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economics thought excercises part 1: getting the feel

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July 20, 2011 – Comments (45)

So it happened that a couple of months ago I had a long drive, 7 hours in fact, and I got to thinking.  We have all these "schools" of economic thought, we have the keynesians who think governments should deficit spend like mad during recessions and save during the boom years, we have austrians who tend to oppose government activity in the economy in general and make some nice points about malinvestment and such.  We have all of this discussion of monetary policy and interest rates and stuff, we have this, we have that.  In all honesty I have never had any interest in economics save forced interest via my participation in markets these last 2.5 years, I had an econ class in college but I was drunk that semester and all I remember is supply and demand setting pricing and "there is no such thing as a free lunch".  I struggled to make sense of it all, all these views (who frequently believe they are in conflict) and I couldn't. 

See, when faced with large amounts of time to kill I generally try to kill it by thinking.  Maybe, one day, you're thinking about some girl you just met, maybe you're thinking about the past, maybe think about an investment strategy.  This time I decided to think about economics, but I was failing to make sense of all of the blogs I'd read about it, so I decided to think about it from the ground up.  From ground zero.  So, here are the first round of the thoughts experiments:

1.  Imagine that all of us CAPsters got stranded on a desert island.  In 1920.  no cell phones, no satellites, no way for anybody to find us.  We're stuck.  We sit down, what, 100 of us?  And we realize we need to start a new civilization.  

We decide we need a currency, and as luck would have it, we find a huge bag full of small beads.  We divy them up and assign values to each bead, and use them as money.  Porte grows vegetables, he sells them to me for X number of beads, alstry writes a book and sells it, etc, etc, etc.  It all works out and we get on.  Lets just say that we each have 10,000 beads to start with. 

One day we discover a weird device.  For no input cost at all, it outputs whatever number of beads we like.  We quickly realize that simply making more beads doesn't help anything, it just causes inflation.  We now all have 100,000 beads, but we really aren'ta ny better off, prices just went up.  Prices just went up because despite the increase in beads, no additional real output (crops, books, sermons, therapy sessions, products, wood, etc.) was created, because we are limited by manpower.  So we just had inflation.  No real mystery there.

lesson from this thought experiment:  printing moeny cannot create wealth, it can only create inflation.  no real mystery here

 

2.  Now imagine that one day us merry 100 CAPsters were suddenly joined by the 500 people that follow Ibankcoin ... their boat crashes, and all of a sudden the population has gone up 500%.  

We're each sitting on our 100,000 beads now ...  so thats 10 million beads.  But all of a sudden the population has swelled by 6 times.  They all move in, start farming, cutting wood, building, preaching, therapizing, they open stores, etc.  But we still have just the same 10,000,000 beads.  

whap happens?  prices plummet, we experience deflation.  why?  because all of a sudden the total amount of goods and services (real wealth) produced by our small society expands dramatically due to increased manpower.  So we have a constant amount of beads trying to buy a vastly expanded amount of goods and services.  

What would the right hting for our government to do be?  Leave the number of beads constant, despite the dramatic increase in population?  Hand out 100,000 beads to each newcomer from Ibankcoin so they start where we started?  The former would result in significant deflation.  Supply and demadn would suggest that prices should fall dramatically if product increases dramatically and moeny doesn't change.  This deflation would have significant downside, debtors would be crushed, savers vastly rewarded, and as is the case with deflationary situations the economy would probalby suffer enormously.  

If we created more beads, we would have a better chance of price stability and societal prosperity.   We have 2 real choices for how to create them.

1.  the government could spend them, giving the new IBCers a chance to earn them, as well as the existing citizens

2.  we could just hand them out to the IBCers, as we handed them out to ourselves at the beginning, and let the economy work itself out.

over the long term, provided that the government didn't remain in the economy, we should eventually wind up in the same place.  X citizens, Y productivyt (total goods and services produced) and Z beads chasing around after it all. 

So I decided that it wasn't really important how we went about distributing the new beads, int he long run.  in the short run it could be incredibly important, but I didn't bother to podner how or why.  

lesson from this thought experiment:  the supply of beads SHOULD NOT remain constant, increasing population and increasing productivity require increasing supplyu of beads lest we experience deflationary situations, which tend to be detrimental to economic activity.  Sometimes, we need to makemore moeny. 

 

3.  So we originally found 1 million beads, andw e later created 9 million more beads.  Before the IBCers showed up, we had 10 million total beads.  Each of which was worth 1/10 millionth of the out put of society, or something like that.  

It is a natural human tendency to save.  Soem people save for a rainy day, its just what they do, and as such some of the money we created is coming out of the economy all the time.  

Whats the most any one person could save, if we had created 10 million beads?  10 million beads, thats all the beads that exist. But, obviously, if the savings of one person approached 10 million beads we would have an economic collapse as so many beads were being taken out of the economy that there simply weren't enough to "go around".  

One way or another, the total savings of citizens (in beads) would be 10 million at all times.  Because thats how many beads exist.  If you spent yours, that would mean somebody else got them and they were (at least temporarily) added to their savings.  

lesson from this thought experiment:  the total savings of a society, in money, is exactly equal to the amount of moeny that society has created.  exactly

 

4.   Arriving of the Seeking Alphans.  So the lads, numerous as they are, from seeking alpha show up one day in boats.  They look around our island, and they see our beads.  Our beads are amazing to them, and they offer us various things for our beads.  Fro 10 beads they will bring us a cow.  For 1000 beads they will bring enough timber to build a house.  

This is amazing to us, as the beads cost us nothing to create.  So we begin to import "things" from Seeking Alphaville in exchange for our beads.  Its amazing.  We give up our beads, we get stuff.  

But what happens when we have given away all of our beads?  We're screwed.  We have no currency left, we cannot conduct our economy except by barter.  Economic collapse is the result of excessive importing in a fixed-amount-of-currrency situation.  

When we are out of beads, the SA folks don't want to bring us any more stuff, do they?  It was the beads that they wanted all along, wasn't it?  Maybe they show up to trade timber for wheat if markets in each country allow a profit for this, but our heyday of importing stuff for beads ends when we run out of beads, adn our entire economy would probably collapse, at least temporrarily, without a currency to back it.  

lesson from this thought experiment:  a finite amount of currency in a society quite literally limits the amount of total trade deficit that it can run.   An economy probably needs a currency to function successfully.  Barter probably isn't very efficient, because billy thepig farmer can't go to a market and get currency, and then immediately go buy milk, he has to find someone who wants a pig in exchange for milk.  

 

5.  But rmeember our bead machine?  We have that magical machine that shoots out as many beads as we wish, with no input required!  

What about our ability to import now?  Its unlimited!  We can simply sit around get everything we need from Seeking Alphaville!  we can just make beads, for free, and get everything. 

Well, until the Seeking Alphans don't want any more beads, because they think they have enough.  Then the game is up, and we have to go back to work.  

But until that game is up, our little CAPsville can literally live for free.  

lesson from this thought experiment:  having a currency that other societies desire is a great advantage for your society.  you can import REAL things (cows, wheat, aluminum, wood, whatever) in exchange for what amounts to nothing:  your currency

 

6.  So we have Seeking Alphaville and its insatiable desire for our beads.  We can literally live for free.  The government creates the beads, and so it has to decide how to distribute them.  

It decides to simply give 10,000 beads to each citizen each year.  As long as the SA folks still want the beads, this is more than enough for our society to get by.  

What happens now?  Some people are more motivated that others and, despite not needing to work, choose to do so.  They work to build relations with SA exporters, they open stores, restaurants, bars, and more.  

What happens now?  Those workers, entrepreneurs, collect more beads than the rest of the people, because some of the people wind up spending their beads on their goods and services (giving htem their beads).  

So what does that lead to?  An imbalance of wealth.  Those who went out and started businesses wind up with more beads than those just living for free, because SOME of the beads those living for free spend go to SAville, but some go back to the entrepreneurs.  

lesson from this thought experiment:  government hand outs literally create wealth imbalances

 

These are the first 6 thought experiments.  We have learned alot. 

We have learnd that simply creating mroe currency cannot create wealth. 

We have learned that prices will be unstable of the amount of currency in the economy is stable.  Productivity and population increases call for the creation of more currency.

We have learned that the total savings, in currency, of the population is literally equal to the amount of currency created.  

We have learned that a trade deficit (importing stuff) can lead to reduction of currency in our own country, unless more currency is created.  Thus, importing things eliminates savings (in currency) of our own citizens unelss more currency is created.

We have learned, and brace yourself for this one, that imports are a benefit to a society.  All we're giving out is those beads that we can create for free, and as long as the rest of the world wants those beads (our currency) we can gte REAL stuff for them, that is a benefit to us.  We, for free, get stuff.  Stuff being materials, labor, etc.

And, critically, we have seen that government handouts lead to wealth imbalances.  Some choose to do nothing if nothing is all they have to do, some choose to work and save.  This creates a disparity in wealth.  

 

More to come.  I think I can explain the economic system and sitaution of the US in the next few blogs.  Thank god for Binve, for through him I found pragcap.com, where I found Modern Monetary Theory.  MMT is very,v ery, very, very good.   It is the best thing we have going for us as a nation and ascitizens of the world.  It needs to be spread, understood.  

It has only one misunderstanding, in my view.  It doesn't realize that the total debt of the US Government is $0, which I will show in a forthcoming blog.  And they don't really grasp the downside of government spending (hinted at in #6 above) and how right he Austrians are about government intervention causing problems (although they go to far, and they have no idea how the US's monetary system actually functions).  But it is amazing, and it hsould be read up on. 

So, if it pleases you, read my blogs.  But alot of this had already been thought of whenI ran these little thought experiments, and MMT concludes much of the smae.  No need to reinvent the wheel, so if you liked these thoughts and they made sense, please read up on MMT.  I'll do the very little and pointless amount that I can toadd to what they already talk about. 

It can literally save the economy, the country, the middle class, and such.  It explains why JGB yields are the worlds lowest when they have the highest deficits.  It is RIGHT. 

Godspeed, merry CAPsters, may you spend your 100,000 beads wisely.


