While I absolutely agree that things got out of hand, you have to see things in perspective.
It is actually good that the media gets into such a frenzy over the death of a person related to technology. I prefer that a lot over the frenzy when somebody like e.g. Lady Di dies. Obviously, this single frenzy does not sustainably shift media priorities away from celebrity focus, but at least people in the general public are reminded once again that, you know, there are these people who are responsible for actually getting shit done.
Thank you. That suddenly makes a lot more sense, in a twisted kind of way. I would still maintain that reducing conservatism to fiscal conservatism is not exactly objective.
More importantly, "fiscal conservatism" is not the same as "not wasting". Here's why: Fiscal conservatism means avoiding deficit spending. By the sectoral balances, if the external balance is in deficit (as is the case in many countries, especially the US), this means that the private sector must also be in deficit. That means private actors must run down their savings or increase their debt. This is an unavoidable fact of accounting. But this in turn reduces the amount of spending in the economy (both consumption and investment), and this causes unemployment.
So a consequence of properly implemented fiscal conservatism is that, most of the time, there will be unemployment.
This means that individuals who could be productive and contribute to the well-being of society do not find a job in which they can do so. But this is certainly a kind of waste.
I'm all for making government more efficient and eliminating waste there. But that has nothing to do with being liberal or conservative, it is simply a matter of proper management. Fiscal conservatism, on the other hand, necessarily causes at least one kind of waste (not in government, but in the economy at large) most of the time.
When using proper definitions - not the modern twisted ones, you can be both a liberal and a conservative at the same time.
A liberal believes in freedom.
A conservative believes in not wasting.
I don't know. This is clearly a thing that might differ from country to country, but I was always under the impression that the conservation in political conservative always referred to conserving the existing social structures.
Lots of people fall for that because it means upholding traditional social values, which conveys a sense of security, but they suffer from it because conservatism also means maintaining the existing power structures (which, more often than not, don't favour the average guy).
Environmental conservatism (which is what I think of when I read "not wasting") really only entered the political landscape in the 20th century, though of course it has somewhat older roots in romanticism.
Once the wealth accumulates to the top only, how will the economy survive without spending by the middle and lower classes? Won't a lot of business just shutdown because people don't have money to spend?
This has already happened, actually. Over the last thirty years, the income distribution has gradually shifted towards the rich, who have a lower propensity to spend. The real income of the lower quantiles in the income distribution were left out in the cold. The only reason that the recession of two years ago hasn't happened earlier was that consumption spending was propped up by pushing ever more debt onto the average citizen. The savings rate was actually negative in the US for some time! Needless to say, this was not sustainable, and was ultimately going to crash and burn.
You do realize that this page does not actually list reasons for most of those recessions, right? I mean, sure, they write things like:
Failure of the Ohio Life Insurance and Trust Company burst a European speculative bubble in United States' railroads and caused a loss of confidence in American banks. (...)
But why did that Company fail in the first place? Can you really say that that was the initial cause? That's like saying the current mess was caused by the failure of Lehman Brothers. Maybe people in 150 years will write that, but even though there is disagreement about what the actual causes are, there is pretty much a consensus that the failure of Lehman Brothers was not a cause, but a symptom of the problem.
Of course, you are right in saying that the temporal coincidence does not imply causation - I wrote as much myself. But it is very suggestive that there is some relationship. An example of such a relationship is that both the GFC and the Clinton surpluses can be attributed to an over-leveraging of the private sector (where that over-leveraging came from is another debate, of course).
besides, you are misrepresenting the way the USD system works; it does not turn physical USD into a larger amount
I chose my words very carefully. I never implied that physical USD can be turned into larger amount. Please read what I said again.
If the fractional reserve banking system can make $980 billion physical USD bills into $9.5 trillion dollars, then the very same system will make 7.2 million bitcoins into 72 million bitcoin credits.
Obviously physical USD bills != USD dollars, and in the same sense, bitcoins != bitcoin credits. I made the distinction very clear by my choice of words.
Right back to you;)
The banking system does not turn an amount of physical bills into a larger amount of dollars. This view of the banking system is shared by nobody. Most economists would say you are wrong because s/physical bills/reserves/. But that's a distortion of the truth, too;)
In fact, as Modern Monetary Theory clearly illustrates, it would be more accurate to say that the banking system maintains a very large amount of dollars in deposits, most of which originated in loans, which in turn are backed by the regulatorily mandated amount of bank capital (as per the Basel accords). In addition, the system keeps a significantly smaller amount of reserves at the central bank as part of the payment settlement system. In most countries, the regulatory rules demand that the amount of reserves is somehow tied to the amount of deposits, so that an increase in deposits also causes an increase in reserves. However, not all countries have such a rule. In those latter countries, the amount of reserves is determined entirely by the liquidity preferences of banks.
This is only true if people replicate the existing system of bank money on top of Bitcoin
Sorry but that's not my assumption. Fractional reserve banking is not just a property of the current banking system. It's a fact of life. (...) Regardless of how bitcoins are marketed or how it works, a bitcoin banking sector will develop, and everyone will start using it because the people who boycott the banking system will not be able to compete with those who do. The market will eventually weed them out just like how it weeded out Bob's two inefficient businesses in the above examples.
Ah yes. You're right: if bitcoins were widely adopted, then such a banking sector would develop. Still, it's ironic, don't you think? People who have an ideological distaste for the existing system invent something to replace it. Then, assuming they win, they will proceed to reinvent (over time, of course) the existing system on top of their replacement.
It's the old "Those who don't know history..." thing all over again.
