Friday, April 25, 2014
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Will Europe Be Willing but Disabled?

NEWPORT BEACH – When it comes to describing Europe’s ever-worsening crisis, metaphors abound. For some, it is five minutes to midnight; for others, Europe is a car accelerating towards the edge of a cliff. For all, a perilous existential moment is increasingly close at hand.

Optimists – fortunately, there remain a few, especially in Europe itself – believe that when the situation becomes really critical, political leaders will turn things around and put Europe back on the path of economic growth, job creation, and financial stability. But pessimists have been growing in number and influence. They see political dysfunction adding to financial turmoil, thereby amplifying the eurozone’s initial design flaws.

Of course, who is ultimately proven correct is a function of eurozone governments’ willingness to make the difficult decisions that are required, and in a coordinated and timely fashion. But that is not the only determinant: governments must also be able to turn things around once the willingness to do so materializes. And here, the endless delays are making the challenges more daunting and the outcome more uncertain.

Experienced observers remind us that crises, rather than vision, have tended to drive progress at critical stages of Europe’s historic integration – a multi-decade journey driven by the desire to ensure long-term peace and prosperity in what previously had been one of the world’s most violent regions and the site of appalling human suffering. After all, the European Union (including the eurozone’s 17 members) remains a collective of nation-states with notable divergences in economic, financial, and social conditions. Cultural differences persist. Political cycles are far from synchronized. And too many regional governance mechanisms, with the important exception of the European Central Bank, lack sufficient influence, credibility, and, therefore, effectiveness.

Left to its own devices, such a grouping is vulnerable to recurrent bickering, disruptive posturing, and disagreement over visions of the future. As a result, progress towards meaningful economic and political integration can be painfully slow during the good times. But all of this can change rapidly when a crisis looms, especially if it threatens the integrity of the European project.

That is where the eurozone is today. A debt crisis that erupted in Greece, the eurozone’s outer periphery, has migrated with a vengeance towards the core, so much so that the survival of the eurozone itself is at stake.

The more the policy response has lagged, the broader the set of questions about Europe’s future has become. Maintaining a 17-member monetary union is no longer a given. Talk of countries exiting, starting with Greece (the “Grexit”), is now rampant. And only hard-core idealists dismiss altogether the mounting risk of the eurozone’s total disintegration.

Nonetheless, many veterans of the European integration project see a silver lining in the dark clouds massing over their creation. For them, only a crisis can stop politicians from just kicking various cans farther down the road and, instead, catalyze the policy initiatives – greater fiscal, banking, and political union – that, together with monetary union, would ensure that the eurozone rests on a stable and sustainable four-legged platform.

But this view is not without its own risks. It assumes that, when push comes to shove, political leaders will indeed do what is necessary – the willingness question. It also presumes that they will have the capacity to do so – the ability question. And, over time, uncertainty concerning the latter question has risen to an uncomfortable level.

Today’s eurozone is beset by an unprecedented degree of rejection – on economic, financial, political, and social grounds – by citizens in a growing number of countries. The longer this persists, the harder it will be for politicians to maintain control of their countries’ destinies and that of Europe’s collective enterprise.

Private-sector activity is slowing, and it is nearing a standstill in the eurozone’s most vulnerable economy (Greece), where a bank run is in full swing. Elsewhere, too, depositors are beginning to transfer their savings to the strongest economy (Germany) and to safe havens beyond (Switzerland and the United States). Weaker companies are shedding labor, while stronger firms are delaying investments in plant and equipment. And global investors continue to exit the eurozone in droves, shifting countries’ liabilities to taxpayers and the ECB’s balance sheet.

No wonder that social unrest is evident in a growing number of countries. No wonder that fringe political movements are gaining traction throughout the eurozone. And no wonder that voters in almost two-thirds of eurozone countries have turned out the incumbents in their most recent elections.

All of this serves to undermine the effectiveness of government policies – by reducing their credibility, clogging their channels of transmission to the economy, and making it difficult to offset the withdrawal of private-sector capital and spending. As a result, the market-based economic and financial systems that prevail in Europe, and that, not so long ago, were a source of significant strength, are losing their vibrancy.

I, too, am fond of metaphors. During a trip to the continent last week, I heard one that captures very well the key dynamic in Europe today.

The eurozone’s leaders are on a raft heading towards a life-threatening waterfall. The longer they wait, the more the raft gains speed. So the outcome no longer depends only on their willingness to cooperate in order to navigate the raft to safety. It also hinges on their ability to do so in the midst of natural forces that are increasingly difficult to control and overcome.

The message is clear. The current crisis might indeed eventually break eurozone leaders’ inherent resistance to compromise, collaboration, and common action. But the longer they bicker and dither, the greater the risk that what they gain in willingness will be lost to incapacity.

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  1. CommentedMoritz G€d1g

    @Aldo Dias:
    Why do you waste your time with a classic case of US idiot? You must be new to the internet.
    Things like:
    "If Taxation can control asset bubbles, then why has it failed so miserably throughout recent history? How does it promote health, safety or efficiency? By making people poorer or jobless?"
    "Inflation is very much a child of the state, and especially reckless state borrowing to fund unworthy public expenditures."
    "So you admit that Taxation is a penalty and that there will be less of the item taxed than if not taxed. So if one taxes income, there will be less incentive to work. Same for consumption, profits, etc. And progressive Taxation amplifies this deterrence."
    "The immense growth in the US in the 90’s came about because of the large tax cuts implemented by Ronald Reagan in the 80’s. [...] Bush in the 2000’s implemented tax cuts, which sent government revenues soaring. However, growth in government expenditure was greater. Thus, the deficit grew, though by the end of his term the debt level had dropped to $160 billion to his credit. The financial crisis and the Democrats taking over in 2008 expanded government expenditure, but Bush’s share of the TARP has almost all been repaid.
    There have been little if any tax cuts under Obama, and mostly increases in transfer payments. America’s present troubles do not revolve around a shortage of demand, but a shortage of supply. And the greater government participation is in the economy, the lower the supply of desired goods. And there has been great growth in government expenditure during Obama's REGIME."
    Did not tip you off?
    Yes, the current situation is not to blame on the predecessor but the growth of the past was due to the predecessor. So much for consistency in timescale. The factories are not letting people go because there is a lack of sales but because a shortage of supply. You don't understand? You are not American obviously.
    Or you would understand that it does not matter who has the money as long as it is not the Chinese. That there is no such thing as deflation but inflation is always just around the corner. Supply creates demand. There can never be enough capital nor investment. Health, education, infrastructure, public research, the ecosystem are not economic factors. Government spending does not generate business unless it is military. If you tax income, people will just get food-stamps and not become bankers.
    One English word is important for you: "service". Governments and companies do not pay their debt they service it.
    Garry is not ill he has a birth defect, he was born in the USA. You must treat him nicely and ignore as much as possible.

    1. CommentedGary Marshall

      Hello Aldo,

      Who said that anyone in Greece or Portugal is lazy? Are Africans living near a desert scraping by on small quantities of food and water lazy? Such people cannot afford to be lazy.

      I champion people working for the benefit of themselves and their own. My problem is with a parasitic influence that has become a great burden to such people. The unproductive take from the productive, encouraging the unproductive and discouraging the productive. Its called socialism with its big government apparatus suffocating the individual entrepreneurial spirit.

      The growth of this parasitic influence has been relentless in Europe, and just look at the results.

      You live in a world laden with Taxation, and all your deficient remedies are limited by this great burden. There is no answer to Europe's financial crisis. It is like a train that cannot stop in time to avoid a bridge recently collapsed.

      The ECB cannot do what you ask. Germany must underwrite such ECB actions. Germany then will have to fund all these EU countries seeking funds in order that their squandering and corrupt governments may continue their ways. That will not happen.

      Governments shall fall along with all those pension funds and bankers that have funded this wholesale financial catastrophe. There will be massive deflation as the amount of money in circulation acutely declines with repeated bank failures.

      The Keynesians have no answers. Government has no answers. The political arena has no answers. And the mercantile class have no answers.

      It will not take much of a spark to set Europe ablaze.

      You say that none will borrow at 7 to earn 2. But that is exactly what every European government has been doing for years. Borrowing at a premium for diminutive and even negative returns.

      With Taxation, Europe will suffer like it never has before.

      Without Taxation, Europe will prosper like it never has.

      Which road are you going down? I think I certainly know. Better to stay with the devil you know than entertain a novelty. Right Aldo.

      September and October of this year will demonstrate just how ugly and dangerous the crisis truly is.

