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Most Countries issue their own currency. If a country is able to issue its own currency why should it bother taxing the people to pay for services?? A country that issues its own currency could issue enough currency to pay for the necessary social services of that country. No Tax burden is needed to pay for the necessary public services.

Not sure if serious...

I am serious. Every modern country issues its own currency. So why does a country need to tax its citizens to pay for services???

Because they can't just print currency endlessly. Simple supply and demand says the more they print the less it's worth.

Do some reading in basic economics.

So when should they stop printing money?

To enable a monopoly on force through coercive debt.

In principle you're right.  They could just engage in inflation.  Print money to pay for state services, the money finds its way into the economy, inflation ensues.  As long as it's kept under control, it could work.  People just get really upset when they find that their money-in-the-bank has devalued by half.  Somehow, part-tax and part-inflation seems to be understood as more acceptable.  Watch "money as debt".

Well, that is, in effect, taxation isn't it? At least it is what I get from Iseree22's proposal.

It is very practical but not the same mechanism. First off, if the State currency weren't used for taxation, who says it would have any exchange value? I would use a different medium to store my wealth, therefore avoid taxation by inflation. It's almost what's happening now to some degree, people who don't have enough to invest get taxed by inflation.

Printing money generates inflation: inflation is hurting primarily those who cannot invest.
Those who earn enough to save and invest can hedge against the effect of inflation for instance by buying a real estate property.
In short, taxes are a way to limit the gap between the rich and the poor.
The gap can be further limited if income taxes are progressive, not flat rate.

And what 'thing' other than the contraction of the money supply and velocity of money leads to deflation ?

You can also prohibit any alternative currency and investment method. That's what happens when the taxation system collapses. It was the case in the 80's in my country, my relatives were involved in foreign currency trafficking during that era, they smuggled US dollars in, hiding them in barrels of sand. :) Value was almost always measured in USD (and DM of course) and we were all millionaires in our State currency. ;)

The central bank its constantly researching and studying that. There is no simple answer or concrete number.

Most goverments have a central bank. They way money is printed is quite complicated. The government 'sells' bonds to the central bank for x amount. The central bank prints out the money and buys the bonds. The bank then waits for the bonds to mature and get their money back plus some interest.

The idea is that the government won't go crazy because the debt will be top high, and taxpayers pay off the debr. Such is the theory. That each unit of currency is backed by future work.

So the government can, in effect, print more money, but only at a huge cost.

The Treasury, not the central bank is the primary source of money. The Central Bank only swaps one form of money for another, and has little effect on real money supply(M0-M2), unless during times of crisis.

Is printing money to employ an unemployed person in productive work inflationary ?

The central bank sets monetary policy. The treasury just prints money.

That is half right. Except a country that issues it's own money can keep rolling-over the debt indefinitely. When the debt falls due the country can simply issue more debt, receive cash from the market or the central bank, and then pay back the value of the debt. The current process is more complex than it needs to be. The amount of currency in circulation is proportional to the amount of National Debt, iff the Country issues its own currency.

What you are missing is that a point is reached when the country can't get credit and its currency is not accepted. 

So the central bank will never be able to purchase government debt in exchange for currency???

How is it ever possible for a country that issues its own currency to not have enough of that currency??

That is like saying to bitcoin miners; 'the only way you can mint more bitcoins is if you first purchase them from the market' under such a regime it would be impossible to increase the number of bitcoins.

This is so far off reality it's cruel. 

Why don't you post something with substance? Instead of relying upon immature replies to cover your lack of understanding.

Why don't you take 15 minutes to read about Weimar or Zimbabwe or Greece or any other country where the State has run out of credit?

Obviously troll thread is now fulfilled.  It was pretty clear he wasn't asking to get a real answer, but I gave him the benefit of a doubt.

Zimbabwe and the Wiemar had to much credit........

Greece on the other hand does not print the Euro. So if you had bothered to thoroughly read the posts of this thread you would realize that what I'm talking about does not apply to Greece.

Next time, please, take a few moments to think.

Please take time to read about them.  They didn't have credit - thats why they had to print money.

