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Fiat Currency vs. the Gold Standard

Updated on March 12, 2014
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Gold or paper?

Gold-backed money is backed by a statutorily-defined amount of gold, held by the issuer of the currency. Generally, it is convertible to gold under certain circumstances. The amount of currency that a government can create and put into use is limited by the amount of gold that the government holds, regardless of the growth or contraction of the economy. The values of different currencies are linked by the underlying value of gold. Proponents of gold-backed currencies believe that this is a more stable system overall.

Fiat currency is simply paper, not backed by anything, including gold, silver, or debt. It is not convertible to anything, and once issued the government is under no further obligations. The amount of fiat currency that a government can create is unlimited. The government can alter the amount of currency in response to growth or contraction in the economy. The values of different fiat currencies are not linked; instead their values are allowed to float in the international currency market. In this way, the various strengths and weaknesses of different economies are taken into consideration when placing a value on their currencies.

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Deficits, defined

Whenever a government spends more than it recovers in taxes, it runs a deficit. It does not matter if the government has the gold to back new dollars, or exchanges bonds for currency, or simply issues currency directly, a deficit (like a surplus) is merely the net difference between income and outgo. Deficits are necessary in order to increase the number of dollars in the economy – this is simply accounting. A deficit for the federal government is a surplus for the economy.

The National Debt

The “national debt” is merely a measure of federal bonds outstanding. Most people think of this as an amount that the government “owes,” but that is not really correct. As part of their normal operations, the government issues and redeems securities, which are widely used throughout the world (as the world's dominant reserve currency, dollars (and dollar-denominated securities) are used in about 75% of international transactions). The dollar value of these normal operations dwarfs the “national debt.” Here is the daily Treasury statement for the end of the fiscal year 2013: if you look at Table IIIA, Total Issues, you will see that in the fiscal year we issued $62,163,479,000,000 (that's 62 trillion dollars) worth of govt. securities. Now look to the right, at Total Redemptions (that's bonds redeemed for dollars) - $61,491,537,000,000. The difference in those mind-boggling numbers is that year's net bond position (that year's addition to/subtraction from our “national debt”). (Thanks to Mike Norman for pointing this out on his excellent blog, mikenormaneconomics.blogspot.com)

UPDATE: The website for the above information has changed (both its web address and its layout). Much of the same information can be found here: http://www.treasurydirect.gov/govt/reports/pd/pd_debtposactrpt_1210.pdf

Deficit Spending and the Gold Standard

When the U.S. dollar was convertible to a statutorily-defined amount of gold, the government could not increase the number of dollars unless it had sufficient gold reserves to do so. Let's say, for example, that there are $100 billion gold-convertible dollars in circulation, and the government has just enough gold to back them. Now, if the government wants to spend more than they recover in taxes, they need to either obtain more gold, or borrow back some of those gold-convertible dollars in exchange for bonds – basically, a promise to deliver dollars (plus interest) at a later date. If they do not obtain more gold and instead choose to borrow, the government's immediate liability (in gold) remains unchanged (there is still $100 billion in circulation), plus they have a future obligation to redeem those bonds for gold-convertible dollars. If they are unable to procure more gold and increase the number of dollars that way, they will have to roll over the debt and issue more and more bonds. Increasing the number of gold-convertible dollars therefore costs the government real resources – gold, or some portion of our national output that can be exchanged for gold.

If the government runs a deficit year after year and continues to roll over the debt, their immediate liability for gold will remain at $100 billion, but their ability to borrow more dollars with the promise of later redeeming those bonds for gold-backed dollars becomes more and more unlikely, because their ability to procure the necessary gold is not a sure thing. The more they borrow, the more risk goes up; bond yields rise, and they have to pay increasing interest rates in order to borrow back gold-backed dollars. This is true debt, because the government cannot simply conjure up the resources necessary (gold) to create the dollars they need to redeem the bonds.

This scenario is what most people (even many economists) still think happens when we deficit spend. They are worried about our ability to meet our obligations as the debt gets bigger, and they are convinced that, someday soon, the interest rate on bonds is going to go up, costing us far more in interest than we pay now. But with a fiat currency, all of these worries are unnecessary, as I will explain.

Deficit Spending and Fiat Currency

When a government wants to increase the number of fiat dollars in circulation, they need only issue more fiat dollars. Operationally, there is no need to obtain more gold, or even issue bonds – a government could simply issue fiat currency directly, at no real cost. There may be, however, legal constraints. There are two main legal constraints on dollar creation in the U.S.: we have to keep a positive amount in Treasury's account at the Fed (normally accomplished by issuing bonds to match our deficit spending*), and Congress has to give its OK to issue more bonds (raise the debt ceiling).

*Since the Treasury can mint coins as needed without backing, the idea of minting a few trillion-dollar platinum coins and depositing them into Treasury's account has been considered. This would satisfy the requirement to keep Treasury's account in the black without issuing more bonds (and increasing the national debt), while allowing the government to spend dollars. If nothing else, this should serve to illustrate that fiat dollars are not backed by anything, since the true value of the metal in the coin is minimal. By the same token, bonds are merely promises to deliver paper dollars at a later date - so bonds and dollars are basically equivalent instruments.

To increase the number of fiat dollars, we do not need to procure gold or silver, we only need to satisfy our legal requirements (selling bonds). So again, we start with $100 billion. Now, our immediate liability on that is $100 billion in paper notes - you can no longer present a note to the government and demand anything for it. Now, let's say we "borrow" $10 billion every year to cover our deficit spending. The chances of the government being unable to redeem those bonds for more paper money are zero (barring political stupidity, of course). The effect of that (zero) risk on bond yields will be zero. And now, the ability of the government itself to buy their own bonds is unlimited (again, barring political stupidity), because they don't have to come up with any real resources (like gold) to do so – they need only create the dollars. Because the government is capable of buying their own bonds without limit, their ability to control bond yields is also unaffected by outside demand, because outside demand is simply not necessary. When the statutory requirement to sell bonds is met by the government itself, the dollars spent are effectively direct-issue dollars, because the government is just “paying itself back” when they redeem those bonds. It is simply an internal accounting operation.

Since the creation of fiat currency is not limited by any real resource, the nature of bonds is also different than it was during the gold standard days. Because the government can create as many fiat dollars as they wish with no cost in real resources (like gold), redeeming bonds and their interest is no burden at all. The "debt" is illusory. The $16 trillion in bonds outstanding (our "national debt") can be completely redeemed at no cost to the government.

As U.S. bonds are 100% certain to be redeemable for dollars, they are best thought of as dollar equivalents. In fact, U.S. bonds are the preferred unit of exchange in about 75% of international transactions. Those dollars come from our trade deficits, the extra dollars that pile up in the hands of China, Japan, Saudi Arabia et al. They convert their dollars into U.S. bonds, and those bonds become the main currency of international trade.

Trade Imbalances

When most currencies were convertible into gold, gold was how countries could settle up their trade imbalances. If we ran a $10 billion trade deficit with, say, France, they could convert those dollars into gold. Our theoretical $100 billion in gold-backed dollars would shrink to $90 billion, because we would no longer have the gold necessary to back $100 billion. This was a serious shortcoming of gold-backed currencies.

Today, trade imbalances are dealt with by floating currency values and trading currencies on the foreign exchange market (FOREX). No real resources (like gold) change hands; currency values are determined by supply and demand.

Summary

Tying one's currency to the availability of gold can prevent a government from taking action to help its economy. Fiat currencies better allow governments to adjust to their money supplies based on economic conditions, like growth.

Questions and Comments

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    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      John, my point was that the fixed income market immediately imposed discipline on the Fed in Sept and forced them to reverse course before they even started to change policy. Which is an indication that the Fed is not making the policy decisions anymore based on price stability or unemployment. They are simply appeasing the financial markets. It’s because the Fed knows that they can only hold yields low when they are buying at times as much as 80-90% of new issues. That means there is essentially no true market price for the securities. They are dominating the bid to such an extreme, there is barely any price discovery. And what the fixed income markets just told the Fed was your bonds aren’t worth near what your artificial prices say they are. So if you bring them to the market we’ll crush them. That scared the hell out of the Fed, because if they change course they blow out the deficit projections. While it’s true that they can do this for sometime…they can’t do it at infinitum. Eventually even with near zero rates, the cost to service just the interest on the debt will suck too much out of the private sector and weigh too heavily on the economy.

      At this point the Fed has long overstayed its welcome. They are causing massive distortions already that are impacting the economy negatively. There is a massive bubble in asset prices, particularly fixed income investments. We see huge moves upward in asset prices without underlying intrinsic growth. Some of the unintended consequences are already being realized. Insurance companies which are forced to hold reserves that are nearly exclusively fixed income oriented, and often mandated to hold a percentage of gov’t debt that must roll that debt as it matures. The lower yields realized will force policy premiums to rise. Since they historically have maintained long duration portfolios, this has only just begun. The low yields on fixed income also force pending retirees to work longer since they can’t generate the same income that they once could. So the lack of turnover in the labor market hurts youth unemployment. Those are just a few of the many distortions. And there are likely numerous others yet to be noticed.

      In terms of inflation, you’re correct that the creation of currency itself will not create inflation, because it does not imply monetary velocity. Historically it is the profligate spending on the fiscal side of the gov’t that is the root of inflation. But it is the monetary side that is subsidizing the reckless fiscal policy. The Fed’s current position is a classic liquidity trap that Dr Hussman quickly identified several years ago. Read below… http://hussmanfunds.com/wmc/wmc101025.htm

      The point here is that the Fed’s actions are by no means without consequences. Just think for a moment what the impact will be to things like pension funds and insurance reserves when this bond bubble bursts. The smart money is already positioning themselves for this. Because the Fed will not, and cannot exit quietly. They had planned a “Ready…Set…Go” strategy to signal to the fixed income markets. And as soon as they opened their mouth in May and suggested they may be ready, they got a dose of reality. Excellent commentary was released this week by Michael Aronstein of Marketfield. Scroll down to the commentary section on page 3. http://www.nylinvestments.com/polos/MSMK02h-101345...

      In terms of inflation, I would also suggest you look back at the measure of how we have calculated inflation and made substantial changes over the years to the methodology. Economist John Williams does an excellent job of creating a chronological history of just how insidious the motives behind these changes have been. And just how distorted the data had become. We no longer use CPI to measure the standard of living. It is now just a geometric weighting designed to suppress the real impact of rising prices, along with numerous arbitrary hedonic adjustments.

      http://www.shadowstats.com/article/no-438-public-c...

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      “John, my point was that the fixed income market immediately imposed discipline on the Fed in Sept and forced them to reverse course before they even started to change policy. Which is an indication that the Fed is not making the policy decisions anymore based on price stability or unemployment. They are simply appeasing the financial markets. It’s because the Fed knows that they can only hold yields low when they are buying at times as much as 80-90% of new issues. That means there is essentially no true market price for the securities. They are dominating the bid to such an extreme, there is barely any price discovery. And what the fixed income markets just told the Fed was your bonds aren’t worth near what your artificial prices say they are. So if you bring them to the market we’ll crush them. That scared the hell out of the Fed, because if they change course they blow out the deficit projections. While it’s true that they can do this for sometime…they can’t do it at infinitum. Eventually even with near zero rates, the cost to service just the interest on the debt will suck too much out of the private sector and weigh too heavily on the economy.”

      Let me say up front that I don't agree with QE, which is a waste of time. Bernanke obviously does not agree with me. He started QE thinking that it would stimulate lending. I don't know if that is still his reason for plowing ahead – he might be worried about deflation, or he might be worried about a market crash, like you said. But I don't think anything more than a temporary market blip would result from stopping QE tomorrow, because nothing the Fed has done (or is able to do) changes the number of net financial assets (MMT-defined as federal securities + dollars) in the economy. They cannot add net assets to the economy, they can only tinker with the composition of those assets (which they are doing with QE). So if the price of stocks or commodities is inflated, it's not being inflated with new dollars.

      It does not matter how many bonds the Fed has to buy. They could buy them all, if need be. The reason they are buying more lately is, of course, QE. This means that the Fed is buying a larger share of the bonds, but the total number of bonds is way up, of course. You read that as demand going down, but it is not. It still makes perfect sense – bonds are used to park dollars, and foreign countries are still parking their dollars there. And banks hold fewer treasuries because, well, that's what QE does. The Fed is exchanging dollars for bonds. These are not market forces at work. That's the whole point. You say that there is no price discovery as if it is an anomaly, but it's just Fed business as usual. The market isn't scaring the Fed at all. There is no real cost to service the debt, because the cost of creating fiat dollars is zero. Interest does not suck dollars out of the private sector, interest adds dollars to the private sector. It's the government paying the interest, and the holders of the bonds (the private sector and the foreign sector) getting the interest.

      There are potential issues with bond interest in the long run, of course, because it just accelerates the rate of dollar accumulation by the rich, plus it adds dollars into the economy regardless of whether or not they are called for. Most of the interest just gets added to the pile of savings and never gets spent anyway, so the effect isn't that big. But money has always piled up in the hands of the rich, and there isn't much that can be done about that, short of claw-back taxation or inflation. We could always move to the direct issue of dollars, since bonds are not necessary for financing or borrowing, but this is a minor point that really doesn't affect our economy today.

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      “At this point the Fed has long overstayed its welcome. They are causing massive distortions already that are impacting the economy negatively. There is a massive bubble in asset prices, particularly fixed income investments. We see huge moves upward in asset prices without underlying intrinsic growth. Some of the unintended consequences are already being realized. Insurance companies which are forced to hold reserves that are nearly exclusively fixed income oriented, and often mandated to hold a percentage of gov’t debt that must roll that debt as it matures. The lower yields realized will force policy premiums to rise. Since they historically have maintained long duration portfolios, this has only just begun. The low yields on fixed income also force pending retirees to work longer since they can’t generate the same income that they once could. So the lack of turnover in the labor market hurts youth unemployment. Those are just a few of the many distortions. And there are likely numerous others yet to be noticed.”

      So what is the natural rate of interest, anyway? What is being distorted? Higher interest rates on govt. bonds are just bigger giveaways of dollars for nothing. You can't worry about the impact of higher interest on the budget one minute, then decry low yields for bondholders in the next. And you can't blame the labor market on interest rates – there are a lot of reasons that the labor market stinks in this country, but the interest rate isn't one of them. Aren't low interest rates supposed to be good for business?

      As I said before, the Fed cannot add net assets to the economy, only deficit spending can do that. If asset prices are “inflated,” it's because of the distribution of dollars in the economy. The rich have a bigger share of the money than ever, and this is what the rich do with their dollars.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      “In terms of inflation, you’re correct that the creation of currency itself will not create inflation, because it does not imply monetary velocity. Historically it is the profligate spending on the fiscal side of the gov’t that is the root of inflation. But it is the monetary side that is subsidizing the reckless fiscal policy. The Fed’s current position is a classic liquidity trap that Dr Hussman quickly identified several years ago...”

      Government spending alone hasn't brought down any fiat economies that I can think of. Hyperinflation has always come from a damaged economy and/or foreign-denominated debt/pegged currencies. Weimar Germany: reparations payable in gold and foreign currencies, plus a damaged industrial base. Germany couldn't feed its citizens, and that will always lead to severe inflation. Zimbabwe – dismantled their agriculture sector, killed their production, and couldn't feed their citizens. Hungary – reparations plus a war-damaged country. Bolivia – problems with their export commodities, foreign debt and a sudden stop. Increased govt. spending has been a reaction to other problems, not the genesis of the problem. http://pragcap.com/understanding-hyperinflation

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      “The point here is that the Fed’s actions are by no means without consequences. Just think for a moment what the impact will be to things like pension funds and insurance reserves when this bond bubble bursts. The smart money is already positioning themselves for this. Because the Fed will not, and cannot exit quietly. They had planned a “Ready…Set…Go” strategy to signal to the fixed income markets. And as soon as they opened their mouth in May and suggested they may be ready, they got a dose of reality...”

      Of course the Fed's actions have consequences, but don't overestimate what the Fed can do with money. The consequences you are talking about are just temporary market fluctuations. Markets have always jumped around on all sorts of news. But dollars (real, govt.-created ones) don't magically appear and disappear, and you can always follow them. Credit and equity are different. Think about what happened when the crash hit. Dollars didn't disappear, they didn't lose value, they didn't leave the country, and there were no big changes made policy-wise. All of the troubles and instability were wholly within the private sector. The expansion of credit (not dollars) was not based on any underlying growth. Plus, people were buying a lot on credit for a number of years, so there was a necessary deleveraging coming up. Tons of stimulus dollars had to fill those holes before people were going to spend again, and the stimulus was way too small (and improperly directed) to fix our balance sheets.

      What, exactly, do you think is going to “burst”? Bonds are still 100% safe. Are you worried about interest rates, or the falling value of the bonds themselves? Wouldn't higher interest rates be a good thing for pension funds? Anyway, U.S. bonds are not held for big returns, they are held because they are safe.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      “In terms of inflation, I would also suggest you look back at the measure of how we have calculated inflation and made substantial changes over the years to the methodology. Economist John Williams does an excellent job of creating a chronological history of just how insidious the motives behind these changes have been. And just how distorted the data had become. We no longer use CPI to measure the standard of living. It is now just a geometric weighting designed to suppress the real impact of rising prices, along with numerous arbitrary hedonic adjustments.”

      Yeah, I'm familiar with these claims. But look around – inflation is mild. I don't care what basket of goods you pick, it is not a product of demand-pull inflation, and it will not approach “hyper”inflation by any reasonable definition of the word. The dollar is keeping pace with other currencies, food is cheap, and we aren't running out of anything. If the government is hiding a problem, they are doing a very good job of that.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      The price of other financial assets are inflated by QE because they force cash out of fixed income into other asset classes. The total Fed purchases today at 85 billion monthly are actually larger than 100% of the Feds annual issuance of debt. This is because the purchase take place in the secondary market. So the money must go somewhere. It creates distortions via monetary incentive that results in malinvestment. The larger distortion is in fixed income at the moment. But the Fed solves each bubble they create by creating a larger bubble.

      Demand for bonds is going down. Treasury auctions have not gone well at all recently. And foreign investors are attempting to diversify away from the dollar. But this is not at all business as usual for the Fed. This degree of expansion to the Fed’s balance sheet has never been done before in history. Only the hubris of gov’t would make them believe they can control the flow of investment via inflating and deflating in an orderly fashion.

      Interest payments made on treasury payments come from tax revenue. That tax revenue must be extracted from private activity. The additional interest on this debt issuance is not being paid to the private sector at all. That’s because the private sector is not buying the bonds. In order to redeem a fixed income coupon, you must hold the instrument. When the Fed adds 4 trillion to its balance sheet, that interest payment does not get paid to you and I in the private sector, because the private sector doesn’t hold the instrument. Yet the existing bonds regardless of where they are held must have their coupons met. The money they add to the economy in buying bonds goes right back to the gov’t to service the debt. This becomes problematic when the interest payments maker up a substantial portion or even exceed the total amount of revenue collected in taxes. We are not there yet, but a rising rate environment will cause that potentially very quickly. A move to even a 6 handle on the ten year puts the national debt at a near 25 trillion in less than a decade without any increase to Federal spending. The interest payments quickly become unsustainable. And that is the point of QE. If you want to know why Bernanke is doing it…its because he is subsidizing the deficit. With all the political gridlock, the rate of growth in spending slowed somewhat since 2010. The deficit shrunk a little more than expected. As a result, he thought he could start to taper. He is trying to pin QE to the size of the deficit. Unfortunately, the Fed didn’t seem to grasp the bubble they created in fixed income, and how efficient bond traders are. They are already ten steps ahead of the game. The minute they discuss a policy change…the selling will start with a vengeance. QE was initially about liquidity. Now it is about being afraid, to make a change because they don’t know how to deflate this bubble without causing an enormous earthquake in the bond market, which will affect everything. But that is a forgone conclusion now. Every fixed income manager I know is not only preparing for this, but many hedge funds, and unconstrained fixed income managers are even easing into what will eventually become larger short positions in treasuries now.

      The Fed was scared to say the least of the Fixed income markets. It took a mere 28 word statement in the last FOMC statement to cause a huge price swing in the bond market. As soon as it happened, they recanted their position.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      Natural interest rates in an ideal world should be set by the market based on the credit quality of the individual parties to the transaction, rather than be some universal benchmark set by the Fed. However since we live in a central banking based system, the concern here is the Fed’s role in setting interest rates should exist on the short end of the curve. Not by expanding the balance sheet to such extremes that they force distortions in asset prices. Bonds are a form of financing. But when there is only one party making the market, the market is distorted. It’s like a penny stock that moves up to 5 dollars a share, but there is only one market maker doing the buying. Then they attract in buyers based on the inflated price that has no real price discovery. Once that market maker leaves with all his excess demand, the market collapses because the demand was not organic and based on proper valuation to begin with. In this case the Fed has accidentally backed themselves into their own pump and dumb scam. Except sophisticated fixed income managers are already moving in advance. Hence the trigger finger we witnessed back in May based on the FOMC minutes. So who gets left holding the bag ??? That will be whoever is slowest to move. The Fed won’t sell their holdings. They’ll just stop buying. The demand will dry up, and the less sophisticated investors who have been taught that treasuries where safe will see massive price declines. Since they won’t want to sell at a loss, they’ll get stuck with these instruments in a rising rate environment, which will be the same as taking the loss, only slower via inflation and time value of money/opportunity cost. Some of the largest victims are likely to be institutions that have mandates to buying gov’t securities. Insurance company reserves are a classic example of this. But I expect the retail investor to pay the biggest price. An economist recently said on the issue of the Fed’s purchase program “When you’re sitting at a poker table and you can’t spot the pigeon in the room…You’re the pigeon”

      Higher rates are not necessarily good for pension funds. That depends on what you hold and when you bought it. Investment grade debt has an inverse relationship to interest rates. So existing bonds in a portfolio have some form of duration. So let say for example that duration is an average of 5 years in a portfolio. Now the ten year makes another near 100% jump to a mere 5%. While still low in historical terms, the impact is 12.5% decline in the value of the holdings in the portfolio. Duration is always multiplied by a factor of 1 for price volatility in either direction…excluding convexity. That means the pension fund is either forced to dramatically increase the contribution to stay compliant or go insolvent and dump it on the taxpayer via PBGC. If they are forced to increase contributions, that is less money that they can commit to business operations. Or in the case of public pensions, that is more tax revenue that must be paid to fund such entitlements, which must also leave the private sector. The hope is this decline is balanced by equity holdings which appreciate. But that is not always the case. Many pensions due to their demographics, as well as endowments and various other places will be impacted tremendously because they are forced to overweight fixed income holdings. And if the shock is larget enough, it could cause a huge selloff in equities as well. Although, I am less concerned about that in the short run. As I said earlier, I expect the greatest impact to be the retail investor who is always last to figure it out.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      Increased gov’t spending is a reaction to many problems. Unfortunately, it is the wrong reaction. You only need to look at the history of the US. As I cited earlier, 1920-21 was the largest recorded deflationary pressures in US history. The gov’t cut spending by 65% in order to eliminate all the distortions created by WW1. The monetary base completely collapsed. The Fed’s monetary interference was almost non-existent in any form of policy response. Market quickly realigned in about months 18 months to produce what was one of the most prosperous decades in history. This happened without any significant New Deal type fiscal or monetary intervention whatsoever, which defies the Monetarist and the Keynesian views. Essentially the gov’t got the hell out of the way. Contrast that with even less deflationary pressures in 1929. The New Deal gave us near 2 decades of an economic malaise. There was virtually no Cap Ex. So much so that the Gov’t had to introduce an undistributed profits tax. At the end of WW2, the transient income from gov’t spending came to an end and the malaise began again. Truman tried to propose more New Deal Spending. He was stonewalled in the Senate. Spending was cut, and taxes like the excess profits tax were repealed. Capital formation began again throughout the 40’s. The problem is gov’t uses a crisis to further expand gov’t. But gov’t spending in excess of production, regardless of the reason for the spending suffocates and smothers the market. Whether it is fiscal or monetary, gov’t intervention into markets to control outcomes never end well. Because the gov’t is inherently inefficient in every single thing is does.

      It is interesting that you mention credit and equity are different. That is somewhat my point. Dollars themselves are credit and not equity. They are credit backed by the treasury. Yet the treasuries only real equity is the innovation created privately in the US economy, which they have the taxing authority over. True equity is the creation of new capital. If I chop off a limp from a tree in my backyard and carve a rocking chair out of it and subsequently sell it to you for $200, I have created capital. The same $200 is circulating in the system. Yet you now have an asset that you felt was worth $200 in your procession that did not exist prior. New Capital has been added to the economy. But when the Fed prints new money, and uses the QE program as means to subsidize the deficit, we get money created and spent fiscally in excess of productivity. All capital originates privately. Money is not capital. Capital comes from creativity, innovation and production. When money is created and spent by fiscal authorities without regard for productivity, inflation and economic stagnation ensues. In some cases like Japan, the massive increase in gov’t created only the stagnation of GDP for more than 2 decades. The inflation did not ensue because virtually all off their debt was held domestically, which was a unique characteristic due to their aging demographic. So today, the inflation isn’t there as it ordinarily would have been. But their GDP is in the same spot it was in the early 1990’s. And what do they do…further weaken their currency via “Abenomics”, which will fail miserably. They will reflate…and deflate…never based on intrinsic value, but gov’t fiat. It gets bigger and bigger and perpetuates the same problem over and over. There are no success stories of gov’t spending to stimulate growth. They produce only transient income, that scares off private investment. Yet no matter how big gov’t gets, the Neo-Keynesians will tell us it’s not big enough. In order to stimulate productivity, you need capital investment. That comes from simplified easy to understand regulatory environments, and incentives that reward capital investment rather than discourage it.

      Food is cheap…tell that to the average housewife going food shopping. It is not just the price of goods, but the quantity. We’re all experiencing various hedonic changes. Rolls of paper towels have less sheets, the quantity of the cereal box gets smaller. Not all inflation is price driven. Much of it is hedonic adjustments. I am not suggesting hyperinflation. Because even using the 1970’s methodology which puts us near double digits, it still doesn’t qualify as “hyperinflation”. But the impact of gov’t spending on prices is actively being misreported for political purposes. The dollar is at historical lows in recent years. But that doesn’t tell you much anyway when compared to global currencies. It’s a global race downward in currency purchasing power to reflate with Japan in the lead. Then compare the dollar to commodities which we must all consume, and you get a different story. Commodity prices have soared since the 1970’s. Especially in the last decade. (with the exception of natural gas which has vast new discoveries). And most of the spikes correlate closely with excessive Fed policy, and Fiscal spending without regard to productivity. Look at the CRB index and compare that to the CPI. It’s a joke. Not even close. http://people.hofstra.edu/geotrans/eng/ch5en/conc5...

      Can we compare wages, or GDP expansion to the price of real tangible assets that go into everything we use to the price action in broad based commodities. It is not feasible for all of these tangible assets to have appreciated just as rapidly as the stagflation of the 1970’s and yet we claim this huge difference in CPI. It’s because CPI has no correlation to maintaining a lifestyle anymore.

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      (Sorry for the delay in replying. Busy week.)

      “The price of other financial assets are inflated by QE because they force cash out of fixed income into other asset classes. The total Fed purchases today at 85 billion monthly are actually larger than 100% of the Feds annual issuance of debt. This is because the purchase take place in the secondary market. So the money must go somewhere.”

      But the secondary market is just a pass-through operation when the Fed buys bonds. QE does not add net assets to the economy. If dollars are moving from one kind of investment to another, so be it, but the total number of dollars isn't changing.

      “It creates distortions via monetary incentive that results in malinvestment. The larger distortion is in fixed income at the moment. But the Fed solves each bubble they create by creating a larger bubble.”

      The “malinvestment” argument doesn't carry much weight outside of the Austrian community. Markets adapt to whatever the conditions happen to be.

      “Demand for bonds is going down. Treasury auctions have not gone well at all recently. And foreign investors are attempting to diversify away from the dollar. But this is not at all business as usual for the Fed. This degree of expansion to the Fed’s balance sheet has never been done before in history. Only the hubris of gov’t would make them believe they can control the flow of investment via inflating and deflating in an orderly fashion.”

      It doesn't matter one whit if there is outside demand for bonds or not. Bond sales are simply not necessary. But even so, bonds still sell, because people need a safe place to park their dollars. If they would rather spend them, that's just fine with our government, but that's not happening. Bottom line is, there is no way in which the market can price the govt. out of its own bonds or otherwise stop it from issuing dollars and setting the rate at which it loans money to banks. And that is all the Fed needs to do.

      How much the Fed expands its balance sheet makes no difference, unless you are going to claim that the Fed is not a govt. agency. I could expand my own household balance sheet by loaning myself a billion dollars on paper, but it wouldn't change my actual financial position.

      “Interest payments made on treasury payments come from tax revenue. That tax revenue must be extracted from private activity....”

      When the govt. deficit spends as much as it does, how can you claim that interest is paid out of tax receipts? I claim it is paid for from those newly-created deficit dollars. If we were running a balanced budget, you would be correct, but we aren't.

      “The additional interest on this debt issuance is not being paid to the private sector at all. That’s because the private sector is not buying the bonds. In order to redeem a fixed income coupon, you must hold the instrument. When the Fed adds 4 trillion to its balance sheet, that interest payment does not get paid to you and I in the private sector, because the private sector doesn’t hold the instrument. Yet the existing bonds regardless of where they are held must have their coupons met. The money they add to the economy in buying bonds goes right back to the gov’t to service the debt...”

      The interest paid to bondholders outside of the U.S. govt. does go to the private sector, including foreign holders (who are all free to spend those dollars). The interest paid within the U.S. govt. (including the Fed) is internal, and it is silly to count that.

      “This becomes problematic when the interest payments maker up a substantial portion or even exceed the total amount of revenue collected in taxes. We are not there yet, but a rising rate environment will cause that potentially very quickly.”

      Why would that be a problem? The government cannot run out of dollars – they don't need tax receipts to pay their bills. Look at it this way – if interest payments (to bondholders outside of the govt.) exceed tax receipts, that means net dollars are entering the economy, which is a good thing on paper. (I'm actually not a fan of giving money to big bondholders, because they are no more likely to spend their interest as they are likely to spend their savings. But that doesn't make the situation untenable.)

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      “A move to even a 6 handle on the ten year puts the national debt at a near 25 trillion in less than a …

      ...

      ...they recanted their position.”

      I don't disagree that Bernanke has the market on his mind, but I do disagree with Bernanke in general. I would kill QE in a heartbeat, and let the market do whatever it will. Dollars do not disappear, and the market would not collapse.

      I don't think they are attempting to “subsidize” the deficit with QE – that makes no sense. QE adds no net assets to the economy, and the interest paid on those bonds held by the Fed aren't costing the government anything. As for bond vigilantes, you only have to look at their track record when they bet against the government being able to hold down interest rates. They get killed.

      “Natural interest rates in an ideal world should be set by the market based on the credit quality of the individual parties to the transaction, rather than be some universal benchmark set by the Fed. However since we live in a central banking based system, the concern here is the Fed’s role in setting interest rates should exist on the short end of the curve. Not by expanding the balance sheet to such extremes that they force distortions in asset prices.”

      Based on what money? And how much? No matter what, the government is going to have an effect on interest rates, if only because they decide how many dollars are in play at any time. I would argue that they influence the market less by doing what they do now than by, say, deciding to balance the budget and sticking with a fixed number of dollars. By affording banks unlimited access to reserves at the discount window, the govt. essentially renders the capital market a nonfactor, because there is not a finite pile of capital shopping around for the best rate of interest. Banks can always make loans, and the base rate is set by the Fed. Otherwise, you get a situation where the already rich (with the capital) are making tons in interest, which doesn't add a thing to production.

      “Bonds are a form of financing.”

      Bonds are NOT a form of financing with a fiat currency. That is gold-standard thinking, and it is at the heart of the widespread misunderstanding of how our economy works. This is why MMTers make a point of saying that, in the U.S., the requirement to issue bonds is only a legal constraint, not an operational one. We could change a couple of laws tomorrow and switch to the direct issue of dollars. Or, we could work within the confines of our present laws and mint a bunch of trillion-dollar coins to keep the Treasury's account positive, which would be, in effect, direct issuance of dollars.

      “But when there is only one party making the market, the market is distorted....

      ...

      …You’re the pigeon””

      Treasuries should be used as safe places to park your dollars, not to speculate on bond prices or yields. A lot of MMTers are bond traders, and they have known this for years. Those low interest rates weren't designed to make your fortune grow. Go ahead and bet against the government's ability to keep interest rates down if you dare.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      “Increased gov’t spending is a reaction to many problems. Unfortunately, it is the wrong reaction. You only need to look at the history of the US. As I cited earlier, 1920-21 was the largest recorded deflationary pressures in US history. The gov’t cut spending by 65% in order to eliminate all the distortions created by WW1. The monetary base completely collapsed. The Fed’s monetary interference was almost non-existent in any form of policy response.”

      That recession was due to the end of WWI. Europe's ag production bounced back, so prices predictably fell. But as recessions go, that one was mild. Cutting taxes was a good move, but cutting spending obviously was not. You claim that cutting spending was to eliminate “distortions,” but cutting spending just lowers aggregate demand. The Fed fiddled with interest rates, first raising them and finally lowering them, but monetary policy really isn't the tool to correct recessions. I guess I'm not sure how this example makes your point and not mine.

      “Market quickly realigned in about months 18 months to produce what was one of the most prosperous decades in history.”

      18 months is not a quick turnaround for a recession. And post WWII recessions (with Keynesian policies of countercyclical spending) are generally far shorter.

      “This happened without any significant New Deal type fiscal or monetary intervention whatsoever, which defies the Monetarist and the Keynesian views.”

      A reliance on monetary policy is not Keynesian (or MMT, for that matter). Keynesian policy is mostly about countercyclical spending by the government to keep aggregate demand level. Monetarists are the ones who think that you can fix everything by controlling the number of dollars, and they have been the ones in the ears of every president since Reagan.

      It is not Keynesian to necessarily keep the government spending all of the time. It is perfectly reasonable to expect the economy to have up periods where little intervention is needed. MMT is all about making sure there is enough aggregate demand and enough dollars to keep the economy moving. These days, because of our large trade deficits, that means government deficit spending, but that demand (and those dollars) could also come from the foreign sector. If, for example, we somehow ran a trade surplus, dollars would be flowing into the private sector (instead of out), and if it was enough to account for our savings, the government would not need to add deficit dollars, because there would be no loss of dollars.

      “Essentially the gov’t got the hell out of the way. Contrast that with even less deflationary pressures in 1929.”

      Why don't we, instead, contrast 1920-21 to the depression of 1893, when we didn't even have a central bank? If you want to test the theory that govt. “getting the hell out of the way” is the road to recovery, don't leave out the (many) examples that don't quite fit in with your theory.

      “The New Deal gave us near 2 decades of an economic malaise....

      ...

      ...Because the gov’t is inherently inefficient in every single thing is does.”

      Here's how I see that period – New Deal spending helped quite a bit, but it was abandoned too soon. When the govt. spent, we did well, and when we cut spending, things went downhill. WWII served to increase demand like crazy (wars usually do), and our economy did well. End of WWII, as the end of most wars, was a big shock, but eventually all of that new labor was put to use. And the G.I. Bill helped a lot, because it takes a while for the private sector to make such big adjustments.

      When, exactly, has government spending outpaced our ability to produce and meet demand? When has the government “smothered” the market?

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      “It is interesting that you mention credit and equity are different. That is somewhat my point. Dollars themselves are credit and not equity. They are credit backed by the treasury. Yet the treasuries only real equity is the innovation created privately in the US economy, which they have the taxing authority over. True equity is the creation of new capital. If I chop off a limp from a tree in my backyard and carve a rocking chair out of it and subsequently sell it to you for $200, I have created capital. The same $200 is circulating in the system. Yet you now have an asset that you felt was worth $200 in your procession that did not exist prior. New Capital has been added to the economy....”

      If you spend your $200, great, the economy rolls on without any need for more. Production = consumption. But if I buy that chair from Walmart and $20 of that $200 goes into the pockets of the Waltons (who will save, not spend, that money), then there is only $180 left in play that is likely to be spent. And if Walmart bought that chair wholesale from China for $100, then there is only $80 left of the original $200 that is likely to be spent. The $120 in the hands of the Waltons and China is probably never going to be spent again, and they will therefore never affect the economy again. That is where deficit spending comes in – you need to replace those lost dollars.

      “But when the Fed prints new money, and uses the QE program as means to subsidize the deficit, we get money created and spent fiscally in excess of productivity.”

      The govt. does not spend in excess of productivity. Production easily increases to meet new demand at this point on the curve – we are nowhere near our limits. Besides, QE money doesn't reach the broad economy. It never gets spent. It's an asset swap with banks.

      “All capital originates privately. Money is not capital. Capital comes from creativity, innovation and production. When money is created and spent by fiscal authorities without regard for productivity, inflation and economic stagnation ensues.”

      That argument is very theoretical, and again, doesn't carry much weight outside of the Austrian community. Also, that argument does not take into account is that government spending is merely the first in what is (hopefully) a large number of spending cycles before a dollar gets hoarded away. After that first round, money is in the hands of people, who, according to your theory, make good decisions.

      “In some cases like Japan, the massive increase in gov’t created only the stagnation of GDP for more than 2 decades...

      ...

      ...In order to stimulate productivity, you need capital investment. That comes from simplified easy to understand regulatory environments, and incentives that reward capital investment rather than discourage it.”

      Japan's bonds are primarily held internally because they have been an export economy for many years. Yen do not flow out of Japan and stay there. And Japan's growth problems (which most countries on Planet Earth would love to have) are due to their trickle-down spending preferences. Inflation did not ensue because QE yen don't reach the broad economy to get spent, just like in America.

      Your claim that there are no success stories stemming from government spending is completely false. Every modernized economy got that way with the help of government spending. Business doesn't create their own infrastructure. Business doesn't pay for defense (or the defense industry). Capital investment is great, but successful investment means making more dollars than you spend. Yes, it leads to economic activity, but the economic activity itself is made possible because people have dollars to spend. If there are no dollars spent on that business, then all the investment in the world isn't going to bring them success. Dollars trickle up, and when the working class can't demand much of the profits, government money is the only option. That is the problem with balanced budgets – dollars eventually find their way to the rich, and the engine grinds to a halt.

      “Food is cheap…tell that to the average housewife going food shopping....”

      If all currencies are staying the same relative to the other currencies, then the problem isn't with the way we spend. It may be that there are real reasons behind the rise in (some) prices. Oil is easy, that's controlled by a cartel. And oil affects most other prices.

      But the claim that we are undergoing bad inflation is just hyperbole. I do the shopping for my family, and I have been shopping for 30 years, and inflation simply is not as high as you say it is. I have experienced one noticeable, lasting jump in prices in 30 years, and that correlates to the jump in gas prices in 2007 or 2008, which drove groceries up. Housing, if you don't live in one of a handful of crazy markets, has gone up only modestly. Utilities are inexpensive. Cars are affordable. Electronics are insanely cheap, as if phone service. Health care and college tuition have gone up a ton, but I have no complaints about the price of my basket of goods. It's our wages that stink.

      “Can we compare wages, or GDP expansion to the price of real tangible assets that go into everything we use to the price action in broad based commodities. It is not feasible for all of these tangible assets to have appreciated just as rapidly as the stagflation of the 1970’s and yet we claim this huge difference in CPI. It’s because CPI has no correlation to maintaining a lifestyle anymore.”

      Wages are a separate issue. Per capita income is a better measure, and we are still doing very well there. The economy as a whole is doing well. But the portion of those profits that go to labor is down, and the private sector has no answer to that. Spreading the wealth is not what private enterprise is good at. And that has nothing to do with prices or inflation, that's a result of low demand for American labor.

      If our wages kept up with inflation, we would be doing very well – even using the lower level of inflation that you think is bogus.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      “QE does not add net assets to the economy. If dollars are moving from one kind of investment to another, so be it, but the total number of dollars isn't changing.”

      But this creates incentive to move capital in an unproductive manner that distorts productivity. And Malinvestment holds a lot of weight. When assets are uses less productively because we artificially push them in one direction or another that is different than the natural forces of supply and demand would take them we get malinvestment. Whether it is a Monetary or Fiscal distortion. Markets do adapt, but they adapt in unproductive ways that create bubbles in credit and do immense damage to productivity. A classic example is the recent housing crisis. This was driven easy money policies, and all the wrong incentives created by HUD and the GSE’s which not only had a ripple effect through the whole economy. But who knows how much more actual productivity would have been created had capital been used efficiently based on the laws of supply and demand.

      You’re entirely wrong about the bond market. The Fed is buying more than 100% of new issuance at the moment to finance the deficit. But the total supply of bonds owned by the Fed is only about 20% of the Barclays Aggregate Index. And less the than 25% of the total outstanding treasuries. (That does not include the additional agency purchases and the holdings of foreign gov’ts they have been buying). That means they are the largest holder of treasuries, and virtually the only current source of demand. But there is an awful lot existing bond supply out there that they don’t hold. If the Bond market liquidates the current holdings with any degree of velocity, the numbers will crush the Fed. Now, if you want to argue that the Fed could simply print enough money to buy up the entire supply of the aggregate bond index, I guess you could say that. But that would make the US a banana republic with credit worthiness no better than Greece. The amount of economic productivity being generated by the economy would not come close to justifying such a debt burden. And the US will no longer be a “Safe Haven” anymore. This is why we are seeing global entities diversify away from the dollar as a safe haven already. We are at risk of losing our status as the reserve currency, which may be inevitable now anyway. So the bond market can price the Fed out by simply destroying the value of the dollar based on its debt burden. It doesn’t mean anything if you continue to print money to buy your own bonds based in a currency that nobody wants. Because the people living under that currency have no purchasing power in relation to goods and services globally. This is why debt is not unlimited.

      While it’s true you can’t specifically allocate which dollars of tax revenue financed debt service versus operations, think about that statement for a moment. With Federal revenues at about 2.7 trillion, what would be the value of the currency if the cost to service the debt was say for argument sake…6 trillion. That is the definition of a banana republic. You entire operation of gov’t becomes printing money to pay for gov’t operations with dollars that nobody respects or wants. So there is not necessarily net dollars entering the economy if the Fed is eventually the only one buying the bonds. Granted we are a long way away from that point. But again, the concept of debt service spiraling out of control is not far-fetched and has happened many times in history. If this had any chance of working, than the Weimar Republic, which I reference earlier would have had no problem recovering. It wouldn’t have mattered what damage was incurred from WW1 or any such reparations, because they could have simply printed money and run endless deficits while they rebuilt their infrastructure. Unfortunately, you need to do business with the rest of the world and the business community. And borrowing to pay for more borrowing doesn’t work in perpetuity for gov’t any more than it works for me to write you countless IOU’s based on money that is owed to me by others, that I may get paid someday in the future.

      It is not silly to count the interest paid to the 4 trillion on the balance sheet to the Fed. Because while you consider it little more than an accounting trick, the taxpayer must still pay the cost of this debt service. Regardless of whether you allocate 20% of tax revenue for this or 99% of revenue, the payment must still be made. If it weren’t a concern, than why doesn’t the Fed simply say we are forgiving all interest payments made to the Fed from the Treasury ??? That would cut the deficit down by 25% overnight. Wouldn’t that totally alleviate a great deal of burden on the taxpayer ??? The reason is it would send the bond market into a total downward spiral and destroy the credibility of the dollar overnight.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      The reference to the Fed subsidizing the deficit with QE is not about adding net dollars to the economy. It’s about allowing the fiscal side of the equation to run massive deficits at very low interest rates. Because should the Fed not have maintained QE, the cost of debt service would be dramatically higher with higher rates. Since there has been no ability to produce any serious reforms in terms of Federal spending and a deficit that was at one point in excess of 1 trillion, which increased 4 fold in a few years, the Fed wanted to hold rates low. They know that a spike in rates blows out all of the CBO’s budget projections. So they don’t want rates to rise in anything but a “controlled manner”. Unfortunately, the attempt to begin that process when the deficit came down a bit did not go well this summer. Hence the liquidity trap. QE does nothing to increase monetary velocity as we both seem to agree. But it created all of the excess liquidity never before seen. And the unwinding of it will create a huge sucking sound down the road as massive distortions are realigned. Ultimately, distortions should be realigned. My point is that the distortions should never get this big to begin with. And the people who will be hurt the most are the ones who least understand it. Solving one bubble by blowing another bubble even bigger is not productive.

      The gov’t does not have to have a direct impact on setting interest was my point. We existed for a long time without having a central banking system which has been created torn down and recreated. In theory currency does not have to be digital and or reserve notes created at will by the Fed. It could be literally coins that are minted as they once were based on actual mining. I am not advocating that, because I don’t think it is practical in a modern global economy that we have today. I am more interested in seeing the creation of money restricted to the supply of tangible assets like a broad basket of commodities based standard. Which is why I said in an “ideal world”. Because the fact that the gov’t does decide how many dollars are in play is what is problematic. They are simply not effective and expanding and contracting the supply of money effectively, and create one asset bubble after another.

      Bonds are STILL a form of financing in a fiat currency when you need the rest of the world to buy them and convert their money into dollars. If you can’t attract people to lend you the money, then you can create trillion dollar coins. What a Brilliant idea…LOL. The concept of the trillion dollar coin is ridiculous. You have a trillion dollar coin that is worth a trillion because the gov’t said so. But to the rest of the world it is worthless. It is no different than the 3rd and 4th century Romans and Greeks creating currency and assigning it a value that had little to no actual precious metals in them. Why make it a trillion…Why not a Septillion. And of course the only real risk is that the people aren’t smart enough to see that there is this immense value in something just because our elected officials said there is. Then see how much you can buy with your currency when you try to trade internationally. Creating currency does not mean you’re creating intrinsic value. Eventually if you continue to create theoretical value out of nothing, it is recognized for exactly what it is…Nothing.

      I have no problem betting against the govt’s ability to keep rates down. And did quite well this summer as a result. That being said my clients and I did very well betting against the ECB as well and going short Greek and Spanish bonds via some top fixed income managers while their credit spreads blew out as well. As a matter of fact, the only Fixed income managers I know that took any real beating where on the opposite side of that trade like Corzine. For the record I am long mostly long US treasuries in the short run, meaning the next to 12-18 months, yet still hedged. I don’t believe the Fed can lose control of the yield curve at these debt to GDP levels. And if the gridlock continues and the deficit comes in further on its own, the Fed has an outside chance of unwinding QE in some form of an orderly fashion. But that I still don’t expect. Although, I believe there is an enormous amount of pent up demand. And if the deficit continues to come in, there will be a substantial increase in economic activity. What remains to be seen is how much of the decrease in the year over year deficit reduction was a result of all of the accelerated cap gains and dividend distributions taken in 2012 to avoid the pending tax increases, which may have caused a short term spike in revenue.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      I don’t know what data you’re reading. But the total collapse of the US economy after WW1 in 1920-21 was anything but mild. It was the LARGEST deflationary pressure in US history. By any data point you can measure was far worse than 1929. The rate of business failure tripled in less than 1 year. Surviving companies saw a 75% decline in profits. The consumer price index fell by 15%. In 1929 the decline was more like 11% at its absolute worst point. Wholesale prices fell by a whopping 36%. There has never been a contraction even close to larger than that in the entire history of the US. Considering this was a larger collapse by nearly any economic metric you could find, it was an extremely quick recovery when compared to 1929 which was two decade malaise in response to quasi-Keynesian fiscal expansions. Yet in 18 months the result was far superior to that of today or the 1930’s.

