This is false in many countries. Learn about legal tender laws. Not all countries have them, but many (most?) do.

Let me try to make it even more painfully obvious to you.

Let us consider Joe The Construction Worker. Joe is currently unemployed and is therefore not saving at all. Now the government increases its spending, and as one of the results of that, Joe gets a (for his skill-set) decently paid job. This allows Joe to save money. But Joe saving money is essentially the same as Joe lending his money to somebody else.

So. There is at least one person who has more money to lend out under the increased budget deficit scenario. In other words, the government's budget deficit affects how much money people can lend out - at least for some money. Do you still deny that?

Once you have understood the case of Joe, who now, thanks to the government's budget deficit, is trying to lend out money, you will perhaps finally understand the rest of the argument as well.

I am all in favour of dissing the central banks of this world and opening them up to more oversight.

However, don't buy into their nonsense claim that they have any control over inflation. They don't. They get lucky occasionally, but by and large they're trying to use a sledgehammer to hit a ninja in a darkened room. The economy is way too complex for them to really decide what the inflation should be.

Comparing the Greek government to the US federal government is invalid. The Greek government is a user of its currency like you and me and has not control over it. The US federal government cannot ever become unable to make payments. This is a very significant difference, which makes it pointless to look at the deficit or the debt as a political goal in itself. Rather, goals in real terms (such as health care, high standard of living, low unemployment) should be set and the monetary powers of the government used towards that goal. Yes, you also need to look at CPI rises while doing that, but to put it bluntly: denying benefits to the poor (which is what usually happens when politicians want to "fight the deficit!!11oneone", whether you like it or not) is not going to help against inflation that comes from energy and commodity price increases.

It is nice to see a reasoned post in such a discussion, I'm especially happy to see somebody point out that banks do not lend out deposits, but this caught my eye:

This has not been true for a very long time. Availability of reserves does not limit bank lending, because banks can always obtain required reserves after the fact. The central bank acts as lender of last resort for that purpose. Explained by an actual economist: Lending is capital- not reserve-constrained.

I just realized that I should probably clarify why I would make that Blizzard bet. In the long run, players accumulate gold, for at least one reason: there are players who become inactive, and their gold never re-enters the in-game economy. Therefore, Blizzard necessarily create more gold than they destroy in WoW in the long run. An equilibrium cannot be reached as long as new players enter and old players leave WoW.

This is the in-game analogue of the fact that private actors like to save money, which creates a drag on aggregate demand, which is why governments have to run budget deficits in the long run.

I recommend you read a little on accounting. When you borrow X amount, you have an additional assets of amount X. However, you also have an additional liability of amount X. The person who gave you the loan has X amount of assets less (the ones that he loaned out), but they will be replaced by a new asset worth X, namely your debt. In other words, the net outcome in financial assets is therefore zero.

No matter how you play this game, as long as only private actors (banks, firms, private persons) are involved, the net financial assets held by the private sector sum to zero. The only way that this quantity can increase is when the government comes in.

You are implicitly assuming that the amount of money you have available to lend out is the same no matter whether there is a government budget deficit or not. But that assumption is clearly false.

The economy is flow-consistent. What this means is that when somebody spends money somewhere, then this money does not magically disappear. It has to come out again or accumulate somewhere. So, with a government budget deficit, some private entity ends up holding more money than they would otherwise have held. In fact, when you sum up over all private entities, the additional amount of money held by all private entities compared to what they otherwise would have had is exactly equal to the government's budget deficit. Note that this is not a theory. It is a mathematical fact that follows from flow-consistency.

Now you may say that time plays a role, and that the additional money is only available after the government has borrowed the money. In fact, if government were to borrow money and then hold on to it for a year before spending it, then you would be right at least inside your flawed model. However, this is not what is happening. The borrowed money is spent, and in the next "time step" it is back in the hands of private entities to be lent out again. The computation becomes a bit longer than what I wrote in my previous post, but the end result is still the same: when you average over time, the introduction of the budget deficit actually reduces the competition between borrowers.

(And let me state again explicitly, in the unlikely case somebody else stumbles into this thread this late: The above three paragraphs are written under the assumption that your approach to how lending works is correct. Reality works quite differently, but I don't expect you to take my word for it. This is why I put forward this argument that even if your model were correct, your conclusions based on it would still be wrong. My hope is that this will encourage you to read more seriously some of the sources I've linked to - in particular 7DIF and Bill Mitchell's blog - where these things are explained in more detail.)

And there's your problem. Your model is that one person borrows. This is a micro-economic model. We're talking about the entire economy, so micro-economics don't cut it. You need a macro-economic model to understand what's going on, otherwise you necessarily fall into the fallacy of composition.

