Do we need taxes with a fiat currency?

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JCD
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Do we need taxes with a fiat currency?

Post by JCD »

I've been thinking about the differences in money over ages for years now.  It seems there are roughly 4 different eras or ideas around money.

- Direct trade and tribalism - Items of value are gift, traded or maintained by a group.  This has no abstraction other than social.
- Value Representation - Value is represented in something that is scarce.  This can be gold coins or tally sticks or giant stone wheels.  This has a indirection count of 1.
- Value Representation of Value Representation - This is the dollars backed by gold (ala gold standard) or debit cards tied to bank accounts tied to money.  You don't hold the value representation, you hold a thing that holds the thing that represents value.  This has an indirection count of N.
- Fiat - Value comes from a thing a third party has agreed to keep relatively scarce, but may choose not to (e.g. hyperinflation).  This has a indirection count of 2.  The first level as I see it is the money to the printer of the money and the second is the confidence of that printer to the thing being valued.

I did all that to ask something I don't understand about taxes.  Why do fiat economies bother to tax at all?

In the first case, collective ownership or social control decide resource allotment.  Thus "Braves" getting feathers is a sort of extra social payment for extra, hard work.  Payments, taxes and redistribution of "incomes" would be way too complex for something so obvious as to divide the meal among those whom all worked together for the survival of the tribe.

With the middle two systems, taxes make sense.  You are taxing some direct representation of a thing of value.  That is to say, you are taking gold from the land owners to pay for the security of their land provided by the kingdom.  How you evaluate who pays what taxes then becomes complex.  This obviously only works once at a large enough scale.

The last system, taxes don't make sense to me, except as wealth redistribution or class warfare or in cases where the entity doing the taxes is not in control of the printers.  Let us say a government needs 20% of GDP to run.  You could tax that 20% or you could print 20-ish%(*) extra currency and devalue the existing currency.  Every dollar of value is thus taxed equally, making the 'rich' pay more in a "logically" progressive(**) tax system.  It is a wealth tax too, not an income tax.  It removes all need for complex calculations of income, etc.  If you want bigger government, print more.  Want smaller, print less.  Government bonds go away, no need for them. States, provinces or other smaller polities would not be able to do this, since they don't control money printers, so this isn't a total transition away from taxes. The fact that inner polities would tax does keep the fiat system's main motivator for earning in that currency--tax payments, around. Last point worth making is around controls. For example, import/export taxes might remain, to control or protect various industries and where goods flow. In fact one argument against this concept that federal gov'ts couldn't manipulate its citizens as easily (e.g. deductions for children). Even then, why not mostly eliminate federal taxes and only leave the smallest amount possible to do whatever 'ethical' manipulation is needed?

(*) Every dollar printed devalues that dollar too, so it is a bit more complex than my linear assumption makes it, but close enough for this conceptual map.

(**) If you hold 80% of currency or currency valued items and I hold 20% and then we double the money supply, handing it out to other people, you now hold 40% and I hold 10%. That seems "progressive" in my head.

You might say this is untested and thus unsafe, but it seems to me it is tested.  Equity or stock is based upon number of shares.  But some equities create additional shares over time in order to finance themselves.  This lowers the value of existing equity holders through "dilution".  If share holders can accept this sort of arrangement, who would be against it philosophically (rather than financially)?

Given the various debates around redistribution, fairness and taxes and spending, it seems like this sort of option is completely ignored. Some folks like the sort of hippy-collective farming-gift economy-tribal solutions and try to opt out of the system. Fair enough. Some advocate for the gold standard or advocate for ownership of gold. I appreciate that too. However no one seems to be talking about what our existing system could evolve into, not even in theory. All the answers I see are about going backwards. That maybe the right answer, but it doesn't seem like it is the only one. I get this could be political discussions, arguing about value systems and if this fits right with your value system. Create your own post elsewhere for that. Want to argue about my characterization of the eras? Unless it is an attack on the system I proposed, create another post.