 

45 Comments – Post Your Own

#1) On July 20, 2011 at 5:16 AM, checklist34 (99.71) wrote:

look folks, I am not an academic, I am an entrepreneur. If you looked in my garage, especially when my girlfriend was there, you'd realize that here will never be a time when academics accept my thoughts.  thinkers vs the doers.  my thoughts literally don't matter. 

please read up on MMT.  please email your congressman.  The middle class, the all important middle class, is saveable in a thought.  Everyone is wrong about the financial condition of the US.  Our government has, literally NO debt, which I shall show in a future blog, which I promise (for once) i'll actually write.  

beyond that please go to a spa at once, and also immediately.  however lame it seems, you have no idea how life changing a good massage can me.  at least I didn't. 

best money you can spend in vegas.  period.  the clubs are a joke and you should not, except once in your life for the experience, ever spend money there.  gambling is a joke.  

the spas are the real deal.  

 

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#2) On July 20, 2011 at 6:36 AM, dbjella (< 20) wrote:

#5 I wonder how painful the pain would be when nobody excepts your beads?

Great post.  I look forward to this series.  Something tells me your initial thoughts on MMT will change as you dig deeper. 

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#3) On July 20, 2011 at 8:33 AM, ChrisGraley (29.86) wrote:

1) Agree

2) Totally wrong. Prices don't plummet. They drop slowly and in direct proportion to productivity increases. The money in your pocket is suddenly worth more. Input costs for businesses decrease as along the way as well. Everyone is wealthier than they were before. Savers are rewarded over debtors.

3) Wrong as well. The total possible savings would be the total amount of beads minus your cost of survival. You are not going to forgo food to save beads and if you have all the beads your neighbors will resort stealing some from you before they starve.

4) The willingness to accept our currency also limits the trade defecit that we can run and the more we print the less someone is willing to accept it.

5) Correct up until the last part. Your currency is linked to your productivity. People don't want your beads because they are pretty. They want your beads to trade them for things of value. In other words, your currency is linked to your productivity. When the amount amount of beads exceeds your productivity, your beads become more and more worthless. See your example # 1. Global trade is the same as Domestic trade.

6) The government handouts don't create the imbalances. The inflation created and the lack of motivation of some people create the imbalance. In the land where money is free, most people won't value it and the ones that do become wealthy.

I commend the effort above, but after reading it I would say that you are definitely not in a place where you can say that Austrians do not understand how the US monetary system works. From your above statements they understand it better than you do.

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#4) On July 20, 2011 at 9:48 AM, binve (< 20) wrote:

Hey check, this is a great post man! I will offer some comments on each of your sections and then some at the end.

1. Exactly.

2. It took me a long time to come to the same conclusion. But when I thought about it in similar terms to how you stated it, I saw it the same way.

3. Once you realize where money 'comes from' and how the sectors of the macroeconomy balance, then this point is self-evident. Bravo. The key concept being the *total* money that the soceity has created. Government spending creates money and government taxation destroys money. Therefore the only way for there to be net money in existence is for spending > taxation. This means that by definition governments must run more deficits than surpluses over the course of time.

4. Right on. Imports are a *real* benefit for soceity and *exports* are a real drain for soceity. In an 'ideal' world, there would be international trade, but all current accounts for each country would be balanced (that is all exports would be balanced by the same size of imports). Large trade imbalances are a source of friction and instability. Just think about the US's tenuous oil position and this should be self-evident.

5. Yep, but with the caveats listed above in 4. Being dependent on imports makes you subject to the exporters whims. So exporters are stables, others... not so much.

6. Agreed.

So here are the basic fundamental questions that economics tries to answer (or at least should try to answer). What is best for soceity?

Highly Efficient Real Resouce Utilization?
Price Stability?
Both?
Neither?

Highly Efficient Real Resouce Utilization is important because this is what gives our soceity benefit. Is having $1 million beneficial? It depends what it can buy. Is being able to afford bread beneficial? Yes. Because bread is a real resource.

So real resources include: raw materials, finished goods, services, labor, and the productivity of that labor.

Money is not a real resource. It is not valuable in and of itself. It is a unit of account that is utilized to facilitate trade and commerce. That what makes it 'useful'. What makes it 'accepted' (at least in the case of fiat currency) is that it is the only thing that is accepted by the government in payment of federal taxes. The federal government (the person who controls the bead manufacturing device in your above example) issues the currency (through government spending) so the non-government sector can accumulate it. The non-government sector accumulates some for saving and some for the purpose of paying taxes. There is instant 'demand' for the currency because everyone will eventually need it to pay taxes. If there was no taxation, there would never be any need for the currency to circulate. But this is then the key, the government must spend enough to allow for the savings desires of the population and taxation.

When do they know they have reached this threshold? Inflation. If real resources are being utilized near their capacity (very small unemployment and underemployment) then the government sees that its 'deficit spending' (creating more fiat money through spending than it receives in taxes) results in widespread inflation. It can either reduce it's deficit spending, run a balance budget or run a surplus. A governement would want to run a surplus when the population no longer desires to net save, and instead decides to net spend on investment (capital expenditures, infrastructure, inventory builds, etc.). When an economy is fully utilizing their real resources (including and most especially employment), then inflation because the key tool to determining the goverment's net spending position.

This means that the government's financial position is not (and should not be) discretionary. There is nothing 'good' about running a surplus. It all depends on the desires of the non-government sector (the private domestic sector and the foreign sector). Since government is the issuer of the currency, they should act in a way that satisfies the net savings desires of the other two sectors at any point in time.

Therefore, when I run through my own thought experiments I come to the conclusion that the best application of economics, the one that gives the most benefit to soceity, is the goal of realizing highly efficient real resource utilization and price stability.

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#5) On July 20, 2011 at 10:15 AM, PeteysTired (< 20) wrote:

Therefore, when I run through my own thought experiments I come to the conclusion that the best application of economics, the one that gives the most benefit to soceity, is the goal of realizing highly efficient real resource utilization and price stability

I agree with the statement, but HOW is this achieved?

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#6) On July 20, 2011 at 10:30 AM, binve (< 20) wrote:

PeteysTired,

In the resouce utilization category, the biggest wasted resource in existence today is human labor. We have high unemployment in all of the developed economies that have massive economic, social and generational drawbacks.

IMO, the single biggest economic good that can be accomplished today would be job creation (which this whole debt ceiling debate idiocy is not only stealing attention away from but is likely to be made worse based on the 'compromises').

Here are two posts with some ideas:

1) Dr. Wray's idea: http://caps.fool.com/Blogs/thoughts-on-a-job-guarantee/605084

2) Dr. Mitchell's idea. See this post but skip down to the section What is the Job Guarantee?: http://bilbo.economicoutlook.net/blog/?p=1541..

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#7) On July 20, 2011 at 10:38 AM, mtf00l (44.84) wrote:

I volunteer to be your Central Banker.  I'll take over and run the "bead" making machine.  Whenever your elected government want's more "beads" I'll fire up the machine and calculate what you owe me in interest "beads" on the "beads" I have the machine create.  Don't worry, I'll use the interest "beads" "for the greater good".

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#8) On July 20, 2011 at 11:46 AM, PeteysTired (< 20) wrote:

binve

I agree that an idle workforce is our biggest problem, but what would they do for work?  We worked so hard to overbuild houses, cars, ipods, trucks...... that demand couldn't keep up so we essentially stopped. 

We have enough stuff.  People are worried that we are throwing money at this problem.  We are throwing money at the problem from a state and federal level.  Are we not spending enough? I think people are afraid of quagmire and they are cutting back and waiting  Some are paying off debt and others are just simply walking away.

 Are you advocating an FDR job creation solution?

I am not sure MMT can overcome this fear without massively throwing beads at the problem.  And once the beads are out there then when fear subsides and people start spending the beads we are going to go the other way of inflation.  How will MMT know when to stop making beads and start taxing to remove beads?  MMT better have some smart politicians using this tool or we are headed for another crash.

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#9) On July 20, 2011 at 12:15 PM, whereaminow (34.29) wrote:

checklist,

Abstract thought is a blessing and a curse.  It has to be grounded in a solid logical foundation.  MMT is an interesting school of thought, but their core premises violate some fundamental laws about money and human action.  I'll set aside the criticism that Austrians do not understand monetary policy rather briefly.

Monetary policy is a tool used to extract private property from other people.  That's it.  That's the big story.  It is nothing more nor nothing less.  This has been the case since the beginning of monetary policy.  That's its purpose, its raison d'etre. 

Knowing the intracacies of how this tool is used is not nearly as important as understanding its purpose, don't you agree?  Do you spend a great deal of time analyzing the intricate ways that organized crime syndicates wire and launder money across the world?  And when you have it all figured out do you promote it as a great idea while chiding those who don't follow the exact details, but nonetheless understand its purpose, as fools?  Kind of back a**ward, don't you agree?

The MMT school looks at coercive money backed by the point of a gun as somehow legitimate (it is not) and therefore the key is to understand how this fraudulent scheme works so as to make it more efficient.  They call it operational reality. 

The Austrian school looks at coercive money backed by the point of a gun as violating economic law - namely that prices are formed by the subjective value scales of market actors engaging in voluntary, non-coercive exchange - and surmises that this is going to fail as the market has the final say over what is and is not money.  Judging by their record, I'm inclined to think they are right.  Judging by reason, I know they are right.

This blog begins with a faulty premise.  As such, it continues down that path leading to faulty conclusions.  So I will tackle only the first premise, and that should be enough to engage the reader to show how MMT can lead you to horrible conclusions that violate economic law. 

1.  Imagine that all of us CAPsters got stranded on a desert island.  In 1920.  no cell phones, no satellites, no way for anybody to find us.  We're stuck.  We sit down, what, 100 of us?  And we realize we need to start a new civilization.  

We decide we need a currency, and as luck would have it, we find a huge bag full of small beads.  We divy them up and assign values to each bead, and use them as money.  Porte grows vegetables, he sells them to me for X number of beads, alstry writes a book and sells it, etc, etc, etc.  It all works out and we get on.  Lets just say that we each have 10,000 beads to start with. 

Notice I left out your point about inflation.  It's not necessary to dispute that.  What i want to focus on is how money comes about.  In your example, you declare a money first and then divine prices by decree or communal vote.  This is indeed the MMT conception of how money comes into use.  It is horribly flawed, however.  Besides several prominent historical works that shatter this myth, one can look at a recent example:  Money in War Ravaged Iraq, which shows that money comes into use as it acquires prices in it. 

You cannot take an economic good, whether it is shiny gold or pretty paper, and assign prices in it via decree or by vote.  Prices are formed through exchange, not prior to exchange. 

