Wednesday, November 16, 2011

How a loan comes to be

This diary is motivated as a rebuttal to many wrongheaded ideas I hear in the blogosphere. Some I even held myself in the not too distant past. Not because I had ever put much thought into them but precisely because I hadnt put much thought into them. Funny how really thinking about something can clear the muddle away.

The idea I want to address in this diary is the nature of a loan. Specifically a loan from a bank

Now, we all know what a loan is right? We dont have something so we get it from someone else with a promise to pay it back. A cup of sugar from your neighbor, ten bucks for lunch from your buddy or even $5,000 from a parent or close relative for something really important. This would be what is called the micro perspective. What an individual does with his individual transactions and the motivations behind them. At any given point in time there are countless billions/trillions owed in this way. One important thing about these loans, they really dont have much macro impact (other than if everyone welched on these we'd have half the population pissed....... hmmmm maybe just like now after all.... but I digress) There is no monetary macro impact in terms of affecting aggregate demand is probably a better way of saying this. Why? Well I think its safe to assume if I lend $5,000 to my brother I dont need it myself. If I did I wouldnt lend it right, so this isnt money that would otherwise be spent on some good or service immediately. But my brother likely did spend it on something so my loss was his gain and we net to zero. I am expecting that he will "lose" $5,000 later when he can and give it back to me but again it is a net to zero in terms of the macroeconomy. No new money has been created to augment aggregate demand. This is the situation being talked about in this parable

This parable is trying to illustrate that one $100 bill can pay off thousands and thousands worth of debts. And this is true. But only if you are talking about the types of debts described above where its between two private sector actors and involves cash or its equivalent (a demand deposit account that one writes checks off of). This is not the case when everyone is indebted to what is functionally an outside third party like a bank.

A bank loan is verrrrrrry different. In spite of what many smart economists think (Mr Krugman Im talking about you here) when we go to a bank and get out a loan its not operationally, functionally, any-"ally" equivalent to what I described above. It involves something entirely different. The thing is I suspect banks know this but they are happy to let people continue to believe false beliefs. Probably cuz those false beliefs benefit them, or so they think. Anyhoo, what I would like to persuade you into seeing is that when you borrow "from" a bank you are not borrowing the accumulated savings of thousands of other people who are so generous to let you use their money for a venture (and "all" they want in return is some compound interest) but in fact you are borrowing from YOU!. Doppleganger whoever that lives a few years ahead and is so optimistic about his life he will promise almost anything to someone who is willing to make his dreams of a small business a reality.

Now, Im not claiming that when thousands or millions of people pool their resources that something greater than the sum of individual parts cant come to fruition and that banks dont in someway, in our modern economy, facilitate that. Thats not my intent at all, my intent is to show that at its most fundamental level what a bank loan IS.

I think this is important because just like if you dont know what matter is you have no way of coherently deconstructing and possibly reconstructing it, if you mis understand what bank loans are your attempts to restore them will fail when they cease to be the monetary support for the economy that they once were. Now, whether or not we should be relying on bank credit to support commerce at our previous levels is ANOTHER discussion to have.............. but not here.

SO lets do a short thought experiment which, I think, demonstrates my point.

Imagine ten people who are all consuming every bit of their income. They have nothing to save because they spend everything to live. Now imagine that only one guy finds a way to consume less and can therefore accumulate savings. At this point could a bank (Im going to take a cue from neo classical econ and “assume” a bank into existence) take his savings and lend them to any of the other nine people?? Of course not. Everyone else is consuming all their income, they have nothing to borrow. A bank could however loan the saver some money against his future disposable income. That loan is created out of thin air and is an addition to present money supply. Once each of the other nine people in that are able to accumulate savings by not using all present income for consumption, they can then become a borrower against THEIR OWN potential income stream.

It requires no one elses savings for me to get a loan, only my own potential future income beyond consumption.

Banks make claims on each borrowers own savings and future income and no one elses.

This realization makes it clear that all efforts to restore lending which focus on the banks side while ignoring the income of average Americans is destined to failure.

Are there any economists who talk like this? Who talk about repairing the citizens balance sheets not the banks? Who talk about income support instead of asset price inflating? Yep .............. the ones who study MMT

Study it!!

Bring on the discussion!