      My point about the relationship of Keynesian ideas and MMT, is basically that there is no real Keynesian policy. The concept of countercyclical deficits is exactly that. It is a theory. But because political entities are not altruistic, they never run countercyclical. They essentially expand gov’t beyond its essential services infinitely. So the ability to create an unlimited amount of debt is what feed’s the expansion of the bureaucracy. Keynes had some brilliant ideas on paper that did not take into account the behavior of those in power. His ideas presume that fiscal spending will be spent in an effective manner, which never happens. And this is where the inflation comes from. If you buy a product from me with your hard earned money, you consider two variables to the transaction, both the cost and the quality. If you go out to dinner on the company expense account, the quality still matters but the cost becomes less relevant. When a bureaucrat spends other people’s money on something that he is not even buying for himself, he cares about neither cost nor quality. So the velocity of money increases with little increase in actual productivity. We get gov’t directing resources to their friends and politically correct investments that are often not economically viable. So the economy produces far less with increased velocity. The New Deal Spending did nothing to help the economy. It produced ridiculous policies like attempting to pay farmers to NOT grow food when millions of people were starving. Most of the money was directed exclusively at swing states for political votes, and excluded anyone who was not a union member. I outlined much of my disagreement and the cause an effect here https://hubpages.com/politics/The-Tale-of-Two-Depr...

      The gov’t spending smothers private activity. Imagine you, me and Mr X have a lemonade stand each on our respective corners of intersecting streets. Then comes some form of gov’t stimulus. The money gets directed towards Mr X to expand his business, because he is friends with the right elected officials. You and I are now competing against a business that is receiving fiscal aid from an entity that can spend money without concern for cost or profits. It makes it impossible to compete with Mr X. So we actually have to cut back or close up shop, because Mr X can sell his lemonade at prices that would cause us to lose money. Then when there is no competition with Mr X, quality also declines. The more the gov’t invests in an industry, or directly provides an investment into an industry, typically you get less investment in that industry privately.

      Private schools are a classic example. My kids go to private school. The academic achievements of the students and the resources/attention they get a far better than that of the local public school, and I live in an upper middle class area. Yet they receive less revenue per student than the public schools in the worst areas of NY. So logic would dictate that since the service and results are better, that more parents would want their kids to attend and the private school would capture more market share. Of course that doesn’t happen. Because many parents can’t afford to send their kids to private school and still pay huge property tax bills to fund the public schools. So public schools pay their teachers far more, produce lower results, with more funding. And yet they have a much larger market share even among middle to upper middle income parents. The public schools outside of areas where they offer charter schools have the almost all the market share of students. Perhaps many parents don’t agree with my wife (who is a public school teacher) and myself in our interpretation of the private schools offering more. Yet when charter schools are offered, parents have to get on a waiting list to join them, often for years. So the demand is clearly there, but not the investment. Why…because gov’t crowds them out. Why would you want to invest in a private school when the gov’t can so easily put you out of business. They have the ability to demand revenue and offer you little choice. So how many people invest in private schools these days. Not many. Almost all the funding is from private charities. And some of them have to go and beg for Federal money as well now, because they can’t raise the capital privately. I am quite certain that if we offered a voucher to every parent in America to send their kids wherever they want to send them, private schools would be popping up everywhere if they could be a competing option for that revenue stream. But the revenue has been pre-determined to go to point A, regardless of where you want it to go.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      You example of the Waltons is flawed. Do they stick the cash in the mattress ??? Not likely. They invest in private equity which creates various forms of venture capital new business entities. They put the money into Muni bonds for lower tax rates which finance the cost of roads, bridges and schools. They make deposits to the bank that recapitalize their reserves and eventually lowers the banks borrowing costs so the money can be lent out to possibly a new small business venture, or a new home buyer who will then employ a home builder to construct his home. I have been investing money for wealthy people for the better part of two decades. They always invest the money somewhere. They are always looking to invest in new capital expenditures. They love private capital because there is less volatility. And the only time they slow the velocity of their investments is when the gov’t puts in place policies to discourage their investments. Their primary interest is return on capital for a given unit of risk. If the risk is great the reward needs to be equally great on a net after tax basis. The money is always spent directly or indirectly. But it is spent more rapidly and productively when there is incentive to spend it.

      Productivity does not easily increase to meet new demand when the demand is transient. Business owners are not stupid. They will not spend money on cap ex and increase productivity because of transient income. They know full well that fiscal stimulus is not organic demand created by the marketplace. A near trillion dollar stimulus did virtually nothing for capacity utilization. In fact the same thing happened in the 30’s. Business cut back in the face of the New Deal. They did not spend more. They did not expand. The only exception was WW2 which was a moral cause people rallied around. Once the War ended and demand slowed, the economy began to contract again. The reason people cite the WW2 is because years and years of New Deal Spending did nothing. Nothing changed with any degree of consistency until not only taxes, particularly on investment capital where reduced. But Gov’t spending fell far enough that there was a benefit for private capital to go to work.

      Japans bonds are actually held domestically because of their demographics. They have a major problem with an aging population and slow birth rate. And little to no external immigration of any substance to replace it. Older societies buy less equity oriented investments and tend to park more money in fixed income. I am talking about their individual citizens, which buy a large portion of their debt along with domestic corporations. Any there fiscal expansion has left their GDP in same place it was in the early 1990s.

      It’s true that business won’t directly spend money on things like national defense on their own. Generally they’re not permitted to on their own. I am not saying there is no role for gov’t to spend money. Gov’t is a necessary evil. But when gov’t spends money beyond essential services with the intent to dictate outcomes we get bad results. If gov’t spending was the solution to employ more people for the purpose of increases in aggregate demand, then why do we use heavy machines on infrastructure projects ??? Why not contract out workers to build roads and then hand them a soup spoon to dig with ??? We could put them to work for to the end of time. The reason is that spending money to produce little to nothing is not effective. And too often, generally nearly all of the time gov’t spends money on projects ineffectively. Unless you think it is wise when gov’t contractors spend $100 for hammer that you and I could buy for $12 at Home Depot. Name for me one gov’t agency that has ever come in under budget and then sent the money back to the taxpayer. 20% of all Federal spending take place in the last month of the year. And about 8% takes place in the last week of the year. That is because bureaucrats are racing around to figure out how to waste money before year end, or they won’t get their increase the next year. Yet business routinely spend money in advance of aggregate demand. If they didn’t nothing would ever get invented. A few decades ago, nobody could possibly imaging why someone would need a computer in their home. Yet it was well worth it to bring to market something that nobody was asking for. Business must have forward looking foresight to make investments in things that will be profitable down the road. Sometime they are right, and sometime they are wrong. But they commonly commit capital without knowing for sure. This is precisely the reason Michael Dell is taking Dell computer private. He wants to make large investments that would otherwise not produce a short term benefit to the shareholder in the eyes of analyst. So they want to rebuild the company by making cap ex investments into an entity that is greatly out of favor and losing market share. And they don’t need a Federal agency to invest the cash.

      Actually the portion of profits/wages that go to labor is not down as nearly as often cited. This national income disparity is greatly overstated. It does not factor in changes to the tax law, transfer payments, and defined contribution plans. I outline the data and the sources that demonstrate how far off Piketty/Saez was here.

      https://hubpages.com/politics/National-Income-Disp...

      It is far more a function of how we report and classify income which is very different than 40 years ago.

      Your experience with the price of goods and services is not consistent with the average Americans perception. There is no way to reconcile the dramatic increase in the prices of commodities with the claims of CPI being were they are. Commodity prices, not just gold and Oil have gone up substantially above CPI over the last 40 plus years. These items go into everything we buy and consume in multiple places along the supply chain. So while some things that exist in an extremely competitive market have gone down. In aggregate there is no way costs can be accurate with the price action in commodities. You can have the vast majority of the ingredients to make something go up so drastically, and the final product is moving in the opposite direction. Yes if we kept up with CPI we would be ok. But the average American is not. The average American consumes commodities, they don’t own them. You can't have a declining dollar, rising commodities and CPI where the gov't claims it to be.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "There is no way to reconcile the dramatic increase in the prices of commodities with the claims of CPI being were they are."

      An hour of labor now will buy substantially more than an hour of labor 50 years ago.

      I haven't noticed any decline over my lifetime of me not being able to have as much as I did 35 years ago…in factt, I have way,way more…

      …and my income has stagnated.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      “But this creates incentive to move capital in an unproductive manner that distorts productivity.”

      If that money was actually going to something that affected production, I would agree with you. But moving dollars from one parking place to another does nothing for the economy. Dollars parked in treasuries do nothing – that should be obvious. But dollars used to invest in the stock market also do nothing – these are secondary sales, so investors are merely trading money with each other. I buy 1000 shares of Google from you, and now you are holding that $1 million. You can move that money from treasuries to stocks to bonds as often as you please - it's still not getting spent on goods, or buying equipment, or doing anything that increases production. If you want to see money being drawn from productive to non-productive uses, the government could offer 20% yields on their treasuries. Otherwise, it's just people with more dollars than they care to spend looking for a place to stash their pile.

      “A classic example is the recent housing crisis. ...who knows how much more actual productivity would have been created had capital been used efficiently based on the laws of supply and demand.”

      There is no “capital market,” because there is an unlimited supply of capital made available (through banks) at the Fed's discount window. The money used for home loans didn't come at the expense of some other enterprise.

      “...Now, if you want to argue that the Fed could simply print enough money to buy up the entire supply of the aggregate bond index, I guess you could say that. But that would make the US a banana republic with credit worthiness no better than Greece.”

      Yes, this is what I am saying (except the part about Greece, of course). Fiat money does not need to be financed, so bond sales are unnecessary. We do not need a good “credit rating.” Our “credit rating” is only dependent on our ability (100%) and our political willingness (???%) to make good on our bond obligations. Japan's bonds are rated low for some reason, yet their yield is super low, and their ability to print yen is unquestionable.

      Greece is not able to create euros, so the comparison is not valid. The better analogy is that Greece is like an American state – a user of the currency, not a creator, and therefore subject to real budget constraints.

      “The amount of economic productivity being generated by the economy would not come close to justifying such a debt burden.”

      The “debt” is not a burden, because fiat dollars cost nothing to create. The only real limitation is the possibility of inflation.

      “...And the US will no longer be a “Safe Haven” anymore. This is why we are seeing global entities diversify away from the dollar as a safe haven already. We are at risk of losing our status as the reserve currency, which may be inevitable now anyway.”

      Not a chance. Our “safe haven” status is good as long as the dollar can be used to buy stuff. And there is no other competitor for a reserve currency on the horizon. The dollar's share (62%) has not changed significantly in the past 20 years. The euro has its own unique troubles. The yen? If you think our situation makes the dollar untenable as the reserve currency, then you sure won't like the yen, either. Same goes for the pound. And that's about it for reserve currency candidates.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      “So the bond market can price the Fed out by simply destroying the value of the dollar based on its debt burden. It doesn’t mean anything if you continue to print money to buy your own bonds based in a currency that nobody wants. Because the people living under that currency have no purchasing power in relation to goods and services globally. This is why debt is not unlimited.”

      The “debt burden” does not destroy the value of the dollar.

      I never claimed that we could print unlimited numbers of dollars. I have always been very clear that the real limitation on dollar creation is the possibility of demand-pull inflation. But you have to understand that inflation does not just happen because there are a lot of dollars floating around out there. Demand must outstrip our ability to meet demand before prices will go up. China doesn't spend many of their dollars. Japan doesn't spend many of their dollars. Their economies are based on being net exporters, so their foreign reserves just pile up. So a lot of those dollars never re-enter the economy.

      “While it’s true you can’t specifically allocate which dollars of tax revenue financed debt service versus operations, think about that statement for a moment. With Federal revenues at about 2.7 trillion, what would be the value of the currency if the cost to service the debt was say for argument sake…6 trillion?”

      You cannot answer that question by just plugging in numbers, or dividing some future number of dollars by today's production. Production grows over time to meet increased demand (if present). For all we know, our economy is capable of producing $6 trillion worth of additional goods and services without inflation. We're already at $15 trillion, right?

      Also, there is the high probability that interest payments will merely get added to the bondholder's existing pile of saved dollars. If you are parking your dollars in treasuries, chances are pretty good that you have more dollars than you know what to do with, so when you get a few more dollars in interest, you aren't likely to spend them. It's like giving a tax cut to Bill Gates. Those dollars will probably never get spent, and will therefore never affect the economy. Look at Japan – they can't scare up much inflation no matter what they try.

      “That is the definition of a banana republic. You entire operation of gov’t becomes printing money to pay for gov’t operations with dollars that nobody respects or wants. So there is not necessarily net dollars entering the economy if the Fed is eventually the only one buying the bonds.”

      What? Dollars enter the economy when the government spends. When the govt. pays for its own operations, those dollars enter the economy – they pay salaries, they buy goods and services, they cut SS checks, etc. The true measure of sustainability is whether your private sector can produce enough to meet the demand of the whole country. Our private sector labor force already carries the rest of society – the public sector, plus children, retirees, etc., and it's taking far less than 100% of the available labor force to do this (which is a pretty recent phenomenon). Someday, 20% of our labor force will be able to produce everything we need and demand – so we will need to expand the public sector to keep those people busy (and paid). Private enterprise won't do that. That may seem like a lot of government spending, but as long as production can meet demand, the economy will be fine.

      Anyway, forget bonds for a minute. What is stopping a country from directly issuing currency? Nothing. Bonds are a holdover from the gold standard days. They can be done away with, and interest will be a thing of the past.

      “Granted we are a long way away from that point. But again, the concept of debt service spiraling out of control is not far-fetched and has happened many times in history. If this had any chance of working, than the Weimar Republic, which I reference earlier would have had no problem recovering.”

      You are missing the point completely. Production is what matters. (And consumption, of course.) Economies, especially manufacturing-based economies like Germany's, take time to get back up to speed. Their machine was damaged. First of all, they needed to feed their people, and European food production took a year to get going again (which you should know from your 1920 recession example). Reparations removed Germany's ability to buy food, because their gold and their limited output was needed to pay the victors. There was simply not enough production at that point to cover all of the demands on the economy. That wasn't debt service spiraling out of control, because they never issued bonds – it was cost-push inflation (food) that led to money printing. Remove the reparations from the equation, and Germany recovers more quickly. I think that much is pretty universally accepted.

      “It wouldn’t have mattered what damage was incurred from WW1 or any such reparations, because they could have simply printed money and run endless deficits while they rebuilt their infrastructure.”

      This is where the Austrians are inventing an argument that they can win. But you have to willfully misinterpret MMTers to get here. It has NEVER been claimed that you can print money like crazy with no consequences. Deficit spending always has to be within the limits of the economy's ability to meet new demand. In Germany's case, their economy's ability to meet new demand was very limited, both by damage and by the necessity to export much of their production to pay reparations.

      “It is not silly to count the interest paid to the 4 trillion on the balance sheet to the Fed. Because while you consider it little more than an accounting trick, the taxpayer must still pay the cost of this debt service. Regardless of whether you allocate 20% of tax revenue for this or 99% of revenue, the payment must still be made. If it weren’t a concern, than why doesn’t the Fed simply say we are forgiving all interest payments made to the Fed from the Treasury ???”

      The “cost” of debt service to govt.-held bonds IS zero. Not only is it paid for from deficit spending, but it is completely zeroed out on the balance sheet. It's not an accounting “trick,” it's just accounting, period. And they could (should!) not only forgive the interest, but dissolve the bonds completely. But there are probably legal barriers to doing that.

      “...The reason is it would send the bond market into a total downward spiral and destroy the credibility of the dollar overnight.”

      Really? By what mechanism? How, exactly, would a completely internal operation like that make the dollar worthless? It would not change the number of dollars in the non-governmental sector. It would not change the ability of the government to make good on their bonds. And it would not even change the demand for bonds that I can see. (Not that demand matters, because the govt. can still achieve it's goals without outside buyers.)

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "The “debt burden” does not destroy the value of the dollar."

      The debt burden is the dollar. There wouldn't be any dollars if it weren't for government spending.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      It doesn’t matter if dollars parked in treasuries do nothing. Which is not true, as they are often used to serve as reserves for collateral, such as when they exist in the portfolio of insurance companies to be used for insurance obligations. Even if that were somehow true, forcing dollars out of treasuries into risk assets that would not otherwise enter those assets contributes to excessive leverage in the system. Investors for example are forced out of fixed income to chase yield. The only thing that makes an asset prices go up is if there are more buyers than sellers. When you force buyers into a market via a distortion, you get asset bubbles as I mentioned earlier. When the market is positioned around these distortions and the bubble pops, there will be repercussions felt throughout the system. So the theoretical Google stock that was sold for $1 million may have only had a true intrinsic value of 800k. Yet it traded for more than it should because of a market distortion not based on supply and demand. I think we have all have seen more than enough of these excessive volatile asset bubbles and the damage they do to the entirety of the system.

      The banks do not have access to an unlimited amounts of capital. Capital is an asset…currency is not capital. Take 500k of cash and stick it under your mattress. Take it out in 20 years and tell me what its worth. Then compare that to a 500k home in 20 years. The home is a capital asset. The currency is not. It does nothing on its own. Banks don’t borrow money without restriction from the Fed either. The discount window exists only for short term lending in temporary shortages of cash flow. They have to pay interest in these loans. It was typically only overnight lending in a liquidity crunch and only extended to a few months due to the extreme circumstances of 2008. And the banks have to have certain existing capital requirements in advance to qualify for credit at the discount window. They must first maintain pools of collateral in advance of borrowing from the discount window typically with a third party custodian. Essentially all the loans at the discount window are supposed to be collateralized. You can’t presume that money didn’t come at the expense of other enterprises. Actual credit extended from bank reserves may have been directed to more productive resources if there wasn’t such incentive to underwrite low quality paper and immediately package and sell them to the GSE’s. This perception that we can lend infinitely to any and all and let the GSE’s buy up every MBS product in sight is exactly how we got the housing bubble. We inflated actual assets with excess monetary velocity. But the market was not making decisions based on supply and demand. Social engineering and easy money was distorting the market. Asset prices were inflated then crashed. And once against did enormous damage to the economic system which is still yet to fully recover.

      “We do not need a good credit rating”. That would be true if you did not need to do business with the rest of the world. When you lose a credit rating, that effects you in an infinite number of ways. For example, just imagine what would happen if the US were to lose its reserve currency status. Oil…which is volatile already due to geo-political risks trades all over the world in US dollars. If the rest of the world stops using dollars in transacting oil, the price of oil would skyrocket to the US consumer. The willingness to use US currency is already beginning to diminish globally. If we lose our reserves status we lose the ability to fund our trade and budget deficits. Now you presume this has no possibility. Of course the Brit’s may have thought that as well before the British Sterling lost its status in 1944. As Dick Bove pointed out earlier this year, In 1950 the US dollar made up about 90% of the worlds money supply. Today it’s shrunk considerably. The reserve status comes and goes. And as I pointed out, the status of dominant currency in a fiat system lasts on average about 40 years and then get replaced, because they always subsidize profligate spending, and lose the credit of the rest of the world. You might think it’s impossible. But if you have traveled abroad recently, many places around the world that would always accept dollars are no longer doing so. My brother returned from a trip in Israel last year and local merchants would not accept US dollars. That was unheard of 25 years ago. The IMF just held formal meetings about a year or two ago to discuss removing the dollar as the reserve status and replacing the dollar with SDR’s. China is viewed by most banking analysts as the biggest threat to replace the US as a single reserve currency.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      The inflation from debt comes when people lose confidence in your currency. And that is already happening like it or not. It does not require “demand pull inflation”. It requires the rest of the world divesting itself of your currency because of the debt burden. Demand pull inflation is theory. But ultimately huge spikes in inflation, as I stated earlier have come from deficit spending without regard to productivity. We had an extremely weak labor market in the 1970’s after all the profligate spending policies of Nixon and Johnson. There was a near run on the dollar. The decoupling of the dollar led to a substantial decline in purchasing power in the 1970’s. During the mid to late 70’s the US continued to experience extremely high inflation without substantial increases in aggregate demand while unemployment remained extremely high. If you just look at the volatility of the dollar versus other currencies over the last decade alone, it has been all over the place. That volatility is disruptive to international trade.

      Correct, Greece could not create Euro’s as their currency. But the ECB had to convince the other members to allow for the creation of Euro’s to bring in their credit spreads, which didn’t work all that well and simply weakened the purchasing power of the Euro to all its members. It did nothing to change their profligate behavior and lack of productivity. Which was my point about unlimited creation of currency just perpetuates poor fiscal behavior. They just repeat the same behavior over and over again.

      I meant there is not net foreign dollars entering the economy when the Fed is the only one buying US treasuries. The dollars that the Fed adds through asset purchases aren’t paying more salaries. They are falling further into the liquidity trap and making our budget deficits worse by subsidizing the deficit spending in the face of the rest of the world that is already concerned with our deficits.

      That is quite presumptive statement that 20%, of the labor force will produce everything we need. Personally, I don’t think there is a chance in hell that will happen. Society is already showing huge strains from having more than ½ the country receiving some form of gov’t assistance. Most citizens don’t like to work hard and produce results while watching others who are fully capable of doing the same feed off the productivity of others. It is bad for society to just find things for people to do that aren’t necessary. And it doesn’t work economically. It takes you back to the inflation problem of monetary velocity without regard for productivity. Fortunately, there is no limit to productivity. The more we produce the more we consume. Frankly I think you and many others have it totally backwards. Supply is what creates demand. The more we create new innovations, the more people want them. It’s impossible to know what societies needs and wants are until we know what we are capable of producing in the future. Nobody wanted or needed an Apple Mac in 1950. Now everybody needs them. The point is that the vast majority of people can be self sufficient without needing to find something for them to do. The needs will evolve to all forms of products and services that we have yet to see. I thinks its extremely unlikely that 20% will ever be sufficient to provide for all of society. Even advances in technology won’t produce that. As the labor force evolves that technology will just be integrated into new forms of productivity.

      The example of Germany’s inflation demonstrates that regardless of the reason for why they created the spending of new currency, whether to feed their people or any other reason was inflationary because they were creating currency and spending it without regard for productivity. And unfortunately, gov’t spending is always unproductive. You get very little productivity for anything the gov’t ever spends money on. If you’re ever in NY take a ride on the Belt Parkway. It’s currently under construction. And it has been since at least 1975. Maybe longer, but I can’t remember back that far. I presume they’re close to finishing it. In reality Germany started to see serious inflation when they started to do things like pay striking workers. But I agree the problem would not have been as severe had they not paid reparations. But reparations made up about a 3rd of their spending. Yet ironically today US entitlements which are nothing more than transfer payments make up more of Federal spending than that currently. But no…I don’t expect hyperinflation in the US. Just the slow erosion of our purchasing power to continue until we have some form of fiscal restraint, if ever.

      I understand that MMT theory means creating money within an economies ability to meet demand. But the Fed is not driven by such ideas anymore. And even if they were they’re not capable of measuring this with any degree of accuracy. The Fed is not any more efficient in measuring this than the local DMV is at processing my license renewal while I stand in line for 2 hours before they know who I am. Gov’t is inefficient. This is why they lept right into the liquidity trap and backed themselves into the corner. Literally not one prediction the Fed has made for the last 10 years has been even close to accurate. All the Austrian school is essentially saying is that all the econometrics models aren’t worth the paper they’re written on, because they cannot accurately model the dynamic forces of the market place. And trying to control the actions of the masses by manipulating the supply of money by fiat is not likely to end well. It will only result in volatile swings of asset bubbles and massive contractions that get bigger and bigger and do more and more damage. And it appears to date, that this is exactly what has happened.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      If the Fed forgave the interest from the treasury, it would signify to the entire bond market that the gov’t is concerned with its ability to make interest payments on the underlying treasuries and the burden it puts on its tax payers. If you can issue debt, then immediately monetize the debt and then subsequently forgive the debt, you are signaling to the world that you’re insolvent. And the bond market would sell in a fury.

      We won’t do away with bonds for numerous reasons. Number one is the gov’t raises revenue from its own citizens and foreign entities to fund its operations. The bond market serves as a last line of defense in the way of out of control spending and what could actually lead to runaway hyperinflation. The debt service of the country must answer to the global fixed income markets. If the gov’t began to simply create currency through the trillion dollar coin type of idea, the political class would really run a muck. There would be no difference between the US and 4th century Rome. You place a lot of faith in elected officials and bureaucrats. When have they shown themselves to be responsible ??? With great power comes great responsibility. Think about the founding of our government. It was rooted in the separation of powers with checks and balances for its ability help prevent abuses. The ability to create currency is a powerful and dangerous tool of the government. Historically the ability to do it without any real constraint has shown it has been abused. Our elected officials are no less profligate and fiscally irresponsible then the 3rd and 4th century. I have no interest in making it easier for them to be wasteful.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "The reference to the Fed subsidizing the deficit with QE is not about adding net dollars to the economy. It’s about allowing the fiscal side of the equation to run massive deficits at very low interest rates…" - LandmarkWealth

      Your idea of what deficits are is totally outside the realm of reality.

      Government deficits are identically equal to non-government savings…government spending creates ALL of the net financial wealth existing in the non-government, and IT IS IMPOSSIBLE FOR THE PRIVATE BANKING SYSTEM TO FUNCTION WITHOUT DEFICITS…part of the savings provided by net government spending is required for borrowers to make debt payments.

      Besides the fact that once spent loan proceeds are saved at the top of the income spectrum, never to be spent again, thereby making it impossible to repay the principal, loans accrue interest from thin air, creating liabilities that cannot mathematically be extinguished without public spending.

      "If the Fed forgave the interest from the treasury, it would signify to the entire bond market that the gov’t is concerned with its ability to make interest payments on the underlying treasuries and the burden it puts on its tax payers." - LandmarkWealth

      You misunderstand the relationship between the Fed and Treasury…

      The Treasury pays no interest to the Fed…quite the reverse…every penny the Fed earns less operating expenses is returned to Treasury…the Fed is non-profit.

      Interest on bonds is paid by Treasury…it's a budget item in the deficit.

      "The bond market serves as a last line of defense in the way of out of control spending and what could actually lead to runaway hyperinflation." - LandmarkWealth

      This is nonsense. The demand for bonds is so great, and the free lunch for bondholders so coveted. The following statements are the reality:

      1. It is absurd to say that bondholders would rather hold cash than cash earning interest. If that were true they would be doing it already. There is no vehicle as safe as bonds, and over the past 30 years bonds have out-performed the stock market and gold.

      2. There is no possibility bondholders will not buy bonds…bonds are originally purchased by 8 banks (primary dealers) that make money no matter what the yield. If they refused they would lose their priveledged position.

      3. Interest rates are set by the Fed, not the market. Bondholders (the market) are powerless in this relationship.

      "Out-of-control-spending" - LandmarkWealth

      More nonsense. Look at a chart of public spending on a log scale (shows rate of change) over the last 60 years…the rate of spending has declined considerably since about 1982.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      The Reference to the Fed subsidizing QE is something that has been pointed out by top fixed income experts like Jeff Gundlach and Dan Fuss. This is not some isolated view.

      “Government spending creates ALL of the net financial wealth existing in the non-government”

      That is totally false. Total national assets are in excess of 105 trillion dollars. Total public and private debt combined is just over 60 trillion. You’re equating financial wealth with financial savings accounts. But that is not the sum total of wealth. Wealth is Capital. Capital is infinite. New Capital is created daily. For example, there are literally transactions that take place completely outside the use of national currency in things like the barter system. The global barter system today is a 10 billion dollar annual business globally where no currency is ever exchanged. Nearly 500k companies in the US participate in this system, each contributing to the creation of new capital.

      “The Treasury pays no interest to the Fed…quite the reverse…every penny the Fed earns less operating expenses is returned to Treasury…the Fed is non-profit.”

      That is partially true. The problem with that statement is that the Fed’s operating expenses are paid for directly from the operations of the Fed and are not part of the normal Federal budget. They pay for operating expenses from the loans they make and interest they earn as well as from open market operations. If you look at their financial disclosures, the Fed is returning on average about 85-90% of the interest they earn from US gov’t securities back to the treasury. This is declared a profit by the Fed. In reality it is not a profit but a liability. While they are non profit, the portion of interest not returned to the treasury is a cost to the tax payer. This also does not factor in the risk the Fed is also now exposing taxpayers to by purchasing private securities, (which is illegal under the Federal Reserve act) which have a default risk. All in an attempt to manipulate interest rates.

      “The demand for bonds is so great”.

      Really…have you watched a US treasury auction lately. The Fed is buying bonds in the secondary market faster than the treasury can issue them. That’s because interest in treasuries is nowhere to be found at these rates.

      People /business are already holding cash. Cash reserves on corporate balance sheets are at record highs. Investors are holding record cash positions. Treasuries were once referred to as “A risk free return” Today they are now jokingly referred to as “The return free risk”. This is the definition of a liquidity trap.

      “The Bond market has outperformed Stocks and gold for the last 30 years “

      That is categorically false at current index levels. That was true a few years ago if the only bonds you were buying were all of a 30 year maturity, which nobody does. And if you mistakenly discounted the average dividend yield on equity holdings, which has made up a huge portion of the S&P 500’s average returns over that period. Gold saw no price action but downward in the 1980’s because of a strong US dollar. The last decade for Gold has produced returns closer to 20% annually as deficits have ballooned. Now if you believe that rates are going to stay low for the next thirty years…well….Good luck. If not than I would suggest you chart the same correlation for the 30-40 years period of the fixed income market leading up to the 1970’s where rates rose for 40 years. Then consider that the weak returns for fixed income did not incorporate the need for a central bank to wind down a 4 trillion dollar balance sheet. This notion that bonds are so safe reminds me of 2003 and listening to people claim that real estate won’t go down. Then of course there was the “earnings don’t matter anymore” crowd of the late 90’s.

      I am not suggesting that nobody will buy bonds. I am not even suggesting that about US treasuries. I am saying that the market will demand substantially higher rates, which will have huge implications for existing bond holders, many of which are institutions that have minimum funding levels that must be offset by declines in asset prices. This pending volatility which is highly likely to evolve from the bubble in the bond market risks be just a disruptive to the economy as the previous Fed driven bubbles. Such shocks to the system cause massive harm.

      Primary dealers in treasuries only affect auctions. They have nothing to do with the secondary market which is dramatically larger than the primary auctions. The Fed does not control rates. The Fed sets only short term rates. They can only attempt to influence long term rates through open market operations. This is entirely the reason why the Fed balance sheet is at 4 trillion currently. Because if it wasn’t, rates would skyrocket due to the lack of interest in treasuries. If your statement were true, than we would have never in history seen an inverted yield curve in treasuries. Obviously that is not the case. Additionally if your statement were true, then rates on the ten year note would not have moved from 1.6%-3% in a few months without any policy change. Hence the Barclays Aggregate Bond index is now negative for the year without any policy change. How can this happen without a massive wave of defaults....unless the bond market prices fixed income…not the gov’t.

      Spending is out of control as a share of GDP, which has increased dramatically in the last few years. The level of spending as a share of GDP is the only measure of spending that is relevant. It is not just the total of spending that is even relevant. It is the composition of spending. Mandatory entitlement spending is consuming huge portions of the budget and growing. The unfunded future liabilities are well beyond any sense of what is sustainable. And although that is not a current liability, it is a future projected liability if not altered. So this directly impacts the value of the dollar, and the demand for treasuries as well. When you have budget expenditure that is flexible and/or temporary it has very different impact than mandatory entitlements, as the EU learned the hard way over the last few years. Yes… the EU…where the ECB was unable to control the interest rates of Spain and Greece without appeasing the bond market.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "That is totally false. Total national assets are in excess of 105 trillion dollars. " - LandmarkWealth

      I said financial wealth, not total national assets. Moving of the goalposts is not allowed.

      "The problem with that statement is that the Fed’s operating expenses are paid for directly from the operations of the Fed and are not part of the normal Federal budget." - LandmarkWealth

      Right, interest paid by banks in the system, from lending out state money. There should be no profit in this operation, but there is for banks unfortunately.

      If they are allowed to earn a profit they should also be allowed to take losses.

      The Fed earns income from it's operations, which it returns to Treasury less expenses. I don't know what you mean by profits because the Fed has no investment. It creates money ex nihilo, so it costs it nothing, profit has no meaning in this context.

      "They have nothing to do with the secondary market which is dramatically larger than the primary auctions." - LandmarkWealth

      The secondary market neither creates nor destroys bonds, the Fed can do that while controlling rates but if you look at the link below you will see that the level of bonds remains pretty constant, only the rates change.

      People may pay whatever they wish for bonds in the secondary market…they already exist. Treasury doesn't need them to buy bonds. As far as people holding cash, it doesn't have anything to do with Debt Held by the Public, since that number is always increasing:

      (see http://www.treasurydirect.gov/NP/debt/current).

      You are giving the impression you think the public is holding cash instead of bonds…if that were true we would see a decrease in the National Debt (Debt Held by the Public).

      "if your statement were true, then rates on the ten year note would not have moved from 1.6%-3% in a few months without any policy change" - LandmarkWealth

      There was a policy change…Fed said it would begin tapering. Still, over the past 30 years or so bond yields have declined linearly with many ticks up (and down) like you have described. I would be careful about taking a short-term bump (quite common) and using it as a basis for an argument…get back to us in a couple of years.

      "Spending is out of control as a share of GDP, which has increased dramatically in the last few years." - LandmarkWealth

      You don't read very well…I referred you to a graph that disputes this assertion, in fact it destroys it mathematically. Maybe your terminology is wrong. We are discussing RATES of increase. Here, I'll even do the work for you…

      https://dl.dropboxusercontent.com/u/33741/FGEXPND....

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      I am not moving the goal post. I am simply pointing out that the creation of wealth is created without the need to deficit spend. I don’t define wealth as cash or necessarily a financial instrument. Which is why currency should keep up with the creation of wealth. But creating currency and spending it through fiscal policy does not itself create wealth or productivity. In effect I would suggest that gov’t deficit spending actually reduces productivity.

      The Fed does have assets. They have been purchasing private securities for years now. It is part of their balance sheet expansion. The Fed reports the interest earned on all of its fixed income holdings as a “profit”. The profit is defined as the money expended to purchase a bond of the US treasury, one of its agencies, private securities or for that matter a foreign gov’t. The difference between the cash spent on the instrument and the return earned on the instrument less its operational cost is defined as a profit. That is what is sent back to the treasury. In 2012 that number totaled about 89 billion. But I agree it is not really a profit. http://www.nytimes.com/2013/01/11/business/economy...

      The secondary market doesn’t create bonds. It sets the bid for them which in turn determines the borrowing cost of any future debt issuance. If the demand drops then the treasury must issue any new offerings at higher rates which increases the cost of borrowing. This happens every day in the fixed income markets as issues come due. The same is true for a private company. This again is why QE exists. Because if the treasury had to depend on the marketplace for anywhere near the amount of debt issuance that is issued, the financing cost would go up. So the Fed creates its own demand for treasuries in excess of current issuance, which has never been done before. Example….If the bond market sold enough treasuries to push the ten year up to 5%, the treasury will issue its next auction for ten year notes at 5%. If it doesn’t then there will be no buyers. So the Fed is buying treasuries in an attempt to keep rates low and in turn lower the cost of the treasury to borrow money when new debt is issued weekly.

      The Fed and its actions in conjunction with the treasury are not entirely unlike a penny stock scheme. They issue stock of a company, then place massive bids in the market for the issuance of the stock that nobody else wants at the current price. This drives the price up artificially beyond that of actual supply and demand. The Fed is now the largest market maker of US treasuries. I am not saying the intent is the same as that of a crooked market maker. But the mechanics are the same. The only difference is in the penny stock scheme, the market maker doesn’t have the ability to create unlimited currency. So instead they limit the number of shares at issuance in order to make the price of the security easier to move. Then they slowly sell the security and divest themselves of the security at current prices before the average investor realizes they are holding a near worthless security. In the case of the Fed, they want to slowly divest themselves as well. That doesn’t make treasuries totally worthless. It just makes them extremely inflated. And many people will get burned on these holding. For every year of duration in a fixed income instrument, it equates to an equal decline in principal value when rates move 1% ( Excluding any convexity in a fixed income issue.) A bond with a duration of 8 years will decline by 8% when rates move 1% upward. Now you can argue that if you hold your treasury to maturity that you’ll be paid back. I could say the same thing about someone who bought a house for $1 million that is today worth 600k. If you hold it for thirty years, you’ll get it back. However, that attitude is ignorant to the time value of money. And in the case of the fixed income markets it doesn’t account for the disruption caused in financing, margin calls, and unfunded liabilities that can develop across things like pension funds that must correct them for price declines annually.

      The public holding cash is not decreasing the national debt because the Fed is buying up that Debt. The pace of 85 billion monthly is more than the total issuance of new US treasury annually as they mature. So the Fed is what is making the difference. That is what is the liquidity trap is. If QE were to end abruptly, that statement would be more accurate. Every report available demonstrates record cash levels on corporate balance sheets as well as individuals with cash. Once again…a classic liquidity trap.

      The Fed didn’t have a policy change. They suggested there might be one in a 28 word statement and the bond market moved substantially. 1.6% to 3% is huge on a percentage basis. That shows you how much of the current rate environment is driven by QE and not actual organic demand for treasuries. The true question of risk is whether or not you believe that the Fed can unwind this massive, never before attempted experiment without a substantial disruption to the financial markets. Either way, intermediate to long term treasuries and most investment grade debt is likely to be a bad investment for many years to come. I personally expect another year or two before this becomes problematic. That is because I think there are a number of other exogenous factors that could cause some deflationary pressures on GDP and push demand back towards treasuries for a short while. And I think the total debt to GDP ratio would still have to grow well beyond current levels before there was any serious risk of the Fed losing control of the yield curve with QE still enforce.

      I read just fine. The rate of increase is not relevant. Hypothetically, If spending grows at an increasing rate of 5% per annum and then slows to 2% per annum, but simultaneously the rate of GDP expansion slows even more then you have an increased debt to GDP level. Spending levels regardless of the rate of change need to correlate to the rate of growth in GDP within sustainable levels. That’s like saying I went from 800k mortgage on a 900k house to a 100k mortgage on a 150k house. The latter is still less fiscally responsible.

      Now some argue that it’s the slowing of spending that contributes to the slower rate of growth in GDP. Sort of the chicken or the egg argument. I am not one of them, as the example I cited earlier of the policy responses around 1920-21 demonstrate. I am firm believer that the increased velocity from increased spending produces less productivity and more inflation.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      "I am not moving the goal post. I am simply pointing out that the creation of wealth is created without the need to deficit spend."

      Nobody disputes that the private sector produces wealth by producing stuff. But the system runs on dollars. Theoretically, if everybody spent every dollar they earned (and there was no population growth, etc.), there would be no need to add more to the economy. In reality, dollars are removed from play by saving. So unless you want your economy to deal with a fast-dwindling number of dollars, you need to deficit spend.

      "But creating currency and spending it through fiscal policy does not itself create wealth or productivity."

      New dollars incentivize people to produce more, in order to earn those dollars. That productivity would not happen without those new dollars. Do you find that statement incorrect?

      "In effect I would suggest that gov’t deficit spending actually reduces productivity."

      When someone says "in effect,....", it usually follows some reasoning that proves their point. By what mechanism does deficit spending - the immediate effect of which is to induce some new production - end up reducing productivity? Are you going to claim that the quantity of money causes inflation regardless of our economy's ability to meet new demand?

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      You don’t need to deficit spend to increase the supply of money. Fractional reserve banking increases units of money in supply. You might call it credit. But nearly all money is digital these days. How can you differentiate between a dollar in my account and a dollar in your account and which originated from where. Credit obviously needs to be controlled to correlate with productivity as well, otherwise you again end up with asset bubbles. During the late 1990’s we had balanced budgets and saw growth in M2. The Fed can increase the amount of lending to banks to increase the supply of money without regard to whether or not there is enough tax revenue to cover interest on the treasuries current liabilities. When the Fed lends money to a bank, it is not a liability but technically an asset. The bank must pay this money back with interest. But the Fed can expand and contract this lending at will thereby expanding the supply of units of money. That money enters the economy having no relationship to the balance of payments between the treasury interest paid to me as a bond holder and tax revenue collected to meet these interest payments. It is as you correctly stated, it is money created via fiat. This is where your idea of simply creating money without bonds is theoretically feasible. I would have no issue with that if the Fed’s creation of money was linked to some form of discipline. As the example I cited earlier, which has been proposed by numerous economist, which would be a monetary standard pinned to a basket of commodities. Imagine a Fed that can create cash to fund gov’t operations directly rather have the fiscal authority borrow it through bonds, as well as use this cash to lend directly to the banking systems. But simultaneously is restricted to a standard that has some form of intrinsic value. This prevents the fiscal side of gov’t from using political influence to pressure the Fed for unrealistic and dangerous increases in the supply of money to expand the gov’t services unnecessarily.

      Yes I do disagree with that statement. People don’t say, “Well… I won’t invent something because the supply of money isn’t groing up” They have no idea whether or not the supply of money is increased. Do you think some tech head at google is studying the monetary base before they implement their new idea for the next google glasses ??? Of course not. The same is true of someone we have never heard of working on a new idea in his garage that he wants to sell to another company. They’re going to be productive, because they happen to be an innovator. They pursue the purchasing power of money, not the quantity. The amount of money you have is not as relevant as how much you can buy with it…aka…purchasing power. That is why the supply of money must be linked to productivity. But it does not cause productivity. Again I will take you back to 1920-21. The supply of money collapsed and productivity quickly skyrocketed. The monetary base did not begin to expand again until years after the economy began to turn and was moving upward rapidly. Deficit spending produces a marginal amount of increase in productivity in relation to the supply of money being increased. That is because of the inherent inefficiency of gov’t. They produce little results for the amount of money thrown at a given project. And that is where the inflation comes from. The system see’s an increase in velocity, with virtually nothing getting produced in return. This is why the same roads are under construction for 3 ½ decades. This is why my wife’s school district pays 3 times the price for a smart board in the classroom than what I can get it for from a retail distributor. More money spent for less production. Not surprisingly my school taxes are pushing 12k per year, which is a rate of increase well above wages. Then the results of gov’t spending crowds out private activity, because there is no point in trying to compete against an entity that does not need to be concerned with cost structures and can be financed by an infinite amount of dollars. Even today, the deficit spending as a share of GDP is larger than several years ago by a wide margin. Yet capacity utilization hovers near two decade lows.

      Deficit spending only works if gov't spends money wisely. But gov't doesn't do anything wisely.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "In effect I would suggest that gov’t deficit spending actually reduces productivity."- LandmarkWealth

      There are so many logical and mathematical fallacies in this statement a book could be written on them.

      Spending=Income, always. Economic agents don't question where their income comes from. It is impossible to cut government spending without reducing income in the non-government.

      The government has spent/transferred $4T/year give or take over the past 3 years.

      If the multiplier is 4, that accounts for $16T of GDP unless you are going to make the claim that those funds are not spent multiple times before they are saved or taken as profit.

      That is complete nonsense.

      Then, you are implying that spending as a result of private credit is superior, as if it's better to borrow from banks at interest than to spend funds injected into the economy through public spending or transfers.

      Even if you were making hat argument, there has been ZERO credit expansion over the past 4 years, in fact it has declined by $1T.

      Furthermore, it is impossible for there to be profit in the aggregate unless the government net-spends. Where would the funds come from? Savings? There has never been a draw-down of savings of significance in my lifetime (65+ yrs). Private borrowing? Credit expansion does not come close to funding profits at that level. Besides, as I noted, we have had a credit contraction, not expansion, so the record corporate profits have come solely from public spending.

      So all of GDP has been a result of public spending, since there has been no draw-down of savings, and no expansion of private borrowing.

      And lets not forget productivity…once we have achieved the ability to produce surplus (50 years ago at least) increased productivity just unemploys people, unless someone is around to buy the surplus. There is a limit to how much an individual agent can consume, especially when his/her wages have been stagnant for so long. Thank public spending for providing all of the additional purchasing power.

      Foreigners sure aren't buying our products, since we have run huge trade deficits for nearly 2 decades.

      "The public holding cash is not decreasing the national debt because the Fed is buying up that Debt."

      If the Fed were buying up that debt then Debt Held by the Public would be declining…it isn't. It increases every year to the penny by what the deficit ends up being, which in reality is just an ex-post picture of how much the public chose (and was able to) save. Did you not even bother going to the Treasury web site? When you start rejecting simple arithmetic you are coming untethered.

      "1.6% to 3% is huge on a percentage basis."- LandmarkWealth

      If you say so…the problem with your argument, or lack of, is that that swing has occurred many times over the past 30 years. The ticks are meaningless…I watch the trend, and since I know that the bond market is a bunch of toothless dogs waiting for scraps (handouts) from the govt I have zero concern that bond prices are going to go up much more. As I said, the Fed tells the primary dealers how much they will pay for bonds…if they don't like it they lose their PD status, and all the perks that go with it. Just like the Japanese, they would buy bonds if the yield were negative.

      Bonds are nothing more than savings accounts for privileged rich people, and if they didn't exist there would be no safe savings vehicle for large sums. If there was a better place to keep their dollars they would be doing it. Hell, they don't even need the money. Only ideological zealots and know-nothings worry about these disaster scenarios that never happen.

      Like hyperinflation. Something the U.S has never experienced, even in wartime. Probably because we've never lost. War reparations and occupying of ther industrial regions caused Germany's hyperinflation.

      Bonds are dollars that pay interest,… it makes no logical sense to say that anyone would rather hold dollars than bonds. Who in their right mind would give away free money? I know, buy gold ;-)

      BTW, savings never get spent in the aggregate, so the money just keeps piling up.

      It is impossible for any agent to spend his/her savings until they had spent all of their income. This is a mathematical truth. It follows that this is true in the aggregate as well.

      The only people that spend all of their income are the bottom 75%…they have no savings. In fact, many if not most Americans have negative savings.

      Savings in huge concentrations only serve to create power for a few over the democratic process.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      How about picking one idea for discussion? These posts just get bigger and bigger until the arguments spread out into incoherence and discussion goes off the rails.

      No discussion can get anywhere if it isn't kept in a somewhat narrow frame. Too many moving parts. Let's try to get back to John's original question.

      We're talking here about a money system (two different kinds actually), which is completely separate from the economic system with which it interacts. The economy is a closed system, as is a gold money system while a fiat money system is not.

      An economy without a money system is a barter system by definition. Gold is a commodity, not money, so direct use of gold for transactions is a barter system. Linking gold to a currencey system is a modified or hybrid barter system.

      Why do you think that is bettter than a fiat money system? Why is it better to limit economic growth to how much gold we can dig out of the ground (and put it in another hole somewhere else for storage) than to just keep score of how much people earn in accounting ledgers and produce the currency as needed to account for their efforts?

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "Deficit spending only works if gov't spends money wisely. But gov't doesn't do anything wisely." - LandmarkWealth

      Nobody does anything wisely, especially the majority. These are the kind of open-ended statements that trash up a discussion.

      What part of government spending does the government do unwisely?

      The military? You want to privatize the military? Even more than we have already?

      Roads, bridges and the National Highway System? Right, I see the private sector funding that. Where would they get the money?

      Social Security? It's just a payment system…people choose how to spend it.

      Medicare? It's just a payment system…people choose how to spend it.

      Welfare and unemployment payments? It keeps people (mostly children) and the unemployed from starving, etc., and in light of public policy that is based on 5% (or more) unemployment (to control the inflation monster) hardly seems like a bad deal. Besides, businesses ultimately end up with every penny (the bottom 75% has no savings)…what's not to like?

