Lots of things churning around in my head today. Mike Sankowski at Monetary Realism had a great post a couple days ago discussing two different functions of money, its use as a medium of account (MOA) and its use as the medium of exchange (MOE). Art Shipman at his blog was also exploring this topic. I think this is a very important subject that gets to the heart of much of the disagreement/confusion amongst the various economic schools of thought.
I think of MOA as "dollar sign" and MOE as "dollar". Obviously they are related but they are not equivalent. One is describing the price of something, the other is a proxy for a credit which can be redeemed for something. The price of something simply tells you how many of the credits you need to obtain it. Most everything in our economy today can get a dollar sign attached to it, or assigned to it. We refer to that as its value or worth. Its not the only measure of value nor is the claim that it is the best measure of value but it IS the value, within this system, we can agree to use to somehow promote exchange of goods within this system. Additionally it allows us to come up with measurements of activity, like GDP, so we can have some sense of what is going on in between us. It is NOT a qualitative measure but simply a quantification based on an agreed quantifier. One complicating element is that "the dollar" our MOE also has a price component to it, due to the trading within currency markets. So our MOE has a MOA component to it. Things with dollars signs can generate dollars for the holders of these things, even if they are not directly sold.
It appears to me that what has resulted within our economy is actually the presence of two economies, separate but intertwined. Banks, financial institutions and the very rich deal with assets that trade as money like and only use the MOA aspect of our money. They are priced in dollars, placed on the asset side of balance sheets or sit in trading accounts and act as wealth, generating income (MOE) for their holders. The rest of us simply receive MOE each week or month and use this to purchase goods, services or some of those fancy MOA things from the other economy. The MOA side of the economy competes for our MOE. The solvency of financial institutions plus the level of borrowing an individual can take on are greatly influenced by the MOA. As a borrower holds more MOA they can borrow more MOE. Additionally as a bank holds a greater amount of MOA they can suffer more and more people failing to pay their MOE (loan losses) before being insolvent.
One problem with the MOA side of the economy is that it suffers from a fallacy of composition. Those values they use on the asset side of their balance sheets cannot possibly be true for all those assets at once. Their value is dependent upon only a certain percentage of them being liquidated at any one time. Allowing all these things to hold a value they cannot possibly hold at once seems a very serious problem. All layers of transactions based on those values will simply add more and more instability to all the balance sheets carrying that asset or its derivative. The more layers you add, the more balance sheets that become dependent on that asset value, the more affect a small price disruption will have.
The MOA side of the economy is capable of growing to levels which can never be supported by the MOE side, since prices can simply reflect desire and not ability. Additionally they can shrink well below levels which support adequate MOE generation for their holders when panics ensue. An economy relying too heavily on the MOA side will be fragile.
We have an economy now that is too oriented around our MOA.
Wednesday, November 14, 2012
Friday, August 24, 2012
What I'd do if I could
Its been a while since I've had anything that I felt was worth posting about. Ive got two or three half posts in the "Hopper" but I just couldnt complete the ideas satisfactorily. This is going to be a different take on an earlier post of mine where I imagined a day when a part of our country seceded and examined how they might go about setting up their own monetary system. I imagined an interview of someone else in the position of creating a country/monetary system and tried to see what kind of questions would need to be asked and answered. I would write that post a little differently today because I have acquired new information in the interim and have developed some of my thoughts to a greater depth but the overall view of that post remains; If your going to start your own country you need your own money and whatever money is used there will be a "state" making a choice about some very important things. The choice they make will mean differences in levels of freedom and levels of aggregate wealth.
Today Im going to be the guy has been put in charge of developing a monetary system for our a new country. Maybe I go in with some German guys and buy a couple Greek Islands.... I dont know or a couple million of us petition the US govt to let us have a portion of land on the Left Coast of the United States and create our socialist paradise. I will have to take a page out of the neoclassicals playbook and make a couple very dubious assumptions. 1) We didnt need a war to get to this point 2) Most/all who are going are behind the project and understand fully what we are embarking on (perfectly rational agents with full view of past and expectations of future)
One of the points I hope to illustrate is that during this time of creating a new country and its monetary system is that these decisions are being made BY GOVERNMENT. Its not a matter of starting a new country, delineating borders, picking a leader, start trading stuff or use the money you have left over form your old country, bring in some banks and over time a new "best" currency emerges by consensus. In the modern world especially a monetary system is by the government and for the people.
There are many options to running a currency. Peg it to another currency or a commodity or let its value float? Do you allow this currency to trade as a commodity on the currency markets or even if you desire it to will investors have any interest in it? How will you arrange the way your Central Bank functions with a Treasury? Will you even have a Central Bank? These are all political decisions and have no free market which shapes them much, but these decisions you make will impact the private markets you hope to be vibrant in your country.
So how would I do it if I could? Seems to me there are only a few real options but I ll go over what I see as all the options and try to eliminate the bad ones.