Ignore for a moment why people borrow and what their profit considerations are, and look at the big picture, of how money flows between all the actors involved. Then you will better understand the economy at a macro level.

Actually, I don't claim the existence of a free lunch. I realize that a lot of what MMT states looks like a claim of a free lunch on a first glance. However, when you actually read what those economists write, you'll realize that they simply have a better understanding of what the constraints are that prevent a free lunch.

In a nutshell, MMT says that there are no financial constraints, but there are real constraints. Here, "real" is used in the economic sense of real goods and services etc.

Government spending adds to aggregate demand, and when that grows too quickly for real productive capacity to adjust, then inflation results. On the other hand, when aggregate demand is too low and the productive capacity is under-utilized, firms will lay off workers and unemployment will result.

Fiscal responsibility therefore means to achieve a budget deficit that is neither too high to push inflation nor too low to result in unemployment. Note how there is no mention at all of whether this means the budget deficit is zero.

Furthermore (and this is simply an observation) since the private sector tends to save in net financial assets in the long run, the private sector creates drag on the aggregate demand. Therefore, budget deficits are normal and in fact desirable.

This last part is what may sound like a "free lunch", but it's really not. It's simply the observation that the private sector tends to not use all its spending power, and therefore, there is cake left over for the government. (The US is also in the special situation where China just keeps sending a lot of cake for no good reason other than they are unable to adjust their economy to do differently, so even more cake is left in the US.) Moreover, the government should eat that cake, because otherwise it will rot and stink up the entire house. (The last sentence is analogy for: if the government does not fill the gap in aggregate demand, this will cause unemployment; unemployment leads to loss of labour skill, which reduces the potential for future growth in the economy; similarly, other productive capital such as factories may be closed and removed forever.)

Dude. If you could have been bothered to at least read the Prologue of that book, you would have read that: "Professor Galbraith coined the term to describe a variety of incorrect assumptions embraced by mainstream economists, the media, and most of all, politicians. The presumption of innocence, yet another example of Galbraith’s elegant and biting wit, implies those perpetuating the fraud are not only wrong, but also not clever enough to understand what they are actually doing. And any claim of prior understanding becomes an admission of deliberate fraud - an unthinkable self-incrimination."

It is a clever and unusual play with words that you failed to recognize for what it is.

And I would bet you any amount that despite those money sinks, Blizzard has a significant budget deficit in WoW gold. Their gold debt should by now have reached quite spectacular heights, actually.

In fact, those money sinks are exactly what taxation is. Taxes are a money sink to prevent inflation.

I'm not sure what you're really saying here. Nobody is saying that government spending is different from any other kind of spending after it has left the government. What people are saying is that there are situations (such as today) when somebody really needs to start spending to get the economy going again. The federal government is in the unique position of always being able to spend - unlike private entities and state governments, both of which can be insolvent, so it's up to the federal government to get things moving again when the private sector has painted itself into a corner.

The deficit is by definition simply the difference between spending and tax revenue. The debt is usually defined as the sum of all outstanding treasuries - and yes, there are MMT economists who believe the practice of issuing treasuries should be abolished. Read their work on the resulting implications for monetary policy.

Also, if you had bothered to look a little further than just stop as soon as you think your prejudices are confirmed, you would have realized that inflation is not ignored at all. For example, see the section "Why the Federal Government taxes" starting at page 25.

The Republicans are debating plans to cut spending. This is unlikely to reduce the budget deficit, and if it does reduce it, it will do so at a high cost in real terms, especially unemployment.

What you have to understand is that there is a discretionary budget - what politicians aim for - and then there is an actual budget outcome that is largely driven by automatic stabilisers. In particular, when the economy is going badly, tax revenue will drop and welfare payments will go up, and thus the actual budget outcome will be different from the discretionary budget. This causes attempts to reduce a budget deficit to often be self-defeating. This can be observed nicely in the various Euro countries that are forced to implement austerity measures.

What people need to understand is that achieving a balanced budget is not a reasonable political goal. At any point in time, if the budget deficit is too high, so that it drives aggregate demand beyond productive capacity, it will cause inflation. If the budget deficit is too low, so that firms lay off workers due to a lack of aggregate demand, it causes unemployment. The high unemployment is evidence that the budget deficit in the US is too low at the moment.

This is not surprising, because the government balance is the counter-part of the private sector balance plus the external sector balance. Since the US is a net importer, and the private sector is saving (it is paying down debts at an incredible rate), the budget deficit must be high.

A reasonable political goal is something like "achieve full employment", because employment allows people to have meaning in their life. "Increase real living standards" is a reasonable political goal for obvious reasons. Having "balance the budget" as a political goal is just plain stupid.

