Tuesday, December 10, 2013

Sycophants and Henchmen

Classifying economists is becoming quite a challenge these days. Austrians, classicals, neo classicals, keynesians, new keynesians, monetarists, post keynesians, market monetarists and now new monetarists.  I have two classifications. Sycophant or Henchmen

When I read an oped by an economist these days they usually are trying to make the non economist believe one of two things.
One;  they want you to believe that the people who are on top of the world calling the shots and determining much of your economic fate, are hardworking smart guys who know what is best and have studied these things like finance and the economics and if you just don't tax them too much or make them follow too many rules, they'll make the world you inhabit with them a more livable place and you'll be happier. These are the sycophants

Two; they want you to believe that "There is no alternative"  this is how its going to be while they are in charge so get used to it. These are the henchmen.

Either  belief you come away with is fine with the guys running the economy.

Wednesday, November 27, 2013

Taking on Krugman

This is one of the most conceited things I can do probably, but I'm doing it anyway. Im going to challenge Mr Krugman (and Joseph Stiglitz) on an economics matter. Ive never taken an econ class and he's a Nobel winner but I still believe he can be wrong...... dead wrong,  on some matters.  He would probably admit as much but not here, on the matter Im going to discuss, likely.

Krugman and Stiglitz (another Nobel winner) were having another public dispute about our current economic "crisis".  I use air quotes because no one in Washington is treating this like an actual crisis. They call it such when they are appealing to voters in front of cameras but I see no interest in treating this crisis. Anyhoo, their disagreement is around the idea that inequality in income distribution is responsible for the lackluster recovery. Stiglitz believes it is, Krugman is having none of it.  Its not so much that he disagrees that gets me its the reason he gives, and I see no evidence that Stiglitz even begins  to have a way to challenge his objection. Pauls response to Stiglitzs' claim is that he sees no evidence that the upper class are under consuming at present.   Well, of course they aren't.  Thats not a claim that should be being made by those who believe that distribution matters in these income things. If thats what Mr Stiglitz is implying then thats just  silly.  The maldistribution of income isn't a cause of whats wrong today...........its a RESULT!!  Everything we have done the last 30-40 years is whats wrong and this wide disparity is the evidence at the end of it all (and I do think its the end, not to be too apocalyptic).  And by doing what we have always done we will stay right here.  There is no mechanism within the "market" to reverse or change this.

Where we go wrong is in thinking of our system like a poker game or anything else where we willingly participate and pay and make bets (choices) and we see how we fare at the end of the night. However we end up is supposedly  determined by how well we estimated potential disasters and avoided them, how well we foresaw great opportunity and took a risk on it.  Thats a nice sounding story but its laughably untrue. Using that analogy we look at one guy with almost all the chips, and the game slowing down because the other nine guys can't even pay an ante and start offering "solutions" like;  "Hey lets make the ante only half a chip".... Okay but this will only extend the pain for the losers. They can always be outbid and pushed out of games because they can't call anymore. Another one is "Those other guys can just borrow form the leader",  riiiiiight, that will last only so long as well, as the chips required just to pay back the interest will drive others out of the game.  You really can't borrow your way out of this when you have no increased income prospects. "Someone can just give everyone more chips" is another solution heard. This is the best of the three but the most politically difficult to pull off in an environment where everyone misunderstands their chips and how they get value.  Too many people think this would devalue their current stock of chips too much, especially the guy with almost all of them but if they realize that playing the game IS the point not tallying up your chips, they might get past this.

None of those solutions though will really make up for the fact that we just need to play a different game

Thursday, October 31, 2013

How Do You Spend if There is No Money?