We could operate like the 51st state and use the US dollar. We would have full leeway as to how we set our institutions up like our tax system our court system our road system our school system. We could determine what level of govt influence or spending we put to these systems. We could make it as publicly driven as we like but if we are using the US$ we have constraints as to how much we spend. That constraint is how many dollars we can get. Within this state we would certainly have some production capacity already (not a totally dubious assumption yet in reality not as simple as it sounds) and some resources that would be ours to extract, refine and create stuff out of but is it possible that we have everything we need? Doubtful. Now if everyone there were happy to live only on the things which we produced ourselves, ("Buy Left Coast first...... and second.... and third" could be our state motto), we could exist, survive and be happy but we would have constraints on growth. This option does not sound like one which enhances our freedom or one that gives us a lot more options from where we are now. I think if you are seceding from somewhere you must stop being beholden to their currency.
We could go the route that many libertarians push for. A private banking driven, sovereign, gold standard currency. What questions would I have about this arrangement? First off, if we are going to go with gold standard, where do we get the gold we need to back our currency. I will grant that we have some land with gold within our borders but (this is another neoclassical level assumption that would be a huge game changer if false.) how much is the right amount for our population and the amount we intend to spend. Ive seen some goldbugs say that its not necessary to set an exchange rate with a gold standard but if you dont guarantee an amount of gold for x amount of your currency what is the reason for a gold standard and how would that be any different from the US today? Putting aside that particular discussion, I WOULD set an exchange rate of gold for our currency if I were to choose a gold standard but my question would still be.... How do I get the gold I need? I have to pay for it somehow. No one is going to give it to me to go start my country. Would all the dollars my now Left Coast citizens still had have to go to buying the gold we need to start a currency system? Actually it would likely be the banks that would have to answer this question as well. How does a bank, created ex nihilo, acquire gold reserves? What can it spend on gold when the previous currency of the new country is no longer desired by the citizens of that country? Answer me that gold bugs. Additional questions I have about this libertarian utopia are how will you interact with the rest of the world. Seems to me that the situation I described above where it would all "work" fine if you just consumed only what you produced equally applies to this scenario. If you are the only place using gold for money, what do you get in payment for the goods you might wish to export? If you wish to import how do you keep your gold supply up? It seems to me that this is not only not an improvement over what we have today, here in the USA, its even worse than above. Especially for those who value freedom as highly as libertarians profess to. In this instance your soveriegn but you limit your ability to spend to how much gold you have.
So lets scratch a gold standard off the list if we want a vibrant new world economy that interacts with the rest of the world and tries to give its citizens the best life they can achieve
How about a private banking driven system with no gold standard? Each bank just issues its own money and there are multiple competing currencies circulating. The currency you are paid in might be different than the currency which a store prices its goods in but exchange rate tables are everywhere so its just a math problem. Eventually the soundest bank currencies start to squeeze out the weaker ones and we are all better off because we are all using a sound currency that for the most part exchanges one for one. So when we start this country everyone already has dollars. Thats the only money we ever used, maybe some converted it to some commodity before the change over but they are on the margin. Most everyone kept their dollars because they needed them to transact. So when "First Left Coast Bank" opens up what do they do? Seems to me step one is acquire some capital. Ill go all neoclassical again and "assume" that most of these banks were here when the previous regime was in place AND they just kept their "real" capital in place. They would hold some US Bonds , some real estate maybe some gold or other commodity contracts but they would still have the question of "what do we have as capital that we can lend against" to answer. In addition, when they go about taking deposits, the only thing every other citizen has are US$. So they must take a US$ deposit and then decide how much "First Left Coast Bank" bucks they are going to extend to them in credit. And each bank will make this decidision differently. This doesnt sound easy, smooth, better, efficient or more freedom procuring to me. It just sounds like a mess. So Im scratching this off the list.
So how about we just play all dictator and stuff and just tell our citizens,
"In spite of what the Zero Hedge morons proclaim your US $ are not worthless. You can keep them if you like and go to the US and buy stuff or you can exchange them to your new national Treasury for "Lefties". We will give exchange at the rate of 1.5 Lefty to a dollar. All transaction within the Left Coast will be in Lefties and anything we purchase from outside our borders will be with Lefties. It may take some time for our Lefties to be accepted but I have a few suggestions for you to speed up that process. Keep doing your job to the best of your ability. What we produce says something about us. Remember, produce something you'd sell to your neighbor. If your neighbor has a problem with it youll never hear the end of it so make it something he'll have no complaint about."