      GM

    2. CommentedAldo Dias

      http://stats.oecd.org/Index.aspx?DatasetCode=AVE_HRS

      http://stats.oecd.org/Index.aspx?DatasetCode=ANHRS

      you can organise the tables above, if you go to 2011, from least work hours to most work hours. You can see that people in countries like portugal or greece work much more than people in countries that are doing much better, economically, like germany and the netherlands. I hope this particular fragmant of your ignorance - which is perfectly excusable, since we, in portugal, for example, keep telling ourselves that we are lazy when we are not. We are unorganized, we have a highly developed but small imports sector, a highly specialized non transactionable sector that has lived off leaching the state, and a vast majority of incompetent businesses, product of the absolute lack of education that began to be addressed in the late 90s and only now is bearing fruit, as well as the fact that the state controlled the economy for centuries and centuries, until 1982.

      So this is your little work snide comment addressed. Regarding borrowing, I don't even insist on the obvious, which is that the ecb needs to be able to function officially as it has unnoficially, which is as a lender of last resort to both private agents and sovereigns. So even if this obvious need isn't addressed, mainly what needs to happen is that the eurozone and its main trading partner, england, can't all devalue at the same time. Especially not when the rest of the world is slowing down as well. For one, it isnt competitive devaluation when everyone does it, and so wont produce the intended eurozone level macro-economic results, or not as profoundly. Secondly, and mainly, the recessionary pressures this creates are too great, they make growth or even stagnation impossible, they send fiscal revenues on a free fall, and so they make fiscal consolidation impossible and thus scare away, for good, the magic faries of market confidence. So the only chance that the crazy troika plans could work, which is a boom in the export sector, is made totally impossible by the generalized aplication of recessionary policies at an eu level and the manifestation of recessionary pressures in the emerging markets.

      And the reason why i say that the obvious role and action of the ecb doesnt even need to happen for the crisis to be overcome is because the eurozone's global debt to gdp ratio is much smaller than that of the us or britain. Two years ago we had enough room to globally invest, which would help the intervened countries to expand their exports and reconfigure their economies. Now though, because of the need to bail out spain and then the italian banks and then probably italy, there is no room for expansionary policies (there might even be no room for bail outs), and so the ecb will have to be much more active and or the intervention fund be made into a bank.

      My point is, no one said borrow at 7 to grow 2.

      And Gary, again you forget to address your silly proof! Go at it tiger, I'm sure you can try a bit harder to bandoozle me with that impossible/irrelevant proof

    3. CommentedGary Marshall

      Hello Aldo,

      So borrow at 7% to generate returns of 2% growth. That makes perfect sense. Spoken like an enlightened big government loving European.

      If the problem were lack of demand, government would have solved it long ago. But its not lack of demand. Government makes little that people wish to buy. Too much government means too little produced, which means inflation.

      Luckily, many european countries can no longer manufacture money.

      So with exams complete, its time to get to work --- Not.

      GM

    4. CommentedAldo Dias

      Then we agree on something gary! right now, since the main problem is lack of demand - greater even than the structural problems of europe (since globally the eurozone is in better debt/gdp ratio than the us, britain or japan) -, the solution is indeed more debt, greater public investment, like you propose! Here here to government debt, to government doing what its supposed to. Have a great summer Gary!

    5. CommentedGary Marshall

      Hello Aldo,

      Enjoy your future in Euro land. With unemployment at such absurdly high rates and Euro countries doing everything to keep the youth out of the job markets, your future appears great indeed.

      They will be turfing our socialist president in a few months. How so your big spending socialists? Not likely. Get ready to riot.

      And when everything is left a smoking ruin, then perhaps you might entertain a novelty.

      I don't say I'm right, but what I offer is certainly an alternative to the Euro apocalypse.

      GM

    6. CommentedAldo Dias

      haha well I don't think idiot is a good descriptor for Gary, just very very intent emotionally intent on being right. so much so that he prefers to be silly and look dumb. But hey, this is like discussing the sex of the angels.

      And the reason for my indulgence was that i sat 11 exams this semester, 5 of which orals, and so anything seemed a worthy distraction ;)

    7. CommentedGary Marshall

      Hello Moritz,

      That's right. I'm the moron. That's why Europe is on the edge of a complete financial collapse, and the US emulating that dung hill of government arrogance, intrusiveness, and squander is heading for the same fate.

      When they are rioting in the streets, even the police, maybe then you and your kind will accept what complete idiots you are and perhaps try something else.

      But you won't Moritz. You will go down like the former leaders of the Soviet state talking what great wonders it has done for everyone within its prison walls.

      Ignore the rising interest rates on even the better European nations. Ignore the European bank collapses as the runs continue. Ignore the European governments heading for default. Its all in one's imagination. Europe is the envy of every nation on earth.

      Keep up the great work.

      GM



  2. CommentedAldo Dias

    im going to try to make this short, because you keep hiding behind the many points i raise to avoid dealing with your nonsensical proof.

    i didnt say government has the inherent wisdom, i said that government is the only one with the ability to, if it acts right. and since regulation is needed - oh but you wouldnt agree with that, right, it hinders "productivity" - the only logical conclusion is that government has to do it. it seems a more rational approach to the issue than to say that government is always wrong, like you do. which is curious, coming from a man who's proof rests on perpetually profitable government investment for every dollar, all the time. Since government doesn't exist, its an abstraction used to refer to the behaviours and decisions and powers of those who we elect, and to whom we have given those powers, it would make sense that they are no more and no less prone to genius and competence or to incompetence and stupidity than anyone of us. your arguments about the deficiencies of government - and that it should be scrapped, like your argument for scrapping taxes - is a thinly veiled attempt at the "get out of my property" speach. thats why you include irrelevant, and not always true or necessary, descriptors like "hard earned".

    secondly, your ideas about consumption are juvenile at best. so the more you have the more you consume? as a percentage of gdp that is bull. companies have never had so much money, the world is awash in cash. simply no one is investing it because no one is buying products right now, because the people that would be effecient consumers, the middle class, have seen or voted away the protective measures that assured their own sustainability. It INCREASES consumption if you have a progressive income tax and higer capital gains tax and corporate tax because you can use this money to invest in the services that support the middle class, thus increasing consumption and generating even more money. this was what was called capitalism until 1983. but im not even going to attempt to convince you that macro-economics is actually more complicated than an addition equation.

    regarding your expertely ill chosen speeding metaphor, when you decrease government support to the middle class, including relaxing economic protectionism in favor of competitiveness and effeciency, you are effectively eliminating the middle class. unlike speed control, which isnt a relevant fiscal revenue source, income tax is, and it is reinvested in the economy to pay for services that support the middle class. I know, gary, its really a bother when the first metaphor that comes to our minds has nothing to do with the topic at hand. i empathize.

    "Secondly, because government must borrow money directly from the people, how long before the people will refuse to lend to those in power who squander public money? And government, devoid of capital, will be forced to change its squandering ways or imitate Greece."

    Its going peachie in greece gary, good job of making your solution popular or even appear right. People in greece don't have what you, judging by your free time, and therefore guessing at your age, have for free thanks to a MASSIVE entitlements program that, together with the iraq war, caused a hole in your budget that your previous president wasnt man enough to tell your country you had to fill: free medicine for older people. people in greece right now dont have medicine to cronic and degenerative conditions, like alzheimers, heart complications, cancer, because the banks cant finance the pharmacies and the national cofferts are desolute. do you comprehend this? this isnt some social politics discussion you have with your friends.

    Regarding the rest of your comment, the only thing i wish to comment is about the aggregate. i was referring to the aggregate of the debt relation, the specific creditor and the specific lender, and the cycle or process of payments. i noticed you were confusing this (but maybe i wasnt clear) in your previous comment. you mentioned the need to close down banks to establish their net situation, which made no sense to me. this is what i meant, and what i think corresponds to the truth: you can find the net situation of any entity by comparing, or subtracting, their assets with their debts or liabilities. but you can do this at any moment. it will. however, not tell you the financial relationships that entity has with others. if you examine those specific relationships, then you obviously need to examine the full extent of that relationship, from borrowing to paying the principal to paying the interest.

    When you talk about comparing tax with comparing debt, you need to examine the entire operation, or procession of operations, that constitute debt, any particular creditory relationship, and the procession of operation that compose the particular tax your examining. In your proof you have to stories that, just because you say they both start with someone shooting a gun - receiving money - it doesnt make them in the least the same thing - a murder. the bullet of one might end up hitting someone, the other might hit a tree. clearly, they are not the same event. Moreover, taxing and borrowing dont even both start with a gunshot - someone receiving money. In one case, debt, some ASKS for money, promising a return, a profit. In the other, taxes, the government, using its sovereign power, democratically confered to its representitives by all of us, has a RIGHT to part of your money. that part isnt yours anymore.

    And if you think thats bullshit then google up a country called portugal. top earners - and thats anyone with an income over 150 000, mind you - pay 46 per cent income tax, plus another, on average, 30 something percent indirect tax. and our tax avoidance is lower than belgium's.