Its a nonsensical question on the surface isnt it? Trained economists won't think so though as they are used to looking at things with money out of the picture............. or so they say.  As a guy who has really jumped with both feet into the econ/finance pond the last five or six years, I feel I am reasonably well versed in what economists are talking about when they speak or write, yet I must say I dont think Ive really ever heard the title question addressed.  Is spending unique to a monetary economy?  Is spending just trading but using a paper/electronic proxy as one of the traded items? I think spending IS unique to a monetary economy and its NOT simply a trade of a different sort than we are used to thinking about.  In fact, Ill go as far as to say that I dont think we would see the world the way it is now if there wasnt money. I am not just referring to the way money has made our transactions easier and greases the wheels of our economic lives but that in fact its moneys design that has created the 1% and the 99%. Additionally its the spending of one side which is the accumulation for the other side. The sides arent 50/50 though.  There is a small segment receiving the spending ultimately.

This is not meant to be some conspiracy theory about Bilderbergs and Jewish bankers running the world but simply a statement about how it must be when we create and use money the way we have for most of our human existence. There must be, according to the rules of our money creation a natural tendency for all the money to end up in few hands. It will happen this way unless some outside force stops it and legislates a different outcome. In a monetary economy we will always tend towards monopoly I believe because once you are the creditor/accumulator that relationship holds in virtually every transaction you take on. All modern (and even through history it is argued, persuasively I think) money systems are credit based AND privately controlled (and in modern times more govt regulated) via banks.  Money gets created out of credit relationships. One side accumulates and another side spends. One half of the relationship creates a debt for the other half.  The debt is repayed WITH INTEREST which means the repay-or ends up giving more money back to the creditor than he borrowed.  Now, what he borrowed may in fact allow him to create much more than he previously could so paying the interest just comes out of his surplus, but if it doesnt allow that, the interest eats away at his net worth. Lets try thinking about lending/borrowing for interest without money.  In other words lets try it in the world that neoclassical economists say we inhabit, one where money is "just" a neutral veil over what is really happening.  Whats being borrowed and what is interest? Are you lending me your talents? Your knowledge? Your backhoe?  It might be any of those three. And what do I repay with? My gratitude? My fealty? My daughter?  A simple "Ill give you four ears of corn today and you give me five later when your field gets productive again"does not describe the mechanics of borrowing in our modern monetary economy.  The borrowers of today are using bank credit, not someone elses extra stuff. Even the concept of giving back more ears of corn than you borrowed at a later date would have obvious limitations. Using  physical goods and services as the means of payment makes it obvious to both sides that there would be limits to what you could expect to be repaid but with money ........... just add some zeros!

The concept of saving is quite easy to understand without money.  You decide to hold onto something you have and use it at a later date.  Maybe its something to eat that you've learned how to preserve maybe its a tool that you have made a little sturdier so it will last multiple growing seasons.  The concept of investment is even conceptualize-able.  I give some of my efforts to your project. I do it both to help you AND to help me. I know that if you are my neighbor, I have a better neighborhood when you are better off. There are tangible reasons to invest my time and efforts. By investing some of the food Ive saved to keep your family alive through the winter means you'll be around and strong in the spring when I might need you too,  plus you wont build up resentment and try and burn my place down or kill my cattle. Consumption is easy. Its the eating of my saved grains, the wearing out of my tools, the sitting in my chair. The consumption of something previously saved or created is basic and in fact the reason most things were created was for consumption either now or later.  These concepts were around even before we invented money and are basic to economics. But understanding spending, I believe,  is more difficult in a non monetary economy. Spending is an act of giving up something. Its draining. We even use the word "spent" to describe when we are worn out and have nothing left. In a non monetary world there is investment, saving, consumption and trading.  There is no spending.

Thinking of spending as  trades is incomplete in my view.  When I trade I am not objectively better off. I might be subjectively better off but I had to give up something of equal value for the trade to take place. Maybe I didnt want it any more but it still had value to someone.  Yes, I got what I wanted and so did my partner, supposedly, but we havent elevated one of us above the other.  So how, in a world where someone has to give up something of equal value to get something else,  could we get to a situation like today where so many have so little?  In todays economy, many spend down while few accumulate up.  These arent trades or swaps, they are loaded transactions that one must do and the other is doing..... for a price. The price is often not the price to own but just the price to continue using. Its the price of staying in the game.