Monday, August 8, 2011

Irrational Expectations

Of all the irrational things we do and expect on a regular basis, and there are many, one just keeps on popping up again and again on blogs I read and in the comment sections. The thing is, I think I may be the only one who sees it as irrational. Ive never seen anyone else comment on it nor has anyone ever responded positively to my comment/question when I make it. I think it is because it involves questioning that thing which everyone just takes for granted and never questions. Its never even entered their mind to question it. Its the idea of interest on saving. Saving, it seems to many, is what defines a rational/good/responsible person. "Save some for tomorrow". "Dont use it all up today". "You dont know what tomorrow brings". These are all true/rational statements. So where is it I take issue? Not with the act of saving itself, because I save plenty, but with the idea that MY saving is necessary and as a result I should be paid handsomely for my saving. In fact, it seems to be posited by all, when I save (an act which helps me) I should be rewarded with not only access to the level of present consumption I decided not to do, but I should have the opportunity for MORE consumption later. And if that condition doesnt exist when I decide at a future date of my choosing? I get to curse our government (they are always to blame) and cry INFLATION INFLATION!! I find the whole exercise quite odd and I hope to show that its quite irrational.

Much of the discussions on econ blogs involves terms like nominal, real, medium of exchange, unit of account, credits, debits, interest and of course the big two.......inflation/deflation. All these terms refer to different accounting variables changing in relation to one another and of course accounting is how we keep track of, keep score FOR, money. Thats all accounting is. These numbers are supposed to represent real economic variables (real being sweat and atoms, ala Winterspeak) but often these numbers take on lives of their own and lose relation to real stuff. I want to argue that removing money and simply looking at real economic factors makes interest irrational, at least the levels that many people seem to think they should earn. Interest and by extension, I believe, extreme variations in wealth would be impossible in a barter world. Except by outright use of force, fraud or theft (Yes I know that probably explains the situation in our monetary world as well but........)

The most common place this idea comes to the forefront is in discussions of our public debt levels and the machinations of our federal reserve. People are concerned today that our low long term interest rates are punishing savers, exposing them to the woes of inflation, as our govt prints cheap money and makes their previously saved dollar worth less and less. Ignoring, for the purposes of this post, the whole flawed notion that most people have about exactly WHAT govt debt represents for the private sector (an asset or a liability), I want to just address the whole notion that someone should EVER expect their buying power to stay the same for a 10, 20 or 30 year period. Just exactly what does everyone else need to do in order for you to keep your buying power intact for three decades? Think about it. Today you have extra money and instead of buying 20 loaves of bread you buy 2 and save the money. Now you will likely be able to buy two loaves of bread a week for the next nine weeks, as the loaf of bread rarely changes prices significantly over 10 weeks, but if you keep that money for 5 years why should you expect that you could still buy 18 more loaves of bread with that money. If you can great, but why does the rest of the system have to operate in such a way as to guarantee it. And if the system doesnt do so, why is the system flawed? Now there are things that you might be able to do with that money to facilitate the likelihood of such a market price for bread. You could invest in technologies which make the harvesting of wheat more efficient or technologies which make the seeds grow more wheat per acre but if you dont, you have no gripe. This same discussion can apply to every product which you decided not to buy and instead saved your money.

Now, according to orthodox economists this is exactly what savers do. They put there money in places where the professionals make these decisions to keep the progress of capitalism moving, protecting the buying power of your dollar. Trouble is this isnt really true. Most of what we call investing is simply buying an already created commodity like a stock, or gold and waiting to find another sucker to buy it later at a higher price. This is the sole purpose of "investing" for most of us and this mindset is perpetuated if not outright demanded by the "professionals" who manage our money these days. Its simply gambling, waiting for the odds to move in your favor and then catch some poor sap in a losing position. Now of course in a world where people are only gambling their own money every winner is off set by a loser, its a zero sum game. But today we have large investment banks gambling OTHER peoples money where they stand to lose nothing (govt backing) and the others lose everything. Its not like your friendly high stakes poker game at all.

