Wondering Aloud

How a loan comes to be

2011-11-16T07:41:00.000-08:00

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

http://blog.streeteye.com/blog/

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!

Irrational Expectations

2011-08-08T06:23:00.000-07:00

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

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

2011-08-06T12:58:00.000-07:00

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
(REAL USA)

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

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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

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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.

John Boehner says "We're broke"

2011-02-16T09:03:00.000-08:00

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

My Moral Argument Part III

2011-02-13T15:32:00.000-08:00

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.

My Moral Argument Part II

2011-02-01T12:18:00.000-08:00

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.

My Moral Argument Part I- A Framework

2011-01-29T17:11:00.000-08:00

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.

Supply or Demand

2010-08-23T04:51:00.000-07:00

Its taken a while to figure out what is worth posting about. My recent obsession with all things economics has left me with much to ruminate about, not being an economist, and not as much to talk about. Most economists have already thought about the things I roll around in my head and have models and equations to express them. . Stories and thought experiments/analogies are what has been the most informative to me in my explorations through the economics blogosphere. Things just have to make sense when you think about them and be consistent with how other systems in our universe work. I find supply side economics to be one of those things that doesnt ring true. Not that it has nothing useful to say or that looking at the supply side is not informative but to build an economic edifice around the supply side seems woefully incomplete.

Now, one could say the same thing about the demand side. Its only one side of the coin and doesnt explain everything. Agreed but my quest is not to find the economics equivalent of the physicists quest for the theory of everything, its simply to find what came first. My question is just about the "prime mover" in economics. This seems to me the ultimate question. Were we designed as demanders or suppliers? Some may say that this is a silly quest to be on because its not answerable. Perhaps. I have no illusions that supply siders will read this and go, "My gosh Ive been bamboozled all these years I must rethink my position". Mostly this is because many supply siders (I think) are simply extreme tax cutters in economist clothes. They hate the notion of a bureaucracy "stealing" their hard earned dollars. So they have used a lot of fancy math and models to show that letting citizens keep more (ALL) their money will lead to a more vibrant and growing economy. But its also because I myself dont think the demand side answers everything. Only a complete view, coherent with consideration of human tendencies, has a chance of being explanatory and embraced by more of a consensus than we have today. Today the number of "camps" is ridiculous and mostly they talk past each other, content to worship their "god" of Hayek, Keynes, Ricardo, Marx or Smith. I wish someone could just say "Stop it!.. Cant we just agree on THIS!!!!"

The large issues are employment, and how to stimulate it, the nature and utility of money and how to preserve something for later so not to just have a large fight today to see who can get "it" all now. On these large issues all the forementioned "gods" were in quite different places I would say. Some said money came about naturally in the form of gold, unemployment is simply someone expressing the will not to work and savers are the SAV-IORS of society. Others might say money is a man made object, more political than anything else, unemployment only happens when a person is required to chase currency via the route of a job and no job is available and savers while good are no more important than borrowers to a modern society they are two sides to the same coin. Just like an exporter needs an importer a saver needs a borrower. There is likely a mix and match of these views within schools of thought but it appears to me that most arguments seem to settle around these areas.

Okay, now to my main topic. Are we first demanders or suppliers? Are we A) primarily demanders and suppliers will arise to meet our wants or B) do we sit around and dream of things to supply and spend our time trying to convince everyone else they will be a better human for it? This is the "prime mover" question. The proximate cause for just how we became homoeconomicus. Most people are quite aware that while blood flow and tissue health are intimately related many dont understand the nature of supply and demand of blood flow in the body. The heart (the supplier) gets all the attention. We pay men hundreds of thousands of dollars a year to keep the pump going (good thing too) but the heart is an organ because the complexity of organisms got to the point where it DEMANDED a heart to keep it alive. The hearts purpose is to keep tissue alive and it gets its signals for what to supply from tissue demand. When tissue need more the heart supplies this. Now, we exist today in the middle of all that. We dont really care as long as someone understands the ins and outs. But we are only an organism when we have tissues demanding blood from a pump. Pump only...... no organism. There are organisms without pumps(not very complex ones) they respire in different ways, but there are no pumps without organisms. So if someone were to hear someone argue that "All we need to look at is cardiac output (Heart function), and remove all restrictions to cardiac output we will have a healthy body. Cardiac output is the determiner of health and any time we see the patient getting sick we are going to increase cardiac output" they would not be doctor you should go see. You need someone with a more complete view of how our body operates. Its not quite that simple.