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      "You don’t need to deficit spend to increase the supply of money. Fractional reserve banking increases units of money in supply. You might call it credit. But nearly all money is digital these days. How can you differentiate between a dollar in my account and a dollar in your account and which originated from where. "

      The distinction is this: banks have to settle up at the end of the day with govt. dollars, not credit. If you run short of real dollars to the point where they become a commodity themselves, it limits the economy.

      Also - there is a large segment of society that isn't helped much by credit. The unemployed and people on social security aren't helped one bit by banks expanding their balance sheets. That's not where they get their money from. And that's where theory meets reality. There are a ton of people still out there that lead a cash-only existence, including a lot of people with jobs.

      "Deficit spending only works if gov't spends money wisely. But gov't doesn't do anything wisely."

      I know this is going to make your head explode, but this is not true. Deficit spending works whether the money is spent wisely or not. We don't need the public sector to be "productive," in that they don't put products on the shelves. It's nice when their work is useful - but it is not essential. The essential thing is getting money in the hands of people that will spend it, so if we have to pay people to dig holes and fill them up, big deal. They weren't doing anything productive anyway. And don't try to argue that that affects the labor market, because it clearly does not. The private sector isn't coming close to employing everybody, and the only thing that will make the private sector hire more people is if they will profit from it. And for that, they need paying customers.

      If you think the private sector is so incredibly efficient with their resources, please explain tanning salons, Silly Bandz, $10,000 bottles of wine, etc.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      "Yes I do disagree with that statement. People don’t say, “Well… I won’t invent something because the supply of money isn’t groing up” They have no idea whether or not the supply of money is increased."

      People invent things and produce things with the hope and expectation of making money. Dollars, specifically. They may not look at the money supply, but it is clear when the economy is doing well and when it's not - consumer spending. And fewer dollars in the hands of people that would spend them means less consumer spending. I don't know how I can make it any clearer than that. All the hard work and all the innovation in the world will not bring you money if nobody has any money to spend. Theory is getting in the way of your thinking here; I've seen this argument before. Dollars are what make the machine run. You can talk about barter all you want, but it is simply not a realistic argument.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      Gov’t settles up as well with dollars issued through deficit spending as well by having to repay the loan on the bond to the Chinese gov’t or anyone else holding the treasury note. There is no reason to presume we would run short on dollars since the credit extended through the fractional reserve system is also infinite. It could constantly increase. My concern is only that the increase in the supply of monetary units be somehow constrained by some form of discipline to prevent political abuse, regardless of the methods we use to increase the money supply.

      Everyone would still benefit the same way they do now. When a bank loans money through the fractional reserve system to an entrepreneur to start a business and he hires people, the money supply works its way through the system in the form of labor force participation. That in turn creates new customers. And the ingenuity of entrepreneurs is also infinite. Therefore the pursuit of profit is also infinite. The difference where theory meets reality is in the incentives for the entrepreneur to actually extend themselves and take that risk. And that is why incentive is what drives capital formation. Of all the years I have invested capital for people, there are always two core concerns.

      1. What is the net after tax return on a dollar.

      2. What is the net risk per dollar invested.

      Frankly, I think the premise of people working unproductively is ridiculous. Creating that type of velocity in money is what destroys purchasing power. And that loss of purchasing power effect those on the lower end of the economic scale the worst. And we have done a great job at destroying purchasing power over the last century. The private sector will never employ everybody because there will always be some form of essential gov’t services. But in the past when gov’t was dramatically smaller, the size of the private sector labor force was equally bigger. There are countless areas in which gov’t participates and crowds out the private sector. Case in point…My mother in-law lives in a neighborhood where they don’t pay for the town to pave the roads, or remove snow. They are permitted to pay for this privately by a small community association. Does that mean that since they don’t pay taxes to the town for this to take place that nobody paves the roads or removes snow. Clearly not…they contract it out privately, and for less money. That means more productivity per dollar spent, and more money for the members of the homeowners association to spend elsewhere. Many of the services we pay for that are distributed via gov’t are done so by force, and not by choice. Things like $10,000 bottles of wine are a great example. You can also buy a box of wine at the grocery store for next to nothing. These represent personal choices, not inefficiency. The fact the one person thinks the cheap box wine is just as good, and it’s available to them is pure efficiency. Markets are delivering to people that which they want. If the cheap box wine wasn’t for sale, then I might call it inefficient. The only time the market is inefficient is when it is distorted by external forces like social engineering, or when it is some form of a monopoly. This is why the role of gov’t should be to regulate a market to produce a fair an orderly competitive marketplace. Without proper competition, we lose efficiency.

      People do invent things with the hope of making money. But there is no shortage of dollars relative to the size of the population by a long shot. It is the purchasing power of those dollars that matter. Not the quantity of dollars in circulation. If you only made $1 dollar per year, it would not matter to you if that dollar bought you all that you needed. I am not saying that the whole world should convert to a barter system. Most of the time when people use such mechanisms to exchange goods and services, it’s an attempt to avoid taxation. Which is once again is an example of why incentives makes a difference. As an example, I am in the midst of completing a 1031 exchange for a client as we speak. Two people will exchange property after years of capital improvements, with no cash involved in the transaction. This is an example of people going to complex lengths not to pay capital gains taxes because they have become more punitive. But the transaction will still take place. Currency again is not value. It is just a simpler more efficient means to exchange goods and services. So, yes the money supply does need to expand over time. But it should expand to keep up with the productivity in the private sector. But the act of expanding the supply of money is not at what increases the productivity itself. People were inventing and producing things before the first form of currency ever came into existence.

      We are not going to create a prosperous society by having ½ the population getting paid to dig holes and then fill them back up again. I think we are living that now. The monetary base is enormous. We both agree QE does not translate into new velocity. The size of deficit spending is triple what it was 6 years ago, and capacity utilization is weaker. Because at current, the incentives to capital formation are weak. They have become weaker from a taxation perspective. And are much weaker from a regulatory and compliance perspective. That is the reason for the decline in velocity. There is certainly no shortage of money at the moment, and we have historically high budget deficits as a share of GDP, which are well above the average of the last several decades. But we have plenty of shortages of incentive.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ pjmeli

      I have no interest in privatizing the military because there are certain essential services of gov’t that make gov’t a necessary evil . National defense is among them, along with courts of law to enforce legal contracts etc. Obviously the term essential is open to interpretation to the individual. But while I concede that gov’t is responsible for national defense, that doesn’t mean I should be ignorant to the fact the pentagon routinely can’t account for billions of dollars they receive and spend. Where in the private sector can you tell your boss you can’t account for any large sum of money and not be held accountable. Yes, even the military budget which is necessary is still filled with immense waste.

      Some of your examples are classic cases of waste. Medicare is more or less insolvent. The cost of Medicare when created was supposed to be about 12 billion dollars annually as per the CBO estimates by 1990. In reality is was more like 100 billion. As per the BLS data, the rate of growth in the CPI between 1930-1965 was about 2.8%. During the same time, the cost of medical care rose about 3%. Since the creation of Medicare the cost of healthcare has risen 40% faster than the baseline CPI. And I would argue the true numbers are higher than that. This is the result of massive prices distortions created by these programs. The indigent elderly were already covered by the Kerr-Mills program before we created Medicare. Dr’s all over the country are opting out of Medicare and many other forms of insurance because they don’t get paid enough to be profitable due to the immense red tape of these programs. None of this is a success. Cost has gone up and availability has gone down through price distortions. Now if you look at things like cosmetic surgery which is typically not covered by any form of insurance, the price has gone down on a relative basis and it’s more available to the masses then in decades past. It’s not just for rich people anymore. Because the market is functioning without any price distortions.

      Social Security is not just a payment system. Both of my in-laws paid into the system for 40 years. My Father in-law passed away 1 year after my mother in-law retired. She gets the higher of the two death benefits, (which was his) but not both. Her entire 40 year contribution is gone with no survivor benefit. She paid into something and never saw the benefit, with the exception of the whopping $255 dollar death benefit. Had that been a private account as it was originally designed to be, there would have been a commuted value she would have been entitled to.

      I am not suggesting that gov’t not have a role to spend money ever. Only that gov’t spending be isolated to essential services, and not an attempt to dictate economic outcomes. More often than not gov’t spending, especially in the form of stimulus is just money directed towards the politically connected and not used for the common good. That is what keeps money at the top. When it is used for something essential such as law enforcement or emergency response teams, it is just a fact of life that there is little incentive to spend money productively. The alternative is to have no gov’t which clearly can’t work either. But to suggest that gov’t spends money effectively is delusional. Bloomberg Business reported last month on some interesting data from the CBO. 18% of discretionary spending happens in the last month of the year. About 8% happens in the last week of the year. All that is happening is that agencies are racing around to spend money on things they don’t need to ensure that they get their annual increase the following year. Because no agency ever comes in under budget and returns the money to the taxpayer. And all gov’t spending happens through contractors that are often no bid contracts. And when they are bid out, the requirements to participate in a gov’t contract are so complex and filled with red tape, it is impossible for the small business owner to participate in the bid. Another example of how most of the money staying at the top due to excessive gov’t.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      Some reading on longer-term debt:

      "But as I explained last week, the short term rate is completely within the control of the Fed.... Long term rates depend on the state of liquidity preference plus expectations of future Fed policy. But in any case, the Vigilantes cannot force Treasury to issue long term debt. It can stick to the short end of the maturity structure and then pay whatever rate the Fed targets. " - Randall Wray

      http://www.economonitor.com/lrwray/2013/05/06/by-j...

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      The problem with this argument is that if the Fed stays exclusively on the short end of the curve, we can get a very steep yield curve that is not driven by economic expansion. There are risks there as well. The treasury issues only short term debt. The Fed is buying short term debt. But part of QE is designed to keep overall market rates low. I believe the main concern is financing the deficit. But they are also trying to lower the cost of financing in the overall marketplace. They still need to go out and buy MBS products and the debt of other gov't agencies that don't offer short maturities. Remember that a substantial portion of this massive balance sheet expansion is not treasury debt. I am concerned with the overall manipulation of the fixed income market. And the long maturities are already on the Fed's balance sheet. Operation twist already extended the duration of the Fed's portfolio. My concerns are not rooted in the Fed selling bonds to cause a tidal wave. I don't expect them to ever sell these holdings. The concern is what happens when they stop buying. Since, not everything they're buying is treasury debt, they can't force the issuers of these other securities to shorten the length of issuance. And if they stop buying that is where the distortion can begin to unwind.

      By the way...I hope you recognize I am not rooting for this. I more than anyone hope to be wrong on this. If the Fed does not unwind this in an orderly manner it will affect me immensely. In the course of financial planning and investment management, it is still imperative to maintain some fixed income holdings since the lower correlation of assets is most important in portfolio management. So both myself, along with everyone in my field are chasing yield in other fixed income instruments that traditionally fair well in a rising interest rate environment, such as floating rate notes and high yield. The problem is that this increases correlations for client portfolios. And if a major shock to the fixed income markets causes another shock to the overall economy I have a big problem. In 2008, treasuries for a brief period were the only asset class who’s correlation didn’t go to one with the rest of the market. If treasuries and investment grade debt are the trigger to a broader rapid sell off, than there is essentially nowhere to hide. And I will be dealing with a lot of unhappy clients. My only hope will be managed futures, which is too small of an allocation to make a difference in that situation.

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      “There is no reason to presume we would run short on dollars since the credit extended through the fractional reserve system is also infinite. It could constantly increase.”

      Bank credit is not dollars. When I said that banks settle up with dollars at the end of the day, that's because banks cannot make their own dollars by expanding their balance sheets. Interbank debts are evened up through reserve accounts. I'm sure you know this already. And it is very possible to run short of dollars. We lose hundreds of billions just to the Chinese every year.

      The “fractional reserve system” is a myth. Dollars aren't multiplied at all. Dollars just allow banks to create credit from thin air, but the number of dollars does not change. Once a bank loan is extinguished, the net result is that a few real dollars have moved from the borrower to the bank. No new dollars have been created.

      “...When a bank loans money through the fractional reserve system to an entrepreneur to start a business and he hires people, the money supply works its way through the system in the form of labor force participation....”

      While they certainly do stimulate economic activity, bank loans still need to be paid off. The net financial result of economic activity (assuming a successful business) is that the bank credit zeroes out, the bank gains a few dollars (from the interest), the business gains net dollars (from profits), the workers usually zero out (few people actually have savings), and customers have fewer dollars (equal to what the business, bank, and employees have gained). Simple accounting so far. Now – where did the dollars come from in the first place? Deficit spending. There is no other possible source, because nobody else can make dollars. You can talk about credit all you want, and I agree that it's a useful thing, and credit certainly makes the economy work harder – but it all zeroes out. I can buy on credit now, but I have to pay that off with dollars, and I have less to spend tomorrow. It is impossible to do any of this without a supply of debt-free government dollars, because money trickles up and gets hoarded.

      “Frankly, I think the premise of people working unproductively is ridiculous. Creating that type of velocity in money is what destroys purchasing power.”

      Velocity does not create inflation. Demand outstripping the economy's ability to meet demand causes inflation.

      Paying people in the public sector (which is not “productive” in that it puts no products on the shelves) puts money in the hands of people that would otherwise be unemployed, because the private sector does not have nearly enough jobs for everyone. So your claim is that we are better off overall if we simply limit the economy to those people who work in the private sector, and, what, just leave everybody else to starve? What about the unproductive children and spouses of the productive few? Aren't they another drag on the economy?

      Essentially you are suggesting that the economy would be better if, in a country of 300 million, 150 million people had money and 150 million did not. The private sector producing for 150 million people with money would be better than the private sector producing for 300 million people with money, even if there was plenty of production to meet the demands of all 300 million. Do you think that, if not for the 150 million public sector workers doing nonproductive work and buying goods and services, the 150 million in the private sector could have twice as much stuff?

      “...Things like $10,000 bottles of wine are a great example. You can also buy a box of wine at the grocery store for next to nothing. These represent personal choices, not inefficiency...”

      No, it represents inefficiency. People just like to couch it in different terms. But $10,000 spent efficiently will buy at least 2000 bottles of wine, or 3000 Happy Meals, or who knows how many sacks of rice. Spend $10,000 one way, and the economy produces one bottle of wine. Spend it another, and the economy produces a lot more. It's waste. And it's a good illustration of why the private sector does a lousy job of employing everyone – capitalism works to make profits for ownership, not to spread them out. Without a constant source of dollars from an outside source (like the government), capitalism would eat itself.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "But while I concede that gov’t is responsible for national defense, that doesn’t mean I should be ignorant to the fact the pentagon routinely can’t account for billions of dollars they receive and spend." - landmarkWealth

      There is no reason to believe that corruption occurs less in the private sector than the government sector. How about Enron? Medicare fraud? Accounting fraud at Wall Street banks?

      Corruption is part of human nature and will occur no matter what system we employ. That's what effective oversight is for, but even that has been co-opted by excess wealth and power.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "Fractional reserve banking increases units of money in supply. You might call it credit. But nearly all money is digital these days" -LandmarkWealth

      Once again you have presented a statement that is logically and factually incorrect.

      First, Fractional reserve banking (a misnomer) does not increase the units of money in supply unless you ignore the liabilities created along with the assets...credit adds zero net money to the system.

      Second, the fact that “nearly all money is digital these days” has no connection to credit…all money created is digital, the level of physical currency and coins remains pretty constant over time, about $1.6T±.

      In the "good old days" it was still digital…pencil and paper on ledgers and balance sheets.

      What was the point of the statement?

      Are you trying to make the argument that credit is all the money creation we need? That credit drives the economy? Because I made a logical case earlier that this is not true…cannot be true mathematically…which you ignored or did not address.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "Frankly, I think the premise of people working unproductively is ridiculous. Creating that type of velocity in money is what destroys purchasing power.” - LandmarkWealth

      Another broad statement with no logical under-pinning and completely ignores the feedback loops inherent in any closed system.

      Purchasing power is a direct function of how much income consumers have.

      Public spending creates more purchasing power (and much of that spending puts the choice in the hands of consumers, not government).

      Businesses do not create enough income to purchase the products they produce.

      Then purchasing power must be augmented from another source, or profits cannot be earned, and in fact, because of saving, only a loss can result from the investment with excess inventory.

      If you are saying people should work before they have money to spend fine, I don't have a big problem with that. But the key is that economic policy is centered around 5% unemployment, which is actually closer to 10% in real terms (underemployment, part-time work, etc.).

      Further, it is not possible for the private sector to employ everyone, even if that was a goal of business. In order to earn higher profits, or any profits, business cannot carry excess workers.

      Productivity increases reduce the number of workers necessary for a given output but does not increase the number of consumers…the employees and the consumers are the same people…they occupy the same group…you can't cut one without cutting the other.

      In a closed system this is inevitable and you can't make the argument we can sell to foreigners to make up for it…it just makes the problem worse…and besides they are also in a closed system and subject to the same dynamic.

      So profits are always made at the expense of the worker one way or the other, but over the long term this strategy cannot succeed for obvious reasons. When the parasite kills the host the parasite dies.

      Government spending to the rescue. TINA other than socialism, or some other form of state ownership of the means of production.

      The world you seem to want cannot exist mathematically over the long term.

      *****************

      P.S.

      Productivity is a way overused term and widely misunderstood. The vast majority of things we consume are not necessary for survival…it is leisure consumption. Much of it goes unsold or is thrown away.

      We are currently able to produce much, much more than we can consume and there is no one to buy the excess production, unless the government buys it or makes transfers to consumers to buy it.

      We are currently producing about 70% of what we are capable of producing, resulting in a loss of human resources (the most important one) that can never be regained.

      Cutting spending or reducing wages will only make this situation worse.

      What we need is to reduce the weekly hours worked per worker, and thsi needs to decline as mechanization unemploys more people. Obviously wages will have to remain constant which means the hourly wage will have to go up as the hours worked go down.

      Lower prices from increased productivity will not solve the problem because prices cannot fall as fast as wages…wage costs account for about 5%-10% of the cost of a product.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "I believe the main concern is financing the deficit…" - LandmarkWealth

      The Fed has nothing to do with financing "the deficit". Deficits are not a thing, nor are they a budget item. Deficits arise directly from non-government savings desires. No one, including Treasury, the Fed, or Congress has any idea what this number, an ex-post after-the-fact picture if you will of what has already happened.

      Then, for required reading, please go to Article I Section 8 of the Constitution where it is written, in law, that…

      "(Congress shall have the power) To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures."

      I don't see anything about the Fed in there or anything about deficits, nor has there been any amendment added that addresses them.

      *Coin and currency are synonymous, according to settled law.

      Deficits are endogenous…beyond the control of the government…which means logically they are controlled by agents in the non-government.

      So it makes no sense to say we should defund the economy so that no one can save. In fact, it would be economic suicide. The business community, despite all of their harping about "hard money", would be very displeased with the outcome.

      What the business community in fact does want is to be guaranteed success, which they have achieved through political control of the policies of money creation.

      They cannot succeed because math (the language of God, the ultimate authority) will not allow it. When citizens realize what is being done to them this handful of elites will lose much of their power.

      In the meantime many millions suffer needlessly, because we think we are "out of money", an accounting object which has no mathematical limit to quantity and costs nearly nothing to produce (keystrokes are very inexpensive).

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      "By the way...I hope you recognize I am not rooting for this. I more than anyone hope to be wrong on this. If the Fed does not unwind this in an orderly manner it will affect me immensely."

      I understand that you aren't pulling for chaos, but I really think you are overstating the problem of ending QE. Again - the number of (dollars + bonds) in the economy has not changed. Even when the Fed has bought MBSs and such, they claim to have broken even. If so, all of their dollars will have come back to them, back into the government's pocket and out of the economy. And the QE dollars have gone to increasing bank reserves, not into the broad economy. Yank QE and the banks will moan, but so what?

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      Yes, the fractional reserve system is a form of credit. But it is an increase in the number of monetary units. If one loan is paid off, but three others are simultaneously issued, the number of units expands. The number of units increases because banks are NOT lending out their reserves, or only a nominal amount of them. The loan issued simultaneously ends up as an on demand deposit back at the bank or a different bank. So there is a larger number of units with purchasing power circulating in the marketplace. Banks are creating dollars form thin air, so does the Fed. They also can contract the money supply as well by decreasing credit while loans are paid off. The ultimate source of the funds is still the Fed creating base money as loans to cover bank reserves. But those dollars are not what they are lending out and have little to no correlation to the amount of new money created. The question of how much volatility this can cause and what constraints it should have is another discussion. They are not creating base money, but there is no question that fractional reserve banking increases the money supply as defined by M2.

      http://www.standardandpoors.com/spf/upload/Ratings...

      The comment about workers having little savings is function of American behaviors. We are an overly consumption driven society. That’s not because we can’t save money, it because we choose not to. I have had clients that make 50k a year and find a way to save money, and other that make 500k and spend everything. Too much savings can be bad for the economy…and so can having not enough savings. There is a balance. My grandparents listened to the radio for entertainment before the TV. But the house had one radio. Today we have three TV’s and do it all on credit. Credit is good but needs to be controlled. There is not an inability to save, just an unwillingness.

      “Demand outstripping the economy's ability to meet demand causes inflation”

      If you have people making money without producing a product or service of any value, they are not meeting the demand of the consumer. So when you deficit spend, you increase the supply and velocity of money, but you haven’t increased the ability to meet the demand of this increased velocity, because you haven’t increased the economies productive capacity. Because nobody needs people to dig holes a fill them up again. There is no demand for that. I am not saying this happens overnight. But it is a slow erosion to purchasing power, which is precisely what has happened here in the US over several decades. The government’s contribution to GDP is higher and the purchasing power of the dollar is at record lows. Even if you discount the new fictional methodologies applied to CPI over the years, the dollar is at record lows even relative to other major currencies. The share of gov’t spending in relation to GDP at the turn of the last century was about 10%. The purchasing power of the dollar was much stronger. The growth in gov’ts share of GDP began to accelerate during the 30’s and slowly increased. And the dollar has been on a steady decline. Today gov’t spending accounts for about 35% of GDP. What good is creating new dollars when they’re buying less than they otherwise should. This is not a case of correlation without causation.

      http://static.seekingalpha.com/uploads/2009/5/8/sa...

      The idea that we can only employ 150 million people and the other 150 million people will starve makes no sense. Are you saying that the people in the public sector are incapable of being able to function in any competitive environment if placed in one ??? If there is no limit to the creation of new innovation, then there is no limit to the number of people whom can be employed privately. As I said there will always be a need for some degree of gov’t services. You can’t have a competitive market in a state of anarchy, so we need gov’t for certain functions like courts of law. But we don’t need them to dig the holes and then fill them up. People don’t have to be left to starve…they just need to be productive.

      $10,000 dollar bottles of wine is not waste. It is simply preference. Value is a matter of perception. Just because you can produce a similar type of product, it doesn’t equate to greater value. I believe your profile said you’re a lawyer. Are all lawyers worth the same ??? Or are some better than others ??? Using your example, it would make no sense to retain a more expensive experienced lawyer…because the kid who just passéd the Bar is providing just as much value for a lesser sum.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ pjmeli

      I don’t disagree that there is corruption in the private sector. But the private sector provides choices and the ability to make quick decisions and adapt to any dissatisfaction. That is not the case with the public sector. If I am not happy with the local schools, I need to either uproot my whole family…or pay for private school and still have to pay for the public schools. I have little to no recourse. In the case of the private sector I have options. Competition is inherent to creating efficiency. Enron exec’s were prosecuted. None of the congressman who covered up for the GSE’s and their accounting scandals were ever prosecuted. Instead they often chaired the committee meetings to investigate the problems they created.

      I did not incorrectly state anything. Fractional Reserve banking is simply not understood by most people. I suggest you have a read from the above link. Or if this is simpler to understand.

      http://fractionalreserves.com/mud.htm

      The point of the statement about money being digital is that you cannot differentiate between base money and the increase to M2 created by the fractional reserve banking system.

      I did not ignore your statement. As I already mentioned, the Fed can influence the supply of money through deficit spending. But I am simply stating that is not as productive as you think. Credit as it is related to increases in the money supply is all we need. It simply needs to be contained. That is different discussion around the regulatory functions of the Fed, as well as other policy measures. Deficit spending is unproductive, and to the extent it happens should be limited to a small % of GDP.

      Once again, I never suggested that the private sector employ everyone. Only that the gov’t employ individuals based on an essential need. The only reason the private sector can’t employ everyone is that there are certain structural necessities that society must have for a marketplace to function, which is where gov’t comes in. That does not mean that gov’t by definition must employ a large percentage of people. This presumes that these people are incapable of being self-sufficient enough to offer skills the public would want. Regardless, there will never be true full employment, because there will always be cases of people who are either lazy, disabled or have some other issue that impairs them to work productively.

      Productivity increases do not have to result in a decreased number of workers. If a new technology is developed, it may cause 10 people to be layed off. But the process to create, manage and maintain that new technology may employ hundreds more. The increases in productivity often simply results in a change in the demand for specific skill sets, which can cause short term structural unemployment issues. It doesn’t have to mean less aggregate labor is needed. The invention of the automobile damaged the demand for the horse and buggy. Did this increase in efficiency reduce the amount of aggregate labor that was necessary ???

      “Much of what is used is thrown away”

      Yet the waste management and recycling business introduces new productivity to that waste.

      We are only producing a fraction of what we can is because the incentives for cap ex or not there. Once again, the deficit spending that moved up three fold did little to nothing to improve capacity utilization. The same was true in the 1930’s. Yet during periods of balanced budgets and/or lower debt to GDP ratios (late 1990’s as well as the early 20’s), capacity utilization remained strong. The facts are not consistent with your statement.

      So we need people to work less hours to improve economic conditions. LOL. They tried that in France…It didn’t work.

      You can keep telling yourself that the Fed is not concerned about financing the budget deficits, but they have specifically pointed to that in the Fed minutes. The Fed is quite concerned with deficit projections. This is precisely why they initiated “operation twist”. The Fed didn’t exist when the constitution was drafted. It sounds like you haven’t traded much in the treasury market. The Fed does not set the fiscal budget. But when the Fed buys more bonds…rates go down. When rates go down, the treasury issues new debt at lower rates to the Chinese and anyone else buying them. That lowers the interest expense to the Federal deficit. If you don’t want to listen to me, listen to one of the most successful fixed income managers of the last 2 decades. (Although I disagree that QE will last forever)

      http://www.valuewalk.com/2013/05/jeff-gundlach-thi...

      Deficits are beyond the control of the gov’t…LOL. If that is the case, then it is not possible for the gov’t to actively attempt to increase the supply of money through deficit spending. Sounds like a contradiction to me.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      I hope I am wrong about QE...And I am not worried about the impact of the assets on the Fed' balance sheet. They will never sell them. They will simply roll of and mature. My concern is the price action in fixed income when the buying of new issues stops. It won't stop abruptly, it will be "tapered". And I am not worried about bank reserves...because they don't loan them out anyway. They already have excess reserves. If the selloff is substantial, many novice investors and institutions under mandate to own these types of securities could be standing in front of a tidal wave.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ JohnfrmCleveland

      I don't mean this to be sarcastic, by I don't think you fully grasp the supply and contraction of what is defined as the money supply. It is not determined exclusively by the gov't. The gov't can increase reserve requirements and impact this. But banks quite literally do create money out of thin air, in a sense not unlike the Fed. The problem is that most people outside the finance field, and frankly even some economist have trouble grasping the principal that the deposit does not create the loan. The loan creates the deposit. Bank reserves held at the Fed have nothing to do with the loans being issued. Now whether or not this is wise or dangerous is a different discussion. Now I would submit that when banks have been permitted to operate without any form of mass social engineering, they are far more diligent at making sure the money creation is directed towards more viable economic production, because it's in their best interest to do so. Versus money created via the mechanism of deficit spending which is more haphazardly spent because politicians don't get held to account very often, and are more interested in buying votes than spending money wisely.

      In 2011, Dr Charles Lieberman spoke at the FPA here in LI. I posed the question to him somewhat rhetorically as to why the near trillion dollar stimulus did not have the desired effect as many had hoped to see. While he was a supporter of the stimulus, he confessed that it was not spent nearly as wisely as it could have been. I say rhetorically because that was a given as far as I was concerned. Much of the stimulus went to reinforce local municipal budgets. Some of it went to my wife’s school. The response was not to get the fiscal budget in line with sustainable levels. Instead they did nothing to alter the budget. Then administration gave themselves a 20% raise, and when the stimulus ran out they laid off a bunch of untenured teachers.

      My point about linking the currency to something, is that the ability to increase the supply of money can be quite dangerous. Whether it’s a bank which is not being properly regulated, or politicians spending and infinite supply of dollars haphazardly, this can become problematic. And ultimately, I have a problem with the danger of any private or political body being able to increase the supply of money without restriction.

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      “If you have people making money without producing a product or service of any value, they are not meeting the demand of the consumer. So when you deficit spend, you increase the supply and velocity of money, but you haven’t increased the ability to meet the demand of this increased velocity, because you haven’t increased the economies productive capacity. Because nobody needs people to dig holes a fill them up again. There is no demand for that.”

      Let me give you a better example. 100 years ago, 100 workers might have broken up like this: 90 farmers, 8 private sector workers, and 2 public sector workers. Those 90 farmers produced enough food to feed 100 people, and the 8 private sector workers produced, say, 10 cars. 100 years later, 100 workers might break up like this: 2 farmers, 40 manufacturing workers, 38 service sector workers, and 20 public sector employees. Because of gains in productivity, the 2 farmers alone produce a surplus of food, and the 78 private sector workers produce everything that the 100 people demand, which is far, far more than 10 cars. The fact that the public sector has gone up by 10x doesn't matter, because demand is completely met by the 80 other laborers. You can't just push more workers into the private sector and expect it to absorb them, because the demand for that extra production won't be there. So what difference does it make what the 20 public sector employees do? The important thing is that all 100 people have money in their pockets to spend. If you instead reduced the public sector back to 2, you wouldn't get 18 more private sector workers, you would get 18 unemployed workers. And unless the government gave them some money to spend, demand would be down 18% (assuming everybody made the same money).

      “The idea that we can only employ 150 million people and the other 150 million people will starve makes no sense. Are you saying that the people in the public sector are incapable of being able to function in any competitive environment if placed in one ???”

      I'm saying that there is a limit on how much demand there is, and the private sector won't hire more people until it is profitable to do so. If there were more dollars ready to be spent, the private sector would be all over it; they are incredibly efficient at separating people from their dollars. And the limit on demand isn't want, or innovation; the limit is dollars. Everybody wants a new car every year, but few people have enough dollars to do that.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      Your example is presumptuous. How do you know that those workers pushed into the private sector won’t be highly productive producing and entirely new product that didn’t exist before. My father left public service and started his own company. People will pursue means to provide for themselves. You underestimate ingenuity. Do you really think that those that are not retained by civil service will all do nothing on a permanent basis ??? The additional 18 workers can contribute to an entirely new industry, which pop up all the time. You are working off of the premise that the increase in efficiency means less labor is needed. That is not true. There is something called creative destruction. When efficiency is created in one place, it opens up even more opportunities another, as my automobile example stated above. While the creation of the automobile destroyed the horse and buggy business, it created a wealth of other opportunities. Not just to manufacture the car. But the increased ability to transport goods and services. The need for new energy sources to fuel the automobile. And countless other benefits along the supply chain. If we presume that new efficiencies hurt the labor market, then we would never make any progress. It is true that there are certainly cyclical strains on labor as older workers need to adapt their skill set and be retrained for a new industry. But that happens all the time. My uncle was laid off as a baggage handler for Pan Am. He went two a trade school and two years later he was working on computer servers in a whole new field that didn’t even exist when he first started with Pan Am. And was making more money than ever.

      And I am saying that as Say’s Law states…the only way that demand is limited is if production is limited. Because supply is what creates demand. The power to purchase can only be increased by more production. This is an ongoing debate in economics.

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      "I don't mean this to be sarcastic, by I don't think you fully grasp the supply and contraction of what is defined as the money supply. It is not determined exclusively by the gov't. The gov't can increase reserve requirements and impact this. But banks quite literally do create money out of thin air, in a sense not unlike the Fed. The problem is that most people outside the finance field, and frankly even some economist have trouble grasping the principal that the deposit does not create the loan. The loan creates the deposit."

      No, I am fully aware of that. Understanding horizontal money is a big part of MMT. We know that the Fed has no real control over bank loans; we knew QE wouldn't work. All that effort, and banks still didn't increase their loans, because nobody was spending money and businesses were sitting tight.

      " ...Now I would submit that when banks have been permitted to operate without any form of mass social engineering, they are far more diligent at making sure the money creation is directed towards more viable economic production, because it's in their best interest to do so. Versus money created via the mechanism of deficit spending which is more haphazardly spent because politicians don't get held to account very often, and are more interested in buying votes than spending money wisely."

      Well, just how do you think the government and its regulations are making banks less diligent? QE was a pretty solid demonstration that the Fed has no power over bank loans, other than low interest rates, and low interest rates are obviously not enough to spur lending.

      Deficit spending has little to do with bank loans. The government is buying goods and services, plus they are paying a lot of salaries. Whether or not you agree with those initial expenditures, that money is then in the hands of people and businesses, and they are free to spend it any way they choose. I explained in my last post how the public sector certainly isn't taking production away from the private sector by hiring labor or buying stuff, and they are in all liklihood adding to production by adding to demand.

      "....While he was a supporter of the stimulus, he confessed that it was not spent nearly as wisely as it could have been. I say rhetorically because that was a given as far as I was concerned. Much of the stimulus went to reinforce local municipal budgets. Some of it went to my wife’s school. The response was not to get the fiscal budget in line with sustainable levels. Instead they did nothing to alter the budget. Then administration gave themselves a 20% raise, and when the stimulus ran out they laid off a bunch of untenured teachers."

      I would have done the stimulus differently myself. The banks didn't need to be bailed out as much as working people and businesses did. And while your wife's school looks to have made some poor choices, I don't have a problem with the feds giving money to state and local governments, who have been pinched as much as any sector has. Because state and local governments spend money, largely on salaries, and that is how the stimulus would have been best spent. Give everybody a job, consumer spending goes up, and the economy recovers. It really is as simple as that.

      "My point about linking the currency to something, is that the ability to increase the supply of money can be quite dangerous. Whether it’s a bank which is not being properly regulated, or politicians spending and infinite supply of dollars haphazardly, this can become problematic. And ultimately, I have a problem with the danger of any private or political body being able to increase the supply of money without restriction."

      In response, I would say this: the amount of deficit spending is way too low right now, not too high, and the proof is that there are so many unemployed laborers and unused resources. There is a practical restriction on spending; inflation, brought on by reaching the limit of some necessary resource. Ideally, that resource is labor. We should be deficit spending to guarantee public sector jobs to anybody that wants one. With no unemployment and everybody able to spend money again, the economy should do very well.

      The option is to not spend more (or even to spend less), and live with rising unemployment and lower aggregate demand. Politicians are still going to do stupid stuff - might as well have a booming economy with a possibility of inflation, rather than high unemployment.

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      "Your example is presumptuous. How do you know that those workers pushed into the private sector won’t be highly productive producing and entirely new product that didn’t exist before?"

      Because the private sector is incredibly efficient at making money, and if there was any demand left out there, they would meet that demand and get those dollars. In reality, there is no barrier between the public and private sectors - if you work for the government and have a great idea for a product, you can go to the private sector and make your fortune. But what I have been trying to explain is that the people in the public sector have money, and they are part of the demand. You seem to think that if you cut them loose, the private sector would grow for it. But without the government paying their salaries, aggregate demand goes down, not up, and there would be less money than ever to be earned. Same goes for government spending in general. It doesn't take away from anything - it adds.

      "... When efficiency is created in one place, it opens up even more opportunities another, as my automobile example stated above. While the creation of the automobile destroyed the horse and buggy business, it created a wealth of other opportunities."

      Efficiency means fewer workers can produce more. And this all works out when an economy is growing a ton and there is still a demand for 100% of its labor. If this was 1920, and manufacturing is recruiting labor from the farms, I might agree with you. But there reaches a point where we will not be able to consume all of what we are capable of producing, and the demand won't be there. Here is an easy proof: If you work 16 hours/day and need 8 hours of sleep, you won't be able to consume all that you produce. That may sound like a simplistic proof, but it hits right at the heart of your contention that all you have to do is add a laborer to the private sector, and his product will be consumed, and he will take his cut of the pie. Well, not if everybody is trying the same thing.

      America's ag sector is about 2% of the labor force (or less), and our labor force is far less than 100% of our population. That 2% produces a large surplus of food, so if we say that our labor force is 100 million, each farmer feeds 150 people (to bursting) with his production. Can you see where increased productivity is heading? A low demand for private sector labor. If a half dozen workers can oversee an automated assembly line that produces 100 cars/day, do you really think it will be possible to consume that kind of productivity if everybody works in the private sector? I sure don't. It doesn't matter if new businesses open up or not, the clear trend is less of a need for labor.

      "And I am saying that as Say’s Law states…the only way that demand is limited is if production is limited. Because supply is what creates demand. The power to purchase can only be increased by more production. This is an ongoing debate in economics."

      I thought the debate was over, and Say's law lost.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      I was talking specifically about lending in the MBS market. The market in terms of loan issuance was totally distorted. The CRA reg’s pressured banks to lend money to people of poor credit that would not have otherwise been lent out. NBER just released a study on this.

      http://www.nber.org/digest/may13/w18609.html

      More importantly was the artificial demand for MBS products that was created by the GSE’s. HUD set requirements that 55% of the MBS products bought by the GSE’s were of low to moderate quality. Banks were issuing poor paper because they knew the GSE’s would simply buy them up and they would never hold the paper. This is why I am not a fan of Krugman. He is quite the political economist. He made outlandish statements that the GSE’s had nothing to do with sub-prime loans. In fact they were mandated to do so by law, which he had to have known. And an SEC investigation revealed that their participation in the sub-prime mortgage market was about 2 trillion dollars. They were actively misclassifying loans on their books. This excessive demand caused excessive loan issuance to un-credit worthy borrowers. Greed is balanced by risk. But the gov’t subsidized away the risk in an attempt to socially engineer an outcome of increased homeownership…and it ended badly. When banks are left to determine by their own standards of who should get a loan, they do a pretty good job of assessing risk.

      I completely disagree with your premise on deficit spending. I firmly believe that every time the gov’t spends money beyond essential services that the private sector they cannot deliver, they crowd out private activity. I can tell you that if the gov’t attempted to enter my business as a market participant instead of a regulator, I would quit immediately. There is no reason to compete with an entity that can spend limitless money with no concern for cost structures. And productivity goes down. The crowding out effect. We’ll have to agree to disagree.

      I agree with the premise that banks should not have been bailed out. Even if their decisions were implemented based on poor gov’t policy, they were still their decisions. Markets don’t work well when there is no accountability. But what happened with my wife’s school is the norm. This is my point about gov’t spending. The money goes directly to those with political connections who need it the least. It centralizes wealth more not less. The stimulus never has and never will allow the small business owner to be part of the process. In effect, it actually pushes them out, because the money goes to the people who need it least and gives them a greater competitive advantage. This is where I believe Keynes ideas fail. In order to be productive enough to have the desired effect, the fiscal authorities need to be altruistic and not political. Unfortunately, I have yet to meet an altruistic politician. Note, a huge portion FDR’s New Deal money was sent to projects of political allies in swing states for votes, and was not based on economic needs.

      If you want to solve the unemployment picture to more normalized levels, you need capital formation, and capital investment. We have little of this because the incentive is terrible. The regulatory burden is oppressive. And to a lesser extent the tax on capital investment is worse. And the shame of it is, that there is a lot of pent up demand right now. I can’t tell you how many clients I and my colleagues have that are waiting to deploy cash when they feel it’s a more friendly environment.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      The private sector would absorb those people because they would develop skill sets on their own that create productivity which increases demand. The barrier, is that once people get set in a civil service job, they can virtually never get fired. So their productivity drops, and they get paid to do little. Some are more productive than others. And that growth in the civil service labor force with less productivity is why the correlation between the decline in the dollar coincides with the growth in gov’t.

      That is not proof, because not everything that is productive is a tangible product. People who work for facebook are productive. There is not tangible product. It is not consumed, but it is a desired service. We can utilize more and more. It is infinite. If it wasn’t then we are all headed for a Matrix movie like existence, were none of do anything because we have become so advanced and efficient that our existence is pointless.

      Yes we can in your example. The farmer who is overseeing an automated assembly line needs a company that manufactures the parts for the line. Someone needs to fix the parts. Someone needs to ship the parts. Someone needs to sell the parts. Someone needs to do the accounting for the company that sells the parts. All roles that did not exist before the automated line was created. It is infinite. We may need less farmers but more people for other things.

      You only thought the debate was settled, because you consider the 2 decade economic malaise of the New Deal response to be a success. I prefer the quicker recovery to even larger deflationary pressures of 1920-21, Which still cannot be explained by the Neo-Keynesians. Which is why they largely overlook it in academia and basic econ 101 courses. They just pretend it didn’t happen. You would think the largest deflationary crash in US history would be a more prominent discussion.

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      "More importantly was the artificial demand for MBS products that was created by the GSE’s. HUD set requirements that 55% of the MBS products bought by the GSE’s were of low to moderate quality. Banks were issuing poor paper because they knew the GSE’s would simply buy them up and they would never hold the paper.”

      But they still had to meet the GSE requirements to approve and sell the loan. (I've taken a bunch of CLE classes by a mortgage loan officer, and he went over the crisis in great detail. Fantastic classes.) GSE-backed loans all have to meet a ton of specifications, and those were not changed in order to attract more lower-income borrowers. And in any event, those loans were guaranteed by the government. Those loans were not the ones costing investors money. The real demand for crap loans actually came from investors. There was a huge demand for MBSs because they had great returns and (bogus) safe ratings. That demand drove the big Wells-Fargo-type banks to lower lending standards, and in many cases commit outright fraud. They were the ones buying loans from mortgage loan outfits, and they were the ones setting the (low) standards for loan approval. (Mortgage loan outfits sell all of their loans, and they don't make a move without prior approval and assurance that their loan will be purchased.) The big banks didn't hold the loans for long, either. They bundled them up and sold them. At some point, they were stupid enough to keep some on their own books. So, that's my answer to the idea of banks policing themselves because of risk – sounds good in theory, but it doesn't work. They were perfectly happy to defraud investors.

      “I completely disagree with your premise on deficit spending. I firmly believe that every time the gov’t spends money beyond essential services that the private sector they cannot deliver, they crowd out private activity. I can tell you that if the gov’t attempted to enter my business as a market participant instead of a regulator, I would quit immediately. There is no reason to compete with an entity that can spend limitless money with no concern for cost structures. And productivity goes down. The crowding out effect. We’ll have to agree to disagree.”

      We will.

      “If you want to solve the unemployment picture to more normalized levels, you need capital formation, and capital investment. We have little of this because the incentive is terrible. The regulatory burden is oppressive. And to a lesser extent the tax on capital investment is worse. And the shame of it is, that there is a lot of pent up demand right now. I can’t tell you how many clients I and my colleagues have that are waiting to deploy cash when they feel it’s a more friendly environment.”

      That's not pent up demand you are seeing, unless your clients have money that they want to spend on products or services, but are holding back for some reason. What you are describing are piles of dollars that are looking to attract more dollars. If you take a close look at the investments you are offering, I think you will find that they don't actually move dollars into productive enterprises, they just shift them around with other piles of dollars. The economy doesn't run on capital, the economy runs on paying customers.

      It is illustrative to actually sit down with a pencil and paper and map out where dollars come from and go to in the course of their useful lives. (Separate them from bank credit.) What you will find is that dollars trickle up to the rich, and without government spending, the only way dollars ever reach the lower end is from wages; and since profits stay at the top, dollars are constantly leaving the system to savings, leaving fewer and fewer dollars moving down to labor. It doesn't take too many cycles to see that, without the government constantly feeding dollars to the lower end, the system is unsustainable.

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      “That is not proof, because not everything that is productive is a tangible product. People who work for facebook are productive. There is not tangible product. It is not consumed, but it is a desired service. We can utilize more and more. It is infinite. If it wasn’t then we are all headed for a Matrix movie like existence, were none of do anything because we have become so advanced and efficient that our existence is pointless.”

      How many Facebook-type websites do you have time to pay attention to in a day? An infinite number? How many meals can you eat? How many cars can you drive? How much TV can you watch? There are real limits to consumption, if you think about the real world and get out of that theoretical box.

      “Yes we can in your example. The farmer who is overseeing an automated assembly line needs a company that manufactures the parts for the line. Someone needs to fix the parts. Someone needs to ship the parts. Someone needs to sell the parts. Someone needs to do the accounting for the company that sells the parts. All roles that did not exist before the automated line was created. It is infinite. We may need less farmers but more people for other things.”

      It is anything but infinite. If the loss of jobs creates an infinite number of new, different jobs, please explain why there are so many unemployed workers out there.

      “You only thought the debate was settled, because you consider the 2 decade economic malaise of the New Deal response to be a success. I prefer the quicker recovery to even larger deflationary pressures of 1920-21, Which still cannot be explained by the Neo-Keynesians. Which is why they largely overlook it in academia and basic econ 101 courses. They just pretend it didn’t happen. You would think the largest deflationary crash in US history would be a more prominent discussion.”

      Look, the responses to the Austrian take on that recession are all over the web, and I'm not going to bother rehashing them here. Woods' analysis is flawed. There are often big fluctuations at the end of wars, but Austrians gloss over that small detail. The underlying problem – a glut of agricultural production – was not that big a deal, as recessions go. It predictably lowered the price of ag commodities. That's a very different type of deflation than deflation caused by a shortage of dollars. What other economists can't explain is why Austrians think it is such a feather in their cap.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      The requirements for the loan quality ratios of what they were buying changed. In 1992 the lower income loans that were required to be purchased by the GSE’s were 30% of their loan portfolio. By 2007 that was upped to 55%. The loan origination was issued privately, and then sold to the GSE’s in the form of the MBS products. The problem is that when the GSE’s went under and had to be taken into conservatorship, the demand stopped and supply was still enormous. So banks had a lot of bad paper that they never expected to hold which became illiquid almost overnight. That coupled with the new mark to market accounting provisions forced them to take write downs on loans that were actually performing. The issue was liquidity. The assets became illiquid almost overnight and were of poor credit quality, and there was no buyer for them anymore. As far as the GSE’s go, the only ones that were technically guaranteed where Federal Farm Credit and GNMA. But they were not the main culprits as they didn’t buy subprime paper. Fannie and Freddie were only implied guarantees, but technically there was no obligation at the time to guarantee anything until the gov’t agreed to take them into conservatorship. That was a very specific disclosure we had to make to clients before we sold a bond. You could not legally say gov’t guarantee with Fannie and Freddie paper. The issue was not if you were a bond holder of a Fannie or Freddie paper. It was that loans landed on the books of the banks that were supposed to get sold into a highly liquid market, who’s liquidity was being created by the GSE’s.

