens when the quantity supplied of a good increases? With a constant quantity demanded, the price goes down. So it is here: if the quantity of money supplied increases, the value of that money decreases.

Thus, paying one's debts with inflated currency means that you're giving yourself a discount off the amount you owed. And that creates lower safety/willingness to lend.

> Issuing currency is identically equal to inflation

That simply isn't true, not even close to true.

<i>Issuing currency is identically equal to inflation</i> No. There is demand pull inflation and cost push inflation. If you remember from econ, inflation or price level is the intersection of supply and demand curves. Since demand and supply are not constant, it is possible to issue greater amounts of currency in the face of greater amounts of supply and still see prices decline if the increase in supply outweighs the increase in demand from issuing more currency. What you are referring to is a gold standard or fixed exchange regime concept(this is what Austrians advocate). In a gold standard, money is a receipt for a piece of gold sitting in a vault. So issuing more money without increasing the supply of gold dilutes the value of money in terms of gold. In fact, this is where the term printing money comes from in the first place. This is not applicable in a fiat currency regime. In a fiat money regime, you can give everyone a million dollars tomorrow and if they don't spend it, there is no inflation. No such thing as printing money in a fiat money regime. All money is created and destroyed in the same way. There is no magical level where money goes from not being printed to being printed in fiat.

<i>continually increasing deficit and debt is unsustainable.</i> Yes but you have to have a model to tell you when to stop increasing deficits and arbitrary numbers like 10 Trillion or 4 Trillion don't mean dick. With modern money, the size of the deficit is equal to the savings of the private sector. Paying off the deficit decreases savings to the private sector which either leads to a recession or credit bubble ( to make up for the lost money.) Deficits need to be targeted based upon the level of inflation and unemployment in the economy that policy makers wish to achieve. Obama cannot on the one hand call for "fixing the deficit problem" while on the other hand calling for more jobs. The two are pretty much antithetical.

inflation or price level is the intersection of supply and demand curves

As I understand your claim, you seem to be regarding the entire market as a single monolithic commodity -- a common Keynesian error.

Sure, the prices of discrete commodities fluctuate as their quantities supplied and demanded fluctuate. That's not at all the same thing as devaluation of the currency due to increase in the money supply.

That said, there's a good deal of controversy over the effect of wages (whose price tends to be sticky, preventing "proper" adjustment for supply/demand). Thus, even Austrians think that a moderate level of inflation is good, because it acts as a hidden throttle on the effect of wage increases.

Was referring to aggregate demand and aggregate supply.

but they are again refusing to face facts in front of them..its not unfunded health care liabilities..its UNFUNDED LIABILITIES in FED Budget that means anytime a law is passed without the means to pay for it..for example going to war in Iraq, etc without raising taxes to pay for it..

Another example taking over the Ed Loans from the private sector and than not raising some type of tax to pay for it.

It should be that in order to pass a bill in Congress that a pair of bills one to enact the law and one to pay for it. That is the budget reform that we need.

My preferred solution is this:

1. Every year, the US Government figures out how much money it wants to spend.

2. Then, it figures out what the (flat) tax rate would need to be in order to rustle up that much money.

3. Then, it sets the tax rate and sends everyone a bill.

You could do this a year in advance just to make sure everybody knew how much they'd be getting taxed. But the important thing is that everybody in the country needs to see the immediate hip-pocket consequences when the government spends more money.

Still doesn't help with things like SS and Medicare, though, which cost a little bit of money in the year they're passed and vast sums of money several decades into the future.

Then a financial crisis hits and the government finds itself unable to react to the needs of a paralyzed market. It's a nice idea in principle. But any time something like this or a balanced budget law/rule comes up in congress, it never has a provision for reacting to emergencies.

The problem with that is, as we've seen (and are seeing), it's trivial to manufacture an 'emergency' or a 'crisis' on demand, whenever it's convenient.

A government that can react to real crises while being vulnerable to fake ones is the best option I've seen so far. People are very creative when it comes to working around problems. Some people see data processing efficiency as a problem to solve. Others see finding ways to manipulate government for profit as one.

This is a really stupid idea.

That kind of tight-budgeting might work when introducing a 7-year old to the concept of an allowance, but national economics is slighly more involved.

"Vast sums," LOL. Very telling you don't mention the drain on the economy by the military or by the financial industry itself.

You have to give him credit for the less-is-more approach to this answer, you summed up centuries of macroeconomics and people who dedicated their lives to finding the most optimal solutions in a very easy to follow <ol>, well done!

Your student loan bill is a bad example. In this case the Gov't was already subsidizing these loans and being charged enough by the banks servicing them for those banks to also turn a profit on that line of business.

By bringing it in-house, the governement doesn't increase their liabilities, and now they don't have to pad the profit margins of loan servicers.

But anyways, generally, what you're talking about is call "paygo" rules. They've been instituted before as house rules (and commonly ignored), you're advocating for them being codified into law. Not a bad idea I don't think, but i haven't given it a lot of thought.

> Another example taking over the Ed Loans from the private sector and than not raising some type of tax to pay for it.

Don't take talking points at face value... Student loans in the "private sector" were a misnomer--they were backed by the Fed Gov't. The private lender had no risk, just guaranteed profit. We saved money by ending subsidizing the private market and making the loans directly. The "takeover" was simply ending the government backing of private loans. Not much of a takeover if you ask me. The private sector can still make loans all they want, they just have to be on the hook for it.

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