Tax incidence, MMT, and attention whores.

[KrazyHorse]

I feel like the taxation mechanism is necessary to explain the nonzero value of the dollar

Why? Why can't the convenience of the dollar as a currency overcome the small risk that the government will attempt to abuse seigniorage?

[KrazyHorse]

I see people focus on this aspect a lot, but it doesn't seem to have any foundation in theory (or empirics; the amount of money that people need to hold to pay taxes is extremely small)

[Kuciwalker]

Please explain what you mean by that. Does it obtain different theoretical results? Does it obtain the same results in a substantially different way?

You can use quotes that helped you understand the framework from IF or the worthwhile post.

The most important theoretical result (IMO) is that the central bank's schtick, altering the duration of government debt by changing the balance of cash and bonds, is an ineffective stablization tool compared to altering the flow of government debt ("net financial assets") to the public. Thus, fiscal policy (in a world without a central bank that can neutralize it) is much more effective than monetary policy today.

[KrazyHorse]

OK. Let me think on this for a while. I am reading the chartalism entry on wiki to refresh my (very fuzzy) recollection of this.

[Kuciwalker]

I feel like the taxation mechanism is necessary to explain the nonzero value of the dollar

Why? Why can't the convenience of the dollar as a currency overcome the small risk that the government will attempt to abuse seigniorage?

I see people focus on this aspect a lot, but it doesn't seem to have any foundation in theory (or empirics; the amount of money that people need to hold to pay taxes is extremely small)

Speculation: needing to pay taxes in it puts a cap on velocity, so people can't expect the price level to grow infinitely for a given quantity of money. Without that theoretical cap on velocity, the possibility of future hyperinflation allows people to expect short-term instability. Taxation creates a nominal anchor.

[KrazyHorse]

Only a very poor one (again, because the amount is so small relative to the actual money supply)

If I told you that the government could only theoretically reduce the value of a dollar in real terms to 10 cents (over the course of a year) rather than to arbitrarily close to 0 cents, does this actually give you any additional comfort in holding currency?

[Docfeelgood]

guilty as charged. i thought i was funny

[Docfeelgood]

well, that's not possible. first, there's no mod area (as far as i know). second, in the staff room no such discussion ever took place.

it did cross my mind to suggest permabanning you though. haven't done it yet, but might. you contribute nothing positive to this board.

all you do is vent some frustration you appear to have on others, by calling half the planet idiots and retards. get a grip on yourself.

Oh no please don't do that. He makes me laugh

[KrazyHorse]

You're late to the party. Go into the other thread (where people are still discussing this).

http://apolyton.net/showthread.php/195776-Thread-for-zzzdosgsdget-to-continue-to-abuse-his-powers-in

[Kuciwalker]

Only a very poor one (again, because the amount is so small relative to the actual money supply)

If I told you that the government could only theoretically reduce the value of a dollar in real terms to 10 cents (over the course of a year) rather than to arbitrarily close to 0 cents, does this actually give you any additional comfort in holding currency?

Sorry, I wasn't speaking in the case that the government abused seignorage; I mean even if the government physically destroyed all of the printing presses (and the current stock of dollars never physically depreciated) so that the quantity of dollars was fixed for all time, if velocity is bounded then the price level would seem to have an absolute floor, so that if it went to 10 cents it could never fall lower.

Right now, the price level is maintained by the expectation that the central bank will manage the dollar supply. If the dollar supply is fixed, the price level would be anchored in a broad range by taxes. If the dollar has literally zero inherent value apart from its liquidity, there appears to be nothing to anchor it at all.

[KrazyHorse]

Why would the postulate that the cb would destroy the printing presses be a meaningful one?

[Kuciwalker]

Why would the postulate that the cb would destroy the printing presses be a meaningful one?

"even if". If the government retains the option to print dollars even though it no longer accepts them for payment of taxes, that would lend even more credence to the expectation of hyperinflation.

[KrazyHorse]

I don't understand this. The government has no incentive to destroy the printing presses. The liquidity premium is real, and in the case of the US is far, far larger than the residual value of tax-payment-currency. The biggest danger to a fiat currency is always that the gov't goes nuts with the printing presses, not that everybody wakes up one day and decides to stop accepting dollars. The only exception to this last point is in the case that the government in question was about to disappear (through, e.g. war or revolution), in which case the tax-payment safety net is meaningless anyway.

[Kuciwalker]

How would war or revolution differ in a relevant way from "the government stops accepting dollars in payment of taxes" wrt the value of dollars? When a country joins the euro all it is doing is saying that it now requires payment of taxes in a different currency; now, all their previous currencies are worthless.

[KrazyHorse]

Because after a war or revolution the new government is likely to enforce payment of ALL CONTRACTS in the new currency, and may even make possession of the old currency criminal.

Even if they didn't, the presumption would be that the liquidity would move to the new currency, destroying the value of the old.

Let's say the US government told you that you could pay your taxes in gold, or any one of the 6/7 major currencies. Do you think this would make a lick of difference?