      As I mentioned earlier, Fannie and Freddie were misclassifying their loans in order to book larger profits, and did so under the protection of the congressman who appointed them as the 2011 SEC investigation revealed. If you sold straws for a living, you would only place as many in inventory as the there was current demand for. But if the Federal gov’t decided to buy up a large quantity of them, you’re not going to care if the demand is organic. Why watch your competition make money why you sit on the sidelines and possibly get put out of business. You won’t, you’ll sell more straws. If the Fed abruptly stops buying your straws, and you have too many in inventory to manage…too bad. The market became a game of musical chairs based on artificial gov’t sponsored demand. Watch Andrew Cuomo, my lovely Govenor brag about leaning on banks to make riskier loans when he was HUD secretary, through his affirmative action lending practices. He was behind the beginning wave of the GSE buying more lower quality paper. During his tenure, HUD increased issuance of lower quality paper by 2.4 trillion dollars in 10 years. Brilliant.

      http://www.youtube.com/watch?v=9TWOPDN5Va0

      The pent up demand is in things like asset purchases. People don’t want to buy real estate because of all the distortions that still exist. The market can’t find equilibrium. They also don’t want to go out and spend money on cap ex. Cap ex requires the purchase of supplies and inventory. The return of on capital investment requires too much in the way of regulatory and tax burdens. If I am unwilling to spend money to expand my business due to what I see as an unfriendly business environment, then I don’t grow my revenue. If I don’t think I can grow my revenue, I am less likely to spend money on discretionary items, so I hoard cash. The origin of my behavior is still that I don’t think I can commit money to grow my income.

      Sorry, but your still missing the point about bank credit via fractional reserve banking. They add as much to the money supply as gov’t deficits as the S&P piece demonstrated. There is no difference in the impact to the supply of money. The life of a dollar is this... I take out a loan from the bank. I use the loan to start my financial planning practice. As the practice grows, I need a secretary to assist me, so I hire one. She is paid a salary and the dollars flow down ward. I need a compliance officer so I hire one. I need a cleaning crew that cleans the office when I am done at the end of the day, so I hire them. So on and so forth. Each one is paid more or less based on their skill set that they offer me. I did not keep all of the revenue. All along the supply chain they are compensated for their economic value, which is determined exclusively by what they offer me. They dictate their compensation based on what they bring to the table. If they bring a new skill set that will help me grow faster, I will pay them more. If they bring me something of little value that I can get anywhere, I pay them less. Simple supply and demand. In order to be paid X…you must produce more than X to justify why you are there. That is compensation for value, versus compensation for digging a hole that you are going to cover up…which is compensation for no value. That later offers more money for less productivity, which is inflationary. Which is why once again that I point to the fact that as gov’t has expanded via the fiat system, the dollar has lost more than 90% of its purchasing power. That is what hurts poor people the most. They have less dollars to begin with, and they now have less purchasing power. Increasing their dollars and simultaneously reducing their purchasing power is not helping them.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      The population is infinitely expanding. We will need more food for more people. That means more people that are going to service the parts to fix the automated system for the farmer who needs more food for more people. We need more facebook accounts for the larger number of people. More automobiles for the larger number of people. Each one creates new economic values that are yet to be discovered. You know at one time in American history the US patent office actually closed because they thought society had become so advanced that there was nothing left to create. For all you know we may be colonizing Mars in 50 years if that project goes well.

      There are two types of unemployment, cyclical and structural. There will always be some structural unemployment, especially in a rapidly changing technological environment. The cyclical is part of the business cycle. As I said earlier, if we had the right incentives, we’d hire more people. Then you have outliers, people that are simply lazy. But that is a small number. Most people want to work. Many don’t offer skill sets. Case in point… Microsoft has to import software engineers every year to the US from other countries. These are fairly well paying jobs. Yet we have U6 unemployment of 14%. Because there is a mismatch in the skill set. It doesn’t mean the demand isn’t there. That is the structural portion. Immigrants to the US come here and produce a 40% higher entrepreneurial rate according to the Kauffman index. That is an example of a societal problem. Americans have become a little to entitlement oriented, and not as willing to take risk. Those same immigrants are 3 times more likely to become self made millionaires.

      Austrians point to that moment in time, because it demonstrates a recovery from extreme deflation that Keynesian policies have never achieved. Not in 1930 and not today. Woods is only one analysis. The arguments around tax revenue increasing are valid, because the approach was a more broad based tax system rather than higher marginal rates. But the monetary and fiscal intervention wasn’t there. That can’t happen according to both the Monetarist or the Keynesian. Deflation is supposedly the thing that economist fear the most. Which I have always found to be a bit irrational. The sooner the market reaches equilibrium and finds true value, the sooner the recovery begins. Engineered soft landings lead to just spreading out the pain over a longer period....Ex 1930 & 2008

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      Getting late..Be happy to continue tomorrow evening if you like.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      @ LandmarkWealth

      “I did not incorrectly state anything. Fractional Reserve banking is simply not understood by most people.” - LandmarkWealth

      I understand it completely. Loans create deposits. Conventional descriptions of Ffractional reserv banking have the dynamic completely wrong, but I don't wish to get off on that tangent.

      The part of your statement that was wrong was that FRB increases the number of monetary units in the system.

      BORROWERS increase the level of monetary units in the system by borrowing. Banks can’t create anything unless qualified borrowers walk in the door and ask for a loan. Banks can do nothing to “push” money out the door. All banks do is choose who gets the money, which by the way is their most important function…underwriting. If there were no BORROWERS there would be no need for a banking system. Qualified borrowers are hard to find…money is not.

      Anyone opposed to the government spending money out of thin air are hypocrites if they don't feel the same way for private banking (loaning out state money).

      And to repeat, the net amount of dollars created through that process is zero. Dollar liabilities are as important as the assets…if you haven’t noticed we have a banking crisis…caused by unsatisfiable liabilities cascading through the system.

      Loans create spending…which is then lost by more than the original amount over time. This leads to another problem with credit (consumer credit), left to some future discussion.

      “The point of the statement about money being digital is that you cannot differentiate between base money and the increase to M2 created by the fractional reserve banking system.” - LandmarkWealth

      No one has implied that you could, or that it mattered. Your statement appeared to conflate credit as a special form of digital money, when in fact all money is digital. A dollar bill is a physical representation of a dollar, it is not money. A dollar is a number on a balance sheet.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      @LandmarkWealth

      “Deficits are beyond the control of the gov’t…LOL. If that is the case, then it is not possible for the gov’t to actively attempt to increase the supply of money through deficit spending. Sounds like a contradiction to me.”-LandmarkWealth

      More like you arent’s aware of the system theory necessary for analysis of deficit dynamics. The government doesn't "deficit spend". Deficits are endogenous, outside of the governments control. The non-government controls deficits.

      “…the deficit spending that moved up three fold did little to nothing to improve capacity utilization.” - LandmarkWealth

      With these last two comments you have demonstrated that you don’t know what a deficit is or what it means. That’s understandable. Most academics don't either.

      A deficit is not a real thing, it is an abstract concept, an endogenous variable of non-government dynamics (the economy), a placeholder if you will. It is an ex-post number representing how much the non-government was able to save over the PAST budget cycle. How much financial wealth the non-government was able to accumulate.

      This includes profits, as retained earnings after distributions are made.

      How could anyone possibly know how this is going to turn out?

      First there’s spending (a flow, which is known), then income (a flow which is unknown), and finally taxes (a flow that follows from taxes so it too is an unknown).

      The difference (deficit) is a stock…accumulated financial wealth. It is the running balance in your checkbook. This is where people get lost for some unknown reason…nothing could be simpler.

      Without deficits, there can be no profits or savings. These things are stocks, or account balances. In order for these things to be possible the number of dollars in the non-government (balance sheets) must increase. What leads to them are flows, and only the government can provide the necessary flows. Without government-induced flows (spending) it is impossible for profits and/or savings to occur in the aggregate.

      So the question becomes how much? The most obvious measure is unemployment…if we have excess unemployment we aren’t spending enough. Others can argue about the best ways to spend.

      Going further, without government spending, there could be no industrialized economy and no capitalism…not at the levels we currently have…our output would be more like that of a barter economy.

      Even in the early 1900's when we were on the gold standard we ran deficits. We have run deficts 80% of the time since the formation of the Republic. When we didn't, depressions followed closely.

      We would be living like the Amish, without any modern conveniences. Some may think we would be better off in that situation. That too is another argument for a different discussion.

      If profits are the goal, public spending is the necessary condition. Without it it is mathematically impossible to achieve.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      Some good articles on long-term bond yields by Edward Harrison:

      "For readers of Credit Writedowns, this explanation should sound familiar. As I noted explicitly in March, the Fed exerts a dominant influence across the yield curve, not just on the short end. You are not going to get rates to rise unless the Fed raises them or inflation and interest rates expectations become unanchored.

      And this is exactly how bond vigilantes work in a sovereign currency area. The implicit understanding is that inflation spirals out of control and the bond vigilantes front run the central bank’s move to counteract this inflation. A lot of people act like the bond market vigilantes are in control here. That’s not the case. The bond market vigilantes are not forcing the central bank’s hand. The central bank controls the policy rate and can continue to keep that rate at which ever level it chooses. Now, I am not a fan of this particular piece of central planning, to be honest with you. But that’s how it works. The central bank is essentially a central planner. It determines what level short-term interest rates are and the market must accept this if banks want to transact in reserves that only the central bank controls."

      http://www.creditwritedowns.com/2013/05/how-bond-m...

      http://www.creditwritedowns.com/2013/03/the-fed-ex...

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ pjmeli

      I suggest you go back and re-read the S&P piece once again. Any increase in the M2 money supply is an increase in the number of monetary units. Every component in M2 is a monetary unit. That is precisely what the fractional reserve system does. It is not base money. But it is an increase in the number of monetary units. The dollar becomes the liability to the bank, not the asset.

      I disagree with the statement that qualified borrowers are hard to find. They are also infinite. Because not all lending is derived from just an isolated few with capital. If I myself invent something, but I have no capital to borrow against I can engage a venture capital company or individual investor with resources to share in the project with me, which happens all the time. So as long as there is creativity, there is an unlimited number of qualified borrowers. I do not believe that creativity is limited to a select few. Perhaps you do.

      I am not a hypocrite. I am simply stating that when banks create money out of thin air for the purpose of lending which becomes spending, they do their due diligence (presuming there are not gov’t distortions at play). So the money is far more likely to go towards productive distribution. A bank will not give you a loan to dig holes and then fill them up all day when there is not demand for that activity, regardless of the amount of collateral. You have to demonstrate a viable business purpose. That doesn’t mean every venture is successful. It just means it is more likely to be productive, whether it is a business loan, home loan, auto loan etc. In the case of gov’t deficit spending, you have the worst form of spending. Someone spending other people’s money on other people. That is when there is little regard for neither cost nor quality. So the productivity drops immensely. In either case, I regard the ability to create money out if thin air as quite dangerous. Which is my original point about why I prefer to see a constraint placed on the supply of money which is linked to a commodity standard. How plausible the mechanics of that are is another issue. I have seen some ideas proposed. But I have little confident in the fiat system, because too much power is placed in the hands of too few.

      “A deficit is not a real thing”

      A gov’t deficit in economics is defined as any amount spent by the gov’t in excess of its taxable revenue. As the national deficit as reported by the congressional budget office went from approximately 400 billion to a peak of about 1.2 trillion, it tripled. The number of dollars have and do increase during periods of both balanced budgets and gov’t surplus. Both the supply of money increased as well as the creation of wealth. Your entire theory is based on the false premise that the national savings cannot increase unless the gov’t deficit spends. Yet that is an entirely false premise. If that were true than the period in which the national debt was paid down in the late 1990’s would have required an aggregate contraction to the supply of money, which did not happen. Non-Gov’t balance sheets did in fact increase. You are still proceeding from the false assumption that there is a difference between base money and the increase in the M2 supply as it pertains to non-government balance sheets. There is not. With all due respect, you are not understanding this fundamental monetary principle. Both the gov’t and/or the banking system can and do create money out of thin air. Which in turn makes your principle that we need to spend more in the way of gov’t deficits to reduce unemployment false. As a will point out once again, in 1920-21 we experienced the largest deflationary contraction in US history. The monetary base collapsed. The recovery, which was the most prosperous expansion in US history, also known as the roaring 20’s, happened without fiscal stimulus. The US gov’t ran budget surpluses for most of that time. Let me repeat…budget surpluses. In response to these surpluses, the unemployment rate declined from about 12% to about 6.7 percent very quickly. That’s correct…the reduction in unemployment did not require a budget deficit and in fact took place during a surplus. Additionally, the non-gov’t balance sheet expanded. So once again, the historical record completely contradicts your statement. Now if you want to argue that the creation of money in the banking system by the end of the 20’s led to excesses which caused the next crash, I would agree. Which brings us back to my point about the creation of money out if thin air without constraint. It is dangerous regardless of who creates it. Also please note that the supply of money expanded numerous times along with the aggregate non-govt balance sheets during periods of budget surpluses in the late 1940’s thru 1951. And again in the mid to late 1990’s. Now if you want to re-write the laws and history of monetary economics based on some abstract view you have of what a deficit is, you are doing it alone. Because there is not a member of the Federal Reserve that believes that the banking system cannot create money out of thin air, and add it to the aggregate non-gov’t balance sheet.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ JohnfrmCleveland

      Here is the only issue I have with this argument. It presumes that inflation is the result of economic expansion. So as the economy expands, there is enough growth to offset the higher cost. Yet, we have in fact seen times like the late 1970’s when we had anemic growth and high inflation…Aka Stagflation. Inflation increases typically do correlate to acceleration in growth. But prior to the 1970’s few economists thought it was possible to have high unemployment and high inflation. Yet it did happen.

      Now I have less concern about the deficit at current. There is enough political gridlock to slow the rate of growth in gov’t for the last 2 ½ years. So I expect the deficit to continue to decline. And as such the labor market has actually improved. As a matter of fact, despite the shut down and the sequester, we’ve seen some modest improvement. As I said, I think had the incentives been better, we’d be much further along. Nevertheless, the labor market is improving. Today’s job report came in better than expected with some modest upward revisions. So we are seeing more people get hired. But personal consumption actually fell. Those people who are getting jobs are not spending the money. Personally, I think there is a lot of pent up demand. I think that as much as the overall business environment has been semi hostile, we can be on the verge of a big upward move, because the growth in gov’t is not there at current relative to a few years ago. And with no reason to expect a change in the political gridlock, I expect deficits to continue to fall and the growth rate to accelerate. The concern around the bond market is not that the buyers go on strike due to current debt levels. If the deficit is declining, that is unlikely. And the debt to GDP ratio is nowhere near a place where I think the buyers stop showing up altogether. In my view, the weak auctions are more a function of the liquidity trap. The fear is when the Fed slows or stops buying, what is the impact to the bubble in existing fixed income holdings. Historically, gov’t intervention in attempt to slowly deflate asset bubbles has not gone well. Think back to Bernanke telling us there was no bubble in the housing market in the mid 2000’s. The Fed started to counteract other fiscal policy forces by raising rates. But the process was so distorted, it was far from orderly. My concern is solely an orderly transition away from QE, and what potential damage it can do to the system when it happens. I don’t know for sure that it will. I hope it translates into a slow orderly decline in fixed income instruments, which would be great for banks and insurance companies. But I don’t think it will, and may be quite a shock to the whole system. Anyone who says that they know it won’t is a fool. Nobody really knows, because there isn’t a policy history on this. It has never been done on this scale before. It is all theory. And not many events in history have followed the script of an econometrics model.

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      "Here is the only issue I have with this argument. It presumes that inflation is the result of economic expansion."

      I'm getting lost in all of these long comments - what argument said that?

      "...So as the economy expands, there is enough growth to offset the higher cost. Yet, we have in fact seen times like the late 1970’s when we had anemic growth and high inflation…Aka Stagflation. Inflation increases typically do correlate to acceleration in growth. But prior to the 1970’s few economists thought it was possible to have high unemployment and high inflation. Yet it did happen."

      Of course it did. The price of oil went through the roof. Cost-push inflation. It wasn't because there was too much demand for American goods. Dollars were leaving for Saudi Arabia. Inflation correlates far better to the price of oil than to anything else, including growth.

      There is also a good correlation between big government spending and a good economy. And a very good correlation between sustained federal surpluses and depressions & recessions. This comeback is going to be weak if we come back at all, because the lower end is being starved of dollars. We'll get a few more jobs for the Christmas season, like we always do, but they will go away.

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      "Your entire theory is based on the false premise that the national savings cannot increase unless the gov’t deficit spends. Yet that is an entirely false premise."

      You misunderstand. This refers to dollars and federal bonds only, not bank credit. And it is correct, because all bank-created "dollars" (credit) are balanced by a corresponding liability. Government dollars are free and clear. So while both dollars and bank credit can help with the creation of value (producing goods, building structures, etc.), NET savings, across the whole economy (domestic and foreign), can only be equal to the federal deficit.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      @LandmarkWealth

      "I suggest you go back and re-read the S&P ……But it is an increase in the number of monetary units. The dollar becomes the liability to the bank, not the asset."

      I suggest you cease responding with incoherest nonsense and address the actual arguments I have made. Or are you unable to figure out what they are?

      FYI, my mention of the gross profit of S&P companies was a data point, not the point of the comment itself. It was included as an example. Does that help?

      Hint#2…to follow my arguments requires some knowledge of simple accounting and bookkeeping, which is the basis of everything I wrote. I assume most everyone can balance a checkbook. Government finances are pretty much the same as balancing a checkbook, except the government gets to add balances ex-nihilo…and you should be thanking your lucky stars it can.

      "I disagree with the statement that qualified borrowers are hard to find. They are also infinite."

      My inclusion of that was an aside…not a foundational piece of the discussion. Why would you focus on that instead of the idea behind the argument?

      But, since you brought it up, saying that qualified borrowers are infinite is about as close to nonsense as a statement can get. There are some 310 million people in the US, and the number of qualified borrowers that aren't already maxxed out is a small subset of that. Even if we assume every living American citizen is a qualified borrower that falls well short of infinity.

      "A gov’t deficit in economics is defined as any amount spent by the gov’t in excess of its taxable revenue."

      And? Nothing I wrote contradicts that…in fact, that was my starting point.

      Thanks for repeating it back to me.

      That is where the ex-post number comes from, but how did that number come to be what it is? My discussion was wrt the fact that the private sector causes the deficit, not government. Seems like you didn't like what I wrote about that so you ignored it, BUT THAT WAS THE POINT OF THE DISCUSSION.

      Debate requires facts, logic and organization. Appeal to authority (experts) is not useful, because there are no experts on this subject. The "experts" have let us down, so we are trying to figure out what makes the system tick ourselves. It isn’t really that complicated…the economy works pretty well…it’s the money system and the morons that control it that isn’t working.

      Understanding a money system requires nothing more than a foundation in math and systems theory, and some accounting. A 10-year -old could do it if it was taught in school…which it isn't, and that is not an accident. Most teachers don't understand it, because they are wearing ideological blinders or have never learned how to think critically, or have been programmed to accept conventional wisdom.

      Everyone should be skeptical of anything they are told, read or hear. Pretty much everyone has the capability of abstract thought and problem-solving. They are not taught these things in our education system…instead they are programmed to be worker-bees, doing something that can make someone else a profit instead of doing what is fulfilling in their own life.

      Now, if you are able, you can argue that my math, or logic, is wrong and then the burden is on you is show us how and where. Then, if it turns out you were right, I will have learned something.

      So far you haven't even tried. So far you don’t even seem to understand the questions.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      Sorry didn’t explain well. The article said “You are not going to get rates to rise unless the Fed raises them or inflation and interest rates expectations become unanchored”

      Correct, the bond market could begin to sell aggressively in an attempt to front fun the Fed due to a fear of inflation.

      But what if the Fed does not wish to take its foot off of the gas pedal due to moderate/slow growth. You could have a Fed that wishes to remain accommodative and wants to keep rates low on the short end of the curve which they clearly control, and simply slow/eliminate QE. This is more of an attempt to normalize policy rather than a fear of inflation, which is moderate. The bond market recognizes the distortion already in inflated fixed income prices with the size of the balance sheet. They sell aggressively in an attempt to front run the decline in asset prices, not inflation…which pushes up the yield on longer term treasuries, and rates rise much faster in a moderate to slow growth environment. Hence, there is nominal inflation (according to the BLS data the Fed uses) but the budget deficit increases substantially because the cost to finance it is now higher. This is not as much an inflation play the bond market is making, but an asset price play. Now those higher budget deficits can lead to inflation, but the reason you get them is because the bond market sold off and the cost to finance the deficit rose while there is still moderate to slow growth. So the Fed would have to raise rates at that point. But the whole process is triggered by selling of fixed income in the open market. That is why the Fed is the new cheerleader for the bond market.

      The premise of the piece is that the demand for fixed income would only decline in the market place because there is an inflation concern. But that is not entirely accurate. I am not divesting from traditional fixed income in an attempt to combat inflation, but rather in an attempt to combat deflation in the asset prices of existing bonds. Don’t assume that all the money that leaves fixed income will go to other equity holdings that will better combat inflation. I can tell you that it won’t happen for my clients. They hold their equity holdings already. I will divest slowly of conventional fixed income and move to non-conventional fixed income and/or cash. Because my fear is not inflation, it is that I am not getting paid enough to hold the debt, and its liquid market value may decline. So, if I think the Fed will slow or end QE, I sell and buy the same bonds back at cheaper prices when the gov’t is willing to pay me more for the same note. Just a normalized policy can cause massive selloff. It doesn’t require inflation. But the whole process can cause inflation when the deficit expands and then rates are forced higher. This is the reason I said Bernanke is not targeting the unemployment data, or existing inflation anymore. They are targeting the size of the deficit. They want to slowly deflate the bond market by slowly tapering QE. The timing of the tapering discussion coincided with the reduction in the budget deficit. The question is can they time this correctly without people dumping bonds, not because of inflation fears…but deflation in that particular asset price. But once the ball starts rolling, you could get the worst of all worlds. A Bond selling avalanche that creates ripple effects through the whole economy, and leads to higher deficits which pushes rates higher to bring deficits in, and all the while there is still slow growth, high rate Aka….Stagflation.

      That correlation is really not true. The surplus has nothing to do with it. In most instances, the correlation is with excess money in the system during the surplus. By the end of the roaring 20’s leading in the Depression of 1929, the banking system created too much money. The surplus did not cause a reduction in money, but too rapid an expansion. There was also additional credit that is not M2 creation, but traditional credit such as margin loans that had no requirements like we currently have under Reg 60. All that excess money created an enormous asset bubble. The same was true in the 1990’s. We had a surplus, but the banks were creating large amounts of money in the M2 supply. That didn’t result in a depression, because the excess wasn’t nearly as large as the end of the 20’s. So the recession was more mild, at least prior to 9-11. But the creation of money was too excessive. Leading up to 2008 we ran perpetual deficits, with really low rates and some poor housing market incentives and we had another massive crash. Whether deficit or surplus, the problem is excess money in the system. Which is my core point. The supply of money is dangerous, and needs to be controlled by some form of discipline.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ JohnfrmCleveland

      Bank credits are not balanced by a corresponding liability. The liability is the deposit. Simple example...

      I borrow a $1 form Bank A. Bank A creates the dollar out of thin air and gives it to me. There is now a $1 and a corresponding liability.

      I take the dollar and give it to you in exchange for a product you created. You deposit the dollar back at the same bank in your account. We still have $1 and a corresponding liability.

      Then you take that same $1 a week later and buy something from me that I made. After I sell the product to you I have that same $1 back.

      I subsequently opt to pay off the loan I have with that $1. The loan is gone…the bank has the dollar back that did not exist before. We now have an aggregate increase in the supply of money of $1 and no corresponding liability. We have just created money. What fun !!! The bank has the dollar, and both parties have gained an asset equal to $1 from the fruits of the others labor. The vast majority of M2 is created by banks, not deficit spending or any other mechanism.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ pjmeli

      I just explained the money creation by banks above. If you can follow it great. If you would rather trade insults, I will simply not reply and engage only John in this discussion. This is about as simple of a math equation that there is. Your premise behind your math is that the money in the bank has to exist in order to create the loan. When in fact the bank creates the money. You don’t have to like the system. But those are the rules.

      Infinity does not mean everyone of us is a qualified borrower. It means that the level of our ability to create things is infinite. So any of us can become a developer of something that brings economic value. The entire venture capital and private equity business, which I have worked around for nearly two decades, routinely finances ideas. Many people develop things that never had access to capital until they developed their idea. Steve Jobs started building Apple products in his garage. So unless you thing that all the people who will ever invent anything worth investing in have already done so, then there is no limit to who can become a qualified borrower. Infinite means unlimited. I did not imply everyone will be creative, just that they can be and the opportunity is there.

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      “Bank credits are not balanced by a corresponding liability. The liability is the deposit. Simple example...

      I borrow a $1 form Bank A. Bank A creates the dollar out of thin air and gives it to me. There is now a $1 and a corresponding liability....”

      Stop right there. Banks don't create dollars, only the government can do that. If the bank gives you a dollar, it's because somebody else has deposited that dollar. So...

      1. Depositor deposits $20 in cash to his bank account. Bank holds $20 in cash (asset) and owes the depositor $20 (liability).

      2. Bank loans you $1 in cash. You hold a $1 bill (asset) and owe the bank $1 (plus interest) (liability). The bank loaned you $1 (liability for the bank), and is owed $1 (plus interest) (asset for the bank)....

      “I take the dollar and give it to you in exchange for a product you created. You deposit the dollar back at the same bank in your account. We still have $1 and a corresponding liability. Then you take that same $1 a week later and buy something from me that I made. After I sell the product to you I have that same $1 back.”

      3. My position is zeroed out, as is my bank's position. You now hold $1 again.

      “I subsequently opt to pay off the loan I have with that $1. The loan is gone…the bank has the dollar back that did not exist before. We now have an aggregate increase in the supply of money of $1 and no corresponding liability. We have just created money. What fun !!! The bank has the dollar, and both parties have gained an asset equal to $1 from the fruits of the others labor. The vast majority of M2 is created by banks, not deficit spending or any other mechanism.”

      4. No, you pay off the loan (plus interest), and your position is zeroed out, loan extinguished. But when the bank loaned you that $1, it decreased its assets (the $20 cash deposit) temporarily to do so. Now, the bank is also back where it started, with assets (once again) of $20 cash. No new money created.

      5. Net transaction: all bank credit is zeroed out, and some interest has moved from your pocket to the bank.

      You could re-do your example without cash, with the bank instead just crediting your account $1, and the end result would be the same.

      M2 counts bank credit, but it doesn't count the corresponding liability, which is very real.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      You are absolutely wrong….Banks can and do create dollars out of thin air. That is where most people get lost in the Fractional Reserve System. They assume that the Bank must have the cash on hand from another deposit to make the loan. That is not the case, and is hard for many people to wrap their head around. But it is true. They don’t have to have the money to make the loan. Now when I say money, I am not talking about minting bills. This is all digital. But they can in fact create money “ex-nihilo”’ as our friend stated. That is why I referred you to the S&P piece. It explains it in great detail. I left out the interest component for the sake of simplicity. But that is obviously part of the equation. Banks also filter some of this money back into the economy by taking the revenue from the interest earned on this money created out of thin air and paying for all of their operations, salaries etc…as well as dividend payments to shareholders who are both individuals and institutions like pension funds. The core principal most people don’t get is that the loan creates the deposit. Not the other way around. When you are getting along from a bank…it is highly probable that they just made that money up from nowhere. Most people do not know that is possible…but it is. And now you see my concern with the risk of money creation out of thin air. I am re-posting for you to re-read. I know it’s complex…but it is what it is. Page 7 covers the creation of money.

      http://www.standardandpoors.com/spf/upload/Ratings...

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      “You are absolutely wrong….Banks can and do create dollars out of thin air. That is where most people get lost in the Fractional Reserve System..... And now you see my concern with the risk of money creation out of thin air. I am re-posting for you to re-read. I know it’s complex…but it is what it is. Page 7 covers the creation of money.”

      No, I was correct. Your example had you receiving the loan in cash, and I corrected your example to demonstrate how this is done – out of vault cash. If you expect to receive your loan in cash, that cash has to come from somewhere. I fully understand the loan/deposit relationship, and how banks create *credit* out of thin air – this includes both the asset and liability side. At the end of my post I explained that the same transaction done without cash ends up exactly the same:

      Me: “You could re-do your example without cash, with the bank instead just crediting your account $1, and the end result would be the same.”

      But most importantly, you were wrong when you said that the bank now had $1 that didn't exist before. It does not. My math demonstrates that clearly. Add it up again, carefully, and you will see. The assets will always equal the liabilities.

      This is why I stress that banks settle up in government dollars through their reserve accounts at the Fed. If you deposit the proceeds of your loan at a different bank, the bank with your deposited credit is not satisfied with an IOU from the lending bank – they want their reserve account credited. At the end of the day, it is real money, HPM, that everybody is after.

      (Part of the confusion may be in the lingo – when I say “dollars,” I mean government-made dollars only. When I talk about banks, I say “credit” or “bank-created dollars.” I get a little sloppy sometimes, for which I apologize.)

      Your source, btw, is very good. It is one that MMTers use all the time, because we are always looking for authorities in the field that agree with us. (MMT is even cited on p. 12) You just got your math wrong. But the fact that banks cannot just create net money is key, so it is important to understand that particular mistake.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "Your entire theory is based on the false premise that the national savings cannot increase unless the gov’t deficit spends. Yet that is an entirely false premise." - LandmarkWealth

      It is an absolutely true premise. It's a fact, by accounting.

      If you wish to prove otherwise show us.

      Credit cannot add to National Wealth…it nets to zero…Credit adds equal levels of positive savings (assets) and negative savings (liabilities).

      This leaves government spending as the source.

      Beyond this any discussion of money creation is pointless wrt operations…which merely carry out the orders of Congress…the entity that actually creates the money when it spends.

      Anything in between is the equivalent of a companies' accounting and billing department.

      Would deficits be possible if Congress didn't spend?

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      You are wrong…the vast majority of M2 never becomes a cash transaction. I made no reference to physical cash. If I receive a loan, I bought something from you with a check/debit card drawn against the loan I received and the entire exchange took place back and forth with no physical cash in the vast majority of instances.

      As the S&P piece, correctly stated…banks DO NOT loan out reserves. They actually cannot loan out reserves. And banks also DO NOT loan out deposits. Yes…you are correct that only the gov’t can create physical cash/ paper currency. But that has no bearing on deposits in the M2 system and the aggregate supply of money. Banks are creating the deposit itself. They cannot cause the amount of reserves at the central bank to decline by creating them and loaning them out. The reserves go down if and when someone takes money out in the form of cash and doesn’t subsequently re-deposit it into the banking system. In reality when a bank makes a loan and creates a “monetary unit”…as long as that is not withdrawn in physical cash, there is no change to the aggregate reserves in the banking system. So the settling at the end of the day that you’re talking about presumes more money is being withdrawn and not re-deposited then what is being created in the banking system. While this can be true at points in time, this is not a constant. People are not actively hiding cash in vaults and under their mattress in the majority. If they were, then the supply of money could contract without deficit spending. Which is why the supply of money may expand or contract via the banking system. See last paragraph in page 7.

      Now in the form of deposits to the money supply in aggregate, there is no difference between the bank created increase to M2 and the physical supply of paper currency. The purchasing power is equivalent at any point in time. Since the vast majority of the transactions which take place are not done with physical cash, the money supply is expanding and contracting via the banking system regularly. The vast majority of the supply of money as defined by M2…which are “monetary units” equivalent in purchasing power to a paper dollar, come from the banking system by a wide margin. In a sense the same could be said about deficit spending. There is not necessarily physical currency created there either. These are digital deposits into the system. When a gov’t agency contracts out a company to do a job and credits them the payment due, they don’t send a bag full of cash. So this expansion to the supply of money is really no different than bank created money.

      In short….more digital dollars are being created in excess of liabilities in the system over time. The issue is how to increase the amount of money creation via the banking system. People clearly don’t go to the bank for credit, which creates money unless they are motivated to do so, which is why I referenced the importance of proper incentives to capital formation.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      The key distinction is that you are presuming that banks creating dollars that will circulate back to them in time and back through the system is limited by the amount of reserves. That is not the case. The monetary base actually has very little to do with the creation of M2. This is why I say that this is very dangerous. Because it encourages constantly creating debt, and satisfying this aggregate debt with money that was just made up by bankers. Hence it can also contribute to asset bubbles if not properly controlled. Under either deficit spending, or bank created money...we have a dangerous situation that can cause asset bubbles and inflation. Which is why I am an advocate for instituting some form of constraint on monetary expansion. Either way money is created out of nothing, whether digital in the banking system or digital/physical via the gov't. Both are very dangerous. Literally 97% of all of the money in supply was created by banks.

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      @LW - I fully understand all of that. As I tried to point out to you, I said that the example works out the same if you just used credit. In fact, I have stated in an article or two that banks are not reserve-constrained. We both agree on that, which is a giant leap forward. But I was also correct on where the bank would have gotten the cash had they given you actual currency. Vault cash (which count as reserves) is the cash on hand at the banks. Tellers have cash in their drawers.

      But your math is flat-out wrong. There is no dollar left over from the bank's credit creation once the loan has been extinguished. Assets always equal liabilities.

      All the credit created by banks, the stuff that shows up as M2 but not M0 or MB, every bit of that is balanced out by a corresponding liability that makes bank credit disappear when we are counting up net financial wealth. Here is an analogy - I have $50,000 in currency, plus $200,000 in bank credit, plus I owe the bank $200,000. What is my net worth? $50,000, even though I might have $250,000 available to spend. Am I likely to spend $250,000? Nope. Not unless I think I can repay my $200,000 debt. That is the functional limitation on bank-created credit. That's why bank lending is nothing to worry about. The biggest problem with consumer debt is that it time-shifts our true ability to spend. I can buy a TV today on credit, but I will have less to spend next month. Plus, I have to pay interest to the bank instead of spending it. Credit does not create more ability to spend, it just makes it easier.

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      "The key distinction is that you are presuming that banks creating dollars that will circulate back to them in time and back through the system is limited by the amount of reserves."

      No, I'm not. I understand how reserves work.

      "Literally 97% of all of the money in supply was created by banks."

      The government has created about $17 trillion dollars (net) in our history, all of which still exist. Some of those are held by various arms of the govt. (including the Fed), and I don't count those. There are about $1.2 trillion in currency in play, plus about $12 trillion in U.S. bonds held by the non-government sector. So it really depends on how you define it.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ pjmeli

      Credit dollars do add wealth in that they increase the productive capacity of the country. In the example stated in which both John and I produce a product that we exchanged via the same dollar, production increased via the exchange of this dollar. This takes me back to an earlier point about wealth. The creation of the dollar whether simply invented by the bank or printed and put into circulation by the gov’t is not itself a creation of wealth. In fact it can potentially destroy wealth through inflation if not distributed properly in too much excess. Which is why gov’t dollars are not really free and clear either. As they are created in excess of productivity, they cause losses in purchasing power. That is a liability to the people who live under that currency. That is their true debt. In the US…since we have engaged on our fiat system, we have eroded more than 90% of this purchasing power.

      The creation of wealth happens when we as individuals create things. That creativity is true wealth. Each one of us to a larger or lesser extent serves as component in the overall supply chain of creativity and production. We may not all be entrepreneurs, but possibly other productive links in the chain that serve a purpose. The less productive a society becomes, the less value the currency they hold is. The difference between the US and Greece in terms of debt to GDP ratio is not all that different. But the productive capacity is quite different. So if Greece was exclusively using Drachma again, it would be near worthless in relation to the dollar. I am not going to get into why the Greeks are so un-industrious in relation to their counterparts in Germany, because it is irrelevant for the sake of this discussion. But the monetary system itself is just a medium used to transact exchanges of goods and services throughout the economy, because of the obvious inefficiency of attempting to barter our way around in a functioning global economy. You most likely did not read this part…But the discussion began with a question linked to by another hubber who is likely long gone from this discussion. And my answer was that deficit spending as it relates to the economy is only problematic when it is an excessive share of GDP. You are free to disagree. But I think little is accomplished by the gov’t deficit spending at a theoretical 6% of GDP and GDP is expanding at a theoretical 2%. This only works when the dollars are spent productively, which seemingly never happens. So in my opinion, the size and scope of the dollars spent ought to be linked to some form of a monetary standard to maintain price stability and not continuously destroy the relative purchasing power of the money being created.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "more digital dollars are being created in excess of liabilities in the system over time." - LandmarkWealth

      You are hopelessly confused, and cannot do simple arithmetic..

      When a bank makes a loan, the borrower receives an asset (cash) and has an equal and opposite liability which is the original balance plus future accrued interest.

      By the time the loan is paid off, there are more liabilities in the system then there were when the loan was made, becauuse of the accrued interest.

      The bank did not create the money needed to pay off the interest. It has to come from some other source.

      Creating more loans just adds liabilities to those already in the system, so more credit just keeps adding to existing liabilities.

      Only income from another source, that is assets without offsetting liabilities, can extinguish those liabilities. Can you say net spending?

      In other news, man can't pull himself up by bootstraps, wonders why.

      BTW, it's a waste of time looking at M2 or M-anything…it tells you what you want to see, like looking at ink blotches.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ JohnfrmCleveland

      I think there was simply a misunderstanding. I never intended to state that the bank can create physical cash…aka from a vault. I was simply referring to the number of on demand dollars available. Meaning increases to M2. Which is defined in monetary economics as an increase in the number of monetary units. I think the assumption by pjmeli that the increase in M2 was not an increase in monetary units was how we got off track. Each one of those on demand dollars can increase productivity. That increases wealth . You are thinking of dollars as wealth, I am not. Which is why I mentioned the example much earlier of why it is that 500k under your mattress for 20 years produces nothing, and a 500k in a home purchase is a real asset. That is wealth. Bank dollars which are created out of thin air with very little limitations do create wealth. Although potentially very dangerously.

      I was not saying that when the bank is paid back the dollar exists as in a deposit. What I was saying, as I mentioned much earlier is that if 3 dollars are created with a loan and one is paid off, then M2 expands. Which is why I said that the banking sector can also contract the supply of money through M2. The national savings is in the productivity increases. We are producing more assets which increase in value. Someone’s net savings is not a function of on demand deposits. It is the sum of their net worth. I have an uncle who owns 11 homes debt free and very little cash other than some rental income which barely pays for his lifestyle. It is hard for me to argue that he did not save over his lifetime. Each unit of production increases our ability to acquire more wealth. Because what we produced can have an increasing value over time. Wealth and money are two different things.

      Now where we are disagreeing is what creates the productivity. Does simply increasing the size of gov’t printed dollars increase production. I don’t believe it does. Because the dollars are too often used for unproductive measures and are subsequently debased. The expansion of M2 allows for increases in production and real value. You think that simply spending money will increase wealth, I am saying when it is done without regard for productivity it has and does actually destroy wealth via the loss of purchasing power. Which again is why I was saying that is important to have the supply of money keep up with productivity. But simply creating large increases in the supply of “vault money” has not increased productivity. In reality it has destroyed enormous amounts of purchasing power. My original comment, if you recall from the reader who posted the question was that deficits are only a concern as a share of GDP. And as such that is my reason for wanting to limit and place an external control on the size of monetary expansion. There is too much room for abuse in the political world. And there is also a great deal of room for abuse in the M2 supply if we are not careful about how we regulate it.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      ""Literally 97% of all of the money in supply was created by banks." - LandmarkWealth

      Literally 97% of everything you write is factually wrong.

      Since 1950 the federal government has spent $66.5T…

      The current outstanding balance of private credit (which started well before 1950) is $44.8T.

      Looks more like 40% to me. [44.8÷(66.5+44.8)]*100

      You seem to be forgetting something important…federal taxes accrue against income from both public spending and private credit spending alike…

      …income is income.

      You can't claim that the level of dollars in existence from public spending is the National Debt™. If that's true then no taxes were paid on income from private spending…

      Which then would mean that public spending creates income and private spending doesn't.

      I don't think you want to make that claim, because it's contrary to everything you believe in. But if you claim otherwise, your original assertion is wrong.

      Now you're in a pickle…

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ pjmeli

      When I am say more digital dollars are being created in excess of liabilities, I am talking about the increase in national wealth...aka assets. The productive capacity and assets of the nation expands. Once again...I am not defining dollars as an asset...but a medium to obtain and produce real assets. So I am not "hopelessly lost" by any stretch. This discussion began last week, before you were a part of it, with me making it clear that deficits which increase the supply of money are only problematic when they are excessive in relation to GDP. And that they cannot be created without limit because of the impact on purchasing power. So while you regard deficits as not real, because the gov't via a fiat system can create money. I am simply pointing out that they are at times destroying more than they create via the loss of purchasing power. A chart of the US dollar since the conversion to the fiat system explains just how well they have done this. And also explains why since the final stage of the break between gold and the dollar in the 70's the gov't quickly moved to alter the way in which we calculate CPI, so that it no longer represents a constant standard of living.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      97% of money is a reference to the money supply, as we would define M2. M2 is the money supply circulating in the system. But I will let you argue with the IMF economist.

      http://www.positivemoney.org/how-money-works/how-b...

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "When I am say more digital dollars are being created in excess of liabilities, I am talking about the increase in national wealth...aka assets." - LandmarkWealth

      Then you are moving the goalposts. Of course spending is multiplied as it moves through transactions…that is the nature of GDP…it's a flow.

      Any "real wealth" created cannot decrease dollar liabilities. Only dollar objects, which are finite in the system, can do that. Real assets can be exchanged for dollars, but that requires awilling and able buyer.

      Much of the "real wealth" is consumed and has no lasting value, as in food, fuel, automobiles, tires, etc. the list goes on and on.

      Less money held by buyers, less value. And businesses, as I noted earlier, do not pay (employees and vendors)…their consumers, enough money to buy their products

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "And that they cannot be created without limit because of the impact on purchasing power" - LandmarkWealth

      I demonstrated that more money creates more purchasing power…that follows from an identity…SPENDING EQUALS INCOME.

      Then…MORE SPENDING EQUALS MORE INCOME. And…

      MORE INCOME MEANS MORE MONEY TO SPEND.

      Now, if people choose to save more instead, then the deficit will end up getting higher. Not real complicated. Private sector spending/saving decisions is what creates deficits.

      We can't spend too much unless we are trying to buy more than we can produce…we haven't had that problem in our lifetimes. No one has made any argument that government spending can be limitless…we have claimed that the government is unlimited in it's ABILITY to spend.

      How much? No one knows, but for most of history it's been too little because unemployment and poverty have been too high.

      We can't "run out of money". Which I hear every day from some moron…including our current President who often says "we're out of money".

      *********************

      "So while you regard deficits as not real, because the gov't via a fiat system can create money…" - LandmarkWealth

      It's comments like these that make me think you just don't grasp what's being said.

      I didn't say that deficits aren't real…they exist…but they are abstractions, the meaning of which almost no-one seems to understand. They are like a picture of an accident after it has already happened. Can't do anything about it then but get ready to take a picture of the next one.

      Defiicits are controlled by the private sector…it's how much money private citizens were able to save…IN THE NET…with no off-setting liabilities, over the budget cycle. It is impossible to know how much that will be beforehand. We can only guess.

      IT IS AN EX_POST NUMBER that compares something we know from the past (spending) to something we don't know how much it would be until it happened (tax revenue).

      It's an endogenous variable…meaning it is controlled from within, by economic circumstances.

      I most cases cutting spending makes deficits larger because it triggers unemployment and the automatic stabilizers (unemployment insurance, food stamps, Medicaid, etc.) ramp up automatically to make up the shortfall, other wise the economy would collapse into a severe recession or a depression.

      These automatic stabilizers are a feed-back system that props up spending if there is shortfall, otherwise goods will go unsold, people will be layed off and the downward spiral is on. Only increased spending can stop such a spiral and the private sector doesn't have the money to do it. Borrowing does not go up in a recession.

      Most electronic appliances (TV's, stereos, etc.) employ feedback circuits in the same way to keep the operation stable, otherwise they would be blowing up left and right (or just not work).

      All money in the private sector is savings, except for current public spending and credit expansion, and those funds will soon be savings also. That is the only possible outcome mathematically. All spending accrues to savings eventually. The spending multiplier currently is hanging around 4 (GDP =spending*multiplier). That means that on average within 4 or 5 transactions (that purchase goods or services) the money ceases to generate income.

      Since 2008 credit expansion has been nil, and consumer credit (mortgages, auto loans, CC, student loans) has declined from it's peak by $1T.

      So guess where the spending has been coming from…

      …and not nearly enough of it obviously…

      Thanks Obama.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      "I think there was simply a misunderstanding. I never intended to state that the bank can create physical cash…aka from a vault. I was simply referring to the number of on demand dollars available.....I was not saying that when the bank is paid back the dollar exists as in a deposit."

      This needs to be nailed down, because your earlier post sure seemed to say that banks can create NET money that exists after the loan is extinguished:

      "Bank credits are not balanced by a corresponding liability. The liability is the deposit. ....

      ...I subsequently opt to pay off the loan I have with that $1. The loan is gone…the bank has the dollar back that did not exist before. We now have an aggregate increase in the supply of money of $1 and no corresponding liability. We have just created money. What fun !!! The bank has the dollar, and both parties have gained an asset equal to $1 from the fruits of the others labor."

      You said that "we have just created money," and "the bank has the dollar." What dollar? (I know it's not a dollar bill, because we have removed that from the example.) This is vitally important if we are ever going to move forward in this discussion.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @pjmeli

      I am not moving the goal post. I said earlier numerous times, that currency is not wealth. The movement of money through the fractional reserve mechanism creates actual wealth. So when John and I exchange the products, we are wealthier for it, as we have created something of value. I specifically said that banks expand and contract the money supply (Meaning M2). In fact that same dollar can circulate for years creating multiple expansions to the GDP of the economy before it is retired. So the money the bank created out of thin air, (which is the vast amount of money circulating in the system) did in fact increase the growth of real wealth in the economy. There are many occasions when increasing the supply of money (meaning base money) is not necessary for the economy to grow and job growth to take place. That is because the problem is not always a lack of aggregate base money in the system. The 1920-21 example I will refer to once again. The base money did not expand until after economic expansion began. Because there was already more than enough money in the system, even after the overall monetary base collapsed. What the system needed was to increase the velocity of that existing money to make it more productive. Which came from proper incentives around capital formation. The base money did not begin to expand again until after unemployment declined and the GDP began to expand. Which proves that deficit spending is not required to increase employment. The increase in base money can come later. Now you can argue as John did that although this was the largest deflationary pressures in US history, that is was somehow an easier deflation to recover from. Maybe that is true. But the recovery in employment was not a result of deficit spending, because it did not happen.

      Secondly, another myth that is perpetuated is one point I believe you were trying to make if I understood your comment earlier. That interest cannot be paid back if the gov’t does not introduce new money (meaning base money) into the system. That is actually false. Some of the M2 supply is actually exterminated rather than retired. So even when the gov’t does not introduce new money into the system, interest can and does get repaid when the base money is constant. Here is why…

      http://fractionalreserves.com/iir.htm

      More spending equals more income. When that income is received for less productivity, it creates inflation and less purchasing power. Once again…The Weimar Republic spent money with less productivity and hyperinflation incurred. That was an extreme example, but spending can and does reduce wealth when it comes from too much money supply being introduced into the system. The lack of productivity in relation to the amount of new currency destroyed its value.

      I never said that gov’t was limited in its ability to spend. I said that both the current fiat system, as well as the proposed ideas via the MMT models have the propensity to destroy purchasing power. That destruction of purchasing power is the real debt. So the limitation is only that people choose to no longer use your currency. In theory you can continue to expand it, which will be futile at such a point. But it is the true consequence of excess currency creation, without regard for productivity. I am quite clear on what you were saying. John made the point that there is no real debt or deficit in earlier comments. You call them abstract. I am simply pointing out that they have consequences. So when policy measures are taken it is important to understand that the increase level of these deficits, or simply increases the supply of money via the MMT position of directly financing gov’t operations will destroy purchasing power if spent haphazardly. I understand fully the role of savings in increasing the national deficit, which is why I point to the importance of policies that incent capital formation and capital expenditures of existing money in the system to reduce the size of these deficits.