How does this knowledge help us? I'd like to posit that our economy is much more naturally like our body. It has flows of money and works off of people wanting/desiring stuff and services, and that when it is healthy (if its ever been) we have a supply that is truly in tune to our wants. We can, I think, use the circuitous nature of life sustaining blood in our bodies to help understand the circuitous nature of life sustaining goods and services in our societies. Knowing the direction of flow is critical I think. In our economy its not quite as simple and consistent as the direction of flow in our bodies, but there is a direction or more accurately, there ARE directions. Things move from somewhere to somewhere else in a very definable direction in a lot of places in our economy and getting flows right is paramount in making proper interventions. For example, loan origination at banks, is primarily driven by a demand for loans from customers, not by a supply of money to be lent. On a system wide level it is demand which drives it. A particular bank might be in a bad financial spot and not give credit to someone they would have a few months previous but system wide it is the financial health of the consumers which drive loans not the financial health of the banks. The banks got sick because their consumers stopped paying, the consumer got sick first. Knowing this, one would never simply give more money to banks to help the credit markets. It will never work and it hasnt worked.

Today, the rut we are stuck in is calling out for more demand. Where does demand come from? Income. Where does income come from? Someone elses non saving. A person who is saving is depriving an income to someone else. We all thrive on someone else not saving. This isnt to say saving is bad but we must understand the consequences of our decisions. Austrians and others argue that it is the savings which result in future income for others through investment. If you look at the flows this doesnt quite bare out. The investment happens first and a residual savings is left. Yes the two equal out but the direction tells you why increasing saving first can only result in recession. Savings is viewed as a supply which will be met by the demand later, but investment is the supply properly RESPONDING TO the demand and leaving behind some savings. This can be explored here . Warren Mosler also does a nice thought experiment here:

Consider this extreme example to make the point:
Suppose everyone ordered a new pluggable hybrid car from our domestic auto industry. Because the industry can’t currently produce that many cars, they would hire us, and borrow to pay us to first build the new factories to meet the new demand.
That means we’d all be working on new plant and equipment - capital goods - and getting paid. But there would not yet be anything to buy, so we would necessarily be ‘saving’ our money to buy the new cars when they rolled off the new assembly lines. The decision to spend in this case resulted in less spending and more savings. And the production of capital goods, which constitute real investment, led to an equal amount of savings. I had this discussion with a Professor Basil Moore in 1996 at a conference in New Hampshire, and he asked if he could use that expression in a book he wanted to write. I’m pleased to report the book with that name has been published and I’ve heard it’s a good read.

Unfortunately, Congress, the media, and mainstream economists get this all wrong, and somehow conclude we need more savings so there will be funding for investment. What seems to make perfect sense at the micro level is again totally wrong at the macro level. Just as loans create deposits, investment creates savings.

What most people refer to as investment today simply is buying an already existing financial asset, stock or bond, and adding income for a broker. Not actually creating anything new at all. This is a fine, legal, ethical and sometimes fun and profitable activity, but it is often sold to us as something else. We need new investment now, to help put people back to work and start producing near capacity. Your 401k is not doing that. This is another flaw in the story that our savings is good and will (by magic) create the opportunity for those future new jobs. This story does not pass the smell test.