Taxes generate income from the act of trade. An inflated money supply can only be spent once, and will destroy the currency very very quickly. Taxes are forever, and don't need to cause inflation.

This is explained very clearly in Debt: The First 5,000 Years (http://www.nakedcapitalism.com/2011/08/what-is-debt-%E2%80%93-an-interview-with-economic-anthropologist-david-graeber.html), which I highly recommend to anyone who wants to really understand economic life (as opposed to just swallowing the prevailing theoclassical theory (http://www.nakedcapitalism.com/2010/08/william-black-theoclassical-law-and-economics-makes-the-law-an-ass.html)).

The imposition of taxes, which must be paid in government currency, is precisely what gives government currency its worth.  Even if you conduct your business entirely in bitcoin, if you live in the US or are a US citizen, IRS will still want its share of your income paid in USD.  This creates great demand for an object which the government is ultimately the sole provider of, which gives it a great deal of power.

Yea your right. Chartalism is the economic thought that asserts that the Government( or currency issuer) must spend before it can collect taxes. How can a state collect taxes if the currency has not been issued yet??


Why does a country need to obtain credit, if it creates its own currency???

The only issue is a possible inflation. Which is very unlikely to happen in any economy that has high unemployment. Not all money printing is inflationary. Using new money to employ people is potentially deflationary. When someone is employed then total production of goods and services increases, which is deflationary. So if the amount of goods & services created is greater than the wage it took to employ someone, then such a situation is deflationary.

Printing money increases they money supply and so it, usually, devalues the currency. Paying taxes decreases the money supply, ideally.

To be honest, there should only be taxes and no money-printing. Or only print money to ensure each unit maintains its value. But that is a difficult balance and usually ends up with a devaluing currency.

Printing money is a tax.

Only with money printing they take the wealth proportionally from all bank accounts, so it's more like a savings tax rather than an income tax.

Then why does it have worth OUTSIDE of the country as well?

Well, if Japanese valued their Yen, it makes sense that anyone else around the world would also value the Yen, because they can buy things from the Japanese with it.

From a Chartalists p.o.v the State creates money, spends it via appropriations and then taxes the community creating a demand for the currency.

While that is workable, it implies that the sole or primary purpose of taxation is to create value for the currency, which is absurd.

It sounds absurd, but the idea that a country that creates its own currency can run out of money is more absurd.

Taxes appear to serve two purposes, creating a demand and regulating inflationary pressures. When inflation increases taxes should also increase.

Lets consider a simple example.  A government want to buy an aircraft for $100 million.

Can they work their printing press to make $100 million in their own currency?  Only if the seller accepts it.  Sellers won't - they want the be paid in a "hard" currency like the dollar, sterling or the euro.

The only way the government can print enough money to buy the aircraft is to print enough that the pulp value is $100 million and barter it for the aircraft. 

It's not absurd at all.  You've overlooking the fact that currency has no fixed value and no intrinsic value.

They can print all the currency they want, but that doesn't mean it'll have any value.


"We can guarantee cash, but we cannot guarantee purchasing power." - Alan Greenspan

Hate to burst your bubble but this is how the Dollar, Sterling and Euro work.

I'll use the U.S as an example. Geithner is told to fund the purchase of a $100 million aircraft. The Treasury currently has $0 dollars, what does Geithner do?? He creates Treasuries and sells them to the market in exchange for Dollars to pay for the aircraft. If no one wants to buy the Treasuries and inflation is within the FEDs target window, then the FED will print money and purchase the Treasury. There is nothing hard about the U.S dollar. It is backed by nothing more than faith.


Your right, if there is an inflation then they can't print more money without doing damage to the economy. But printing money to lower unemployment is not inflationary. Whenever fresh money is used to utilize unused capacity, then inflation will not occur.

And using fresh money to fulfill obligations like SS, Medicare, and the federal payroll is NOT using it to utilize unused capacity... so your statement is still absurd.


You can't just create money to pay the government's bills.  You CAN print money to fund infrastructure projects, do research, and other things that will actually create jobs and grow the economy.  This is what's being attempted now.  But that's not remotely comparable to just saying, "hai guise, no more taxes! We're just going to print what we need to pay the bills!"