I actually pointed this original use of the term out myself. It's just that most economists have moved on. The causal link between money supply and price increases is actually non-existent. As I've written in a sibling post, the only links that exist are when there is a third event (such as increase in consumer credit leading to excessive consumption) that increases both the money supply and the price level at the same time. But this is not a causal link from money supply to price increases. And the empirics support this. It's one of those things where everybody "knows" that there is a causal link, but when people actually try looking for it, they can't find it. Yet for some strange reason, they just "know" that it "must" be true, empirical studies be damned.
This leads to fun stuff like economists predicting three years ago that the actions of the Fed would lead to massive inflation. Strangely, this inflation still hasn't shown up. Even of the relatively modest inflation we're having right now, almost everything can be attributed to energy prices. Not a sign of monetary policy-caused inflation is in sight.
Besides, the outdated definition of inflation is simply useless. Nobody's life is directly affected by the size of the money supply, and the size of the money supply is not a policy variable, i.e. the government does not set the size of the money supply. On the other hand, the definition of inflation in terms of price increases is useful, because people's lives are directly affected by changes in the price level.
printing fiat currency funnels money from the lower and middle classes to the politically connected elites.
Oh please. Any funneling of money towards politically connected elites has nothing to do with whether one has the fiat money or not. Political systems before 1971 were perfectly capable of funneling money towards the connected elites. This has more to do with societal attitudes towards corruption etc. than anything else. If you let your politicians run over you, that's what you get. Whether you have fiat money or not just doesn't matter.
> it is not determined by the government, and therefore > defining inflation in terms of the money supply is > simply pointless.
I don't follow. Why does it matter who inflates the supply?
It matters for policy discussions. In the gold standard world, expanding the money supply (and base) is something that governments did. Inflation, in the gold standard sense, was something that governments did. So it made sense to argue for or against certain government action.
In our modern world, money supply changes and inflation are things that are almost entirely done by the private sector. The implication for policy debates is huge.
Either way, supply/demand still works: supply of money goes up, price of money goes down.
Uh, no. The term "money supply" is really very misleading. Just because the "money supply" (i.e. M2) increases, that doesn't mean that money somehow "becomes cheaper". There is not a market like for commodities. In fact, there is no robust causality from a growth of the money supply to anything else. The only causalities there are is that some third type of event causes both the money supply to grow and something else to happen.
For example, increasing consumer credit can cause the money supply to grow and also aggregate demand to grow, which in turn can grow the economy, or, if the economy hits supply side constraints, cause inflation. So in the latter case, it is not the growth of money supply that causes inflation; instead, it is a third event (more consumer credit) that simultaneously causes inflation and a growth of the money supply. Similarly, in the first case it is not the growth of money supply that causes growth of the economy; instead, it is a third event that simultaneously causes growth of the economy and of the money supply.
Sorting out those causalities is kind of important.
> There are really two big classes of loans in > our society:
I believe you are leaving out the federal debt, which at 14 trillion dollars accounts for somewhere in the neighborhood of 100% of the money supply.
I was talking about private sector loan activities, which are what really affects the money supply the most. Also, don't delude yourself: outstanding mortgage debt is on the same order of magnitude as total government debt, and that's just one type of private debt.
Besides, it's not like government needs you to loan it money. Government debt is really a tool of monetary policy. Read about how our monetary systems actually work.
The irony is, of course, that rain is caused by sunshine. Sunshine is what causes water to evaporate, which is a prerequisite for rain. Of course, nobody is suggesting to abolish sunshine, because sunshine has plenty of inherent benefits. And so does rain, by the way. So your analogy is pretty flawed, because neither depressions nor government surpluses have any inherent benefits (for a monetarily sovereign government, that is).
To go back on the correlation vs. causality issue though, there is a solid causal theory for how government surpluses create depressions based on sectoral balances. The government surpluses have the effect of squeezing cash out of the private sector, causing spending and aggregate demand to collapse, which is what leads to the depression.
Given that there is a plausible theory of cause and effect and a pretty strong empirical observation, you'd be a fool not to consider the possibility that the government surpluses really did cause the depressions. In any case, you'd have to come up with a better rebuttal.
Exactly, the recession after Clinton's surpluses fits the pattern perfectly, and I would include it. The reason that Wray excludes the Clinton surpluses is that they weren't followed by a depression, but "only" by a recession. Even the current mess we're in is not considered to be a depression by economists (for whatever reason, don't ask me why). Wray has more to write on the topic on the page that I linked to.
Shrinking government spending (...) has also made Germany the only stable economy in Western Europe in the recent years.
Funny fact: Germany was (with France) the first country in EMU to violate the Maastricht limits on government deficits. On the other hand, Ireland, Spain, Italy and Portugal used to be within those limits before the GFC and are now going down the drain.
There may be lots of reasons why Germany has done comparably better than other EMU countries, but shrinking government spending is not one of them. And it's not like Germany is doing so great either: In fact, early warning indicators are pointing down again these days.
Well how many recessions have been caused from over extension of debt? Sounds like your theory is missing some sample data.
The sample data strongly suggests that it is in fact government surpluses that cause depressions. I quote from here:
Since 1776 there have been exactly seven periods of substantial budget surpluses and significant reduction of the debt. From 1817 to 1821 the national debt fell by 29 percent; from 1823 to 1836 it was eliminated (Jackson’s efforts); from 1852 to 1857 it fell by 59 percent, from 1867 to 1873 by 27 percent, from 1880 to 1893 by more than 50 percent, and from 1920 to 1930 by about a third. Of course, the last time we ran a budget surplus was during the Clinton years. (...)
3. The United States has also experienced six periods of depression. The depressions began in 1819, 1837, 1857, 1873, 1893, and 1929. (Do you see any pattern? Take a look at the dates listed above.) With the exception of the Clinton surpluses, every significant reduction of the outstanding debt has been followed by a depression, and every depression has been preceded by significant debt reduction. (...)
