Re: Re: Much ado about nothing? A light clicks!

Randy,

Warren sent me a reply separately with some comments and I still have to
digest some of his points.

Basically, I can not accept the position that fiscal deficits and, for that
matter, current account deficits can be sustained indefinitely. I understand
the logic that Warren has provided and, if I may state it as I understand
it, the sustainability is contingent on keeping interest rates low, very low
in fact. Otherwise, interest payments will then start to be a burden.

Given this, I then wondered just how tenable are keeping interest rates low,
not that it is not within the power of the Fed to do so, rather, keeping
interest rates low while continuing to increase debt levels have their
effects on the financial markets. There are endo/exogenous forces involved.
A flight from US assets will raise interest rates and exchange rates. A rise
in demand for Euro as a reserve asset will lower the demand for the US
dollar. I cited, as a scenario builder, the moves to create other currencies
which will effectively raise the demand for Euro although Warren has
commented privately that an oil-priced-in-Euro will have no effect on the
demand for dollars. I don't understand this position since one would expect
non-oil producing countries to increase their Euro reserves. Furthermore, we
see the CRB rising, we see gold rising, we see in our daily lives prices
rising notwithstanding what the official CPI says. I go back to "only labor
creates value" and as each "unfunded" fiat is spent, the unit value of fiat
decreases. Some say, it depends. Depends on whether the spending will result
in capital spending and job creation?

What if the present debt sustainability (it hasn't shown in domestic
inflation) is only because of the defaltionary environment? What about
maldistribution effects which I think are not even in the equation when
discussing debt sustainability? So much of the value created is going into
financial assets because of the superstructure, the real economy is being
impoverished. Then there is technology which so far has displaced labor.
Don't these two factors mean a slow but deteriorating level of aggregate
demand? And, if don't see it empirically, it is because of all of the debt
creation. Remove debt. The system crashes.

Allow me to say however that I continually wonder whether we have, indeed,
entered into a new era where things like soft money or social credit (both
of which I do not understand) are the new paradigm. My present anxiom is:
Only labor creates value. This value is stored in money.

I hope this clarifies my confusion.

Gary

(I note that the constraints on spending imposed by Maastricht are being
reviewed and it wouldn't surprise me if they did.)

----- Original Message -----
From: "Wray, Randall" <wrayr@umkc.edu>
To: "Gary Santos" <evs@info.com.ph>; <she_forum@adam.itk.ntnu.no>
Sent: Wednesday, February 12, 2003 10:15 PM
Subject: RE: [HE] Re: Much ado about nothing? A light clicks!

> Gary: I wasn't quite sure what point you were trying to make, or whether
it was related to points previously made on this line. Bill, Warren, and I
are NOT claiming the central bank can both exogenously set the interest rate
AND set the exchange rate. Quite the contrary. Rather, we argue the CB
should set the overnight rate at a low level (even 0) and let the currency
float where it may. We do not disagree with you that "speculators" (or,
better, the "rest of the world's demand to net save in dollar assets")
impact the value of the dollar. I think we would probably disagree about the
extent to which the CB could manipulate the exchange rate (without a
currency-board arrangement, anyway) if it chose to abandon a floating rate
(which we think is a very bad idea).
> Note, however, that the US dollar is not crashing. the euro is simply
moving back toward its previous level. And, in any event, Euroland will very
soon come crashing down, and the euro may well self-implode. Hey, the
Argentinean peso remained very strong right up to the end, too!
> randy
>
> -----Original Message-----
> From: Gary Santos [mailto:evs@info.com.ph]
> Sent: Sat 2/8/2003 10:58 AM
> To: she_forum@adam.itk.ntnu.no
> Cc:
> Subject: Re: [HE] Re: Much ado about nothing? A light clicks!
>
>
>
> Hi, Warren. And, as you know I, too, am having a hard time understanding
the
> "no consequence" to borrowing. So, if we could cover that ground again, if
> you will: (And, I don't think you are a Nazi. You're a regular guy with
> wierd but perplexing ideas.)
>
> I can understand that the Fed has full control over the interest rate. I
can
> understand that it also has a considerable degree of control over the
> exchange rate especially when exporter country central banks have an
> interest in keeping their exchange rates competitive. BUT, the private
> sector, the speculator and the investing funds, do not have to cooperate
to
> keep the dollar strong. And, certainly, not all central banks. After
> conventional wisdom tells them that the US debt level is too high, they
will
> likely choose not to net save in US$. They will say, "Let the central
banks
> have all of the dollars. Give us other fiat especially those with less
> uncertainty."
>
> And, isn't this happening even now? We belittle the dinar of Mahathir and,
> perhaps, even the Arab dinar but doesn't this show the crack in the dike?
> The same with the move to price oil in Euro, the rise in the CRB Index and
> of some central banks diversifying some of their reserves into gold?
>
> To be sure, the confluence of events over the last decade or two, all
> contributed to the strong dollar and the bind the exporting countries find
> themselves in, in that, they perpetuate the status quo and allow the US to
> "borrow" from the world and from its citizens. The US is, indeed,
fortunate
> that China is willing to price themselves so low. But, the lifestyle that
US
> citizens have grown accustomed to is contingent on so many changing
things.
> The logic of sustainable borrowing even appears to me dependent on a
> deflationary mentality -- that the money stock does not show up in
spending
> and borrowing because people want to save.
>
> Certainly, the central banks with an interest to keep the dollar strong
can
> keep the status quo going for some time, perhaps, even as long as a
decade.
> But, the bigger the debt level as fiscal deficits and current account
> deficits continue, the bigger the uncertainty, the stronger the tendency
to
> diversify away from the US$. And the bigger the fallout in the end. Fiat
> does not create value, only labor does. There are two cracks in the dike:
> inflation imported into the US (China implodes, oil is priced in Euro) or
> the exchange rate can't be held or both. Imagine what will happen if
> interest rates are forced upward due to bond selling.
>
>
> ----- Original Message -----
> From: "Warren Mosler" <mosler@rocketmail.com>
> To: <she_forum@adam.itk.ntnu.no>
> Sent: Saturday, February 08, 2003 8:55 PM
> Subject: Re: [HE] Re: Much ado about nothing? A light clicks!
>
>
> >
> > --- Peter Kriesler <P.Kriesler@unsw.edu.au> wrote:
> > >
> > >
> > >
> > > OK, so what you are saying is that if the government
> > > borrows from the
> > > private sector by selling bonds, then, if we rule
> > > out any interest rate
> > > effect, there will be no change to the level of
> > > aggregate demand. I can
> > > accept that. However, if that is the case, then what
> > > problem is there with
> > > government borrowing?
> >
> > None, it's just not an imperative for spending
> > as most think. Budget constraint, etc. and all that.
> >
> > If the government increases
> > > expenditure, then, I
> > > agree, "financing" is irrelevant. However, if it
> > > makes people happy, to
> > > have an equivalent amount of borrowing and it has no
> > > impact, then what is
> > > wrong with that?
> >
> > Nothing at all, apart from a waste of accounting
> > time, and all those bond traders that could be
> > otherwise employed curing cancer, etc.
> >
> > warren
> > >
> > >
> > > Peter Kriesler
> > > School of Economics
> > > UNSW
> > > Sydney 2052
> > > http://economics.web.unsw.edu.au/people/pkriesler/
> > >
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> >
> >
> > ===> > http://www.mosler.org
> > http://www.moslerauto.com
> >
> > Primary email contact: wmosler@mosler.org
> >
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Received on Thu Feb 13 04:02:15 2003