Indeed. Saying that the visible universe is shrinking is not exactly accurate, but it captures the gist of what is going on according to current cosmological models, AFAIU. What's happening is that space itself expands uniformly, that is, the same amount of expansion happens at every point in space. Of course, this expansion adds up over long distances, so that regions very far away from us are receding at close to, and then faster than, the speed of light.
This means that we now receive light from galaxies that we will no longer see in the future. This is the sense in which the visible universe shrinks.
On the other hand, we can always see light from as far as the light could have travelled since the big bang, and in that sense, it doesn't really shrink, it just becomes less dense. It all depends on what type of coordinate system you're talking about, and what unit of measurement you're using.
The many-words interpretation of quantum mechanics tells us there are obscene numbers of universes that exist, because the universe creates perfect copies of itself every time a quantum decision is made, except for the quantum decision itself being different in each copy.
That's a widely spread but IMO misleading popularization. When you read more about the many-worlds interpretation, all it's really saying is that the universe really is a unit vector in a (very high-dimensional) complex vector space. As such, many-worlds says that the universe really is a linear combination of all the many possible states that the universe could be in. The linear combination is the physical reality.
Popularization then calls each of these possible states a parallel universe. That's not completely wrong, but it is very misleading.
Arbitrage is certainly important, and it should happen on a time scale that is faster than ordinary economic events, because markets need some time to adjust [1]. But it is fairly obvious that there are strongly diminishing returns for society as arbitrage becomes faster. Imagine a hypothetical alternative market which operates on a one minute heartbeat, for example: the market algorithm simply runs a secret auction once per minute at a pre-determined time, with bid prices as fine-grained as one millionth of a cent to avoid some pathologies. My hypothesis is that such a market would be as inconsistency- and arbitrage-free as what we have today, to an accuracy where the difference simply doesn't matter to ordinary investors - where by ordinary investors, I mean actors with an investment horizon that is measured at least in months. So you would have the same benefit to the society while using less resources (resources that are currently used to get ping times down etc.).
At the same time, look at your last argument: HFT traders are basically competing among themselves, but since their response times have to be so fast these days, they are mostly competing to exploit each other's weaknesses and the weaknesses of the trading algorithms of larger investment funds.
In the hypothetical market, competition between algorithmic traders would still happen. But since there is now more time for computation, the emphasis shifts away from hacking to get short response time and instead towards making more intelligent decisions about price. There might be a shift towards more emphasis on evaluating fundamentals, and that can only be a good thing for the efficient allocation of capital.
[1] Incidentally, I suspect that the reason that much of what neoclassicals say about the macroeconomy is wrong precisely because they incorrectly assume fast arbitrage in macroeconomic events.
It's more and more about what algorithms your "opponents" are using and what your algorithms are set at.
Only if you are in it for day-trading profits. And if you are, well, you deserve to be beaten senseless by some HFT algorithm.
If you're a long term investor, with a time horizon of many decades, this doesn't matter. For example, I have a stock I bought 15 years ago. It has gone up by around 3X in that time. HFT makes no difference to me when I've held a stock over many years or decades. The exact microsecond it sells doesn't matter to me after a period of decades.
The fundamentals are driven by stock valuations, which are based in what people guess about the future of the company. You can be as informed about that as anybody. If you believe a company will do well over the long haul, buy some of their stock. Don't worry about HFT. You don't have to microsecond-time your sale and beat some other HFT algorithm when you've made a lot of money over years, rather than little bit over seconds.
It's more and more about what algorithms your "opponents" are using and what your algorithms are set at.
Only if you are in it for day-trading profits. And if you are, well, you deserve to be beaten senseless by some HFT algorithm.
If you're a long term investor, with a time horizon of many decades, this doesn't matter. For example, I have a stock I bought 15 years ago. It has gone up by around 3X in that time. HFT makes no difference to me when I've held a stock over many years or decades. The exact microsecond it sells doesn't matter to me after a period of decades.
This is a good point. But then the question becomes: what good does HFT provide? A lot of smart people are sucked into that sector because of the money, where they are arguably causing a net loss to society by participating in an arms race that does not produce any real goods or services. Those smart people could in principle be contributing to research and development in areas that actually improve everybody's standard of living, such as medical research and robotics - or perhaps even in economics when it comes to analyzing long-term successes (after all, genuinely improving the capital allocation in the long-term could be beneficially to society, unlike the short-term gambling that is happening these days).
With that in mind, there needs to be a discussion on how best to disincentivize this kind of extremely short-term behavior, where it is via transaction fees or via trading on heartbeats.
That's pretty flamebaity, but let me try a reasonable response anyway.
As I see it, the military budget has two purposes: (1) prolong global US hegemony for as long as reasonably possible, (2) stimulate and maintain strategic domestic industries, both in terms of production facilities and in terms of R&D - basically, the military budget is Keynesianism in a guise that appeals to Republicans.
It seems fairly clear that goal (1) can be achieved on a much smaller budget, if that budget is used more intelligently, i.e. not wasted by getting into unproductive quagmires. We can argue about the exact numbers, but just compare the size of the US military budget to the next runner-up country. It's clear that there is much more than enough of a "safety margin".
Goal (2) can easily be achieved by an ambitious space program. Such a program could require domestic production of parts, as well as pretty advanced domestic R&D.