Even in your simple example of 100 people stranded we can begin to conceptualize problems with assigning prices.  How will any two people agree on the worth or different items, measured in beads?  Will they vote?  Will they have an auction?  What about the various kinds of labor that can be performed by our unfortunate settlers?  Doesn't everyone think their labor is worth more than the next person's?   Very few people ever agree on the price of an item and everyone's subjective scale of values is always changing.  This is why stock prices are constantly changing.

The price system solves this problem.  Prices come about as economic goods are exchanged.  Prices cannot be formed any other way.

To look at it from another angle, just to help clarify for the reader, imagine a scenario where you, checklist, are the only person stranded on the island.  In this case, however, there are already 100 people living there in a small community.  You approach them with 100,000 beads and suggest they start using these beads as money.  What do you think their response will be?  Your suggestion won't make any sense.  How will they know what a "bead" is worth?  Does it equal one coconut or two coconuts?  There is no exchange in beads and there are no prices in beads.

Thinking the problem in this manner leads you back to the universal law that Usage Preceeds Law.  I stress this often.  You cannot legislate things that are not in existence.  This simple truth shatters the entire MMT paradigm that the State is the sole creator of money and therefore the rightful entity to decide the value of money.

Money is a commodity.  It is a commodity that is already in use and that acquires prices in it through voluntary exchange.  It cannot be imposed by an outside entity.  This is why no society in human history ever voluntary accepted paper money. Paper money originates as a claim on private property.  Taking away the property while using force to keep the claims circulating is the only way governments have been able to get around this economic law.  And it only seems to work for about a generation or so.

Money is also property.  It belongs to someone.  Americans deposited their property (gold) in banks in exchange for a claim on that property.  The word dollar is a name that is defined as 1/20th of an ounce of gold.  That is all.  It originates from the word thaler, which was a minted coin in Europe that was widely respected.  But a "dollar" is not a thing unto itself.  It has no meaning without the underlying property (the people's gold), just as a claim check for your coat at the nightclub has no meaning when detached from the underlying coat. 

Now we see the inherent flaw in MMT.  They separate the term dollars from physical property and believe that the market accepts these meaningless dollars voluntarily.  No such thing ever occurred.  Hence, they believe that prices are not formed through voluntary exchange of private property based on subjective value scales.

To avoid this, they escape into post-Keynesianism.  They use very crude macro tools with fancy, but meaningless, terms like excess capacity and resource utilization.  Most horrendously they support make-work programs that replace real consumer choice with temporary solutions that only serve to keep labor in positions that are proven to be unsustainable. 

This is not to say that some work MMT does is not useful.  As economic journalists, a couple of MMTers have more use than say a NYT journalist.  Beyond that, I have yet to find anything of value.   

I'll stop here and await a thoughtful rebuttal from either yourself or binve or any other MMT enthusiast.  I have been hoping to debate one for months :)

David in Qatar

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#10) On July 20, 2011 at 1:08 PM, smartmuffin (< 20) wrote:

David,

Can you recommend any readings on the history of money, how it came about, and how gold in specific came to be adopted and widely accepted?

I generally agree with the Austrian premise of "exchange comes first," but I wonder, at some point in human history there had to be some sort of great revelation when one man said, "Aha!  I don't have to haul a giant basket of corn around and trade my corn for every single thing I need, instead, I can use gold which is something everyone wants and is much easier to carry, transport, etc."

The question of how and when that took place interests me.

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#11) On July 20, 2011 at 1:30 PM, whereaminow (34.29) wrote:

smartmuffin,

Rothbard's What Has Government Done To Our Money provides the best brief illustration (it's barely over 100 pages of easy reading.)  The book Forty Centuries of Wage and Price Conrols is extremely fascinating and relevant.  Through that book one can find dozens of other books referenced that examine the monetary history of various societies.  It's a relatively unknown book, but it is an extremely scolarly work that is easily accesible to the lay reader.

David in Qatar

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#12) On July 20, 2011 at 1:32 PM, FleaBagger (29.59) wrote:

I haven't read the whole thing (yet), since I'm a slow reader and have other things to do before work today, but about #2: deflation doesn't usually happen at a rate of 500% economic growth in a single month. When it happens at a rate of 1 or 2 (or even 3)% economic growth in a month, debtors do well enough because of their increased purchasing power per unit of currency. If the debts were taken out for productive purposes, then the capital is worth more in the more productive environment. (Think about it: if your suppliers can sell your input costs to you for less, and labor does more for less, mightn't that counterbalance the lower prices you're forced to charge?) These things balance out, and slightly better than they do in inflation, because the prudent and successful are rewarded more than the foolish and the failures. Inflation helps not just debtors, but failing debtors and crooked debtors (banks) most of all. It also punishes prudence and honest success.

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#13) On July 20, 2011 at 1:39 PM, ChrisGraley (29.86) wrote:

@binve

Government spending creates money and government taxation destroys money. Therefore the only way for there to be net money in existence is for spending > taxation.

This is incorrect. Government spending in itself does not create more money. I'll use the beads example... If there are 10,000 beads and 99 fools and you give them 100 beads each and keep the last 100 for the goverment, we have accounted for all 10,000 beads. If the government spends all 100 of it's beads, no new beads were created. It's not until it fires up the magic bead machine that new beads are created, but you could fire up the machine and hand those beads to the 99 fools and you created new money as well. The inflationary effect is the same. So if you created an extra 100 beads, it doesn't matter if the government spent them or they handed them out to the fools, what you are left with is 10,100 beads that can buy what 10,000 beads used to buy. Taxation would only destroy money if the beads were destroyed once the government collected them. Now if the government taxed and hoarded the beads, there would be a deflationary effect, but the beads are still there and could be spent.

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#14) On July 20, 2011 at 1:51 PM, binve (< 20) wrote:

ChrisGraley ,

I don't agree with your rebuttal.

>> If there are 10,000 beads and 99 fools and you give them 100 beads each and keep the last 100 for the goverment, we have accounted for all 10,000 beads.

Since the government has the bead making machine, it's 'savings' of 100 beads is meaningless. You are basically saying that the government 'owes money to itself'. But since the government is the source of all beads in existence and can make new beads on demand, the concept of the government 'saving' beads is inapplicable.

>>Taxation would only destroy money if the beads were destroyed once the government collected them.

That is *exactly* what happens with beads and the US Dollar. When we pay our taxes every April 15th, the spreadsheets that say how many 'dollars' you have are debited from your bank and added back to the Treasury's tax and loan accounts at the Fed.

So what happens then, does the Treasury say 'now we have more money and we can now spend it'. No. They can always spend at any time regardless of tax inflows. Paying your taxes does mean the government saves them and can spend them later. It is the currency issuer, it can *always* spend any time it wants by crediting private sector bank account.

Let's make this clearer. Now lets say instead of paying your electronically you actually go to your bank make a withdrawl in the amount of taxes you owe, go down to your IRS office and pay your taxes in cash. Does the Treasury 'save' those dollars? Nope. Most likely it records the transaction and shreds paper money. If they are in good condition, they might put them back into circulation.

The point being that concept of a sovereign currency issuer 'saving' in the fiat currency that they have monopoly control of and create on demand at any time is a meaningless concept. This would be true if we were on a Gold standard. But we aren't, so it isn't.

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#15) On July 20, 2011 at 1:58 PM, catoismymotor (30.49) wrote:

I don't know how it happened but this blog and subsequent comments have given me hydrocephalus.

 

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#16) On July 20, 2011 at 2:30 PM, whereaminow (34.29) wrote:

binve,

But since the government is the source of all beads in existence and can make new beads on demand, the concept of the government 'saving' beads is inapplicable.

Government beads are public money.  There is another kind of money, specifically private money.  Once private money begins to supplant public money, the government's beads lose their value no matter how many they create or destroy.  An example of private money would be Liberty Dollars.  Perhaps the reader will understand, using the private vs. public money scenario, why the government viewed the creation of Liberty Dollars as a "unique form of domestic terrorism."

If your entire school of thought rests on using force to keep private money out of existence in order to artificially inflate the value of the public sector beads, how is this not in violation of the economic law that prices are formed through the voluntary exchange of private property based on subjective value scales?

David inQatar

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#17) On July 20, 2011 at 2:30 PM, mtf00l (44.84) wrote:

The Fed creates and recieves them.  The Treasury just get's the spreadsheet.

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#18) On July 20, 2011 at 2:42 PM, binve (< 20) wrote:

whereaminow ,

Government beads are public money.  There is another kind of money, specifically private money.  Once private money begins to supplant public money, the government's beads lose their value no matter how many they create or destroy.

I do not deny this nor has anything that I said negates this.

The US Dollar (Federal Reserve Note) is the current sovereign currency of the United States of America. There have been many others in the past. There may be more in the future.

I do not dispute this .... nor is here nor there.

The point of this discussion is not to say what monetary system is 'best' or the properties it 'should' exhibit. The point of this discussion is to describe the monetary system that we have, as it exists right now. As such I am not saying it is 'good', I am not saying it is 'bad'. I am just describing how the system actually works.

I keep stating this, but nobody seems to hear it. Anyways....

The main point is that a convertible currency monetary system is fundamentally different than a fiat currency floating exchange rate monetary system. As such covertible currency macroeconomic analysis is completely inapplicable.

This is a basic point. And if you don't agree on this basic point then we should just agree to disagree. Otherwise we are just talking past each other.

Again. I am not saying one is better than the other, just that they are different and have necessarily different analysis.

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#19) On July 20, 2011 at 2:57 PM, whereaminow (34.29) wrote:

binve,

That's fine.  You know that I think very highly of you, and our disagreement on one matter does not change that. 

I dispute assigning the term money to define something which has no underlying private property value.  I don't think there is a way to make it work. 

All the best, always.

David in Qatar

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#20) On July 20, 2011 at 3:00 PM, binve (< 20) wrote:

David,

Thanks man. I feel that same way towards you.

I dispute assigning the term money to define something which has no underlying private property value.  I don't think there is a way to make it work. 

I understand what you are saying.

Best to you as well,

binve.

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#21) On July 20, 2011 at 3:02 PM, PeteysTired (< 20) wrote:

I am just describing how the system actually works.

Not to be crass by what is the point?

If the US can never default as you say, but through gov't spending (aka deficit spending) nobody accepts the currency which many believe can occur, then technically you are correct.

Would you mind addressing my post earlier?

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#22) On July 20, 2011 at 3:12 PM, binve (< 20) wrote:

PeteysTired,

Not to be crass by what is the point?