Obviously, correlation does not imply causation, but if data as strong and suggestive as this doesn't at least make you stop and think and reexamine the conventional wisdom of the austerity fanatics, then you aren't being rational or reasonable, you're simply being a religious zealot.
If the fractional reserve banking system can make $980 billion physical USD bills into $9.5 trillion dollars, then the very same system will make 7.2 million bitcoins into 72 million bitcoin credits. Don't confuse the actual currency in circulation with whatever the money multiplier produces.
This is only true if people replicate the existing system of bank money on top of Bitcoin (besides, you are misrepresenting the way the USD system works; it does not turn physical USD into a larger amount; instead, it turns reserves at the Fed into a larger amount of cash deposits at commercial banks; physical money is an irrelevant implementation detail). M0 is reserves at the central bank, and nobody except banks trades with reserves, because nobody except banks has accounts at the central bank. Instead, people have bank accounts and paper money.
So for your statement to hold, the future Bitcoin-based economy would have to have a banking sector where the majority of the population actually does not use Bitcoins at all, or only in very small quantities. Personally, I find that unlikely given the way Bitcoin is marketed.
On the other hand, it would be very ironic to see a complete repeat of the history of money: banks built on Bitcoin, terrible bank runs and crashes due to lack of regulation, the re-introduction of regulation and Bitcoin central banks, and finally, when even that becomes untenable again, a removal of the Bitcoin standard. Those who don't know history are doomed to repeat it, and all that.
The longer story is that your definition of inflation is simply outdated. It used to be used for gold standard currencies, where "inflating the money supply" was something that a government actively chose to do, and so it was reasonable to talk about it. In our modern monetary systems, the size of the money supply is endogenous, i.e. it is not determined by the government, and therefore defining inflation in terms of the money supply is simply pointless.
The size of the money supply is mostly determined by the credit creation of banks. When a bank makes a loan, the money supply increases. When the loan is retired, the money supply shrinks. There are really two big classes of loans in our society: mortgages, and loans to cover production costs of firms. The first class grows when house prices rise: increasing prices in houses causes the size of mortgages to go up, which expands the money supply. The second class grows when general price levels increase: firms have larger production costs, which means they're taking out larger loans, which grows the money supply.
Of course there are other factors driving the money supply as well, such as Minsky-type cycles in how banks assess the credit-worthiness of their customers, but there is certainly a causal link from price levels to the size of money supply that people don't seem to be aware of.
Been to Walmart lately? Everything except tech is going up. The government is suppressing the official inflation figures with a lot of smoke and mirrors but for an ordinary person wages are pretty flat and the price of everything is going up.
You're labeled a troll, who knows if fairly or unfairly, but for you and for others who come across this I would just like to mention that the subjective perception of inflation is still subject of research.
At least one group of economists (sorry, I don't have the link handy) is trying to address exactly what you're saying. The disconnect between official CPIs and what people perceive exists in many countries, at the same time as independent economists confirm official CPI computations, so to believe in government conspiracies everywhere is at least a bit crazy.
So they tried to figure out why individual perception is different. The summary of their result was something like: CPIs are computed to represent people's spending in an objective way, but in people's perceptions, some classes of goods have a much higher impact on how they feel about the price level. Since inflation is never equal across the board (there are always some classes of goods whose price increase is higher, and others whose price increase is significantly lower than average), the individual perception can become distorted depending on which classes of goods have particularly strong price increases.
I have a crazy idea. Instead of flushing this money down the toilet, why don't we use it to pay the government's debt instead?
And what would that achieve, exactly? You would reduce the overall balance sheet of the economy, since the government's debt may be less than it would otherwise be, but also somebody's assets are less.
It is futile to think about the cost of government in monetary terms. The only useful measure of cost of government is to think about whether the government's spending uses real resources (goods, services, human labor) that could otherwise have been enjoyed to further the well-being of private citizens in a better way.
So DARPA will employ scientists and engineers and support staff for more pie-in-the-sky research. That adds directly to economic activity, and will indirectly lead to new technology that can increase productivity. That's a pretty good use of real resources in my book.
So what? As far as I can see, my logic still applies: the anonymous country sells their treasuries or waits for the principal to be paid back. Instead of putting that money back into treasuries they put it into something else. This means the US$ money is now in other hands. From those other hands, it will in the end flow towards US taxes (if it is spent in the US) or back to treasuries owned by somebody else. You really have to look at it from the big picture perspective to understand macroeconomics, the individual level just doesn't cut it (even if the individual happens to be a country).
If you still think this logic is flawed, please point out how your example invalidates this logic. Where is the step in the argument that fails?
(Side note: I'm not a US citizen nor do I live in the US; it seems you were writing with the assumption that I was.)
Exactly! It's nice to see things spelled out reasonably. I would only add a few minor things:
Of course, the value created if any tends to work over time - the value of a new sewage treatment plant accrues to society over the years it operates, so when there is healthy demand interest rates may have to rise to prevent inflation as the resources in existence in the present are constant, but when demand is slack, there were probably not many better competing uses the resources could have been put to, so this is not inflationary.
Some economists, especially coming from MMT, say that since the effect of interest rates is so indirect and unclear - it actually increases available money for savers, after all - inflation is actually better controlled via taxation.
There are implementation problems with that, of course, since politicians don't like to raise taxes, so a largely independent body might have to be created to adjust taxation based on inflationary pressures.
Ensuring resources are put to the use which best grows the economy is the only saving the government is capable of. Usually but not always, this means not spending.
