Deficit Owls | What Determines The Value Of A Currency @deficitowls5296 | Uploaded August 2016 | Updated October 2024, 11 hours ago.
Professor L. Randall Wray discussing how the purchasing power of a currency is determined. Since the government tax creates a demand for that currency, the amount of currency demanded will be *at least* equal to the total amount of the tax, but probably more than that, meaning the government will have to run deficits. But this doesn't tell us what the currency will exchange for: will $1 buy 1 apple or 1,000 apples?
Modern Money Theory suggests that this is determined by what prices the government pays when it purchases goods and labor. If you need $100 to pay the tax, you are going to work for the government (or for somebody else who has worked for the government) until you have $100. So the government can dictate what you must do to receive $100: will it take 1 hour of work, or 200 hours of work? Arbitrage around this in the private sector will determine the purchasing power of $1.
A government could dictate a price it will pay. It could dictate every price it would pay, and then all activity in the private sector would change to arbitrage around these. More commonly, governments set a single price, and allow market forces to determine the rest. In a gold standard, the government fixes the price of gold, and then relative market pricing determines the rest of prices in the economy.
A problem can happen when the government doesn't fix any price, but allows markets to determine all prices. This is because a small amount of inflation will lead to the government paying higher prices, which will lead to more inflation, which will spiral. In our current setup, we use unemployment to deal with this: when prices start to rise, demand falls because the poor can't buy, which brings prices back down.
MMT advocates instead the government should fix the price of unskilled labor, by offering a Job Guarantee, to anybody who is ready, willing, and able to work at a fixed nominal wage. This would reverberate through the markets and help anchor other prices against inflation or deflation.
See the whole video here:
youtube.com/watch?v=SFf95BVx9Qw&index=7&list=PLYvSXI9SKGf2lIno6TI0r_PbLX_cpAwuu
Like Deficit Owls on Facebook here:
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Professor L. Randall Wray discussing how the purchasing power of a currency is determined. Since the government tax creates a demand for that currency, the amount of currency demanded will be *at least* equal to the total amount of the tax, but probably more than that, meaning the government will have to run deficits. But this doesn't tell us what the currency will exchange for: will $1 buy 1 apple or 1,000 apples?
Modern Money Theory suggests that this is determined by what prices the government pays when it purchases goods and labor. If you need $100 to pay the tax, you are going to work for the government (or for somebody else who has worked for the government) until you have $100. So the government can dictate what you must do to receive $100: will it take 1 hour of work, or 200 hours of work? Arbitrage around this in the private sector will determine the purchasing power of $1.
A government could dictate a price it will pay. It could dictate every price it would pay, and then all activity in the private sector would change to arbitrage around these. More commonly, governments set a single price, and allow market forces to determine the rest. In a gold standard, the government fixes the price of gold, and then relative market pricing determines the rest of prices in the economy.
A problem can happen when the government doesn't fix any price, but allows markets to determine all prices. This is because a small amount of inflation will lead to the government paying higher prices, which will lead to more inflation, which will spiral. In our current setup, we use unemployment to deal with this: when prices start to rise, demand falls because the poor can't buy, which brings prices back down.
MMT advocates instead the government should fix the price of unskilled labor, by offering a Job Guarantee, to anybody who is ready, willing, and able to work at a fixed nominal wage. This would reverberate through the markets and help anchor other prices against inflation or deflation.
See the whole video here:
youtube.com/watch?v=SFf95BVx9Qw&index=7&list=PLYvSXI9SKGf2lIno6TI0r_PbLX_cpAwuu
Like Deficit Owls on Facebook here:
facebook.com/DeficitOwls