Now every Left Coast citizen knows what they will get for their old currency. What does the Treasury do with its acquired US$? Well it can certainly go and procure goods and services that it is unable to produce in house as long as their is a dollar price on that, and of course this requires another "neo-ass" (shorthand for neo classical assumption) that these dollars would be honored, they could say No Left Coast dollars. NOW banks can enter the picture, because the citizens now have a net worth in Lefties that can be assessed and an appropriate loan amount can be determined. Seems to me until this point banks have no reference point other than some real asset which could be of indeterminate value. It seems that until a bank can determine your net worth in something pretty ubiquitous loaning is a very high risk operation. So high risk that most borrowers would say no thanks. Would Left Coast have a Central Bank? Sure. The system would need a borrower of last resort and lender of last resort to keep payments flowing but Im not sure there needs to be a lot of manpower dedicated to it. It could mostly be a computer program that simply issues electronic reserves and measures banks health via an algorithm designed by conscientious bankers (I know there are some). We definitely dont need these annual treks to Jackson Hole where nothing of substance happens just a proclamation that "We are concerned about blah blah blah in the global system and we wish for further emasculation of our fiscal bodies so the fate of the worlds economy is at our behest........ oh and Milton Friedman rocks!!!"
Additionally, since we can never run out of our Lefties I would provide a citizens income to everyone form birth. As a citizen it would be your right. The exact administration of this would involve ways to add to it for certain education milestones being met or deduct from it if certain violations occur. Financializing more of our life seems inevitable so why not find an acceptable worth for a newborn citizen and one who meets certain criteria as they age. Now banks have a minimum income they know can be used to pay back loans. Seems to be a stabilizing force to banks. Might it result in fewer consumer loans, likely, but I dont view that as a negative. Although people might be encourage to take more risks if they werent going to lose everything so I dont think its a given that this would lead to complacent citizens who just spend their dole money on basics and dont search for innovations.
One thing I need to point out is that it would additionally be necessary at some point, maybe not at first but eventually, to assess a tax in Lefties. This tax would simply be necessary to insure that Left Coast citizens seek some lefties. At some point, once the economy is up and running, we might find people preferring to just cross the border and work for dollars which would be fine to a point but might reach a point where Left Coast businesses cant find labor. To keep our currency area going and to keep us from devolving into a 51st state which just uses dollars but has no rights, something would be needed to keep people seeking and hopefully saving in lefties. It seems to me its just a fact of modern nation states, if you wish to have autonomy you should have your own currency but to keep your own currency viable some form of gentle coercion (no 9mm necessary hopefully) thru taxation would be necessary. Some citizens might think of their taxes as "paying for their govt" but your treasurer would know better (that that citizen wouldnt have the lefty to pay the tax unless the treasury had issued it first)
I just cant see any market mechanisms that this new country could use to find a new currency but I m open to someone showing me some.
Today Im going to be the guy has been put in charge of developing a monetary system for our a new country. Maybe I go in with some German guys and buy a couple Greek Islands.... I dont know or a couple million of us petition the US govt to let us have a portion of land on the Left Coast of the United States and create our socialist paradise. I will have to take a page out of the neoclassicals playbook and make a couple very dubious assumptions. 1) We didnt need a war to get to this point 2) Most/all who are going are behind the project and understand fully what we are embarking on (perfectly rational agents with full view of past and expectations of future)
One of the points I hope to illustrate is that during this time of creating a new country and its monetary system is that these decisions are being made BY GOVERNMENT. Its not a matter of starting a new country, delineating borders, picking a leader, start trading stuff or use the money you have left over form your old country, bring in some banks and over time a new "best" currency emerges by consensus. In the modern world especially a monetary system is by the government and for the people.
There are many options to running a currency. Peg it to another currency or a commodity or let its value float? Do you allow this currency to trade as a commodity on the currency markets or even if you desire it to will investors have any interest in it? How will you arrange the way your Central Bank functions with a Treasury? Will you even have a Central Bank? These are all political decisions and have no free market which shapes them much, but these decisions you make will impact the private markets you hope to be vibrant in your country.
So how would I do it if I could? Seems to me there are only a few real options but I ll go over what I see as all the options and try to eliminate the bad ones.
We could operate like the 51st state and use the US dollar. We would have full leeway as to how we set our institutions up like our tax system our court system our road system our school system. We could determine what level of govt influence or spending we put to these systems. We could make it as publicly driven as we like but if we are using the US$ we have constraints as to how much we spend. That constraint is how many dollars we can get. Within this state we would certainly have some production capacity already (not a totally dubious assumption yet in reality not as simple as it sounds) and some resources that would be ours to extract, refine and create stuff out of but is it possible that we have everything we need? Doubtful. Now if everyone there were happy to live only on the things which we produced ourselves, ("Buy Left Coast first...... and second.... and third" could be our state motto), we could exist, survive and be happy but we would have constraints on growth. This option does not sound like one which enhances our freedom or one that gives us a lot more options from where we are now. I think if you are seceding from somewhere you must stop being beholden to their currency.