That is to say, I want to explore this topic purely from a money theory basis and not an economic or political basis.  For example, I get those with the most dollars today have the most to lose from a switch in systems.  But from a monetary perspective, why wouldn't this system work? I want to know if the idea is sound, not viable.

ertyu
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Re: Do we need taxes with a fiat currency?

Post by ertyu »

You tax because the government needs to provision itself in order to continue providing public goods and services. When you tax then turn around and spend those taxes, you do not change the money supply, you just transfer paper thingies from one part of the economy to another. If you didn't tax, you would need to finance your spending by printing money. If you overdo this, you become Zimbabwe. The argument is, "well, can't we just not overdo it, then" and the answer to that argument is that it is easy to generate inflation, but not so easy to generate 2.5% controlled, sustainable inflation.

On why not inflate away wealth instead of taxing it: taxes can be targeted to different groups in different ways/amounts in order to encourage some economic behaviors and discourage others. Further, taxes can be made progressive or regressive. Taxes are thus a better policy.

bostonimproper
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Re: Do we need taxes with a fiat currency?

Post by bostonimproper »

I mean, we're probably going to end up in this state in a roundabout way with deficit spending. At some point debt becomes large enough that we start printing currency to pay down and edge up inflation. Given annual US federal budget is around 3% of total net assets in the US, I honestly don't think this would be the end of the world. Caveat: As long as you're not systematically outpacing growth.

The benefit of tax system is as you and ertyu mention, i.e. for policy reasons like wealth redistribution and generating soft incentives/disincentives to particular behavior.

tonyedgecombe
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Re: Do we need taxes with a fiat currency?

Post by tonyedgecombe »

It would certainly discourage hoarding cash. I have often wondered if this might be a better option than corporation tax which seems to have many problems associated with it.

bostonimproper
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Re: Do we need taxes with a fiat currency?

Post by bostonimproper »

The other benefit of federal taxes is it encourages the conception of national pride and unity. "Look at all these nice things we have like national parkd, roads, etc because we all worked together."

JCD
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Re: Do we need taxes with a fiat currency?

Post by JCD »

One element I have considered is would the government become even more wrapped around the wheel of business?

For example, if the gov't announces a plan to go to the moon, and then prints an extra 10% currency to finance that, the market might devalue all businesses by some portion of that money because the market assumes that a trip to the moon has no economic value in the next 10 years, a reasonably long investment period. On the other hand, if the gov't announces investment in travel infrastructure and prints money, the market might say that will create 1.2 dollars for every dollar printed thus the market devaluation of the currency is more than offset by the business gains. Without "safe"(*) bonds to invest in, the market would be forced into corp. bonds, inner polity bonds and stock market.

(*) Safe in the sense that the bond will always be paid back because fiat currency debt can always be paid back via printing more dollars.

With the investment world is so much more constrained, it would flood all the other investment vehicles with cash. This pumps up the price and increases price sensitivity. A single share of an average company might double or triple(*) in value and thus a 10% gain/loss is a great deal more dollars than it was previously. In such a world the market would try to limit gov't spending to only those things with clear, near term payoffs. Investors would see the gov't as a possible black swan debt generator and want to control it to prevent that from occurring. Investing in long term science would be seen as a waste rather than basic research that will payoff decades later.

(*) Examples: US Debt is about ~25 Trillion and US Stock Market's market cap is ~35 Trillion. UK national debt is ~2 Trillion and FTSE Market cap is ~2 Trillion. Even if we assume these markets are overvalued, I don't think you can claim more than tripling of most reasonable market's prices.

Of course this is all narrative logic, without empirical or even simulation evidence. Given its limits, I'm interested in hearing other narratives or even counter arguments to this narrative.

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fiby41
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Re: Do we need taxes with a fiat currency?

Post by fiby41 »

I think along following lines:

Government draws upon an account with 0 balance when it writes a cheque. It is borrowing from the future to pay it's currently debts. Assumption is that the future will be rosier than the present. This account is in the negative now. When the taxpayer pays taxes it shows up as income on the government's balance sheet. This positive amount neutralizes the negative debt of the same amount in an effort to bring the balance back to zero.
The difference between you and me or any other institution or organization vis a vis the government is that we need to have capital first in order to spend it while the government spends first the money it does not have.