    Your proof is wrong, you know it, you must. just stop publishing it everywhere, its cyber pollution. and we both agree there should be a heavy tax on that.

    This is the last of my answers. hope you have a good one, gary ;)

    In your proof you

    1. CommentedGary Marshall

      Aldo,

      This is a very simple proof. Its basic arithmetic. You add up a couple of things and perform reasoning that a young child would not find very difficult.

      I don’t care what your political philosophy is, nor your rather inane assertions. They don’t much matter to me. What matters is the proof that Taxation has no financial benefit for a nation since the cost of borrowing for a nation is nil if it borrows from its own resident citizens and in the currency of the land. However you wish to interpret the ramifications or implications of said idea, that’s your affair, not mine.

      Now Greece never abolished Taxation. The US Government, still taxing, has increased its size yet again. The danger in government is not in its deficit. It’s in the size of government relative to the rest of the economy. And the size of government relative to the rest of every economy in the western world has become perilously high.

      Now I have tried repeatedly to reason with you, to cite clear examples, to give clear demonstrations. Every time the effort fails to penetrate in any way. So I am done with trying to explain anything to you. My suggestion is go back and re-read everything that has been written. When you can explain my points with some clarity, come back and repeat them to me. I shall give you a yea or nay. Okay!

      I have asked you a simple question. I have asked you to explain to me how a bank repays its lenders, its depositors and bondholders. Again you go off on an incomprehensible rant about creditor relationships.

      Now I shall repeat the question because the answer, which everyone but you seems to know, is crucial in answering your query as to how a nation will repay its lenders. When you understand how a bank and to some extent a firm performs this miracle of modern finance, then you will understand how a nation shall perform this miracle.

      But the worldly and educated university student undergoing presently his exams can’t bring himself to answer this rather dull question; Can’t bring himself to admit what the entire banking community knows, what economists know, what everyone in the finance business knows, what the general public knows, and what all my brethren on planet Mars know.

      So what does the educated university student do? He answers every bizarre question that one never asked. You aren’t looking to become a politician are you, Aldo? How about a lawyer? Both professions definitely need more people like you.

      GM.

  3. CommentedAldo Dias

    Gary, hello!

    Well, your second paragraph is entirely not true. lol sorry to start off on a negative. but if you think about it, its really a positive: Governments DO pay their debts! There have been many instances of this. Most countries' debt levels look like this:

    http://focusfinancial.medmancreative.com/wp-content/uploads/2012/03/Gross-Federal-Debt-In-20th-Century.png

    "So you dispute the costs of Taxation. Government does not waste money because they are free to take it. Nor do taxes deter anyone from doing what they normally might were there no taxation. That is a first. You must be the only person to argue that Taxation comes with no costs. And one wonders why so many US corporations have $2 trillion sitting in foreign bank accounts?"

    i didnt say this, i said that it doesnt have the inherent or necessary extreme costs you alluded to (your expression wasnt extreme but something in that area, if i remember rightly). And i also didnt say that taxation has no effects. it positive and negative effects, the positive outweigh the negative, thats why it exists in 95% of this earth. It can regulate individual behavious, it cant control asset bubbles, it can promote health, it can promote efficiency, it can promote safety, it can help the environment, it can discourage wasteful spending, etc etc etc, really, etc. oh and it can pay for stuff, including the interest of debt that the state contracts. because you keep forgetting, or not mentioning, that this interest has to be payed. how? using taxes. Because it is only in your, pardon my boldness, distorted view of the dynamic of government and its fiscal policies that debt will only ever increase, because since you do not have a role for taxes - which are, of course, the center of state financial policy - more and more debt has to be contracted to pay for the mythical "original principal interest", and more debt to pay the interest on that, and more and more debt to pay the interest on that.

    "There will be some who lend great amounts and some who lend nothing. However, they all comprise the community. An address should distinguish those who live within the community from those without. And the funds to be repaid by Taxation will all come from that community collective and be handed back to those within the community."

    "You are confusing taxpayer and creditor. In my system there will be no taxpayer. "

    One of your main contradictions lies in the difference between these two paragraphs. On the one hand, you admit borrowing from international creditors, albeit positively discriminating foreign creditors. This would be ilicit to eu law, but lets ignore this. The contradiction here is that if there is no tax payer you cannot borrow from the outside, despite what you suggest, because assuming that community resourced debt is financially neutral there would not be any money to pay the interest on foreign debt. foreign debt would thus be forbidden, and so greatly limiting a country's capacity to deal with economic cycles, for example.

    But moving on to the main issue of your proof, which i think i have now clearly identified: value assessment and or confusion between residents and the state, in that wonderful figure of yours, "the community".

    There is a difference between compensatory debt, debt that yields a profit (interest payments minus inflation rate) and debt with interest rates at inflation. Moreover, you can even consider debt that shields a free transfer, which would be debt subjected to an interest rate lower than the rate of inflation.

    "So if a community borrows from its own citizens to fund worthy public expenditures rather than taxes those citizens, it will not alter the aggregate finances of the community or the wealth of the community any more than taxation would have."

    This is where you are wrong, because the simple reality i described vastly differentiates debt from taxes and means that the net effect is only 0 when the interest rate is the inflation rate. if it is more than the interest rate the creditors make a profit. And so if the "community" lends 10, the state must pay 10 plus y, and if y - inflation equal other than 0, the net effect cannot be 0. Like you said, simple arythmatic. So when i meant that there was a problem with you assessment of value i meant that just because there is a right of credit, a bond, and a corresponding obligation, a liability, that just means that the honoring of the liability, the satisfaction of the right of credit, the bond, will exonerate the debtor from the creditors right. It does not mean, however, that, in the case en point of debt, the money loaned is of the same value as the money owed. simply, principal minus inflation does not equal principal + y, if y is larger than the inflation rate.

    In other words, when comparing the financial situation you must compare the money transfered and not the rights that emerge from the transaction, from the deal. That is like starting to count to 10 starting from 9.infinity. So if 10 million is lent, and 10 million plus y are payed back after x years, and y is different than 0, the net effect is obviously not 0.

    Moreover, like ive addressed in another post, I think you are substituting the relationship between creditor and debtor who happen to be resident of state A and state A with this interesting and absolutely totalitarian and nihilistic concept that you created of "the community", the all consuming absolute entity. And prepare yourself because this part REALLY baffles me.

    On one hand you rely on relationships, ie bilaterality or bilateralism, two parts: bond issuer and bond holder, and even resident and state. But then you generate this figure, "the community". I will try to explain the contradiction.

    If you take the interest or perspective of the community, than as long as the relationships or transfers of assets happen within "the community", the net change is 0. It will ALWAYS be zero, even if the residents lend 10 against the promiss of the government to pay 10 + y and the government pays 10 + (y-x), pays only 5, or pays nothing whatsoever. From the point of the community, given your condition that all are residents. And this is why this "communtiy" of yours makes no point as a financial concept, because it is an absolute one. if you compare "the community" with the "non community", then you have relative terms, the possibility of a relationship and thus the possibility of a relationship of financial content or nature.

    But you do mention, like i said, two relative concepts or entities that can and do exist in a financial relationship, which are the creditor bond holder and the debtor bond issuer. But this is irrelevant of belonging or not to the community.

    This said, id like to make one more consideration regarding "evaluating value". you ignore the truth that different assets have different values according to the situation in which they exists. This means a very simple thing, that is the basis that allows for commerce: Something you value little - because you dont like it, dont need it, dont want it, dont know what to do with it - might be of immense value to someone else because of the exact opposite reason to its lack of value to you. Moreover, and this phenomenum is very relevant in debt, your imperative need for something reduces the value of all other things (ie when you really need cash, you really really need cash and need to sell at wtv price) - and this is one of the reasons why debt in general, public and private, is very hazardous and worse than taxation.

    I am going on about this because the state, intending to build a port that would generate significant economic activity with 10 per cent annual growth, decides to ask for money, issuing general bonds. Bond subscribers agree to a premium of 6 percent year. This is the economic value of the bond subscribers savings given his situation. If he were a tech genius or had a burgeoning start up that grew 20% annum, then he would possibly not be a subscriber of the governments bonds, because his savings' economic value, given his situation (tech genius or start up investor) is greater than the value the government offers. On the other hand, the state does not necessarily obey a logic of profit and investment return (but merely economic foment or social aid, for example). But, given its situation - the aims that the citizens entrust it to seek - so will the state's assets' value be determined.

    All this very long exposé to show you that, hopefully expunged from your spirit that the idea of "the community" is, you will also understand that even the first idea of fiscal neutrality that i presented (x minus inflation = x plus y, where why equals inflation) has to be interpreted, if we are to properly analyze the full ramifications of borrowing versus taxing (or any other financial operation) in more subjective ways and account for para-fiscal or economic advantages that the fical operation brings.

