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The Weekend Quiz – September 30-October 1, 2017

Welcome to The Weekend Quiz. The quiz tests whether you have been paying attention or not to the blogs I post. See how you go with the following questions. Your results are only known to you and no records are retained.

1. Assume that a nation is continuously running an external deficit of 2 per cent of GDP. If the private domestic sector successfully spends less than its overall income, then we would always find a public sector deficit.

2. The automatic stabilisers built into fiscal policy operate to return the government's fiscal balance returns to its appropriate level once growth returns to trend following a downturn.

3. The government has to issue debt if the central bank is targetting a non-zero policy rate and is reluctant to pay a competitive return on excess bank reserves.

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    This Post Has 12 Comments
    1. I got #1 wrong, which I will blame on not being fully awake when I took this quiz. It continues to surprise me how upset I am when I get an answer wrong, although it probably doesn’t surprise anyone else who reads the comments on the quiz at this point. Thanks for the Quiz! Love it and love to hate it at the same time. Any psychiatrists reading?

    2. Well, I’ve just had my sister asking me whether I believe in the ‘Magic Money Tree’? So I’ve got to get together some references! Any suggestions would be warmly welcomed!

    3. I got number two wrong. I guess I was just thinking of how deficits may “accommodate” increased private saving through automatic stabilisers like benefit payments in a recession. Once growth and dissaving recommence deficits reduce. But the growth may still require a deficit… Is that the point?

    4. David, most recently there was this from Bill at this blog – Central banks still funding government deficits and the sky remains firmly above
      dated August 23, 2017. Reviewing that might help. I would link to it but it wouldn’t show up for a long time and it might not show up at all depending on Bill’s mood about that particular blog. Oh, its his blog so he usually allows links to it :)

    5. “Well, I’ve just had my sister asking me whether I believe in the ‘Magic Money Tree’? So I’ve got to get together some references! Any suggestions would be warmly welcomed!”

      Haha, maybe you can reply with, do you still believe in the ‘money comes out of the ground’ theory?

    6. Thanks @Jerry Brown, but I think I’ll need to explain what a ‘central bank’ is !
      And thanks @Dingo. I think I’ll ask her where the hole is that the money appears from!

    7. I have been wanting to compile a map so to speak of the principles of economics and finance in order to help teach others exactly what money and wealth really is, so that it becomes easier to explain macro-economic principles. This is not an attempt to map out history as it actually happened but rather an attempt to map out principles of economics and finance in order to understand exactly how things like money and wealth came about and what their original sources are. This is my understanding based on my study of law and its history, and lately gaining support from my studies of MMT and other economics schools. I have tried to stick with principles which are supported both by law and economics but I would like to see how others think of it and where anyone differs especially if any of it does not jive with MMT.

      1. At its core, economics is about the production, distribution and consumption of ‘commodities’.

      2. A commodity is the same as property, a legal ability to control a resource.

      3. Resources are not limited to tangible items like goods, houses, machines etc, but also include intangible items like human labour and promises.

      4. Legal control over a resource includes (but is not limited to):
      – the right to charge a fee (the fee being legal control over some other resource which another possesses) for the use of said resource (production phase?);
      – the right to convert or manipulate the resource into some other resource (production phase?);
      – the right to exchange legal control over the resource for legal control over some other resource which another possesses (distribution phase?);
      – the right to destroy the resource (consumption phase?).

      5. For the purpose of production, legal control includes both means of production (land, raw materials, machinery, human labour etc) which the law calls the ‘tree’ and the produce (goods and services) which the law calls the ‘fruit’ (further, we will treat wholesalers and retailers as owning unripe fruit and the fruit as only ripe once it is in hands of the final consumer).

      6. Legal control over a resource at its inception (i.e. when a resource becomes a commodity) only occurs at the production stage.

      7. All distribution of legal control over resources requires legal relations in order to give effect to trade and exchange.

      8. When a consumer finally consumes a resource to zero (eats it etc), the legal control over the resource naturally disappears with it.

      9. Therefore, economics is about the production and inception, trade and exchange, and consumption and destruction of legal control over resources.

      10. Inception of legal control of any resource at the production stage (the tree) can only come from one source – the government; i.e. the community must give up public or common ownership and inalienability of the resource to a private entity.