Another concept whose name I forget deals with the wealth effect as a function of proximity to flow of money. The closer you are from where the money is being created, the more you get to keep for yourself. In its simplest form money is a claim on someone else's time/labour.

Currency is not the value of the good or service. But it is the medium through which that good or service is exchanged. As a medium of exchange, it has some intrinsic value but by definition this cannot be greater than the value of the good or service you are exchanging it for. If it were, you'd rather keep the currency than exchange it for something else.

Velocity of money is the number of times that unit of currency changes hands. You pay for taxi, driver pays for cigarette, ... All with the same coin.

Those who have their assets in means of production lose less than those who have their assets denominated in currency when the supply of currency is increased.

As long as there is 'real growth' somewhere in the economy, the government can get away with its musical chairs (money changing hands) until the music stops...

Features of money are:
Store of value
Medium of exchange
Unit of account.

Inflation subjects savings to risk:
Inflationary monetary system requires citizens living with in them to subject their hard earned savings to risk.
Penalty one savers.
Inflationary monetary regimes promote spending.
They require the money to be invested or speculated with, which involves risk, so as to atleast have a chance to keep nave with inflation, eliminating the feature as a store of value.

Kryptonite to government spending:
Bad planning
Failure to save
Over promising
Aging population
Low economic growth.

Money is only a claim cheque, you can't do anything with it if the good you want to exchange it for ia not there (seignorge). Price of good is irrelevant. Net energy as measured in terms of energy returned per input energy to produce that good is important. Social complexity is built up surplus energy.

JCD
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Re: Do we need taxes with a fiat currency?

Post by JCD »

bostonimproper wrote:
Fri Feb 21, 2020 11:43 am
The other benefit of federal taxes is it encourages the conception of national pride and unity. "Look at all these nice things we have like national parkd, roads, etc because we all worked together."
That could happen, or people might wave flags saying don't tread on me. I'm genuinely curious, do you know of any established democracy where the populous feels good about paying taxes? I'm not saying it doesn't exist, I just don't know of it. At best, some people seem to think it is a reasonable trade off, which I think of as more a "meh" than "woo hoo, we build awesomesauce together!".

JCD
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Re: Do we need taxes with a fiat currency?

Post by JCD »

fiby41 wrote:
Sun Feb 23, 2020 1:54 am
Money is only a claim cheque, you can't do anything with it if the good you want to exchange it for ia not there (seignorge). Price of good is irrelevant. Net energy as measured in terms of energy returned per input energy to produce that good is important. Social complexity is built up surplus energy.
I agree and think you are describing something like what Dr. Tainer would say regarding energy. However, energy is not equal to the number of claim checks printed. That is to say both of the following a equally valid:

1 kwh = 1 claim dollar
1 kwh = 2 claim dollar

The difference between the two is the "value" of the dollar. The question is, is there any reason a government can't simply print more money for services and thus raise the cost of everything else that is valued by those dollars. Imagine for a minute that the gov't decided everyone deserves 1000 kwh per month, free of charge. If you use less, they pay you back the rate that they charge someone else the 1001+ kwhs. They don't tax to pay for this, they simply print money and plan to print money to pay for this forever. They have no debt, because they issue no bonds. Why is this valid or invalid?

To make it even more concrete:
1-1000 kwh = 0 dollars
1 kwh over 1000 = .2 dollars

Real cost per kwh = .2 dollars at time 0 (thus pre-inflation). Thus 200 dollars is being printed per citizen per month. Inflation per year for this service: .2%

Imagine in your own country, what the impact of that would be. Is this a service to the poor and a tax on the wealthy? It seems like it to me. So why bother with income or sales tax outside of the things already listed?

JCD
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Re: Do we need taxes with a fiat currency?