Some say we have a supply glut today and we should just let supply contract to meet demand and then we build from there. Well, we were demanding those things a few years ago and thats why the supply grew, now we just have a financial crisis and some people think we dont have money anymore. How could we not "have" the money now? Money is created when there is a demand for it. Money came along when we as a species demanded it. We didnt walk along the road one day and go "Look, there's some money, I think I'll go use this to buy me some wheat and a new tunic" It was our creation. We started out as demanders of money (and then the supply of it was hijacked by the Machiavellians of our societies). When we started out in nonmonetary societies we simply traded things we thought were mutually useful but the only things we took from someone else was something we wanted(demanded). The next time we met up with that tribe they likely had what we demanded the last time. Our forefathers, way way back forefathers not Ben and Thomas and the lot, simply consumed everything they needed from mother earth. They didnt supply anything. It was all supplied and in abundance (somewhere) they just needed to seek it. It was a while before we had any suppliers.

I hope Ive pointed to some of the inadequacies of supply side thinking which seems to dominate our discourse today, at least amongst those in power. Do you think it has anything to do with the fact that those in power are the suppliers?....... hmmm. It takes little effort to make gods in your image, the effort is in convincing others to worship those gods.

Walking Away

2010-01-08T05:03:00.000-08:00

There has been much discussion around the blogosphere about the issue of homeowners walking away from badly underwater mortgages. Megan McCardle had an opinion (surprise surprise!) and Steve Randy Waldman at interfluidity had a response

There is no doubt that I agree with Mr Waldman and respectfully call BULLSHIT on Ms McCardle. Libertarians are the last group of people I will take any moralizing comments from since they tend to be the group of people who will defend their right to do as they please the most emphatically. Of course Ms McCardles concern is for "business" interests in this case or more probably the "engine" of capitalism. She couches her argument in "social contract" type language but is ultimately disgusted by people who "game" the system. This gaming of the system is exactly the type of behavior her "brand" of capitalism breeds. It cannot run without it. The amount of outside (government) intervention necessary to prevent this would probably make society unlivable in her view. Of course the legislation she referred to was decidedly one sided in limiting the consumer from exercising options at the discretion of businesses at any moment.

At this very moment there is case before our supreme court which is trying to decide if there should be any limits to how corporations can operate in the political sphere. Laws regarding donating to political causes has made some distinctions between people and corporations mainly because corporations have so much more financial weight at their disposal. It seems likely that THIS supreme court will side with corporations and rule that they have the same right as individuals regarding expressing their political desires with campaign funding. The question needs to be asked; If they have individual rights do they also have individual responsibilities? I doubt you will find corporations suddenly willing to subject them selves to moralizing about the "common good" and the "fabric of society" when their self serving actions are exposed.

The following post I found this morning sums it up pretty well for me. It was at Greed Greens and Grains

Mortgage walkaways, good or bad?
We economists are indoctrinated into thinking first in positive rather than normative terms. That is, how DO people and markets behave, not how SHOULD they behave.

So. Should you walk away from your underwater mortgage?

I don't know. All I know is that if you're a rational economic agent you WILL walk away from your mortgage if the benefits outweigh the costs.

Or maybe not...

You see, the mortgage business seems to be counting hard on the idea that maybe you won't walk away from your mortgage even if you're hundreds of thousands underwater and it is in your material self interest to walk away. Not walking away saves the investment banks tons of money if you valiantly pay you mortgage even though it serves their profits over your economic interest. These are the same banks (and mortgage-backed securities holders, including the Fed) that took huge risks in lending to you in the first place, and had assumed you would walk away if things got as ugly as they currently are. Oh, did I mention those guys are still making gazillions?

It's kinda funny how the financial business plays the morality card when it suits their pocketbooks, no?

Anyway. I think it is true that many people go on paying their mortgage even when it is not in their material self interest. People do this mainly because they feel it is morally correct to do so. It's a little like taxes: cheating on taxes would pay for many people but they don't, just because they think it's the wrong thing to do.

What I'm really wondering is whether this phenomenon of people sticking it out with an underwater mortgage is is a good thing or a bad thing for broader economic recovery. You see, I think many banks are reticent to workout mortgages for people who are underwater and struggling because they feel if they lower the principal for some it will weaken the moral suasion they currently have over underwater mortgage holders who can go on paying, but probably shouldn't. This general reticence then keeps lots of people underwater and, more importantly, stuck in homes that are suboptimal for their particular circumstances. And this helps to keep the economy generally stuck in a rut. People simply cannot move to the locations, living situations and jobs that align best with their current circumstances.