If the US can never default as you say, but through gov't spending (aka deficit spending) nobody accepts the currency which many believe can occur, then technically you are correct.

The question then is repudiation (and eventually discontinuance/supplantation) of the US Dollar inevitable? I don't know the answer to that question. If you think you do then good for you. And if you think the answer is yes, then just ignore any fiat currency floating exchange rate analysis on the Dollar until that occurs.

Would you mind addressing my post earlier?

I preemptively addressed many of them in the first link in comment #6 (here). If you didn't watch the video, then you should.

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#23) On July 20, 2011 at 4:19 PM, HarryCarysGhost (99.72) wrote:

Good post Checklist, I have'nt read the comments yet, but just wanted to say-

There is no way I am spending my beads on alstrys book.

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#24) On July 20, 2011 at 5:08 PM, JakilaTheHun (99.94) wrote:

Only had time to skim through, but excellent blog all the same, C-list!

Admittedly, my readings on modern economics have been limited, as well.  I sort of reasoned through things on my own and then tried to figure out how modern schools agreed or disagreed on particular issues.  I found Keynes and Friedman to be the economists that tested and refined my thinking the most.

I generally believe that the three major schools of thought as I perceive them (Keynesian, Austrian, Monetarism) are mostly accurate, but I think each school is stronger in certain areas than others.  Austrian School is stronger in regards to understanding the inefficiencies of government intervention, but Monetarism is stronger in understanding monetary policy.  Keynes understood trade, currencies, and the inability of monetary policy to stimulate money supply in a deflationary recession.

I find it particularly fascinating that you reached a very similar conclusion to me on government intervention and debt. 

I view raising taxes in a monetary system like the US's not as a 'budget balancing mechanism', but rather, a transfer of economic autonomy from the private sector to the public sector. By its nature, the private sector *tends* to be more efficient than the public sector, so this exchange leads to less overall economic growth in most cases. 

Which is why I'm not too keen on raising taxes to 'balance the budget' because it's not actually solving the underlying problem which is the inefficiencies created by our entitlement programs and military spending.  It's merely taking more private sector resources and using them in inefficient fashion, thereby sapping long-term economic growth. 

 

In any case, great thought provoking blog, checklist --- and great explanation of things in easy-to-understand terms.  I only wish I were as skilled as you on that front. 

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#25) On July 20, 2011 at 9:01 PM, whereaminow (34.29) wrote:

SInce I have a minute, I'll look at scenario #2

2.  Now imagine that one day us merry 100 CAPsters were suddenly joined by the 500 people that follow Ibankcoin ... their boat crashes, and all of a sudden the population has gone up 500%.  

We're each sitting on our 100,000 beads now ...  so thats 10 million beads.  But all of a sudden the population has swelled by 6 times.  They all move in, start farming, cutting wood, building, preaching, therapizing, they open stores, etc.  But we still have just the same 10,000,000 beads.  

whap happens?  prices plummet, we experience deflation.  why?  because all of a sudden the total amount of goods and services (real wealth) produced by our small society expands dramatically due to increased manpower.  So we have a constant amount of beads trying to buy a vastly expanded amount of goods and services.  

What would the right hting for our government to do be?  Leave the number of beads constant, despite the dramatic increase in population?  Hand out 100,000 beads to each newcomer from Ibankcoin so they start where we started?  The former would result in significant deflation.  Supply and demadn would suggest that prices should fall dramatically if product increases dramatically and moeny doesn't change.  This deflation would have significant downside, debtors would be crushed, savers vastly rewarded, and as is the case with deflationary situations the economy would probalby suffer enormously.  

If we created more beads, we would have a better chance of price stability and societal prosperity.  

There is no social benefit to either increasing or decreasing the money supply.  Should the population increase, while the total stock of money remains the same, this would merely increase the demand for cash (bead) balances.  This would shift the demand curve for goods and services down and left, lowering the price of goods. Therefore, the PPM of beads would rise until the new demand for cash balances intersects with the supply of beads at the new equilibrium price of money.  In this scenario there is no net positive effect, nor a negative effect.

To think of it another way, you started with 100 people and 10,000 beads as the total money stock.  Does that mean that the proper amount of money in your economy is an average of 100 beads per person?  That seems rather arbitrary does it not?  Certainly this doesn't appear to be a universal economic law, but rather specific to the circumstances at the time you landed on the island.  

(As we have seen from my previous comment regarding topic #1, beads do not get thrust upon a market without being already in use.  But let's play along and say that you have these beads and everyone wants to use them.) 

By signing up for this new economy, are they also signing up to an average of 100 per person for all eternity?  And so with every increase in population a corresponding 100 beads must be made?  That makes no sense.  If 100 beads/person is somehow optimal, what would you have done if you only found 1,000 beads at the start?  That would have only been 10 beads per person.  Would you have panicked and immediately inflated the bead supply 10 fold?  (That would be so Bernanke of you...lol)

The simple fact is that any amount of beads will suit your purposes as long as they are divisible (which they are not, so the beads are probably a bad money, but that's another topic.)  

Therefore, the supply of money, like the optimal supply of shoes is best left to the participants in the market.  This is especially true since we have seen from my previous comment that money is actually private property.  Intentionally diluting private wealth (aka stealing) confers a negative social benefit.

David in Qatar 

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#26) On July 20, 2011 at 9:38 PM, whereaminow (34.29) wrote:

I should point out, though it should be obvious, that under the scenario where your population explodes 6 fold practically overnight, there is going to be a huge amount of suffering no matter what tricks you pull with the money supply.  The simple fact is that the resources, capital, and goods in your community are the same as they were before every Tom, Dick, and Harry showed up to play the bead game.  But now you have to feed 6 times as many mouths with those same resources. 

Blaming such a plight on a lack of money is not really seeing the forest for the trees, but it has been a pretty standard economic fallacy that has been put into many texts when looking at population growth. 

David in Qatar

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#27) On July 20, 2011 at 10:27 PM, dbjella (< 20) wrote:

David, thanks for bringing so much to this excellent blog.  I wish we had more of a debate, because what Check has laid out is exactly the discussions the world should be having.

#25 Where I am stuck is that even with lower prices there is going to be tremendous pressure to bring wages down.  I think this is the hardest thing for the avg person to go through.  This is probably where unions and wage laws come from, but from a practical purpose it is hard to cut someone's wages even though they see cheaper prices for goods.  I don't know what the answer is, but nobody wants to get cut. 

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#28) On July 20, 2011 at 11:25 PM, whereaminow (34.29) wrote:

Where I am stuck is that even with lower prices there is going to be tremendous pressure to bring wages down.  I think this is the hardest thing for the avg person to go through.

Well certainly that's true, but we have to realize that this hasn't always been the case.  This idea that is cultivated in the Western economies that wages must stay high is because there was someone always there willing to trade this promise for votes.  But it's not like this is some universal feature of humanity.  Most people throughout history have lived in poverty.  You don't find reports of people protesting for higher wages in 12th century Spain.  They expected to live in soul crushing poverty.  That's just the way it was.  Although I do hasten to add that guilds - the forerunner of unions - did always fight for entry limits into their profession as they thought this would make them better off. (It doesn't)

It's not until you had some economic success that people began to believe that they were entitled to a certain level of wages.  And of course, along with that, you needed politicians to come along and promise to keep those wages artificially high even after an artificial boom collapsed. This is exactly the course that Hoover and FDR followed from 1929 onward, and it exacerbated the crisis as Rothbard details in America's Great Depression.

So of course nobody wants to get cut, so what helps is to not create the conditions for the unsustainable boom possible in the first place.  The boom drives up wages and, even more importantly, directs people into lines of work that do not match real consumer preference.   At this point, we're getting into ABCT and I may bring that up to debate other parts of this blog.  So I'll just stop here.

David in Qatar

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#29) On July 20, 2011 at 11:30 PM, awallejr (83.78) wrote:

Not to sound flippant, but I really am too late to the party here so my critique of CHK's thread is that on such a deserted island Alstry was apparently able to sell a book to some sucker.  I would, however, buy Porte's vegetables.

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#30) On July 21, 2011 at 12:08 AM, ChrisGraley (29.86) wrote:

Sorry that I didn't get back to this earlier binve.

My first example was to show you without the magic bead machine, to show you that the spending does not create money.  The money has to be created before it can be spent even though it may only be a millisecond before. Spending it does not create it. You could just as easily hand the money to the masses and not spend it at all. 

The same applies to taxes. Taxing does not destroy the money. Taxing without spending any more would destroy the money, but we as a country can't manage to spend less for any meaningful amount of time and you would need some new accounting methods because that money would still show on the books as money that you can spend later. If you raise taxes by 10% and increase spending by twice the amount, no money was destroyed. Even if you did manage to keep spending the same and raised taxes, in our country you would still have a net increase in money due to fractional reserve banking. Here's another problem with taxing to destroy money. Some created money can't be taxed out of existence. We can't tax money that is in other countries. So if we have 10,000 beads, but 5,000 of them are in China, we can't effective tax our own population enough to account for that.

The last problem I want to talk about is that we literally force ourselves to create more money exponentially by funding our entitlements with beads to be created later (debt). Since money creation is exponential, taxes must also increase exponentially. Since that money isn't just in the hands of your population, (but you can only tax your population,) you will eventually hit the point where the burden placed on your population is too much for them to support.

 

 

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#31) On July 21, 2011 at 1:19 AM, binve (< 20) wrote:

Hey Chris,

Those are good comments, but I have to disagree with the mechanics. Some of your analysis and concepts are based in convertible currency economics. And like I discuss above with David in comment #18, I am not saying that a Gold standard is better, I am not saying a fiat currency standard is better. I am saying that there are many Gold standard concepts/analysi that are inapplicable to fiat currency concepts/analysis.

My first example was to show you without the magic bead machine, to show you that the spending does not create money.  The money has to be created before it can be spent even though it may only be a millisecond before. Spending it does not create it.

This is not true a true statment in our current currency system.

Government spending and taxation is a 'vertical' transaction in our monetary system (as opposed to bank lending which is 'horizontal'). I go into much more detail here if you are interested. But the act of Federal Government spending *is* money creation. The Federal Reserve doesn't print the money first and give it to the Treasury to spend. The Treasury doesn't pull the money out from somewhere and to spend it.