So, obvious political issues aside, I see no compelling rationally justified reason not to shift a pretty significant piece of the budget from the military to space exploration.
Skipping to what I think is really the crucial point.
But what kind of confidence are we talking about here? Mostly, we are talking about confidence in future income streams. If, as an employee, I worry about being laid off in the next few months, then naturally I am going to save more - if possible - to have some savings as buffer. Similarly, as an employer, if I worry about landing enough contracts over the next months, I am not going to employ more people. It's all about income streams.
So you're choosing not to agree with me why? The above is not some deep insight, but merely a slightly different model.
I'm not exactly disagreeing with you. Rather, you seem to use "it's all about confidence" as an argument to contradict me. What I am saying is that one of the most important factors in confidence is the confidence of future income streams, i.e. demand.
In other words, it is completely misguided to use confidence-related arguments as a reason to ignore the issue of aggregate demand.
Everyone agrees on that. But what is reality here? I just don't buy that our current problems are because we didn't try stimulus hard enough.
I recommend that you go through publicly available data sets, and just look at the scale of the accumulated private debt that collapsed due to the GFC. All that debt recorded previous "stimulus" by private households spending more than their income, and all this "stimulus" then stopped abruptly. We can throw numbers around here, but I think the best approach is for you to just take a look yourself. A lot is available from the St. Louis Fed's FRED database, for other, aggregated data, you might want to look at some of the things that Richard Koo and Steve Keen have collected.
In any case, the scale of the problem was truly mind boggling, and you really have to take a rational thinker's approach to judging how big those numbers are in relation to each other.
Even in a do nothing scenario, eventually the uncertainty goes away.
You're missing the point.
To paint an obviously exaggerated picture, if a prolonged global depression causes so much social unrest that the global supply chain disintegrates, then what good does it do if uncertainty goes away afterwards? When living standards declined after the fall of Rome, do you really think people thought that was just fine, since after all, uncertainty eventually went away?
Now of course nobody expects anything quite so stark, except perhaps limited to countries like Greece and Spain. But the point still stands: prolonged recessions can decrease the long-term trajectory of an economy. It's called hysteresis.
Will the feds be trying to block expansion of my business after I already have spent the money for expansion? Who knows? But Obama has already blocked a lot of such things (particularly, fossil fuel related industries and infrastructure) and is likely to continue that practice should he get reelected.
Frankly, you're letting your politics cloud sound judgement (bringing suspicions about future behaviour of one specific politician into the discussion is a sure sign of that). It is a pity that I cannot find the link right now, but a survey among small businesses around 2010-2011 clearly indicated that what they were most worried about was finding customers for their products and services.
Regulation can be troublesome, I give you that, but individual pieces of regulation are mostly confined to a very narrow segment of the economy, and the problem we're talking about here is obviously at a macro level.
First of all, there wasn't that much stimulus happening in the first place. All those huge sounding numbers that the Fed throws around with various QE activities does almost exactly zero to stimulate the demand
It gave a tremendous amount of wealth to anyone who owed money. Bond and loan yields dropped as a result. There probably was a bit of inflation as well. That should have spurred collective demand in theory just due to the massive number of people who hold loans out there and suddenly had a lot less risk in their portfolio. In practice, I see it as confirmation of my assertion.
It didn't help those on the lower end of wealth spectrum as much though, like all those people whose mortgages were under water. Rate of savings matter a lot.
The argument that it's all about demand is just a transparent excuse to increase public spending.
That's where you're letting your politics cloud your judgement. Demand-side economists can almost as easily be used to justify tax cuts, and many demand-side economists indeed argue for income tax and tax roll cuts for lower-income brackets.
The subtle issue here is that tax cuts are only really effective when they affect low-wealth/income households, as those are the ones that are most likely to go out and spend the additional available income on real goods and services.
Similarly, many European businesses risk a lot if they make big investments now. They could get burned by some consequence of the Greek thing. That's just how it is. People are unwilling to buy lots of stuff, if they don't have confidence in the future.
But what kind of confidence are we talking about here? Mostly, we are talking about confidence in future income streams. If, as an employee, I worry about being laid off in the next few months, then naturally I am going to save more - if possible - to have some savings as buffer. Similarly, as an employer, if I worry about landing enough contracts over the next months, I am not going to employ more people. It's all about income streams.
In a sense, demographics are central to the explanation of the cycle that is proposed in the article. 50 years is about the time it takes for lessons to become lost because the people who experienced them personally are dead or too old to affect the course of events.
Of course, my assertion is. But why isn't all that stimulus that the US and the rest of the world burned, doing much? That's supposedly a huge spur to demand, but it's fallen pretty flat.
There are two things to keep in mind here. First of all, there wasn't that much stimulus happening in the first place. All those huge sounding numbers that the Fed throws around with various QE activities does almost exactly zero to stimulate the demand, and economists who focus on how the financial sector works have been able to predict that quite accurately.
Second, the Obama stimulus has in fact helped soften the recession according to most simulations, including those of the CBO. The stimulus simply wasn't very big compared to the overall size of the problem. (Yes, the problem was that huge.)
As for the whole uncertainty thing, look: Of course this is largely a chicken-and-egg problem. You are of course right that uncertainty leads to individuals spending less. But then this reduction in demand causes uncertainty in the first place. So the non-partisan question here is how to best break that cycle. It is obvious that if you inject more demand into the system, this eliminates many reasons for uncertainty for individual spending decisions.