Perhaps your right, then the next question is; why are people trying to reduce the national debt ?

Because like any debt, we're getting to the point that servicing the interest alone is becoming a significant part of our budget.  We're up to almost 5% of the budget at this point.  That's over $150 billion per year in interest charges.


Most importantly, go back to what you said about how government spending works.  We sell treasuries on the open market and people buy them because they believe they'll be paid back.  We're rapidly approaching the point where people are doubting whether they'll actually get paid back.  Of course we can just print money to pay them back with any time we want, but go back to the quote from Greenspan - giving them cash isn't the same thing as giving them value.  So if no one else wants to buy our debt, we're left with the Fed.  That's why the Fed is independent of the government.  They won't keep buying treasuries forever either.

So do we really NEED to reduce the national debt?  No.  But we absolutely have to stop adding to it, especially at the ridiculous rate we're going now.  The debt can grow, but it needs to do so at a sustainable rate so that we're not: #1, overrunning ourselves with interest payments, and #2, grossly outpacing real GDP growth.  It's not all that much unlike your previous question.  We can increase money supply, but only if it's adding real value to the economy.  We can increase debt, but only if it's adding real value to the economy.

The FED will continue to purchase Treasuries indefinitely. This is how they set interest rates. The FED generally doesn't print money and pay interest on peoples bank accounts. The FED sells treasuries in exchange for cash. Each Treasury has an associated yield and it is the 'tool' that actually sets interest rates.

So yes the FED will continue to purchase Treasuries indefinitely, as long as the inflation rate does not go above the FED limit. If the State uses the money collected from the sale of Treasuries to increase the productive capacity, then the risk of inflation deminishes. Correspondingly, the FED will continue to purchase Treasuries indefinitely.

So the National Debt should be increasing at a steady rate to increase the productive capacity of the economy. The money from the sale of Treasuries should go towards programes that private industry are unwilling to invest in. Things like education, the environment and healthcare. There will be a corresponding increase in the productive capacity of the U.S economy which will lead to real value for Treasury holders.

The National Debt has been increasing steadily since its inception, so why has it never been an issue before?? Because it isn't an issue.

Iseree22, you're one of those "monetarily sovereign nation" people, aren't you?  Please read some economics.  Any.  Keynes, Rothbard, Mankiw, Caplan, Mises, Friedman....whoever. 

You are stating that we can continue to increase the national debt forever.  This is absurd.  What happens when the national debt reaches 20 trillion dollars and interests rates rise to 10%?  At that point almost all the US revenues will be used on paying off the interest on the national debt.  Then what?

And IT WILL go above the Fed limit at some point.  That's what I'm trying to say.  Yes, you CAN print money indefinitely if the economy continues to expand exponentially... but the economy CAN'T forever expand exponentially

That's like saying you can have sex forever, as long as you don't blow your load.  Or like saying that this bottle of water will last forever, as long as it doesn't run out.  Your statement doesn't make any sense.

What do you think has been happening over the last 80 years(prob longer)? If GDP increased by some % then that is exponential growth. The growth of national debt has also been exponential, and yet strangely the FED is still purchasing Treasuries.

What happens when there is an inflation? The then the state should run a surplus, either by the government collecting more via taxes than it spends, or the central bank adjusting monetary policy which leads to a contraction in credit money. However taxation is a more effective method of regulating inflation than using monetary policy. Taxation can remove money from the sources of inflation more precisely than interest rates.

That's assuming the state actually runs a surplus with the excess tax money.  If increase taxes AND increase spending, then they've done absolutely nothing to control the inflation because that extra tax money has gone right back into circulation, and that's exactly what they have a tendancy to to.  The US has run very few surpluses in modern history.




The GDP is NOT growing at a greater rate than the money supply is increasing.  It was, previously, but now we have a situation in which money supply is increasing tremendously and GDP is essentially stagnant or increasing only miniscule amounts.  This brings me back to what I originally said...


So how do you address the situation we're in now?  Yes, you can print to pay the bills as long as the economy is keeping pace, but the economy is not keeping pace anymore.  What do you propose we do in this situation?