I basically agree, though I would not call that saving. The way I see it, the government ostensibly has the goal of advancing the welfare of its citizens. This can be done with a more or less hands-off method, but some high-level steering will always be necessary due to the nature of economics.
Growing the economy then becomes only a sub-goal of the larger goal of advancing general welfare, and at some point in the future it may no longer be an appropriate sub-goal (see the discussion about sustainability here on Slashdot recently). However, as long as there are productivity improvements, growing the economy is important to achieve full employment (which I believe should always be a sub-goal of advancing general welfare).
Google's worth as a bookmark system has seriously dropped with the way they're handling links now. Obviously, the links in my post are messed up, they should be: #1 and #2.
That may be the case for you individually. However, as I've written in response to a sibling post as well, there is no escaping from the US$ system at an aggregate level. Dollars remain dollars; even if you convert your dollars into EUR or something else, then simply somebody else will have more dollars. As long as these dollars are not used to buy treasuries or to pay taxes, somebody will always have them, and thus have an incentive to put them into treasuries if they don't want to spend (because treasuries earn more interest than just holding on to cash). Even if you as a private person do not buy treasuries but instead put the money into a savings account, then that just means that your bank will be left over with surplus reserves at the Fed, which will cause that bank to buy treasuries so that they can profit from the interest differential. And if you do spend, then taxes will ensure that the money flows back to the government over time.
This is why, for a monetarily sovereign government, debt really isn't a problem. By the way, this is a reasonable starting point for this topic, as well as this overview on MMT.
So you spend 100$ and let's say the taxes on this are 10$. Now somebody else has 90$ more. They either spend it or save it. If they spend it, more gets subtracted in taxes and we repeat the same logic with let's say 81$. If they save it, they might buy treasuries directly - then everything is clearly fine - or they might put their money on a savings account, in which case their bank (or some other bank) will eventually buy treasuries to profit from the differential in interest. In the third variant, they buy some asset like stocks with their 90$, but then again somebody else gets those 90$.
The point is that there is no escaping from the US$ system in the sense that dollars remain dollars forever, and as long as people do not buy treasuries or pay taxes with those US$, there will be a surplus in reserve accounts that encourages banks to buy treasuries.
As it currently exists, if we were to take 100% of the income from every American today, it would not pay off the national debt.
So what? I'll let you in on a little secret: the people who actually own all those treasuries do not want it paid back. It's really that simple. [1]
They hold on to those treasuries because they want to keep the value represented by those treasuries rather than spend it, and they would scream bloody murder if you took the treasuries away from them, because there is no other comparably safe interest-earning asset around.
What's even better is that if some of those people do decide to spend the value represented by the treasuries, this will drive up GDP and it will drive up tax revenue. And magically, the amount by which tax revenue will increase automatically will be exactly the amount necessary to pay out the treasuries. That's a simple accounting equation.
Could someone please sit down with key leaders and explain to them in plain English (or the languages of their choice) why virtually all the premises upon which our society is built, fail the test of exponential growth. [...] Its time to get straight, tell the truth, clean up the mess, and make the planet fit for human habitation on all levels. We start by fixing the disaster that our economy(s) are/is, and we get on with the SANE job of designing then implementing sustainable future.
That's a bunch of big, hollow words. Null content. Come back when you have workable proposals instead of hot air.
[1] Of course, they do want to get their principal back when those treasuries expire, but they'll just "reinvest" that principal back in new treasuries, which is effectively the same as not wanting to get paid back at all.
Obviously, the economy needs both consumption and production.
To figure out which side holds the root of the current weakness of the economy (in terms of real measures like unemployment), I prefer to make a "mental diff" of before/after the financial crisis.
Up until the financial crisis, things seemed to be going fine. (We now know that the seeds of the crisis were being planted, but back then, things were looking good.) Consumption and production went hand in hand and everybody was happy, more or less.
Now ask yourself: which part of the equation was changed by the financial crisis? Did it rob the country of entrepreneurs? Did the crisis create significant new regulation or other legal barriers to doing business? Did it rob the country of financial capital? Or did the financial crisis cause the consumption part of the economy to collapse because people's mortgages were suddenly under water? I say the answers are No, No (as far as the financial sector is concerned: unfortunately), No (perhaps temporarily, but that has long since passed), Yes (the mortgage problem may be less visible in the media these days, but it's far from gone, and unemployment has reached proportions were it becomes a vicious cycle).
The problem isn't so much that people have been encouraged to consume - production would be pointless without consumption - but that that consumption was largely enabled by private debt (mortgages and credit cards) to the extent that the savings rate was actually negative. This arrangement was unsustainable and collapsed in the financial crisis, so the consumption part of the economy is now missing.
The troubling aspect is that if the consumption part is missing for too long, then the production part will decay, too. Businesses go bankrupt when they can no longer find customers, and then employees are laid off. If those employees remain unemployed for a longer time (and this is happening now), then valuable skills may be lost as well.
On a more philosophical note: While producers and entrepreneurs clearly play an important role, yes, I do believe that the economy should be ultimately guided by consumption, because what's the point of the economy if it doesn't ultimately provide for consumers? Besides, every time somebody says people can/should vote with their wallet, they are essentially saying that the economy should be driven by consumption.
Slashdot Mirror
While I absolutely agree that things got out of hand, you have to see things in perspective.
It is actually good that the media gets into such a frenzy over the death of a person related to technology. I prefer that a lot over the frenzy when somebody like e.g. Lady Di dies. Obviously, this single frenzy does not sustainably shift media priorities away from celebrity focus, but at least people in the general public are reminded once again that, you know, there are these people who are responsible for actually getting shit done.
Thank you. That suddenly makes a lot more sense, in a twisted kind of way. I would still maintain that reducing conservatism to fiscal conservatism is not exactly objective.