We could go the route that many libertarians push for. A private banking driven, sovereign, gold standard currency. What questions would I have about this arrangement? First off, if we are going to go with gold standard, where do we get the gold we need to back our currency. I will grant that we have some land with gold within our borders but (this is another neoclassical level assumption that would be a huge game changer if false.) how much is the right amount for our population and the amount we intend to spend. Ive seen some goldbugs say that its not necessary to set an exchange rate with a gold standard but if you dont guarantee an amount of gold for x amount of your currency what is the reason for a gold standard and how would that be any different from the US today? Putting aside that particular discussion, I WOULD set an exchange rate of gold for our currency if I were to choose a gold standard but my question would still be.... How do I get the gold I need? I have to pay for it somehow. No one is going to give it to me to go start my country. Would all the dollars my now Left Coast citizens still had have to go to buying the gold we need to start a currency system? Actually it would likely be the banks that would have to answer this question as well. How does a bank, created ex nihilo, acquire gold reserves? What can it spend on gold when the previous currency of the new country is no longer desired by the citizens of that country? Answer me that gold bugs. Additional questions I have about this libertarian utopia are how will you interact with the rest of the world. Seems to me that the situation I described above where it would all "work" fine if you just consumed only what you produced equally applies to this scenario. If you are the only place using gold for money, what do you get in payment for the goods you might wish to export? If you wish to import how do you keep your gold supply up? It seems to me that this is not only not an improvement over what we have today, here in the USA, its even worse than above. Especially for those who value freedom as highly as libertarians profess to. In this instance your soveriegn but you limit your ability to spend to how much gold you have.
So lets scratch a gold standard off the list if we want a vibrant new world economy that interacts with the rest of the world and tries to give its citizens the best life they can achieve
How about a private banking driven system with no gold standard? Each bank just issues its own money and there are multiple competing currencies circulating. The currency you are paid in might be different than the currency which a store prices its goods in but exchange rate tables are everywhere so its just a math problem. Eventually the soundest bank currencies start to squeeze out the weaker ones and we are all better off because we are all using a sound currency that for the most part exchanges one for one. So when we start this country everyone already has dollars. Thats the only money we ever used, maybe some converted it to some commodity before the change over but they are on the margin. Most everyone kept their dollars because they needed them to transact. So when "First Left Coast Bank" opens up what do they do? Seems to me step one is acquire some capital. Ill go all neoclassical again and "assume" that most of these banks were here when the previous regime was in place AND they just kept their "real" capital in place. They would hold some US Bonds , some real estate maybe some gold or other commodity contracts but they would still have the question of "what do we have as capital that we can lend against" to answer. In addition, when they go about taking deposits, the only thing every other citizen has are US$. So they must take a US$ deposit and then decide how much "First Left Coast Bank" bucks they are going to extend to them in credit. And each bank will make this decidision differently. This doesnt sound easy, smooth, better, efficient or more freedom procuring to me. It just sounds like a mess. So Im scratching this off the list.
So how about we just play all dictator and stuff and just tell our citizens,
"In spite of what the Zero Hedge morons proclaim your US $ are not worthless. You can keep them if you like and go to the US and buy stuff or you can exchange them to your new national Treasury for "Lefties". We will give exchange at the rate of 1.5 Lefty to a dollar. All transaction within the Left Coast will be in Lefties and anything we purchase from outside our borders will be with Lefties. It may take some time for our Lefties to be accepted but I have a few suggestions for you to speed up that process. Keep doing your job to the best of your ability. What we produce says something about us. Remember, produce something you'd sell to your neighbor. If your neighbor has a problem with it youll never hear the end of it so make it something he'll have no complaint about."
Now every Left Coast citizen knows what they will get for their old currency. What does the Treasury do with its acquired US$? Well it can certainly go and procure goods and services that it is unable to produce in house as long as their is a dollar price on that, and of course this requires another "neo-ass" (shorthand for neo classical assumption) that these dollars would be honored, they could say No Left Coast dollars. NOW banks can enter the picture, because the citizens now have a net worth in Lefties that can be assessed and an appropriate loan amount can be determined. Seems to me until this point banks have no reference point other than some real asset which could be of indeterminate value. It seems that until a bank can determine your net worth in something pretty ubiquitous loaning is a very high risk operation. So high risk that most borrowers would say no thanks. Would Left Coast have a Central Bank? Sure. The system would need a borrower of last resort and lender of last resort to keep payments flowing but Im not sure there needs to be a lot of manpower dedicated to it. It could mostly be a computer program that simply issues electronic reserves and measures banks health via an algorithm designed by conscientious bankers (I know there are some). We definitely dont need these annual treks to Jackson Hole where nothing of substance happens just a proclamation that "We are concerned about blah blah blah in the global system and we wish for further emasculation of our fiscal bodies so the fate of the worlds economy is at our behest........ oh and Milton Friedman rocks!!!"
Additionally, since we can never run out of our Lefties I would provide a citizens income to everyone form birth. As a citizen it would be your right. The exact administration of this would involve ways to add to it for certain education milestones being met or deduct from it if certain violations occur. Financializing more of our life seems inevitable so why not find an acceptable worth for a newborn citizen and one who meets certain criteria as they age. Now banks have a minimum income they know can be used to pay back loans. Seems to be a stabilizing force to banks. Might it result in fewer consumer loans, likely, but I dont view that as a negative. Although people might be encourage to take more risks if they werent going to lose everything so I dont think its a given that this would lead to complacent citizens who just spend their dole money on basics and dont search for innovations.
