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View Diary: Austerity isn't dead... but it should be (132 comments)

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  •  You're absolutely right too, its crazy that the (5+ / 0-)

    right has so many people convinced that if only the govt wouldn't contribute so much to GDP then all will be better.  All those unemployed people and unused capacity.....guess what market fundies.....your perfect precious private sector doesn't want those resources, if they did they would use them.  But after so many decades of no wage growth, with the private credit bubble finally popped and not adding to consumer spending, there just isn't enough money to be spent by the middle class to employ everyone anymore.

    So we can either lower the trade deficit (which isnt necessarily a good thing, it could be the Americans out -competing those poor Bangladeshians on wages is hardly a direction I would like to go or exporting natural gas so that our prices for the fuel go up) or we can increase the Govt's deficit.  If the right would agree to increase the deficit, I would certainly agree for it to all be on the tax reduction side....not that thats the best way to do it but as long as its tax cuts for the middle class only like the payroll tax holiday, I could live with that in our current divided Govt environment.  The private sector simply needs more money to spend, because nobody's wages are going anywhere until we have full employment and the workers have a little more leverage (more unionization would help immensely also).

    "The Earth is my country and Science my religion" Christiaan Huygens

    by Auburn Parks on Sun Apr 28, 2013 at 09:54:01 AM PDT

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    •  On the monetarist side, those who are concerned (0+ / 0-)

      that the Fed's various QE programs are debasing the money supply forget (or never knew) that money supply is only one part of the equation of exchange and that velocity of money is another key component:

      M * V = P * Q (basically 'GDP')

      So, after 2007, when the velocity of money declined calamitously, i.e., people and businesses were simply not spending their money, government (the Fed) had to increase the money supply dramatically to maintain a given level of economic activity.

      Once V picks up, it will be time for the Fed to reduce M (by selling bonds in its inventory, thereby causing real interest rates to rise), lest we have significantly higher inflation. Until V increases, though, there is every reason for the Fed to maintain its loose monetary policy. I have seen little sign of a sustained pick-up in V off the moribund floor of 2007-08. Witness the TBTF banks' current balance sheets, flush with cash that is not producing one iota of economic activity.

      I know that Keynesians can and often do object to monetarist theories, but it's been quite awhile since I studied the matter in depth and I have forgotten the specifics of their objections.

      I agree with you that tax cuts are one way to achieve a modestly stimulative effect, albeit not the most efficient way. (Direct transfer payments via programs like unemployment insurance and AFDC are probably the most efficient way.) Another heretical way to do so is to tax savings accounts to provide a disincentive to save and an incentive to consume. After the Cypriot debacle, though, I doubt that heresy will be up for consideration. :)

      •  Much of what you say is true (2+ / 0-)
        Recommended by:
        ozsea1, OrdinaryIowan

        However, I would like to point out one important concept:

        If the money supply and velocity increase, its not a guarantee of inflation as long as its accompanied by a corresponding increase in the production of goods and services (like we would see with a lowering of the unemployment rate).  This is why, we MMTers assert that we almost never need to worry about DEMAND pull (supply shock inflation like health care, college tuition, oil induced inflation of the 70's is always a possibility that needs to be watched for) inflation until the economy is operating at full capacity and employment.  This is also the basis for why we believe that we can have full employment and price stability given the right Govt maneuvers (Job guarantee for example).  We could set the price of labor by employing all the unused labor resources and let the supply of Govt guaranteed work long as we do this on the low wage end of the pay scale so as not to bid up labor and add to inflationary pressure.

        "The Earth is my country and Science my religion" Christiaan Huygens

        by Auburn Parks on Sun Apr 28, 2013 at 12:16:43 PM PDT

        [ Parent ]

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