Without attaching any morality to the situation, it seems to me that the general situation where people are unwilling to walk away from mortgages is slowing general economic recovery. It is adding a lot of nominal rigidity that we really could do without.

Like always, if I'm wrong about this someone please tell me why I'm wrong

Businesses are feeding off our morality and profiting from it. Cynically they have bet that we will all be suckers and continue to do irrational things. Irrational from a business standpoint. If corporations want individuals and corporations to lack distinction they certainly should not protest when individuals act in kind.

I think this is a perfect demonstration of the modern day American "hypercapitalists" being completely ignorant of the consequences of their ideology. Running around and labeling as a communist or socialist everyone who wishes some sanity in our economy even if it results in some added costs (taxes) or restricted freedoms (legislation) has brought us where we are today. Since the Reagan revolution we have had to endure one liners like "Greed is good" or "The government cant do ANYTHING right". People mindlessly parrot this bullshit and never actually think what kinds of decisions have been historically made that brought us where we are today. I work with women making mid six figure salaries exactly equal to their male counterparts who parrot the right wing talking points while enjoying their guaranteed eight week paid time off when they get pregnant. Who do they think guaranteed this for them? The corporate titans? Do they think that these guys went to Washington and asked that they be made to pay their female workers on par with their male cohorts and also pay them for eight weeks and hold their position while they sat out with their new babies? The amount of "freedom" they enjoy at their jobs was ONLY guaranteed by a "big government". This why I "walk away" when any of these people open their mouths about politics, government and economics.

A Case for Purpose

2009-12-06T05:12:00.000-08:00

Over at Greta Christinas blog I have gotten into a discussion with her about theism/atheism. She has written many articles at AlterNet and other places about her encounters with christians and her strong atheist views. I like her writing and feel she has something important to say. Her main "gripe" if you will (which is shared by many of the more prominent atheists) is that religion and religious believers hold their arguments to a completely different standard than they hold atheists arguments. They also act like atheists have no right to argue them or anyone else out of their positions. Well this idea is prevalent among theists, especially evangelical christians, and frankly it is absurd. They would take no other topic and declare it off limits for rational debate but their faith is not to be "offended". First off there is a difference between a person becoming offended by a comment and someone making an offensive comment. Too many evangelicals wear their outrage on their sleeves. They act as if every question about religion is a personal affront. Well honestly that is part of their tactical agenda, declare something too offensive to discuss in public and voila all atheists are just trying to offend people by putting up billboards or teaching their children evolutionary biology. So I really share her frustration with the way the public in this country treats subjects that can and should debated. Especially one like religion and some of its more tenuous claims which have the potential to change the way certain people are treated in this supposedly democratic country.

Anyway over at her site I got into a discussion with her regarding the idea that there may be hints of evidence that our universe has a purpose. Not to point to a particular god that "inspired" a particular text thousands of years ago but some sort of greater force that when we subjugate to it we can actually improve our existence and reach a higher realm of understanding, peace and happiness. I've been inspired by much of Robert Wrights writing. He is a big question guy like I am
(I generally tire quickly of small talk and want to find out deeper stuff about someone fairly soon) and he's a tireless researcher. You may read his books and disagree with some of his conclusions but you cant say he didn't do his homework. Further, you better be able to explain the evidence he uncovers or your claim that he's wrong doesn't hold any water.

Here is my response to her when she tells me to bring it on after I commented that I think there IS at least faint evidence of purpose in our universe.

It seems from studies of evolutionary theory that beyond individual selection pressures there are also group selection pressures. These emerge from the same biologic source (DNA) but do manifest themselves in different manners. Individual selection would best be characterized as zero sum in most cases. Group selection is more non-zero sum, we can all benefit or at least we can all not suffer a loss by working together. It is here that morality emerges it seems. Morality is completely contingent upon "others" being around. It seems that within our DNA there is a "predisposition" to carry out moral actions, group selection constraints if you will. So it looks like DNA as a natural replicator was under some sort of "pressure" to create an array of organisms, which in turn were under some sort of pressure to procreate and multiply, which in turn allows the moral behavior to emerge.