    Sorry for the immense length.

    All the best,

    aldo

    1. CommentedGary Marshall

      Hello Aldo,

      So a tax, that is a penalty, is a good thing as you argue. Taxing income or whatever is the target gives you less of that item. If you penalize the middle class on income and consumption, that is confiscate their hard earned money, you drive the middle class into the lower class. If you penalize the upper classes on income and consumption, you drive them into the middle class.

      To even suggest this has healthy rewards, that penalizing people on income and consumption is a good thing, shows that you have little or no understanding of what you are talking about. Penalizing productive efforts does not make us wealthier, happier, more productive people. It is very difficult to argue with someone who does not see or understand this point.

      Government has not the wisdom to operate the thermostat as you assert. It rarely raises taxes when revenues are surging, and often raises taxes when they fail to furnish enough. Your posited beneficial scheme has no relation to reality. The markets solve the problems of supply and demand quite adequately. It is only government that will interfere in this amazing, efficient, and remorseless mechanism that quickly settles any problems of dearth of superfluity.

      I shall repeat this for you one last time. A soaring GDP will come from 2 areas. One, a great penalty placed on income, consumption, and so many other worthy activities shall have been removed. Do you understand what happens when you remove a penalty on an activity. To take it down to a simple level, if a rigidly enforced penalty is placed upon speeding and it is removed, do you not expect that there will be a great deal of speeding after the abolition of this penalty? Do you not expect to see an abundance of vehicle moving at much higher speeds all over the place?

      You might try to argue that lowering vehicular speeds has benefits. Fine. That may be. But it does not in any way alter the fact that if you lighten or abolish the penalty against speeding, there will be far more speeding. And so, if one relax a penalty against worthy economic activities, there will be more of them. Do you follow this logic?

      Secondly, because government must borrow money directly from the people, how long before the people will refuse to lend to those in power who squander public money? And government, devoid of capital, will be forced to change its squandering ways or imitate Greece.

      If you do not understand these two salutary forces that come into play, then I can help you no further. You do not even understand that the driving force of US renewal in the 80’s was caused by Reagan’s immense tax cuts. You do not even appear to understand the US Federal Government’s finances during the Clinton era. Nor do you have a complete picture of what occurred during the Bush years. The fundamentals in these topics are in dispute only among ignoramuses.

      You say that debts must be payed. I asked you a direct question that you have failed to answer. I asked you how a bank, a financial lender, pays back its debts to its bondholders or depositors. You have given an evasive and ridiculous answer.

      I do not care what the present state of banks are. I asked you a question that pertains to the essence of how banks function, in good times or ill. Be man enough to properly answer that question without invoking all sorts of abstruse and irrelevant points. Even though banks are in such poor financial condition, primarily at this point for lending to rotten governments the world over, they still function and they still have depositors, well in most EU countries. And it seems that taxing power is not a defense from national default either.

      You claim the bank pays interest on the debt. Fine. How does it pay interest on the debt? Do the debts of the bank decrease when it pays this interest? Do the bank’s aggregate liabilities decrease?

      Your evasive answer is what one would best attribute to a young child. So stop acting like a young child and answer the question? How does a financial lender pay back his own lenders? Tell us of a reality on earth that differs so greatly from my reality on Mars, in which banks always repay their lenders and depositors in the aggregate.

      This is where the rest of your argument hinges upon, neglect of the obvious. Answering my query honestly will provide the answers for the rest of your arguments.

      And in your last paragraphs, you appear to little understand what a theoretical concept or discussion is. I suppose a theoretical discussion of one dimension in a three dimensional space will cause you similar confusion. It may be that all that time you have expended in learning and in currently undergoing exams may have gone to waste.

      GM

    2. CommentedAldo Dias

      Of course taxing desincentives a certain behaviour or outcome but that is not, in itslef, inheringtly bad. Adequate taxing incentives people to join the middle class, which is not only the economic goal, or should be, of any society, since it was this middle class that enabled the unparallel western world growth of the 20th century and is now feeding economies like the chinese, brazilian and turkish, and also permits social cohesion and therefore empathy and common political interests amongst citizens.

      Fire burns you. Cold freezes you. But you can use both moderately to cool down or to keep warm. you can use fire to get rid of something you dont want. Taxes can control the "thermostat" of an economy, and they can increase the "heat", increase the pressure of something so much that it becomes undesirable or economically unprofitable.

      "And a soaring GDP created by the abolition of Taxation will achieve just that."

      I repeat my question, where is the soaring gdp? Taxes in america have never been so low, and the same with taxation levels (I mean the money that is subject to effective tax, vs tax break money and or industry specific incentives). Where is this soaring growth? This is a fallacy, Gary, the principle that governs adequate taxing is a little bit more complex that a downward line drawn with a ruler.

      "The immense growth in the US in the 90’s came about because of the large tax cuts implemented by Ronald Reagan in the 80’s. Clinton did not balance the budget with tax increases."

      No, he did both, because he was an able politician and the republican party werent sociopathic 12 year olds then. He did both gary. you can argue that economic growth stemmed entirely from the tax breaks, which is up to you. But you'll have to own that and you can't use history as proof of your argument, because your argument did not happen in history, since bill clinton and the congress used a joint ballanced approach, affecting both variables (tax breaks and taxing). What you can't do is rewrite facts in history that are documented to the nth degree. You can't make things up, basically.

      Moreover, while you may personally believe that tax increases had no role, you would be being exceedingly unbalanced and partial in your analysis, because you do not support your claim with reality but with a priori theories about how you think or hope the world works, such as taxes generate no growth. Thats not true, they pay for the financing of government and public services, either directly or indirectly, paying for debts (which must be payed!).

      And regarding your allusion of reagan, you do know how often reagan raised taxes right? and how much higher those taxes were than compared to "old commie" jimmy carter.

      "Bush in the 2000’s implemented tax cuts, which sent government revenues soaring."

      Lol this is hysterical. this is exactly the opposite of what happened. Despite the need to increase taxes, because of the idiotic war "on whats his name - who cares", he gave tax breaks, BY DEFINITION reducing government income (actually, increasing government expenditures, but since that is a mortal sin in your "land of the free" you started this use of tax breaks on a massive scale to hide what are, in fact, government subsidies and hand outs). The only legitimate argument to be made for tax breaks is that IN THE LONG TERM they will generate employment and therefore growth. but this is, of course, a fallacy, like i said, because 11 years on and tax breaks have proven ruinous for your budget, for your democracy, for your unemployment, for your standing in the world, and above all for your democracy and social cohesion.

      And bush also imploded your health care budget by giving free drugs to old people. Talk about the price of democracy, that florida vote became REALLY expensive for your country to pay!

      So bush exploded the military budget, invented a whole new budget to fund a private-public deep state called the department of homeland security, not only didnt raise taxes to pay for this but decreased taxes by giving out tax breaks to economic lobbies.

      Even on the little things i cant agree with you Gary lol: "However, growth in government expenditure was greater. Thus, the deficit grew, though by the end of his term the debt level had dropped to $160 billion to his credit."

      This was because he was abandoning the war in afghanistan in favor of the more profitable future market, iraq. Of course he was also creating the biggest national security risk for your country since 9/11. but thats peanuts, of course.

      "There have been little if any tax cuts under Obama, and mostly increases in transfer payments."

      like i said, tax breaks and transfer payments are the same thing, just a matter of accounting.

      "And there has been great growth in government expenditure during Obama's regime."

      Massice cut in public workers, at electoral cost, because if he would have merely KEPT the number of public workers under bush the unemployment would be 2 or 3 per cent higher. And despite public sector job loss there have been overall job gains. this is uncanny, given the current state of the world economy, and especially uncertainty with europe.

      "The interest rate and prices of goods and assets shall be the arbiter of what gets done and what doesn’t get done. The government with its taxes seeks revenue."

      This reality exists only in your mind, Gary. Why in world, given that taxes affect pricing, be the "arbiter" of what gets done or not as well as private sector determined market forces? should the fed not exist as well? im scared your going to say yes. Just because you think its unheroic the whole world should set aside valuable tools, at a time when public policy is increasingly impotent to deal with many world issues? The fact is, today, in this reality, taxing is used for both! green energy and electric car tax breaks (and i mean on the part who you need to incentive, which is the consumer, so tax breaks on vat), tax increases on pollution and so forth are realities and have been for decades. at least on this part of the atlantic.

      "How does a bank pay back its lenders? They borrow and borrow and lend and lend. They never repay their lenders in the aggregate."