      The point that you just made about cutting deficits creates higher unemployment is again not consistent with history. Again…1920-21 we ran surpluses and unemployment fell. In the late 1990’s we ran surpluses and unemployment fell. Because you again are assuming that the gov’t introducing new money into the system via deficit spending is required. But it is quite possible there is enough money in the system at a given point in time, and that is why unemployment declined and productivity increased during these periods of budget surpluses. Because the correct incentives to capital formation were put in place as policy measures. There are and have been points in time when it was not necessary to increase the supply of dollars to increase productivity. Each one of those are clear examples of where the actual result completely differs from what you state can’t happen.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ JohnfrmCleveland

      I apologize if I was not clear. In the example I was creating the reference to creating money was to explain that banks to not need deposits to create a loan, and that they increase the supply of money pertaining to M2 based not on reserves as many people assume. So as long as there are more loans being issued than are being retired, the money supply (meaning M2) is being expanded by the banking system via thin air.

      Now with regard to NET money. What happens when the bank makes the loan created out of thin air to me. I have the money and spend it, giving it to you. I have the liability and theoretically the asset I bought which you created. But I am unable to repay this loan due to the fact that I had some unfortunate circumstance or business did not go as planned or I simply died. The loan is never extinguished, which happens all the time. I now default on this loan, but you still have the dollar (meaning M2 money). In a practical world there is actually NET new M2 money created which is circulating in the system, because not all loans are successfully retired. Now presuming that you never took that dollar out and converted it to cash, the banking system in aggregate does not need to increase reserves either. Now the bank may be unhappy about the loss. And possibly may have seized as collateral the asset you created which I bought from you. But in terms of the supply of digital dollars, there are more in the system.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      "Now with regard to NET money.... In a practical world there is actually NET new M2 money created which is circulating in the system, because not all loans are successfully retired."

      This is not correct either.

      When a bank loaned you money, it created two sets of assets and liabilities: on your ledger, your asset is the loan credited to your account, and your liability is the debt you owe the lending bank. On the bank's ledger, the bank's asset is the debt you owe them, and their liability is the credit they gave you. If you fail to repay the loan, the liability is never extinguished, so it remains on the bank's ledger as a liability. Your gain is balanced out by the bank's loss. No net gain in the system. In the real world, that comes out of the bank's profits. Again, bank credit can never add to the net financial wealth (money, not stuff) of the economy.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      If the bank seized the asset that I purchased as collateral, the asset itself still exists. For the sake of simplicity, call it a home. Obviously you cannot buy a home for a $1. But the point is that the bank satisfies the liability with the collateral, so they may not have an actual loss if they did sufficient underwriting. The home does not vanish. And the dollar is not extinguished from circulation in M2 because it is in your account. I am not claiming that this is an ideal situation, because we want borrowers to be successful and create wealth for themselves. We don't want them to transfer their wealth to the bank because they defaulted on a liability. But the asset you created offsets the liability of the bank…and the dollar is still in the system having never been retired. You gained it and it is in your account from when I bought the asset from you and the bank now has the asset. The bank may have also reported a partial loss on their balance sheet if the collateral wasn't sufficient. But that still does not mean that the dollar in circulation is retired. They can create new dollars with new loans and increase M2 at will with few limitations. The loss does not reduce the dollar from continuing to circulate. Again, it is not an ideal outcome. As I linked to above…

      http://fractionalreserves.com/iir.htm

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "I said earlier numerous times, that currency is not wealth. " -LandmarkWealth

      If we are talking about Fiat Currency vs a gold standard, we are talking about financial wealth…wealth in state money. Any part of the discussion that takes long excursions into productivity, etc. is off-topic. Extended discussions of real wealth is off-topic, other than how it may be related to nominal wealth.

      FYI, the gold standard system is also fiat in nature. State money is still created out of thin air, but is indexed to some price of gold.

      "The movement of money through the fractional reserve mechanism creates actual wealth" - LandmarkWealth

      This statement is ambiguous. Does FR operations create net money? No.

      Or does the spending generated by borrowers create wealth? Yes. Then it is all given given back by someone when the loan is paid off and…

      …there is a net re-distribution of income to the banking system due to accrued interest taken as profits, thru distributions and retained earnings. Their savings keeps getting bigger.

      In the absence of public net spending, this empties the barrel so to speak and the sytem collapses. The barrel (system) cannot be re-filled by expansion of credit, because credit is income-limited and credit itself reduces the income of the cohort that is making the payments.

      The credit system has innate frictions (saving)…it therefore cannot be self-sustaining.

      Saving comes from public spending (net) and nowhere else. All other saving is a collection of liabilities and assets that cancel out.

      FYI we are still talking about financial wealth, which is nominal and solid as bedrock…nothing exists on this part of the balance sheet that wasn't put there by government or borrowers spending. The magic pixie dust of the market can do nothing here.

      Real assets are a kind of mirage, a floating number that is adjusted for in the Net Worth column. Real asset values can fluctuate widely and be worthless in an instant…the value is real only if someone, somewhere, is willing and able to buy it. That's as far off-topic I will go to make my point.

      Perpetual motion is impossible, in real-world systems or in abstract mathematical systems.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "In fact that same dollar can circulate for years creating multiple expansions to the GDP of the economy before it is retired." - LandmarkWealth

      That is true for only a tiny subset of the spending over a budget cycle.

      Otherwise we should not have deficits, or they would be very small.

      In fact all money spent by all parties (govt. and borrowers) is consumed as savings over the budget cycle, with the rest accruing to taxes, otherwise deficits would go to zero over time naturally…meaning people had stopped saving and no profits were being made.

      FYI…$550B in savings…through our trade deficit…accrues to our budget deficit each year…foreigners saving…again, caused by non-government agents, not government.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "…base money…"- LandMarkWealth

      Please define base money, in your own words if possible.

      "I said that both the current fiat system, as well as the proposed ideas via the MMT models have the propensity to destroy purchasing power. " - LandmarkWealth

      Only through distorted and illogical ideas of how money systems work.

      Purchasing power won't decline unless we try to consume more than we can produce…something that hasn't been an issue in our lifetimes and is unlikeley to become so (barring some catastrophe)…especially in light of the rate of mechanization.

      If you are referring to inflation, the rate has been steadily declining for over 30 years and is approaching zero…not somewhere we want to be going.

      This part of your argument is a red herring. Might as well throw in hyperinflation too, joining the list of things that are never going to happen or are so implausible they require none of our attention.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "What the system needed was to increase the velocity of that existing money to make it more productive" - LandmarkWealth

      Increased velocity means spending in the hands of consumers. Without that there can be no velocity. Where do consumers get the income they spend? What is the originating source?

      Can a business succeed on sales to only it's own employees and vendors alone?

      In other words, a typical business invests (spends) x in production of it's product. It (hopefully) receives 1.4x in revenue…

      From where does the 0.4x difference originate?

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "Secondly, another myth that is perpetuated is one point I believe you were trying to make if I understood your comment earlier. That interest cannot be paid back if the gov’t does not introduce new money (meaning base money) into the system. That is actually false.…

      Not false…you are conveniently ignoring something.

      http://fractionalreserves.com/iir.htm" - LandmarkWealth

      That little discussion did not mention saving…the elephant in the room…

      The funds (proceeds of loans then spent) are saved by one group…

      The liabilities are held by another group…

      There is some (but not much) overlap between the groups.

      There is nothing that will claw the savings of the one group into the pockets of the other…there is no transmission mechanism.

      If the borrower doesn't receive the income lost to saving from somewhere he will default. Holding the loan effectively lowers the borrowers income (by about 10% of the balance).

      Borrowing more money to make your payments is a game that is impossible to win.

      The debt service curve and the income curve intersect at a point where debt service consumes all of ones income. At this point, besides not being able to make payments, the borrower will starve to death while living under the freeway, and the banking regulatory agencies will be investigating why the bank loaned that much money to someone without the means to repay it.

      In reality, default occurs long before the curves cross.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "Again…1920-21 we ran surpluses and unemployment fell." - LandmarkWealth

      Immediately followed by a depression, which recovered slightly and then went the full monte in 1929.

      Employment grew as a result of credit expansion…creating a bubble…which then collapsed, as an understanding of math tells us, taking back all of the gains and then some.

      The money just shifted around the table, ending up in the hands of a few elites.

      Thanks for making my argument for me.

      ************************

      "In the late 1990’s we ran surpluses and unemployment fell." - LandmarkWealth

      …and then within two years we had a recession and GWB had to start spending like crazy, never quite enough, so that we had a so-so economy for a while at which point banks began actively making loans to borrowers that had no chance to repay in order to inflate a bubble (and make lots of cash).

      The rest is history, and it was inevitable because the government tried to drive the economy through credit expansion without providing the balances necessary to make the payments. This is not possible, so the sequence will repeat every time we attempt the strategy.

      Over history we have balnced the budget or paid down the debt a total of 7 times, 6 of which were followed closely by depressions, and the last (current) one is still working on it. It hasn't become a depression yet because we learned from the Great depression, implementing the automatic stabilizers, but spending has not been great enough to reduce the misery, and we are working on a full-blown depression.

      If you bothered to look at a graph of public spending vs outstanding credit…

      https://dl.dropboxusercontent.com/u/33741/FGEXPND....

      …it should be obvious that credit outstanding cannot out-pace spending without a resulting crisis. Every time the credit line gets near the spending line there is an associated crisis. Look at the dates then look up the crisis.

      Thanks again for helping me make my argument.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "But the point is that the bank satisfies the liability with the collateral, so they may not have an actual loss if they did sufficient underwriting. " - LandmarkWealth

      First, If the bank did sufficient underwiting it would't be holding the collateral in the first place. Normal default rates are well under 5%.

      Second, when a bank takes collateral into REO it almost always loses money.

      Third, the borrower loses his equity, if he had any.

      Fourth, If a bank makes enough bad lending decisions so that its default rate is over 5%, it is in danger of becoming insolvent, as most of the big investment banks are in reality now, propped up by the govt.

      Currently the Fed and Freddie Mac/Fannie Mae are carrying the unpaid liabilities, hoping to wait out the collapse. Good luck with that, they've been throwing gas on the fire by allowing banks to do the same things that got us here.

      Thsi is not a normal situation…the government is not supposed to keep banks from going under…they should have to lose all their remaining assets and be broken up, the parts sold to other banks.

      If the banks liabilities are never cleared this is in effect fiscal…net spending, although the spending took place long ago.

      Under the law banks are not allowed to carry liabilities in excess of their assets (and stay open).

      The government stepped in and is carrying these liabilities without precedent…because the government is owned by bankers.

      And you worry about money spent directly by government for public purpose.

      Your logic is twisted and anti-human.…and it is wrong.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      LW: “If the bank seized the asset that I purchased as collateral, the asset itself still exists. For the sake of simplicity, call it a home. Obviously you cannot buy a home for a $1. But the point is that the bank satisfies the liability with the collateral, so they may not have an actual loss if they did sufficient underwriting. The home does not vanish. And the dollar is not extinguished from circulation in M2 because it is in your account....”

      I'm not denying that the home exists, of course. But we are talking about net financial assets – dollars and (if you were correct) leftover bank credits. The bank dollar does not vanish, but the liability does not vanish, either. Even if the bank seizes the house and sells it, the liability does not just get erased. Somebody is going to lose an asset (probably the bank) in order to make the ledger balance. This is as close as economics gets to a law.

      The same goes for government-made dollars. Every one ever made (and not taxed away) is still in existence – even the few that have burned up are still there on the ledger. The only way they are erased is when the government itself collects taxes, and dollars flow back into the government's domain. The advantage of those govt. dollars is that the government continues to hold the liabilities for the dollars they produce on their side of the ledger, while the rest of the world enjoys liability-free dollars. The government's liability on a dollar used to be a bit of gold; now, it is nothing.

      Banks do not have this power. When a bank has more liabilities than assets (like when a loan is defaulted on), they are broke and cannot stay in business.

      You are losing sight of this in the abstraction. Banks do not operate in a vacuum. When we say that banks can create credit out of thin air, that is an abstraction. They must have assets in hand before they can really do anything. If not, *I* could call myself a bank. I could grant you a million credits, and you could owe me a million credits, but without something behind that, no other bank is going to let you open an account, and no store is going to let you buy stuff with those credits. So, getting back to your example, while the loan defaulter still has the dollar (or whatever that dollar bought), the bank takes a loss, and the bank loses an actual financial asset for being dumb enough to make a bad loan. Net (bank credit) assets across the economy do not change. Even if this theoretical bank is distributing its own branded money, the rule still holds, because the bank must have sufficient assets to cover losses.

      “...As I linked to above…”

      I don't know what you're reading from that link that makes you think that financial assets don't equal financial liabilities, but if it says that, it is wrong.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ JohnfrmCleveland

      The liability to the bank is satisfied by the asset. I am not talking about total financial assets versus liabilities in this equation. The bank has the asset, but to what extent. Theoretically the bank can get more money for the house or they can sell it for a loss versus the original loan, presuming they choose to sell it. Now what if they sell it, and post a loss…or they never had any collateral at all, and the entire dollar loaned is a loss. The $1.00 is circulating in the M2 supply. The bank clearly has a financial loss. So the loan that was regarded as an asset at issuance, is now a permanent loss that will never be paid back. A bank loss does not result in a reduction to the M2 money supply. The digital dollar never returned to its original source. So there is an extra dollar circulating in the system in aggregate. The bank as a result of the loss cannot go into another depositors account and remove one of their deposits to compensate for the loss. So the net dollars in the M2 supply were increased, because the liability, whether full or a partial loss will never be satisfied. In this case I am not demonstrating that there is a gain of wealth. There is clearly a loss. But there is a gain of an actual digital dollar in the system by accident that will never be extinguished. Now you can argue that this loss will affect the bank’s ability to loan money out in the future. But in reality the ability of banks to create future assets and liabilities simultaneously for new loans are near limitless, and only impaired when one of those dollars is converted to physical currency requiring them to increase reserves. My point is not that this is a positive transaction. Just that the aggregate M2 supply increased essentially permanently by this dollar that can never be extinguished, excluding the event in which a bank is actually liquidated. Now in a practical world, as bank losses mount, banks will contract M2 anyway as a mechanism to protect themselves from further losses in an economic downturn. But practically speaking, this loss does not require the banks to increase reserves. And as long as the bank has enough positive loans producing income, they will not be liquidated, and this particular dollar will circulate in perpetuity.

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      @LW - if I can't make you understand this, ask an accountant.

      But one last try... the digital dollar does not have to return to its source. ANY financial asset the bank holds can extinguish that liability (and that is actually exactly what happens). We are talking about net financial assets across the whole economy. One party can hold net assets while another party holds net liabilities. I don't know why you think assets are permanent and liabilities are not, but you are wrong.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ pjmeli

      A gold standard is not defined at fiat money anywhere other than in your head. Fiat is state-issued money which is not convertible by law to any other thing, nor fixed in value in terms of any objective standard. A gold standard is a constraint. I do not advocate gold, but rather something entirely different.

      I never said the credit system was self sustaining in perpetuity either. I fully recognize the ability for both credit expansion and deficit spending to become problematic. I have been clearly making the point that both of them left to the ability of individuals in power are extraordinarily dangerous. While credit tends to be extended more efficiently, neither can happen in excess. But when individuals are left to their own devices with near absolute power, they abuse the system. Hence, the need for a monetary standard.

      Net global savings comes from public spending. Not national savings. Foreign capital can also contribute to savings. So there are periods when the system can have more than enough money, and simply needs the right incentives to spend that money. Then there a periods when the opposite is true. This is a core point that Keynes was making in the area of counter cyclical deficits. The problem is that we don’t utilize anything of the sort anymore. We deficit spend when it is not necessary, and expand credit virtually limitlessly. A monetary standard that links the creation of net new money created by the gov’t is a control mechanism to prevent abuse.

      “That is true for only a tiny subset of the spending over a budget cycle.”

      I think that is the point I have been making about controls placed on the creation of money. It needs to steadily increase, but at a pace which is not permitted to happen without regard for productivity. Which brings me back to the principal of a monetary standard. Not sure how you are defining a budget cycle. This can happen for years before it becomes problematic and new money would have to be introduced.

      Base Money is reserves plus circulation…In my words. M2 and the like are created out of thin air.

      Inflation does not inherently destroy purchasing power. Inflation in excess of wages destroys purchasing power. And since the delinking of the US dollar to all forms of a monetary standard, the purchasing power of the dollar has declined by more than 90%. The rate of inflation has nothing to do with purchasing power. If inflation went up by 3%, and my compensation went up by 2%, then there is an inherent loss of purchasing power. If the inverse where the case, I have gained purchasing power even though costs rose. Now if you want to understand how we actually calculate CPI, Core CPI CPI-U…etc and just how much the metrics have changed to hide the value of the dollar through geometric weightings which bare no resemblance to the actual experience of the consumer, have a read at what John Williams, an economist who has testified on the issue before congress has to say to explain it. I have already posted this for John. I will assume you are not familiar with the changes to the methodologies or simply disagree.

      http://www.shadowstats.com/article/no-438-public-c...

      The increased source of consumer spending is capital expenditures. During periods like the 20’s and the 90’s we clearly demonstrated that there was enough money in the system. There was room for budget surpluses and a stronger currency. There were numerous incentive to capital formation via the tax code as well as the reduction of the gov’t crowding out the private sector. At some point, new money via the gov’t needs to enter the system. Now is clearly not an example of this in my view. There is more money on corporate balance sheet than ever in US history. Individuals who have cash have record cash holdings as investors. Interestingly, as the deficit has come in over the last 2 years, job growth has picked up. We are not in a state of a money shortage. The private sector at current has significantly deleveraged, and is sitting on piles of cash. And very few of the entrepreneurs I come across are willing to part with cash at the moment, because the regulatory and tax burden has become more hostile. We are not in a state of too little cash. We are at current dealing with dis-incentive.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ pjmeli

      The depression that followed the 20’s was an example of too much credit. Absolutely. I never said it wasn’t. I have said numerous times that the ability to create excessive credit and excessive deficits to GDP via poor incentives to capital investment which triggers spending are both problematic. But first stage of the recovery in the 20’s was not too much credit, that came later. It was capital investment, triggered by shrinking the Federal budget by 65% because it was way too big at the time, and broad based tax reform. The same is true about the late 1990’s. There was not an explosion is excessive margin loans etc until the later part of the cycle. Which was what Keynes was trying to tell us about counter cyclical deficits. Not running massive deficits in perpetuity. Although, I believe his ideas are terribly flawed in many ways.

      I did not overlook anything. I explained the practical effect on M2 to John in my comment. Considering I have been extremely, critical of the FRB system as it is currently modeled in my comments, there is nothing immoral or anti human about them. The only thing immoral here is someone who prefers to use a forum for an exchange of views and ideas as means to throw out ad hominem attacks.

      The point about the interest being repaid without a necessary increase in the total supply of money is a distinctly separate issue from the possibility that a bank may have actually created a digital dollar that will not on its own likely ever be removed from M2 via a default. Now…I presume you did not follow the logic of the link from last night. So I will copy and paste the specific example as explained by Professor Keen in one of his white papers about his model. This is a well known fact among central banking officials, which had never occurred to me either until I had the opportunity to work with a former Fed official who explained the process to me.

      “The supposed impossibility of repaying interest is bit like the following dilemma. Imagine two people on a desert island: Mary and Sue. Sue owes Mary $20 but there are only $10 in existence and this is currently in the hands of Mary. At first glance it appears that the debt could never be repaid. But this apparent impasse is easily solved. All that has to happen is for Sue to sell Mary some good or service. Say, for example, Sue spends some hours catching fish. She could sell the fish to Mary for $10. This $10 could then immediately be given back to Mary as part payment for the debt. Now simply repeat the process one more time and the debt is cleared. The total amount of money that can be paid by Person A to Person B is not limited by the total amount of money that exists in the economy. “

      The fact that increased in the total money supply are not required to pay interest is simply not taught at the undergrad level in economics. Then again the whole banking system is not typically properly explained. That being said…I am not an advocate of constant supply of money approach either.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      "So there are periods when the system can have more than enough money, and simply needs the right incentives to spend that money."

      There aren't periods - there is always enough money already in existence to fuel the economy. But it is not at all realistic to hope for that to happen. Consider the existing large piles of existing money in the world: The rich do not give up their money. If the rich invest, it is only to attract more dollars their way. Same story for companies - they only invest if it will bring them more dollars. Finally, there are the big trade surplus economies - China, Japan, Saudi Arabia, etc. They won't spend because their economies are based on being net exporters. Spending their foreign reserves only serves to hurt their domestic economy. So while there is plenty of existing money in theory, don't hold your breath waiting for it to shake loose and get spent. There is only one entity consistently willing and able to spend more dollars than it gets back, and that is the federal government.

      The reason I have been pushing you to understand that bank credit cannot add net financial assets to the economy is because trying to spur the economy with credit expansion instead of government deficit spending is a bad way to go. Hoarding of financial assets, be they dollars or bank credit, is going to happen. But when people save bank credit, other people are left with the balancing liabilities, which do not disappear, and are very real. But you can save government dollars, and nobody else in the economy is burdened with the liabilities.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ John.

      All, I am saying to you is that the deposit when it was created by Bank A became a liability, and remained a liability when it was re-deposited at Bank B. Deposits are liabilities to banks. The note on the loan was the counterbalancing asset to Bank A. But that note has now become a liability because it won't be paid back. Which means we now have an extra digital dollar circulating in the system that doesn’t otherwise belong there. This is inherently inflationary, as is the entire FRB system. This is distinctly different the concept of paying interest without a need for the supply of money to increase.

      The notion that the Rich won’t part with their money is a fallacy. If that were the case than all rich people would live in one home. Because they would never want part with their money to build another vacation home. But they do. And when they do, workers are hired. Rich people are interested in a return on their money. They want value for their dollars like the rest of us. They don’t store them in a “vault” in cash. I have been investing money for wealthy people for two decades. They want to constantly spend their money to acquire things. Everything they acquire requires new production. And a large number of them are extremely entrepreneurial. Getting them to spend money on capital expenditures requires proper policy incentives. Simplified tax code…Simplified regulatory system etc.

      I never said that bank credit creates net financial assets. I said it can create net wealth when it is properly regulated. The entire principal behind the current FRB is not something I support. I am saying it is inflationary. And when people receive and spend excessive creation of gov’t dollars in excess of productivity, that is also inflationary. Gov’t also debases currency, and have been doing so since the beginning of time. I said multiple times that I support a more conservative monetary standard because I don’t want a system driven by exclusively credit creation. But even as haphazardly as bank credit can get spent when not regulated properly, Gov’t spending is even less efficient. One is abused at the political level, the other becomes an inflationary house of cards. I am saying…let me be clear. No typing errors. A monetary system linked to a standard. I want better retention of purchasing power. Not orange juice that cost more per gallon than gasoline. Again, I have seen ideas around a basket of commodities approach. There are numerous ideas out there. None are easy solutions. But both bank credit and gov’t deficits require decisions to be made by humans who can be corrupted without constraint. It is harder to corrupt a tangible asset that is an inanimate object. There are other ideas such as a constitutional amendment to limit spending to a share of GDP, which could theoretically deficit spend with some constraint.

      The trade surplus component is cyclical. What China’s position is today will be different in 20 years. Simple example…The new advancements in energy production is likely to make the US energy independent in 15-20 years. That potentially lowers the cost of production, and possibly brings more manufacturing back to the US due to the lower cost of production. Actually some of that has already happened due to China’s lack of a proper reporting and excessive corruption. It is about being globally competitive. Which we have failed at miserably in recent decades.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      In case you're not clear about what I am saying. I am not saying that the additional digital dollar in circulation is an asset. The digital currency is not an asset. I don't regard any form of currency as an asset. But there is an additional net digital dollar in circulation, which it seemed you didn't think could happen if I understood your comment correctly. That is just how the FRB system works. I was merely pointing out the it is possible to create a net digital dollar which circulates M2 in perpetuity, that should have been retired. In reality that net dollar actually hurts purchasing power, because it created via a loss of wealth.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      “All, I am saying to you is that the deposit when it was created by Bank A became a liability, and remained a liability when it was re-deposited at Bank B. Deposits are liabilities to banks. The note on the loan was the counterbalancing asset to Bank A. But that note has now become a liability because it won't be paid back. Which means we now have an extra digital dollar circulating in the system that doesn’t otherwise belong there. This is inherently inflationary, as is the entire FRB system. This is distinctly different the concept of paying interest without a need for the supply of money to increase.”

      I know what you are saying, because you have stuck to it for many posts. And it is dead, flat wrong. Liabilities do not just go away like that. Again – ask an accountant. (And the part about extra dollars being inflationary just because they exist – that's wrong, too.)

      “The notion that the Rich won’t part with their money is a fallacy. If that were the case than all rich people would live in one home. Because they would never want part with their money to build another vacation home. But they do. And when they do, workers are hired. Rich people are interested in a return on their money. They want value for their dollars like the rest of us. They don’t store them in a “vault” in cash. I have been investing money for wealthy people for two decades. They want to constantly spend their money to acquire things....”

      Yes, of course rich people spend *some* of their money. But how many do you know of that decrease their net pile of dollars over time? That's what I'm talking about – money piles up in the hands of the rich. Always has. And that money needs to be replaced. Or, in the terms that we have been using lately, those rich people are collecting net financial assets, while the rest of the economy (collectively) and the government are collecting net liabilities. (Which do not just disappear.)

      “I never said that bank credit creates net financial assets....”

      You said that loan defaults create net financial assets. You said the asset remained while the liability disappeared.

      “...I said it can create net wealth when it is properly regulated.”

      No argument there.

      “...And when people receive and spend excessive creation of gov’t dollars in excess of productivity, that is also inflationary.”

      You have repeated this often, but offer up no logical mechanism by which it would be inflationary.

      “...I am saying…let me be clear. No typing errors. A monetary system linked to a standard. I want better retention of purchasing power. Not orange juice that cost more per gallon than gasoline. Again, I have seen ideas around a basket of commodities approach. There are numerous ideas out there. None are easy solutions. But both bank credit and gov’t deficits require decisions to be made by humans who can be corrupted without constraint. It is harder to corrupt a tangible asset that is an inanimate object. There are other ideas such as a constitutional amendment to limit spending to a share of GDP, which could theoretically deficit spend with some constraint.”

      Inflation happened under the gold standard, too. In fact, it was worse. I know, I know – the data is being manipulated. But none of these things that you are suggesting would be manipulation-proof. And even if you were correct about inflation (which I am definitely not conceding), what good is retained purchasing power if half of your population can't make ends meet anyway?

      “The trade surplus component is cyclical. What China’s position is today will be different in 20 years.”

      Why wait 20 years in hopes that the Chinese will do a 180 and start running a trade deficit with their largest trading partner, when we can simply create and spend the dollars ourselves? Why should the unemployed sit idle for two decades or more because you fear that – maybe – inflation might hit at some point in the future?

    • profile image

      John H. 3 years ago

      The bank has a liability to the Fed too, otherwise nobody would care about the bank having an overdraft at the Fed. You have to consider what happens if the borrower (or economic circumstances) ruins the value of the collateral. It's going to come out of the bank's hide. Otherwise, why would they bother to make loans in the first place? If they could just create net money directly, they would lock their doors and call out for hookers and blow. The Government, otoh, can mark up someone's bank account and the only liability they create is against their own taxes.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      @LandmarkWealth

      First, apologies for the poor choice of words in my last post.

      "I presume you did not follow the logic of the link from last night. So I will copy and paste the specific example as explained by Professor Keen in one of his white papers about his model. This is a well known fact among central banking officials, " - LandmarkWealth

      Sir, (I don't know your name), I've read all of that and as all examples of the type, they ignore the most important factor in the entire dynamic...SAVING.

      Steve Keen appears to be making the same mistake.

      The mainstream in general seems to be unaware of it's existence.

      Saving is the economic equivalent of friction (heat loss) in real-world mechanical and electrical processes.

      Heat loss is why perpetual motion is impossible, and so it is in economics wrt saving.

      Any example or scenario constructed that does not account for saving will lead to the wrong conclusions, and will fail any attempt to apply the solution to real-world problems.

      Until you accept that, all of your arguments will fail, because you are attempting to solve the wrong problem.

      This is the most important insight in economics, and the credit circuit is subject to it, just like any other in economics. It would be in your best interests to learn the implications of saving. I don't mean savings accounts, which refer only to the most obvious and simplest forms...any account that holds dollars, no matter how brief in time, is a savings account.

      If the level of the account remains the same or grows over time, the money in it is not "circulating". It is money taken out if circulation.

      Economics is the study of flows. Savings does not flow. In the aggregate the level of savings grows by the level of the deficit over each budget cycle. Those funds are unlikely to be used for spending.

      In order for that to occur, the number (savings balance) would have to decline, and it never does.

      The money of concern to economics is what is available for consumption and investment, flows.

      Income that can be spent has to be in the hands of the consumer, so even there the level of funds is not necessarily an indicator of how much demand we should have.

      The conventional notions of money supply are useless, and no time should be wasted.

      There is always enough money...the system makes sure of that...but there is rarely enough money in the hands of consumers.

      The distribution is out of balance...the charge is on the wrong pole of the battery.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ pjmeli

      Apology accepted.

      Professor Keen it not missing the point about savings. True savings is about accumulating value. It is not the currency itself. It is the sum of our productivity. We don’t chase dollars, we chase the value of the asset we can acquire from someone else’s productivity in exchange for our productivity. Which is why I made the point that people invented things and exchanged goods and services before the idea of a currency was even conceived. So, while I agree that a true barter system is totally impractical, the currency simply serves as the medium between which we exchange productivity. If you and I were the only to people on the island, we could create endless savings by exchanging that what we each create, and the other desires. The currency is a form of efficiency to speed up the process in country with 300 million people, and a global population in the billions. Without it…we’d obviously wait forever attempting to bring buyers and sellers together. If I needed a house and you needed food, it wouldn’t matter that we both had currency in our hand. I can’t live in a dollar and you can’t eat it. So we use the currency to set values to exchange the house you built for me, and the food I grew for you. My uncle I cited earlier owns 11 homes. He doesn’t keep have much in bank accounts. The revenue from the real estate pays for the cost to maintain it and his lifestyle. Does his lack of savings in terms of currency mean he hasn’t saved ??? I think not. You can accumulate endless amount of value by exchanging ones productivity for another. It is common knowledge in monetary economics that dollars do not have to grow in supply in order to repay interest or accumulate savings. You define savings as currency…I define savings as something of value. When someone dies…The Federal gov’t and the state may impose an estate tax upon that estate, also known as the “Death Tax”. Pull up an IRS 706 form online. They don’t ask how much currency did the decedent have to determine the size of their taxable estate. They look at ALL equity. Real Estate…Cars…business interests etc. All the non-currency has an economic value that has been saved and can be exchanged for other value created by others. So the gov’t wants to tax all of it. Not just the currency. Because they recognize all of it as savings. And there is no limit to the amount of savings as defined as value that we the people as a whole can create.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "True savings is about accumulating value. It is not the currency itself." - LandmarkWealth

      Nominal savings takes dollars out of circulation…putting them on the sideline.

      You have to keep reminding yourself the discussion is taking place in the nominal world. Nominal dollars…nominal assets and nominal liabilities.

      Nominal and real have no solid linkage. They are on separate sections of the balnce sheet and real always adjusts wrt nominal, not vice-versa.

      I don't know what you mean when you say "true savings", but if you veer too far off into the world of real assets you are going off-topic.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      @LandmarkWealth

      I meant to repeat the formal definition of savings…

      Savings is defined as income not spent. Another way of saying this is:

      Income is saving until it is spent.

      Which means that as soon as income is spent, it is savings again. It is a balance.

      What is important to note here wrt flow is that if ANY balance remains constant or is increasing, savings is increasing and these funds are not being spent. The funds are no longer part of the economic calculation.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      @LandmarkWealth

      One more thought re our discussion of "deficit spending" the other day…

      Deficit spending" is misnomer…it implies causation to the wrong party in the transaction.

      First, the government spends…

      Then, the spending generates income as it dissipates through the non-government.

      Finally, we have taxation, which is less than the original spending…and later on in time from the spending. The Arrow of Time is very important when analyzing real-world events.

      An accurate description of what has taken place is that the non-government has taken profits, thus returning only part of the original spending.

      This is the only logical explanation for what has taken place, in simple terms.

      There is no such thing as deficit spending by the government. It is a fairy tale and is a completely inaccurate description of what has taken place…made up by vested interests that wish to control access to the fruits of workers labor.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ JohnfrmCleveland

      John, I am not wrong. I didn’t say the liability went away. The dollar itself in the system is the additional liability along with the liability on the Banks balance sheet. But the reason it is initially inflationary, is it is still floating in the M2 supply. The liability on the bank side from the loss, unfortunately in a real practical world does not actually constrain future lending. In theory it should as lending is a multiple of reserves. But the problem with the FRB system, as explained in the earlier S&P piece is that modern Central Banks don’t constrain the amount of reserves they supply. Instead they supply whatever reserves the bank requests. So in reality, the digital dollar is there, but the liability that never went away did not anyway constrain the actual future lending. Ask a Central banker. In many nations, central banks don’t even place any reserve requirements at all on lending. Nearly every monetary policy economist has correctly observed that credit creation drives the reserves… not the other way around. Now I do concede that in a wave of massive defaults…that is clearly deflationary to the credit system, because banks will in all likelihood move to protect profits and shrink M2. But when a small number of defaults happen…it is actually inflationary.

      “But how many do you know of that decrease their net pile of dollars over time? “

      Nearly all of them. Rich people, who I have managed asset for, over many years…HATE to hold cash. Some of them are vain and wish to impress others with their possessions. They can’t flash their checkbook. They can show off the Bentley or new Mercedes. In most cases they are simply looking for a return on their money. That does not mean dollars. It means assets of value. The most popular vehicle of choice in recent years has been private activity investing because of the lower ratio of volatility. The love things like private REIT’s. Aside from the added tax benefits, they’re not subject to huge swings in volatility. Each one of those REIT dollars goes toward new construction of property. They love private equity deals, where they can often get in on the ground floor of starting a new business, where the larger potential for returns are better, which create new jobs and finance new ideas for new products and services. This is vital to the process of capital formation.

      I don’t know where this idea came from that Rich people like to pile up cash and stare at it. But it is a total fabrication. Rich people, and business entities hold large amounts of cash when they have little incentive to do anything with that cash. And that is very much driven by tax policy. Regulatory policy on the business end plays a large role as well. It doesn’t help that when Rich people spend money, they are also often demonized for it. Look at the culture of our country. I am no big fan of Gov Romney. But in the last election we heard media outlets question him about building an elevator in his house for his cars…or some sort of nonsense. Isn’t that precisely what we want him to do with that money. Somebody built the elevator, somebody fixes the elevator, somebody makes the parts to fix the elevator, somebody delivers the parts to fix the elevator and somebody made the car for the guy who delivered the parts for the elevator. This is a good thing, not a bad thing. Gov Romney did not want to stare at his cash…he wanted the elevator. People call this Gluttonous…but it’s exactly what we want him to do.

      The logical explanation for inflation through deficit spending is pretty clear. The more dollars that enter the system without the capacity to serve those dollars results in inflation. When we pay people to dig holes and fill them up, we have not increased the productive capacity of the country. What we have are a bunch of spots on the ground where the dirt looks like it was freshly turned over and more money in the system. Government routinely and excessively spends money on things that nobody wants, needs and accomplishes nothing. And again…it has damaged the dollar for years.

      Inflation happened under the gold standard. I am not saying you can’t have inflation. You just have better price stability. Which has various benefits, including international trade, and business forecasting. We can debate the fabrications around CPI all day long. But look around you. In the 1950’s Dad went to work and mom stayed home. Today Mom and Dad have to both go to work to make a living. Some people attempt to cite the Piketty/Saez data on wage disparity. That is fatally flawed because it ignores various forms of income. But I will concede there is some of that. And some of it is the fact that Americans and many people in the developed world simply want everything yesterday. But on the whole, it is devaluation of the currency. This has been going on since Emperor Nero in 54 AD. Politicians use the excess spending as a means to promise things to people to buy votes. They promise free services, distort prices and deliver just enough in those services to render people utterly dependent on gov’t and society at large less productive. And we get slow erosion of the currency. We can’t wait for China. We need to compete with them now. But we don’t get competitive by paying 9 people to do the job of 1.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ pjmeli

      I understand your logic. But what happens in reality is that when the gov’t spends dollars to hire people to do X, the people in the competing private sector stop doing X. People with cash…hoard cash, because they have no reason to invest in a business that does X. You can’t compete with an entity that can spend money without regard for profit and loss. When gov’t directly invests in a business that does X, then, other people in the competing fields leave the field. And it becomes a monopoly of the marketplace. Productivity declines in a monopoly and people with savings save more as their opportunity to participate declines. This is why I said gov’t spending should be restricted to those services deemed essential. But not having the ability ever deficit spend can certainly be a problem. In a state of emergency, if tax revenues are not available…it makes the gov’t unable to respond, which is their job. And even with proper incentives, there will be ebbs and flows to the natural business cycle. This is simply a debate about what came first…the Chicken or the Egg. What I have observed through many years of working with people with substantial assets, is that their behavior to invest new capital is incentive driven. They don’t look at gov’t generated demand as anything more than transient and unsustainable. I understand that it is in reality sustainable. But with consequences to purchasing power. They don’t make huge capital investments because the gov’t put a bunch of people to work digging holes and filling them up. They are not that stupid. And that is precisely the current sentiment of wealthy people. Although I would place more blame on the current regulatory environment. My observations about how capital has been distributed, is that supply creates the demand. The notion that gov’t can simply produce demand without damaging productivity is all theory in my view. Gov’t is not efficient, and it is not anymore altruistic than a greedy business man.

      The worst of it is the way the contracts are handed out by gov’t. It is all driven by political connections. Gov’t contracts do more to put dollars directly in the hands of the political elite than anything. And then they themselves won’t spend them for the same reasons, because they recognize the very problem they created. Can any of us think of a sector of the economy where gov’t has become a major factor and produced a combination of greater efficiency, better quality, lower costs and more availability ??? Education…Housing….Healthcare.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "But what happens in reality is that when the gov’t spends dollars to hire people to do X, the people in the competing private sector stop doing X." - LandmarkWealth

      I seriously doubt that…we have over 7% unemployment and 16% if you count the under-employed.

      The government is not taking anyone necessary from the private sector.

      How could it ? It doesn't pay as well.

      The government does not compete with the private sector for workers, that is a myth.and always has been. Funny I don't see the private sector offering jobs at a livable wage to th eunemployed now…and the governmnet employment has declined substantially over the past few years.

      Corporations hire people in foreign countries to build their products…people that don't spend then their incomes on our stuff.

      Where does the income come from to buy those products?

      Somone has to provide jobs for the displaced workers.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "People with cash…hoard cash, because they have no reason to invest in a business that does X." - LandmarkWealth

      What business (X) is in competition with the government? I can't think of one. Most government payments go to private companies anyway. Another red-herring argument.

      They hoard cash because they don't have enough customers, not because they don't have enough help.

      And it isn't because the government is hoarding workers either.

      Again, no business pays it's employees/vendors enough so that they could turn around and buy the businesses output at a profit. If there is any saving whatsoever the best the business could hope for is a loss.

      If the government doesn't spend enough many businesses will be unable to earn a profit, because their customers don't have enough money to buy their products.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "the reason it is initially inflationary, is it is still floating in the M2 supply. " - LandmarkWealth

      How does the level of the M2 money supply cause inflation?

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "When gov’t directly invests in a business that does X, then, other people in the competing fields leave the field. And it becomes a monopoly of the marketplace. " - LandmarkWealth

      When and in what industry does the government do this?

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      “John, I am not wrong. I didn’t say the liability went away. The dollar itself in the system is the additional liability along with the liability on the Banks balance sheet.”

      OK, we have a growing vocabulary problem here. You can't just switch accounting terms around and call an asset a liability because you don't like what an asset represents. We need to stipulate to a few things here.

      In double-entry accounting, assets always equal liabilities. Neither just “go away” on their own; but if you hold an equal number of assets and liabilities, they net out to zero, and in the case of banks (and currency-issuing governments), the issuer can extinguish a loan with an equal number of assets.

      When we talk about “dollars,” we mean government-created dollars, where the liability remains with the government, and the asset (the dollar itself) remains in the economy. Governments can extinguish those liabilities by taxing dollars back into the government's domain.

      When we talk about “credit,” we mean bank-created credit (and the accompanying liability).

      When we talk about “financial assets,” we mean dollars and govt. bonds, plus bank credit.

      When we talk about “net financial assets,” we mean financial assets minus financial liabilities. Not houses, not corporate stock, and not production itself.

      Now that you agree that liabilities do not just disappear, it should be clear that bank credit cannot add net financial assets to the economy. Are we agreed on that? That leaves government-created dollars as the measure of net financial assets in the economy (which includes govt. bonds).

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      “But the reason it is initially inflationary, is it is still floating in the M2 supply. The liability on the bank side from the loss, unfortunately in a real practical world does not actually constrain future lending. In theory it should as lending is a multiple of reserves. But the problem with the FRB system, as explained in the earlier S&P piece is that modern Central Banks don’t constrain the amount of reserves they supply. Instead they supply whatever reserves the bank requests.”

      You have the mechanics of lending correct, but the reasoning is wrong. Yes, bank lending is not reserve-constrained. Yes the central bank will supply (loan) whatever reserves the bank requests (borrows). But existing bank credit has nothing at all to do with this, and I don't see the connection between the bank-created money from the loan default and why you think it is inflationary.

      The true constraint on lending is the lack of money to be made by borrowing. That is the sole reason that businesses borrow money – to make more of it. If paying customers are not there, businesses sit tight. And like pjmeli has been trying to explain, there are real-world problems when trying to keep an economy running with nothing but bank credit, and no new influx of government-created dollars. Interest is one. Savings is another.

      Is it theoretically possible to run an economy with a fixed number of govt.-created dollars and bank credit? Sure. If people spent everything they earned, the economy could probably grow enough to pay the interest. But saving is the bigger problem. You claim that savings is no big deal, and people don't really save money. But the U.S. has created about $17 trillion net dollars in our history, and about $16 trillion of those have been exchanged for govt. bonds (savings), and are effectively no longer in play. The government pays interest on those bonds without breaking a sweat, because they can create money for free. But imagine if the liability for that debt was borne by the economy – for every bank credit that was being spent, we would be paying interest on 16 more bank credits.

      Me: “But how many do you know of that decrease their net pile of dollars over time? “

      LW: “Nearly all of them. Rich people, who I have managed asset for, over many years…HATE to hold cash.”

      I'm going to have to call “baloney” on this one. Financial assets in one's bank account are the very definition of “rich.” And over time, the rich just amass more and more. I'm not saying that they don't invest, and I'm not saying that they don't spend some of it. But I am saying that as the tangible wealth of the rich grows over time, so does their measure of net financial wealth.

      “The logical explanation for inflation through deficit spending is pretty clear. The more dollars that enter the system without the capacity to serve those dollars results in inflation....”

      OK. But you seem to assume that we are at the point where the system can no longer meet new demand, because you are saying that any new dollars are inflationary. Do you really believe that our economy is having trouble meeting demand?

      “When we pay people to dig holes and fill them up, we have not increased the productive capacity of the country. What we have are a bunch of spots on the ground where the dirt looks like it was freshly turned over and more money in the system. Government routinely and excessively spends money on things that nobody wants, needs and accomplishes nothing. And again…it has damaged the dollar for years.”

      Here is another spot where vocabulary is getting in the way. I define “productivity” as something that helps put a product on the shelf or makes a service available for purchase. Basically, GDP. The private sector makes the products and services that are sold. The public sector does not sell their services. So the two sectors do not compete in the marketplace for anything but labor, and there is still a large excess of available labor. Since the private sector is having no trouble meeting demand, even with government spending, why do you think that public sector work has to “increase the productive capacity of the country”? And since the private sector is meeting demand, how does this “damage the dollar”?

      “...Some people attempt to cite the Piketty/Saez data on wage disparity. That is fatally flawed because it ignores various forms of income.”

      No, the attempts to counter the P-S data are fatally flawed, and here's why: P-S measured exactly what they said they were measuring – wage disparity in the marketplace. You, on the other hand, want to add in after-the-fact adjustments that the government makes to try to rectify the large disparity. Taxes and transfer payments are the reaction to the very real income disparity they studied. What you are trying to do is claim that, because of taxes and transfer payments, the wage disparity itself is overblown – which is not correct. The wage disparity is the underlying problem, and the private sector has no answer for it.

      “...They promise free services, distort prices and deliver just enough in those services to render people utterly dependent on gov’t and society at large less productive.”

      The government does not promise free services. They promise to pick up the tab. The government does not steal production to give to the poor – they buy it, like any other customer, whether they buy it directly, give people money to buy it themselves, or pay people wages so they can buy it themselves. Food for the poor comes from supermarkets, healthcare for the poor comes from normal doctors and hospitals, and housing for the poor comes from the private sector.

      None of this makes society less productive. Whatever people buy with government-supplied money adds to aggregate demand, which increases production. And it isn't keeping anybody from taking a job, because there is still a large surplus of labor looking for work. When the private sector starts having trouble filling minimum-wage jobs openings, then we can start to consider effects on the labor market.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ JohnfrmCleveland

      When a Loan is created the loan is an asset the dollar is the liability. When the loan defaults, the loan becomes a liability. So we went from one asset and one liability to two liabilities. If the bank has sufficient collateral, then the liability and loss is to the borrower. If there isn’t, the bank takes the loss. The point I am making is there is still a net additional dollar in M2 by default. Nothing in a bank statement as a loss permits them from draining an M2 dollar from the system to net out the dollar that is not supposed to be in the aggregate M2 supply at that point in time, which you seemed to think can’t happen…unless I misunderstood you. But it can. So the bank created digital money, which is a liability and was incapable of extinguishing it. That does not refer to a financial asset. It is a financial liability. But there is a net M2 extra dollar.

      The reason it’s inflationary is there is an extra dollar deposited to your account from what you sold to me. But the corresponding transaction failed, destroying wealth. The productivity declined, as the borrower failed. But his dollar is still circulating in the system for you to spend. An extra dollar, less productivity is inflationary. Since a small number of loan defaults produce this result, each corresponding loss should constrain the bank from issuing additional credit to the system to balance the supply of M2. Bank credit (M2) is a multiple of reserves. But since banks are in reality not constrained…as they can request increases to reserves near endlessly, the M2 supply doesn’t get contracted to offset this loss. When we have a small number of loan defaults in relation to successful loans, the cost of the increased M2 is inflationary. In general any increase to M2 creates inflation, because it means velocity is going to be higher. If banks could not simply request increases to reserves so readily, then the loss itself might have a greater impact on their ability to increase M2. Now if the opposite is happening, and there are a large number of defaults, it becomes deflationary because the banks will move to protect profits and contract M2 rapidly.