Post by JCD »

I did think of one new factor for consideration. Keeping a complex tax system around maybe a way of keeping unemployment lower during recessions. That is to say, you never fire your tax accountant, even during a recession. In fact you might hire more in order to get you more write offs to save more money. The gov't tax lords (like the IRS) don't fire gov't employees either, making it a shock absorber for bad times.

bostonimproper
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Re: Do we need taxes with a fiat currency?

Post by bostonimproper »

JCD wrote:I'm genuinely curious, do you know of any established democracy where the populous feels good about paying taxes?
No, but I hear all the time the complementary complaints, like, "Is that where our tax money should be going?" and "I deserve X and they don't deserve it because I pay taxes and they don't!" That is to say, people maintain ownership and skepticism around government spending because of our tax-based system. They may not be gleeful about it, but they are somewhat cognizant of it, which I think ultimately produces better governance maybe?

Riggerjack
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Re: Do we need taxes with a fiat currency?

Post by Riggerjack »

I think I smell a dumpster fire. :twisted:
Let us say a government needs 20% of GDP to run. You could tax that 20% or you could print 20-ish%(*) extra currency and devalue the existing currency. Every dollar of value is thus taxed equally, making the 'rich' pay more in a "logically" progressive(**) tax system. It is a wealth tax too, not an income tax. It removes all need for complex calculations of income, etc. If you want bigger government, print more. Want smaller, print less.
So many false assumptions packed so tightly! :shock:

First, like every MMT/chartalism fanboy, you conflate wealth and money. I can understand why one would want to exclude economics and politics. Just a basic understanding of either shoots this concept full of holes.

But just sticking with money. What happens when the budget is announced? If one holds physical assets, one would look to expand holdings. Values are about to go up. If one holds bonds or cash, one would want to move into physical assets, or stocks, thus driving those prices up immediately. Whoo hoo! QE forevers!

People actually act in their own best interests, as they see them. Tell them their money is going to be worth 20% less at the end of the year, what do you think that looks like? Take a look at Venezuela. We have real world examples.

But we would be making a change, and all changes benefit someone. Who would benefit from this? Holders of physical assets. Real estate owners, producers of physical assets, from farmers to manufacturers. Nonmonetary service providers would be approximately neutral, and holders of bonds or cash would lose.

As a landlord, I would price this 20% inflation into the lease, so this will screw renters, but I would do fine. My fixed rate mortgages sure looks good, though. (On my end. Screw those pension funds who bought the MBS's, they deserve to lose cuz they are rich, right?)

Like every other redistribution scheme that sounds really smart in your dorm room with a bong in hand, this just makes the wealthy, more so.

But maybe I misunderstood, and that's what you meant by wealth tax. :roll:

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Re: Do we need taxes with a fiat currency?

Post by jacob »

Shots fired.

tonyedgecombe
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Re: Do we need taxes with a fiat currency?

Post by tonyedgecombe »

Riggerjack wrote:
Tue Feb 25, 2020 9:19 am
First, like every MMT/chartalism fanboy, you conflate wealth and money.
You can disagree without being so rude.

Riggerjack
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Re: Do we need taxes with a fiat currency?

Post by Riggerjack »

Yes, I shouldn't post before my morning coffee. :oops: This is a pet peeve of mine, no need to share my peevishness.

And I did such a good job of not venting in the last UBI thread... :roll: One day, I will learn to play nice with others.

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Re: Do we need taxes with a fiat currency?

Post by GandK »

No one should ever post before his morning coffee. ♡

JCD
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Re: Do we need taxes with a fiat currency?