      But they pay the interest on their debt Gary! They pay the interest, and they support the risk! You talk about the negative effects of taxing, i have told you the even more negative effects of no or too low taxing (asset bubbles, inflation sometimes, depending on the assets nature). But you fail to realize the risk of debt. Taxing = powers of the state. Debt = state behaves like a normal creditor regarding the creditor. Do you think banks right now are stable? no! exactly because while they maybe able to pay the interest rates on their debt, and to contract more debt to pay for old principle, other banks fear that they will be able to pay for the new debt they have contracted. Debt has RISKS and COSTS and you seem to be blind to them.

      "As people will be wealthier, debt to GDP will decline drastically over time, leaving the nation a far wealthier and more secure borrower."

      Really, id love to live in your head, where countries only get richer! its very "puritans on the mayflower", discovering the endlessly plentiful new world where everyone can be a landowner. You do realize countries do get poorer right? Its happened in the USA, I think the news people call it the 2008 recession. lol I am sorry to sound like a smart aleck but really, are we talking about reality or about your ego Gary. Countries do get poorer, happens everyday. what then? thats what i meant when in the previous post i said you failed to address how this state would suddenly become super effecient and invest in such productive opportunities that they would pay for themselves, for the non-profit services the state provides and for this increasing debt. (and, of course, as always the question remains: how would this state-investor retrieve dividends from such investments? user-specific taxes? wait, those are taxes! dividends from stock? that would make a state an owner of everything it put money into. so your a chinese communist, is that it Gary?).

      But the problem is greater. even if the state, and the private sector, for that matter, became this super effecienct state-on-roids kind of thing where every single highway had a gazilion cars waiting to ride it up and down and every single port had boats lined up till the horizon waiting to get in, what about externalities. what about things that dont depend on the government or the country. what about 9/11, what about the banking crisis that started in america (not saying the problem was exclusively american) and then contaminated europe. what about tsunamis? these are uncontrollable things to third party states that cause recessions that would make your sistem implode. and like i said, they happen every single day. every single day a country in africa faces starvation or war or droughts or so on so forth. every day.

      And you fail to address all this, just like you failed to address the problems i identified with your proof.

      "The proof is very clear. When one creates a national debt, he creates a national asset, because the money is borrowed from the community. At any point, to eliminate the asset and debt at some point in the future, the principal and interest will be collected from the community and then all of it returned to the community. Debts and interest are nullified, and the community is no better or worse off. There is never a case that the money will run out. It can’t."

      So you maintain your recent develop, that REQUIRES a tax to make sense, to collect the money owed. So your proof is no longer the same. Before you said "the aggregate financial situation of a community is unchanged if the debt is from state to residents." then i said yes, this is true but meaningless, because if the government doesnt pay the debt the financial situation of the community as a whole is the same. This was presuming an interest of inflation rate. With an interest above inflation rate you can actually say the community because poorer, because the state didnt pay back what it borrowed plus a little more it promised to create. I further more said that this plus y was impossible to pay, even if it was at or below inflation, because the government, without tax, has no way to collect revenue from its investments, because a user tax is still a tax.

      And this is the problem with your proof! You construct a system that prooves, you say, that tax and debt are interchangeable, that debt has no additional costs of finance to tax and it avoids the effects of taxing that you perceive to be entirely negative. The reason your proof doesnt work is that this equivalence between taxes and debt doesnt work, they do different things and opperate in different ways: debt, if its accompanied by any interest (even y below inflation rate) requires taxing to pay for it! either user-specific taxes to go on highways, use ports, use airports or pay for healthcare, or general taxes. And in this case a mix of approaches, as often happens, is the ideal, with the exact balance depending on the essentiality of the public service.

      Furthermore, in your "no taxes till the end approach" you are defrauding the institute of debt and, above all, defrauding the citizens who lent their state money expecting it to pay it back with interest, possibly so that they could live a happy retirement, and the state says, basically, that the money it asked for x number of years, and for which it would pay x percent, was now the state's, because the people now had to pay an extraordinary tax to match the ammount they lent the state.

      This is fraudulent on so many levels that the I can't begin to address. The only thing this is more than fraudulent is stupid, because who on their right mind would lend to a state who did anything half as grievous as this.

      But I know what your going to say: your model is only supposed to proove that borrowing is financially neutral within the community. But if this is all your trying to proove then your proof is useless and a waste of cyber space, one good mind (yours) and myself, because like i told you if i killed you and got all your money or you did the same to me, our aggregate financial situations remain the same. is this what your trying to proove? in this sense any transfer of money doesnt affect the balance because we are looking at an absolute reality, that has no relationships outside itself nor, in the end, relationship within it. to talk about debt and taxing you are talking about relative concepts and situations, ie two entities interact with eachother to defend their own interests, over the course of time in which that relationship endures. This is reality.

      What you talk about is like saying "its useless to go to mars because the aggregate mass of the universe remains the same". Meanwhile you missed that your on mars.

    3. CommentedGary Marshall

      Hello Aldo,

      So you admit that Taxation is a penalty and that there will be less of the item taxed than if not taxed. So if one taxes income, there will be less incentive to work. Same for consumption, profits, etc. And progressive Taxation amplifies this deterrence. You are quite right when you say that we should tax the things we want less of like pollution.

      I did not get into the topic of more availing conditions for servicing the debt. I agree with you. A higher GDP makes servicing the debt less onerous. And a soaring GDP created by the abolition of Taxation will achieve just that. Debt levels will rise, but GDP and wealth will rise that much faster. Thanks for pointing that out.

      The immense growth in the US in the 90’s came about because of the large tax cuts implemented by Ronald Reagan in the 80’s. Clinton did not balance the budget with tax increases. He balanced it by controlling the growth in government expenditure. Bush in the 2000’s implemented tax cuts, which sent government revenues soaring. However, growth in government expenditure was greater. Thus, the deficit grew, though by the end of his term the debt level had dropped to $160 billion to his credit. The financial crisis and the Democrats taking over in 2008 expanded government expenditure, but Bush’s share of the TARP has almost all been repaid.

      There have been little if any tax cuts under Obama, and mostly increases in transfer payments. America’s present troubles do not revolve around a shortage of demand, but a shortage of supply. And the greater government participation is in the economy, the lower the supply of desired goods. And there has been great growth in government expenditure during Obama's regime.

      An economy has always gone through ebbs and flows, with or without Taxation. The interest rate and prices of goods and assets shall be the arbiter of what gets done and what doesn’t get done. The government with its taxes seeks revenue. It does not seek to penalize the abuse of public resources or stifle economic growth. There is a big difference. In seeking revenue, it deters many worthy economic projects making us all poorer. There is room in my system for penalizing bad behavior and abuse of public resources. This is where a Tax will actually be applied for its intended purpose: to deter. It will not be used to generate revenue for public expenditure.

      How does a bank pay back its lenders? They borrow and borrow and lend and lend. They never repay their lenders in the aggregate. And banks have no shortage of lenders. This is the very same way the government will pay back its lenders, by substituting another for the first lender. As people will be wealthier, debt to GDP will decline drastically over time, leaving the nation a far wealthier and more secure borrower.

      The proof is very clear. When one creates a national debt, he creates a national asset, because the money is borrowed from the community. At any point, to eliminate the asset and debt at some point in the future, the principal and interest will be collected from the community and then all of it returned to the community. Debts and interest are nullified, and the community is no better or worse off. There is never a case that the money will run out. It can’t.

      If the government squanders money under Taxation, all its ills will disappear under borrowing because government will have to justify everything it does based on cost and benefit analysis. Bureaucracy, which thrives under Taxation, will vanish under borrowing. Same with every other government department. Many departments will disappear.

      Why? How do you treat your banker? Do you treat him as badly as you might treat someone who is forced to give you money? If one has to borrow money he can no longer confiscate and invest it on behalf of those he borrowed it from, will these lenders tolerate squander, corruption, needless regulation? Would you? Of course not.

      How Aldo, does repayment of debt to one person, while borrowing the exact same amount of money from another person contribute economic cycles? Your concept is alien.

      The government benefits from the growth in Taxation. The nation benefits from its abolition. Do note the difference. The nation will borrow the money through its agent, the government, and the government will wisely invest the money. The nation then benefits from those investments. They pay for themselves. Just as with any private corporation.

      My proof is a revenue question, not an expenditure question. How and upon what government expends the funds does not enter into the discussion, though I have explained how borrowed money will generate public returns greater than costs.

      Aldo, I speak of a theoretical transfer in the same way a bank might speak of a theoretical closure in determining its net worth. Okay! The bank calls in all its loans and pays off all its depositors. Then whatever remains is distributed among shareholders. Its all theoretical, but the true value is apparently reflected in the share price. A bank like a nation will never do this. To do so is a silly exercise. Imagine shutting a bank for good each time someone asks what its monetary worth is! To suggest the determination of a bank’s worth by performing this costly closure each time means you really don’t understand finance.