Here's a good article on why we've had such huge monetary base increases, but yet very little actual inflation (so far).  We're teetering on the edge of a cliff and if things tip the wrong way, it'll get ugly.  Are you suggesting we just keep creating money and hope the economy revives and catching up?

http://www.econbrowser.com/archives/2009/03/money_creation_1.html

Yea, but there hasn't been a meteoric rise in inflation. Inflation is expected. But if inflation goes above some 'level', then in addition to raising interest rates and decreasing the amount of credit money, the state can tax.

The system atm is setup in favour of the banks. They want to be the ones who issue the currency. Then they can apply fees(bank collected taxes) and other crap that doesn't help society. They want surpluses so they can expand the amount of credit money. The ones who issue the currency have the power. Then they want bailouts so they can support their 'credit economies'.


The money supply(M2) has not increased significantly. If it had core inflation would be through the roof.

http://research.stlouisfed.org/fred2/series/BASE?cid=124

This shows that as you say the amount of cash(M0) has increased dramatically. Unfortunately the article you posted didn't explain how the process works. That line also represents how many assets the FED has purchased. The FED has purchased Treasuries in exchange for cash. Treasuries function exactly like cash. So although the FED has injected a heap of cash(M0) it has also sucked a similar amount in Treasuries. The net effect is close to zero. This why there is no inflation and there won't be one. The price of gold is falling, USD/EUR is starting to increase, etc.

The only item of note, was when the FED purchased Morgage-Backed Securities during QE1. That amount is inflationary.


Like I said before, there won't be any inflation unless the Treasury sells some more Government Debt, or the FED purchases credit money for real money.

Yes, atm we need more deficits to employ more people, and consequently increase the amount of Goods & Services produced. This has no net effect upon inflation, but a real effect upon the welfare of people. If I said, ok we are going to mint a heap of Bitcoins, but they will be used to improve Bitcoin infrastructure, do you think that would be inflationary? I would argue no, the additional bitcoin infrastructure would increase the demand for bitcoins(deflationary), and at the same time employ people.

People need to understand that functionally, there is little difference between Government Debt and Cash.

No, there hasn't a been meteoric rise YET.  But what you're proposing is making this constant, massive money creation the norm and in fact the sole method of funding government liabilities.  How do you figure it'll be sustainable?



Agree 100%






I'm not sure I follow here.  The Fed buying treasuries puts cash into circulation... so how are you saying the net effect is zero just because the Fed exchanged treasuries for cash?  Are you saying that because cash and treasuries are both included in M2 the Fed's buying cancels itself out?

I suppose that's an interesting point and intentionally overlooked by the hyperinflation cry babies.  However, that'd only apply if it was buying existing treasuries.  If NEW treasuries are being issued (which is what's happening) and the Fed is buying them, then you've still got a net increase in M2 due to more treasuries in the system.


 


I agree 100% with the bolded.

As for the how much inflation we actually have.  I know the OFFICIAL figures are quite low (you quoted ~3%), but commodity prices pretty much across the board disagree with only 3% inflation.  What is your response to that?

That is exactly what I'm saying. The asset swap may result in some additional cash being added to the economy, but the amount is negligible and will have little effect upon the economy. IMO it has been deliberately overlooked to inflate the price of gold, and take attention away from the real source of money, government spending/debt. I think that only 10% of gold purchases are for economic purposes, 50% for consumption(jewelery) and the rest for investment. So there is no real economic demand for gold.
 

There three sources of inflation; money creation, money velocity, and essential resource shortage.

The first two are obvious, although some would argue that credit money is an expression of money velocity. Meaning, if a bank can lend out 10x the deposit amount, then it has actually made that same parcel of money 10x faster through parallelization. From this abstraction, money velocity obviously affects prices.

The third occurs when there is an essential resource shortage. The suppliers of such a resource can start to set the price of a resource, and economic agents are forced to pay to survive.  The way around this is to reduce the imbalance between supply and demand, which is usually achieved by contracting the money supply. This forces economic agents to fail faster than usual, and realign their productive capacities towards activities less dependent on the essential resource. This process works fine as long as the economic agents are not people, if they fail they die! In such circumstances, only rationing or a quota-system(same thing) will work. This is what happens during war of course.