Outside of neoclassical economic models, expectations follow reality more than the other way around.
That's an interesting line of thought, though I would ask just how many cycles you would need to find the right price. The market may see some over- and undershoots in the valuation, but it seems like no more than a handful cycles would be needed. Then each cycle might require several "ticks" to work its way. In any case, even if the length of a tick were a minute, it should take much less than a day for the price to settle.
I suspect you are replying to people who have in mind a definition that "inflation = increase of the money supply". Needless to say that this is a ridiculous definition to start from in modern days, since the size of the money supply is not a thing anybody cares about as a primary indicator; the only reasonable definition for inflation is via the price level. But old habits die hard, and the nuts who want the world to work differently are very vocal in this small corner of economics. Don't sweat it;-)
The other side of that argument is that science is telling folks that no, you can't use more than we've got forever, and yes, what you do is impacting other people. And some folks want any excuse to say, "So what. I only live once, screw the next generation, I want it all. Now!"
Math is telling the government that no, you can't spend more money than you've got forever, and yes, what it does is impacting other people.
Actually, math is saying the opposite. Since the US federal government is monetarily sovereign (it is a currency issuer), math is saying that the US federal government is able to forever spend an arbitrary amount of US$. There are no limits. As long as there is somebody willing to sell a good or her services for US$, the US federal government can buy them.
Now obviously, running a too large deficit for too long will have inflationary effects. But how large is too large? There is no general rule for where the inflation-neutral point is. In fact, there are good arguments that the inflation-neutral point is a steady, long-run deficit to compensate for private sector net financial assets saving desires.
As an addendum: Vickrey got it wrong in the short term because he did not foresee the expansion of private credit. In the long term he got it right because this expansion of private credit was not sustainable.
Vickrey seems to be saying that the then-newly-elected Clinton administration is getting it all wrong, that it is failing to provide enough stimulus and the economy will suffer unless it changes its policies. But historically the Clinton years were very good ones economically. So did Clinton do what Vickrey said, or was Vickrey wrong?
That's a good point. I would say it is a bit of both. The Clinton years were good ones for the US economy, and there was a surplus under Clinton for some years, but this was never sustainable. In some sense, the real question is: What is the relationship between the surplus and the economy?
The sane answer, I think, is that the Clinton surpluses were only possible because of the economic good times. A well running economy implies high tax revenues and low social spending, and therefore pushes the budget deficit towards surplus automatically, even when politicians do nothing.
But the more worrying part, and this is where Vickrey got it right, is the question of how those good economic times were possible in the first place? The answer to that is that the Clinton administration was also a time when private credit really took off. Economic growth was largely fuelled by consumers going into debt to finance their consumption. As should be clear to everybody by now, that wasn't such a good idea after all, because unlike government debt, consumer debt is not sustainable.
Once you start dealing with a deficit that's bigger than what you can reasonably expect to grow, you're in deep trouble.
You're taking the wrong metric here. When it comes down to it, the deficit is simply equal to the net imports plus the saving of the private sector. That is not a theory, by the way, it is a simple consequence of proper book keeping. So whether a government deficit is big or not really needs to be seen in relation to the desires of the private sector and the behaviour of the rest of the world.
What you are seeing in the US is simply that the crazily low savings rate of the private sector is returning back to normal now. Where before, consumption has been financed by easy credit, this access to credit has now dried up and everybody is scrambling to get their balance sheet in order - a balance sheet recession. This increase in private saving needs to be supported by a government deficit. If the government withholds the assets that the private sector needs, this will result in less spending, i.e. a lower path of GDP, and a lot of pain for private individuals especially via higher unemployment.
To anybody who reads the parent: yes, those debt numbers sound impressive. However, ultimately they are just the necessary counter-part to giving the private sector the monetary assets that it desires. This was understood a long time ago, see e.g. here. More recently, Modern Monetary Theory economists have been pushing the same point. If you haven't yet, I recommend you set aside some time to read introductory explanations e.g. here and here and here.
The bottom line is this: targeting a specific size of the budget is bad policy. The budget will be whatever it has to be to match the behaviour of the private sector. Artificial austerity, as is being proposed these days, is coercion of the private sector to go against its natural behaviour, even when that natural behaviour is benign. In other words, austerity actually means an oppressive and draconian government. Deal with it.
Leverage does not "create money" It's a technique to utlize the money the have.
Perhaps your problem is a semantic one? You have to understand that there are different notions of what money is anyway. As I have hinted at before, banks cannot directly increase the monetary base (though they can indirectly force the central bank to either increase it or miss its monetary policy target). However, the actions of banks do change the size of the money supply, because the money supply includes the size of bank deposits. In particular, the money supply grows when banks make loans, hence money is created.
Anyway, here's one final attempt. Have you ever read this article on Money creation? Seriously, read it. It is fairly short compared to the other links I have provided to you.
The mainstream portrayal of reserve banking is flawed as far as I can tell, but despite such disagreements about the details, all major schools of thought in economics agree that banks create money (that does not mean that banks get an entirely free lunch, as regulations are supposed to make seignorage impossible; but banks do create money, if not for their own spending purposes). Unless you at least acknowledge and somehow address this dissonance between your claims and basically all of economics, you just come off as a crackpot who doesn't understand what he's talking about.