More importantly, "fiscal conservatism" is not the same as "not wasting". Here's why: Fiscal conservatism means avoiding deficit spending. By the sectoral balances, if the external balance is in deficit (as is the case in many countries, especially the US), this means that the private sector must also be in deficit. That means private actors must run down their savings or increase their debt. This is an unavoidable fact of accounting. But this in turn reduces the amount of spending in the economy (both consumption and investment), and this causes unemployment.
So a consequence of properly implemented fiscal conservatism is that, most of the time, there will be unemployment.
This means that individuals who could be productive and contribute to the well-being of society do not find a job in which they can do so. But this is certainly a kind of waste.
I'm all for making government more efficient and eliminating waste there. But that has nothing to do with being liberal or conservative, it is simply a matter of proper management. Fiscal conservatism, on the other hand, necessarily causes at least one kind of waste (not in government, but in the economy at large) most of the time.
When using proper definitions - not the modern twisted ones, you can be both a liberal and a conservative at the same time.
A liberal believes in freedom.
A conservative believes in not wasting.
I don't know. This is clearly a thing that might differ from country to country, but I was always under the impression that the conservation in political conservative always referred to conserving the existing social structures.
Lots of people fall for that because it means upholding traditional social values, which conveys a sense of security, but they suffer from it because conservatism also means maintaining the existing power structures (which, more often than not, don't favour the average guy).
Environmental conservatism (which is what I think of when I read "not wasting") really only entered the political landscape in the 20th century, though of course it has somewhat older roots in romanticism.
Once the wealth accumulates to the top only, how will the economy survive without spending by the middle and lower classes? Won't a lot of business just shutdown because people don't have money to spend?
This has already happened, actually. Over the last thirty years, the income distribution has gradually shifted towards the rich, who have a lower propensity to spend. The real income of the lower quantiles in the income distribution were left out in the cold. The only reason that the recession of two years ago hasn't happened earlier was that consumption spending was propped up by pushing ever more debt onto the average citizen. The savings rate was actually negative in the US for some time! Needless to say, this was not sustainable, and was ultimately going to crash and burn.
Modern Monetary Theory economists predicted that a long time ago, but nobody listened.
Some kind of progressive taxation is needed to keep the income and wealth distributions stable.
Sales taxes are not progressive.
Your move.
Thank you so much, good sir (or lady). The whole "you can't raise taxes because they'll evade it" meme is ridiculous and needs to be shot dead.
If we're looking at only six dates over 220+ years, I'm going to call "post hoc ergo propter hoc" on your Surplus->Depression link.
See here for better reasons on the recessions: http://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States
You do realize that this page does not actually list reasons for most of those recessions, right? I mean, sure, they write things like:
Failure of the Ohio Life Insurance and Trust Company burst a European speculative bubble in United States' railroads and caused a loss of confidence in American banks. (...)
But why did that Company fail in the first place? Can you really say that that was the initial cause? That's like saying the current mess was caused by the failure of Lehman Brothers. Maybe people in 150 years will write that, but even though there is disagreement about what the actual causes are, there is pretty much a consensus that the failure of Lehman Brothers was not a cause, but a symptom of the problem.
Of course, you are right in saying that the temporal coincidence does not imply causation - I wrote as much myself. But it is very suggestive that there is some relationship. An example of such a relationship is that both the GFC and the Clinton surpluses can be attributed to an over-leveraging of the private sector (where that over-leveraging came from is another debate, of course).
besides, you are misrepresenting the way the USD system works; it does not turn physical USD into a larger amount
I chose my words very carefully. I never implied that physical USD can be turned into larger amount. Please read what I said again.
If the fractional reserve banking system can make $980 billion physical USD bills into $9.5 trillion dollars, then the very same system will make 7.2 million bitcoins into 72 million bitcoin credits.
Obviously physical USD bills != USD dollars, and in the same sense, bitcoins != bitcoin credits. I made the distinction very clear by my choice of words.
Right back to you ;)
The banking system does not turn an amount of physical bills into a larger amount of dollars. This view of the banking system is shared by nobody. Most economists would say you are wrong because s/physical bills/reserves/. But that's a distortion of the truth, too ;)
In fact, as Modern Monetary Theory clearly illustrates, it would be more accurate to say that the banking system maintains a very large amount of dollars in deposits, most of which originated in loans, which in turn are backed by the regulatorily mandated amount of bank capital (as per the Basel accords). In addition, the system keeps a significantly smaller amount of reserves at the central bank as part of the payment settlement system. In most countries, the regulatory rules demand that the amount of reserves is somehow tied to the amount of deposits, so that an increase in deposits also causes an increase in reserves. However, not all countries have such a rule. In those latter countries, the amount of reserves is determined entirely by the liquidity preferences of banks.
This is only true if people replicate the existing system of bank money on top of Bitcoin
Sorry but that's not my assumption. Fractional reserve banking is not just a property of the current banking system. It's a fact of life.
(...)
Regardless of how bitcoins are marketed or how it works, a bitcoin banking sector will develop, and everyone will start using it because the people who boycott the banking system will not be able to compete with those who do. The market will eventually weed them out just like how it weeded out Bob's two inefficient businesses in the above examples.
Ah yes. You're right: if bitcoins were widely adopted, then such a banking sector would develop. Still, it's ironic, don't you think? People who have an ideological distaste for the existing system invent something to replace it. Then, assuming they win, they will proceed to reinvent (over time, of course) the existing system on top of their replacement.
It's the old "Those who don't know history ..." thing all over again.