Personally there is some 'opinion' that states that some commodities have been inflated. Gold is the obvious one, copper, and other commodities. TBH I haven't really looked much into it. But it seems that banks and other large pools of money are playing a Ponzi game with some commodities. They are using money from retirement funds to push the price up. 

http://tinyurl.com/6de6qcq
http://tinyurl.com/62nl5sz

Ok that's exactly what I've been saying for years now. I'm glad others see it as well, but we seem to be in a tiny minority. I'd like to talk further about your background and such, I'll probably shoot you a pm when I'm not at work and stuck using my phone.

Sure thing, you sound busy :).

About the relationship between inflation and monetary velocity:
When 1 $ is “printed”, assuming a velocity of  2, the GDP can increase by 2 $ without any effect on prices (leaving out of the discussion the effect of international trade balance for simplicity).
If the GDP growth is less than that (say 1 $), then we have either money going in slower motion (velocity has decreased to 1)  OR prices going down (divided by 2 = deflation).
If the GDP growth is stronger (say 4$), then it may be attributable to inflation (prices multiplied by 2) or to higher monetary velocity or to both effects combined.

In short, there is NO direct relationship between monetary velocity and inflation (dP) but a rather complex one between 4 variables:
V= PT/M
dV = TdP/M + PdT/M –PTdM/M2

I take it that you consider a resource shortage as a negative determinant of dT (T: amount of transactions in real terms, not monetary terms).

Not at all, just don't want to type more than a sentence or two from my phone.  :P

Maybe I mis-understood what you said, so I'll write what I think is 'right' and continue from there.


1BTC is printed and velocity is 2, then total money supply is 2BTC. Therefore if Real GDP(inflation adjusted) is 2BTC then inflation is zero. This means 2BTC worth of goods & services are produced.

If Real GDP growth is less than this, then the amount of Goods & Services will be less than 2BTC, which means inflation has occurred.
If Real GDP growth is above this, then the Real Output is above 2BTC, meaning that deflation will occur.

It appears you are using the Money Exchange Equation:

MV = PQ

     M is the total dollars in the nation’s money supply
     V is the number of times per year each dollar is spent
     P is the average price of all the goods and services sold during the year
     Q is the quantity of assets, goods and services sold during the year

So P = MV/Q, my calculus skills aren't as advanced as yours so I'll make observations on this relationship.

In short your right. My point about credit money, is that all things being equal, if credit money is derived from real money then this could be seen as increase in the velocity of real money. Therefore if M and Q remain constant, and V increases by definition P must increase.

Personally I think the Money Exchange Equation starts to fall apart during times of extreme resource shortage. This is because money will start to move towards the suppliers of such resource. Therefore you would expect to see prices fall according to the Money Exchange Equation as the supply of money falls, caused by the suppliers cash stockpile. Sometimes this is offset by a contraction in Real Output, but velocity usually falls as economic interactions fall due the lack of the essential resource. The suppliers don't care about the fact that there is only so much money circulating, therefore they will charge any price they like regardless of the Money Exchange Equation. The Money Exchange Equation functions in 'ideal' markets. When markets are no longer 'ideal' it falls apart.

Printing money to inflate the currency is just a form of tax, it is a tax on wealth.

There is not much reason why you should not do one over the other. They both do the same thing just in different ways.

We currently do both in the US.

Getting rid of all taxes and just printing money would at least get rid of the huge amount of beurocracy that comes with paying taxes which would save hundreds of millions of dollars.

But it would shift our way of using money dramatically. Any money that you earn, you would benefit from spending as soon as possible. There would be no incentive to save money. Investment would be very difficult.

There would reach a point where people would drop the currency and use other means to trade. Then the cost of the IRS would be shifted to the cost of keeping people using our currency.

That would only be true if significant inflation occured.

Minor inflation is good as it encourages investment in business assets which in turn grow the economy. People complain that this devalues their money but a majority of banks set their interest rates to inflation to prevent this very occurrence.

In the early days of the colonies. Tax was for luxuries. America was paying too much Brit tax and hence the Boston tea party.

If people hoard money, eventually the market figures it out. It's not necessary to strong-arm people into circulating it.