      Interest can and does get paid without the gov’t increasing the supply of money, as the example I posted from Professor Keen demonstrated. Savings is quite possible unless you think that most people want cash and not processions. I don’t think that is the case. The people that want to hold a large percentage of cash are typically those that don’t have a substantial amount of assets and are concerned about short term liquidity. Otherwise savings of assets are endless.

      Of all of outstanding treasuries, who is holding them ??? Meaning who is saving them ??? About half of these treasuries are bought by foreigners. Most of that is foreign gov’t. As of now about 15% and rapidly growing is our gov’t. There are also state and local govt’s. US households make up only about 8%. And money market accounts are another 4%, which I would also define as savings. Insurance companies buy treasuries because they are required to. And most of the money held in treasuries by corporations and large scale business are there until they’re deployed, which happens in ebbs and flows. People are not buying a large portion of treasuries to save. Gov’t buys debt of the US gov’t far more than the public does. The breakdown is as follows…

      http://macromon.wordpress.com/2013/01/30/who-owns-...

      You can believe that if you like, but Rich people do not like to hold cash. Cash is a poor investment and is a guaranteed loss over time. They recognize that holding cash is not economical. So if you are wealthy and are comfortable, then having a large cash cushion for a rainy day fund is not necessary. They can raise cash instantly with credit from other assets as collateral. They increase cash based on incentive. But they hate holding it. They want processions. And they want return on their money, which requires them to constantly move it around. I would venture to say that the biggest problem I have had with clients over the years is convincing them to increase their cash holdings, which I encourage them to do as a mechanism to lower correlations for many investors. I get more push back on that than anything.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ JohnfrmCleveland

      In terms of demand, it is true that capacity utilization is low, and actually not improved through recent deficit spending. But our true ability to meet demand is a question of what is demand when the ball gets rolling. As we already covered, the banking system creates the vast majority of dollars via bank credit in the system that are transacted between you and I. Yet they have not come anywhere near the maximum capacity based on current reserves available. So the true potential for demand is the sum of all of this credit that is available once people choose to access it and spend it. It is a question of velocity. Once velocity begins…there is too much money in the system, and too much credit available. But what is the productive capacity of the US ??? What do we make in this country ??? Not much. We consume more than we produce. So when you have a banking system that gives away money to spend at near infinitum, and a gov’t that continues to introduce new dollars, coupled with a society that doesn’t make anything anymore, we are playing with pushing the boulder down a cliff and then hoping to run down and catch it. I am not confident in the govt’s ability to control this.

      What damages the dollar is when the gov’t spends money to hire a company to build an outhouse for 100k in a park that is rarely visited and sells for 10k retail. Or when they spend $200 for a hammer that sells for $10 retail. The number of dollars introduced into the system are not consistent with the labor required to produce them. Gov’t buys things for excessive amounts from the private sector without actually creating new labor for the spending.

      That is not all I focused on in the Piketty/Saez data by a long shot. Re-read it. I stated that most of the differential was how we report income. 401k plans did not exist in the 1970’s. That accounts for a far more disproportionate reduction in reportable income for the lower end worker. Additionally, another huge factor was how we define personal income. The tax law changes to S-corps/LLC’s vs C-corps substantially altered how income is defined in their reporting. There were also factors related to income rotation. A massive proportion of the disparity is not wages, but rather capital gains, which is highly rotational from year to year. And is also highly rotational from individual to individual. Piketty/Saez simply conveniently ignored all of these factors. There was too much data for me to regurgitate here. You’ll have to re-read it if you like.

      https://hubpages.com/politics/National-Income-Disp...

      “Gov’t buys services” Let’s look at an example of this. Gov’t mandates people to Medicare at age 65. When a Medicare patient walks into my brother in-laws office he gets paid about 8-10 cents on the dollar. In fact he loses money on each Medicare patient, when you factor in the mountains of red tape he has to deal with just to maneuver through the Medicare system. So where does he make up the lost revenue from ??? He charges the private insurers more to cover the difference against other patients. This distorts the prices. Over the years the cost transfer to private insurance has put the insurance companies and the Dr’s at odds for over billing, so they now have to fight the insurers over every little detail as well. When the gov’t entered the healthcare industry in 1965, they became a competing force against the insurance industry. Yes… the gov’t did actually compete by providing a service, which drained some of the market share from them, depleting access to customers. Since Medicare is required as a primary coverage, people will certainly not buy another primary. At best they buy a supplemental. So what is the result ??? If you accept the BLS data which as you know I think is even worse…Since the gov’t entered the health insurance industry as a participant…the cost of healthcare which moved lock step with CPI before 1965…has since risen 40% faster than CPI.

      And now due to such poor reimbursement rates and mounds of bureaucracy, Dr’s are starting to opt out of Medicare, which decreases access. Many practices that accept it limit the number of geriatric patients they take to stay in business. They have to wait for someone to die before they take in another. Even the famed Mayo Clinic stopped taking Medicare patients in some parts of the country. And how does the patient get treated. My father, a diabetic on Medicare needs testing strips to get his blood checked. Several years ago, the gov’t told all the insurance companies that they don’t have to pay for them anymore through supplemental plans. So of course the insurer is happy to alleviate the liability. Then my father walks into the pharmacy to get his testing strips. The pharmacy then tells him that Medicare now requires that you submit a log of your blood work to your Dr, who then must submit it to Medicare, and wait for them to get back to you…hopefully before the turn of this century. Aka…my father who once obtained these strips easily…just got rationed. Prices went up…access went down. Before any of this new legislation was passed, the largest health insurer in the US was the US gov’t. And we wonder why prices are out of control. What about the poor elderly ??? Who will take care of them ??? They were already covered under the Kerr Mills program before this unsustainable monstrosity was created.

      Now contrast that with elective cosmetic surgery which is usually not covered by any form of insurance in most cases. 50 years ago…that was for movie stars. Today middle class women can get tummy tucks and breast augmentation. Men get hair transplants. Cost on a relative basis are lower, there is more access, and quality has improved.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ JohnfrmCleveland

      When people are given benefits for free to sustain themselves at a minimum level of sustenance, they become institutionalized. They learn nothing, and expect more. And they will vote for whom ever promises them the most. They do little increase their skill sets and make themselves marketable. There was a time in this country that accepted welfare was something to be ashamed about. That is not the case anymore. It is a societal problem. People can create their own demand by offering something to the market place that they want, or never knew they wanted until you created it. But that doesn’t happen when they get institutionalized.

      Consider this...the dept interior spends more than 50k per year on families below the poverty level. Yet can't move the poverty level. If they just gave them the money...they'd be above the poverty level.

      Just curious your thoughts on inflation data. You don’t concede that John Williams data about inflation being understated is accurate. But there is no disputing that the changes to the methodology have been done. The BLS concedes this. They simply are saying it is more accurate. So if that is true, then that means the old methodology was flawed. And if we apply the new methodology to the 1970’s, then the high rates of inflation were in accurate. So does that mean that the stagflation we experienced in the 70’s simply didn’t happen and Americans simply imagined a state of affairs that wasn’t accurate. Or is the current methodology not accurate ??? I fail to see how we can have it both ways.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ pjmeli

      “The gov’t doesn’t pay as well”

      You sure about that. A NYC sanitation worker makes more money in salary and benefits than the average primary care physician. I know countless people who work in civil service because they can’t get fired. I have a colleague who quit working at JP Morgan in Manhattan as a programmer to go work for the NYC dept of corrections for exactly that reason. He knows once he does his 1 year probation…he isn’t going anywhere. Particularly in my wife’s school district, where nobody has ever been fired. I think the GSA’s music video’s demonstrated that they can do damn near anything they want. Two years ago I was referred a client who was a school superintendent. His pension was 22k per month !!!

      The national average compensation for a public sector worker is now more than that of a private sector worker.

      http://news.yahoo.com/gov-employees-more-private-s...

      The gov’t does compete with the private sector. Medicare is a classic example. My mother in-laws street getting plowed is another. She was given the option to pay for the care of the streets in her community and they did so for less money rather than have the town pave roads and plow snow. Much of the crowding out is by force. The option for the private sector to accomplish something is never offered even when it can be. And when it is, people often take them up on it. Public schools and the opposition to charter schools is another clear example. Which is really just legalized segregation.

      If we want corporations to spend money to hire workers here in the US, then we need to give them incentive to hire here…not make it more difficult, which we do regularly from a tax and regulatory perspective.

      “They hoard cash because they don't have enough customers, not because they don't have enough help”

      How do you explain venture capital ??? Has does a new idea come to market ??? If a product didn’t exist then, there is no demand for it. You can’t have customers to something that has never been sold. But if you have investors willing to take a risk…they retain labor in advance and take a risk. They hire marketing teams and advertisers…developers of products…and take a chance. Somebody bought the first home computer. But it had to be built before anyone really knew it would be a success. When I started my firm…I couldn’t be sure whether or not my firm would work. I had to take a chance. Everyday…entrepreneurs take a chance and start a new enterprise. And when they do…they hire people via cap ex. The customers don’t knock on your day and say please start a business and invent something for us.

      “When and in what industry does the government do this?”

      Education is a classic example of people leaving a field. One of the largest private High Schools on Long Island just closed two years ago after more than 60 years. They had phenomenal academic results. But people can’t pay 10-20k in property taxes, 70% of which is public education…and still pay tuition. Gov’t put them right out of business. Which is a problem for me, because my kids are in private school. And now they need to travel nearly an hour each way to go to HS when they’re ready. And with the property taxes on Long Island…you’d have to be sniffing glue to want to open a private school. The one’s that are here can barely keep up. We lost three families from my kids school this year because they can’t afford it, even though the tuition is far less than there proportionate level of school taxes. They didn't want to leave…they had to.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "I'm not saying that they don't invest,…" - JohnfrmClevland

      John, this is anotherarea that needs clarification, lest we go off into other tangents…

      financial investment is not economic Investment I…

      Economic investment is money spent on labor, plant and equipment, materials and vendor support. in the anticipation for selling products or services in the future for a gain.

      Financial investment produces nothing…it just moves money from one place to another in the system.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "“The gov’t doesn’t pay as well” - paul

      You sure about that." - LandmarkWealth

      Yes, it is a fact, and is uncontroversial. Everything you wrote after that is anecdotal and proves nothing.

      Ideological arguments can alter the appearance of reality but it cannot change it.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "When a Loan is created the loan is an asset the dollar is the liability. When the loan defaults, the loan becomes a liability. So we went from one asset and one liability to two liabilities." - LandmarkWealth

      No. There is only one asset and one liability remaining.

      The loan was a liability before the default and it remains a liability after default. The only thing that has changed is the entity that owes the liability.

      No net change in NFA has occurred..

      The banking system produces no net financial assets, it is forbidden to do so by law.

      The Fed produces no net financial assets either, by law.

      All net financial assets originate through U.S. government spending.

      If everyone understood these simple truths monetary economics would be so easy.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ pjmeli

      No…to the Banking system a loan is an asset. All customer deposits are liabilities. They simultaneously create an asset and a liability as per the definition of Fractional Reserve Lending. When a loan defaults…it to becomes a liability. This is not a net Financial Asset. There are two liabilities. One of those liabilities, a customer deposit… allows the customer to spend it.

      Financial Investments do produce something. When a company goes public, they do so to raise capital and expand a business. The shareholders buying the stock are part of the capital formation process. When we buy corporate bonds…we help finance the operations of the company as a creditor. When we put money into REIT’s the money goes towards the construction of new commercial and residential housing, as well as the ongoing maintenance. When we buy a Master Limited Partnership…we raise capital to operate energy companies and/or their infrastructure. Nearly every financial asset is a part of the financial process to raise and invest capital in the real economy. The stock market is just a place to raise capital on a large scale and let everyone participate. The increased volatility over the recent years has just driven more of the wealthiest Americans to more private activity vehicles that allow more direct participation. But the dollars still ultimately move through the economy. You can’t start a business, unless you first commit the capital. And as every entrepreneur…including myself knows...When you start a business…you are the last one to get paid. First comes the employee’s, supplies, office space, insurance, advertising, etc. Then comes the customers. It cannot happen in reverse. The capital must be committed first. Which requires a good deal of risk…Which requires incentive.

      “Yes, it is a fact, and is uncontroversial. Everything you wrote after that is anecdotal and proves nothing”

      I cited a specific study. This is not anecdotal. But if you’d like…here is another from the Congressional Budget Office released last year that says the same thing about Federal workers. Their compensation is on aggregate more than the Private Sector.

      http://www.cbo.gov/publication/42921

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      When a borrower defaults on a loan, the borrower no longer owes, and the lender no longer expects payment. The borrower's liability and the lenders asset cancel each other out. The borrower is left with an asset, and the lender is left with a liability (a loss). No net change. This is Accounting 101. This is also common sense 101. I can't believe we're still arguing about this.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      I never said there was an increased net asset. I said the M2 supply has an extra dollar in circulation, whether the borrower has it or someone else has it. The loss to the bank is a loss on their balance sheet that balances the gain to the consumer who borrowed the money, although still a liability to the banking system when re-deposited. But the loss does not contract M2. That is my ONLY point. A bank cannot pull another dollar from the M2 money supply because they took a loss on their balance sheet. They cannot subtract a dollar from a customer account. They can only eat the loss on their balance sheet. That does not change net customer deposits in the system. They can only theoretically constrain future lending. Which doesn't actually happen in reality because of the way the mechanics of lending work. Once again...Customer plus one in M2...and Bank negative one...which is NOT M2 money.

      The loan increased M2...the loss did not decrease M2...but did impact the balance sheet of the bank. No net gain...Extra dollar circulating. This is widely known by Central Bankers.

      http://www.safehaven.com/article/12377/loan-defaul...

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      "I never said there was an increased net asset. I said the M2 supply has an extra dollar in circulation, whether the borrower has it or someone else has it. The loss to the bank is a loss on their balance sheet that balances the gain to the consumer who borrowed the money, although still a liability to the banking system when re-deposited. But the loss does not contract M2. That is my ONLY point. A bank cannot pull another dollar from the M2 money supply because they took a loss on their balance sheet. They cannot subtract a dollar from a customer account. They can only eat the loss on their balance sheet."

      "Eating the loss" comes out of bank profits. Borrower has one bank credit, bank has one less credit. No extra dollar circulating. Your source recognizes this as a "resulting capital loss" by the bank. The dollar has effectively moved from the bank to the defaulter.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      @LandmarkWealth

      "Financial Investments do produce something."

      No, they don't. There is only one thing a financial investment can do…

      …shift money from one place in the economy to another, without any production in between. There is no possible increase in NFA, so it has to be is zero-sum. Someone's gain is another's loss.

      It's an extraction industry.

      Yes, the financial sector employs people, but in the net it removes more funds from the 99% than it pays them to work. It's called profit.

      The rest of us need to eat, and financial services don't help us in that regard.

      It is a redistribution industry…and don't try to tell us that it makes us all better off because our investments grow…our investments grow because the government puts money in them, by spending.

      In order for all of us to be better off, money has to come from it's lone source…public spending.

      Then, the financial services industry skims most of that off and leaves a jar of jam on the bottom shelf for us ordinary folk. Thanks but no thanks, the average monkey picking stocks at random out-performs the average hedge fund.

      Over the past 50 years bonds have out-performed the stock market.

      The financial services industry is a skimming operation feeding off the Federal tit.

      There is no such thing as a budget deficit…it is profit-taking by the non-government. It is endogenous (from within) the non-government…and public spending makes it possible, because money cannot originate from within the non-government (counterfeiting is illegal).

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      The loss to the bank does not remove money from M2. This is a fact of the FRB system. It can only constrain future lending, (In Theory) It is impossible for it to decrease the money supply directly in proportion to the amount of credit dollars added. You cannot pull money out of M2 that was added to M2 via credit unless that credit was satisfied. You can convince yourself otherwise if you want. I never said the bank was making money. Clearly they aren’t and don’t want people to default and impair their balance sheet. I said there was a net increase to M2. Bank capital is not part of M2. If you don’t believe me, call the regional Federal Reserve governor’s office and see if they will let you speak to a policy advisor on the banking system. I wouldn’t hold my breath though. If you’re ever in NY…look me up and I will introduce you to some people who work at the NY Fed that can verify what I just said.

      Dollars invested in anything shift money from one place in the economy to another. The dollars raised to bring a company public go to expand a business. Without those dollars raised via the investment banking process, then capital formation declines. Additionally, equity oriented investments also pass profits in the form of dividends that produce cash flow that is also a source of income for spending. When dollars are invested into corporate bonds, they finance corporate operations to run the company, expand new areas of the business etc. If none of this was true, then business owners would never go public and/or issue public debt…and simply retain all of the profits for themselves. They bring opportunity for society to invest in these vehicles because they need to raise the capital to expand. If they could do it on their own they would. I don’t know where you think the money goes when a REIT is issued. But it doesn’t fall into a black hole. It is used to build and maintain property.

      The Financial services marketplace is a form of redistribution. It allows for people to participate in profits as investors into the economy that could not otherwise do so because of their limited access to capital. The marketplace since the deregulation of the commission structure in 1975 now allows for a housewife to own a portion of Google profits for as little as $5 to transact. That same transaction was several hundred in 1975. On an inflation adjusted basis, that is an enormous reduction, and allows people to profit at the lower end of the income scale that could not have before. And as Professor Keen has already proven with his models, there is no requirement for the supply of money to increase to realize profits and interest. That is no secret in monetary economics. It’s just not taught in econ 101. Again, that doesn’t mean I believe we should use a fixed money supply. But there is no mathematical equation that requires dollars to increase in order for wealth to grow and true profit to be realized.

      “The average Monkey outperforms the average hedge fund”

      That is not even close to accurate. But hedge funds are not all designed to necessarily outperform the market. Just to keep up with the market on a better risk adjusted basis. Essentially maintaining reasonable Alpha, with a substantial reduction in Beta. If you are looking at long only investing, then you would be correct in saying that markets are highly efficient and most money managers don’t outperform the broad based indexes in equity investing. Which is why Eugene Fama received his nobel prize recently in support of his work on the 3 factor model for decades now. And I do utilize a slight Fama/French bias in my approach with clients for efficiency. But the average investor (Monkey) substantially falls behind the broad based indexes. Most studies show that the average investor, when left on their own, attempt to time markets and produce returns that capture about 1/3rd of the historical market returns. So, if you’re asking me…Which I doubt you are….I would stick to the weak form of efficient market hypothesis when it comes to equity investing.

      “Over the past 50 years bonds have out-performed the stock market”

      Sorry, but this is so far from true, that it is somewhat amazing that you make this assertion. I think you know that. If you were to go back to the market bottom of 2008, which would be the most favorable 50 year rolling period recently, and discount the recent rebound in stock prices, the bond market averaged an annualized return of 6.52%. The Broad US stock market (Wilshire 5000) averaged 9.26% for that same period. And that is considering the last 35 years produced declining rates, which are unlikely to continue. I just ran it in my Morningstar program.

      In regard to Financial services….In case you haven’t noticed, stock commissions are lower than ever. They are in a race to zero. Eventually, it will no longer be a transaction oriented business at all. The fastest growing area of the marketplace are ETF’s which destroy the profit margins of Wall Street investment management firms and shrink margins. Investors can own the S&P for as little as .09% annually. Exactly the opposite is happening. They are reducing the cost to investors dramatically.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      @LandmarkWealth

      http://usatoday30.usatoday.com/MONEY/usaedition/20...

      This is just one news article…I've seen many others but that was a year ago…but I'm not going to chase it any further because it is off-topic. I regret bringing it up because it's another sidetrack clouding the issue. I won't make that mistake again.

      M2 is meaningless, it is a small subset of the total level of dollars and has no bearing on anything of importance…you can't prove anything related to the mechanics of money creation by referring to it. It isn't going to lead us anywhere. It too is clouding the issue. I'm done with it.

      *****************

      The issue at hand is whether a monetary economy can power itself without any government spending to drive production and fund profits, as opposed to some kind of "hard money" system.

      This is the essence of fiat monetary systems vs the others.

      It is impossible for there to be profits in the aggregate unless the government net-spends* . Even under a gold standard.

      *(don't be misled by my phrasing here…The government cannot choose to net-spend…economic agents force it, by saving financial wealth)

      It is impossible mathematically.

      You seem to think it isn't, so show us where profits come from.

      Any argument that appeals to "experts" is rejected in advance, so don't waste your time. We aren't discussing opinions so "expert" testimony is out of bounds…there are very few experts in economics…modern economics is not science.

      Since experts can't be relied upon we will have to be bound by a higher authority…arithmetic.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      "I said there was a net increase to M2."

      As in, there is a net increase in bank credits. There is not. The bank itself loses a credit when it takes the loss. Liabilities always equal assets. If you need an illustration, just imagine that the bank, instead of issuing electronic credits, instead issued bank-branded coupons. The coupon originally borrowed from the bad loan would still be in circulation, but the bank would instead take a coupon from its own profits to extinguish the loan from its books.

      This is not saying that one party cannot profit. It is perfectly possible for one party to hold net assets while another holds net liabilities, but across the whole system, it zeroes out.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      You said they outperform over 50 years…Not True. If you use a 30 year period that is only true of you isolate the S&P 500 index and eliminate the last two years. Your article is dated from Jan 2012. The S&P is up over 26% just this year as per yesterday’s close, and another 16% in 2012. You just conveniently overlooked a huge portion of the rebound from a major selloff. That is hardly a broad measure of stocks anyway. There are thousands of publicly traded US companies. The S&P 500 is only 500 large cap equities. The small and mid cap market has substantially outperformed large caps over time. That is the basis of the three factor model. The S&P Small cap index has outperformed the Large caps by 3 ½ percent annually just over the last decade. Then you have to look at things like REIT’s and MLP’s, each of which has outperformed the S&P 500 as well. And if you really measure the true return of the broad based equity markets, you have to include foreign equities, like emerging markets which have averaged better than 15% a year for the last decade. MLP’s are also up over 15% annually over the last decade. You are really cherry picking. And then account for the fact that rates have been falling since the early 80’s. If you expect that to continue, then buy some 30 year treasuries…And I wish you luck. The 40 year returns for the aggregate bond index leading up to 1980 was about 3.5% as rates consistently rose. And that didn’t require an unwinding of QE, which may be quite a disaster to bond holders who are already negative ytd on just such speculation. That also should not mean that I believe investors should never own fixed income. Fixed income is an important mechanism to lower correlations. But to argue it is the stronger performing asset class, really requires you to isolate a specific area of the market and then do a specific point to point return.

      M2 is not a small measure of money. It is the VAST amount of money in circulation. This is directly from the NY Fed….Where do you get this stuff…

      http://www.newyorkfed.org/aboutthefed/fedpoint/fed...

      It is only impossible for there to be profits if you define a profit as currency. Assuming the only thing people desire to obtain is currency, than that would be true. I don’t think society at large wants to stock pile dollars and stare at them. Perhaps there are some people like that with some deranged fears. Otherwise it is quite possible to have profits. The math is pretty simple. There is no limit to the amount of tangible assets that can be exchanged. There is no limit to what we can create. So if billions of people around the world sell everything they own and choose to only exchange currency for currency, without ever creating anything…then your premise is correct. Otherwise it is fatally flawed. Unless of course you can somehow demonstrate what the maximum amount of good produced is, and when we will no longer as a society to ever create anything anymore.

      There is nothing stopping us from having a fixed amount of currency if we so choose. It is only impractical in my view because of the ebbs and flows of the economy could put the gov’t in a pickle to respond to emergencies like natural disasters or a war if they can’t spend more than they receive back in tax revenue at that particular point in time. Which is precisely why I don’t support that approach. That does not mean that it is necessary to spend money just to introduce new dollars as stimulus. If the existing dollars gain velocity, production can and has gone up in the various examples I cited throughout history. Most of the corresponding contractions resulted in too much credit being extended in the subsequent years following surpluses. That is also, as I said many times a potential problem, if not managed well.

      Credit is a wonderful thing. But the current system the Fed designed is very problematic in my opinion. I would prefer lending to look more like brokerage lending. If you walk into Merrill Lynch and ask to short IBM stock, you are asking them to loan you the stock. They must first look at their inventory of IBM stock in other customer accounts with a rehypothecation agreement. Assuming there is enough, they can do it. If not they can’t just invent shares out of thin air the way banks invent digital dollars. And you must as the client looking to short the position put up collateral in advance of the transaction. You can’t just promise to deliver something someday…maybe. Ironically, most people look at Wall Street as the big casino. But their process for extending credit is far more logical than the way the banking system has been designed by the Fed.

      @ John…

      It does zero out…But not in the money supply. Because a bank loss does NOT contract the money supply. It is impossible to do so. The only way the mechanics of banking could make that true would be if I failed to repay a loan, and the bank opted to then go into your account and decide they are taking an equivalent amount of dollars from you to cover their loss, even though you had nothing to do with the transaction. That is not the case, and is currently illegal…thankfully.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      Gentlemen, Consider this…The Fundamental argument here is not really a mathematical one at all. It is possible to have both a fixed amount of currency…which I don’t really support, or have a gov’t that can create and spend currency endlessly. Both systems allow for an increase in the velocity of money and increased productivity in theory.

      There is not debate as to the ability of the gov’t under a fiat system as to whether or not they can continue to spend. More so about what the consequence of this would and has been. But if the goal is to get people to spend money, than the real debate is only about which system is more effective. You are essentially proposing that it is more beneficial to place the authority to spend in the hands of a bunch of bureaucrats to create money through fiscal spending and place it in the areas of the economy that most need it. I believe that politicians are reckless, careless and anything but altrustic. They will show little care for how they spend money, because they have an endless supply of it. They will make sure that the ultimate goal is to get votes rather than increase productivity. And over time, their recklessness creates less and less productivity and more and more dollars because people can be bought for their vote. That appears to me exactly what has happened. We have a country which now produces little...consumes a lot, and has major issues with a large number of people that do not have the skill sets that the current market demands, even with low current demand. And a good segment of the population that appears to be in my opinion, simply lazy and expects things. So we import labor for both advanced skills and manual labor from outside the country.

      The other alternative is to give incentive to people that already have money to spend money. This only fails if you believe that people with money, want only money and not the things that money can actually buy. I don’t think that is representative of the people with resources. I guess you do. We have become a very difficult place to do business as a nation. From a regulatory standpoint, there is enormous red tape. Nothing is simple anymore. We have become a very litigious society, which also slows productivity and capital investment. And we have 70k plus pages of tax laws…much of which contradicts itself. These things waste resources and make it less profitable for someone with money to make an investment. So often, they make their investments off shore, or don’t do any at all. In my opinion, that’s when they stock pile cash, while they wait for the business climate to change. Which is exactly the current state of affairs. Profits are up, but not through top line growth, but bottom line cost cutting. There is no reason to want to spend money as an entrepreneur. In fact the deficit scares them more than anything. People don’t want to go through the hell of starting a company and hope it works (and many fail) when they see other people getting money from the gov’t for producing nothing. That is disincentive.

      Incentive matters. And politicians have little incentive to do anything with the money that they spend but give it away and get votes. If you kid believes that you’ll keep giving them desert without eating any dinner, than they’ll continue to not eat dinner. Why should they. That is exactly the relationship politicians are developing with the voter. Give me more, and I can do less. So I am not saying that rich people will be anymore altruistic. Many do give huge sums to charity, but we certainly can’t exclusively depend on that. In fact they are constantly looking to consume more and more. So let’s use that against them. Incent them to pursue more and more. And the more business they want to own, the more money they need to spend. People all too often pursue power. The gov’t can regulate market efficiently in theory. But that doesn’t always work perfect either. The question is which form of the pursuit for power through the utilization of currency is more effective. Because that is all that is happening here. Since neither is perfect the system is flawed. As long as humans are flawed, the system is flawed. But the benefit of a monetary standard, is that it is a discipline imposed on humans. Whether it is Gold, or some other basket of commodities…we can’t manipulate the intentions of an inanimate object. That is my rationale for a monetary standard.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "Both systems allow for an increase in the velocity of money and increased productivity in theory" - LandmarkWealth

      No, they don't.

      If the money supply is fixed, or limited, velocity is not only limited, it will necessarily decay in a closed system, which is essentially what you are proposing, that the system remain closed.

      In systems theory a closed system cannot grow by definition without net adds from another system.

      You're entire argument depends upon this not being true...but it is true by definition, it is incontrovertible.

      When you release the gas pedal on your automobile it slows down and comes to rest...bootstrapping (self-propulsion, ie perpetual motion) is not possible.

      In a monetary economy, velocity decreases with saving...it makes no logical sense to argue that as the pool of money to spend from declines consumers will spend with greater frequency to maintain the flow.

      From science we know better...it cannot happen.

      You don't really believe that it can do you?

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ pjmeli

      A closed system only limits velocity to the extent that creativity and the desire of people to consume things is limited. The counterparties have the ability to create new wealth and continue to innovate to meet the needs of others. Your car is an inanimate object that can create nothing on its own to replace the gas it consumed. If your car could in turn develop something on its own and exchange it for new gas, that would be a better analogy. People don’t save just currency…but I think we covered that already. But I have not proposed a closed system anyway. Only a system of discipline where there are degrees of direct constraint that are placed as a limitation on the pace of the expansion of currency linked to real value.

      I will leave you gentlemen with this. No disrespect at all intended towards either of you, as we are each entitled to a view of what we think will work better. However, when I observe the argument for a fiat system, or the MMT argument , it reminds me of watching a teenager argue with their parents. Teenagers tend to think they know more about what’s going to happen on the road they’re walking, then those that have already been down that road before. They think it’s different for them…and they know better.

      Throughout history, from the Roman era of Augustus, Caligula, Nero, and Claudius II Gothicus, all the way up to John Law, and more modern day Abenomics…we have seen the political elite destroy currency through profligacy and hubris. Each time they believe that this is somehow different, and they have somehow figured out how to endlessly create value out of thin air based on nothing. And each time the people who entrusted and placed their faith in such arrogant leaders to abandon all forms of discipline were terribly disappointed, as their purchasing power was slowly destroyed. The notion that we have somehow figured out a way to make sure it’s different this time is the essence of human arrogance. As the old saying goes, those who fail to study history are doomed to repeat it. I believe I heard somewhere that Einstein once said the definition of insanity was to repeat the same behavior over and over again, while expecting a different outcome. I prefer to listen to the words of wisdom of some of our founders.

      “Paper is poverty,... it is only the ghost of money, and not money itself”

      Thomas Jefferson 1788

      Nice speaking with you gentlemen, I enjoyed the exchange.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "A closed system only limits velocity to the extent that creativity and the desire of people to consume things is limited." - LandmarkWealth

      Creativity and/or desire cannot enable consumption...that requires money

      Everything you wrote after that shows you don't understand the arithmetic, so if anyone is the teenager walking down the road thinking they know everything it would be you, not MMT proponents.

      MMT brings the economic discussion into the realm of science, where you have refused to go.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      Go back and read Professor Keen's example of the two women on the island. That is the solution to your arithmetic problem. There is not a an economist on the planet who’s principal expertise is in monetary economics that believes that it is impossible to have a fixed money approach. Only disagreement about which is more effective. Both are possible. There is no debate over arithmetic. There is only debate over which better stimulates velocity. Currency in concept was first conceived about 4500 years ago. People were inventing and exchanging things long before that. They never stopped because they ran out of ideas. They just needed efficient forms of exchange.

      Happy Holidays

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "Go back and read Professor Keen's example of the two women on the island. That is the solution to your arithmetic problem. There is not a an economist on the planet who’s principal expertise is in monetary economics that believes that it is impossible to have a fixed money approach." - LandmarkWealth

      Once again you refer me to Steve Keen…he consistently ignores saving, which he apparently doesn't understand, and neither do you (or most everyone).

      Once again you appeal to authority…which proves you don't know how to form a coherent argument.

      Being in the majority doesn't make you right. Being right does.

      Keen’s right about a lot of stuff but he misses the most important element, saving, so his conlusions are (mostly) wrong. He doesn't see the elephant in the room…it's the savings stupid!!

      If you wish to learn how monetary economics works read Bill Mitchell, Warren Mosler, Randall Wray et al. They have it down cold (they developed the framework) and they have the additional trump card of having been right about pretty much everything over their careers.

      No conventional economist on the planet can make that claim… all they have come up with is excuses for why they have been so wrong, or deny that they were wrong at all.

      MMT'ers principal expertise IS monetary economics. They are the teachers…everyone else in the group you described needs to become a student.

      **************************

      Let me propose a simple analogy in place of Professor Keens…

      Put two dollars in a pail, then try to take 3 out. Then imagine everyone trying to do the same thing simultaneously, but taking the third dollar out of someone else’s pail. That can only work if no one saves.

      Each dollar saved by anyone stops that transaction chain dead. It becomes incumbent on another source to provide the dollar needed to continue the chain, which is a necessary condition for the movement of goods and services.

      The impossibility of the system moving forward without the external add is obvious, yet that is what every agent in the non-government is trying to do…holding back savings from their income, spending less back into the system than they take out in financial wealth.

      Most of the hard-money arguments and those of neo-classical economists are like shell games…they hide the truth rather than expose it.

      The exchange of goods and services does not alter the dynamic, because goods and services cannot be used as money and cannot be swapped for money in a way that produces more money.

      Velocity declines along with saving. This is really all one needs to know and understand. From there you can get anywhere you need to go.

      The money that fills the savings gap has to be entered into the system manually from an external source…only government can do this (under the Constitution), by spending.

      If it doesn’t do so then financial wealth cannot be accumulated…no one could save or profit (in aggregate),and under this condition a monetary economy breaks down (and so does the banking system) because the spending chain breaks down as a result of saving…it approaches a barter economy which is highly inefficient, and inadequate for the task at hand.

      There’s a reason man implemented money systems in the first place.

      There is a reason why the U.S. has consistently run deficits over it’s entire history…something the hard-money zealots conveniently ignore…it would unravel all of their arguments if they didn’t.

    • profile image

      John H. 3 years ago

      "Velocity declines along with saving. "

      http://research.stlouisfed.org/fred2/graph/?g=orV

      So it does!

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      I referred you to professor Keen’s example because it illustrates the fundamental flaw in your argument that everyone in the field recognizes, and simply not taught even at the undergrad level of economics. It is explained in a simple easy to understand way. Production is not limited by the amount of currency in the system. The same example could have used a new hut to live in rather than a fish to sell, which would have created a more permanent asset that would not be consumed immediately…and resulted in a net savings. And, I was additionally trying to correct the false statement that it is impossible to repay interest in a fixed money system. There is no impairment to savings unless people only accumulate dollars and never spend them. There has been more currency created in the US alone than the entire population of the planet many times over. The only way your point is valid is the people taking the money out of the pale want to never spend it. They never want the things that the money can buy, and therefore nobody ever creates anything. Currency is not, and has never been wealth. If it was than Zimbabwe would be one of the wealthiest places on the planet for all the currency they had created before they had to abandon it. They are poor because they stopped producing things when war destroyed their productive capacity. And additional currency did not rebuild it. It is a means to acquire assets. We do not pursue currency…we pursue wealth. The debate between those that believe in a fixed money system versus the MMT view vs a form of monetary standard and various other adaptations of monetary policy has only been a debate about how to increase velocity and the issues of potential inflation. If you argument held any weight, then a total ban on all forms of currency would mean people around the world would simply lay down and die. They would never produce a single thing again. But that is not likely to be true. They would barter their way through life as they did before the creation of currency. Because that is an extremely inefficient mechanism to exchange goods and services, we use currency. You are still equating savings with currency. Currency is nothing more than a piece of paper that derives its value from the production of the underlying economy. I don’t know many people who would rather have $10,000.00 versus 15 apartments on the upper east side of Manhattan. Because the apartments are value and can be exchanged for other things of value in existence and/or yet to be created. Many assets are created through this medium of exchange that exist in perpetuity. Therefore a permanent savings has been achieved. The apartment is the savings. In fact for most Americans, their single biggest asset in their net worth is their home. By your definition, someone who owns 2 million dollars in real estate debt free, and has a few hundred dollars in savings…has not actually saved well. If you believe that, then we have will have to agree to disagree. I would rather own assets that I can exchange for goods then pile up cash that on its own does nothing. Particularly assets that are likely to appreciate over time. Perhaps you think if you stick money in the safe, that it will grow on its own. It doesn’t. That is why most people don’t stick cash in a safe unless they’re trying to hide it from the IRS. Once again…the asset created is the savings. Even today people exchange assets for assets outside the barter system through 1031 exchanges. But that is just a means to avoid taxation.

      Velocity does decline with savings of currency. But as I have pointed out numerous times, during the 20’s and the late 90’s velocity increased markedly during periods of budget surplus. The mechanism of increasing velocity was proper incentive to capital expenditures, which we have none of today. So corporations and individuals are hoarding currency. We’ve had the largest deficits as a share of GDP in some time, and less velocity. The 1990’s and 1920’s saw no deficits and higher velocity. The only problem then was too much credit extended at the latter stages of the cycle.

      If you want to support the MMT view because you believe it is a more effective way to increase production and savings more equitably, then that is a position you are free to take, even though it is outside mainstream economics. I have problems with the risk of inflation it creates from the players in charge of currency creation. But don’t waste your time trying to explain that it as mathematically impossible to run an economy on a fixed money system. Not even the most notable advocates of your position are arguing that. As JohnfrmCleveland correctly stated…there is always enough money. And the hard money advocates also correctly point out that the currency has declined in purchasing power along with the deficits that have been run. People have more saving and can buy less and less with it. That is the balancing act that has not been maintained very well throughout history by fiat govt’s. You simply have more faith in the ability of fiscal authorities to maintain your purchasing power than I do. I want constraint placed on the size and scope of fiscal spending. I don’t trust any individual or group to operate with absolute authority and no form of discipline. Especially political bodies. Perhaps the MMT view will gain even more steam. It seems to me that every few generations people need their John Law. If they’re lucky they’ll end up better off than he did.

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      "As JohnfrmCleveland correctly stated…there is always enough money."

      Yes, there is - theoretically. There are about $17 trillion in existence right now, most of that outside of the government's domain. BUT the vast majority of that is held as savings, in the form of bonds, and they are not getting spent. And this is where you refuse to accept the reality that people/businesses/countries actually do hoard dollars. The proof is right there in the large (and growing) national debt. If everybody spent all of their dollars, this conversation wouldn't be necessary.

      No, production is not limited by the amount of currency in the system, but it is limited by the amount of demand in the system. Again - if every party spend all of their dollars, no problem. But in the real world, demand is limited by saving, which limits the lower end's access to dollars.

      We have been consistent all throughout this thread (and throughout MMT, for that matter) that the savings we are referring to are Net Financial Assets, not tangible goods like huts or fish. You keep returning to your own definition of savings, but you are either missing or avoiding our point. People save dollars, and that throws a real wrench into your theoretical system. We do not barter.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ JohnfrmCleveland

      I was simply illustrating that their is not mathematical reason why the number of dollars must increase. The issue is spending those dollars. Of the 17 trillion US dollars, the portion which is held in bonds...which we already covered. Most of that is purchased and held by our own Federal Gov't, Agencies of our Federal gov't, State and local municipalities and Foreign gov'ts. An awful lot of big government. So if these agencies were not buying all these bonds, then that money would be in supply. People savings dollars does not account for but a fraction of US treasuries as pointed out in the earlier link.

      Yes...demand limits production. And demand is driven by capital expenditures. Which brings us back to incentive to capital expenditures. The money has to be spent to start the business before the customer can walk in the door. And the money to spend to start the business requires the entrepreneur to hire people, buy supplies, spend money on marketing etc. to create the business and take risk. Incentive matters. It is the only way we increase demand without destroying or harming purchasing power.

      Net Financial Assets are what you are referring to. But what throws a wrench into your theoretical system is that Net Financial Assets are not worth more when the value of the currency at play declines simultaneously in accordance with the increase in NFA. Which is why people with a lot of money don't like to hold cash. They want assets. And in order for them to spend their cash to obtain more assets, they need incentive. They only want a large majority of their net worth in cash when the obstacles to cap ex are to cumbersome.

      By the way...you never answered the question. Was the 1970's BLS models for inflation flawed and stagflation didn't really happen ??? Or are todays BLS models flawed and inflation is much higher than the BLS wants to report ??? Or is there a 3rd alternative you propose.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      I will repost for you again…in case you didn’t read it. Of the 17 Trillion…as of the start of the year it was 16.2 trillion. 4.9 Trillion was held in intergovernmental holdings. The remaining 11.3 trillion broken down as follows. The combined amount of US/local gov’t holdings when combined with the intergovernmental debt is about 52%. With the extension of QE, I think the updated number would move that to about 60%. But we’ll use January data. Then another 48% is held by foreigners. Of the 48% about 30% is foreign gov’ts from the last data I have seen. So more than 80% of what was 16.4 trillion is not being bought by these individual savers. What we have is awful lot of gov’t financing gov’t. Not people buying treasuries.

      http://macromon.wordpress.com/2013/01/30/who-owns-...

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      "Of the 17 Trillion…as of the start of the year it was 16.2 trillion. 4.9 Trillion was held in intergovernmental holdings. The remaining 11.3 trillion broken down as follows...."

      I know. If they are dollars not being spent, they are savings.

      "What we have is awful lot of gov’t financing gov’t. Not people buying treasuries."

      It's not government financing. It is people/businesses/banks/countries exchanging piles of cash that they don't plan on spending anytime soon for interest-bearing securities.

      The actual amount of currency in play is only about $1.4 trillion, much of that held outside of the country. That figure goes up slowly and steadily, even with tremendous deficit spending. That should demonstrate just how fast dollars are lost to savings these days.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      But it's is mostly the gov't saving the excess dollars by a wide margin to operate more gov't. Totally unproductive, due to the excess of gov't. Your correct that the currency, (not M2 credit) is relatively small. Gov't keeps absorbing it back up. A small minority of these saved dollars in treasuries are people and corporations.

      There is an old saying in the investment world. Rich people buy assets...and poor people buy liabilities. What that means is poor people put their money in CD's. And rich people put their money in a new start-up businesses, venture capital and so on. I am not saying they never buy bonds. They do. Almost never treasuries, and usually muni's. It is a function of lower correlations to risk assets that they otherwise use. It really depends on how you define the term rich. A guy with a million net worth will buy a publicly issued REIT. A guy with 50 million wants in on the ground floor of some new venture capital deal. But people with real serious capital want their money constantly working. And when it's not...they're spending it on some luxury that you or I may not even be capable of imagining….which is a good thing. What we need is to get them to keep spending, which is about incentive. If the political climate stays the same...they'll keep a lot of money in cash...and/or go offshore. Bigger gov't to be paid for by the wealthy will mean more scarcity in capital investments and more money to go offshore. All totally un-productive to the nation as a whole. The good news is I personally think that this is about to slowly change. If you bury companies in red tape & 20k page regulations, than they will devote less resources to new ventures and things like R&D.

      This is very much the sentiment the last few years from their perspective.

      http://money.msn.com/investing/why-the-rich-stash-...

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      "Yes...demand limits production. And demand is driven by capital expenditures. Which brings us back to incentive to capital expenditures. The money has to be spent to start the business before the customer can walk in the door. And the money to spend to start the business requires the entrepreneur to hire people, buy supplies, spend money on marketing etc. to create the business and take risk. Incentive matters."

      You make it sound as if this is all there is to it. But there is no incentive at all to start a business unless there is a reasonable expectation of paying customers. Finding the capital to open a business is the easy part - banks have plenty of money to loan out, and there is already lots of money sitting around waiting for an opportunity to make more. But none of this puts money into the hands of the lower end in time to help the business. That capital is not what funds the customers. As pjmeli has been saying, without some outside source of money, there is not enough to fund both the consumption/production cycle and the profits that businesses exist for. Profits will drain dollars from the system every time.

      "It is the only way we increase demand without destroying or harming purchasing power."

      Austrian dogma. You are trying hard to correlate deficit spending with inflation, but the correlation simply is not there. Without it, your argument fails completely.

      Deficit spending is not a giveaway - the dollars enter the economy by purchasing goods and services. The new dollars are the incentive for new production. It is not a dilution of the money supply (why does the size of the money supply matter to you now, but not when we are talking about running the economy?), but an increase in the size of the production/consumption cycle.

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      "But it's is mostly the gov't saving the excess dollars by a wide margin to operate more gov't. Totally unproductive, due to the excess of gov't. Your correct that the currency, (not M2 credit) is relatively small. Gov't keeps absorbing it back up. A small minority of these saved dollars in treasuries are people and corporations."

      Governments (except for the federal government) can save dollars, too. They are all capable of spending those dollars. It is still savings, still dollars not being spent. We buy stuff from Chinese businesses, and China sits on their dollars. They are a (potential) customer like any other, and they aren't spending.

      "There is an old saying in the investment world. Rich people buy assets...and poor people buy liabilities. What that means is poor people put their money in CD's. And rich people put their money in a new start-up businesses, venture capital and so on."

      Data on savings isn't great, but one obvious point is that most people don't have net financial savings at all. Most poor people don't even have CDs. They live paycheck to paycheck, and if credit is a part of their life, it's because they have unpaid credit card debt. Those of us that have 401(k)s and a little extra at the end of the month invest in stocks, if anything. I'm not saying that (many) people go out and buy treasuries, because they don't. But in aggregate, that's where a lot of savings end up. Some portion of savings obviously goes to buy treasuries, even if it's indirectly. I imagine that my family's various retirement accounts include some treasury securities in there somewhere. But China and Japan are the big savers, for obvious reasons - buying American goods does not help their economies.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      That is all there is to it. There is plenty of currency to fund the consumption/production cycle, if we have a more stable currency. When we have near 17 trillion people in the US….I will worry about the number of dollars in existence. There is no reason to purposely increase spending as a stimulus. It will simply happen and a function of the ebbs and flows of the business cycle.

      What good is producing the excess currency if it simultaneously declines in value. The inflation is there. Which is why you don’t likely have a good answer to the BLS question. Either we had the roaring 70’s or the BLS is BS’ing us as we speak. If you do, I would love to hear it. They constantly alter this data to hide and reduce the cost of expenditures. For that matter, they just restated all the GDP data a few months ago to alter every single year since 1929. Did they make the data more accurate…I don’t know ??? Haven’t read there revisions yet. My guess is there is some new nonsense in there to tell us where doing better than we are.

      There is plenty of capital/assets available. Credit…not so much since the current Dodd-Frank bill took us to the other end of the extreme. But that is something I believe is temporary. The problem is not capital available. It is incentive. And I can assure you that large deficits are deterrent to a potential entrepreneur’s willingness to invest. And the small business world accounts for most of the job creation. They don’t particularly like it when Federal and State employees are making more money to do less. Who wants to do more and take more risk for less compensation than the people who are supposed to work for you. I have worked my whole career with people of wealth. Many of them entrepreneurs. Probably most. That is their psychology. The only ones that want more gov’t spending are the ones that have monopolies on gov’t contracts, so they’ll take in all the money and have no competition. So they can overcharge and rape the taxpayer. Those monopolies drive up prices as much as anything.

      I agree most people don’t have net financial savings, at least early in life. They have debt. 70% of the wealth in the US is held by those over 50 for obvious reasons. That excess debt is more because we as a society live on credit too much and want everything yesterday. That is the culture of America today. We think we’re doing better than past generations because we have more stuff, but we owe a whole lot more. If you think about it, the incentives are all wrong. We give poor people tax deductions to take on more debt. And we give rich people through higher, more punitive and more complex tax laws incentive to hide money in tax shelters, swap out tax losses and invest in special tax preference assets.

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      "That is all there is to it. There is plenty of currency to fund the consumption/production cycle, if we have a more stable currency."