So lets remove the money and see what a saver is really doing and really expecting. A saver is simply deciding to only consume what they need right now and putting some aside for tomorrow. If they needed it they wouldn't save it. So how is it so noble to make the rational decision to only consume what you need? If they are lucky enough to have way more than they need what can they do? They either put it aside and use it before it spoils, deteriorates or is somehow not in the same condition it started and therefore not of the same utility or they find someone else who might can use it. Now if they have that someone else maybe they trade but there is never a guarantee that there will be someone else needing what you have extra of. But lets say you find someone who has none of what you have and would like some but they have nothing you need or want. What to do? You can invest in him and let him have it and work with him to help him return something to you. Your investment requires work on your part and your return is commensurate with the effort you put in to your investment. If you just say "here" and walk away you've given him something but you should not expect anything in return other than an in kind gift. No interest. If you would like some real returns down the road say one, two or five years ahead, you need to do something to bring that to fruition. Investment is an effort not a passive activity.

I remember being taught the "Rule of 72" a number of years back. The rule took the interest rate divided it into 72 and came up with the doubling period for your investment. 7.2% doubled every 10 years. 3% doubled every 24 years. Now of course this was just "nominal" doubling. This didnt necessarily reflect twice as much real stuff being created and that is the point. How could we ever set up, endorse, encourage and continue to genuflect towards a system which says it can double in size in every 10 and 20 years....... forever!? Is this not madness? Is it not being designed to fail? We could never have these expectations in the absence of money. In the absence of an abstraction which purports to represent real activity but in truth is becoming totally detached from real activity.

In the previous example of loaves of bread. Would it be rational for someone to lend a loaf of bread to someone and expect 2 in ten years? Maybe. Could everyone expect that? No. Especially not into perpetuity. If you wait 20 years you would expect 4. 30 years you would expect 8. It becomes obvious using real stuff that these interest returns are irrational expectations.

So if there is something you want, get it now. Dont save the money and expect to be able to get IT or its equivalent in 5 or 10 years, not unless you make an active effort yourself to try and ensure such a thing. Its like the girl you had the opportunity to marry when she was 21 beautiful and wanting to marry you. At 30 she may be fatter, she may have let her complexion go OR she may be more beautiful than ever but love someone else now.

Save when you dont need everything you have but dont expect the rest of the world to make sure you can get what you want later. It dont work that way

Saturday, August 6, 2011

An Austrian a Monetarist and a Chartalist walk into a bar (a thought experiment)

Thought experiments can be very useful and powerful tools. Designed to make you consider things you've never considered before they ask you to question orthodox ways of thinking. Its easy for us to just go with what we think we know. Much of what we know isnt really known, in the sense that its a proven fact. It just functions as a working definition of the reality we find our selves in. Agreed upon conventions function as knowledge until something comes along which upends that convention. When what we thought we knew cant explain a new set of circumstances we are in a quandary. Do we do the work to reexplain the circumstances or do we tell a convenient story which satisfies us and allows us to move on? The first response is hard the second can simply be the product of a creative mind.

The current economic situation has given us much fodder for debate and many areas where we should question things we've always understood to be true. A prime area is the nature of money. How did money or does money come to be? There are some varied historical explanations which revolve around barter societies discovering money on their own and stories about a state making the determination what will be used as money. I find the state theory of money more persuasive but I certainly cant say the evidence settles it.................historically. I do think that regardless of where you stand on the historical evolution of money, today states play a very large role in determining somethings degree of "money-ness" .

What I want to do here is look at how an Austrian a Monetarist and a Chartalist might design their monetary system from scratch, say after forming a new country that has seceded from the USA. I hope to show some of the questions that would need answering and different ways of answering them.

First how an Austrian might approach it. Professor James Galbraith is talking to Rick Perry the newly elected president of RUSA

PG- So Governor Perry , congratulations in advance of becoming president of your new country. It must be quite thrill !

RP- You betcha! (guess who his VP is)

PG- Well the first question I have for you sir, since I'm an economist, is what are you going to use for money in your country?

RP- We're gonna use gold! Thats what Mr Paul suggested. We are going to have sound money here, none of that "out of thin air stuff"

PG- The gold standard was abandoned over 40 years ago by almost all developed nations, are you sure that is the directon you want to take?

RP- Absolutely! Gold is the only true money. Paper money is worthless. What are you going to do with it in a crisis, you cant eat it!?

PG- Being able to eat your currency is not a standard I think we should adhere to but if we do gold fails in that regard as well....does it not?