This is simply not true. Banks cannot issue money they don't have, either physically or electronically.
You don't have to take it from me. Here is a nice visualization of what happens when a bank makes a loan. You can let economist Bill Mitchell explain it to you. Or you can read between the lines in the Basel accords, which define how much leverage a bank can have. Of course, "leverage" is the key word here - banks normally create money when they increase their leverage (technically speaking, they can also increase their leverage by changing their position to be riskier according to the Basel rules, but that is an exception rather than the rule). If you speak German, you might also want to look at this explanation of the German central bank, in particular the section on "Giralgeld". More generally, if you want to understand how money works, the best sources are the writings of Modern Monetary Theory economists, simply because they place value on explaining the down-to-earth mechanisms underlying all the fancy talk. I suggest you start here or here.
If I were you, this cross section of sources from all over the economics spectrum (from ultra-orthodox to highly unorthodox) would convince me.
Seriously, if every loan a bank made "magically created money", we'd be in such runaway inflation it would cost billions for a gallon of milk.
Since the premise of that implication is true without there being runaway inflation (though I want to emphasize that there still is no magic involved), it seems you also have to work on your understanding of how inflation works.
Look, I understand where you're coming from, and I understand you find it hard to believe the things that I'm writing. But consider the possibility that I'm right. Can you risk being wrong about that?
Two years ago, I probably would have reacted like you did (although I hope that I would have better estimated my own lack of knowledge in the matter). The fact of the matter is that, unfortunately, the macroeconomics education sucks everywhere around the world, and unless you study economics at university you never normally come across all these things. That's not your fault. In the context of the financial crisis I've become curious to understand more, and I've read up on all these things. I've come across a lot of unintuitive things along the way, and it takes time to digest everything. It took me at least a year, and I'm still learning new things.
I sincerely hope you will set aside some time to follow some of the links I listed above. It can be an amazing intellectual experience.
If/when people lose all faith in a currency, inflation skyrockets. (...) Several of Europe's currencies were valueless during the second world war - and the first for that matter. A wheelbarrow full of money couldn't buy a loaf of bread.
Ah, but why was that? Was that because people had no faith in the currency, or was it because there simply wasn't enough bread around? War takes its toll on the production capacity of a country.
As long as people believe that a dollar bill has value, then you can trade that dollar bill for something or real value.
False. If nobody has anything of value to trade against that dollar bill, then you cannot trade it no matter how much you believe in it. When a valley in the Alps is snowed in, people there do not "lose faith" in the value of their money, but if the supply trucks are cut off, that faith isn't going to help them at all.
It's all about supply and demand. Faith is irrelevant.
The tax man can bang on the doors of every citizen in this country, but if they don't have dollar bills with which to pay their taxes, then he'll either accept some other form of payment, or do without.
... and then he calls the judge to impound their assets, which is why normal people will rather go and offer their labor in order to get money and pay taxes. Keep in mind, of course, that collecting taxes would actually become easier if people had a shitload of money due to hyperinflation.
Look, fiat money is a creation of mankind, I totally agree. You cannot eat it or do anything with it, so it has no intrinsic value. But to go from there directly to the conclusion that the value of fiat money rests only on faith is bogus. It just does not follow logically.
In particular, if you actually drill into hyperinflationary periods anywhere, you will quickly understand that faith had no causal role to play in any of them. The stories read remarkably similar, and they are always caused by some combination of factors including collapse of production in the economy caused by war or idiotic policies, together with currency pegs or foreign-currency denominated debts.
A country can print more money, you and I as citizens cannot (legally) do so. Nor can the banks.
The statement about the banks is misleading. While they cannot print money in the literal sense (physical currency is only created by government), they do "create money" whenever they give out loans. That money is then "destroyed" when the loan is repaid. This is generally agreed upon in economics; you can read about the various definitions of money supply, for example. Except for the monetary base, they all include credit money created by banks.
Of course this site doesn't go into too much detail but 95% of our money is magically created out of debt.
Actually, it's 100%, and there's nothing magic about that. Just as a matter of accounting, every from of monetary assets is actually somebody else's liability, i.e. debt. Those physical dollar bills in your wallet? They are a liability of the US government.
But that's no reason to go insane about it. Calm down, set aside a few hours, and read the Modern Money Primer by UMKC economist Randall Wray, or, if you don't have quite that much time, this summary on PragCap.
The United States has fiat money. The value of our currency is tied to nothing at all. The value of our money is purely whimsical. So long as people have faith in the currency, it is valuable. When faith begins to fade, it will have no value.
No matter how little "faith" people have in the US$ - and what the hell does "faith" mean in that context anyway? - they will still have to use US$ to pay their taxes, because the government says so. That is the floor that prevents the value of US$ from dropping to zero, and in fact taxes are where the value of money initially came from. Taxes drive money. Not enough people are aware of that, even though it's kind of obvious once you really think it through.
I'm not an expert on the matter, but there is a serious debate among academics that The Prince was actually meant as satire, i.e. that Machiavelli's goal was to criticize the practices outlined by highlighting them in their full immorality, perhaps even targeted at the general public as an audience. This debate seems to not be fully settled, but it's worth pointing out given your comment. If those commenters are right about Machiavelli's actual intention, it would be deeply sad and ironic how the word "Machiavellian" is used these days.