When the US Treasury spends (on DoD projects, Social Security payments, Government payroll, etc.) it credits private sector bank accounts that exist at the Federal Reserve. This is the only transaction within our monetary system that has no corresponding liability (which is why it is called 'vertical'. All bank loans are both an asset for borrower and liability for the bank, which is why these transaction are all 'horizontal'. Bank loans do not create 'net' financial assets). This crediting of private sector bank accounts is the Government spending money into existence, right at that very instant. Not a millisecond before or after.  

The same applies to taxes. Taxing does not destroy the money.

In our monetary system, it does. 

Taxes do not fund anything. What they do is transfer net financial assets from the non-government sector to the government sector. Does the Government need to 'save' Dollars in order to spend them? No. As I discuss above, the Treasury spends money into existence by crediting private sector bank accounts. It doesn't check the IRS as asks 'do we have the funds?'. It doesn't go the the Federal Reserve and asks 'can we get a loan?'. It simply spends on projects/programs that Congress has authorized it to spend on. It does another step of issuing bonds at the same time. See this post for more discussion here. But the upshot is that bonds nor taxes 'fund' any government spending.

So if taxes move net financial assest from the non-government sector to the Government, and the Government can spend money into existence at any time, and as sovereign issuer of the US Dollar can never 'run out of dollars', then Federal taxes destroy fiat currency. Returning money to the sovereign currency issuer destroys that money since the concept of a sovereign currency issuer saving money in a currency that they have monopoly control of and create on demand at any time is an inapplicable concept.

If we were talking about a Gold Standard, then we have a completely different scenario is a dollar is back by Gold and is convertible into something tangible. In that case the government does need to finance itself. Bonds and taxes actually are revenues. 

But in a fiat currency environment, they are not. Bonds and taxes don't fund anything. Taxes are a drain of net financial assets from the private sector. That's all they are.

Even if you did manage to keep spending the same and raised taxes, in our country you would still have a net increase in money due to fractional reserve banking.

This is conflating two ideas. See my points above regarding horizontal vs. vertical money creation.

Some created money can't be taxed out of existence. We can't tax money that is in other countries. So if we have 10,000 beads, but 5,000 of them are in China, we can't effective tax our own population enough to account for that.

That is an intersting point. But lets see how it would work:

The US Government declares a one time 100% asset tax. Citizens of the US are subject to this law and has to return all saved money to the government. There are literally zero dollars held by the private domestic sector. But, China not being subject to those laws, still has Dollars, right?  Well, if their money was sitting in accounts at the Fed, then the government can 'confiscate' that money with a keystroke. But let's just play this out. Let's say instead that all of China's Dollar holdings are in physical printed dollars. So now technically there are Dollars sitting in China ... so what? China could exchange those Dollars for some real goods, but the US decides to set the exchange rate between the US and China so that all of the Dollars that China owns can buy one pencil, or something equally ridiculous. And as soon as someone from the US sells that pencil to China, the government confiscates the rest of that money through the 100% asset tax still in effect.

The point is that fiat currency literally is 'fiat'. It has no physical backing. It is created instantaneously by government spending. It is drained from the non-government sector through taxation.

Taxing does not give the governement any more ability to spend money that it didn't have before in a fiat curreny system.

There is no constraint on a soverign currency issuer to *ever* run a balanced budget or a surplus. It never needs to be funded. You cannot think of a sovereign currency issuer like a giant household, or a corporation, or a state. All of those entities need to finance their spending, the Federal Government does not. 

The constraints in a fiat currency system are real resources, like I list in comment #4. Fiat currency is *not* a real resource. If we were on a Gold standard, then money *would* be a real resource. But we aren't, so it isn't. Spending money into existence, in a fiat currency system, beyond the ability of the economy to turn that money into real economic output results in inflation. That is the only real constraint in a fiat currency system.

It's not default. It's not Government financing. It is not a self-imposed debt ceiling. It's inflation.

Again, not calling it bad or good. I am just calling it as it exists today. If our currency system changed tomorrow, then I would be discussing how the rules are different for that system. But this is how this system behaves and these are the rules and constraints that it must obey.

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#32) On July 21, 2011 at 7:49 AM, ChrisGraley (29.86) wrote:

Thanks binve,

But I would argue the semantics used to support MMT are flawed. I'll have to wait until after work to reply to this, but the fact is that the only reason that we no longer have to physically print the money first is that we have computers now. We still create the money. In fact, for MMT to hold true we must resign ourselves to the fact that we must perpetually be in debt as a country. Anyway, I will continue this discussion later and I do appreciate your reply.

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#33) On July 21, 2011 at 1:24 PM, whereaminow (34.29) wrote:

That is the only real constraint in a fiat currency system.

It's not default. It's not Government financing. It is not a self-imposed debt ceiling. It's inflation.

binve,

I know you would rather let it be, so I am not writing this so much for a response from you but for the readers who want to think more about MMT vs. Austrian viw.

How does MMT define inflation?  If you define as price rises, we already have inflation, and therefore, we are already constrained. 

But if we define inflation as money inflation, then we were constrained the minute that a dollar was produced that was not redeemable in gold at 1/20th of an ounce.

Since that has been the case for 80 yaers, we would theoretically have been constrained this whole time, and I don't see MMT speaking of that.

So am I going to assume that MMT is speaking of "price" inflation.  Global food prices are 39% higher YOY.  Does that create any constraints?  American CPI measurements  - a faulty statistic to begin with since it relies on objective utility and average shopping carts that do not exist, as I have written about elsewhere - show upticking inflation for several months now.

How does MMT measure inflation? Do they admit to inflation right now?  Do they see any current constraints brought on by our current inflation?  Or do they deny inflation because it can only occur when there is full resource utilization, like the Keynesians who thought stagflation was impossible?

I'm going to be back in a few to discuss the chicanery behind "loans create deposits".

David in Qatar

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#34) On July 21, 2011 at 2:05 PM, mtf00l (44.84) wrote:

These are my favorite type of post.  Where three competing philosophies are represented by people who have studied their respective beliefs and discuss with passion their beliefs.

It is from exchanges like these I learn the most.

Thank you.

mtf00l

It sounds like everyone agrees America runs a Keynesian system.  Has a purely Austrian system ever been tried?

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#35) On July 21, 2011 at 2:13 PM, ChrisGraley (29.86) wrote:

OK binve, I have a little time so I'll add a little bit now...

I'm going to borrow one of your own statements to try to get us more aligned here.

"Not true in our current system"

While I understand your point that we technically don't have to create bonds to spend money anymore, we do have to create those bonds in our current system. We could change our minds later and change the system, but in the system that we have now, we must create those bonds. There there is a balancing ledger entry and that balance is our promise to pay back more dollars later. While it is a Congressional restraint and not an operational one, it's still a restraint.

I'll repeat that spending itself does not create money. If you spend money that you have, you didn't create new money. You have to spend new money. In other words you have to deficeit spend and you still have to create that new money with a bond in our current system. If can do the same thing by paying for my meal with a credit card instead of paying in cash. Fractional banking also creates money. Lets say the government deposits 1 billion dollars in an account at JPM. JPM can then turn around and loan out $800,000,000 . (depending on the reserve requirement) That money then gets deposited at another bank and they loan out a percentage of that and the process keeps repeating through deposit multiplication until $4B or $5B is loaned out. This is where all the free money in the housing bubble came from.

Taxes do not destroy money on a net basis unless spending remains constant or decreases. If I collect $1B in taxes but I've increased spending by $2B during the same time, I have a net increase of $1B. Taxes need help to destroy money.

China could exchange those Dollars for some real goods, but the US decides to set the exchange rate between the US and China so that all of the Dollars that China owns can buy one pencil, or something equally ridiculous. And as soon as someone from the US sells that pencil to China, the government confiscates the rest of that money through the 100% asset tax still in effect.

First of all, no one would sell anything to anyone if they were taxed 100% Why would they? They have no incentive. Next China would choose not to participate if the exchange rate was set to an unacceptable level. Since the US is the reserve currency, China could choose to trade those dollars for oil or for gold with another country. Until the dollars are exchanged in the US or repatriated in some way, they would trade outside of US influence. No exchanges would take place in the US with a 100% tax rate.

Taxing does not give the governement any more ability to spend money that it didn't have before in a fiat curreny system.

While this is correct right now, it would be incorrect if the US didn't have debt.

There is no constraint on a soverign currency issuer to *ever* run a balanced budget or a surplus. It never needs to be funded. You cannot think of a sovereign currency issuer like a giant household, or a corporation, or a state. All of those entities need to finance their spending, the Federal Government does not. 

There is one constraint. The willingness of others to accept that currency. You can print all the money that you want and if nobody will accept it you don't have any money at all. Also MMT actually mandates perpetual debt. The theories break down if you ran a balanced budget or a surplus.

MMT appears to only be good for explaining what is happening now and continuing the same path and it actually collapses eventually when our country either comes to it's senses or with continuouslly accelerating taxing and spending to the point that other countries refuse our currency. We don't need to exhaust our resources to the point of default. We just need other countries to think that we can no longer pay.

As far as the rules and contraints of the system go, the choice of other countries to play by those rules are at whim and voluntary. Their best interests are not always our best interests.

 

 

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#36) On July 21, 2011 at 2:21 PM, whereaminow (34.29) wrote:

mtf00l,

I doubt that anyone agrees :)  I think we run a mixed economy, as does everyone else in the world, where there is some Keynesian elements, some free market elements, and some plain old political barriers to economic activity.  The Keynesians I argue with usually assert that America was a Keynesian paradise from FDR up until Reagan, but when you drill them on that they often back away from this assessment as well, noting that there were other elements at work as well.

Has a purely Austrian system ever been tried?

Yes, but you would have to define a "purely Austrian system."  Today that would include the private production of police and courts, so you could count frontier America before the Progressive State reached out and brought them under heel.  Even there, you have some local monopolies on government but their reach was limited. Up until 40-50 years ago, millions of people lived without a central coercive state and they usually lived better than their state bound neighbors (See Scott, Art of Not Being Governed, Yale Press). But that is Rothbardian conclusion of anarcho-capitalism. 

Mises' conception of a pure Austrian system would differ, and would include a central state, and many suggestions of Austrian, or classical, economist led to the era of liberalization, which back then meant "removing government restraints on free trade."  Today, of couse it means the opposite.  Most Austrians today reject the possibility that a central state can be limited to basic "night watchman" functions.  Who could disagree lol?