RP- Well........ uuuhhh.... yeah .... I guess thats true......... but gold has been money for thousands of years. That should mean something, huh?

PG- Well I could argue about golds moneyness but that may be a discussion for another time. In order for you to enact a gold standard you are going to need to have some gold in your countries coiffers. How much do you think you'll need for the 100 million people who decided to stand with you in your new country?

RP- I dont really know. I think Ron Paul has all that information he's the gold expert.

PG- Well, I can tell you that you are going to need a lot. A lot more than the citizens of this country likely own...... And you are going to have to convince them to part with it as well. The whole purpose behind a gold standard is that your money is backed by gold. You are telling your citizens "if you wish to you can trade X amount of your currency for Y amount of gold". This way they are content that they can get something for their money. It lets them sleep at night....... so I've heard. A critical part is that the govt has to have the gold , not the people, at least to start. You are going to need to acquire the necessary gold somehow.
How will you do it? What will you use to buy it?

RP- Cant we just use our dollars? Me and my buddies have lots of them.

PG- Well yes you can but gold is over 1500 dollars an ounce. How much money will it take to buy the necessary gold? Dont forget too that as soon as you and your buddies move to acquire all the gold you'll need, the market price will continue to go higher. It will not be a cheap undertaking. I dont think there are enough dollars to buy what you'll need. Starting a country and a currency system is a very broad undertaking, there are lots of things to consider. I dont think a gold standard is the way you should run this.

RP- Ron will be so disappointed if I dont, he really was looking forward to reestablishing this country as an economic superpower and he says only a sound money system will get us there.

PG- How you run your money system is very important I agree, but a gold standard will take your eye off the ball. I strongly suggest you abandon that idea.

RP- What do I do then?

PG- You need your own currency that is not at a fixed parity with any commodity or any other currency. It is a floating exchange rate determined in the markets and related to the productiveness of your people. You need to promise your citizens nothing in exchange for their currency, other than the ability to pay off tax liabilities.

RP- TAXES!? WE wont have any taxes HERE!!.

PG- You need some way to get your new currency in use. Why else would they use it if they must pay no taxes with it?

RP- Well, its our national currency, theyll use it because they are patriots!

PG- Maybe for some time but if they do not NEED to, eventually you will find folks developing their own currencies. Whats to prevent your banks from issuing their own private currencies?

RP- I'm not sure I want to prevent banks from issuing their own private currencies. That sounds like a good thing to me.

PG- Well, there are some potential problems with every bank having their own currency. You'd have many prices on things, Some people would be paid in one banks currency while others would be paid in another banks currency. Having one currency for your country offers some very real advantages and makes much of economic life more hassle free. Even if you go the private multiple currency route you are still left with the problem of how banks acquire and what they use as capital. All banks need capital in order to function. What will banks in your country use as capital?

RP- What do they use as capital now in the US?

PG- The short answer is mostly dollars. Dollars which individuals use to buy initial stock in a bank. A bank is required to raise a certain amount of capital to be retained in the event of loan losses. Your country will likely require its banks to adhere to international standards in order for them to be perceived as legitimate and strong. So, your new countries' banks will need capital. They can use dollars, but remember the dollar isnt your currency. Do you want your banks capitalized with a foreign currency? How will your citizens react when their banking system is disrupted because some foreign entity debased their currency, making your banking system unstable?

RP- Cant banks use gold as capital?

PG- Yes, but remember gold varies in price every day. Having more than a small amount of gold as backing capital opens up great volatility to the banking system. And your banks still have the problem of acquiring the gold. Right now all your citizens still have dollars, but your new banking system cannot use dollars, or shouldnt use dollars. You dont control them and primarily you want control of your nations currency. You will need to set a date for exchanging dollars for your new currency. And you will need to set an exchange rate initially. Later the market will set the exchange rate for you.

RP- So I exchange their dollars for our "Tallers" and then what do I do with the dollars?

PG- Many options really. Use the dollars to buy stuff from the US that your country needs right now. Or take those dollars and buy US Treasuries with them. These treasuries can be a part of your national wealth. You can earn interest and redeem the dollars later. You can exchange those dollars for another currency and buy products from somewhere else like Japan or China or Canada

RP- Why cant I just do this thru a bank currency?