Slashdot Mirror
Indeed. Saying that the visible universe is shrinking is not exactly accurate, but it captures the gist of what is going on according to current cosmological models, AFAIU. What's happening is that space itself expands uniformly, that is, the same amount of expansion happens at every point in space. Of course, this expansion adds up over long distances, so that regions very far away from us are receding at close to, and then faster than, the speed of light.
This means that we now receive light from galaxies that we will no longer see in the future. This is the sense in which the visible universe shrinks.
On the other hand, we can always see light from as far as the light could have travelled since the big bang, and in that sense, it doesn't really shrink, it just becomes less dense. It all depends on what type of coordinate system you're talking about, and what unit of measurement you're using.
The many-words interpretation of quantum mechanics tells us there are obscene numbers of universes that exist, because the universe creates perfect copies of itself every time a quantum decision is made, except for the quantum decision itself being different in each copy.
That's a widely spread but IMO misleading popularization. When you read more about the many-worlds interpretation, all it's really saying is that the universe really is a unit vector in a (very high-dimensional) complex vector space. As such, many-worlds says that the universe really is a linear combination of all the many possible states that the universe could be in. The linear combination is the physical reality.
Popularization then calls each of these possible states a parallel universe. That's not completely wrong, but it is very misleading.
Arbitrage is certainly important, and it should happen on a time scale that is faster than ordinary economic events, because markets need some time to adjust [1]. But it is fairly obvious that there are strongly diminishing returns for society as arbitrage becomes faster. Imagine a hypothetical alternative market which operates on a one minute heartbeat, for example: the market algorithm simply runs a secret auction once per minute at a pre-determined time, with bid prices as fine-grained as one millionth of a cent to avoid some pathologies. My hypothesis is that such a market would be as inconsistency- and arbitrage-free as what we have today, to an accuracy where the difference simply doesn't matter to ordinary investors - where by ordinary investors, I mean actors with an investment horizon that is measured at least in months. So you would have the same benefit to the society while using less resources (resources that are currently used to get ping times down etc.).
At the same time, look at your last argument: HFT traders are basically competing among themselves, but since their response times have to be so fast these days, they are mostly competing to exploit each other's weaknesses and the weaknesses of the trading algorithms of larger investment funds.
In the hypothetical market, competition between algorithmic traders would still happen. But since there is now more time for computation, the emphasis shifts away from hacking to get short response time and instead towards making more intelligent decisions about price. There might be a shift towards more emphasis on evaluating fundamentals, and that can only be a good thing for the efficient allocation of capital.
[1] Incidentally, I suspect that the reason that much of what neoclassicals say about the macroeconomy is wrong precisely because they incorrectly assume fast arbitrage in macroeconomic events.
It's more and more about what algorithms your "opponents" are using and what your algorithms are set at.
Only if you are in it for day-trading profits. And if you are, well, you deserve to be beaten senseless by some HFT algorithm.
If you're a long term investor, with a time horizon of many decades, this doesn't matter. For example, I have a stock I bought 15 years ago. It has gone up by around 3X in that time. HFT makes no difference to me when I've held a stock over many years or decades. The exact microsecond it sells doesn't matter to me after a period of decades.
The fundamentals are driven by stock valuations, which are based in what people guess about the future of the company. You can be as informed about that as anybody. If you believe a company will do well over the long haul, buy some of their stock. Don't worry about HFT. You don't have to microsecond-time your sale and beat some other HFT algorithm when you've made a lot of money over years, rather than little bit over seconds.
It's more and more about what algorithms your "opponents" are using and what your algorithms are set at.
Only if you are in it for day-trading profits. And if you are, well, you deserve to be beaten senseless by some HFT algorithm.
If you're a long term investor, with a time horizon of many decades, this doesn't matter. For example, I have a stock I bought 15 years ago. It has gone up by around 3X in that time. HFT makes no difference to me when I've held a stock over many years or decades. The exact microsecond it sells doesn't matter to me after a period of decades.
This is a good point. But then the question becomes: what good does HFT provide? A lot of smart people are sucked into that sector because of the money, where they are arguably causing a net loss to society by participating in an arms race that does not produce any real goods or services. Those smart people could in principle be contributing to research and development in areas that actually improve everybody's standard of living, such as medical research and robotics - or perhaps even in economics when it comes to analyzing long-term successes (after all, genuinely improving the capital allocation in the long-term could be beneficially to society, unlike the short-term gambling that is happening these days).
With that in mind, there needs to be a discussion on how best to disincentivize this kind of extremely short-term behavior, where it is via transaction fees or via trading on heartbeats.
That's pretty flamebaity, but let me try a reasonable response anyway.
As I see it, the military budget has two purposes: (1) prolong global US hegemony for as long as reasonably possible, (2) stimulate and maintain strategic domestic industries, both in terms of production facilities and in terms of R&D - basically, the military budget is Keynesianism in a guise that appeals to Republicans.
It seems fairly clear that goal (1) can be achieved on a much smaller budget, if that budget is used more intelligently, i.e. not wasted by getting into unproductive quagmires. We can argue about the exact numbers, but just compare the size of the US military budget to the next runner-up country. It's clear that there is much more than enough of a "safety margin".
Goal (2) can easily be achieved by an ambitious space program. Such a program could require domestic production of parts, as well as pretty advanced domestic R&D.