Post by JCD »

Riggerjack wrote:
Tue Feb 25, 2020 9:19 am
But just sticking with money. What happens when the budget is announced? If one holds physical assets, one would look to expand holdings. Values are about to go up. If one holds bonds or cash, one would want to move into physical assets, or stocks, thus driving those prices up immediately. Whoo hoo! QE forevers!
So in effect, you are saying people will put their money into investing for the future rather than building up debt. That means people will avoid giving out debt and thus society would have to live within its means since no one is going to want to loan out money. Or they might give out loans that are inflation adjusted, thus owning bonds would look just like they looked before, just with jumps for inflation. None of these things feel particularly deadly to an adopting nation or to the concept itself nor does this falsify the assumptions I made. What breaks such a system? In fact, the argument that this is like QE would seem to suggest fiat might naturally tend towards this course. If so, regardless of whether we like it or not, it is best to think through how the macro economy might behave in such a world.
Riggerjack wrote:
Tue Feb 25, 2020 9:19 am
Take a look at Venezuela. We have real world examples.
I would say Venezuela is not a realistic example or comparable for several reasons.
1. The inflation rate is much over the "20%" example I gave. Even in a sort of range between 10-50% is way below Venezuelan inflation for a year.
2. Taxes are non-trivial: "Income for non-resident individuals arising from non-business professional activities is subject to tax at 34% on 90% of the gross payments. Salary and other income received by non-residents for services performed in Venezuela are subject to a flat 34% tax, withheld at source." - http://taxsummaries.pwc.com/ID/Venezuel ... nal-income
3. Oil curse and all that brings.
4. Perhaps a counterexample to your point is Japan at with a raise in "debt to gdp" from ~40% to ~200% in 30 years. https://www.macrotrends.net/countries/J ... -gdp-ratio This is with taxes of ~50% on personal https://tradingeconomics.com/japan/pers ... e-tax-rate and a somewhat complex effective tax rate ~30%: http://taxsummaries.pwc.com/ID/Japan-Co ... ate-income . Where is there hyperinflation?

Given that high debt increases does not always create insane inflation, it seems hard to believe that Venezuela is a valid point by itself. If we do have a real world example outside of QE I don't know what it is.

Regarding QE, at present QE is "expected" to be paid back. If QE wasn't expected to be paid back, I'm not sure the economy would behave the same way. I think you agree that QE is expected to be paid back with future taxes and paying the money back somehow is built into our existing economic framework, but I'm not sure that is your view. If the QE wasn't expected to be paid back, then we already have some form of "QE forevers" and that would imply you feel the USA is heading for Venezuela-land. Did I get that straight? I think we both agree QE created inflated asset prices, but thus far it didn't create much inflation in the general economy. That is to say, landlords didn't increase prices by N% based upon additional dollars printed by the fed. This puzzles the fed and I guess that is something you wouldn't expected either, unless it was accepted those are temporary dollars, soon to be paid back somehow. Is that right? Is that your model works?
Riggerjack wrote:
Tue Feb 25, 2020 9:19 am
...holders of bonds or cash would lose.
Agreed, particularly bonds without inflation protection. Cash under your bed would be trash. Maybe you would hold gold or alternative currency when you wanted to be out of hard assets? On the other hand, would banks offer 15% interest in savings accounts so they could loan out inflation protected mortgages?
Riggerjack wrote:
Tue Feb 25, 2020 9:19 am
As a landlord, I would price this 20% inflation into the lease, so this will screw renters, but I would do fine. My fixed rate mortgages sure looks good, though. (On my end. Screw those pension funds who bought the MBS's, they deserve to lose cuz they are rich, right?)
I think it is fair to say that fixed rate mortgages are out the window in that sort of world. However, would the landlord drop prices by x% they save in taxes? In the property world things do get a bit interesting. Would housing actually rise or fall in value with this change over? For example, the tax write offs go away, which might equate to a loss. We have real world examples of this occurring in high property tax states and seeing property values go down a bit - although not as much as you might imagine (https://www.washingtonpost.com/realesta ... story.html ).