Spending as consumption doesnt work either because in a non monetary economy, when I consume no one else gets anything. I'm simply consuming my own stuff that I saved.  In a monetary economy when I spend my "numbers" go down and someone elses go up.  They get better off according to our scorekeeping system. Now, we all know that the scorekeeping system does not tell the whole story, but it tells a very important part of the story. Its why we developed it. To tell a different story. To see who has the most. To see who wins.

In a monetary economy I think of spending as something that happens when someone decides not to save money anymore.  Thats all it is. Its anti-saving of money.  Any decision not to save IS spending so if you look where all the lack of savings are thats where you find where the spending is. Conversely wherever you find savings growing there is no spending.  If you look at the charts a great number of people are doing spending while a very few are just collecting their spending, doing no net spending of their own.  Within this framework of course spending includes investment because investment is an act of not saving as well. We just call it investment when it is used for something other than paying off an old loan, consuming something for yourself today or buying a piece of art or jewelry.  Come to think of it, many people, maybe even some economists, do call buying a piece of jewelry or art investment. Or even an old share of stock or an old bond.  This is actually just reforming your savings.  A perfectly fine thing to do in a free society, but encouraging that activity is not what we need today. We need investment spending and I think it needs to come from different places than the spending is now coming from. Its been coming from these places the last 30+ years and we've ended up here. No one really likes it here, so I hear, so to go somewhere else maybe we need some new spenders.

Thursday, January 31, 2013

Daddy, where does a middle class come from?

Income distribution is starting to crop up everywhere now (shout out to OWS folks.....thanks!!!).  All the big boys are talking about it.... Krugman, DeLong, Stiglitz, Shipman.  It is an important topic. One of the ways you can tell its an important topic is that TPTB  dont want to talk about it.  They want to simply dismiss it as whining by the losers in our current system.

What the talk is really about, it seems to me,  is how do we get back a true middle class? I'm sure there are different ways to define middle class and certainly many of us who are truly upper class by income division would self identify as middle class. They (we) see middle class as a value system as much as an income division. So first off I shall define what I am calling middle class.

Middle class folks are those who need to work for their primary source of income ( and WISH to..... this is the "values" part) but their work does not NEED  to be over 60 hours a week to make ends meet and have some left over for retirement.  If you are living off interest payments, daddys work, 20 hours of work a week or your 60 hours pays you enough that you can pay cash for your house in one year with your savings..... you are NOT middle class.  This is not an exhaustive list I gave.  There are additional ways to not qualify for middle class. Ultimately middle class is the group of people who are not one financial setback away from poverty.  They have a significant cushion that doesnt involve counting on family to completely change what they were doing to get you back on your feet.

To step back a little though, the idea of classes is not even universally accepted. On the assumption that classes are a useful way of understanding our society and its economic stratification, it must be said that the whole notion of classes points out that a relative station in life is something we think about.  Im working from the idea that absolute wealth is less important than relative wealth.  This is why taxation is not really of importance to wealth because as long as everyone who makes what you do is taxed as you are no one will climb up or fall down a position because of tax levels.  If Im the richest guy after taxes, it makes no difference whether thats a 1000$ a year or a million a year. As the richest guy I will have access to most in a market based monetary economy.  This should start to demonstrate, in addition,  why distribution matters. If I have 1000$ and no one else has more than 100$ I have way more access than anyone else to dollar priced goods. So station in life matters, in fact I would argue, it's ALL that matters.

It seems that in America we dont like comparing ourselves to other Americans financially.  Its sort of a taboo here.  Dont talk about what you make or anyone else.  And when you do, dont sound like you begrudge any one else their due share. We like to think we are all the same here.That we dont suffer from class envy here like other places.  Its the class envy that leads to socialism/communism.  Thats why I think these distribution arguments tend to be dismissed.  In America, it seems its just the size of the American Pie that matters, not who gets to eat how much.