PG- You could but it is cleaner to do your govt transactions via a govt currency. Now there is no reason your private sector has to use your govt currency but they might find it more convenient. If they dont use the govt currency then they wont get any liquidity protections from a Central Bank. The banks and the depositors will be on their own. Depositors may not like the idea of losing all their money if a bank does stupid things. Depositors are not shareholders necessarily. Shareholders provide a bank with starting capital but depositors simply keep their money with you and hopefully take out loans with you. Your citizens have been used to living in a country with deposit insurance, you think they want to give that up?

RP-Probably not..... hmmmmmmmm. But a Central Bank? I'm not sure we're going to have one of those. Ron has been an "end the fed" type ya know. He thinks it causes more problems than it solves.

PG- Thats a debate that may be worth having, but realize that the world you are operating within has central banks. Every other country you will be doing business with has one. There ARE some real advantages to keeping your settlement system working even when some banks are in trouble and having a lender of last resort can be advantageous as well. I would strongly advise having a central bank but the institutional arrangements of it and your Treasury are something you need to decide with your legislators.

RP- I'm still not sure about this govt currency stuff. We are free market people down here. That sounds too much like the old Washington bureacracy.

PG- Mr President, I think having a single currency is the best way to start and if its managed well all will be good. You may wish to create the conditions where alternative currencies can develop over time but I feel the best way to start is with one. There are places in some European countries that have developed some local currencies but it has been a gradual process.

RP- Well I thank you for your input professor but I'm going to have to defer to Ron on this. I'll tell him the points you've made but ultimately as Treasury Secretary its going to be his call.

The main points I want to highlight here are that even with a gold standard there are decisions which need to be made BY FIAT, at the discretion of someone given the authority. It seems to me a completely mistaken notion that a gold standard is something that promotes freedom of markets, honesty of currency and better possibilities for real economic growth. There are those who have said to me that there does not need to be an exchange rate with gold promised by the government in order to run a gold standard. My only answer to that is "REALLY!?". What has changed about a country who purports to run a gold standard yet promises you no gold in exchange for your currency if you so desire. That seems the WHOLE POINT of a gold standard.

Next I will explore, to the best of my ability, how a monetarist would approach this endeavor. I must confess to not fully understanding monetarism as it is presented in the blogs Ive visited like Scott Sumners "Money Illusion" or Nick Rowes "Worthwhile Canadien Initiative". I'm not even sure Nick Rowe places himself fully in the monetarist camp. Monetarism seems to be sort of a hybrid gold standard/full fiat type arrangement. It seems inordinately concerned with defending dollar values and as has been pointed out by TC so very well here, requires all activity to take place via the banking system usually through real estate lending. This is really how our current system is run for the most part, thanks to the Reagan revolution and supply side thinking.

The real flaw I see in it is that it runs all prosperity enhancing programs through our financial system (and prosperity degrading ones too). It purports to be free market but ends up being government subsidized money cartels squeezing the working class out of every penny of income. The thing is, this isnt a bug its a feature and the people defending are becoming more and more brazen in defending it. Financial markets are placed on unassailable pedestals while salaried workers are subject to cries of lazy, profligate or worse. I had inteneded a mock conversation like I had for the Austrian/goldbug view but really I dont think I can add anything. If you want to know why we shouldnt follow monetarism and have an oversized role of a financial system, look at the world today...... RIGHT NOW! Yes there are those who could argue that pure monetarism hasnt been followed and that is a point that I will concede, but pure anything has never been nor ever will be followed....... so grow up and get with the business of solving real world problems. Not making up pie in the sky theories that are of little practical use. You know the world has turned upside down when someone can accuse a theory of being "too literal". Sad. And he has a lot of people reading his blog who agree with him. Sadder


Now Id like to explore what a Chartalist would do if charged with developing a new monetary system.

Here we have Warren Mosler who has been appointed Treasury Secretary of the NUSA (New USA) and Neil Cavuto is interviewing him on Faux News.

NC- We have now as our guest Warren Mosler the Treasury Secretary of the New USA. Warren, you are finally getting what should be described as your dream job. You had a lot of...... shall we say.... "outside the box" ideas when you were just a regular guy with a blog and an investment company. Now you get a chance to show what you know about running a monetary system.