Another point you didn't make but occurs to me is there might be a cash grab between labor and capitalists for the money that use to go into taxes. In the US this is payroll taxes. If those go away, that too becomes a cash rush. If the employer gets it, does that lower costs of products produced? If the employee gets it, does that mean they have more money to spend and stimulate the economy?
Riggerjack wrote:
Tue Feb 25, 2020 9:19 am
Like every other redistribution scheme that sounds really smart in your dorm room with a bong in hand, this just makes the wealthy, more so.
Actually, there is some evidence that redistribution schemes of the 1930s-1960s in the USA worked. Full employment gave workers a monopoly on labor, pushing business profits down. That plus increases in taxes (not nearly as much as the left would claim, but increases none the less: https://en.wikipedia.org/wiki/Corporate ... istory.png ) seemed to have created less income inequality (https://eml.berkeley.edu/~saez/saez-USt ... s-2017.pdf ; page 9, Fig 1), which does seem like counter evidence to your claim.

To be clear again, I'm not advocating redistribution is right for any polity, I'm exploring "what happens if...." Income inequality is currently a political hot potato, being aware of the kinds of responses that might occur to lower it and how they might impact investments seems important, no matter where you land politically. This is why I want to exclude the politics from this. Also I posted this in the money question, so lets keep it on topic.

Will this create conditions like that of the 1930s-1960s, maybe not? One obvious thing the wealthy might do is invest abroad and keep their cash in foreign accounts. On the other hand, they might see 0-2% federal tax rate and think, "deal time!" Historically businesses don't handle inflation well in the short run, but do in the long run (e.g. SP500 returned -1.15% annually between 1970 and 1980 and 4.75% annually between 1970 and 1990 using https://dqydj.com/sp-500-return-calculator/). So again it seems that inflation might be a wealth tax, not protection. It is that contradiction of responses from history that makes this question interesting to me. I think your model is not robust enough to give good predictions, but don't let that stop you from trying again with a bit more data to back up your claims.

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Re: Do we need taxes with a fiat currency?

Post by bostonimproper »

Sorry, can someone ELI5 me why inflation in this scenario would be newly printed currency/GDP rather than printed currency/net combined assets?

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Re: Do we need taxes with a fiat currency?

Post by Riggerjack »

My point wasn't a general worry about inflation. Chartalism ignores inflation as basically irrelevant, and from that perspective, I don't think they are wrong.

I understand why you don't feel Venezuela today is a good comparison to how your proposal would work. Now go back to Venezuela of 10-15 years ago, when 20% was the inflation rate, and tell me how your solution would differ from their results 10-15 years down the road. There are significant differences between the US and Venezuelan economies, but the human reaction to predictable high inflation is the same.

What I was thinking specifically, is cash and bonds are only one form of wealth. Changing the rules on how cash and bonds work, changes behavior. This change in behavior is very predictable. The result is much higher asset prices. That's what I mean by QE forevers.

I understand the appeal of a system that would be predictable and controllable. An economy is not such a system.

Consider:
https://web.archive.org/web/20130415095 ... -disorder/

Then consider that the US dollar doesn't exist in a vacuum. There are bonds in US dollars all over the world. What do you think happens to international relations when we change the rules for all those other countries? How will international trade work, when we change out dollars for Monopoly money?

I mean, we call China a currency manipulator, with no apparent sense of irony. But this would add a whole new level of bizarre to the work of the state department, wouldn't it?

JCD
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Re: Do we need taxes with a fiat currency?

Post by JCD »

Riggerjack wrote:
Tue Feb 25, 2020 9:49 pm
I understand why you don't feel Venezuela today is a good comparison to how your proposal would work. Now go back to Venezuela of 10-15 years ago, when 20% was the inflation rate, and tell me how your solution would differ from their results 10-15 years down the road. There are significant differences between the US and Venezuelan economies, but the human reaction to predictable high inflation is the same.
It would seem to me that Venezuela's oil cursed, planned, invest in only one resource caused the failure. If you are saying that the method of taxing and spending "caused" that behavior, I can understand that. It is possible that the behavior side of the state might change under such a system. That is a reasonable attack. However, resource cursed nations tend to embrace the resource curse, regardless of how they tax/spend. The problem of boom/bust cycles exists in every economy, but typically there are natural shock aborbers that prevent busts from going too far. For example, if your tourism sector goes bust one year, you might see more resources placed in your exports that might change your cashflows, but not harm them too badly. However, if every sector goes red at once and stays red, getting out of that is nearly impossible. When you only have one sector and you don't control that sector's price, you land in resource curse land. I just don't see how this sort of system creates that sort of outcome in places that don't suffer resource curses, unless you specifically think that no taxes means you must have a managed economy.
Riggerjack wrote:
Tue Feb 25, 2020 9:49 pm
I understand the appeal of a system that would be predictable and controllable. An economy is not such a system.