 What has become obvious to me is the idea that middle classes dont just occur in market based monetary economies.   They must be created by some force bigger than the biggest market participants. Left to their own, monetary economies would eventually all come to resemble the banana republics, where great wealth is held by a few and everyone is basically a servant. It is not inherent in the nature of capitalist economies for a large middle class to exist without govt intervention. You cant find a country with a strong middle class and not find one where the govt has interceded to "make" that middle class possible.  Minimum wage laws, labor unions, paid time off, sick leave..... all these things are middle class creating ideas. And none of these have happened anywhere in the history of our planet without a govt, acting on behalf of people who do not own the means of production, insisting on  and enforcing said ideas. Without them bosses would take more and more away in wages and benefits to support their bottom profit line.   The natural trend is for a few large players to end up  with huge numbers of little players toiling away for them.  This arises because power usually works this way, and money is power in a capitalist economy.  Power never willingly gives up anything, it is only forced to.  Once a capitalist gains market share, the power it creates tends to multiply not recede.

Unless you think a middle class is not something to be concerned about, then income distribution should be a focus of policy.  Im not as concerned about the over saving of the 1% as distribution skews upwards, Im concerned about the increased costs to everyone else as their income share shrinks and their need for credit increases.  Credit is expensive.  More expensive than cash.  The extreme in distribution is making life way more expensive for far too many people.  It has to change.  Only we, through our collective will of govt can do that.  The market sees no point in it.

Monday, January 21, 2013

Why Income Inequality Matters; The Toxicity of Debt

Paul Krugman and Joseph Stiglitz are having a bit of a disagreement.  Joseph is citing income inequalities as holding back our recovery. Paul disagrees. He wants to agree and thinks he makes some good points but cant jump on board totally.  Paul cites some graphs of savings rates in his NYT column  and suggests that there is little evidence that the rich are underconsuming.

I dont think the underconsumption is from the rich. Its from the non rich who are losing incomes TO the rich.  I think Paul is making the wrong assumption about where the underconsumption is coming from. He seems to think that distribution doesnt matter much. As long as total income to the economy is the same demand will be the same. I think he's mistaken. I think he's mistaken because he dismisses the toxicity of debt

Let me offer an analogy to our economy using something I understand well, our cardiovascular system.

Lets think of the flow of money like the flow of blood through our body. Acid, a normal byproduct of cellular function is like debt. Healthy cells are getting the blood they need and are able to get their waste products, acid, removed.  But a cell that is either demanding too much or is in an area that is under perfused, runs the risk of accumulating acids to the point of toxicity and cellular death.

We have about 6 liters of blood in our body and it gets pumped around at  anywhere between 3 liters minute to 15 liters a minute.  There is a natural hierarchy of perfusion within the body.  The brain, and kidneys alone receive over half of our cardiac output in normal conditions. So while at any given time over half the blood in our bodies is going through brain and kidneys, the rest of the bodies needs must be maintained or their debt (acid) will build up and not just kill that tissue but the whole body.  In times when the heart is either incapable to meet the needs (failure) or the needs of the tissue are just too great (infection or vigorous exercise) acids build up.  As long as inflows are met, acid wont reach toxic levels but if not sickness or death is imminent.

Incomes are what keeps consumers healthy. Debts are a normal part of our modern capitalist system as well and as long as the flow of incomes meets debt service their is no problem.  But we want growth, and our banks encourage growth by taking on more debt. They want more people taking on more debt. These debts must be cleared or they will reach toxic levels and freeze the system.  They freeze it in two ways 1) They stop getting paid or 2) They are the ONLY thing getting paid.  As I said earlier, incomes are what keep consumers healthy and even if total incomes stay close to the same, if that total is only being distributed between 30% less of the consumer force, their debts become toxic and affect the whole system. Banks fail and businesses lose customers.