      The banks do not pay their debts. Nations do not pay their debts. Many corporations see their debt levels rise. People incur larger debts today than they ever have, though being finite creatures they do pay their debts personally or leave it to their estates to fulfill the task. Yet you tell me one must pay their debts.

      To the lender seeking his money back, yes. In the aggregate for a nation, it never happens with or without Taxation. That is reality. If you cannot accept reality, I cannot continue a conversation in the fantastic or whimsical.

      Regards,
      Gary Marshall

    4. CommentedAldo Dias

      by the way, Gary, i really don't want your money ;). but if i eventually convince you you could give it to a good cause, if you dont need it.

    5. CommentedAldo Dias

      Well, let me start by agreeing with you: currently we tax the wrong things. we should tax pollution and waste, not income. I dont know if you do that in the US but in europe, for example, we tax engine size. Therefore a smal 1000 cc dieself car pays virtually no tax other than value added vs a big 6000 dollar mercedes gets taxed heavily. Indirectly we also tax weight and size of cars, because our motorways are all payed and a jeep payed double that of a saloon, a transport car double that of jeep (or tripple that of a saloon, cant remember).

      Regarding debt, you cannot support your position by giving me 3 points on a graph. How about when clinton was president, when the us was a net lender rather than a net receiver. there is not debt in this case. and my graph is a probably proof that your belief is wrong because if the debt to gdp ration drops then the debt because easier to service, meaning you need less of it to maintain the same level of economic output. but as you point out, this can mean that your economy has grown or, yes, that you are paying more of your debt down.

      Regarding your questions on taxation, they are not really questions about taxation. rather, you question human falibility to foresee and to implement. your point can really only be this, because then how would you explain that you had the immense economic growth you did in america in the 90s, which probably is unrivalled amongst developed countries, a balanced budget that afforded great "benefits", and higher taxes than during the 8 bush years plus 3 obama years. If taxes have such costs, which means that when you stop having those costs there are more resources available for the magic fairies of confidence and financial capitalism to spread around, where are those resources and the growth they promised? Its not like you (im presuming your american for some reason Gary) had demographic changes that explain the derailing of your budget or sinking middle class consumption. But we both know where the money is Gary, its in businesses, kept deep in the circuits of some bank's computer, because no one who runs a real, productive business is investing right now. because there is no demand.

      its the classic dissonance between something being logical for the individual and ilogical for the collective. It is LOGICAL for individuals to devalue, it is LOGICAL for individuals to reduce the wages they have to pay, it is LOGICAL for individuals to desinvest. but it is NOT LOGICAL for everyone to do, it is NOT LOGICAL at the collective scale. And if its impossible to consume (wage cuts) it becomes not logical for profit driven companies to invest, and that leads to more cuts on wages and thus consumption. It is a vicious ilogical irracional circle composed entirely of perfectly logical and racional steps that can only be broken by someone who has the ability to perceive and address this macro irrationality. that entity is the state, and the focus of its action has to be on fommenting consumption, on supporting the middle class. And this means continued government action, such like you had since your war effort began and until the 80s, and adequate action in crisis.

      For this, i grant you, its better if the state has financial security. the problem in europe is that everyone went keynesian and the southern states didnt have the financial security that continued financial responsability gives. And this is the purpose of financial austerity: it is for the long run. And investors only care for it in the long run. because in the short run it helps avoid no crisis of confidence and only hurts the economy, helping no one, on the contrary.

      So back to your taxation point: just because the bullet didnt kill the duck doesnt mean that it was the weapons fault. in fact, the logical thing to assume is that the shooter missed. the same with foreseeing asset bubbles and taxing's ability to control them. IN FACT, its a giant contradiction to say, like you do, that taxing has GREAT NEGATIVE EFFECT ON THE ECONOMY, and then not admit that taxing, because it does desincentive the thing it taxes, cant dampen uncontrolled growth. lol you dont even believe in your own boogie men Gary, your a complicated man!

      you then repeat that borrowed money can also pay for things. you are, of course, right. but how do you pay for the borrowed money, including the interest rate - profit - it comes attached to. And contrary to what you seem to suggest, being able to pay for something is not the same as paying it. you will get more loans, which you can use to pay for loans you have which have matured, but you need to pay interest on the loans you have. and that builds. And since, again contrary to what you suggest, growth isnt exponential, even if a country were to grow FOR EVER at 10% a year, your debt will eventually, by force of simple arythmatic, dry out, because the percentage of new debt that can be used for discretionary spending will be 0, because more and more of it will be needed to service the debt. of course 0 is never reached, because the whole thing implodes much sooner. Portugal right now, which has a GREAT national health care system, despite the HUGE cuts, spends more of its gdp per year to service its debt than to fiance the ministry of healthcare and thus the entire national health care service, the department of education (which has a HUGE bureaucracy) and thus the entire school system, from nursery to university and the ministry of internal administration (police forces, boarder control, etc). This is how much debt costs. Its much more dangerous and costly than taxes. And also highly beneficial, if used right. But the idea that it musnt be payed is ridiculous. Its interest must always be serviced, and that is a great transfer of money to outside the community.

      How? taxing residents and national economic activity, of course, which is how debt is payed.

      "The jurisdiction would only borrow from those within it. How does borrowing only from those within a jurisdiction limit its ability to deal with economic cycles? I have no idea what you are talking about."

      Because debt must be PAYED! there is INTEREST with debt, or is this concept alien?

      "Because the state will no longer be able to borrow and squander with impunity,"

      I would love to be your shrink Gary, you are a complicated man indeed. So the state should borough all this money, and private agents just because they reside in its jurisdiction would give it money with 0 profit (because, like i said, this is the only way your proof works), and yet the state in your world would not borough with impunity, and only use this money for REALLY REALLY good investments, which in your world means only economically profitable ones. Apart from the naivety of this, or the sheer uselessness of saying it, since you dont elaborate how to get there (have really really good laws and really really clever and incorruptable judges, i imagine), you dont explain how the state will benefit from the economic growth of the country - because without taxes the state would only receive dividends from its investments. so in your world the state would be a giant consorcium of coorporations, or have one to generate its revenue, is that it? because how would you otherwise pay for medical care to those who cant? someone who needs a heartransplant? let them die, like some morons shouted in some republican convention?

      or is your theory based on the idea that what matters is that debt could potentially be payed off at any moment. as long as the arythmatic is there, itll work. It wont. wealth is generated and it also spontaneously evaporates. take a fire to a factory, that then causes the insurance company to assume costs. Then take the case of a tsunamy or other natural disaster. take 9/11. Take the wall street crash. Take daily stock market reality. Just take reality in general Gary, im sorry. No taxation doesnt work, not only does in not work logically, in your proof, but it doesnt work in reality because the defining characteristics of tax and debt are vastly different, and therefore the dynamic qualities of the two, how the affect and are affected over time, are also different.

      And Gary, i believe we are nearing a breakthrough:

      "When I speak of the government satisfying its debts, I mean it to be taken only theoretically. At some point in the future, the government will take money in taxes from the community and hand it back to the community, erasing all debts. The community is no better or worse off in the aggregate. Individually, there may be great variance. But such a transfer will never occur because the financial costs in doing so will always be far greater than the benefit in doing so, which is nil."

      So "taken theoretically" means not taken seriously at all, so that we can all indulge you in your little proof. Because if it means that then i will "take you theoretically" and not keep at this. Because you just admitted that your proof is wrong. its not like you forgot to mention a little side thing that could maybe happen in the future, kind of if the government so chooses. taxing to pay for the whole opperation IS essential in your model. Paying debt isnt some hypothetical, paying debt is ESSENTIAL! and especially, when you compare the net situation of taxes with the net situation of debt, your are, or must, compare the NET situation, that means after all necessary and relevant opperations. And the word DEBT also has to mean something, and one of the things 99.99999% of debts in the world involve is payment of interest that is higher than inflation. you have to PAY a debt - i dont know how much i can repeat this. what you are saying is akin to saying we were all even in the race, but he crossed the finish line first. 2-3 is 0; oh, and there is -1 that can be accounted for. That -1, paying the debt, is essential to it and to its accounting.

      And your right, i dont speak english as a mother tongue, i havent spoken english regularly in 5 years, i have written this in a hurry because i am currently sitting exams. but i did attend an ibo school, in english, from the age of 3 and until i went to college, and so im a little incredulous that you understood so little from what i wrote. i also cant help but notice that it was exactly in the post where i explained to you in very concrete terms why your proof does not work at all that you understood the least of.

      Tell me exact passages you cant understand my meaning, ill have no problem making them clear to you.