I actually pointed this original use of the term out myself. It's just that most economists have moved on. The causal link between money supply and price increases is actually non-existent. As I've written in a sibling post, the only links that exist are when there is a third event (such as increase in consumer credit leading to excessive consumption) that increases both the money supply and the price level at the same time. But this is not a causal link from money supply to price increases. And the empirics support this. It's one of those things where everybody "knows" that there is a causal link, but when people actually try looking for it, they can't find it. Yet for some strange reason, they just "know" that it "must" be true, empirical studies be damned.
This leads to fun stuff like economists predicting three years ago that the actions of the Fed would lead to massive inflation. Strangely, this inflation still hasn't shown up. Even of the relatively modest inflation we're having right now, almost everything can be attributed to energy prices. Not a sign of monetary policy-caused inflation is in sight.
Besides, the outdated definition of inflation is simply useless. Nobody's life is directly affected by the size of the money supply, and the size of the money supply is not a policy variable, i.e. the government does not set the size of the money supply. On the other hand, the definition of inflation in terms of price increases is useful, because people's lives are directly affected by changes in the price level.
printing fiat currency funnels money from the lower and middle classes to the politically connected elites.
Oh please. Any funneling of money towards politically connected elites has nothing to do with whether one has the fiat money or not. Political systems before 1971 were perfectly capable of funneling money towards the connected elites. This has more to do with societal attitudes towards corruption etc. than anything else. If you let your politicians run over you, that's what you get. Whether you have fiat money or not just doesn't matter.
> it is not determined by the government, and therefore
> defining inflation in terms of the money supply is
> simply pointless.
I don't follow. Why does it matter who inflates the supply?
It matters for policy discussions. In the gold standard world, expanding the money supply (and base) is something that governments did. Inflation, in the gold standard sense, was something that governments did. So it made sense to argue for or against certain government action.
In our modern world, money supply changes and inflation are things that are almost entirely done by the private sector. The implication for policy debates is huge.
Either way, supply/demand still works: supply of money goes up, price of money goes down.
Uh, no. The term "money supply" is really very misleading. Just because the "money supply" (i.e. M2) increases, that doesn't mean that money somehow "becomes cheaper". There is not a market like for commodities. In fact, there is no robust causality from a growth of the money supply to anything else. The only causalities there are is that some third type of event causes both the money supply to grow and something else to happen.
For example, increasing consumer credit can cause the money supply to grow and also aggregate demand to grow, which in turn can grow the economy, or, if the economy hits supply side constraints, cause inflation. So in the latter case, it is not the growth of money supply that causes inflation; instead, it is a third event (more consumer credit) that simultaneously causes inflation and a growth of the money supply. Similarly, in the first case it is not the growth of money supply that causes growth of the economy; instead, it is a third event that simultaneously causes growth of the economy and of the money supply.
Sorting out those causalities is kind of important.
> There are really two big classes of loans in
> our society:
I believe you are leaving out the federal debt, which at 14 trillion dollars accounts for somewhere in the neighborhood of 100% of the money supply.
I was talking about private sector loan activities, which are what really affects the money supply the most. Also, don't delude yourself: outstanding mortgage debt is on the same order of magnitude as total government debt, and that's just one type of private debt.
Besides, it's not like government needs you to loan it money. Government debt is really a tool of monetary policy. Read about how our monetary systems actually work.
The irony is, of course, that rain is caused by sunshine. Sunshine is what causes water to evaporate, which is a prerequisite for rain. Of course, nobody is suggesting to abolish sunshine, because sunshine has plenty of inherent benefits. And so does rain, by the way. So your analogy is pretty flawed, because neither depressions nor government surpluses have any inherent benefits (for a monetarily sovereign government, that is).
To go back on the correlation vs. causality issue though, there is a solid causal theory for how government surpluses create depressions based on sectoral balances. The government surpluses have the effect of squeezing cash out of the private sector, causing spending and aggregate demand to collapse, which is what leads to the depression.
Given that there is a plausible theory of cause and effect and a pretty strong empirical observation, you'd be a fool not to consider the possibility that the government surpluses really did cause the depressions. In any case, you'd have to come up with a better rebuttal.
Exactly, the recession after Clinton's surpluses fits the pattern perfectly, and I would include it. The reason that Wray excludes the Clinton surpluses is that they weren't followed by a depression, but "only" by a recession. Even the current mess we're in is not considered to be a depression by economists (for whatever reason, don't ask me why). Wray has more to write on the topic on the page that I linked to.
Shrinking government spending (...) has also made Germany the only stable economy in Western Europe in the recent years.
Funny fact: Germany was (with France) the first country in EMU to violate the Maastricht limits on government deficits. On the other hand, Ireland, Spain, Italy and Portugal used to be within those limits before the GFC and are now going down the drain.
There may be lots of reasons why Germany has done comparably better than other EMU countries, but shrinking government spending is not one of them. And it's not like Germany is doing so great either: In fact, early warning indicators are pointing down again these days.
Well how many recessions have been caused from over extension of debt? Sounds like your theory is missing some sample data.
The sample data strongly suggests that it is in fact government surpluses that cause depressions. I quote from here:
Since 1776 there have been exactly seven periods of substantial budget surpluses and significant reduction of the debt. From 1817 to 1821 the national debt fell by 29 percent; from 1823 to 1836 it was eliminated (Jackson’s efforts); from 1852 to 1857 it fell by 59 percent, from 1867 to 1873 by 27 percent, from 1880 to 1893 by more than 50 percent, and from 1920 to 1930 by about a third. Of course, the last time we ran a budget surplus was during the Clinton years. (...)