So, obvious political issues aside, I see no compelling rationally justified reason not to shift a pretty significant piece of the budget from the military to space exploration.
Skipping to what I think is really the crucial point.
But what kind of confidence are we talking about here? Mostly, we are talking about confidence in future income streams. If, as an employee, I worry about being laid off in the next few months, then naturally I am going to save more - if possible - to have some savings as buffer. Similarly, as an employer, if I worry about landing enough contracts over the next months, I am not going to employ more people. It's all about income streams.
So you're choosing not to agree with me why? The above is not some deep insight, but merely a slightly different model.
I'm not exactly disagreeing with you. Rather, you seem to use "it's all about confidence" as an argument to contradict me. What I am saying is that one of the most important factors in confidence is the confidence of future income streams, i.e. demand.
In other words, it is completely misguided to use confidence-related arguments as a reason to ignore the issue of aggregate demand.
Everyone agrees on that. But what is reality here? I just don't buy that our current problems are because we didn't try stimulus hard enough.
I recommend that you go through publicly available data sets, and just look at the scale of the accumulated private debt that collapsed due to the GFC. All that debt recorded previous "stimulus" by private households spending more than their income, and all this "stimulus" then stopped abruptly. We can throw numbers around here, but I think the best approach is for you to just take a look yourself. A lot is available from the St. Louis Fed's FRED database, for other, aggregated data, you might want to look at some of the things that Richard Koo and Steve Keen have collected.
In any case, the scale of the problem was truly mind boggling, and you really have to take a rational thinker's approach to judging how big those numbers are in relation to each other.
Even in a do nothing scenario, eventually the uncertainty goes away.
You're missing the point.
To paint an obviously exaggerated picture, if a prolonged global depression causes so much social unrest that the global supply chain disintegrates, then what good does it do if uncertainty goes away afterwards? When living standards declined after the fall of Rome, do you really think people thought that was just fine, since after all, uncertainty eventually went away?
Now of course nobody expects anything quite so stark, except perhaps limited to countries like Greece and Spain. But the point still stands: prolonged recessions can decrease the long-term trajectory of an economy. It's called hysteresis.
Will the feds be trying to block expansion of my business after I already have spent the money for expansion? Who knows? But Obama has already blocked a lot of such things (particularly, fossil fuel related industries and infrastructure) and is likely to continue that practice should he get reelected.
Frankly, you're letting your politics cloud sound judgement (bringing suspicions about future behaviour of one specific politician into the discussion is a sure sign of that). It is a pity that I cannot find the link right now, but a survey among small businesses around 2010-2011 clearly indicated that what they were most worried about was finding customers for their products and services.
Regulation can be troublesome, I give you that, but individual pieces of regulation are mostly confined to a very narrow segment of the economy, and the problem we're talking about here is obviously at a macro level.
First of all, there wasn't that much stimulus happening in the first place. All those huge sounding numbers that the Fed throws around with various QE activities does almost exactly zero to stimulate the demand
It gave a tremendous amount of wealth to anyone who owed money. Bond and loan yields dropped as a result. There probably was a bit of inflation as well. That should have spurred collective demand in theory just due to the massive number of people who hold loans out there and suddenly had a lot less risk in their portfolio. In practice, I see it as confirmation of my assertion.
It didn't help those on the lower end of wealth spectrum as much though, like all those people whose mortgages were under water. Rate of savings matter a lot.
The argument that it's all about demand is just a transparent excuse to increase public spending.
That's where you're letting your politics cloud your judgement. Demand-side economists can almost as easily be used to justify tax cuts, and many demand-side economists indeed argue for income tax and tax roll cuts for lower-income brackets.
The subtle issue here is that tax cuts are only really effective when they affect low-wealth/income households, as those are the ones that are most likely to go out and spend the additional available income on real goods and services.
Similarly, many European businesses risk a lot if they make big investments now. They could get burned by some consequence of the Greek thing. That's just how it is. People are unwilling to buy lots of stuff, if they don't have confidence in the future.
But what kind of confidence are we talking about here? Mostly, we are talking about confidence in future income streams. If, as an employee, I worry about being laid off in the next few months, then naturally I am going to save more - if possible - to have some savings as buffer. Similarly, as an employer, if I worry about landing enough contracts over the next months, I am not going to employ more people. It's all about income streams.
In a sense, demographics are central to the explanation of the cycle that is proposed in the article. 50 years is about the time it takes for lessons to become lost because the people who experienced them personally are dead or too old to affect the course of events.
Of course, my assertion is. But why isn't all that stimulus that the US and the rest of the world burned, doing much? That's supposedly a huge spur to demand, but it's fallen pretty flat.
There are two things to keep in mind here. First of all, there wasn't that much stimulus happening in the first place. All those huge sounding numbers that the Fed throws around with various QE activities does almost exactly zero to stimulate the demand, and economists who focus on how the financial sector works have been able to predict that quite accurately.
Second, the Obama stimulus has in fact helped soften the recession according to most simulations, including those of the CBO. The stimulus simply wasn't very big compared to the overall size of the problem. (Yes, the problem was that huge.)
As for the whole uncertainty thing, look: Of course this is largely a chicken-and-egg problem. You are of course right that uncertainty leads to individuals spending less. But then this reduction in demand causes uncertainty in the first place. So the non-partisan question here is how to best break that cycle. It is obvious that if you inject more demand into the system, this eliminates many reasons for uncertainty for individual spending decisions.