Once you define your political goal, you need to take an unideological look at how to to achieve that given the economic reality. If that means maintaining a high budget deficit, then you maintain a high budget deficit.

If what you said were true, then most private consumption would also be bad for the economy: it's spending that only produces stuff to be consumed which will be gone later.

So it's not quite as simple as that. War spending creates jobs, which is good for the economy. The Second World War is how the US managed to get out of the Great Depression.

That said, "good for the economy" as measured with traditional indicators like GDP does not necessarily translate directly to "good for the people". Probably everyone outside the military-industrial complex would agree that the money going towards military spending could be used for much better spending instead.

However, simply cutting military spending will destroy jobs. So you need to have a plan for what you want to do instead of military spending.

The federal government gets the money that it spends from the same place where Blizzard gets the gold in World of Warcraft. In other words, whenever the federal government spends, money is created out of thin air. It does not come from taxes. The accounting that creates this illusion is just a historical vestige from the distant gold standard past.

I understand that Modern Monetary Theory is hard to swallow at first, because at first sight it appears as if MMT were claiming that there is a free lunch. And in fact there is something as close to a free lunch as you can get at this point in time, however it is not an unlimited free lunch in any way.

What MMT observes is that the federal government has no financial constraints. However, there are real constraints. The two main points are the following:

1) If the government's discretionary budget deficit is too big, then it pushes aggregate demand beyond the productive capacity of the economy, which leads to inflation. On the other hand, if the government's discretionary budget deficit is too small, then the lack of aggregate demand causes mass unemployment. So how big is too big, and how small is too small? The answer is that it depends on the private sector's decisions. Most of the time, a budget deficit is necessary to accomodate the private sector, though very occasionally, a budget surplus may be appropriate (this must be a very rare event though: six out of seven times that the US government ran a budget surplus in its history, a recession followed, and the seventh time set the stage for the global financial crisis).

2) Irrespective of the discretionary deficit that politicians desire, the actual budget outcome may be very different due to automatic stabilisers (tax revenue and welfare payments). Example: the discretionary budget deficit in the US at this point in time is too small, causing unemployment. The resulting lack of tax revenue and the increased welfare payments cause the actual budget outcome to be bigger than desired. The interaction of discretionary and actual budget lead to the (initially) counterintuitive situation where the discretionary deficit needs to be increased so that the actual deficit can become smaller.

Disregarding for a moment that you clearly don't understand how government spending works, this is true. And it's not actually a theory, it's simply the definition of GDP. If the government were somehow to spend that much additional money, the nominal GDP would in fact double (let's ignore multiplier effects for now). Look up the definition of GDP.

Now refer to what I wrote above: while there is a lot of idle capacity in the economy right now, I don't think there's that much spare capacity. As a result, the increased aggregate demand would cause inflation, and therefore the real GDP would not double (it would still likely increase, just not by that much).

However, if the economy really were below 50% capacity utilisation, then yes, the government could really spend that much without causing inflation (with the caveat that the distribution of the additional spending matters: the type of spending must match the type of available capacity, otherwise there may be inflation until the market adjusts to restructure the economy to match the demand).

So let's go back to the "free lunch" thing for a moment. Right now, an unusually large part of the US economy's productive capacity is idle. The most obvious indicator of that is the extremely high rate of unemployment. All those unemployed people could be put to work if the federal government increased its discretionary budget deficit with the appropriate spending measures. All that is necessary is the political will to do so - and that is as close to a free lunch as it gets. Of course, once those people are employed, the free lunch is over.

Not everybody would be happy about such an employment program, of course. Employers like to be able to threaten their employees with the fact that they're easily replaceable from the current pool of unemployed, which allows them to keep wages down. A state of full employment would likely (depending on how it is achieved) remove this threat. So there is a cost associated with removing unemployment, but this is a cost that decent folk would be willing to pay. You can read more about the history of the fight against employment by the ruling elite here.

Not necessarily. What we're talking about here is people paying debt back to their bank. The bank will be very happy about that, but being repaid won't make them give out more loans directly, because bank loans are not limited by the amount of money available to the bank anyway. So debts being settled will just cause the money supply to shrink - the M1-M3 type of money supply, not the monetary base; the latter is still very high in the US due to the Fed's monetary policy, but ultimately it's the private sector that determines the size of M1-M3, and the Fed's quantitative easing has demonstrated spectacularly that the orthodox theories about how those quantities are related are just plain wrong. You'll find a little more on this - light on the theory, but with pretty graphs - here.

