1. Can have, if the Fed accomodates by buying securities. But usually not accompanied by inflation. Deficits, by themselves, can't cause inflation because they leave the net supply of transactional money unchanged. 2. Not unless the Fed accommodates into a full-employment economy, which they normally would not do. Inflation nowadays is usually caused by an externality, which the Fed, because their tool bag lacks taxation and fiscal authority, has a hard time doing much about. Their main tool is the Funds rate which they can control. By raising the funds rate and Security sales from their inventory they try to slow down the economy by forcing up lending rates and decreasing bank reserve balances, hoping to reduce inflation by reducing aggregate demand for goods and services. They are denied the two most effective tools for fighting inflation, tax increases and fiscal measures. Only the Congress can wield these latter two powerful tools. 3. No, because other things are not equal! As rates rise existing bonds fall in value to yield a rising rate of return that tracks the nominal rates on new issues. Over the long term what matters to you is the time-weighted real yield. (Bond portfolios can be managed to reduce the impact of changing nominal rates.) 4.Possibly, if the Fed decides to accommodate pressure on rates, but remember the Fed is in charge of setting the wholesale price of money; not the market. The market must accommodate the Fed. 5. Yes. Being the source of the Reserve currency is a huge advantage to the U.S. It creates a monstrously large market for Treasury Securities. And too the Dollar's reserve status creates an incentive for our trading partners to support the dollar. Our partners have large hoards of dollar denominated assets and they don't want these assets to decline in value and they want the dollar well valued relative to their own currencies to support their own export market, which is the source of their dollar reserve. Being the source of the reserve currency carries with it the responsibility of supplying enough dollars to the rest of the world to support world commerce. This means we will run continuous net deficits in our trade and balance of payments accounts. This is not the disadvantage some ignorant Republicans believe it is, because imports increase our standard of living, whereas our exports increase the standard of living in some foreign country. (see Warren Moslers fascinating discussion of the affect of Fed rate increases in an economy that is experiencing relatively high "debt" to GDP ratio. Read debt here as the sum total of outstanding Treasury Securities. (Not the same as the cumulative sum of Treasury Securities sold by the Treasury).
Thank you for your detailed reply. By the way, what do you think would happen if income taxes were reduced or eliminated and the government increased borrowing to make up the shortfall? I would imagine productivity would increase, but other than that, would there be much long term difference?
Interesting question. And I think we have the answers already. First we now recognize that taxes are not for the purpose of raising money to spend. For spending, we can either tax or not tax, it doesn't matter; yet taxes must remain an important component of government money operations. Taxes are the most efficient way to remove money from the economy. If we have too much money in the economy, we can reduce the amount by taxing. If we have too much money in some sector of the economy , we can specifically tax that sector , etc. Most importantly, by our government's only accepting the U.S. dollar in payment of taxes, we must work at least enough to earn U.S. dollars to pay our taxes. This keeps us using the U.S. dollar rather than substituting another currency. In Ecuador, for example, you must get paid in U.S. Dollars, because that is the only currency the Ecuadorian government will accept in payment of Ecuadorian taxes. Taxes give sovereign money value!!! So taxes have at least two functions, they remove money from the economy when total spending is too high, and they give money value. Here is what Abba Lerner (a prime influence in MMT) wrote in 1943. The first financial responsibility of government (since nobody else can undertake that responsibility) is to keep the total rate of spending in the country on goods and services neither greater nor less than that rate which at the current prices would buy all the goods and services it is possible to produce. From this it is easy to understand why the true constraint within which an economy must operate is its productive capacity. What Lerner is telling us is that when spending is too high, the government should reduce spending and raise taxes. And if spending is too low, the government should do the opposite. Lerner continued on this same theme to write: An interesting corollary is that taxing is never to be undertaken merely because the government needs to make money payments... Taxation should therefore be imposed only when it is desirable that taxpayers shall have less money to spend. I think it would be safe to say that these statements by Lerner broke strongly from prevailing wisdom at the time. Today, Lerner's ideas comprise a part of the foundational influences of what is now called Modern Money Theory. Lerner did not understand the "detailed piping" of Central Bank and Treasury operations. Virtually no economists in his day did. Furthermore we were still technically on a gold standard in 1943, although Franklin Roosevelt's administration, after encouragement from Keynes, had forced a massive devaluation of the dollar in order to facilitate recovery from the depression and finance WWII. The Fed Chairman at the time characterized Roosevelt's action, as others have since, as tantamount to taking us off the gold standard. The Fed Chairman was furious! I think most MMT economists today believe both low taxes and permanently low interest rates are desirable. Your question was: "...what do you think would happen if income taxes were reduced or eliminated and the government increased borrowing to make up the shortfall?" Let me now attempt a compact answer: I think we could reduce taxes to zero if our only concern was generating money to spend, since we don't need tax revenue to spend! But that's not our only concern. We must continue to tax to maintain sovereignty over our money and give it value. Furthermore, we must pay attention to the necessity of maintaining a sufficiently progressive tax structure to preserve social equality and stability. Otherwise our democracy will be at even greater risk than it is now. A very progressive tax structure, substantially more progressive than our current structure, is one of the best weapons against the inescapable perverse reality of all capitalist economies, which is the return on capital is inherently greater than the economic growth rate. (see T. Piketty, "Capital in the Twenty-first Century"). As far as increasing "borrowing" to make up a shortfall, I assume you mean increasing what we are actually doing now by taxing less. What we are doing is not real borrowing but simply giving the appearance of borrowing. Yes, we might be able to print more and tax less. But we will always be constrained by our economy's capacity to produce. In other words, we can increase our spending up to the point of full capacity to produce. Spending beyond that will cause inflation. It's our economy's capacity that determines how much we can spend without creating inflation. If the amount of money in the economy is limiting productivity, then we can increase productivity by spending more. It's not a good idea, however, to eliminate taxes completely, because we would then risk loss of sovereignty over our money, we would put social stability at greater risk, and our money could become worthless. We do need taxes, we just don't need them to raise spending money. And too, we must remember that taxes are our most efficient weapon against inflation. Our problem is that only Congress can use that weapon, and they are politically not inclined to do so.
Taxes are to fund the gubmint. Gubmint's job to spend those taxes. Therefore it is no stretch at all to say gubmint raises money by collecting taxes from citizens/corporations.
Going to have a good think to digest all this. Does it matter much to the economy if Government spends more money on capital projects, such as food, energy, or transportation infrastructure versus increasing, say, bureaucracy? I presume no matter how the Government creates and spends money, jobs are created and more money is in the hands of people that will be spent or invested, increasing economic growth. On an individual basis, decisions regarding consumption and investment can have a profound effect on their wealth over time.
%% THAT; + user fees+ permits. Laughable that one speaker could goof up US economy; especially since he got fired for cause, with a huge number against him That could be good since the talking snake media disliked it + is wrong for so long.....................