WM- Yes Neil. While Im happy and honored that president Sanders asked me to be in my current role, I wish that the old USA would have shown more willingness to explore my ideas I developed in my "7 Innocent Frauds of Economic Policy"
The old country could have avoided many of the problems plaguing it today. 25% unemployment, almost no growth and crumbling infrastructure.

NC- Aw cmon Warren. We've got corporate profits higher than ever, our workers are the most productive on the planet ..... now that we've got those damn unions outlawed... and gold is almost $3,000/oz. We have lots of very wealthy people, more than your country has. The only people not working are those who prefer drinking in a La-Z boy to doing my yard work.

WM- (Smiles)

NC- So what will you do different form the old country Warren?

WM- Well first off we are going to make a commitment to full employment and price stability in our country.

NC- How can full employment be guaranteed?

WM- Anyone who cant find work in the private sector will be in a bridge job that guarantees them a minimum wage with benefits until they can, if they wish, be re employed by the private sector. We would like everyone to be employed in the private sector, outside of the minimum needs in the public sector, but we recognize that there will be times when the private sector experiences rough patches and will lay people off. What we want to avoid are the downward spirals of GDP, and loan defaults that result from people losing income. Its not good for a banking system and has negative social effects when people lose their jobs and cant meet their obligations.

NC- How will you afford this? Taxes will have to be 90% I imagine...... what a nightmare.

WM- Affordability is never the question. At least not in the way you mean it. Our people now understand that our money is never available or not available. We have made a commitment to these values and we will simply fund them. No one else will be getting less of something they need just because someone else is getting income support. In fact, our people understand that these income supports keep their businesses healthy. People with incomes continue to come to your restaurant, your tire store, your hardware store or your software store. One persons employee is another persons customer. We only tax at a level necessary to cool inflation and our system is very flexible with very little income taxes and more taxes that are better thought of as demand regulators.

NC- I think this fast going to be a "You pretend to work we pretend to pay you" type scenario which was typical of the old USSR before Reagan showed them how to run an economy by lowering taxes and spending them into the ground!!

WM- Well, USSRs problem was less about not spending enough but more about trying to be the core producer and exporter to their sphere of influence rather than the US model which was about importing from all those that they settled with like Germany, Japan, Korea or Viet Nam. They had an unsustainable economic model.
We have no illusions about being the exporter to everyone nor do we wish to control our trade partners. We wish for all our transactions to be voluntary and we dont shoot for any particular level of Current Account balances. We know that what our trade partners do does not stop us from doing what we believe in.

NC- How long before you have unsustainable deficits and the rest of the world rejects your debt?

WM- Define unsustainable. We can run whatever level of deficit we want to reach our macroeconomic goals. We dont NEED anyone to "buy" our debt. If they wish to save in our currency we can make arrangements but we are in no need of them owning Treasuries. We still have to decide if we will even issue treasuries. The only reason we would is to drain reserves and maintain our FFR. We are leaning right now to having a zero FFR so no need to drain reserves.

NC- That sounds like something your banks wouldnt like

WM- Look, we dont have a banking system so we can have a government, we have a government that provides some support to our banking system. We intend to keep the hierarchy clear here. Our banks can make money by facilitating commerce, they dont need to just play in a bond market that becomes a government subsidized casino.

NC- So give me some specifics on some of the decisions you will be making in the next few weeks?

WM- Well we need to start our own currency so we can stay sovereign and not be tied to anyone elses activity, thats most important. So we need to determine when and for what exchange rate we will let our citizens trade dollars in for. All our banks will be recapitalized with our new currency and all goods will be priced in our new currency. We can help to set some prices by the wages we pay our government employees and by what we pay our domestic producers for the things our government is going to need.

NC- The govt is going to SET prices?

WM- Your govt does too NEIL. They set a wage by what they pay their employees and they contribute to prices for many goods
by determining what they will pay. Its not a mystery, its part of the power and responsibility of a sovereign currency issuer. We intend to be make sure our citizens understand these things. Our people will be less concerned about the size of government in monetary terms and more about impact in real terms.

NC- Not concerned about the size in monetary terms? You think they wont care about deficits?

WM- They will understand that they have control over deficits in as much as their savings desires will dictate to a large degree the amount that the government will need to spend into the economy. The more they wish to save the more we need to spend (or less we need to tax). We are going to have economically literate citizens, not a bunch of people inundated with mythology.