Again I dont believe there was a conscious choice by some omnipotent mind to "make" DNA this way, just that our cosmic environment is tuned so that first DNA emerges, then variety of life, then sentient beings who live in groups, then selection pressures within the groups to behave in ways which maximize the groups chance of survival not just the individuals. If this is true, why is the groups chance of survival an emergent property? Are we becoming all small parts of a larger organism which we will "discover" later? No answers there but certainly legitimate questions.

The discovery in physics that all we are is an existence in a very small corner of reality (4 of maybe 11 dimensions) lends some support to a small part of a greater organism idea. MY next question is, can we extrapolate at all from current conditions and possibly see what might emerge at the next level of understanding. Is the "greater organism" a greater good? Is it something we will find pleasing? Again if you look at what strategies seem to be programmed into our DNA I think we can be hopeful. Its a matter of trusting that the mechanism we've discovered, DNA replicating and producing larger and larger organisms (not individual size per se but collective size), will continue in its present manner. Small changes over billions of iterations make huge changes but each iteration results from a cooperative process.
DNA it self had to be created in much the same process at the molecular level. Each strand of DNA
is composed of thousands of genes which must sit in the correct spot and only pass their information at a very specific time. It too is a "cooperative" process at the smallest level. Cooperation seems to get 'it" done. Understanding that there are "others" whose needs supercede yours at the present time seems to be selected for. Taken to its logical conclusion with universal milieu-- DNA--individual organisms--multiple organisms-- groups of organisms-- groups of groups all operating under "pressure" to cooperate an subjugate individual needs at times, what in the end will/should this mega organism be subjugated to?

Why is cooperation seemingly selected for at so many levels of the universe? What factors at every level seem to influence the greater likelihood of cooperation? In humans certain emotions and mindsets are more conducive to cooperation? Do these appear as more prevalent within a population? I think they do.

These are more questions but I do think that there is a faint hint of something we are "subjugated" to and the best way, it seems, to achieve that is to forget self (a very buddhist notion), sacrifice your individual needs (a very christian notion) and look at our existence as a "spiritual" journey we are going on together( a new age church notion)

Part of the reason i started my blog was so that I would have a place where I could keep my ideas and possibly one day put them into book form. I dont know why anyone would want to read it really but I promise it would be more accurate than Sarah Palins book. Actually I think that is a great reason to like Sarah Palins book (not that I have or ever will read it) because her book sets a standard for what can be accepted as "Non Bullshit". If you ever want to publish something and the publisher says your manuscript is bullshit you can immediately argue that Sarah Palins book has more documented bullshit than any book ever written (except mabe the book titled " On Bullshit" by Harry Frankfurt.

My Very First Blog Post

2009-11-21T17:28:00.000-08:00

This is so exciting! All these months of reading other peoples blogs and now its time for me to put up. What to say? There really are lots of things rattling around in this 50 yr old brain. I'm not an expert on anything worth blogging about (talking about the virtues of general versus regional anesthesia in a patient with ischemic cardiomyopathy doesnt make for much discussion in the blogosphere) but I'm interested in and have done quite a bit of reading about economics, theology, cosmology and randomness in the last two years. So, where shall I go with my first entry into the ether (an appropriate word choice for an anesthetist).