David in Qatar

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#37) On July 21, 2011 at 2:49 PM, binve (< 20) wrote:

Hey David,

No problem. These are some points where we can discuss/debate because we do have some commonality in viewpoints. I think my views here might be slightly different than yours, so let me offer a few responses.

How does MMT define inflation?  If you define as price rises, we already have inflation, and therefore, we are already constrained.

This is too much of a blanket statement, so I don't fully agree with it on those grounds. I will address the specfics momentarily.

But if we define inflation as money inflation, then we were constrained the minute that a dollar was produced that was not redeemable in gold at 1/20th of an ounce.

I both agree and disagree with this. You are discussing the expansion of the monetary base. This assumes that the base gets multiplied into a large money supply (chasing real goods) via a money multipler model in the Quanity Theory of Money (or something similar). Without stepping into that hornet's nest right now, let me just say there are alternate theories besides those.

From an MMT point of view the more appropriate metric would be 'net financial assets' instead of 'money supply'. They are not the same thing. The money supply (depending on which version you use) will count demand deposits, reserves, loand, money markets, etc. This a mix of both 'base money' and 'bank money'. The reason the difference is important is because of the horizontal vs. vertical money creation argument that I use in comment #31. 

Since horizontal money creation has both an asset and a liability generated at the same time, the 'net financial assets' generated is zero. Someone can take out a loan and buy a real good, but that money is still owed and will have to be repaid or defaulted on eventually.

Only vertical money creation generates *net* financial assets because government spending is the only transaction with no associated liability. Therefore the net financial assets in existence is the same size of the national debt (approximately, there are some central bank actions like sterlization that are also vertical that will affect that total).

This is why the long term deficit postion of the US goes hand in hand with the long term inflation trend we have, which was the main upshot of this post that I wrote.

So am I going to assume that MMT is speaking of "price" inflation.  Global food prices are 39% higher YOY.  Does that create any constraints?

Talking about global food prices in relation to American inflation is a little bit of mixing apples and oranges. But since the US is one of the world's largest food exporters, there is something to this statement. 

I suppose an MMTer would talk about a 'stable' inflation rate as a low constant average YoY percentage. I have a little issue with this. If the goal is full employment and price stability, then deficit spending should be able to be matchted to population growth (that is fully employed at the working age) and an inflation rate of zero should be the real goal. 

But let's talk about the current environment as that is what you are discussing in your comment. Inflation has been anything but stable in recent history (the last 10 years). With the high unemployment rates that we have had it is not attributable to demand-pull inflation (at least I call BS on anyone making that claim). 

But take a look at TPC's CPI (which is higher and more realistic than the BLS CPI). And you will see both an extreme inflation spike and an extreme deflation spike in the last 10 years. This is exactly a function of the private sector leverage (horizontal transactions) that was built up from 2002-2007. But since those transactions were all horizontal, those loans had to be repaid. When the economy faltered and people lost jobs and unemployment rose, the bid up price of assets could no longer be supported. They fell which lowered the price of housing, which reduced spending (as these loans were being repaid and credit lines were being cut) which reduced more prices, etc. etc.

This is a prime example of why any horizontally created spending boom will always collapse back on itself. Because it cannot be sustained because the liabilites don't go away. 

So currently we are back up to 3% inflation. However this is not 'uniform' inflation across all components that make up an inflation index. Some are up a lot, some are up a little, some are down. Again, this is not indiciative of a demand pull inflation environment. It is indicative of price setting (akin to cost-push inflation) 'fueled' mainly by oil prices. The US is the worlds biggest energy importer and is especially sensitive / at the mercy of OPEC. They are price setters in this scheme and the US just has to take it. Food production being energy intensive is also subject to this effect which is why food and energy prices have been moving (mostly) in a similar fashion.

The biggest thing the US could do to smooth out this source of inflation is not to have better monetary policy (which is mostly worthless anyways), but to really become serious about energy independence. That is the only real solution.

I'm going to be back in a few to discuss the chicanery behind "loans create deposits".

I'm sure I won't agree with it, but I will eagerly read it as I do all of your work. :)

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#38) On July 21, 2011 at 3:32 PM, binve (< 20) wrote:

Chris,

Good comments and I agree with many of them, but maybe not the overall framework:

While I understand your point that we technically don't have to create bonds to spend money anymore, we do have to create those bonds in our current system. We could change our minds later and change the system, but in the system that we have now, we must create those bonds. There there is a balancing ledger entry and that balance is our promise to pay back more dollars later. While it is a Congressional restraint and not an operational one, it's still a restraint.

Agreed and not disputed

I'll repeat that spending itself does not create money. If you spend money that you have, you didn't create new money. You have to spend new money. In other words you have to deficeit spend and you still have to create that new money with a bond in our current system.

This is still incorrect. Government directly crediting private sector bank accounts *is* spending money into existence. If I have an account at the Fed and the Treasury credits it by $100 then I have (from out of nowhere) $100 that did not exist prior to the moment of that credit. It is a real deposit and I can go take it and buy a nice bottle of scotch or something. The point is these are very real transations that increase the *net* financial assets in the banking system (because no corresponding liability was created).

On the bond side, yes the Treasury creates a bond too ... .so what? So lets say instead of buying a bottle of scotch with my $100 dollar credit I buy a $100 bond at the Treasury's next auction. So I send my $100 credit back to Treasury in exchange for a bond. It is obvious that this transaction did not increas the net financial assets.

The moment the Treasury spent that $100 into existence (by crediting my account) was when net financial assets were created. The purchase of the bond was a *swap* with an asset that already exists (the $100 credit). Because once the Treasury gets the $100 credit back in exchange for the bond, what do the do with it? Nothing! 

It did not 'finance' the Treasury
It did not give them any more ability to create new credit into different accounts any time they wanted to.

Bond purchases are swaps. This is exactly the same process that occurs during OMO or QE. The Fed purchases bonds from the Primary Dealers that already exist in exchange for reserves. It is a swap.

One techncality is that the interest earned from the bonds are new net financial assets. The original bond purchase is a swap, but the interest (which comes from the Treasury) is a new NFA. This is why QE is actualy *deflationary* since it removes intrest income from the private sector (the Fed returns all interest it holds on Treasurys back to the Treasury, where is disappears back into the ether).

Fractional banking also creates money. Lets say the government deposits 1 billion dollars in an account at JPM. JPM can then turn around and loan out $800,000,000 . (depending on the reserve requirement) That money then gets deposited at another bank and they loan out a percentage of that and the process keeps repeating through deposit multiplication until $4B or $5B is loaned out. This is where all the free money in the housing bubble came from.

This is all horizontal like I discussed in comment #31. Regarding the housing / leverage bubble, read my comment to David in #37.

Taxes do not destroy money on a net basis unless spending remains constant or decreases. If I collect $1B in taxes but I've increased spending by $2B during the same time, I have a net increase of $1B. Taxes need help to destroy money.

Agreed and that is what I said. To be clear: government spending creates money. Government taxation destroys money. Therefore Deficit spending (G>T) creates *net* money and a Surplus (T>G) destroys *net* money over a given time period

Until the dollars are exchanged in the US or repatriated in some way, they would trade outside of US influence. No exchanges would take place in the US with a 100% tax rate.

You are missing the point of my (contrived) example. You were saying that the Dollars held by China was out of the US government reach. But that isn't strictly true based on my (contrvied) example. In that case, if the government did not intend to honor those dollars (wanted to tax them out of existence) why would some other country trade real goods in exchange for them? I am not too hung up on this point though. I will simply concede it.

There is one constraint. The willingness of others to accept that currency. You can print all the money that you want and if nobody will accept it you don't have any money at all. Also MMT actually mandates perpetual debt.

The condition on acceptance is the fact that only Dollars are allow for as payment for Federal Taxes. Since everyone (nearly) owes taxes at some point in their life, this creates the demand for the currency.

Fiat money is a tax credit. It is really nothing more than that. It is 'useful' because it is also a unit of account and facilitates trade. 

The theories break down if you ran a balanced budget or a surplus.

This is not true. You can run (and actually should run) a balanced budget or suruplus if you need to drain demand from the economy (if inflation is rising because we are near full employment). 

You can't run surpluses indefinitiely though. Because eventually it will just be like the 100% asset tax example. If (T>G) for long enough (which destroys net financial assets) then eventually you will tax away *all* of the NFA from the private sector, leaving them with no Dollars. The only way in that case for the private sector to accumulate dollars again is for the Government to *spend dollars into existence* (credit private sector bank accounts). 

MMT appears to only be good for explaining what is happening now and continuing the same path and it actually collapses eventually when our country either comes to it's senses or with continuouslly accelerating taxing and spending to the point that other countries refuse our currency. We don't need to exhaust our resources to the point of default. We just need other countries to think that we can no longer pay.

I don't agree. Because the point of this exercise is to show that the debt can *always* be serviced because the governement can *always* create dollars out of thin air to service any intersest.

The way this system stays in existence is if the population thinks it is fair, thinks that the stability of this system is 'good enough' to avoid switiching to another system. It is all based on confidence. The governement enforce taxes. And as long as the population agrees that the system is beneficial, it will pay taxes and the system will perpetuate. But when the population is no longer satisfied with this system, it will force our leaders to start another one.

Again, I am not calling the current system good or bad, just describng it.

 

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#39) On July 21, 2011 at 3:34 PM, binve (< 20) wrote:

David and Chris,

It is exhausting responding to both of you :) I am saying 'no mas' because my brain hurts and I need to think about something else for awhile. So I will drop off this conversation now.

Good discussion!

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#40) On July 21, 2011 at 3:37 PM, whereaminow (34.29) wrote:

binve,

Ok, I'll make a couple points, without attempting to open up any new cans of worms. (Aren't there enough of those open already LOL?)

Talking about global food prices in relation to American inflation is a little bit of mixing apples and oranges. But since the US is one of the world's largest food exporters, there is something to this statement.

I would add that another aspect that it is relevant is that many countries pyramid their own reserves on top of dollar reserves.  And in other countries they still maintain a large dollar reserve simply because they don't have any better ideas.  So I do think that America has, and continues, to export a lot of inflation to countries and peoples that can't "afford" it.  You know if you spend 50% of your income on food and then food prices shoot up 40%, that's a revolution.  So in a way, bless the Fed for sparking Arab Spring :)

If the goal is full employment and price stability

I definitely cannot agree with these goals.  I understand that full employment in the MMT sense is making sure that all who want to work, can work.  But jobs are not an end unto themselves.  They are a means for producing things in qualities and quantities that consumers demand.  The trick is to avoid policies that "create" jobs which produce things that people do not prefer (in an economic sense.) 