NC- No need to get ugly Warren

WM- Not intended as ugly Neil but the world was done a great disservice by the economics profession from the 80s til 2013.
Not understanding how to regulate banking activities and unnecessarily encouraging unemployment through their inflation fearing policies left a lot of people unnecessarily poorer than they could have been. We intend to not make that error.

NC- Well Warren we are out of time for now. I hope to talk to you in a year or so and we'll see who's economics is right!

WM- Thanks Neil


There is certainly much unexplored in this thought experiment but I do think this is a good start and hope others can add to this either in the comments or on their own blogs.

Wednesday, February 16, 2011

John Boehner says "We're broke"

Speaker of the house John Boehner told reporters yesterday that we are broke. This was in response to someone asking him about proposed cuts which will cost quite few jobs. He said if it caused some to lose jobs it was fine because we are broke.

Boy I sure hope no trouble breaks out in the Sinai peninsula or Iran. How will we be able to get our young men to go fight if we cant pay them, or buy additional fuel for our carriers and airplanes? Will we need a bake sale? Maybe a golf tournament?

I really wish someone would ask him where the money would come from in the event of a new international crisis. Would we have to go to our banker (China) and ask for just one more 5 trillion dollar line of credit? How the hell does China get all these dollars when we cant....... aren't they US dollars???

How did we run out of money? Where was this "stock" of money kept and didn't someone have the job of telling us when it was running out? Why did we have to hear it from John Boehner?

They better not come asking me for any cuz I've got my bills to pay

Sunday, February 13, 2011

My Moral Argument Part III

The people who seem to have the most opposition to the MMT school of thought are the Austrians. It really strikes at the core of all they are opposed to............... on MORAL grounds, of course. I find myself attracted to arguing the merits of my views with Austrians more than any other group and its usually because they make such strong moral claims about their arguments. I cant say I've ever felt I've argued an Austrian out of their view (about as likely as arguing a fundamentalist Baptist out of his view) but I have been able to crystallize I think what it is that they see morally wrong with my view of the economy and money. As I see it the Austrians have the largest problems with the following ideas; 1) A "state" issued money, especially if its not backed by gold 2) A central bank which is there as lender of last resort 3) Efforts to "stimulate" the economy 4) State provided employment or pensions 5) Inflation, which is really a result of the previous 4 in their view 6) States regulating business activity, which should be left to the court system (presumably a creation of the state)

I see #1 as falling under the "Money is the root of all evil" (MIROAE) type moral framework. The state takes over our money system and cannot be trusted with this responsibility and always ends up debasing our currency as they pursue frivolous wars, handouts to cronies etc etc. #2 falls into this category as well but also into the "Two wrongs dont make a right" (TWDMAR) framework I described in part I. Backstopping unproductive behavior is always and everywhere simply rewarding failure and cannot have a redeeming value in this view. #3 I would put into the "Invisible hand"(IH) framework. The economy is seeking a right equilibrium and we only delay, for a period, that effort. Stimulus never works we only think it works. #4 Is in the MIROAE because by giving people money for unproductive (anything outside private sector is simply exploiting private sector production) activity we are making them lazy, dependent and worthless. #5 I see as a falling into all three categories, which is due to the nebulous nature of inflation. To the Austrian inflation occurs because a state spends new money into an economy, the central bank monetizes debt and state employees have guaranteed raises and generous pensions which cause wage price spirals. Money is evil when spent by a state and guaranteed employment contracts go against the invisible hand regulating labor supply an demand through wage adjustments. #6 definitely falls into the IH framework as businesses are viewed as being sensitive to price fluctuations as their signals. Regulations, by affecting the costs, end up distorting price signals and increase uncertainty, leading businesses to functionless then optimally. Left alone businesses will always get it right because prices will reflect all real information out there. If their product is dangerous, we'll find out and punish them by not buying it. If their product is of poor quality, we'll price it lower then the higher quality competitor. Attempts by outside agents to rectify these issues will only end up hurting consumers, it is postulated.