    6. CommentedGary Marshall

      Hello Aldo,

      On governments repaying their debts, your graph gives a debt/gdp ratio. Of course, this ratio will vary. When GDP grows, the ratio will rise and graph line fall. When government contracts a great deal of debt for little growth in GDP as in the Carter or Obama years, the ratio will fall or graph line rise.

      My point was that once a government has contracted a debt, it never or very rarely pays it down. In the US, from $2.5 billion in 1910 to $43 billion in 1940 to $15 trillion today. The debt just keeps on growing over time. It rarely if ever declines.

      So Taxation does not have such an extent in costs. Well, the only way to find out is to abolish Taxation and see what happens. Taxation can certainly regulate behavior. It is a penalty. Apply it to anything and it will discourage one from doing what they are doing. Apply it to income and consumption, and you shall have less of both.

      If Taxation can control asset bubbles, then why has it failed so miserably throughout recent history? How does it promote health, safety or efficiency? By making people poorer or jobless? By squelching private enterprise or driving it out of the jurisdiction or country?

      You must get into details and beyond incredible platitudes to prove a point. Borrowed money can also pay for things. That is why the government has a debt.

      The debt will only increase, but with assets outpacing those liabilities at 2 to 1 conservatively estimated. The nation will be far wealthier.

      The jurisdiction would only borrow from those within it. How does borrowing only from those within a jurisdiction limit its ability to deal with economic cycles? I have no idea what you are talking about.

      On the matter of inflation, however the financial markets deal with the problem of inflation as reflected in the lending rates, it will prevail in dealings between the government and government lender.

      Inflation is very much a child of the state, and especially reckless state borrowing to fund unworthy public expenditures. Because the state will no longer be able to borrow and squander with impunity, inflation should cease to be. There will of course be changes in the prices of certain goods as determined by market conditions, but a general rise in prices caused by reckless government expenditure will be a thing of the past.

      When I speak of the government satisfying its debts, I mean it to be taken only theoretically. At some point in the future, the government will take money in taxes from the community and hand it back to the community, erasing all debts. The community is no better or worse off in the aggregate. Individually, there may be great variance. But such a transfer will never occur because the financial costs in doing so will always be far greater than the benefit in doing so, which is nil.

      I hope that answers your questions and concerns. I must admit that you lost me in your explanations. I know there is a language barrier at work so I tried to answer them in the best way possible.

      Regards,
      Gary Marshall

  4. Commentedjracforr jracforr

    The greatest irony of European's financial crisis is that the solutions proposed for the European Union is modeled of the USA. They are being told they need a central banking system, greater economic union and greater collaboration between the diverse states. In short you need to be exactly like the USA if you want to succeed. Yet Europe's disaster was exported from America. All the laws and oversight that the diverse Europeans were lacking, the USA already had, yet it could not protect us against human greed and deceit. Why do we assume that Europe will benefit from mere technical changes when the problem was caused by lapse in our ethical standard.

  5. Commentedpeter fairley

    EU central fund & ECB powers are nothing close to USA Federal powers and the EU is too confused and democratically fragmented to change in time. USA govt efforts are somewhat fruitless; the EU/ECB is dangerously weak. EU member govts are broke with local govt spending needs, and with already high taxes. Have any economists totaled up 17 country GDP, and shown a % ratio of GDP/bailout funds, ECB commitments etc.? I believe the ratio is very low, reflecting this underlying weakness. Market celebrations of the EU putting out fires are disguising a slide into EU recession with limited EU powers to counteract recession. Then we get political revolt of northern voters...along with bank failures, bankruptcies, higher unemployment etc

  6. Portrait of Christopher T. Mahoney

    CommentedChristopher T. Mahoney

    Fiscal union merely socializes the eurozone depression. The crucial actor is the ECB which must reflate and monetize.

    1. CommentedGary Marshall

      Hello Mr. Mahoney,

      The reason that the ECB will not do the obvious is because it would leave the ECB a broken institution, and very quickly.

      The ECB is a lender like any other. It creates assets and liabilities through the lending process. If the bonds it buys, adding to ECB assets, fall sharply in value whilst the liabilities created in member reserves remain, the ECB will be unable to withdraw those faux reserves.

      The artificial increase in reserves will have a potent effect on market interest rates. With reserves soaring, market interest rates will decline.

      This is the Japanese disease or the Fed disease, in which interest rates artificially depressed through massive increases in bank reserves have crushed returns for troubled lenders and depositors, leaving everyone poorer and problems persistent, indefinitely.

      Not a very good situation is it.

      And when the ECB attempts to sell deficiently valued bonds to withdraw reserves and restore honest conditions of supply and demand to financial markets, the effort will come up short.

      So which country will offer bonds to sell to the ECB so that it may withdraw all the superfluous and faux reserves?

      That is why the ECB does not act as you desire, nor the Germans, who will have to back this costly nonsense.

      GM

  7. CommentedGary Marshall

    Hello Mr. El-Erian,


    The individual European countries have the means to remedy their current problems with ease. And the means to that end is contained in the little proof below for the abolition of Taxation, which novelty may be absurd on the face of it, but not so when examined.

    If you or anyone can find the flaw in this proof, I shall be more than happy to give the reward of $50,000. None have yet been successful. Perhaps because so few have tried.

    Its not the end of Europe or the world, but a new beginning.

    Enjoy!

    ####

    The costs of borrowing for a nation to fund public expenditures, if it borrows solely from its resident citizens and in the nation's currency, is nil.

    Why? Because if, in adding a financial debt to a community, one adds an equivalent financial asset, the aggregate finances of the community will not in any way be altered. This is simple reasoning confirmed by simple arithmetic.

    The community is the source of the government's funds. The government taxes the community to pay for public services provided by the government.

    Cost of public services is $10 million.

    Scenario 1: The government taxes $10 million.

    Community finances: minus $10 million from community bank accounts for government expenditures.
    No community government debt, no community
    government IOU.

    Scenario 2: The government borrows $10 million from solely community lenders at a certain interest rate.

    Community finances: minus $10 million from community bank accounts for government expenditures.
    Community government debt: $10 million;
    Community government bond: $10 million.

    At x years in the future: the asset held by the community (lenders) will be $10 million + y interest. The deferred liability claimed against the community (taxpayers) will be $10 million + y interest.

    The value of all community government debts when combined with all community government IOUs or bonds is zero for the community. It is the same $0 combined worth whether the community pays its taxes immediately or never pays them at all.

    So if a community borrows from its own citizens to fund worthy public expenditures rather than taxes those citizens, it will not alter the aggregate finances of the community or the wealth of the community any more than taxation would have. Adding a financial debt and an equivalent financial asset to a community will cause the elimination of both when summed.

    Whatever financial benefit taxation possesses is nullified by the fact that borrowing instead of taxation places no greater financial burden on the community.

    However, the costs of Taxation are immense. By ridding the nation of Taxation and instituting borrowing to fund public expenditures, the nation will shed all those costs of Taxation for the negligible fee of borrowing in the financial markets and the administration of public
    debt.

    Regards,
    Gary Marshall

    1. CommentedGary Marshall

      Hello Aldo,

      I did not say that Government cannot tax to raise revenue for public expenditures. I asked the question why would one tax with all its inherent costs when one can borrow bereft of such costs? Note the difference.

      Taxation is not the only mechanism for paying for public expenditures. Government also happens to borrow. And once government borrows, it rarely if ever pays the money back. The debts just keep on growing. When you say without taxation government will never pay back the nation’s debts, it is also the same case with taxation.

      So you dispute the costs of Taxation. Government does not waste money because they are free to take it. Nor do taxes deter anyone from doing what they normally might were there no taxation. That is a first. You must be the only person to argue that Taxation comes with no costs. And one wonders why so many US corporations have $2 trillion sitting in foreign bank accounts?

      If you expect to be taken seriously, then maybe you should alter your opinions so that they more reflect reality.

      The proof is such that even if there were no costs inherent in Taxation, borrowing would still not affect the finances of the nation. Adding an asset and an equivalent liability does not affect one’s wealth.

      And that is all my community example shows. 10 years after the funds were borrowed, or x years after the funds were borrowed, the accruing liability is exactly matched with an accruing asset. Its a wash.

      Where do I say taxation is beneficial to the nation? Not the state, but the nation: its citizens and corporations?

      There will be some who lend great amounts and some who lend nothing. However, they all comprise the community. An address should distinguish those who live within the community from those without. And the funds to be repaid by Taxation will all come from that community collective and be handed back to those within the community.

      I am only interested in aggregates, not individuals. But no such tax transfer will ever take place because its just a theoretical transfer to illustrate a point, the point being that there need be no Taxation when borrowing costs a nation nada.

      You say the State is responsible for satisfying debts. And where does the State currently get its funds from? From exactly the same place the State will obtain its borrowed funds. .