Here we start to see the beauty of Mises theory of human action.  We cannot know a priori what consumers want.  Those preferences are revealed through action.  There is no job creation program that matches consumer preferences.  There cannot be, since consumer preferences are only revealed through action.  Human action creates jobs that match consumer preferences in a market economy.  Any other method may create jobs, but moves us into something else, a quasi nightmare economy where decisions are made arbitrarily based on non-economic factors.  You will still have a rocking GDP, of course, but it will be the sum of abitrary numbers based on arbitrary decisions and hence, it will be just a big ole arbitrary number with no meaning :)

Price stability is also not an end, but a means. I know that MMT scholars agree with us that the Fed has done a terrible job of promoting price stability.

But as you point out in later sections of your comment, measuring prices and money aggregates is extraordinarily difficult.  Prices do not move uniformly.  Money aggregates are incredibly difficult to measure as well.  And the idea that we should tie money creation to population growth assumes that there is a proper amount of average money per person, which I think I showed to be fallacious in comment #25.

Prices are real things that give us valuable information, but only if they arise through the exchange of private property because the point of an economy is to help each other create real things that satisfy our wants.  Once you move outside of that, we move into a quasi economy where half of every transaction is not actually property but just a ticket/token, the price system is distorted and the signals that people need to make rational economic decisions are gone. 

I hope I did not open up any more worm cans =D

David in Qatar

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#41) On July 21, 2011 at 3:40 PM, whereaminow (34.29) wrote:

David and Chris,

It is exhausting responding to both of you :) I am saying 'no mas' because my brain hurts and I need to think about something else for awhile. So I will drop off this conversation now.

Good discussion!

Victory is ours!  ROFL, I am totally kidding.  Thanks for a great discussion.  We should let some other people carry the torch from here on out.  Always good to discuss economics with you!

David in Qatar

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#42) On July 21, 2011 at 5:22 PM, ChrisGraley (29.86) wrote:

Nooooo! We are actually getting close to a turning point I think. Take a long break and revisit this one. In the mean time, I'll address your last post to me. Take whatever time you need to respond. 

This is still incorrect. Government directly crediting private sector bank accounts *is* spending money into existence. If I have an account at the Fed and the Treasury credits it by $100 then I have (from out of nowhere) $100 that did not exist prior to the moment of that credit. It is a real deposit and I can go take it and buy a nice bottle of scotch or something. The point is these are very real transations that increase the *net* financial assets in the banking system (because no corresponding liability was created).  

Again I think we are talking past each other with different semantics, but we are definately getting closer. In my eyes what you just described is not spending. It's deficit spending. Actually in my eyes that is simply money creation from debt and not spending at all because you haven't bought a bottle of scotch yet. Here's a good choice .

Now lets say that government has created the a new tax on scotch and that money that's collected goes directly to an account at your local bank and from that account it provides you with a bottle of scotch a week. (friends share by the way) No money was destroyed by the tax because it's there for you to buy your next bottle of scotch. Money will be spent when you buy the bottle of scotch, but no new money was created. We spent money without creating money. We taxed money without destroying money. We simply moved it around a bit and you're a bottle of scotch ahead of the game.

On the bond side, yes the Treasury creates a bond too ... .so what? So lets say instead of buying a bottle of scotch with my $100 dollar credit I buy a $100 bond at the Treasury's next auction. So I send my $100 credit back to Treasury in exchange for a bond. It is obvious that this transaction did not increas the net financial assets.

The moment the Treasury spent that $100 into existence (by crediting my account) was when net financial assets were created. The purchase of the bond was a *swap* with an asset that already exists (the $100 credit). Because once the Treasury gets the $100 credit back in exchange for the bond, what do the do with it? Nothing! 

It did not 'finance' the Treasury
It did not give them any more ability to create new credit into different accounts any time they wanted to.

Bond purchases are swaps. This is exactly the same process that occurs during OMO or QE. The Fed purchases bonds from the Primary Dealers that already exist in exchange for reserves. It is a swap.

One techncality is that the interest earned from the bonds are new net financial assets. The original bond purchase is a swap, but the interest (which comes from the Treasury) is a new NFA. This is why QE is actualy *deflationary* since it removes intrest income from the private sector (the Fed returns all interest it holds on Treasurys back to the Treasury, where is disappears back into the ether). 

Believe it or not we agree here. But what you see as a technicality, I see as the point. MMT requires more and more money creation which is backed by bonds. When money is destroyed by taxation the bonds and the obligation to honor them is not destroyed along with the interest needed for debt service. So even in our world where money is created at whim, we pay transaction costs. As we refinance bonds, we pay yet another transaction cost and we have to refinance for a higher amount to pay off the transaction costs for the last bond. This creates a deflationary anchor on our economy that we try to solve by creating more money and inflating our currency. Which, we in turn put in the ledger entry for even more bonds. You could argue that we could use the tax money that we collected to buy bonds and remove those from the system at the same time that we destroy the money which is what we actually do to an extent, but since we have to collect the debt service the net effect is to take more money out of the system than we put in. Free money appears to be un-sustainable. 

The condition on acceptance is the fact that only Dollars are allow for as payment for Federal Taxes. Since everyone (nearly) owes taxes at some point in their life, this creates the demand for the currency.

Yes but China, Russia, Saudia Arabia and other countries that we deal with do not pay us taxes. They could choose not to honor our money and we would not be able to print our way out of it.

Fiat money in my opinion is not a tax credit but a productivity tax based on your example with the bonds above.  

This is not true. You can run (and actually should run) a balanced budget or suruplus if you need to drain demand from the economy (if inflation is rising because we are near full employment). 

You are correct here. I worded this poorly. What I meant was that you can't run a completely balanced budget with no National debt. I wasn't talking about a yearly deficit.

I don't agree. Because the point of this exercise is to show that the debt can *always* be serviced because the governement can *always* create dollars out of thin air to service any intersest. 

Yes this seems to be a key difference between us. I agree that we can keep printing but I don't agree that China will keep accepting.

The way this system stays in existence is if the population thinks it is fair, thinks that the stability of this system is 'good enough' to avoid switiching to another system. It is all based on confidence. The governement enforce taxes. And as long as the population agrees that the system is beneficial, it will pay taxes and the system will perpetuate. But when the population is no longer satisfied with this system, it will force our leaders to start another one.

Again, I am not calling the current system good or bad, just describng it. 

I think global acceptance has to break first.  If it doesn't, popular acceptance will eventually fail, but by that point we will be past the point of no return. 

I always love discussing economics with you binve because you put a lot of thought and effort into your answers without reciting overly repeated political psycho-babble. 

 

 

 

 

 

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#43) On July 21, 2011 at 11:47 PM, binve (< 20) wrote:

Chris and David,

Okay last response on this thread I swear. :) But both of your responses are so good that I really do believe they deserve some follow up.

First let me start with Chris

----------------------------

Again I think we are talking past each other with different semantics, but we are definately getting closer

I agree, however there is a fundamental point that we are disagreeing on, and I will point it out in a second. It is based on one of your responses. It is also very much tied to Davids response in comment #19: "I dispute assigning the term money to define something which has no underlying private property value.  I don't think there is a way to make it work". I don't necessarily disagree, but the principle behind all fiat currency macroeconomic analysis assumes that money specifically does not have property value (it is literally a 'fiat' tax credit). So I am taking the other side of the argument in the case as a Devil's Advocate, because it is a fundamental point that can be neither 'proven nor disproven' in debate. It is a core tenent, a belief. It is like having a debate between an atheist and a Christian that goes like "either God exists or not. Prove your point in a debate" .... Obviously there will never be agreement because this is a key point of contention.

As such, another key point of conention in economic analysis is: "Does money have to be inherenetly 'valuable'? Does it have inherent worth? Or it decalared by 'fiat'?"

An Austrian (or someone who agree with much Austian analysis) will likely say that money is inherently valuable, that it is a real good like other real goods.

An MMTer will likely say no, money is a unit of account with no inherent worth.

I honestly see the merit in both aruguments. Like I have said before, there is much about Austrian economics that I very much agree with and find useful (see David's respone in comment #40 especially). But since I honestly think a literal fiat currency is potentially 'viable', I am just taking up that side of the debate in this current debate. Not because I agree with it wholeheartedly, but because so many others disagree with it wholeheartedly. And you can't have a debate without disagreement.

... okay. With that in mind, lets get to some responses.

Actually in my eyes that is simply money creation from debt and not spending at all because you haven't bought a bottle of scotch yet. Here's a good choice .

First, before *anything* else.... All I can say is good choice my man :) I am a big fan of Glenmorangie and have a bottle in my cabinet (it's only a 10 year though). I had a taste of the 18 year only once and it was a thing of beauty :) Macallan is another that is near and dear to me, but if I had to pick a 'favorite' (which is really impossible, it depends on your mood and the character you want in your whisky) that I go to over and over again, it is Talisker.

But your responses gets to a fundamental question... what is debt? What is deficit spending?

Your repsonse implies that the $100 credit is not money because I haven't bought anything with it yet. But that doesn't make any sense to me. Because one of the fundamental defition of money is 'the ability to exchange it for real goods or services'. It would be like getting a loan from a bank and saying that loan isn't money because you didn't buy a car with it yet.

But that is where you are going in your next example

Now lets say that government has created the a new tax on scotch and that money that's collected goes directly to an account at your local bank and from that account it provides you with a bottle of scotch a week. (friends share by the way)

I would certaintly share my scotch with you, David, checklist and indeed any of my friends on caps :). But let's discuss the mechanics here for a minute. There is a New tax on scotch, which means that someone has to buy the scotch to begin with for their to be a tax collected. let's step through this:

1. Government credits my bank account by spending $100 into existence
2. I purchase a $100 bottle of scotch. The tax goes into effect.
3. The liquor dealer then 'owns' the $100 and sends the bottle of scotch to the Treasury's tax and loan account. (The liquor deal swapped a real good [scotch] for money [$100]. This transaction is a wash).
4. The Treasury's tax and loan account assigns the scotch to my bank account consistent with the tax policy you state above.
5. My bank account provides me with the bottle of scotch.

What did we learn from this? From step 1, there is an extra $100 in existence from the governement spending that has not yet been destroyed by any taxation.