The common theme in these critiques is the negative aspect of "The State" and the perfect condition of "markets". States always morph towards an immoral polluter of human quests to be economically free. While markets express and satisfy human whims and desires when allowed to operate uninhibited. This brings forth two questions (just to start) for me; So what makes a state different than a market? Is not the state a market response to the human question of "How best to organize and protect our collective interests"?

I can already see this exploration taking a lot of tangents but I want to try and focus my efforts on the six forementioned ideas and I hope to use the answers to my 2 questions to begin to show that the Austrians are creating a false dichotomy.

Tuesday, February 1, 2011

My Moral Argument Part II

To recap my last post. When examining the appeals to morality, made in almost any thread you get involved in discussing economics, money and our present recession, I find at least three recurring types of arguments that are being appealed to. 1) Two wrongs dont make a right type arguments 2) Money/greed is the root of all evil types of arguments and 3) Invisible hand (hat tip to Art!!) type arguments.

I also argue that maximizing our satisfaction is at the heart of these arguments. Two wrongs dont make a right is never satisfactory because it risks a never ending spiral of retribution, vengeful hearts are never content. Money is the root of all evil recognizes the hollowness of chasing monetary wealth. Chasing money often leads to compromising all principles and is denounced in virtually every culture. The notion of an invisible hand tries to remind us of our ignorance of the big picture and tries to assure us that there is something looking out for the big picture so we should just let go and stop trying to control that which we cant control. We will always end up with collateral damage with any effort and be less satisfied.

The root of the word economics is oikos (household) and nomos (custom or law) so within the word is a suggestion that there are customs or laws governing the trade of goods and services. In any society that ever existed it is through its laws and customs that the collective morality is expressed. In addition, virtually every economist Ive ever read opines that each of us in our economic decisions is trying to maximize our own welfare. It seems to me that economics is about trying to maximize our own welfare while maintaining an eye to the customs which have been agreed upon within your culture/community. When I hear people trying to argue that economic decisions are value free or amoral I just have to chuckle. No decision is value free. If one claims something is just about money and not personal that reveals a fundamental flaw in a view that money isnt personal. Money IS personal. That is why people are so passionate in their feelings about it.

Lets agree at least that every decision we make with our money says something about our morals. It must. We use money to express what we want, what we are willing to pay for, what we value and what has meaning to us. We would never pay for something totally meaningless to us. Even when I bought Happy Meals for my son and had ZERO interest in the worthless plastic toy inside, I knew my son was going to get great joy from not only the toy but the totally empty calories, and I WAS willing to pay for his joy, no matter how fleeting I knew it was.

Saturday, January 29, 2011

My Moral Argument Part I- A Framework

At some point most everyone with an opinion on our current economic situation defers to a moral position. The use of the term moral is applied in many ways. One way is to see certain interventions being considered as leading to moral hazard ,sort of the "two wrongs dont make a right" morality. Another way is to see certain actions on the part of different economic actors as immoral and thusly the cause of all this, a type of "money is the root of all evil" morality. Still a third way is to view our economy as something separate from our human actions that actually has moral intuitions to it. The "market" is described as some sort of perfect vehicle for bringing our wants and needs into fruition, using our capacity and efforts as a way to determine what we deserve. When we use the market purely everything works but when we try to manipulate the market the results are never what we hope for. I dont have a catchy name for this but it assumes that a market is completely amoral and punishes all people equally, playing no favorites and that only people,usually in the form of governments, make immoral/moral decisions. Markets are pure people are not.

I'm interested in what is at the heart of these moral arguments. Finding a framework to look at validity of morality claims. I find moral arguments very persuasive because they get to, I think, the heart of what we as humans are about (social creatures trying to survive and needing people we both like and dislike in order to do so). However the use of the term moral is often times thrown out quite loosely and is frequently used as way to discourage further questioning. I've seen many people simply comment that they object to a certain considered policy or suggestion on moral grounds without any further elucidation. It is used in much the same way a person objects on religious grounds and we are not "allowed" to question their religion.

Moral arguments always mean "I dont like it". So at their core they are about human satisfaction. There may be numerous reasons why they dont like it but when morality is invoked you can be sure we are dealing with dissatisfaction about something.
So morality must be about increasing satisfaction, at some level. It may not be about immediate satisfaction. It may involve longer term satisfaction but somewhere there is satisfaction.

If its NOT about human satisfaction then I'm not sure I care about it.