3. The United States has also experienced six periods of depression. The depressions began in 1819, 1837, 1857, 1873, 1893, and 1929. (Do you see any pattern? Take a look at the dates listed above.) With the exception of the Clinton surpluses, every significant reduction of the outstanding debt has been followed by a depression, and every depression has been preceded by significant debt reduction. (...)
Obviously, correlation does not imply causation, but if data as strong and suggestive as this doesn't at least make you stop and think and reexamine the conventional wisdom of the austerity fanatics, then you aren't being rational or reasonable, you're simply being a religious zealot.
No, bitcoin is precisely the equivalent of M0.
If the fractional reserve banking system can make $980 billion physical USD bills into $9.5 trillion dollars, then the very same system will make 7.2 million bitcoins into 72 million bitcoin credits. Don't confuse the actual currency in circulation with whatever the money multiplier produces.
This is only true if people replicate the existing system of bank money on top of Bitcoin (besides, you are misrepresenting the way the USD system works; it does not turn physical USD into a larger amount; instead, it turns reserves at the Fed into a larger amount of cash deposits at commercial banks; physical money is an irrelevant implementation detail). M0 is reserves at the central bank, and nobody except banks trades with reserves, because nobody except banks has accounts at the central bank. Instead, people have bank accounts and paper money.
So for your statement to hold, the future Bitcoin-based economy would have to have a banking sector where the majority of the population actually does not use Bitcoins at all, or only in very small quantities. Personally, I find that unlikely given the way Bitcoin is marketed.
On the other hand, it would be very ironic to see a complete repeat of the history of money: banks built on Bitcoin, terrible bank runs and crashes due to lack of regulation, the re-introduction of regulation and Bitcoin central banks, and finally, when even that becomes untenable again, a removal of the Bitcoin standard. Those who don't know history are doomed to repeat it, and all that.
The technical definition of inflation is an increase in the money supply. And as it turns out, that was indeed just around the corner.
Rising prices are really just a symptom (money supply goes up, money value goes down, you need more money to buy stuff).
You have it backwards, unfortunately. Inflation is defined to be an increase in price levels. This increase in price levels can indeed cause the money supply to grow, but more on that in two paragraphs.
The longer story is that your definition of inflation is simply outdated. It used to be used for gold standard currencies, where "inflating the money supply" was something that a government actively chose to do, and so it was reasonable to talk about it. In our modern monetary systems, the size of the money supply is endogenous, i.e. it is not determined by the government, and therefore defining inflation in terms of the money supply is simply pointless.
The size of the money supply is mostly determined by the credit creation of banks. When a bank makes a loan, the money supply increases. When the loan is retired, the money supply shrinks. There are really two big classes of loans in our society: mortgages, and loans to cover production costs of firms. The first class grows when house prices rise: increasing prices in houses causes the size of mortgages to go up, which expands the money supply. The second class grows when general price levels increase: firms have larger production costs, which means they're taking out larger loans, which grows the money supply.
Of course there are other factors driving the money supply as well, such as Minsky-type cycles in how banks assess the credit-worthiness of their customers, but there is certainly a causal link from price levels to the size of money supply that people don't seem to be aware of.
Been to Walmart lately? Everything except tech is going up. The government is suppressing the official inflation figures with a lot of smoke and mirrors but for an ordinary person wages are pretty flat and the price of everything is going up.
You're labeled a troll, who knows if fairly or unfairly, but for you and for others who come across this I would just like to mention that the subjective perception of inflation is still subject of research.
At least one group of economists (sorry, I don't have the link handy) is trying to address exactly what you're saying. The disconnect between official CPIs and what people perceive exists in many countries, at the same time as independent economists confirm official CPI computations, so to believe in government conspiracies everywhere is at least a bit crazy.
So they tried to figure out why individual perception is different. The summary of their result was something like: CPIs are computed to represent people's spending in an objective way, but in people's perceptions, some classes of goods have a much higher impact on how they feel about the price level. Since inflation is never equal across the board (there are always some classes of goods whose price increase is higher, and others whose price increase is significantly lower than average), the individual perception can become distorted depending on which classes of goods have particularly strong price increases.
I have a crazy idea. Instead of flushing this money down the toilet, why don't we use it to pay the government's debt instead?
And what would that achieve, exactly? You would reduce the overall balance sheet of the economy, since the government's debt may be less than it would otherwise be, but also somebody's assets are less.
It is futile to think about the cost of government in monetary terms. The only useful measure of cost of government is to think about whether the government's spending uses real resources (goods, services, human labor) that could otherwise have been enjoyed to further the well-being of private citizens in a better way.
So DARPA will employ scientists and engineers and support staff for more pie-in-the-sky research. That adds directly to economic activity, and will indirectly lead to new technology that can increase productivity. That's a pretty good use of real resources in my book.
And as far as the debt is concerned, you're simply worrying about a non-problem.
So what? As far as I can see, my logic still applies: the anonymous country sells their treasuries or waits for the principal to be paid back. Instead of putting that money back into treasuries they put it into something else. This means the US$ money is now in other hands. From those other hands, it will in the end flow towards US taxes (if it is spent in the US) or back to treasuries owned by somebody else. You really have to look at it from the big picture perspective to understand macroeconomics, the individual level just doesn't cut it (even if the individual happens to be a country).
If you still think this logic is flawed, please point out how your example invalidates this logic. Where is the step in the argument that fails?
(Side note: I'm not a US citizen nor do I live in the US; it seems you were writing with the assumption that I was.)
Exactly! It's nice to see things spelled out reasonably. I would only add a few minor things:
Of course, the value created if any tends to work over time - the value of a new sewage treatment plant accrues to society over the years it operates, so when there is healthy demand interest rates may have to rise to prevent inflation as the resources in existence in the present are constant, but when demand is slack, there were probably not many better competing uses the resources could have been put to, so this is not inflationary.