But let's make this point very clear (as it is critical tenet of this economic analysis) that bottles of scotch, nor Gold, nor Euros, etc. are acceptable for payment of taxes owed to the US government. If I owe the US government $100 of in taxes, I can't send them a bottle of scotch worth $100. If I have a bottle of scotch, I need to sell it to someone in exchange for $100. Only then can I extinguish my tax liabilities.

Until the government levies a $100 tax (payable in dollars, not scotch), then the $100 of deficit spending in step 1 is a net financial asset of the private domestic sector (of which the liqour dealer and myself are a part). And the private domestic sector is $100 'richer' and will be until a $100 tax is levied (and someone has to exchange a real good for that $100 so that it can be sent back to the government).

This illustrates the key concept of vertical vs. horizontal transactions: Only the government can create *net* fiancial assets in the private domestic sector. That net spending (deficit spending) is not cleared from the private domestic sector until a tax is levied in equal magnitude (the spending in balanced by a tax). It is clear then that the accumulation of net financial assets (Dollars) within the private sector if and only if government has net deficit spent (when all of the cumulative spending is greater than all of the cumulative taxation).

As was obvious between the exchange between myself and the liquor dealer, our transactions are horizontal. We can exchange real goods for NFAs, but we cannot amongst ourselves change the amount of net financial assets in existence. The only thing that can is a vertical (government) transaction.

Believe it or not we agree here. But what you see as a technicality, I see as the point. MMT requires more and more money creation which is backed by bonds.

We started to convergence, and then we diverge. This is not a true statement. In fact, I thought you acknowleged that in comment #35: "While I understand your point that we technically don't have to create bonds to spend money anymore, we do have to create those bonds in our current system. We could change our minds later and change the system, but in the system that we have now, we must create those bonds. There there is a balancing ledger entry and that balance is our promise to pay back more dollars later. While it is a Congressional restraint and not an operational one, it's still a restraint.".

Here is the logic that needs to be followed, in order to see what bonds 'do', from here:

1 ) The US Federal Government spends (via the US Treasury) by crediting private sector bank accounts at the Federal Reserve
2) There is a Congressional constraint that all US Federal Government spending be matched by Government Bond sales
3) There is a 'debt ceiling' associated with the size of outstanding Government bonds
4) Both 2 and 3 are self-imposed constraints with historical origins and neither are an operational constraint to Federal Spending
5) The US Federal Government is monopoly issuer of the US Dollar, is the source of all Dollars, and can never 'not' have Dollars
6) From 5, the US Federal Government can never become 'insolvent' in terms of honoring US Dollar denominated obligations. The only way it cannot honor its Dollar denominated obligations is if it *willingly decides* not to pay them. This is another self-imposed constraint, not an operational one
7) Net Federal Government spending (spending in excess of taxation) creates net deposits which creates net reserves in the banking system. An increase in reserves pushes down the overnight lending rate. The Federal Reserve maintains control of its target overnight rate by selling US government bonds from its portfolio (via OMO) to ensure demand for reserves (the overnight interest rate) matches its target policy rate.

When all these points are considered, it becomes obvious that the US Government bond market:

a) Does not *fund* anything (It did under a convertible currency standard but does not under a fiat currency floating exchange rate standard)
b) Provides the non government sector with interest income which the US Government will always be able to provide since it is monopoly issuer of the US Dollar
c) Has relevance in the US Monetary System to facilitate liquidity management operations.

That's it.

Whether Government bonds exist today or not in our current system is completely irrelevant to the monetary operations and spending capability of the US Governement.

We can pretend that a self-imposed debt ceiling constraint is a real constraint. But that does not change the fact that the government creates money by spending and the purchase of bond is a *swap* with the money that was already spent into existence. Nothing more. Calling it 'debt' and then using a debt ceiling argument adds no insight whatsoever to this basic operational reality.

So even in our world where money is created at whim, we pay transaction costs. As we refinance bonds, we pay yet another transaction cost and we have to refinance for a higher amount to pay off the transaction costs for the last bond. This creates a deflationary anchor on our economy that we try to solve by creating more money and inflating our currency. Which, we in turn put in the ledger entry for even more bonds. You could argue that we could use the tax money that we collected to buy bonds and remove those from the system at the same time that we destroy the money which is what we actually do to an extent, but since we have to collect the debt service the net effect is to take more money out of the system than we put in. Free money appears to be un-sustainable.

Chris I completely and violently disagree with this.

We don't need a debt celing. I have demonstrated this over and over. But lets assume that it doesn't go away, that we keep wearing this self-imposed chain. What is 'unsustainable' about this? The government can always 'afford' to spend into existence the interest required to 'service the debt'. Even though the bond funds nothing, and it never has to wait for a tax revenue to come in before it does so, it can *always* spend that intersest into existence. The tax collecting to buy the bonds is not even remotely how this process occurs at all. I have been discussing this all day, and perhaps we have to simply walk away from this point.

I think global acceptance has to break first.  If it doesn't, popular acceptance will eventually fail, but by that point we will be past the point of no return.

That is an interesting view. And in some ways that could even be useful for the US. Right now we have a large current account deficit. This is a real benefit for the US because we get real goods in exchange for Dollars. The problem is our trade imbalance is *very* unbalanced. And these imbalances create frictions which create real problems. I talked about this in the comments above and I will post the relevant pieces again.

Imports are a *real* benefit for soceity and *exports* are a real drain for soceity. In an 'ideal' world, there would be international trade, but all current accounts for each country would be balanced (that is all exports would be balanced by the same size of imports). Large trade imbalances are a source of friction and instability. Just think about the US's tenuous oil position and this should be self-evident.

The US is the worlds biggest energy importer and is especially sensitive / at the mercy of OPEC. They are price setters in this scheme and the US just has to take it. Food production being energy intensive is also subject to this effect which is why food and energy prices have been moving (mostly) in a similar fashion. The biggest thing the US could do to smooth out this source of inflation is not to have better monetary policy (which is mostly worthless anyways), but to really become serious about energy independence. That is the only real solution.

There can be an economic discussion about whether imports are good or bad, but I think it really goes to bigger issues. It gets to questions on national self-reliance and fair and more balanced trade among all the worlds trading partners, not just the advantages for a select few.

I always love discussing economics with you binve because you put a lot of thought and effort into your answers without reciting overly repeated political psycho-babble.

Thanks Chris, I feel the same way toward you! Very good discussion man!

-----------------------------------------------

Okay, now for a response to David:

David this is a great response and is the perfect illustration of why I hold much of Austrian economics in high esteem. I don't agree with all of it, but I can't find much to disagree with here. But in the spirit of debating and discussion, let me offer a few counter ideas.

I understand that full employment in the MMT sense is making sure that all who want to work, can work.  But jobs are not an end unto themselves.  They are a means for producing things in qualities and quantities that consumers demand.  The trick is to avoid policies that "create" jobs which produce things that people do not prefer (in an economic sense.) 

So in an economy there are goods that people want. The free market interprets those desires through price signals and satifies those demands. And if the demand is geninue than a business or industry can be formed around it. I very much agree with Austrian philosophy on this one.

But there are some activities that have a real economic good, either directly or indirectly, without a clear and decisive cost-benefit ratio. Such as Urban maintenence and renewal, inftrastructure maintenance and building, community sponsored projects, traditional volunteer organizations like the Red Cross, etc. These activities may not have direct short term benefits where the private sector may not want to bid on them. But they have long term social and economic benefits.

I think this is a role where a Government funded Job Guarantee program could be very useful and benefical for not only employment but overall economic growth. Communities and Municipalities know where and how they can employ people. Currently we have a minimum wage. This is the 'no bid' wage by the private sector. If workers were hired at the minimum wage then it would not be disruptive to other wages. So if the government offered work to anyone who wants it at the minimum wage, it would not pressure private sector wages. And give work that is socially and econominically useful over the long term.

As the business cycle moves up and down, the private sector work force grows and diminishes. We see this happen in many cycles. Right now we have a buffer stock of unemployment. With a Job Guarantee program, then instead it would be an employed buffer stock. And in this case, workers would continue to demonstrate that they are willing and able to work. They would still be learning skills and engaging in the work force. I think this would have long term benefits to the private sector as well because they would hire workers out of the program (by simply paying slightly more than the minimum wage) that are demonstrating a work ethic, and do have current skills, cutting down on training costs.

Unemployment has horrible long term social and economic costs that can span generations. I think it is a worthwile goal to reduce unemployment while at the same time adding real long term value to the economy. I think this is a possible and realizeable goal.

David, I really continue to believe that while we see some things differently, we probably have more agreements than differences. I really enjoy discussing economics with you and look forward to doing so in the future.

Take care my friend,
binve

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#44) On July 22, 2011 at 7:43 AM, ChrisGraley (29.86) wrote:

LOL, we diverge again.

I don't want to be the house guest that never leaves so I'll leave things at your last statement but I would love to talk about this more at a later time.

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#45) On July 22, 2011 at 10:48 AM, whereaminow (34.29) wrote:

binve,

Sorry buddy, but I just can't let it rest without making one more point.  I'm the like the guy trying to quit smoking who has to have one "last" cigarette which is of course never his last one.

In the philosophical sense, what are jobs? Jobs are humans' way of paying for help.  Take the example of a ham sandwich.  You buy the ham and the bread, but what you are really buying is labor.  The labor to kill the pig and chop it up and package it.  And the labor of the trucker.  Etc.  That's what you buy at the store.

Now, what could possibly go wrong here?  Let's just set aside the business cycle for now, since I don't want to make this a post about inflation and ABCT.  One thing that can happen is that somewhere along that path some jerk with an inflated sense of his importance can come along and say "you can't ship that product through here unless you pay me a cut!"

This is why in non-coercive states, even those that attained great wealth as traders, there is no such thing as unemployment.  It doesn't exist.  It's not there. Ever.  There are still slackers that don't work, or disabled, just like any society.  But the chronic unemployment and underemployment you see in the democratic countries is nonexistent.  This is because there is no jerk with enough power to prevent us from helping each other.

So before we think up temporary solutions that only serve to keep labor in place where there is no market need, we need to identify why this festering problem of unemployment even exists.  We have to look through the record and figure out how economies ever recovered from past crashes.  The answer is always and everywhere is that the only way an economy can recover is if government gets out of the way, and stops telling people what they can and can't do and by how much. 

David in Qatar

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