This is one of the things that I had the most problems understanding, asking myself the "is it really like this?" question more than a few times. But a number of sources agree that at an operational level, the decision by the bank to give out a loan has nothing to do with how much money (reserves, to be more precise) the bank has. The people who make those decisions don't even know how much money the bank has. They just make the decision based on creditworthiness and interest rates, and then a different department at the bank worries about getting the money - if necessary - after the fact. This liquidity management is entirely separate. It takes a while to unlearn the incorrect elementary school picture of banking that we are all told.

So the total amount of debt, and therefore the size of the money supply, grows and shrinks based on changes in the demand for debt and the risk-averseness of the banks. Currently, the US economy is still settling debts, and the money just "disappears". In the accounting sense of assets and liabilities, the corresponding assets and liabilities (money and anti-money) cancel each other out and that's it, the balance sheet shrinks and nothing replaces the lost volume.

It does seem like a kind of vicious cycle:

The almost inquisition-like hatred of everything to do with government spending prevents politicians from pushing for visionary projects like the ones you mentioned. As a result, only two kinds of government spending happen: the boring things that people just take for granted (and that are probably efficient as often as they are inefficient), and the ugly back room deals that continue precisely because they are ugly and dominated by ruthless vested interests. The latter is correctly identified as inefficient and wasteful, and the cycle continues to feed itself.

I have no idea how this cycle could be broken. From where I'm observing, Obama probably had the necessary momentum to pull it off early in his presidency, but it seems like he wasted the opportunity.

True, those wars were disruptive. But the dependency ratio (number of workers per retiree) did drop as was predicted around 1900 - perhaps not as much as those predictions said it would, but the change was still an order of magnitude. It was productivity improvements that saved the day.

And yes, the retirement system in Germany was reset after the Second World War. And the coolest thing about this is that pensioners benefited from that reset. It was the reason that Germany switched to a Social Security-type system instead of capital-based retirement funds: by using the Social Security-type system, we could guarantee that pensioners could benefit from the general economic upswing in Germany that started in the 1950s and really took off in the 1960s.

I am not a professional economist either. I'm a mathematician who got interested in macroeconomics and I seriously started reading around about a year ago. I don't have a quick fix to the US situation, but the first thing that needs to happen is for the focus of the discussion to shift. People need to realize is that there is no debt crisis. The debt is basically just after-the-fact accounting (with the exception of interest payments, but those shouldn't be the primary concern).

Once that happens, the rough outline for what needs to be done is that somebody needs to start spending again. After all, the actual problem (from my political perspective) is the insane amount of unemployment, which is really the biggest kind of waste you can imagine. Any kind of squabbling over government inefficiency is just peanuts compared to that. And the unemployment is caused by the simple fact that not enough spending is happening to put the people into employment.

There are basically three sources of spending: private (consumption and investment), government, and external sector.

The private sector is still dealing with the aftermath of the financial crisis. Part of the reason why the stimulus has not been as effective as it could have been is that it consisted of a lot of tax breaks. I am not against that on principle, but you have to realize that when people who are deep in debt get a tax break, they're probably going to use it to pay down their debt. So spending doesn't increase and so it doesn't help the economy recover. (This is the balance sheet recession argument of Richard Koo) Businesses are in a similar situation, and they aren't going to invest unless they see spending go up first.

The external sector is also unlikely to be a source of spending soon (and it's questionable whether you even want it to be one; if you look at it simply in terms of cargo ships bringing stuff to the US vs. cargo ships taking stuff away from the US, then I would say that the trade balance is hugely in favour of the US - China just keeps sending you guys stuff for free!)

Which basically leaves the government to fill in the spending gap because there is nobody else left to do it. So if you want a soundbite, I'd say: build that high-speed rail (to fit with the article) or carpet the southern US with solar plants, or fix the roads, or something like that. Basically, any kind of labour-heavy infrastructure investment is the way to go.

And it's important to keep in mind that adding X amount of discretionary spending to the budget will not increase the budget deficit by X. After all, those newly employed workers are going to pay taxes and they will no longer receive unemployment benefits. And then realistically there's also the multiplier effect which orthodox economists don't like because it conflicts with their ideologies, but even they have to concede at least the first part of the argument. So increasing discretionary spending by X will increase the budget deficit by less than X, and it might in fact reduce the deficit (possibly with some delay).

This may sound strange to the libertarian types out there, but the biggest benefit of a government-controlled currency is that it can be controlled. This allows a reasonable government to dampen economic cycles by implementing countercyclical policies. The facts of life are that the economy can get into a situation that is universally agreed to be bad, without any single individual being able to do anything about it. Then collective efforts are required to get out of it, which is where government comes in.

In a world of only Bitcoin, such collective action would be forbidden by the mathematical safeguards of the system, and the consequences would be roughly as bad as the consequences of the gold standard. (Yes, despite what some people believe, getting rid of the gold standard allowed for a lot of good to be achieved in the world economy.)