Outside of neoclassical economic models, expectations follow reality more than the other way around.
That's an interesting line of thought, though I would ask just how many cycles you would need to find the right price. The market may see some over- and undershoots in the valuation, but it seems like no more than a handful cycles would be needed. Then each cycle might require several "ticks" to work its way. In any case, even if the length of a tick were a minute, it should take much less than a day for the price to settle.
I suspect you are replying to people who have in mind a definition that "inflation = increase of the money supply". Needless to say that this is a ridiculous definition to start from in modern days, since the size of the money supply is not a thing anybody cares about as a primary indicator; the only reasonable definition for inflation is via the price level. But old habits die hard, and the nuts who want the world to work differently are very vocal in this small corner of economics. Don't sweat it ;-)
Math is telling the government that no, you can't spend more money than you've got forever, and yes, what it does is impacting other people.
Actually, math is saying the opposite. Since the US federal government is monetarily sovereign (it is a currency issuer), math is saying that the US federal government is able to forever spend an arbitrary amount of US$. There are no limits. As long as there is somebody willing to sell a good or her services for US$, the US federal government can buy them.
Now obviously, running a too large deficit for too long will have inflationary effects. But how large is too large? There is no general rule for where the inflation-neutral point is. In fact, there are good arguments that the inflation-neutral point is a steady, long-run deficit to compensate for private sector net financial assets saving desires.
As an addendum: Vickrey got it wrong in the short term because he did not foresee the expansion of private credit. In the long term he got it right because this expansion of private credit was not sustainable.
Vickrey seems to be saying that the then-newly-elected Clinton administration is getting it all wrong, that it is failing to provide enough stimulus and the economy will suffer unless it changes its policies. But historically the Clinton years were very good ones economically. So did Clinton do what Vickrey said, or was Vickrey wrong?
That's a good point. I would say it is a bit of both. The Clinton years were good ones for the US economy, and there was a surplus under Clinton for some years, but this was never sustainable. In some sense, the real question is: What is the relationship between the surplus and the economy?
The sane answer, I think, is that the Clinton surpluses were only possible because of the economic good times. A well running economy implies high tax revenues and low social spending, and therefore pushes the budget deficit towards surplus automatically, even when politicians do nothing.
But the more worrying part, and this is where Vickrey got it right, is the question of how those good economic times were possible in the first place? The answer to that is that the Clinton administration was also a time when private credit really took off. Economic growth was largely fuelled by consumers going into debt to finance their consumption. As should be clear to everybody by now, that wasn't such a good idea after all, because unlike government debt, consumer debt is not sustainable.
Once you start dealing with a deficit that's bigger than what you can reasonably expect to grow, you're in deep trouble.
You're taking the wrong metric here. When it comes down to it, the deficit is simply equal to the net imports plus the saving of the private sector. That is not a theory, by the way, it is a simple consequence of proper book keeping. So whether a government deficit is big or not really needs to be seen in relation to the desires of the private sector and the behaviour of the rest of the world.
What you are seeing in the US is simply that the crazily low savings rate of the private sector is returning back to normal now. Where before, consumption has been financed by easy credit, this access to credit has now dried up and everybody is scrambling to get their balance sheet in order - a balance sheet recession. This increase in private saving needs to be supported by a government deficit. If the government withholds the assets that the private sector needs, this will result in less spending, i.e. a lower path of GDP, and a lot of pain for private individuals especially via higher unemployment.
All that has been known for a long time, see e.g. here. Modern Monetary Theory also explains the connections quite well, and can perhaps help you calm down in general.
To anybody who reads the parent: yes, those debt numbers sound impressive. However, ultimately they are just the necessary counter-part to giving the private sector the monetary assets that it desires. This was understood a long time ago, see e.g. here. More recently, Modern Monetary Theory economists have been pushing the same point. If you haven't yet, I recommend you set aside some time to read introductory explanations e.g. here and here and here.
The bottom line is this: targeting a specific size of the budget is bad policy. The budget will be whatever it has to be to match the behaviour of the private sector. Artificial austerity, as is being proposed these days, is coercion of the private sector to go against its natural behaviour, even when that natural behaviour is benign. In other words, austerity actually means an oppressive and draconian government. Deal with it.
Leverage does not "create money" It's a technique to utlize the money the have.
Perhaps your problem is a semantic one? You have to understand that there are different notions of what money is anyway. As I have hinted at before, banks cannot directly increase the monetary base (though they can indirectly force the central bank to either increase it or miss its monetary policy target). However, the actions of banks do change the size of the money supply, because the money supply includes the size of bank deposits. In particular, the money supply grows when banks make loans, hence money is created.
Anyway, here's one final attempt. Have you ever read this article on Money creation? Seriously, read it. It is fairly short compared to the other links I have provided to you.
The mainstream portrayal of reserve banking is flawed as far as I can tell, but despite such disagreements about the details, all major schools of thought in economics agree that banks create money (that does not mean that banks get an entirely free lunch, as regulations are supposed to make seignorage impossible; but banks do create money, if not for their own spending purposes). Unless you at least acknowledge and somehow address this dissonance between your claims and basically all of economics, you just come off as a crackpot who doesn't understand what he's talking about.