One thing I need to point out is that it would additionally be necessary at some point, maybe not at first but eventually, to assess a tax in Lefties. This tax would simply be necessary to insure that Left Coast citizens seek some lefties. At some point, once the economy is up and running, we might find people preferring to just cross the border and work for dollars which would be fine to a point but might reach a point where Left Coast businesses cant find labor. To keep our currency area going and to keep us from devolving into a 51st state which just uses dollars but has no rights, something would be needed to keep people seeking and hopefully saving in lefties. It seems to me its just a fact of modern nation states, if you wish to have autonomy you should have your own currency but to keep your own currency viable some form of gentle coercion (no 9mm necessary hopefully) thru taxation would be necessary. Some citizens might think of their taxes as "paying for their govt" but your treasurer would know better (that that citizen wouldnt have the lefty to pay the tax unless the treasury had issued it first)
I just cant see any market mechanisms that this new country could use to find a new currency but I m open to someone showing me some.
Saturday, April 28, 2012
An Interesting Idea From a Dubious Source
Much of the talk on the econ blogs I follow revolves around the idea of a Job Guarantee (JG). This is an idea deeply imbedded into the MMT macro view. Some say its a necessary component and that "You are not an MMTer if you dont endorse the idea". Others are less dogmatic about it but it cant be denied that full employment, defined as anyone who wishes to earn an income is able to, is a primary goal of the MMT macro view. The other part of the trick is price stability though and the macroeconomists within the MMT school argue that price stability is best achieved by a wage anchor. The design of a JG can run anywhere from a fully federally controlled "make work" type program to a subsidy of private businesses at whatever level is necessary to "hire" everyone. The common denominator in both ends of the spectrum is recognizing the reality that the govt, as currency issuer, can fully fund a full employment economy. There are tradeoffs in every system but there is no saying "we dont have the money to do this". Thats a huge hurdle for a large portion of the population. Many believe the govt would run out of money if such a venture were tried.
One idea that has been offered involves an income guarantee, payable through a paypal debit card account. Here is the originator of the idea (as far as we know, the originator) Morgan Warstler;
Using a clone of Paypal and Ebay platforms, the US govt. should establish a Guaranteed Wage of $240 per week. Anyone who wants to work registers, receives a Debit Card,and each Friday has their GI deposited. All recipients have their labor weeks auctioned online. Bidding begins at $40 per week ($1 per hour). Bid increases by .50 cents per hour ($20 increments). Recipients keep 50% of the top bid, if they take it. If they opt for a lesser bid outside certain boundaries there are penalties (fraud measure). Recipients cannot be made to work outside a radius of a couple miles. Bidders must deposit money into system before they bid. They must accurately describe the job. Feedback will be given both ways. If you are familiar with Ebay, you understand what this accomplishes. There are no taxes paid, there are basic workplace protection requirments. Umbrella insurance is sold on site for folks bringing labor into their home. Expect 30M to register so approx $345B is our cost assuming 30M are auctioned at $1 (The govt. is picking up $5.50 and bidders are in for $1) At an avg. bid of $4 per hour, avg. worker is making $8, and the govt. is spending $250B a year. There is no more UI. There is no more minimum wage. That’s why there are 30M in program.
I would have to say that normally I would be 75-100% behind the idea. Its simple, it allows choices, there is a lot of bottom up thinking to it, the framework for it is in place already and I do think many people on both sides of the spectrum could get behind it. My primary reservation is knowing who came up with it. Not that I really KNOW Mr Warstler. He's as anonymous to me as Arthur Shipman or Mike Sax, guys on the internet I talk to with my keyboard. I wouldnt know any of these three if they walked in my house but I have read a lot of what they have to say on the sites I visit. I feel like I know them and know what kind of people they are. Mr Warstler is NOT good people, as they say.
First off Morgan is a fan of and I think a contributor to the late (yea!!) Andrew Breitbarts site. I'm not sure who is (was) a more despicable person, Breitbart or Limbaugh. Its close. So anyone who contributes to anything that guy did is only making the world worse. Not that bad people cant come up with good ideas, and vice versa, but in general I prefer ideas that come from people who at least seem to not be psychopaths.