      11. If we consider this from the perspective of there being no other legal control of any resource at this point, and so this happens to be the first ever request of a private entity to the community to relinquish control over a resource then it must also stand that the private entity does not own any legal control over any other resource in which to pay the government in exchange for legal control over the tree. So it is here we must suggest the first ever ‘debt’ is created. The private entity goes into debt to the community for the use of the tree which must be paid back out of the fruits of the tree (or upon default relinquishes private control of the tree). Put another way, the community loses control over the tree which diminishes their ability to source needs, but now owns a claim against the private entity for the use of the tree, which must be paid back in fruit (we can call this taxation) and provided the private entity makes good on its promise, this fruit makes up for the loss of control and use of the tree (at this stage the taxes are only the means by which to pay the community for the loss of the use of the tree, in other words, the private ownership of the tree displaced the communities ability to use it for sustenance and the tax is simply the cost of this displacement – what the private entity pays in taxes is consumed by those in the community who were displaced). What the private entity gains is exclusive legal control over the tree and any fruit thereof subject only to the communities demands; in this sense the community has enabled the private entity to own ‘wealth’ subject to taxation (the latter which then extinguishes that wealth when the community consumes the fruits paid in taxes).

      12. However the private entity is not just interested in making good his debt and his needs alone, his motivation is to generate surpluses for the purpose of trade and the inception of distribution.

      13. In order for distribution to exist let alone flourish there must be more tree owners, and further there must also exist the ability to form private legal relations for purpose of private exchanges, and further the willingness of government to enforce all debts the result of private exchanges.

      14. Seeing this as a win-win for those in government (provided the producers can produce more than what they have taken by way of displacement), the government relinquishes more access to trees to private entities and encourages more distribution.

      15. As production and distribution expanded the government and its liabilities increased in size also, which forced it to pre-purchase those needs instead of increasing or waiting for taxes in physical fruits (the latter also becoming too cumbersome and impractical by this stage).

      16. To do this it had to go into debt to the producers and distributors, i.e. it created and issued its own currency (tokens) to purchase resources.

      17. This currency sits as a liability on the books of the government which carries with it several duties including:
      – to facilitate and encourage more distribution and to enforce agreements made with it (so the currency can be used to make exchanges between private persons);
      – accepting it (instead of physical fruits) in payment of taxes;
      – to keep a lid on how much it actually spends into the economy so as not to flood the economy with too much of it;
      – it also carries a liability of the producers and distributors themselves to accept it in payment of debts when tendered.

      18. So here we had the inception of public money and a recognized and universal unit of account.

      19. As production and distribution expanded further traders themselves found a need to be able to negotiate (transfer) their claims against other traders, which meant to treat legal promises owed to them as commodities, and thus created a further need for a willingness of government to enforce negotiability of debts.

      20. Here all the core ingredients necessary for private money started to come into being – the endorsement by government of the transfer-ability of private debts.

      21. Recognizing that a unit of account existed (public money), intermediaries could facilitate the transfer-ability of debts by pricing them in this unit of account, issue their own private money denominated in this unit of account, and then by purchasing these debts from creditors at a discount and selling them to willing buyers – thus creating markets, clearing houses, depositories etc; without this universal and recognized unit of account, the transfer-ability of private debt, the issue of private money, and the intermediaries themselves would not have been able to flourish.

      22. As technology increases, physical currency and physical private money, and other physical means of recording and accounting for debts becomes replaced over time by electronic means.

      23. At this point it must be remembered that, even though most debts today are treated as commodities (transferable), at the core of all debt is the final command to some final debtor down the line to relinquish legal control over ‘physical’ fruits (goods and services) at some point in the future, whether that is to another private entity or to the government; this is the final consumption phase and the destruction of legal control and more importantly, the destruction of any government liability as it relates to a private entities legal control over a resource, irrespective of whether that final consumer is a private entity or government.

      24. Therefore, the contention that taxes fund government spending cannot hold true; the only way it could hold true was to go way back to the start and instead of assuming that the whole community owns things in common and then agrees to sell some to the first person wishing to become a private property owner, the opposite would have to be the case; i.e. the whole world started with everyone owning private property and a couple of people got together and decided to invent a community and a government and went into debt to the private property owners. The obvious problem with this is that private property ownership is only as good as one’s ability to protect it, and without a community and a government, this is not possible.

      25. If every entity which owes a debt was to finalize their debt, there would be no property, no wealth, no money, etc, but just things, and ultimately, no real need for a democratic government.

      26. What this also means is that ‘wealth’ can only be created by government (even wealth from exports are only possible because the foreign government backs the foreign money) and can only be destroyed by government or final consumption by private persons. In between this (the distribution phase) wealth is only ever transferred between private persons and does not go up or down in the aggregate.

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