The thing that has been occupying most of my mental energy lately is MMT, Modern Monetary Theory also known as Chartalism. Far be it for me to act as the BCS of MMT economists, ranking the proponents of the theory on the basis of say, "How well they take down the Chicago school arguments" or maybe " The ease with which they take mundane subjects like trade deficits and make them understandable" but four names (well 3 names and an alias) have shown up time and time again when exploring this school of thought. Billy Mitchell , Warren Mosler , L Randall Wray and Winterspeak . Now I am not an economist nor did I ever take an economics course but my training in medicine did teach me to analyze and problem solve. I can look at two arguments and, given some standards for evaluation, decide which is a better argument. I am far from alone in this ability. I imagine most anyone who scored over 1000 on their SAT has the tools to do this but most of us dont think about economics as something which is amenable to that type of analysis. Regarding economics, most of us get all our info from TV talking heads and when the consensus is saying "Government deficits are bad' or "hyperinflation is a real danger around the corner, remember Weimar Germany" we really don't think to evaluate the veracity of those claims.

Now I wasn't looking to question those claims. There wasn't a voice in my head going "Ya know that just doesnt sound quite right to me" but I was following various econ blogs daily just to try to get a handle on this crisis. I did have a sense that this current crisis might be the most important event of my lifetime and I was a sponge for anything regarding it. Interfluidity is one of my regular stopping spots. Steve Randy Waldmann is a great writer and has such an interesting take on things I was really attracted to his site. He doesnt post daily so you find yourself looking forward to what he has to say.( As an aside, treasury officials invited some econ bloggers to Washington a week or so ago and Mr Waldmann was one of them so I think they read him too!) One of his posts linked me to Winterspeak and I read something that just blew me away;

The Federal Government does not need taxes in order to spend. At the Federal level, because the Fed is a currency issuer, the sole purpose of taxes is to extinguish money, reduce aggregate supply, and therefore limit inflation to a tolerable level.

What? We dont use taxes for spending? How can that be? Is this really true? Were we not behind on taxes for the entire Bush presidency? This idea was profoundly new to me. We had run deficits most of my life and I really thought they were deficits. That we owed something to someone else. That was the paradigm I was operating from. A zero sum, if you take from here you are depriving there, kind of model. Well as I soon found out......not true!! Whats even worse is that lots of people know this. Lots of people who talk about our national budget dont tell us that the deficit isnt a deficit at all! It is categorically NOT something we owe to anyone.

The deficit is simply an accounting operation that says how many credits (in our case in the US, dollars) the government has given to us. It says nothing about how they are distributed mind you, just how many are out there.

So MMT says; "deficits aren't bad, they just are". Now this started to have a ring of truth because I knew that all my life we had run deficits. If they really were bad how could we run them for all this time? In all fairness, MMT would more accurately say that deficits account for the current level of new financial credits in the private sector. That is a neutral statement but that does not mean that we can always let that deficit rise. It does have consequences. However it must be recognized that at times of low utilization of resources (like potential workers or factories at low capacity) a rising deficit will work towards increasing utilization of those idle resources. Certainly there are times when we need to lower the financial credits in the private sector to stave off inflation.......this is known as taxation. Now the circle was being completed for me.

Well that addressed the deficit talk for me but what about that hyperinflation? Is that a worry?

I was less convinced that we should be fretting about that after realizing all the misinformation about the deficit. I've found that people who screw up one concept badly are prone to screw up another related concept equally badly. Weimar Germany was certainly a terrible time to be a German citizen and all the talk regarding that era focused on the fact that they "kept trying to print their way out of trouble". Well I now knew there had to be more than that. Billy Mitchell gives a very thorough and concise analysis of the troubles facing Weimar Germany and modern day Zimbabwe in his article Zimbabwe for Hyperventilators 101 . After reading this I must say that the chances of any developed nation becoming a Weimar Germany today would take monumental errors on the parts of many people, not just the guys running the "money printers". I know I'll sleep better now.

Finding out about MMT has been like a new toy. I really think the principles of it should be and easily could be taught to 7th graders. Its important for us to understand the nature of our monetary system so we dont get scared by people with either an agenda or just too much ignorance for everyone elses own good (when your ignorance is only negatively affecting you thats acceptable, but dont infect my house with your ignorance). Take the time to learn this powerful paradigm. Thats what it is, its a new, complete way of viewing how our monetary system operates. We are still partially stuck in a gold standard paradigm and we are not in a gold standard world. Get with the program guys!

Well thats all for now.

Peath out brotha