When 30%, I imagine its even more than this now, of your potential consumer base is only getting enough income to barely service old debts, these debts hurt everyone. They become a systemic problem not just a personal problem. The rest of the people cannot nor will not increase their debt levels enough to offset this reduction.

Distribution of flows matter.  There are healthy distributions and un healthy distributions



Saturday, January 12, 2013

Balanced Budgets are Un American

There can only be one way that a government can run balanced budgets in perpetuity, and that is to have  complete control of its income.  Without that a government can only set tax rates but not the amount of taxes it takes in.  As long as the private sector is determining the level of income everyone is collecting expecting a government to balance its books is a fools errand.  So how does a government have complete control of its income? It gets complete control of everyones salaries. IOW it employs everyone.  So, in fact, those who are clamoring for balanced budgets are asking us to move closer and closer to a command economy where the government has control of your income, sets tax rates and then controls what it receives in revenues.  Does that sound like the American dream?

Lets stop this balanced budgets nonsense.

Wednesday, November 14, 2012

MOE and MOA, a discussion which has been MIA

Lots of things churning around in my head today.  Mike Sankowski at Monetary Realism had a great post a couple days ago discussing  two different functions of money, its use as a medium of account (MOA) and its use as the medium of exchange (MOE).   Art Shipman at his blog was also exploring this topic.  I think this is a very important subject that gets to the heart of much of the disagreement/confusion  amongst the various economic schools of thought.

I think of MOA as "dollar sign" and MOE as "dollar".  Obviously they are related but they are not equivalent.  One is describing the price of something, the other is a proxy for a credit which can be redeemed for something. The price of something simply tells you how many of the credits you need to obtain it.  Most everything in our economy today can get a dollar sign attached to it, or assigned to it.  We refer to that as its value or worth. Its not the only measure of value nor is the claim that it is the best measure of value but it IS the value, within this system, we can agree to use to somehow promote exchange of goods within this system.  Additionally it allows us to come up with measurements of activity, like GDP, so we can have some sense of what is going on in between us.  It is NOT a qualitative measure but simply a quantification based on an agreed quantifier.  One complicating element is that "the dollar" our MOE also has a price component to it, due to the trading within currency markets. So our MOE has a MOA component to it. Things with dollars signs can generate dollars for the holders of these things, even if they are not directly sold.

It appears to me that what has resulted within our economy is actually the presence of two economies, separate but intertwined.  Banks, financial institutions and the very rich deal with assets that trade as money like and only use the MOA aspect of our money.  They are priced in dollars, placed on the asset side of balance sheets or sit in trading accounts and act as wealth, generating income (MOE) for their holders. The rest of us simply receive MOE each week or month and use this to purchase goods, services or some of those fancy MOA things from the other economy.  The MOA side of the economy competes for our MOE.  The solvency of financial institutions plus the level of borrowing an individual can take on are greatly influenced by the MOA. As a borrower holds more MOA they can borrow more MOE. Additionally as a bank holds a greater amount of MOA they can suffer more and more people failing to pay their MOE (loan losses) before being insolvent.

One problem with the MOA side of the economy is that it suffers from a fallacy of composition.  Those values they use on the asset side of their balance sheets cannot possibly be true for all those assets at once.  Their value is dependent upon only a certain percentage of them being liquidated at any one time. Allowing all these things to hold a value they cannot possibly hold at once seems a very serious problem. All layers of transactions based on those values will simply add more and more instability to all the balance sheets carrying that asset or its derivative.  The more layers you add, the more balance sheets that become dependent on that asset value, the more affect a small price disruption will have.

The MOA side of the economy is capable of growing to levels which can never be supported by the MOE side, since prices can simply reflect desire and not ability. Additionally they can shrink well below levels which support adequate MOE generation for their holders when panics ensue.  An economy relying too heavily on the MOA side will be fragile.

We have an economy now that is too oriented around our MOA.