      We just went over where most of that $17 trillion is. How do you plan on convincing those big savers to part with their dollars? How do you plan on convincing businesses to invest their savings when their savings is your only possible source of financial profits? (And that is how people want their profits - in dollars.)

      If business (in the aggregate) is able to invest, say, $3 trillion in cash, they are going to want more than $3 trillion in return. If the government does not deficit spend, there are only two places where that profit can come from: exporting goods for dollars, and consumer credit (putting the poor deeper in debt). Export possibilities are always there - if businesses were able to shake those dollars loose, it would have happened by now. And expanding consumer credit isn't sustainable, and it puts a large hunk of the population in bad financial shape just so you can keep deficit spending down.

      "What good is producing the excess currency if it simultaneously declines in value. The inflation is there."

      You can't pin inflation on money growth. The correlation simply is not there. Inflation is there because a little bit of inflation is targeted, plus there are some things that are simply out of our control. Like oil. Which is my answer for what happened in the 70's. I can't say that I'm intimately familiar with BLS data, and I've already spent too much time on this stuff as it is, but I don't see why there should be a big problem explaining the 70's. We went off the gold standard, and there was an oil embargo - things were bound to be weird.

      Finally - the reason you would continue to deficit spend - even if it led to inflation, which it doesn't - is because an unacceptable percentage of our population would starve without it. The private sector does not spread our considerable wealth out very well, and there is no reason to believe that it would under different circumstances.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      Yes…we just went over where the 17 trillion is. It’s the gov’t and other gov’t agencies buying bonds. Individuals and mutual funds, and non gov’t agencies make up a small portion. So we don’t need to convince the public and individuals to move out of something they are not holding. But there is collective national assets of about 105 trillion dollars and collective national debt of about 60 trillion when you include the gov’t debt. Personal debt is about 16 trillion. So we have about 40 trillion in equity/ wealth in this country. Much of which can be used as leverage to produce capital investments with the proper motivation.

      Exporting goods are a great idea. If you have the proper incentive to do business in the US, we could actually start making things again. The deficit spending will still happen. It is a function of savings as you have pointed out. But it should be something that happens in a sense organically. When the gov’t spends money only on essential services, and the savings rate goes up…we’ll get new money introduced through deficits. When the velocity picks up we’ll have periods of surplus. I am opposed to actively increasing spending for the purpose of deficit spending as a targeted stimulus because it is inherently wasteful and corrupt. Which is why I referenced deficits as only a concern as a share of GDP from the beginning. Once we put the power in the hands of gov’t to spend endlessly towards a targeted objective, rather than just providing inherent services, we get extreme corruption and a society that becomes more and more dependent on gov’t and less and less productive.

      I pin inflation to unproductive money growth. Gov’t spending money wastefully and making people dependent on gov’t. The private sector doesn’t spread our wealth around. And gov’t does ??? They spread currency and destroy value. Gov’t partners with the private sector when empowered to do so, and makes sure that the money stays at the top. Gov’t is no more altruistic than any private entity.

      Let me leave you with this to ponder. Imagine that we someday actually achieved the ratio you mentioned about productivity. I don’t think we will. But let’s assume that 20% can produce all that is needed for themselves and the other 80%. So we need to find something for the other 80% to do. Presumably that is the govt’s job. So 2 out of 10 people are the productive ones. Let’s imagine that you and your wife have 8 kids to care for while both working full time. But then let’s imagine that those are not even your kids. Let’s imagine that they are not even kids…but grown adults that you are required to care for who have absolutely nothing wrong with them. But you have to work and produce things to provide for them, while they do a whole lot of nothing all day. Over time you’ll start to think…why the hell am I stuck doing the work while everyone else gets to sit around. And eventually you’ll lose your motivation to be productive as well. This is the problem with wasteful spending. The size of the unproductive population grows and grows and those that are productive lose their incentive to work, invest and take risk. When the gov’t is entitled to spend money without restraint, they can and do produce a lot of unproductive people with useless skills that are a drain on society, which is a good segment of today’s population. A lot of people with few skills that offer little in the way of anything an employer would want. And then those people keep voting to take more and more from the productive until there aren’t many productive people left. And growth further slows. If gov’t provides for essential services only, without trying to control outcomes…we will get on our own countercyclical deficits. New money (Base money) will enter the system as needed when people save more than they consume. When the opposite is true, the currency will get stronger as we pay down deficits levels. As long as there are limitations on the scope of gov’t spending through a monetary standard or a percentage of GDP, or some form of control over the deficit…I have no problem with them. Gov’t empowered with no constraint attempting to control outcomes never works well.

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      "...So we have about 40 trillion in equity/ wealth in this country. Much of which can be used as leverage to produce capital investments with the proper motivation."

      But none of which will ever go towards net financial profits. Can you not see this problem? The rich hold just about all the money and wealth already. Where did they get it? From people who paid for stuff. Money trickles up. If the govt. taxed away half of the income of the rich, and redistributed it to the poor by giving them $30,000/year jobs, the people who own the means of production would have it all back in short order.

      "Exporting goods are a great idea."

      Maybe it is, and maybe it isn't. Right now, we get a lot of useful stuff for free. And to remain the world's reserve currency, we need a lot of dollars out there in play. If we could pull it off somehow, it would put a lot of people to work, at least. But probably at super-low wages. Then, somewhere down the line when we have run trade surpluses for years and have brought back all of the trillions of dollars, what then? Do we start accepting renminbi in trade?

      "Let me leave you with this to ponder...."

      Ah, the moocher society argument. The productive are worthwhile, while the public sector are just hangers-on. How about this: the public sector jobs that the 80% work in are useful. Not "productive," but useful. Basic scientific research (already funded by the govt.). Cops, firemen, and teachers are now plentiful, and make up much of the middle class. A large healthcare system, paid for by the government, no longer driven by the profit motive. Maybe the least capable of the labor force are the ones working as labor in the private sector. Ownership is still rich, and consumer demand is steady and high, because nobody has to worry too much about unemployment.

      Look at the private sector now - there is a bunch of useless, unnecessary stuff being produced and consumed already. Add up how much of your budget is spent on entertainment - it's probably a ton. Got a fancy car with lots of extras? Why? Because those of us with decent careers make far more than we need, while others can't even find work at all. Sure, I'll spring for the two-toned paint and the rear-view mirror defrosters, because I have the money. I go out to dinner every week, and I spend more on appetizers than some families get for food stamps that day. And nobody would call me rich.

      So you have the private sector working like crazy, chasing down dollars. In my suburb, which is upper middle-class at best, we are awash in restaurants, tanning salons, mani-pedi salons, premium ice cream parlors, etc. Is this stuff what you refer to as "productive"? If the private sector is reduced to selling tanning bed time, do you really believe that expanding the public sector and hiring more cops, teachers and firemen would be a waste of our resources? Who is the bigger moocher, the teacher, or the private sector businessperson who runs the tanning salon and takes our money that way?

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      It would create net Financial Wealth. And the Rich are not interested in holding all the money. They want things. When they spend people get the money. When they save you’ll get your deficits, which will increase the number of dollars and allow for NFA. The poor move up from poverty by being motivated to improve their skill sets so the Rich have to pay them more for what they offer. Then the poor hold more money and assets and are no longer as poor, and the rich have the product of what was created. That doesn’t happen when they can just get on the gov’t dole. Which is exactly what happens when the gov’t spends money just for the sake of spending, that is not for the purpose of essential spending. We have more people doing less all over gov’t.

      If you have a problem with spending more on appetizers than most people eat, then give it to charity. Of course the restaurant owners and his employees will lose the revenue as a result. I give a substantial amount to charity every year, because I’d rather give it to people I know are actually in need and not give it to the gov’t which will too often direct it towards people abusing a system riddled with fraud. The private sector is not waste, but simply meeting the demand of others. And recycling the unused prodcut is itself a multibillion dollar business that employees more people.

      Anything that is not driven by profit is inherently wasteful. Are all gov’t employee moochers…No. Many are. And many have a lot more to offer society if they did not have it so easy and been institutionalized. Our own GAO says there are literally billions of dollars spent on redundant gov’t services that are totally unnecessary every year. Yes we need firemen. We need teachers. But we don’t need teachers that sit in NYC’s rubber room on administrative leave for years on end because they can’t be fired and aren’t even teaching anymore. When society pays the gov’t employee more money than the people in the private sector that actually make things…gov’t is too big. How many societies thru thousands of years have to totally collapse from within before you can see that. Most have one common denominator. They no longer treated currency as a commodity, but something that can simply grow on trees. And little by little they slowly destroy their currency, and the productive capacity of their society.

      A free market economy means someone will always be at the bottom, and someone at the top. We each control our own destiny, and simply printing currency will not alter that. I know poverty quite well. I grew up living 4 people in one room. We a shared a bathroom with the other tenants on the same floor. I moved out at age 16, and made it through hard work and commitment. Failure was never an option. Today I live pretty well. That is something that is dying in this country. I don’t even get a knock on the door anymore for kids to offer to shovel the snow for a few dollars. Instead we have a society that places people on SSDI because they are obese, instead of just losing weight. The work ethic is slowly dying, because people think you are going to improve quality and production by placing the gov’t in charge of it. Gov’t bureaucracy has already destroyed the education system with their standardized testing and giving parents no choices. They have destroyed the healthcare system by pushing Dr’s out of the field and distorting prices. What’s next ???

      I believe it was Alexis de Tocqueville that once noted that many Americans are so enamored of equality that they would rather be equal in slavery than unequal in freedom.

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      “It would create net Financial Wealth....”

      What would create Net Financial Wealth? Net Financial Wealth means new liability-free dollars. Bank loans cannot create net liability-free dollars. Only government deficit spending can do this, which has been a central point all along. It is certainly possible to create and acquire more tangible things while keeping Net Financial Assets within the economy level, but everybody wants at least some of their wealth as a pile of dollars, and they want that pile to grow.

      “...And the Rich are not interested in holding all the money. They want things. When they spend people get the money.”

      The Rich absolutely want to increase their piles of dollars, in addition to increasing their other wealth. It is pure fantasy to deny this. Yes, if and when the rich spend, labor gets the money – but this is only temporary. If the lower end does not save, those dollars flow right up the chain to ownership, who keep at least some of the profits in dollar form. And we all know that the lower end does not save in the aggregate. Most of them can't afford to save.

      “...When they save you’ll get your deficits, which will increase the number of dollars and allow for NFA.”

      When who saves? The poor? They can't afford to save, it takes everything they can earn just to get by. And if you are talking about the rich, well, we all know they save dollars. But it isn't the saving itself that gives you deficits and net financial assets – it is the government's deficit spending that gives you net financial assets. Otherwise it's a zero-sum game.

      “The poor move up from poverty by being motivated to improve their skill sets so the Rich have to pay them more for what they offer. Then the poor hold more money and assets and are no longer as poor, and the rich have the product of what was created.”

      That worked a lot better a few decades ago, when American labor had enough leverage to demand a bigger share of the profits/production. Now, with automation and cheap foreign labor, there isn't much leverage at all. And this low cost of labor has not even resulted in lower prices – ownership just gets a bigger profit margin out of the deal. Even as you move up the ladder into more skilled jobs, there isn't much that can't be outsourced now.

      “If you have a problem with spending more on appetizers than most people eat, then give it to charity.”

      What's the difference between charity and welfare? Why wouldn't receiving charity kill someone's ambition, too?

      “Anything that is not driven by profit is inherently wasteful.”

      This is just Austrian dogma. What, exactly, is being wasted?

      Profit and private enterprise are nice tools, but they don't solve all of society's problems. And improving society is what civilization is all about. It's not all about helping a few people get rich.

      “When society pays the gov’t employee more money than the people in the private sector that actually make things…gov’t is too big.”

      This is not true. For similar levels of education and experience, govt. workers earn less than their counterparts, on average. Plus, most live in the D.C. area, where the cost of living is high.

      “How many societies thru thousands of years have to totally collapse from within before you can see that. Most have one common denominator. They no longer treated currency as a commodity, but something that can simply grow on trees. And little by little they slowly destroy their currency, and the productive capacity of their society.”

      You are blaming the fall of civilizations on fiat currency? Seriously? Time for a reality check. Wars were a much bigger problem throughout history.

      Blaming laziness is also ridiculous. Unemployment shot up a few years ago when the financial crisis started. Did all of those people lose their jobs because they suddenly got lazy? Don't you think it is more likely that there were some money problems behind the sudden loss of jobs?

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      Net Financial Wealth. The same way I did it. I get hired at an entry level job. I started making 12k a year, adjusted for inflation today would be about 24k today. I develop a skill set from the training I received and make a little more. I use some of that revenue to pay a mortgage payment. I am building equity and my wealth grows. Over time my labor pays off my liabilities. The more I improve my skill set the more valuable my labor becomes. I keep little in cash because cash is worthless over the long run. If myself with my hard earned wealth, along with others save more on aggregate in any given year, then more dollars will enter the system. In years we opt to spend more, than we will potentially have a surplus. But I will never run completely run out of things to consume or acquire. In fact the more I make the more I spend. The lower end doesn’t save because they are undisciplined. They choose not to. Most people who don’t save anything have more unnecessary garbage than they need. They choose to spend money irresponsibly. I came from poverty most people below the poverty level have never seen. I did it…they can do it. Everyday immigrants come to this country with nothing and in no time own a franchise, a landscaping business, or a gas station. Yet somehow our poor can’t because they are dependent and institutionalized. They don’t make the same sacrifices to accumulate wealth, because they are not of the same mindset of generations past. The latest ipod is more important that putting a few dollars in their 401k plan. They’ll trample each other in walmart for these luxuries, but they can’t save.

      I said it before, and I will say it again. Rich people hate holding cash. They like their money working for them. If you ever work for an investment firm, you’ll find that out quickly. Their money is always on the move. Because if it isn’t, than they are losing. That is how they think. With the exception of a few crazy people, nobody wants to look at a bank statement of 3 million in cash unless it’s a fraction of your net worth. Cash loses its value every day. They only hold large amounts of cash when they feel there are too many obstacles to investing it.

      Prices are going up…that for sure.

      There is a big difference between charity and welfare. Charities have to raise the money, and tend to more often than not spend them more wisely, since they can’t print their dollars. This is much more true at the local level than national charities. So when I give money to the Hope House…I can see and meet the people there. I know what kind of people I am dealing with, and whether or not they are really just down and out and doing their best, or they are simply abusing the system like the clowns selling food stamp debit cards at a discount for drug money outside the local shopping center. I am not buying votes like a politician who will benefit from keeping people dependent. If they aren’t helping people truly in need with a run of bad luck, then I don’t donate.

      What is being wasted ??? Do we need 15 separate agencies to oversee the safety of food. 82 separate programs to oversee teacher quality. 12 separate agencies to regulate international trade. There are an awful lot of people doing nothing. But I don’t need the GAO’s endless reports on this stuff. I only need to take a trip to the DMV and watch 10 people stand around a coffee machine while I have to take a day off and wait for hours to register a car.

      Government employee’s don’t make more...??? Argue that with the CBO. Their data says the opposite, along with other studies. Unless you have a PHD…why produce anything in the private sector anymore. Who needs the added risk. Let somebody else take the chance. You’re better off working someplace where you can’t get fired for more money.

      http://www.cbo.gov/publication/42921

      Yes…unemployment did shoot up as a result of the financial crisis. But our capacity to create and manufacture anything in this country was already gone long before that. Because we have and continue to have an unfriendly environment towards capital investment and a society that is more and more accustomed to expecting things from gov’t. SSDI enrollment has nearly tripled in the last decade. All of a sudden everybody is disabled. Being disabled used to mean you had end stage renal failure or some terrible event. Not it means you’re just fat.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      Interesting how we define poverty...what they have and why they can't save. 65% have a DVD player. That's vital. We didn't even have a TV until I was about 10. And they were around long before I was born.

      http://www.heritage.org/research/reports/2011/07/w...

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      "...If myself with my hard earned wealth, along with others save more on aggregate in any given year, THEN MORE DOLLARS WILL ENTER THE SYSTEM."

      No, they won't, and this is why it is so important to understand how dollars enter the economy. The ONLY way that net dollars enter the economy is when the government deficit spends. There is no way around this fact. You can scrimp and save and work hard and improve your skill set, you can create tangible assets that were not there before, but all your hard work will not create a net increase in dollars in the economy. Assuming a balanced federal budget, if you are able to save some dollars, that means somebody else has a few less of them - or even went into debt.

      "I said it before, and I will say it again. Rich people hate holding cash."

      And I'll again say that, regardless of their preferences for other investments, their cash balances also rise as their wealth rises.

      There is a simple mathematical truth to what I am trying to get across here. Dollars are the fuel that drives people and businesses to produce, and they do matter. In real life, dollars do not efficiently cycle from production to consumption over and over with no loss. Savings removes a bunch of dollars from the cycle. And without new dollars, the production/consumption cycle will eventually shrink. It's not an ideological battle I'm trying to wage here. I don't like to see people getting paid to do nothing, either. But it makes no sense at all to disregard the obvious mechanical features of the real economy and force a square peg into a round hole. Dollars don't spring up out of thin air just because you work hard. There has to be a source.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      Yes...and if we save more, then less spending equals less income...which equals less tax revenue...which equals a deficit. If tax revenues doubled because of an explosion of spending than the deficit would go down or be eliminated. If we save more, then less spending means less taxable income. Savings increases the deficit. When we spend it decreases.

      Rich people see their cash balance rise when we see crazy politicians screaming about higher taxes and more gov't controls. Then they go into hiding.

      This is not a simple mathematical truth. Dollars don’t fuel people…the things they can purchase with dollars are what drive them. Dollars are a medium. And history has shown time and time again that increasing the supply of dollars without limitations is very…very dangerous. And that is why there needs to be constraint around the increase in the supply of new currency. Because political bodies are not trustworthy enough to be in charge of this without checks and balances. That is why this view behind MMT is so far outside the mainstream in the field of economics. It exists only in a theoretical world where deficits have little consequence. Until of course productivity declines through gov’t profligacy as politicians abuse the system as they always do. And eventually your currency falls out of favor. MMT’s seem to forget that the US currency is not the only ballpark the global economy can play in. And the rest of the world is already starting to take their ball and go home. And until the gov’t gets back to sustainable spending levels…they’ll continue to diversify out of the dollar. The Chinese are already planning to allow currencies to flow freely through China by next year. The size and scope of deficits do matter. And if we don’t start to show some degree of fiscal restraint…the dollar will be just another global currency.

    • profile image

      John H. 3 years ago

      "Dollars don’t fuel people..."

      They do if the currency is coercive. Seems that most national currencies are.

      "... increasing the supply of dollars without limitations is very…very dangerous."

      We agree on that point.

      "And that is why there needs to be constraint around the increase in the supply of new currency."

      Non-sequitur.

      " It exists only in a theoretical world where deficits have little consequence."

      You made that up. Please go back and read what's already been written about this.

      "MMT’s seem to forget that the US currency is not the only ballpark the global economy can play in."

      Indeed there may come the day when other countries don't want to send us stuff for USD. Enjoy it while it lasts. The unemployment is the unfortunate thing about the exchange, but that needn't be.

      "And until the gov’t gets back to sustainable spending levels..."

      Consumer driven inflation is unsustainable, at that point, the deficit should come down.

      "The size and scope of deficits do matter."

      Who said they didn't?

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      "Yes...and if we save more, then less spending equals less income...which equals less tax revenue...which equals a deficit. If tax revenues doubled because of an explosion of spending than the deficit would go down or be eliminated. If we save more, then less spending means less taxable income. Savings increases the deficit. When we spend it decreases."

      I'm not sure what you're shooting for here, but if you are implying that our saving or spending behaviors somehow create dollars on their own, you are incorrect. Government deficit spending is the only way new dollars can enter the economy. Our behaviors determine how much deficit spending is necessary to replenish dollars lost to savings, but the government still has to do the spending.

      "...And that is why there needs to be constraint around the increase in the supply of new currency."

      I don't know why you think that MMT advocates unrestrained government spending, because our constraints are clearly spelled out. I suppose after 30+ years of hearing about our unsustainable debt load, people have become conditioned to believe that our nation is close to broke. And it is only because of this idiocy that millions have had to suffer through unemployment and poverty, when it is clear that we have more than enough resources to keep everybody comfortable. We have no shortage of food, water, energy, housing, or anything else needed to meet increased demand. As there are no shortages, there is no reason to think that prices would rise significantly due to too much demand.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      Yes… the government has to do the spending. And there job is to spend on essential services. Our natural cycles of consumption and savings through the business cycle will create new base money without the government trying to spend money to achieve a specific economic outcome. That is how gov’t gets in trouble.

      I am not saying that MMT advocates want unconstrained spending in the sense that they want money to be spent endlessly. I am saying that this notion that we can permit this authority in the hands of political figures is dangerous. And the bypassing of the debt markets removes any and all constraint of government to the extent that it has not already been lifted. It is naïve to expect that there is any group now or anytime in the future that will not abuse such authority. You place way too much trust in the authority of gov’t. History tells us that the more power gov’t gains…the more it abuses people. MMT ideas are like letting lion lose in your house and hoping he doesn’t eat you. Prices will rise due to even less productivity. All the money will get directed towards people who do little and vote the right way. And nobody will want to build the houses or produce the energy when they could get paid for doing little and taking no risk working for gov’t. Of course we could always embrace the argument that gov’t could simply employ people directly to do those things directly. If they could first figure out how to operate a website after spending six times the cost they projected. But I think we have already seen many time in history how well other centrally planned societies have gone.

      @ John H.

      I made up nothing. John’s earlier comments on a different link indicated that deficits are nothing to be concerned with. In fact he embraces the idea that we should bypass debt issuance altogether and move towards gov’t printing money to directly finance operations, which isn’t going to happen. And world is already starting to diversify away from the dollar as a direct result of our deficit spending, much of which has nothing to do with essential services.

      The Chinese are pressing hard for a new reserve currency. And because of the reckless way in which we spend money, I can’t say I blame them.

      http://www.examiner.com/article/china-offers-next-...

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      "I made up nothing. John’s earlier comments on a different link indicated that deficits are nothing to be concerned with. In fact he embraces the idea that we should bypass debt issuance altogether and move towards gov’t printing money to directly finance operations.."

      You didn't make it up, but you certainly misunderstood what I said. Deficits in and of themselves are not the concern. Demand outstripping our ability to meet demand is the concern, and the limit. And debt issuance is no constraint at all. It's just interest paid out for doing nothing. We don't finance government spending with debt issuance anyway.

      And no, "natural cycles" of production and consumption do not produce net dollars. I don't know how many times I have to explain this, but it seems like willful disregard of reality at this point.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      Yes…and targeting an increase in the money supply through massive deficit spending as form of stimulus combined with a banking system that has near limitless amounts of credit is a good way to get into trouble when you have a society that doesn’t make anything anymore. Which is precisely why we get more and more asset bubbles that expand too rapidly and contract violently. And when the trouble comes, the solution will be too spend even more, because that is all congress will not how to do. Inflate…crash…and reinflate.

      And yes…the natural cycles of business do create net dollars. If you look back in history, you’ll see there have been more times than not a deficit of some sort, even when gov’t was not creating large fiscal stimulus plans to spend money just for the sake of spending. In fact this happened even when gov’t spending was a dramatically smaller portion of GDP. Because it is inevitable that there will be periods where spending and consumption slows, which will create deficits and net new dollars. Most of history the US has run some form a deficit, long before the gov’t expanded into so many areas of the economy that they currently exist in with a multitude of redundancies. But the economy recovered faster when the stimulus came from other aspects of fiscal policy, like tax incentives which allow the market to allocate dollars instead of gov’t directing revenue towards failed investments that misallocate dollars. The anemic recoveries are consistent with gov’t stimulus programs to increase spending dramatically as a mechanism to stimulate demand. The 1930’s were a classic example of that. Today is not all that different in many ways.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      “Yes…and targeting an increase in the money supply through massive deficit spending as form of stimulus combined with a banking system that has near limitless amounts of credit is a good way to get into trouble when you have a society that doesn’t make anything anymore....”

      Let's put an end to this bit of mythology right now. America is still at or near the top of the manufacturing game.

      http://www.nationmaster.com/graph/ind_man_out-indu...

      http://www.wisegeek.org/what-are-the-top-manufactu...

      http://investing.curiouscatblog.net/2011/12/27/top...

      “Which is precisely why we get more and more asset bubbles that expand too rapidly and contract violently. And when the trouble comes, the solution will be too spend even more, because that is all congress will not how to do. Inflate…crash…and reinflate.”

      Well, if you are basing that theory based on the United States “not making anything anymore,” I suppose it's time to come up with a different theory. Because the way I see it, when we spend dollars, production increases to meet the new demand, and the numbers say that we are well able to do that.

      “And yes…the natural cycles of business do create net dollars. If you look back in history, you’ll see there have been more times than not a deficit of some sort, even when gov’t was not creating large fiscal stimulus plans to spend money just for the sake of spending. In fact this happened even when gov’t spending was a dramatically smaller portion of GDP.”

      That does not mean that natural business cycles create the dollars. You simply cannot get there without federal deficit spending. It does not matter what the economy is doing at the time. The reason you see a lot of deficits is because they are necessary in order for the non-government sector to realize net financial savings/profits. When the federal government has made sustained runs at lowering the national debt, our economy has suffered for it, because it removes dollars from the economy. I don't think most politicians understand why this is so, but at least the pol's natural inclination to please by spending serves our economy better than misguided efforts to “lower the debt.”

      "Because it is inevitable that there will be periods where spending and consumption slows, which will create deficits and net new dollars. Most of history the US has run some form a deficit, long before the gov’t expanded into so many areas of the economy that they currently exist in with a multitude of redundancies. But the economy recovered faster when the stimulus came from other aspects of fiscal policy, like tax incentives which allow the market to allocate dollars instead of gov’t directing revenue towards failed investments that misallocate dollars. The anemic recoveries are consistent with gov’t stimulus programs to increase spending dramatically as a mechanism to stimulate demand. The 1930’s were a classic example of that. Today is not all that different in many ways."

      I don't think your data on this is any better than your data on how much the U.S. manufactures. Austrians have a well-deserved reputation for creating their own mythology, then pushing it tirelessly, even if the face of hard data to the contrary. The government is inefficient, people are super-efficient, the government causes “malinvestment,” more dollars = inflation, etc. Yet here we are, deeply “in debt,” inflation is still low, interest rates are still low, bond yields are still low, we are completely able to create dollars, the dollar is holding its value, and the rest of the world still wants to trade their goods for our dollars.

    • profile image

      John H. 3 years ago

      "Yes…and targeting an increase in the money supply through massive deficit spending as form of stimulus..."

      They really should try that sometime.

      "...combined with a banking system that has near limitless amounts of credit is a good way to get into trouble..."

      No need for the combination, banks have been creating hell on earth for some centuries now, all on their own.

      "...when you have a society that doesn’t make anything anymore."

      Germany seems to do well enough by it. But they have all that automation, you see...

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      The United States manufacturing base has declined dramatically since its peak. More importantly we import more than we export. Which is the problem. We’re the largest economy in the world…but only the 3rd largest exporter and second largest importer. That is pathetic.

      When we spend dollars via stimulus bills and plans…we get wasted production that produce Solnydra type malinvestment which does not drive job growth, but creates only transient income for a brief period. When the deficits are run as part of some form of tax incentive towards capital investment, we get much greater success in creating sustainable job growth, as dollars are allocated in ways that improve the productive capacity of the US. This supposed suffering did not occur in the late 40’s and early 50’s when we ran surpluses. We simply worked through the natural cycles of spending and consumption. Major financial calamities during periods of surplus have been virtually always linked to excessive credit creation that was not irrational in its nature. There was no evidence that this was the lack of some form of massive fiscal intervention. When massive fiscal stimulus bills were embarked on we have gotten extremely anemic recoveries, and ridiculous legislation…like paying farmers not to grow food while people all over the country were starving. The evidence today is as clear as it gets. We are running near trillion dollar deficits…and velocity is extremely weak. Why…the incentive to invest capital in terms of taxation and the regulatory environment has gotten worse. The trillion dollar deficits…have done nothing to increase demand…and everything to increase waste…fraud and abuse of the system.

      There is nothing flawed in the data. Below is a chart of national deficits since 1900. More often than not we have bounced between deficit and surplus during the normal business cycle. The exception was two major world wars. During those periods we saw more economic stability that we have seen in recent decades that have been riddled with asset bubbles. Since the 1980’s when massive deficits became the trend…we have seen more and more asset bubbles. And the most successful periods have been times like the mid-late 90’s where gov’t got smaller, and back to focusing on essential services.

      The inflation argument is a weak one. I have already pointed out the inherent flaws around CPI and how it no longer even attempts to measure a constant standard of living anymore. According to the current methodology, inflation in 1980 was only about 6%...when those of us who where there no better. If you think paying more for a gallon of orange juice than a gallon of gasoline, which is manipulated by OPEC is moderate inflation…then I’ hate to see what you call high inflation.

      http://www.usgovernmentdebt.us/us_deficit

      Germans do quite well as a net exporter. They also have something that is rapidly dying across the rest of Europe, as well as here in the US. It’s called work ethic. Something in the German DNA that seems to be different than the rest of the less industrious members of the EU. When you buy German products…more often than not you can expect excellent quality and craftsmanship.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      “The United States manufacturing base has declined dramatically since its peak. More importantly we import more than we export. Which is the problem. We’re the largest economy in the world…but only the 3rd largest exporter and second largest importer. That is pathetic.”

      Why is that pathetic? What is so great about exporting, anyway?

      “When we spend dollars via stimulus bills and plans…we get wasted production that produce Solnydra type malinvestment which does not drive job growth, but creates only transient income for a brief period.”

      Again, this is Austrian dogma. No production is wasted in our situation because there are no shortages. If some giant government project was pulling workers from fields and factories, or using up so much iron that it drove the price up, then you might have a point. But this is not happening. Spending govt. money on just about anything only adds to the number of paying customers out there, which is good for aggregate demand. If we paid otherwise unemployed labor to dig holes and fill them up, they would still be able to live and buy goods like everybody else. It doesn't subtract from anything, it only adds, and I challenge you to prove otherwise. Give me a few instances where government spending actually crowded out someone or something in the private sector.

      “When the deficits are run as part of some form of tax incentive towards capital investment, we get much greater success in creating sustainable job growth, as dollars are allocated in ways that improve the productive capacity of the US.”

      Do you have any proof of this, or is this just more of a talking point? Because I have seen studies that say just the opposite – tax cuts don't really drive growth at all. Productive capacity doesn't pay off if there isn't increased demand for the production.

      “This supposed suffering did not occur in the late 40’s and early 50’s when we ran surpluses. We simply worked through the natural cycles of spending and consumption.”

      The U.S. ran 3 years of reasonable surpluses after 5 years of tremendous deficit spending (WWII). The surpluses led to a recession in 1948-1949. We ran two years of surpluses in 1956-1957, and we had a recession in 1958.

      “Major financial calamities during periods of surplus have been virtually always linked to excessive credit creation that was not irrational in its nature. There was no evidence that this was the lack of some form of massive fiscal intervention.”

      It's not “massive” fiscal intervention you should be looking at. You need only look for sustained budget surpluses in the years leading up to the recessions and depressions. I'm using these easy-to-follow lists:

      Budget deficits/surpluses: http://www.davemanuel.com/history-of-deficits-and-...

      Recessions and depressions: http://en.wikipedia.org/wiki/List_of_recessions_in...

      “When massive fiscal stimulus bills were embarked on we have gotten extremely anemic recoveries, and ridiculous legislation…like paying farmers not to grow food while people all over the country were starving....”

      We haven't had any stimulus that I would call “massive,” and even when we tried some major stimulus spending (during the Depression), it wasn't sustained long enough. When an economy tanks the way ours did, you have to compare the “massive” stimulus to the actual loss of production and demand suffered. Any deficit spending will be helpful, but it wasn't nearly enough to make up for the losses. So, yes, too small of a stimulus will make for an anemic recovery.

      “The evidence today is as clear as it gets. We are running near trillion dollar deficits…and velocity is extremely weak. Why…the incentive to invest capital in terms of taxation and the regulatory environment has gotten worse. The trillion dollar deficits…have done nothing to increase demand…and everything to increase waste…fraud and abuse of the system.”

      Velocity is about spending money, not about investing capital. Nobody is investing because there are not enough paying customers to justify it. The stimulus should have been put into the hands of the lower end, instead of being used to prop up banks. If people had money to spend, both businesses and banks would have been fine.

      “There is nothing flawed in the data....”

      I was referring to your assertion that the economy recovered faster when we used tax cuts instead of deficit spending. There is nothing backing that up.

      “Below is a chart of national deficits since 1900. More often than not we have bounced between deficit and surplus during the normal business cycle. The exception was two major world wars. During those periods we saw more economic stability that we have seen in recent decades that have been riddled with asset bubbles. Since the 1980’s when massive deficits became the trend…we have seen more and more asset bubbles. And the most successful periods have been times like the mid-late 90’s where gov’t got smaller, and back to focusing on essential services.”

      I think my explanation – that surpluses lead to recessions and depressions – correlates much better with the data.

      “The inflation argument is a weak one. I have already pointed out the inherent flaws around CPI and how it no longer even attempts to measure a constant standard of living anymore.”

      I was there in 1980 too, and the biggest pain was inflicted by the price of oil, which peaked in 1980. Plus, Volcker was trying to apply monetary policy by targeting the money supply, which was stupid. But even with Volcker's insane interest rates and high oil prices, what we experienced was still not runaway inflation, or anything close to it.

      I don't know what the relative prices of gasoline and orange juice have to do with anything.

      “Germans do quite well as a net exporter. They also have something that is rapidly dying across the rest of Europe, as well as here in the US. It’s called work ethic. Something in the German DNA that seems to be different than the rest of the less industrious members of the EU. When you buy German products…more often than not you can expect excellent quality and craftsmanship.”

      Germans make good stuff, I agree. They are also in a unique situation, because their “exports” to the rest of the Eurozone bring in euros, which helps them far more than stockpiling dollars or yen. But being a net exporter isn't the answer to all of your economic problems. Just like assets and liabilities have to net to zero, so does worldwide trade. If the U.S. gave up its role as Earth's Biggest Consumer, somebody else would have to pick up the slack.

      As far as work ethic goes, Germans get 24 days/year of paid leave, which is four more that Greeks get. Americans get zero.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      And exporting society is a more self-sufficient society. It’s one generally with a stronger currency that is not dependent on borrowing your way to prosperity.

      It is not Austrian dogma. It is wasted resources. We hire people to enter industries based on political correctness that the market has already deemed uneconomical. The venture fails and we still have more unemployed people with no skills. We did nothing to improve the productive capacity and added new dollars to the system. We didn’t add new customers, because unemployed workers don’t go out and spend large amounts of money. What we have is a bunch of politically connected people that are running a classic bust out on the tax payers. Because these stimulus dollars don’t make it the lower end of the economic spectrum, because they don’t incent capital investment…as we have seen for more than 5 years.

      Yes…there is proof. Attached is the effective tax revenue as a share of GDP since 1934. Since the end of WW2 the revenue collected as a share of GDP has stayed between 15-20%. When marginal rates where 92% in 1952, the treasury took in about 18% of GDP. When rates where 31% in 1990, the treasury took in 18% of GDP. Regardless of where marginal rates are set, the gov’t collects about the same…15-20%. This is because higher tax rates dis-incentivize capital investment and increase tax shelters. Greater capital investment means higher velocity. GDP expands and revenues go up to keep up with GDP even with the lower rates. Also known as the Laffer curve. Bob Mundell has also done some great work on this as well.

      http://www.taxpolicycenter.org/taxfacts/displayafa...

      Alternatively, when we look at substantial declines in the unemployment rate, we can see that in 1921-22 the top marginal rate was slashed from 73% to 25%, and unemployment quickly fell from about 11.7% to about 3% by 1923 without any form of fiscal stimulus. And tax revenues rose by about 60%

      JFK put in place a move towards a reduction in the top marginal rate from 90% to about 70% in the early 60’s, along with a reduction in the corporate tax rate. We also saw as subsequent spike in revenue and a decline in unemployment.

      The same was true in the early 1980’s. Top marginal rates were lowered progressively from as high as 70% to as low as 28%. Tax revenues rose and unemployment declined rather rapidly. Unfortunately, the response to the increased revenue through the 1980’s started a trend of spending a lot more than what was coming in. And we learned the hard way in the early 90’s that deficits don’t matter…until they matter.

      In the mid 1990’s, while marginal rates went up, more targeted tax cuts were put in place towards direct capital investment, and gov’t was slashed to more reasonable levels. Unemployment declined, and GDP expanded to produce one of the most prosperous decades of the 20th century.

      Each of these examples are classic cases of putting money back in the hands of those that make capital investments as well as the consumer. And two of them are examples of doing so while simultaneously taking more spending out of the hands of the gov’t, which led to two of the most prosperous decades in American history. The only flaw with both scenarios was too much credit extended towards the peak of the economic cycle. You’ll note that the recession following the 90’s and balanced budgets was rather mild prior to 9-11. Yet…as you look at the history of recessions…most took place during periods of deficits because more often than not we have run a deficit. Yet the quickest recoveries took place during periods of smaller gov’t when there were not massive fiscal spending initiatives to spend money just to put people back to work. This spending for the sake of spending, without funding a specific agenda such as WW2 or the cold war has happened twice. The 1930’s and 2009. Both have led to anemic recoveries. The spending that followed the New Deal and WW2 also led to very high inflation which cost the Truman administration control of the congress. Too say that it wasn’t long enough ignores the impact to the loss of purchasing power subsequently suffered by the consumer. And to say that the 2009 stimulus bill was not large enough or not massive is obviously subjective. But it was the largest deficit as a share of GDP that we have seen in sometime. And it did not produce the result of quicker recoveries that we have seen in past years where deficits where a function of incentives towards capital investment.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      “Velocity is about spending money, not about investing capital”

      We already covered this. Business has to first commit the capital to hire people. Businesses don’t have customers in advance of the capital investment. It just doesn’t happen. You have to spend the money to create the infrastructure of a business entity first. Which means you have to risk capital. Which means you need to hire people first. Every dollar of capital investment creates velocity. I don’t know what world you live in where people have customers waiting outside the door before you invested a nickel in a company. When was the last time you met an entrepreneur who told you that customers were lining up outside his house telling him they wanted to buy something that he might make…someday…maybe…so he should hire them. They always have to hire people before there are customers to service. And hiring is just one place they have to spend money in advance of having customers.

      “I think my explanation – that surpluses lead to recessions and depressions – correlates much better with the data.”

      Then of course all of the enormous spending during the Bush administration should have led to more sustained prosperity. Instead they got half the equation right. They took in more revenue and spent way too much. And the solution to all of this spending was more spending…neither of which has worked.

      I am not discussing the cause of the inflation in the late 70’s. I am simply stating that according to the BLS’s current methodology…it never happened. Which means the current methodology today is dramatically flawed and we have much higher inflation over the last few decades…or the stagflation actually never happened. I was there…and I know it did happen.

      Germans do more work in 10 minutes than the Greeks do in a week on the job. Showing up for work is not work. You have to actually produce something. The Greeks proved pretty well that paying people for doing nothing doesn’t accomplish much. If the US was able to meet its own demand with its own productivity than we might actually have both a more stable currency and a better unemployment picture. Instead we import more than we export. And we also have to import labor, because we have a dependent society with weak skills to bring to the market.

      You might also want to take note that the improvement in the European economic data recently is happening in the face of austerity. And the recent mild uptick in the US has happened in the face of a slight slowing in the rate of growth in gov’t spending.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "And hiring is just one place they have to spend money in advance of having customers." LW

      All of the money businesses spend (invest) in aggregate is not nearly enough to buy their products an/or services.

      No level of "velocity" can alter that simple fact.

      The money has to come from somewhere. There is no multiplication in accounting (closed system and all that).

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ pjmeli

      We have already demonstrated that it is quite possible to operate an economy on a fixed money system, even though I do not advocate that. Businesses...like people are often interested in acquiring assets and not always cash. You simply continue to define savings as only financial assets, which is totally illogical.

      MMT is and will remain way outside of mainstream economics because it is dependent on a very flawed idea. It presumes that political bodies can expand the supply of money without serious checks and balances and won't abuse this authority. There are already too few constraints on the creation of currency. And even with the need to issue debt instruments and deal with the realities of the global fixed income markets...currency creation has been abused enough to devalue the dollar...the Yen...and so on. There is no logical reason to assume that we are going to put in place a system which further eliminates any roadblocks to the creation of Federal spending and expect that this will be done with any sense of restraint. It will be furthered abused by those promising benefits to anyone who will vote for them. And we will have more gov't websites that cost 6 times more than they were supposed to and still don't work. More spending and getting little to nothing of value in return. I can't for the life of me imagine where this inherent trust in gov't comes from. For thousands of years, govt's have abused their citizens at every opportunity in which they were given excessive authority. The ability to create currency is not, and has not been any different. It will be abused until the currency falls out of favor…which is sadly already beginning to happen in I’s early stages. You gentlemen have a whole lot more trust in political bodies than I do. Where in the record of human history you derive this from, I can't possibly imagine. Take a good look at the relationship of Greece and Germany. The Germans have had it with the Greeks, and wanted nothing to do with bailing them out. Why…because the productive don’t want to pay for the unproductive to do nothing. It creates huge strains on society. So now the Germans have been asked to spend more money to bail out Greece, so they have the money to buy the products they make. That Brilliant…I give you money for free, because you produce nothing of value…so you can buy my products back from me with the money I gave you. This unhealthy relationship may just end with Greece having to leave the Euro Union…because they add virtually nothing of value. That lack of creating any value in Greece is a classic example of what a gov’t looks like when political bodies are permitted to pay people to do nothing. It just gets worse and worse.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      We have already demonstrated that it is quite possible to operate an economy on a fixed money system - LW

      No,”we” haven’t and neither have you, but that has never been the issue.

      It isn’t a question of whether we can “run an economy” on a fixed-money system. That ccould mean any economy, regardless of outcomes for it’s participants…it could be a share-cropper economy, or an economy where 95% of the participants live in poverty…we have no interest in those kinds of outcomes.

      The issue has been that it is not possible for agents in the non-government to net-save in the aggregate unless the government net-spends. This observation then leads to the conclusion (fact) that profits cannot be earned by businesses in the aggregate either without net government spending.

      To which your replies have been……**crickets**, along with denials but no logical proof, (which only requires simple arithmetic btw).

      Then you argue constantly that the wealthy don’t hold onto financial wealth (savings) but spend it all…(investment spending is ~ 17% of GDP)…whoops…financial wealth is over 3.5 times GDP…

      …while the bottom 75% have negative net savings, leading to the conclusion that all of this financial wealth is either held by the top 25% or it is not held by anyone…?????

      …which leads to the conclusion that rich people spend every penny of their income…they have to, otherwise their financial wealth would increase…and that doesn’t happen…

      …which leads to the conclusion that there is no savings…the money is constantly moving…

      …which leads to the conclusion that we must have infinite GDP (we don’t?…uh-oh).

      Let’s do some more arithmetic…

      Total financial assets (dollars) in the non-government is $59T…GDP is about $16T…wait, what happened to infinity? That’s only about 27% of the total dollars in the universe moving at best…

      …but the government spends about $4T, which accounts for about 25% of GDP if it goes straight to savings (which don’t exist in your world, and investment spending, which accounts for another 17% of GDP, and credit expansion, which has been nil over the past 4 years, leaving 58% of GDP possibly generated by savings that rich people don’t have…

      …which leaves us with $59T generating $16T of GDP BEST CASE SCENARIO…a 0.27 multiplier…BEST CASE…

      …but I (we) know better…savings doesn’t do diddley once it becomes savings, just generates rentier income that is effectively a toll gate at the mouth of the economy…

      …so my money is on government spending rolling over, dissipating gradually (but quickly) so that at least 62% of GDP or more is a DIRECT RESULT OF PUBLIC SPENDING…a multiplier of 2.5…that creates the flow that generates incomes that drives spending and a capitalist economy.

      Also, taxes are deducted from most income from the get-go…as it is earned so that actual public spending is effectively much less than $4T…bigger multiplier…

      Investors are like poker players…chasing dollars that are created by new government spending, Otherwise there would be no reason to play…no one fishes an empty pond…no one plays poker with players that have no money.

      So much for capitalism.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      "We have already demonstrated that it is quite possible to operate an economy on a fixed money system, even though I do not advocate that. Businesses...like people are often interested in acquiring assets and not always cash. You simply continue to define savings as only financial assets, which is totally illogical."

      What "we" have demonstrated is that it is mathematically impossible to increase the net number of financial assets (dollars) without federal deficit spending. And there is nothing illogical about concentrating on savings in terms of financial assets (again, we never said that people cannot accumulate tangible goods, too) - the only illogical thing is continuing to deny that people (and other entities) actually save in the form of financial assets. It flies in the face of reality.

      "MMT is and will remain way outside of mainstream economics because it is dependent on a very flawed idea. It presumes that political bodies can expand the supply of money without serious checks and balances and won't abuse this authority. "

      MMT says nothing about the wisdom of political bodies. Almost all MMTers think our politicians are idiots - for worrying about the national debt and for spending too little to ease unemployment. And while MMT as a school of thought is still outside of the mainstream (as is Austrian econ), it is still an accurate description of the way the system actually works right now. If more people understood how money is created and flows through an economy, MMT would be the mainstream school of thought. And we would all be better off for it, instead of starving the economy of fuel for fear of a debt that is not really a debt.

      BTW - the euro is a totally different type of currency. If Greece has to leave the union and return to the fiat drachma (which they should do, immediately), it is because the euro is an unworkable system.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "…which leaves us with $59T generating $16T of GDP BEST CASE SCENARIO…a 0.27 multiplier…BEST CASE…" - me

      Should read …which leads to $59T generating $9.3T of GDP BEST CASE SCENARIO…a 0.16 multiplier…BEST CASE…

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ pjmeli

      Yes we have…as people exchanged goods and services before the creation of currency. There is nothing mathematically preventing it unless people desire to exchange only currency without the involvement of goods and services.

      It is quite possible to net save as long as net savings doesn’t mean exclusively currency. Only in this strange world of MMT does net savings mean only currency. As if business don’t want to own plants and equipment, and people don’t want to own real estate and other tangible assets. I have given you logical proof numerous times. Once again…My uncle owns 11 homes. Net worth of probably 6 or 7 million dollars of real estate. His cash position is nominal. He has saved assets well in excess of the average American. In your odd definition of savings…he has not actually saved. Yet he has saved asset in excess of the average American, which are made up of net new wealth that was created which did not exist prior.

      I didn’t argue that the wealthy don’t hold onto financial wealth. I said they don’t like to hold onto cash. This typically happens during periods of disincentive to capital investment such as today. Which is why both corporate balance sheets and individual investors are holding cash positions greater than the norm at the moment. In general, when we have an environment that is friendly towards capital investment…wealthy people don’t like heavy cash positions. They are smart enough to know that cash doesn’t create wealth. Cash is a guaranteed inflation adjusted loss. If you don’t believe it…join a wealth management firm, gather up some high net worth clients and try to advise them to maintain heavy cash positions as a mechanism to increase their net wealth. See if they stay with you. I didn’t say they spend every penny of their income on consumption. Although they do consume as well. I said they prefer to invest their net worth. And the higher up the net worth spectrum…the more they move away from public investments towards private equity and venture capital. Opportunities that offer higher potential reward for being on the ground floor of start up ventures.