Consider:
https://web.archive.org/web/20130415095 ... -disorder/
I think that is a claim against the MMT world view, but not the one I produced. MMT suggests controlling the economy at max burn constantly by ensuring full employment occurs constantly. I didn't not describe that as part of the scenario. I simply eliminated taxes from a federal level. It might be a libertarian state, with only 5% inflation spent on military and judicial systems. I don't think that would fit into your model of a predictable economy.

One way to look at this is just modeling where the US is going, broadly speaking:
1. Decrease taxes
2. Increase debts
3. Decrease discretionary spending
4. Increase healthcare and military spending over time

While different categories might experience black swans (e.g. 9/11, 08 crises), while the empire might rise or fall (e.g. China, European Union) and while shifts in population may occur (e.g. Boomers SS needs, Millennials being a big generation with x birth rate), the factors that have yet to change in spite of political will (e.g. tea party, contract with america) debt may become too big to keep growing with any sort of reasonable payoff. If we do hit such a "runaway" rate, some logical response must be given. Will that be austerity? Will that be MMT-like? Will it be a debt jubilee? Will we just keep growing, keeping ahead of this debt? Those are all lovely questions, but they are all US specific. I'll get to this point in a bit. The point is, I'm interested in mapping out how these sorts of new systems might behave. I mentioned one of the earlier systems, a sort of "Full Employment" system and how that works. This is a system I just don't have my head wrapped around.
Riggerjack wrote:
Tue Feb 25, 2020 9:49 pm
Then consider that the US dollar doesn't exist in a vacuum. There are bonds in US dollars all over the world. What do you think happens to international relations when we change the rules for all those other countries? How will international trade work, when we change out dollars for Monopoly money?

I mean, we call China a currency manipulator, with no apparent sense of irony. But this would add a whole new level of bizarre to the work of the state department, wouldn't it?
What if the US kept paying those bonds but issued no new bonds. I agree it would be a very different economic system than the US has now, but that doesn't make it wrong. Again, in a libertarian version of this, a 5% inflation world would be nothing new. In a socialist country, an inflation rate of 40% would be high, but given that we are already inflating our currency by ~7% (M2 currency) it isn't insane. That being said, I agree we do have to do something about this--international trade would be a problem even if the books balance nationally.

However, I suspect this hits into my political wall, since how it is handled depends on the other players. Most everyone adopted the Washington Consensus which built this world trade system into being. We now have a fractured multi-party system with China having developed in a different way than the Washington Consensus and having the 2008 crisis has really tarnished this system. As you note, a little disorder maybe needed and thus this gives an opening to some alternative trade/government system. While we've focused on the US, who is to say it would be the US who would adopt this sort of system? A smaller country, sensing that the Washington Consensus has failed might try such a system. And if it is the US, it might be adopted as a new system to counter the Asian Way. While it would be a radical shift, who is to say such a radical shift is impossible given the world we live in now. The problem is this is a gateway into the politics and I'm really trying to avoid that avenue. So for now, I decline to explore the topic deeply.

As for how international trade would logically work, I simply don't have enough inner working knowledge of trade policy to know how the WTO would treat this topic. If you have that level of expertise, I'd be interested in hearing it. Given a M2 of 7% and china is at ~9%, it is hard for me to tell what the WTO would do with a currency at 20% or 30%.

Another related topic is, do countries even bother to buy other countries currencies in such a system? If you know the currency will be devalued at 20% per year, you might not want to hold the stuff. Thus China holding our debt wouldn't happen. Is that a more risky world with more chance of war? It has interesting implications for sure.

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