Turns out Im not the only one who thinks Morgan Warstler reads like a toxic personality. Here is Raul Groom at "The Vanishing Dollar":
As many who read this blog (if any section of this blog's readership can be usefully called "many") probably already know, there is a person out in Internet-land who calls himself Morgan Warstler. He's a blogger for the odd, ugly, and mostly useless righty politics site Big Government (full name: "Andrew Breitbart presents Big Government featuring editor in chief Mike Flynn," and no I am not making that up). He's a gadfly on several well-known economics blogs including Scott Sumner's The Money Illusion, but most of my dealings with him have been at Yglesias' place over at ThinkProgress. All in all, the guy is a nutcase, and I really don't recommend listening to him, reading him, or talking to him at all. It will just make you angry and confused. That said, the Warstler may well be a genius. He's fallen in with the wrong people and has couched his policy recommendations in politically toxic, morally bankrupt packages. But the man is onto something. I know, I know. Forty-two loyal Yglesias fans (the entire readership of this blog, sadly) just threw up a little in their mouths. But Morgan's Guaranteed Income plan is sort of on to something. I'll explain later. Just wanted to warn you, sort of an econ version of the "trigger warnings" on sites that focus on social issues. I will be taking up a lukewarm defense of Warstler this week. Consider yourself on notice.
Dan Kervick, one of my favorite posters of late says; "I call Morgan Warstler a "Darth Vadar Marxist". Those are folks who seem to accept a whole bunch of Marx's theorizing about class warfare, but who then try to encourage everyone to join the dark side of the greedy capitalists"
Obviously Ive made the point that I think he's a terrible guy, but he's also afflicted with some really poor economic thinking. He thinks the whole problem with our unemployment problem is simply too high of wages (Yes if we all made even less more of us would default at the debt levels we've achieved..... making the banks really happy then). He views the economy as a zero sum game where the only way someone who doesnt have something can get it is by depriving someone else of that thing (which would mean in his world the only way the "haves" got it was by getting it at the expense of the "have nots"....... try making the argument that the US is rich only because theyve made Africa, Mexico and Central America poor... I dare ya!). He also in one of his comments at someones site made the statement that consumption was "bad". Bad? Tell that to the worlds manufacturers who are just looking for someone to consume their product How can something which is the other side of the coin from production be bad? Putting a label on an economic variable like that strikes me as religious zealotry. Puritanic.
Now all of this, again,is not to say that he hasnt hit on something quite good. He may very well have. I dont have large objections to it but whenever someone who thinks like an Austrian economist, is friendly to the likes of Andrew Breitbart and is smart (cunning may be a more appropriate description) I think one should look real hard at ANYTHING he proposes.
Im pretty sure that over 90% of the time if Morgan Warstler likes it........ I wont.
One idea that has been offered involves an income guarantee, payable through a paypal debit card account. Here is the originator of the idea (as far as we know, the originator) Morgan Warstler;
Using a clone of Paypal and Ebay platforms, the US govt. should establish a Guaranteed Wage of $240 per week. Anyone who wants to work registers, receives a Debit Card,and each Friday has their GI deposited. All recipients have their labor weeks auctioned online. Bidding begins at $40 per week ($1 per hour). Bid increases by .50 cents per hour ($20 increments). Recipients keep 50% of the top bid, if they take it. If they opt for a lesser bid outside certain boundaries there are penalties (fraud measure). Recipients cannot be made to work outside a radius of a couple miles. Bidders must deposit money into system before they bid. They must accurately describe the job. Feedback will be given both ways. If you are familiar with Ebay, you understand what this accomplishes. There are no taxes paid, there are basic workplace protection requirments. Umbrella insurance is sold on site for folks bringing labor into their home. Expect 30M to register so approx $345B is our cost assuming 30M are auctioned at $1 (The govt. is picking up $5.50 and bidders are in for $1) At an avg. bid of $4 per hour, avg. worker is making $8, and the govt. is spending $250B a year. There is no more UI. There is no more minimum wage. That’s why there are 30M in program.
I would have to say that normally I would be 75-100% behind the idea. Its simple, it allows choices, there is a lot of bottom up thinking to it, the framework for it is in place already and I do think many people on both sides of the spectrum could get behind it. My primary reservation is knowing who came up with it. Not that I really KNOW Mr Warstler. He's as anonymous to me as Arthur Shipman or Mike Sax, guys on the internet I talk to with my keyboard. I wouldnt know any of these three if they walked in my house but I have read a lot of what they have to say on the sites I visit. I feel like I know them and know what kind of people they are. Mr Warstler is NOT good people, as they say.
First off Morgan is a fan of and I think a contributor to the late (yea!!) Andrew Breitbarts site. I'm not sure who is (was) a more despicable person, Breitbart or Limbaugh. Its close. So anyone who contributes to anything that guy did is only making the world worse. Not that bad people cant come up with good ideas, and vice versa, but in general I prefer ideas that come from people who at least seem to not be psychopaths.