      You are confusing taxpayer and creditor. In my system there will be no taxpayer.

      I think my proof quite clear. You seem to get hung up on matters that have little bearing on the subject.

      Regards,
      Gary Marshall

    2. CommentedAldo Dias

      And of course, your whole analysis looks at this phenomena in stasis and does not appreciate the dynamic complexities of debt and taxation... well, you do look at the negative dynamics of taxing, I'm sorry (there are positive ones). You say that borrowing does not alter the aggregate finances of the nation at all but, in the long run, debt also has pernicious effects, as we know, especially given the lack of certain specificities like america's superpower status and especially the dollar. Debt reduces the assurances offered by a country's guarantees, it increases the need for growth or the burden of taxation, and so on so forth.

      The biggest issue with your analysis is that you ignore this, you ignore that individuals will not invest just for the sake of investing, that what is logical for the citizen does not have to be logical for the creditor, and above all what is logical to the individual need not be logical to the collective.

      Without mandatory subscription your proof makes no sense or has no aplicability in the real world. and mandatory subscription would very much fall under the state's power to tax, and this is why i presume that you do not refer to mandatory subscription in your analysis.

    3. CommentedAldo Dias

      Yes Gary, but the government, the result of popular will, has the right to do this. You can then question the role of media and our ability to reach at the truths behind political actions; you can question our model of representative government, and argue that when you have an elite that are supposed to cater to the greater god but have the power to cater to themselves you will always have corruption, that this is a systemic truth. But what you cannot argue is that the government is not sovereign and cannot therefore tax economic operators within its territory.

      And I repeat, a taxing operation is not the same as an emission of bonds. Taxing is the state's mechanism to pay for its obligations, including those generated from bond emissions. If a country had no tax, it would never pay back its bonds (in a non-natural resource rich country). So the wider argument that I believe you are trying to make, that taxing and bond emissions fully equate and therefore, due to the taxing costs you identify (which I don't agree with or dont believe the private sector to operate largely in the same manner - and perhaps with different, often greater moral hazards), does not carry through. But if this isn't something you are implying, or something your proof could be used to back up, than please correct me.

      But regarding the scenario you described, of taxing the bond holders for the principal and the interest rates, the prospect doesn't scare me. It doesn't scare me because, despite an overly aggressive fiscal administration, the basic tennants of the rule of law apply. In my country of Portugal, for example, descriminatory taxes (taxes that differenciate equal situations) are constitutionally forbidden.

      But these arguments have to do with the practical relevance of your proof. The logical issues of your proof are:

      1. When the government taxes 10 mil, the community is, at that moment in time, poorer 10 mil. But then taking your analysis of bonds (which I'll question in a moment), the community is not 10 mil. poorer but exactly as poor or as rich as it was before, because you argue the state's debt will be serviced by its tax payers and, in your unique scenerario where the bond-holders are entirely residents, the bond-holders and the tax payers are one of the same. So you yourself admit the first difference: in one case the community is 10 mil poorer, in the other it remains the same. So you admit taxing is beneficial to the state.

      2. the second problem in your proof is that in a volluntary bond-subsciption model not all resident citizens would subscribe to the bonds - and like I said, you cannot discriminate those who do from those who don't. So the key relationship on which your proof is based upon doesn't exist, the "community", which you think of as a cohesive entity but in fact, without mandatory subscription, is an assortment of bond creditors, does not equate to the "community" of tax payers. The canceling out effect you propose cannot therefore take place. So how would you structure this relationship. What would be the guarantee of bond-holders? I dont know how coutries without a public collective person "state" operate, but in the continental model for example it is the state, not the tax payers, that are liabel. And in one way or another i'm sure all countries work with public intermediaries of some kind. How then do you structure the guarantees in case of default. If the state defaults on its resident bond holders, would that be irrelevant, since in the end, according to you, despite their position of creditors their assets are, in a direct relationship, guarantees of the state's failure to meet its responsibilities.

      You are confusing the particular relationship of Tax payer and creditor, and the legal/practical consequences that result from the difference between these two concepts.

      2.1 the fact that there is little distinction in the bond market between national and international creditors further hinders your proof's relevance and feasibility. And what about bond holders who are not residents. Can they directly seek reparation with any citizen of the state, for his share of the total debt. Or even for the whole ammount, and leave the "internal creditors" of the indebted country to sort the issue amongst themselves, the who owes who what. Or are countries who are supposed to guide there financial life according to your proof, where all creditors of the state are simultaneously tax-payers, supposed to not resort to international creditors.

      So in so far as your proof is supposed to mean something, to talk about real life phenomena such as taxes or bond emissions, I have trouble not only with its logical faults, to the logical conclusions it would take you and, above all, to its relevance in modern day financial relationships. It seems like your just trying to be clever, and proposing something that has no real use, no practical application.

    4. CommentedGary Marshall

      Hello Aldo,

      The proof works. If a nation borrows from its own citizens, paying interest on the borrowed funds, its financial position in the aggregate will be unaffected. It will be no richer or poorer.

      With bonds outstanding and interest accruing, suppose the government decides wipe out the national debt by taxing the entire borrowed sum. It would take principal plus interest from the nation's taxpayers, and hand principal plus interest to the nation's lenders, retiring all debt and leaving the nation no better or worse off financially.

      As I said, this is simple arithmetic and simple reasoning. If you can find the flaw in it, I shall give you $50,000US.

      So a nation taxes to save itself the interest costs. But in fact there are no savings as demonstrated above.

      Even if there are no costs to Taxation for a nation, then proof remains entirely relevant. One may tax or borrow without altering the nation's financial position in any way.

      Do you understand this?

      Now you question the fact that there are costs in Taxation. If there were no costs, the proof above remains unaltered: Borrowing will not alter the nation's finances in any way.

      But Taxation has huge costs. The government can take your money and do as it pleases. It can squander with impunity as one can see with all these green technology investments. It can employ legions of bureaucrats performing work of little or no value. It can leave the roads in a poor state while catering to the whims of its party members or fringe voters. It can institute and enforce oppressive regulations without justification of benefit.

      Why? Because the government can take your money by force of law.

      And do consider all those individuals and businesses that are forced to pay for this monstrosity. Because of onerous taxation and regulation, many businesses and individuals will just leave for more clement jurisdictions of Taxation and regulation. Many will just not bother to do anything. Money that could go to refining production methods and increasing or creating competitive advantage is taken and dispensed by those who know little of the value of money.

      Now you may be one of those people that think one will work just as hard and often with a tax rate of 20% as with a tax rate of 78%, but I think you a little wiser than that. Am I right?

      So the costs of Taxation in government corruption and squander are immense, almost as much as they are in deterrence.

      So if borrowing does not alter the aggregate finances of the nation at all, and Taxation comes with immense costs, why are we taxing in place of borrowing?

      Do you have an answer, Aldo?

      You can put an end to my repeated posting and enrich yourself at the same time. Why don't you do that?

      Only resident citizens will be able to lend to the government. No banks and no central bank lending. Only corporate lending through pension funds. With such large amounts of funds in question, how could one person or entity hijack the government agenda, as it does presently with Taxation, in which little groups of influential people can easily stimulate the mercenary tendencies of those in government?

      Regards,
      Gary Marshall

    5. CommentedAldo Dias

      lol Gary I don't mean to offend you but really this has to be one of the most uncritical things I've ever read and you keep posting it everywhere.

      The reason your proof does not work, or is irrelevant, or is impractical has to do with 3 things.

      The first is this "immense cost of taxation" you speak of. Other than the tax itself, I don't understand what your referring to. Is there some sort of moral hazard in paying a bill that is called a tax, that you knew beforehand you had to pay?

      And since the only "cost" of tax is servicing the actual tax - paying it - the only difference between these two approaches to raising public finances would be the obligatory nature of paying taxes vs the voluntary nature of IOU. Well, Gary, if this is your point, if this is the advantage you advocate, than it is probably also the reason why I have been the only one with the patience to tell you that you cannot finance the entire public administration of a country on a voluntary basis. The aims of the state and the aims of the private sector, while sometimes overlapping, are distinct. The interests of the state are the collective wellbeing of its people, the interests of capitalism is profit. While the procurement of profit often generate community betterment (though seemingly less and less), and the state's and other actors' procurement of the public good can sometimes generate profit for itself (and hopefully always to others), it is ridiculous to confuse the two, and thus think that they, and the entities that promote them, are interchangeable.

      You cannot, therefore, make the democratic and sovereign state dependent on the opinions of investors regarding its "profitability" or, even worse, the profitability of each individual expense. Its ludicrous, its more than a complete veto power, its the handing off of the political democratic state to the richest and most powerfull amongst us in the most blatant way possible. Its the end of democracy, liberalism and the western world in its defining defence of individual political rights.

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