Some economists, especially coming from MMT, say that since the effect of interest rates is so indirect and unclear - it actually increases available money for savers, after all - inflation is actually better controlled via taxation.
There are implementation problems with that, of course, since politicians don't like to raise taxes, so a largely independent body might have to be created to adjust taxation based on inflationary pressures.
Ensuring resources are put to the use which best grows the economy is the only saving the government is capable of. Usually but not always, this means not spending.
I basically agree, though I would not call that saving. The way I see it, the government ostensibly has the goal of advancing the welfare of its citizens. This can be done with a more or less hands-off method, but some high-level steering will always be necessary due to the nature of economics.
Growing the economy then becomes only a sub-goal of the larger goal of advancing general welfare, and at some point in the future it may no longer be an appropriate sub-goal (see the discussion about sustainability here on Slashdot recently). However, as long as there are productivity improvements, growing the economy is important to achieve full employment (which I believe should always be a sub-goal of advancing general welfare).
Google's worth as a bookmark system has seriously dropped with the way they're handling links now. Obviously, the links in my post are messed up, they should be: #1 and #2.
That may be the case for you individually. However, as I've written in response to a sibling post as well, there is no escaping from the US$ system at an aggregate level. Dollars remain dollars; even if you convert your dollars into EUR or something else, then simply somebody else will have more dollars. As long as these dollars are not used to buy treasuries or to pay taxes, somebody will always have them, and thus have an incentive to put them into treasuries if they don't want to spend (because treasuries earn more interest than just holding on to cash). Even if you as a private person do not buy treasuries but instead put the money into a savings account, then that just means that your bank will be left over with surplus reserves at the Fed, which will cause that bank to buy treasuries so that they can profit from the interest differential. And if you do spend, then taxes will ensure that the money flows back to the government over time.
This is why, for a monetarily sovereign government, debt really isn't a problem. By the way, this is a reasonable starting point for this topic, as well as this overview on MMT.
So you spend 100$ and let's say the taxes on this are 10$. Now somebody else has 90$ more. They either spend it or save it. If they spend it, more gets subtracted in taxes and we repeat the same logic with let's say 81$. If they save it, they might buy treasuries directly - then everything is clearly fine - or they might put their money on a savings account, in which case their bank (or some other bank) will eventually buy treasuries to profit from the differential in interest. In the third variant, they buy some asset like stocks with their 90$, but then again somebody else gets those 90$.
The point is that there is no escaping from the US$ system in the sense that dollars remain dollars forever, and as long as people do not buy treasuries or pay taxes with those US$, there will be a surplus in reserve accounts that encourages banks to buy treasuries.
As it currently exists, if we were to take 100% of the income from every American today, it would not pay off the national debt.
So what? I'll let you in on a little secret: the people who actually own all those treasuries do not want it paid back. It's really that simple. [1]
They hold on to those treasuries because they want to keep the value represented by those treasuries rather than spend it, and they would scream bloody murder if you took the treasuries away from them, because there is no other comparably safe interest-earning asset around.
What's even better is that if some of those people do decide to spend the value represented by the treasuries, this will drive up GDP and it will drive up tax revenue. And magically, the amount by which tax revenue will increase automatically will be exactly the amount necessary to pay out the treasuries. That's a simple accounting equation.
Could someone please sit down with key leaders and explain to them in plain English (or the languages of their choice) why virtually all the premises upon which our society is built, fail the test of exponential growth. [...] Its time to get straight, tell the truth, clean up the mess, and make the planet fit for human habitation on all levels. We start by fixing the disaster that our economy(s) are/is, and we get on with the SANE job of designing then implementing sustainable future.
That's a bunch of big, hollow words. Null content. Come back when you have workable proposals instead of hot air.
[1] Of course, they do want to get their principal back when those treasuries expire, but they'll just "reinvest" that principal back in new treasuries, which is effectively the same as not wanting to get paid back at all.
Obviously, the economy needs both consumption and production.
To figure out which side holds the root of the current weakness of the economy (in terms of real measures like unemployment), I prefer to make a "mental diff" of before/after the financial crisis.
Up until the financial crisis, things seemed to be going fine. (We now know that the seeds of the crisis were being planted, but back then, things were looking good.) Consumption and production went hand in hand and everybody was happy, more or less.
Now ask yourself: which part of the equation was changed by the financial crisis? Did it rob the country of entrepreneurs? Did the crisis create significant new regulation or other legal barriers to doing business? Did it rob the country of financial capital? Or did the financial crisis cause the consumption part of the economy to collapse because people's mortgages were suddenly under water? I say the answers are No, No (as far as the financial sector is concerned: unfortunately), No (perhaps temporarily, but that has long since passed), Yes (the mortgage problem may be less visible in the media these days, but it's far from gone, and unemployment has reached proportions were it becomes a vicious cycle).
The problem isn't so much that people have been encouraged to consume - production would be pointless without consumption - but that that consumption was largely enabled by private debt (mortgages and credit cards) to the extent that the savings rate was actually negative. This arrangement was unsustainable and collapsed in the financial crisis, so the consumption part of the economy is now missing.
The troubling aspect is that if the consumption part is missing for too long, then the production part will decay, too. Businesses go bankrupt when they can no longer find customers, and then employees are laid off. If those employees remain unemployed for a longer time (and this is happening now), then valuable skills may be lost as well.
On a more philosophical note: While producers and entrepreneurs clearly play an important role, yes, I do believe that the economy should be ultimately guided by consumption, because what's the point of the economy if it doesn't ultimately provide for consumers? Besides, every time somebody says people can/should vote with their wallet, they are essentially saying that the economy should be driven by consumption.