Turns out Im not the only one who thinks Morgan Warstler reads like a toxic personality. Here is Raul Groom at "The Vanishing Dollar":
As many who read this blog (if any section of this blog's readership can be usefully called "many") probably already know, there is a person out in Internet-land who calls himself Morgan Warstler. He's a blogger for the odd, ugly, and mostly useless righty politics site Big Government (full name: "Andrew Breitbart presents Big Government featuring editor in chief Mike Flynn," and no I am not making that up). He's a gadfly on several well-known economics blogs including Scott Sumner's The Money Illusion, but most of my dealings with him have been at Yglesias' place over at ThinkProgress. All in all, the guy is a nutcase, and I really don't recommend listening to him, reading him, or talking to him at all. It will just make you angry and confused. That said, the Warstler may well be a genius. He's fallen in with the wrong people and has couched his policy recommendations in politically toxic, morally bankrupt packages. But the man is onto something. I know, I know. Forty-two loyal Yglesias fans (the entire readership of this blog, sadly) just threw up a little in their mouths. But Morgan's Guaranteed Income plan is sort of on to something. I'll explain later. Just wanted to warn you, sort of an econ version of the "trigger warnings" on sites that focus on social issues. I will be taking up a lukewarm defense of Warstler this week. Consider yourself on notice.
Dan Kervick, one of my favorite posters of late says; "I call Morgan Warstler a "Darth Vadar Marxist". Those are folks who seem to accept a whole bunch of Marx's theorizing about class warfare, but who then try to encourage everyone to join the dark side of the greedy capitalists"
Obviously Ive made the point that I think he's a terrible guy, but he's also afflicted with some really poor economic thinking. He thinks the whole problem with our unemployment problem is simply too high of wages (Yes if we all made even less more of us would default at the debt levels we've achieved..... making the banks really happy then). He views the economy as a zero sum game where the only way someone who doesnt have something can get it is by depriving someone else of that thing (which would mean in his world the only way the "haves" got it was by getting it at the expense of the "have nots"....... try making the argument that the US is rich only because theyve made Africa, Mexico and Central America poor... I dare ya!). He also in one of his comments at someones site made the statement that consumption was "bad". Bad? Tell that to the worlds manufacturers who are just looking for someone to consume their product How can something which is the other side of the coin from production be bad? Putting a label on an economic variable like that strikes me as religious zealotry. Puritanic.
Now all of this, again,is not to say that he hasnt hit on something quite good. He may very well have. I dont have large objections to it but whenever someone who thinks like an Austrian economist, is friendly to the likes of Andrew Breitbart and is smart (cunning may be a more appropriate description) I think one should look real hard at ANYTHING he proposes.
Im pretty sure that over 90% of the time if Morgan Warstler likes it........ I wont.
Monday, April 16, 2012
Two Grinches
Politics is all about keeping your base supporters energized and ready to go to the polls for your party. You use the media to get out easy to digest messages, you have pundits who articulate these messages in various ways so they appeal to as many people as possible and then there are the think tanks that spend billions learning how to further manipulate people to achieve an end. Part of what you do is spend time pushing the positives of your team and part of the time its pushing the negatives of the other team. Its a back and forth and both parties in our system have enjoyed periods of rather sustained success due to their ideas being adapted at just the right time in history.
Democrats enjoyed success for most of my early life and it mostly started with Roosevelt and WWII. Our responses to the depression, a period of great pain for many that was seen as the end result of high finance run amok, were the cornerstone of democratic policies for decades. Protecting people by insuring their deposits (FDIC), making housing affordable via 30 yr mortgages (Fannie) and guaranteeing an income in old age (SS), were just a few of the important ways that average Americans were spared destitution if economic times turned real bad.
Republicans have enjoyed success from my college days onward. Mostly because they had the presidency when we fought off the inflation of the 70's and it was their policies which have been given credit. One of the strategies they have successfully used since that time centers around an idea by Jude Wanniski, a journalist/economist/author of that day, called the Two Santa Claus' theory.
It is described this way in Wikipedia;
"The Two Santa Claus Theory
The Two Santa Claus Theory is a political theory and strategy published by Wanniski in 1976, which he promoted within the United States Republican Party.
According to Wanniski, the theory is simple. In 1976, he wrote that the Two-Santa Claus Theory suggests that "the Republicans should concentrate on tax-rate reduction. As they succeed in expanding incentives to produce, they will move the economy back to full employment and thereby reduce social pressures for public spending. Just as an increase in Government spending inevitably means taxes must be raised, a cut in tax rates—by expanding the private sector—will diminish the relative size of the public sector". Wanniski suggested this position, as Thom Hartmann has clarified, so that the Democrats would "have to be anti-Santas by raising taxes, or anti-Santas by cutting spending. Either one would lose them elections"
The theory states that, in democratic elections, if one party appeals to voters by proposing more spending, then a competing party cannot gain broader appeal by proposing less spending. The first "Santa Claus" of the theory title refers to the political party that promises spending. Instead, "Two Santa Claus Theory" recommends that the competing party must assume the role of a second Santa Claus by not arguing to cut spending but rather offering the more appealing and publicly sellable option of cutting taxes.