This is simply not true. Banks cannot issue money they don't have, either physically or electronically.
You don't have to take it from me. Here is a nice visualization of what happens when a bank makes a loan. You can let economist Bill Mitchell explain it to you. Or you can read between the lines in the Basel accords, which define how much leverage a bank can have. Of course, "leverage" is the key word here - banks normally create money when they increase their leverage (technically speaking, they can also increase their leverage by changing their position to be riskier according to the Basel rules, but that is an exception rather than the rule). If you speak German, you might also want to look at this explanation of the German central bank, in particular the section on "Giralgeld". More generally, if you want to understand how money works, the best sources are the writings of Modern Monetary Theory economists, simply because they place value on explaining the down-to-earth mechanisms underlying all the fancy talk. I suggest you start here or here.
If I were you, this cross section of sources from all over the economics spectrum (from ultra-orthodox to highly unorthodox) would convince me.
Seriously, if every loan a bank made "magically created money", we'd be in such runaway inflation it would cost billions for a gallon of milk.
Since the premise of that implication is true without there being runaway inflation (though I want to emphasize that there still is no magic involved), it seems you also have to work on your understanding of how inflation works.
Look, I understand where you're coming from, and I understand you find it hard to believe the things that I'm writing. But consider the possibility that I'm right. Can you risk being wrong about that?
Two years ago, I probably would have reacted like you did (although I hope that I would have better estimated my own lack of knowledge in the matter). The fact of the matter is that, unfortunately, the macroeconomics education sucks everywhere around the world, and unless you study economics at university you never normally come across all these things. That's not your fault. In the context of the financial crisis I've become curious to understand more, and I've read up on all these things. I've come across a lot of unintuitive things along the way, and it takes time to digest everything. It took me at least a year, and I'm still learning new things.
I sincerely hope you will set aside some time to follow some of the links I listed above. It can be an amazing intellectual experience.
If/when people lose all faith in a currency, inflation skyrockets. (...) Several of Europe's currencies were valueless during the second world war - and the first for that matter. A wheelbarrow full of money couldn't buy a loaf of bread.
Ah, but why was that? Was that because people had no faith in the currency, or was it because there simply wasn't enough bread around? War takes its toll on the production capacity of a country.
As long as people believe that a dollar bill has value, then you can trade that dollar bill for something or real value.
False. If nobody has anything of value to trade against that dollar bill, then you cannot trade it no matter how much you believe in it. When a valley in the Alps is snowed in, people there do not "lose faith" in the value of their money, but if the supply trucks are cut off, that faith isn't going to help them at all.
It's all about supply and demand. Faith is irrelevant.
The tax man can bang on the doors of every citizen in this country, but if they don't have dollar bills with which to pay their taxes, then he'll either accept some other form of payment, or do without.
... and then he calls the judge to impound their assets, which is why normal people will rather go and offer their labor in order to get money and pay taxes. Keep in mind, of course, that collecting taxes would actually become easier if people had a shitload of money due to hyperinflation.
Look, fiat money is a creation of mankind, I totally agree. You cannot eat it or do anything with it, so it has no intrinsic value. But to go from there directly to the conclusion that the value of fiat money rests only on faith is bogus. It just does not follow logically.
In particular, if you actually drill into hyperinflationary periods anywhere, you will quickly understand that faith had no causal role to play in any of them. The stories read remarkably similar, and they are always caused by some combination of factors including collapse of production in the economy caused by war or idiotic policies, together with currency pegs or foreign-currency denominated debts.
A country can print more money, you and I as citizens cannot (legally) do so. Nor can the banks.
The statement about the banks is misleading. While they cannot print money in the literal sense (physical currency is only created by government), they do "create money" whenever they give out loans. That money is then "destroyed" when the loan is repaid. This is generally agreed upon in economics; you can read about the various definitions of money supply, for example. Except for the monetary base, they all include credit money created by banks.
Of course this site doesn't go into too much detail but 95% of our money is magically created out of debt.
Actually, it's 100%, and there's nothing magic about that. Just as a matter of accounting, every from of monetary assets is actually somebody else's liability, i.e. debt. Those physical dollar bills in your wallet? They are a liability of the US government.
But that's no reason to go insane about it. Calm down, set aside a few hours, and read the Modern Money Primer by UMKC economist Randall Wray, or, if you don't have quite that much time, this summary on PragCap.
The United States has fiat money. The value of our currency is tied to nothing at all. The value of our money is purely whimsical. So long as people have faith in the currency, it is valuable. When faith begins to fade, it will have no value.
No matter how little "faith" people have in the US$ - and what the hell does "faith" mean in that context anyway? - they will still have to use US$ to pay their taxes, because the government says so. That is the floor that prevents the value of US$ from dropping to zero, and in fact taxes are where the value of money initially came from. Taxes drive money. Not enough people are aware of that, even though it's kind of obvious once you really think it through.
I'm not an expert on the matter, but there is a serious debate among academics that The Prince was actually meant as satire, i.e. that Machiavelli's goal was to criticize the practices outlined by highlighting them in their full immorality, perhaps even targeted at the general public as an audience. This debate seems to not be fully settled, but it's worth pointing out given your comment. If those commenters are right about Machiavelli's actual intention, it would be deeply sad and ironic how the word "Machiavellian" is used these days.