This theory is a response to the belief of monetarists, and especially Milton Friedman[citation needed], that the government must be starved of revenue in order to control the growth of spending (since, in the view of the monetarists, spending cannot be reduced by elected bodies as the political pressure to spend is too great)[citation needed]. See also Starve the beast.
The "Two Santa Claus Theory" does not argue against this belief but holds that such arguments cannot be espoused to try to win democratic elections. In Wanniski's view, the Laffer curve and supply-side economics provide an attractive alternative rationale for revenue reduction: that under reduced taxation the economy will grow, not merely that the beast of the government will be starved of revenue, and that that growth is an attractive option to present to the voters. Wanniski argued that Republicans must become the tax-cutting Santa Claus to the Democrats' spending Santa Claus."
Interesting stuff. It seems to me that this strategy is blowing up for both parties. Now they are locked in a race to take away the least from their electorate. Both agree that something must be taken away but the what and the amounts differ. Now instead of being the "Two Santa Claus'" they are becoming the "Two Grinches". Whos brand of cutting will be most effective and appealing?
One of the things that may favor democrats is that they are more sincere in their beliefs that we must cut stuff. I disagree vehemently with austerity measures, knowing they are wrongheaded and based on a completely flawed paradigm of how govt financing works, but the democrats are more likely to be seen as sincere in their efforts to make things better. Republicans have shown that they are just about slashing and burning everyone elses stuff and keeping their stuff safe from harm. Unfortunately our politicians keep reenforcing the idea the populace has that the only choice we have is the least bad one.
Democrats enjoyed success for most of my early life and it mostly started with Roosevelt and WWII. Our responses to the depression, a period of great pain for many that was seen as the end result of high finance run amok, were the cornerstone of democratic policies for decades. Protecting people by insuring their deposits (FDIC), making housing affordable via 30 yr mortgages (Fannie) and guaranteeing an income in old age (SS), were just a few of the important ways that average Americans were spared destitution if economic times turned real bad.
Republicans have enjoyed success from my college days onward. Mostly because they had the presidency when we fought off the inflation of the 70's and it was their policies which have been given credit. One of the strategies they have successfully used since that time centers around an idea by Jude Wanniski, a journalist/economist/author of that day, called the Two Santa Claus' theory.
It is described this way in Wikipedia;
"The Two Santa Claus Theory
The Two Santa Claus Theory is a political theory and strategy published by Wanniski in 1976, which he promoted within the United States Republican Party.
According to Wanniski, the theory is simple. In 1976, he wrote that the Two-Santa Claus Theory suggests that "the Republicans should concentrate on tax-rate reduction. As they succeed in expanding incentives to produce, they will move the economy back to full employment and thereby reduce social pressures for public spending. Just as an increase in Government spending inevitably means taxes must be raised, a cut in tax rates—by expanding the private sector—will diminish the relative size of the public sector". Wanniski suggested this position, as Thom Hartmann has clarified, so that the Democrats would "have to be anti-Santas by raising taxes, or anti-Santas by cutting spending. Either one would lose them elections"
The theory states that, in democratic elections, if one party appeals to voters by proposing more spending, then a competing party cannot gain broader appeal by proposing less spending. The first "Santa Claus" of the theory title refers to the political party that promises spending. Instead, "Two Santa Claus Theory" recommends that the competing party must assume the role of a second Santa Claus by not arguing to cut spending but rather offering the more appealing and publicly sellable option of cutting taxes.
This theory is a response to the belief of monetarists, and especially Milton Friedman[citation needed], that the government must be starved of revenue in order to control the growth of spending (since, in the view of the monetarists, spending cannot be reduced by elected bodies as the political pressure to spend is too great)[citation needed]. See also Starve the beast.
The "Two Santa Claus Theory" does not argue against this belief but holds that such arguments cannot be espoused to try to win democratic elections. In Wanniski's view, the Laffer curve and supply-side economics provide an attractive alternative rationale for revenue reduction: that under reduced taxation the economy will grow, not merely that the beast of the government will be starved of revenue, and that that growth is an attractive option to present to the voters. Wanniski argued that Republicans must become the tax-cutting Santa Claus to the Democrats' spending Santa Claus."
Interesting stuff. It seems to me that this strategy is blowing up for both parties. Now they are locked in a race to take away the least from their electorate. Both agree that something must be taken away but the what and the amounts differ. Now instead of being the "Two Santa Claus'" they are becoming the "Two Grinches". Whos brand of cutting will be most effective and appealing?
One of the things that may favor democrats is that they are more sincere in their beliefs that we must cut stuff. I disagree vehemently with austerity measures, knowing they are wrongheaded and based on a completely flawed paradigm of how govt financing works, but the democrats are more likely to be seen as sincere in their efforts to make things better. Republicans have shown that they are just about slashing and burning everyone elses stuff and keeping their stuff safe from harm. Unfortunately our politicians keep reenforcing the idea the populace has that the only choice we have is the least bad one.
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
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!
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!
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
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
(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.
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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
------------------------------------------
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.
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.
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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.
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