      The net negative savings at the bottom of the economic spectrum comes in large measure to poor choices they make. When you have an I-phone but couldn’t make an IRA contribution for that year…you have made a choice not to be a saver. I came from the poorest segment of society. I worked three jobs to put myself through school. When others were interested in luxuries, I made a point to sacrifice. Today I do very well. We didn’t need three TV’s in a house in 1950. Today people are totally undisciplined and want everything yesterday. They don’t save because they choose to spend too large a portion of their wealth on nonsense. When the majority of people below the poverty level have a DVD player, it is their fault they are not saving. Wealth is not created over night. It is slowly accumulated by making smart decisions coupled with hard work. I did…and anyone who so chooses can also do it.

      Your examples of spending and GDP are flawed. Gov’t spends 4 trillion dollars. Nearly 1 trillion alone is Medicare/Medicaid. Two areas of the economy that were once private and now nationalized. This is not gov’t adding to GDP…it is gov’t absorbing a portion of the private economy that is no longer allowed to participate in it and running it through the gov’t sector. Gov’t simply crowded out the private sector and decided to ban and absorb that portion of the economy.

      You’re on one hand claiming this deficit which is running near 1 trillion annually over the last 5 years is going straight to savings, and on the other hand saying that the bottom 75% are net negative savings. Doesn’t sound like its working very well. I never claimed deficits don’t create net new savings as defined by dollars. I am saying that targeted spending programs as a form of stimulus do more to concentrate wealth up top. Because all of these programs result in more money paid directly to the politically connected and those who need it the least. But velocity remains low, because none of this is an incentive to capital investment in the private sector. Which is not surprisingly exactly what is happening today. High deficits…low velocity. The net new dollars don’t work their way down the economic ladder with any real velocity until there is incentive to cap ex. All of the supposed infrastructure projects that were supposed to come from the stimulus bill….What happened to them ??? High speed rails ??? Nope.

      “Investors are like poker players…chasing dollars that are created by new government spending”

      I don’t chase dollars…I chase assets. Dollars are not something that I will ever want to keep in large supply…because they lose value every day. Poor people chase dollars try to build cash and buy liabilities.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ JohnfrmCleveland

      Not all people save the majority of their wealth in the form of financial assets. But I never advocated a fixed monetary system. I am not opposed to introducing new dollars to the system. It is the mechanism to doing it, and the speed and pace to doing it. When we have record cash positions on corporate balance sheets and investors holding historically high cash positions, there is little reason to believe that we need huge deficits at this moment in time. What we need is motivation for corporate American as well as the average entrepreneur to spend money and take some risk. They are very well capitalized at the moment. But they are staring down the barrel at tax increases, and massive new regulatory burdens. So they are hoarding cash. Exactly what happened in the 1930’s. Profits remain high due to cost cutting. In fact they are near record high profit margins. But they will not make a serious commitment to deploying cash until they see an environment that is more friendly to cap ex. This is definitely not it. Hopefully this will change sooner than later.

      The Euro is an unworkable system. It was foolish to merge a monetary system without a merger of a fiscal system. But my point was simply the dynamics at play when you have an extremely unproductive segment of the economy being subsidized by a highly productive segment by comparison. What you get is one group of people that develop contempt for the other. It is extremely bad for society. And that is why I said gov’t should be restricted to essential services. Because if gov’t is hiring people to dig holes and fill them up, aside from the inflation risk…you’re going to have a whole lot of pissed off people in the private economy that want to know why they have to carry the load for others. Which is exactly why the Germans were pissed about having to bail out the Greeks. A society cannot continue to function when there are less productive people than unproductive people. When gov’t expands into new spending endeavors that it is not equipped for due to the lack of accountability, we get into trouble. We are much better off managing the cycle of deficits and surplus via the tax code, and letting the market allocate the dollars in the system.

      MMT may not say anything specifically about the wisdom of political bodies. But who do you think will be in charge of this spending in such a system ??? The very people you refer to as idiots. Elected officials that could now spend money without even having to raise money in the fixed income markets first. What possible reason would they have for not promising everything for free and spending money endlessly. It would near guarantee re-election until the currency was destroyed and the people realized what had happened after the fact. And politicians aren’t worried about what happens once they get theirs. They would have the whole country dependent on gov’t faster than you could blink an eye.

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      "Yes we have…as people exchanged goods and services before the creation of currency. There is nothing mathematically preventing it unless people desire to exchange only currency without the involvement of goods and services."

      We use currency these days. If you want to talk about ancient history, feel free, but it carries no weight here. Do your clients pay you in chickens, or dollars?

      "It is quite possible to net save as long as net savings doesn’t mean exclusively currency. Only in this strange world of MMT does net savings mean only currency."

      I have been very clear about separating financial savings from the accumulation of goods and property. We clearly label these things, and I know we've been doing it, because this is about the tenth time I've had to remind you not to conflate the two. I fully understand that financial savings do not represent the whole picture, or even the majority of savings for most people. But understanding the saving of financial assets is vitally important to understanding the movement of financial assets throughout the economy, and you seem bound and determined to deny the simple mathematical truths about those financial assets that have been thoroughly demonstrated. Money does get saved, and it does pile up in the hands of a few at the top. And the only way for the non-government sector to net save dollars is for the government to run a deficit. Two very simple truths that *should* make the light bulb flicker on. Money starts with government deficit spending, and it trickles up through the economy until it gets hoarded away. Stop the flow of dollars from the government, and the economy slows down for want of fuel.

      "MMT may not say anything specifically about the wisdom of political bodies. But who do you think will be in charge of this spending in such a system ???"

      Who is in charge of ANY system? The government. Look, I understand your concerns. But there are two extremes here - too much spending, which ends in demand-pull inflation, or too little spending, which ends in high unemployment and recessions. We are far, far closer to spending too little than we are to spending too much.

      "But my point was simply the dynamics at play when you have an extremely unproductive segment of the economy being subsidized by a highly productive segment by comparison. What you get is one group of people that develop contempt for the other."

      It is your economic philosophy that is breeding the contempt for your unemployed countrymen. To a close approximation, you are judging a person's value to society based on the number of dollars he earns in the private sector. That philosophy makes Britney Spears more valuable than 99.99% of Americans. She makes a lot of money - she's productive, and her taxes pay for a bunch of moochers who, apparently, choose not to work.

      When I see people out of work, I feel genuinely bad for them, because an unenlightened government is starving the economy of dollars because they think that they have to borrow these little pieces of paper that only they can print. Under these circumstances, even if they managed to get a job flipping burgers, they would only be putting somebody else out of work.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      Actually I have clients pay all the time outside of cash transactions. There is more bartering than you think. Generally that happens with the middle income clients. I have had client’s power wash my house, paint rooms, and even build a patio for me rather than pay me directly. If you think about it, you can figure out why that is a benefit to both of us. But generally the only time that will happen with upper income people is in the form of real estate exchanges.

      Money in the form of cash only piles up in the hands of those at the top when we give them no reason to deploy that cash. Which is exactly where we are today. Deficits creating new dollars is not a process that needs to constantly increase in its size and magnitude. Is the average middle class American better off today than they were when we ran deficits at about 1-2% of GDP ??? Not likely. The reason those deficits were smaller is we gave people that might ordinarily hoard cash incentive to declare income and invest it. We gave entrepreneurs who create the vast majority of new jobs reason to take risk. That is the key ingredient missing today. And little will change until that changes.

      Obviously the government is always in charge. But the MMT approach removes even further any barriers to restraint. You may not think so…but the fixed income markets weigh in very heavy on the decisions of the Fed. The last thing in the world I want it to further empower congress to spend money without restraint. The problem is you are believing the inflation data the BLS puts out there. But they are totally disconnected from the real world experience of the lower end consumer. The American Institute for Economic Research also comes to a similar conclusion. Rather than simply apply the old BLS standards as John Williams does, they have an index that is designed to replicate everyday expenses of the average American. Their conclusions are not much different. In 2011 the BLS reported CPI of 3%. The everyday price index was more like 8%. This is the reality of what is hollowing out the average consumer. Have a read…

      https://www.aier.org/article/7557-epi-reflects-bas...

      I don’t have contempt for unemployed people, as long as they are trying. I have contempt for people that sit in cushy gov’t jobs that do nothing and add no value. And there is a lot of that in gov’t which is riddled with redundancy. When a fireman runs into a burning building, he is worth every penny. Actually he is worth more. But when the employees of the GSA are getting paid more money than the average private sector worker to make music videos all day for fun, and the rest of us have to actually provide something that people want, I have a problem with that. Why must I produce a product or service and they produce nothing but wasted time and no accountability. How about I get paid to make videos for fun and they can go out and break their but and risk everything to start a business. That sounds more fair to me.

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      "Money in the form of cash only piles up in the hands of those at the top when we give them no reason to deploy that cash."

      Wrong. Financial assets - money - always pile up in the hands of the few at the top. It does not matter what the circumstances are behind it, it does not matter if we are talking about gold or fiat, it does not matter what incentives we give them to spend or invest or whatever. The fact that money piles up in the hands of the few at the top is the second oldest fact of life, and denying it in any form is self-delusion. Money flows to the top, period.

      This is the most incorrect statement I have seen you make, right here:

      "The net new dollars don’t work their way DOWN the economic ladder with any real velocity until there is incentive to cap ex." (caps mine)

      This is because you have the dynamic completely backwards. Money flows UP. The rich are the rich because the money that they do spend brings them more money. (Don't mistake that for the moral of the argument - it is simply meant to demonstrate the fact that mathematically, the number of dollars held by the top is always going to increase.) This is not a bad thing, it is just a fact of economics. But it is important to recognize which direction money flows, and to design your economy accordingly. Money given to the rich does not help an economy, because it does not flow down. But money given to the poor is spent, and earned, and re-spent until it gets to the rich. The dollars are the incentive, and production will occur for the same reasons it always has - people want to live. "Malinvestment" and moochers and "unproductive" people do not stop the machine from working like you think they do. I find all of those concepts to be custom-built for the overall Austrian philosophy, and they don't really apply to the real world. Nobody stops working for such reasons. It's pure fantasy to believe that they would.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      Believe what you want. The hands of the wealthy are not always the same hands. People move up and down the economic ladder. Someone who is poor today is not necessarily going to remain poor. I am living proof of that. I came from extreme poverty and now I exist well into the upper income brackets. Most wealthy people are not born on third base…despite popular opinion. Some are…but all over America we have self-made millionaires who started with nothing. Men like Lloyd Blankfein started selling concessions at Yankee Stadium and became the CEO of Goldman Sachs. Larry Ellison, Sheldon Adelson and others all started with nothing and made it even bigger. Wealth and success are only predetermined by ones commitment to success. People stop advancing when they become content. And if they’re happy with where they are, there is nothing wrong with that. But this notion that only the Rich stay Rich is a total fallacy. There are self-made people everywhere. And if the wealth only stayed at the top and never changed then these people wouldn’t exist. In fact back in 95 the Federal Reserve Bank of Dallas published a report that demonstrated that only about 1% of the people in the bottom income brackets remain there on a permanent basis. And the majority of people who have been in the lowest tax brackets have also been in the highest tax brackets at different points in time. The Treasury Dept also published a similar report on national income mobility which demonstrated that the rich and the poor are commonly the same people, just at different point in their lives. Only about 40% of those in the top 1% of earners in 1996 were still there by 2005. So when you’re talking about the rich vs poor…you’re quite often talking about the same people at different snapshots in time.

      http://www.treasury.gov/resource-center/tax-policy...

      So by your logic, we need not worry about incentive to have rich people go off shore, increase cash holdings and have companies continue to raise even higher record cash holdings, since it won’t make a difference. You logic is what is totally flawed. Rich people make capital investments, which means their investments and spending creates added labor. Particularly the small business owner, who is the primary driver of new job creation. When they take risk and hire more people, that means more people can make mortgage payments and own things. And their net wealth can increase as well, along with their overall standard of living. I am not arguing that the wealthy make investments in order to end up net negative. I am saying that when we encourage cap ex, we lift up all of us at the same time by creating more overall opportunity Malinvestment doesn’t stop the machine. It just distorts prices and creates bubbles. Moochers create an unproductive society where there is more incentive to not produce something and get paid more to work for the gov’t doing nothing while somebody else works hard, until we all want to do nothing.

      What is theory and not related to reality is that the gov’t will direct their spending towards the poor. When in fact it has resulted in no bid contracts for the politically connected. None of it to any substantial portion has ever gone to the lower end of the economic scale. In fact when we look at gov’t spending as a mechanism to target the poverty rate, we can see that the decline in the rate of poverty was actually much faster before the Great Society policies. This is how good the gov’t is at moving the overall number of people out of poverty and improving the conditions of the poor.

      http://www.economicsjunkie.com/wp-content/uploads/...

      Now I have cited 4 different periods where there were direct targeted policies towards capital investment incentive that resulted in a sustained economic improvement. The early 20’s, the early 60’s, the early 80’s and the mid 90’s. How many examples in the last century or so of US economic history can you cite where there was a sustained improvement without such incentive ???

    • JohnfrmCleveland profile image
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      John 3 years ago from Cleveland, OH

      “Believe what you want....”

      That's the thing – I'm not looking to believe in anything. I just want to be correct. I was trained as a scientist, so social theories don't interest me. If something doesn't line up with the data and the evidence, even if it sounds like it makes sense, I know it's not correct. A few years ago, I used to worry about the national debt like most other people. Then a banker friend of mine explained to me how reserve banking actually worked, and I had to discard most of what I thought I already knew. Since that time, no other school of thought has had a winning argument.

      “The hands of the wealthy are not always the same hands....”

      I never said that they were – but one's starting position is usually the best indicator of one's ending position. Doesn't defeat my point about money trickling up, anyway. That is as plain a truth as you are likely to find in this life. You are better off just accepting it and trying to understand why it happens than you are trying to explain it away.

      “So by your logic, we need not worry about incentive to have rich people go off shore, increase cash holdings and have companies continue to raise even higher record cash holdings, since it won’t make a difference....”

      Everything makes somewhat of a difference. But you make too much out of the small details, and you are missing the bigger picture. Money itself is a sufficient incentive. Business will carry on in the face of higher taxes, corruption, “malinvestment,” unproductive moochers, red tape, or whatever hurdles there happen to be. Certainly the hurdles here aren't as great as in most other countries – our taxes are relatively low, our infrastructure is OK, our labor is educated, etc. You complain about the conditions here like they are about to make all business owners throw up their hands and give up, which is clearly a ridiculous notion. Are you going to quit working and instead live off of our amazing welfare benefits? No? Me neither.

      “You logic is what is totally flawed.... I am saying that when we encourage cap ex, we lift up all of us at the same time by creating more overall opportunity....”

      Nobody makes a dime of profit unless the government deficit spends.

      “What is theory and not related to reality is that the gov’t will direct their spending towards the poor....”

      What are the big federal outlays in the budget? SS, Medicare/Medicaid, paying government employees, defense spending... the government is either giving money to the poor, buying goods and services for companies to earn, or paying federal employees directly for their efforts. Your accusation of most govt. money going straight to the rich is unfounded. There will always be occasional examples of some companies gaining more than they deserve from govt. spending, but relatively speaking, this is a drop in the bucket. Govt. spending goes primarily to the lower end, where it is needed. And that is in spite of conservatives and deficit hawks doing everything in their power to stop any benefits to the poor.

      “Now I have cited 4 different periods where there were direct targeted policies towards capital investment incentive that resulted in a sustained economic improvement. The early 20’s, the early 60’s, the early 80’s and the mid 90’s. How many examples in the last century or so of US economic history can you cite where there was a sustained improvement without such incentive ???”

      I don't agree that capital investment incentives were the reason the economy did well. There are always other (and better) explanations. Early 80's: Reagan increased govt. spending by a ton, and the price of oil fell by a ton. Mid 90's: not the great economy that people sometimes think it was. Dot com boom made it look better than it was – then we went into recession after Clinton ran a bit of a surplus. This country has never been hurting for capital. When the economy is doing well, companies will invest their capital, incentives or not. Paying customers are always the key.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "People move up and down the economic ladder. Someone who is poor today is not necessarily going to remain poor. " - LW

      This is baloney. A negligible number of rich people move into the ranks of the poor and vice-versa.

      The vast majority of people that are born rich remain rich, and so to the middle class and the poor.

      There is virtually no class mobility In the U.S....

      The middle class is disappearing. I suppose they too are moving uptown.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "Only about 40% of those in the top 1% of earners in 1996 were still there by 2005" -LW

      The top 1% are not the problem...if you pay taxes on $375k you make the team.

      It's the top 0.1% and above that's sucking all of the oxygen out of the room...that us the group that is causing people to drop out of the 1%.

      It's the Great Hollowing Out...the middle class is tapped so now they are draining the next group up.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ JohnfrmCleveland

      If you are only concerned with the data, the data clearly demonstrates that the most sustained periods of economic growth were periods in which policy was friendly to capital investment. And you are correct that deficits are nothing to be worried about to a certain extent. As I said, they matter only as a percentage to GDP. But when they get to large, they devalue the currency, which hurts the purchasing power of the everyday consumer. Now you can continue to believe the data that the BLS puts out which most Americans don’t happen to seem to be experiencing. Or you can look at various non-political unbiased studies that demonstrate that there is in fact a much larger degree of purchasing power loss. In a sense, we can have inflation and disinflation/deflation simultaneously. It just depends on what goods and services we’re talking about. Unfortunately, the average American spends a larger portion of their income on everyday items like Orange Juice and Toothpaste. And they are getting hammered by the increased prices.

      Money trickles up and people trickle up with it. Your comments implied that the rich stay rich and the poor don’t gain access to wealth. The data from the treasury and numerous other studies tell a very different story. While most rich people don’t usually become poor, (Although, that happens from time to time as well) poor people are not locked out of the access to wealth by any means.

      You are correct that business will carry on in the face of whatever policy is. That is sort of my point. Today, profit margins are about 70% above historical norms. Mostly through cost cutting. But because the focus has been exclusively on deficit spending, and no attempt to make capital investment more friendly…we are spinning our wheels in terms of job creation. Such policies don’t really punish the wealthy. They punish the poor. Because without incentive towards cap ex…they’ll be no job creation for the little guy with any degree of magnitude. The issue with the tax code, in comparison to other places around the world is not really the effective rates. In fact effective rates don’t change all that much. It the complexity and wasted resources. The US is notorious around the global business world for having one of the most unproductive tax codes in terms of its complexity. But incentive is not just about taxation. It’s regulatory and it’s also the high degree of the litigious nature of how we operate. The more difficult these circumstances become…the more difficult it is to operate, and the less encouraging it is to capital investment. So since the political climate has become more unfriendly towards capital investment, we shouldn’t be surprised that companies are hoarding record cash levels.

      It is not unfounded. The money that goes to programs like Medicare and Medicaid is not paid to the poor. It is paid to medical industry to the extent that they actually reimburse anymore, and in larger measure the bureaucratic machine that operates these programs. The poor, to the extent that they receive a direct benefit, is just enough to keep them dependent on the system. Which is likely why the poverty level hasn’t changed since we started this entitlement state. If you took the aggregate amount of money spent across all federal agencies on families below the poverty level, the total cost per family is well above the poverty level. According to the OMB…in 2011 that figure was over 60k per year. The 600 billion spent on national defense, and various other areas of Federal purchasing is where the waste is in terms of sending money to the top. Who do you think gets the contracts to sell supplies to the Social Security Administration and every other Federal Agency. I can assure you, it’s not the mom and pop shop. It’s the largest corporations who will overcharge, and then hoard cash because there is so little incentive to increase capital investment in the private sector. It’s not that I don’t want a national defense program. But when we permit such waste, we concentrate even more money up top.

      You may recall that the spending during the Reagan administration came back to pay quite a price. Granted, much of it may have been a necessary evil in the face of the cold war. But it was not without consequence. From the mid 1990’s when policy changed, it was absolutely one of the best economic periods of the last century. The recession that followed was relatively mild and part of the normal business cycle. It was not really that severe until 9-11 happened. The subsequent military spending on two wars, whether justified or not did serious damage to the budget deficits and the value of the dollar. Revenues increased with EGTRRA. But spending was far too high. And the commitment to another massive unfunded liability hurt the longer term fiscal projections further.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ pjmeli

      “A negligible number of rich people move into the ranks of the poor and vice-versa”

      That depends on how you define rich versus poor. If you’re looking at the top tax brackets, then your statement is false as per almost every study on income rotation. If we define people as rich based on income, income is highly rotational over time. Much of it is pinned to age. Most people are not hitting their peak earning years a 22 years old. So they would likely have incomes at or close to the poverty level. Yet by age 50, that same person will tell a different story on their tax return. And by age 70, when they are likely retired…they tell yet another story. I will use my uncle again as an example. His taxable income is just above the poverty level. That’s because he put most of his net worth in the form of Real Estate. Now if he died and we completed a 706 estate return…he’ll hardly look poor. Due to Income rotation, taxable income doesn’t always tell the best story about the wealth someone has accumulated.

      “The middle class is disappearing. I suppose they too are moving uptown.”

      Actually, I think the data demonstrates both. There has been an increase in the number of people we would define as wealthy. They had to come from somewhere. By the same token, if you’re the guy who is content with a 9-5 job and not a 70 hour a week workaholic like I once was (and there is nothing wrong with that)…then it is getting harder for you. Which brings me back to the inflationary discussion. The disparity in wages is way over stated. It’s what you can buy with those wages that are impairing those in the middle class. And as long as we choose to look at the BLS methods for measuring the CPI as the standard, we will be ignoring the true cost of maintaining a constant standard of living.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "That depends on how you define rich versus poor."- LW

      By their relative incomes. What matters is the distribution and the relative difference between them.

      There are fewer rich people in comparision to those in the percentile groups below them…a very small group of people are pulling away from everyone else, by extracting their wealth from them, financial and otherwise.

      "Actually, I think the data demonstrates both." - LW

      Only if you massage your definitions for the convenience of your argument.

      "There has been an increase in the number of people we would define as wealthy." - LW

      There has been an increase in population growth, so there has been an increase in everybody…what matters here is the relative size of the groups and their relative change in wealth over time. Of course here we are focused on financial wealth.

      The number we use to define wealthy has steadily gone up. For the purposes of this discussion it would include people that occupy the top 0.1% of the income spectrum. There are some 315,000 people in this group.

      The number of people in the next group…the 1% to the 0.1%, is pretty small…less than 3 million or so. The remaining 99% average about $45,000/year in family income and the lower 75% of that group has zero or negative net worth…

      …and a much larger increase in the number of people we would define as not wealthy as compared to 40 years ago.

      LW you have zero chance of convincing anyone here that the "rising tide" is lifting all boats. We aren't buying it, becaue we understand the math of the controlling system and that math proves that your anecdotal comments are mostly hot air.

      Still, this particular discussion has again veered off course.

      You continue to be unwilling (or unable) to discuss the real mathematical limitations of a modern monetary system or why public spending is a precondition for non-government savings or profit in the aggregate.

      And you continue to fail to provide any logical reason why the quantity of money in existence has any relationship whatsoever to inflation. You conflate money with spending…they are not the same thing…and you assume that the money (savings) we have is being spent. That is a mathematical impossibility too considering the level of GDP we have.

      Inflation is a direct result of spending that attempts to consume more than we can produce… saving is income not spent so saving cannot cause inflation. Further, we have a deficit in spending because we cannot afford to consume a fairly large subset of our production, which has led directly to higher unemployment.

      Finally, you continue to try to sell the myth that investment spending makes everyone richer, which is a mathematical impossibility. To make that claim is analagous to claiming that poker players lose money in their attempts to win more money, thus enriching their opponents and increasing their own wealth at the same time. I call that cognitive dissonance.

      If you were my financial advisor I would be seeking out a replacement…one at least that hadn't (yet) proven he can't do simple arithmetic.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ pjmeli

      There are certainly more people that are defined as at or below the poverty level, particularly in recent years. But it is not a one way street. When we look at the total number of people moving up, that has increased as well. Year over year that is not always the case. That just reinforces my point that when we have unfavorable conditions to capital investment, we can and do see increases at the poverty level.

      I am not massaging any definitions. There are countless studies like the one that the treasury did that demonstrate the notion of income rotation. A large number of people defined as wealthy by the tax code move in and out of the upper brackets. The same is true when you look at the top 1%. Many do not remain in that bracket and find themselves in much lower income ranges. I consider myself among them. My first job in the financial services field was below the poverty level at that time. Today I am well above that level. When I sell my firm and retire I fully expect to have a nominal taxable income. That is why you really can’t measure ones wealth by their income. It is very misleading. But too often we use income as a definition of wealth. Especially when we look at self employed individuals who can deduct nearly everything they spend money on and reduce their AGI greatly compared to the average employee.

      Population growth is a fair point. But a huge portion of that is immigration which is generally an addition of poverty like conditions. Most people are not coming to the US for opportunity because they came from great wealth. Although, most studies show immigrants move up the entrepreneurial chain much faster than the average American. They start out poor when they get here. But they are much more likely to eventually move up the economic scale as self employed people than most Americans. The Kauffman index has immigrants at a 40% higher probability of becoming a successful entrepreneur. My guess is that they have a different perspective and are more appreciative of the opportunities they have relative to where they came from. From what I have seen, they are typically very hard workers.

      I don’t think I have to convince you. 6 years of deficit spending with policies that don’t include any encouragement to capital investment, and in fact have discouraged it instead tell enough of a story. Which just demonstrates that spending alone will not get it done. It didn’t work in the 30’s and its not working now. The labor force participation rate is lower than any time since the late 70’s. There are record numbers of Americans below the poverty level and on food stamps. And all the while companies have the largest cash balances we have seen in modern times. Which is quite amazing considering that they can’t earn much on short term cash these days. Which tells you that the incentive to invest capital and take risk is absolutely terrible. And every major sustained turnaround of the last century has been preceded by relatively substantial new incentives to capital investments, and produced much quicker turnarounds. If that is not enough for you, then you’ll have to watch the same malaise continue until DC becomes more business friendly.

      I never said that gov’t deficits are not a pre condition to financial savings as you and John define it as net financial assets. I have simply demonstrated that there have clearly been periods like the 20’s, late 40’s and 90’s where net wealth has in fact increased while the gov’t ran surpluses. This just demonstrates the view that Keynes was trying to illustrate about countercyclical deficits. There are times when deficits are too large, and times when they should in fact increase. But spending alone resolves nothing, because the proper incentives to capital formation must still be there.

      The quantity of money alone does not have a relationship to inflation. It is the quantity combined with velocity and reduced productivity. We have higher deficits which have made the dollar weaker even relative to other currencies. We produce less and have higher prices related to everyday items that most impact the average American. Which is why I made the earlier reference to a gallon of orange juice versus a gallon of gasoline. Everyday items like OJ are not subject to the geopolitical risks that effect gasoline. So while in 2011 the core CPI was reported near 3%, meat and milk rose more than 9%, coffee was up 19%, peanut butter 27%, boys and girls clothes rose 6% and 9% respectively. Those price increases are just facts. So a price decline in the cost of a new big screen TV that offsets the everyday items does not do much to help the lower income Americans you are talking about that buy this stuff every day. These price increases are not opinion. They are factual. I have not argued that we have had hyperinflation. Just simply much larger inflation than the BLS data would like to demonstrate for political reasons. A couple of independent studies have validated this. And in fact the BLS does not even deny that they have greatly altered the mechanisms of how they calculate inflation. They have been very clear that their methods are designed via geometric weightings to represent what people are actually doing. But they are not designed to measure the ability to maintain a standard of living anymore, and have not been for some time. When someone substitutes chop meat for prime rib, the fact that they spent less money does not mean their lifestyle did not change. Which was my point to John. If the newer methods are more accurate, than we never saw all that much inflation in the late 70’s. I don’t buy that for one minute.

      It is not a mathematical myth. If I buy a building and invest in a business to employ people there, I am not losing money. I have capital assets. Just because a business has at a given point in time less cash on hand doesn’t mean they are losing wealth. Poker players don’t lose money in a game and gain capital assets in return. They just lose. A business spending money on long term commitments is not an inherent loss. A business can in fact own the building, the equipment and the inventory. That is why when you own a company and put a new roof on the building, it’s not a tax deduction. You have to capitalize the investment, because it is in fact an asset. When they make that commitment, it is good for the people they need to hire. I don’t know what type of economy you envision where it is not a benefit when business owners deploy their cash and make capital investments. I guess you think this does nothing to lift up the people they have to hire. I would have to disagree on that. I think they are better off with a job, and it does in fact lift them up.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      @LandmarkWealth

      Your first paragraph does nothing to prove the point that we don't have an unbalanced income distribution towards the top, or that the top is composed mainly by different people at different times…very few overall get a chance to experience wealth…there is very little class mobility in the U.S. and what little we have does not alter the fact that fewer and fewer people hold more and more of the wealth that is being created, resulting in the rest of us sharing a piece of a smaller pie.

      All you have done is present an alternative view based on your worldview on how the system is arranged for most of us.

      We aren't buying your interpretation.

      "It is not a mathematical myth. If I buy a building and invest in a business to employ people there, I am not losing money." - LW

      If you have little or no income from it you are losing money.

      If your cash assets are less than your cash liabilities and your income doesn't make up the difference you are out of business, or very nearly so.

      If someone else has little money, you will not be able to sell your asset.

      What have you got?

      "The quantity of money alone does not have a relationship to inflation. It is the quantity combined with velocity and reduced productivity. We have higher deficits which have made the dollar weaker even relative to other currencies." - LW

      Velocity does not apply to the quantity…prior savings has no velocity. Velocity is a measure of new spending, which creates incentives to invest. Higher defiicits do not make the dollar "weaker" relative to other currencies. Besides that, a "weaker" currency is to our advantage, because then our products will be more attractive to foreign buyers and maybe we could start empoying moe people to build the products foreigners would consume.

      Saving should be discouraged, therefore a "weaker" dollar would be a good thing in most cases.

      "I have simply demonstrated that there have clearly been periods like the 20’s, late 40’s and 90’s where net wealth has in fact increased while the gov’t ran surpluses." - LW

      No kidding…again you help make my arument for me…in credit bubbles, during budget surpluses or balanced budgey years, cheap credit and "irrational exuberance" can (does) create big bubbles, which then MUST contract, generating losses at least equal to the gains, since most gains are based on lofty valuations.

      We get a recession or depression. What puzzles me is that you seem to be promoting this as a way to run an economy. As an aside, Larry Summers (along with the high-fiving of Paul Krugman) currently pushing this very idea…ie we need bubbles to make our particular economic system to work). Straight from the mouths of Wall-Street snake-oil salesmen.

      We got the same thing during the Clinton years…which we are now paying for.

      I don't want any part of it…credit expansion is a trap, the only viable path to growth (healthy growth) is through public investment.

      Credit is themain cause of inflation in our system, that is another reason credit is so insidious. The main one is that one in debt, only government spending can provide the funds necessary to make the payments.

      That's when the bubble bursts, because the government is already in surplus mode, so it takes a drastic change in spending policy to save the banking system, which does not deserve saving in this case.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ pjmeli

      “Your first paragraph does nothing to prove the point that we don't have an unbalanced income distribution towards the top, or that the top is composed mainly by different people at different times”

      You don’t have to read the first paragraph. Just read the study the treasury did or the various other academic studies done on the topic of income rotation.

      “If your cash assets are less than your cash liabilities and your income doesn't make up the difference you are out of business, or very nearly so”

      Companies raise cash through credit against tangible assets all the time, no different than you or I taking a HELOC. I don’t believe I suggested that companies want to spend every penny of cash. I said that spending cash on capital assets is not an inherent loss like your poker player analogy, which is hardly comparable. In fact sometimes they spend money on non-capital assets that result in a long term gain. It cost money to train an employee as well. But if their new skills result in increased economic output for the company, it will be worth it. That’s why companies offer training programs and tuition reimbursement. The employee gains new marketable skills and the company gains increased output, at least for a time. In those cases they are expenses that are deductible rather than capitalized. Your statements almost imply that these things don’t happen. Do you presume that companies benefit long term by keeping their money in cash equivalents and staring at them, while never investing in their people or their infrastructure. Who do you know that wants to operate like this ???

      “weaker currency is to our advantage, because then our products will be more attractive to foreign buyers and maybe we could start employing more people to build the products foreigners would consume”

      Except we import more than we export, and the cost to import products is more money, because our currency is devalued. And it is hard to attract investors to want to produce things in the US because we have been so unfriendly to capital investment, and a labor force that has been heavily institutionalized by the hand of gov’t handouts. Take a good look at the trade unions. They are even importing foreign labor now.

      Inflation occurs when the money supply grows faster than the amount of goods and services in the economy. Deficit spending, applied to boost consumption, will result in inflation because the amount of goods and services in the economy is unchanged while the monetary base is steadily increased with no substantial increase in production. Especially since we make less and less here. Deficit spending applied to boost production will increase the amount of goods and services, and is not necessarily inflationary. Which means we need capital investment to increase production, which will also mean people hired at new jobs and more consumers. Have we learned nothing from Japan throughout the 90’s. About 10 major stimulus plans that were targeted at consumption. They did nothing increase growth for decades and their currency has declined steadily. And a constant state of economic malaise. Fortunately for them, as bad a shape as they are currently in, they’re at least a net exporter with their weak currency. The US has a weak currency and net imports, so the cost of my kids clothes which are never made here, are outrageous.

      “Saving should be discouraged, therefore a "weaker" dollar would be a good thing in most cases”

      No…savings should be discouraged in regard to people and entities that hold large cash positions. Savings should be encouraged by those on the lower end of the economic spectrum, which we do to some extent through tax incentives like 401k plans etc. We have had a fairly substantial decline in purchasing power and rising commodity prices since the early 2000’s. How do you think that has worked out so far for the average consumer ??? I don’t see the big benefit you do.

      The 40’s and 90’s were not huge credit bubbles. They were relatively mild declines. The major credit bubble of the 20’s was based on excessive margin lending before Reg T. I am not advocating bubbles. That is why I am so critical of the Fractional Reserve system as it currently stands. I am saying that the cycle of deficit to surplus should be a countercyclical deficit that is simply derived from the normal business cycle. Even with an environment where the gov’t is relatively friendly towards capital investment, there will still be inherent periods where consumption declines. During those periods of slower spending, if the gov’t simply maintains its current role of spending on essential services, we will have deficits. That will add the net new money to the system. When spending increases in the private sector the opposite will happen. The deficit will decline and maybe even produce a short term surplus. This cycle works itself out when the gov’t simply stays out of it, and provides for essential services, rather than just throwing money into wasteful redundant programs that are not needed. Or worse targeting investments directly into totally uneconomical business ventures that don’t boost productivity. All we have gotten in return for running massive increases to Federal spending from about 2001-2010 is really expensive consumer staples. And very nominal if any incentive to want to do business in the US.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      "Deficit spending, applied to boost consumption, will result in inflation because the amount of goods and services in the economy is unchanged while the monetary base is steadily increased with no substantial increase in production. Especially since we make less and less here."

      This is so absolutely incorrect that I don't know quite where to start, because I thought we had been over these very topics a number of times. Production is not fixed! It goes up and down to meet demand. And it has risen to meet demand without breaking a sweat. Continuing to claim that we make less and less in this country is simply sticking one's fingers in one's ears and closing your eyes. I already gave you the statistics that proves this to be a complete and utter myth.

      I guess what I really don't understand about the Austrian school is, why bother lying to yourselves? What purpose does it serve to build a school of thought that can only exist in a fantasyland where real numbers and real circumstances do not exist? Nothing actually operates in reality as the Austrians think it should - so what is the point of trying to apply those economic theories to our reality when perfectly good explanations already exist that fit the data and explain why things work the way they do?

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      Production is not fixed. But can remain fixed when the business community views the demand as transient. It makes them unwilling to commit to the longer term capital investments that employ people on a permanent basis. Japan is a clear cut example of this. This was the overwhelming flaw in Keynes position. If you know there is a spike in demand resulting from some short term infrastructure projects or some other form of spending, you’re not going to commit serious capital. It would be foolish to do so. The demand is temporary. So you’ll just stretch the exiting labor force farther. Which is exactly what is happening today. People with jobs are working more hours, and companies are not committing these massive cash positions. All of this deficit spending targeted at consumption, and not incentive to invest capital has done zero to move the needle in the labor force or improved capacity utilization. That doesn’t mean we shouldn’t improve infrastructure when it is needed. It just means don’t throw money at things that don’t need to be done.

      You did not give any such statistics. You demonstrated that we are still a large manufacturing base. But you left out the fact that this has declined substantially over the last several decades, and we import more than we export. And that many of the things we import are that are basic necessities of the average American are not made here like clothing. The increased productive capacity to the extent it is happening with any nominal increase in demand is taking place elsewhere…not in the US.

      What I will never understand about your view is there is not a shred of evidence in any free market economy anywhere in the world that has ever demonstrated that simply applying deficit spending without improving the conditions to capital investment has ever worked. Yet there are countless examples where capital investment was encouraged that almost always produced a quicker recovery. Please give me an example of where spending vast amounts of money without targeting an increase in cap ex via incentive worked. Japan was and is a total failure in such attempts. The US failed miserably in the 30’s trying exactly that. When has this ever happened outside of theory ??? Please cite an actual success story.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      “Production is not fixed. But can remain fixed when the business community views the demand as transient....”

      Businesses react to demand. If the demand is there, I can't think of a single business that will sit by and let its competitors reap the profits.

      Besides, the idea is not to cause a temporary spike in demand, the idea is to keep demand high and steady. If more people understood that fiat currencies do not have to be financed by debt, there wouldn't be such a pushback against government spending. But even with the strong countercurrent of deficit hawkishness, government spending doesn't go down very often. You are trying to invent theoretical reasons why businesses would not invest in making profits, but they are all stretching the bounds of reality. Our changes in demand just aren't that big. Business reacts to demand just fine.

      Capital expenditures just aren't the story here. Even if we somehow managed to shake hoarded cash loose from businesses and got them to invest, that money is only a one-time bump, and not even a net gain. Real net gains come from deficit spending.

      “It makes them unwilling to commit to the longer term capital investments that employ people on a permanent basis.”

      Capital investments have nothing to do with the permanence of employment. Companies don't invest in order to pay higher labor costs – if anything, they invest to lower their labor costs. Employment is all about the demand for labor, and the terms of employment are all about businesses' options concerning labor. If a company can increase their margin by using cheap foreign labor, they will. Businesses will invest money when there is more money to be made. Spending “targeted” at consumption *is* spending that will induce investment, because consumption is exactly what businesses need. Labor isn't being overworked because business is waiting for something, labor is being overworked because they have zero leverage anymore. If you don't want to work 50 hrs/week, there are bunches of unemployed people who will.

      “You did not give any such statistics. You demonstrated that we are still a large manufacturing base. But you left out the fact that this has declined substantially over the last several decades,...”

      Did you not notice that the graphs were all still moving upward?

      “...and we import more than we export....”

      What does this have to do with anything? The question was about our economy's ability to meet increased demand. The fact that we are net importers does not affect that ability.

      “...And that many of the things we import are that are basic necessities of the average American are not made here like clothing. The increased productive capacity to the extent it is happening with any nominal increase in demand is taking place elsewhere…not in the US.”

      The actual amount of stuff imported from China is overblown. It's a very visible segment, because we import electronics, toys, and a lot of everyday stuff that fills the shelves at WalMart, but the real number is only about 11% of our economy. We still produce plenty, including most of what you call basic necessities – food, housing, energy, transportation, entertainment, construction, and heavy machinery are overwhelmingly domestic. And when someone goes from unemployed to employed, what do they spend their money on? Rent, utilities, food, and transportation. If they have something left over, maybe they'll buy one of those $30 DVD players you think they shouldn't have. But then they will rent or buy DVD movies, which are mostly American products as well.

      “What I will never understand about your view is there is not a shred of evidence in any free market economy anywhere in the world that has ever demonstrated that simply applying deficit spending without improving the conditions to capital investment has ever worked.”

      Don't make it sound like MMT is against capital investment, because it's not. But it is not the key to anything, either. No deficit spending + super incentives for capital investment = no net profits – that's just a mathematical fact. But deficit spending + no incentives for capital investment = net profits. It's that simple. You are focusing on the wrong thing.

      The only history I can point to is Keynesianism, which, regardless of your opinion of it, has been successful. But Keynesian principles were mostly in practice back in the gold standard days, so the comparison isn't perfect. Modern fiat currency economies have only been around for 40 years, and people still don't have them all figured out, obviously.

      “...Yet there are countless examples where capital investment was encouraged that almost always produced a quicker recovery. Please give me an example of where spending vast amounts of money without targeting an increase in cap ex via incentive worked. Japan was and is a total failure in such attempts. The US failed miserably in the 30’s trying exactly that. When has this ever happened outside of theory ??? Please cite an actual success story.”

      The 30's was not a failure of Keynesianism at all. They didn't even spend vast amounts of money. Fiscal conservatism ruled the day: (from Wiki)

      “New Dealers never accepted the Keynesian argument for government spending as a vehicle for recovery. Most economists of the era, along with Henry Morgenthau of the Treasury Department, rejected Keynesian solutions and favored balanced budgets."

      More mythology debunked. Governments all over the world cut back.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "Deficit spending, applied to boost consumption, will result in inflation because the amount of goods and services in the economy is unchanged while the monetary base is steadily increased with no substantial increase in production. Especially since we make less and less here." - LW

      Bollocks. Deficit spending can't cause inflation...it goes directly to saving after a few transactions. It is taxed along the way through payroll deductions and estimated tax payments by businesses.

      Any inflation caused by too much spending would have to come from private debt expansion...that would always be the main cause.

      Right now we don't even have that.

      Deficit spending cannot cause inflation because it is by definition saving, and saving can't cause inflation.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      “Businesses react to demand. If the demand is there, I can't think of a single business that will sit by and let its competitors reap the profits.”

      Really…in Japan they literally handed out spending vouchers for people to go buy stuff, and they did buy stuff. And they still didn’t hire. In the 30’s there was also no such hiring. They didn’t react the way you envision. They hoarded cash so much that FDR issued an undistributed profits tax.

      When you attempt to keep demand steady, we get back to the problem of paying people to do nothing. Which is also a strategy that has failed all over the world. The real net gains in dollars you’re talking about from deficits are just going to the top, and corporate profits are 70% above historical norms, and still no hiring. Because the incentives are wrong.

      Yes, labor does have zero leverage. It’s because there is so much of it available because corporate America will not hire. And countless surveys of CEO’s and small business owners demonstrate exactly the sentiment I am conveying. Yes, they want to reduce labor costs when possible. But when there is consistent demand that they believe it dependable, they have to expand their labor force. And the gov’t cannot consistently expand demand without providing the same counter benefits to invest capital. Otherwise spending has increased faster than capacity.

      Yes…I did notice the graph. Have you noticed that US has about 10% of its GDP comprised of manufacturing. And it was more like 25% just 35 years ago. The global share of GDP that makes up manufacturing has in general declined. But not anywhere near in proportion to the US. We have retained high skilled manufacturing roles, and then don’t even have the qualified people to do them and have to import foreigners to fill the roles. All the lower skilled jobs were shipped overseas. So when stimulus dollars permit lower end workers to buy clothes for their kids, they buy it from the Chinese, which does nothing to help US labor. What it has to do with, is when demand increases from target spending towards consumption, the fact that we import more means the deficit rises which is weakening the currency and purchasing power. The demand is met by expanding supply from foreign manufacturers more so than the US. So we spend more than we make. We are not the ones meeting the increased demand. The only positive in the current manufacturing pace is the potential new innovations that have come in the energy sector, and the new discoveries taking place all over places like North Dakota. Which is also a classic example of failed stimulus. The gov’t spends money on all of these failed green energy fantasies to satisfy political correctness. All the while there are vast new discoveries taking place in the energy sector that could actually use some gov’t assistance. Do they get it…Of course not. Instead they figure out ways to attack them with regulators and try to slow their progress.

      The 30’s was the furthest thing from a success. Which is why we called it a Great Depression. Fiscal Conservatism ruled the day in the mid 90's, not in the 30's. The Federal deficits as a share of GDP ballooned long before the War effort began. The term vast amounts of spending is somewhat subjective. But what is clear is that despite all of that supposed demand, companies still didn’t hire and meet the demand the way you would have expected. And the deficits after the stimulus bills in 2009 were larger as a share of GDP than they were during the New Deal prior to entry into WW2. And it still hasn’t worked here. Of course the counterfactual argument is always…it wasn’t enough spending. It never is I guess. In Japan, they ran a total of about 10 such stimulus plans targeting consumption. Apparently that also was not enough. Comparatively, Germany just prior to the contraction of 2008 implemented various labor market reforms under the Hartz reforms. They slashed taxes, and also cut welfare spending. And for all the complaining about these cuts…Guess who is leading the way in the EU and weathered the storm best. What a surprise.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      @ pjmeli

      "Deficit spending cannot cause inflation because it is by definition saving, and saving can't cause inflation."

      Can you point to a time when there has been a substantial increase in deficits as a share of GDP in which the value of the corresponding currency did not decline ??? When your currency declines...you lose purchasing power.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "Can you point to a time when there has been a substantial increase in deficits as a share of GDP in which the value of the corresponding currency did not decline ??? When your currency declines...you lose purchasing power." - LW

      Your response implies causation where there is none, and ignores what I wrote, which is simply basic accounting (math), so must be true.

      Inflation is a GOOD THING. It discourages excess saving, which is bad for an economic system (too much friction is bad).

      It follows then that allowing excess accumulation of financial wealth is a BAD thing, it is excess saving, and it leads to the very deficits you decry.

      If you want to reduce deficits reduce the amount of wealth individual agents are allowed to accumulate.

      This will not, however reduce inflation, which by the way I am not concerned with…it is the boogie man of economics that is yet to hurt the vast majority of citizens.

      Inflation, if not caused by the monopoly pricing of oil (the main cause over the past 40+ years) is caused by the expansion of private credit.

      As I said, and I re-iterate, deficits are saving, saving cannot by it's very nature cause inflation…inflation is caused by too much spending…trying to buy more than we can produce…which we are a long, long way from doing.

      An hour of my labor today will buy me much more than it would 40 years ago. That is the important measure. Inflation is meaningless in this context. Worrying about inflation is akin to worrying about the Sun burning out.

      P.S. currency has no "value". It is an index mechanism…scorekeeping…a measuring system.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      It is causation. When you currency declines the cost to purchase commodities rises. That effect’s the entire supply chain. In case you haven’t noticed…commodity prices skyrocketed along with the huge deficits. You can’t see the components that go into a product rise dramatically without the finished product rising dramatically.

      Inflation is a good thing ??? That depends. Tell that to the lower end consumer who is paying dramatically more for peanut butter, orange juice and a cup of coffee…and still can’t find a job. The problem is your confusing inflation with loss of purchasing power. You can have inflation and still gain purchasing power…or you can have inflation and lose purchasing power. And inflation in the face of a devalued currency is a loss of purchasing power. It only works if you are growing wages and productivity in excess of the rate of inflation. And that is not the case now…nor was it the case in the 1930’s. So instead we just keep altering the methodology to imply that a decline in the price of a big screen TV is enough to mitigate the impact of price increases that the lower end consumer feels in all the things they buy weekly. Unfortunately…it doesn’t. So those of us screaming for more deficit spending targeted at consumption, simply ignore these prices increases and pretend it’s helping the consumer when they have to pay more for toothpaste. The problem is when the labor market is weak, the cost of a big screen TV can still go down or maintain a price level with demand shrinking for luxury items. But consumer staples do not go down in the face of a weak currency because they are daily necessities. People don’t cut back on toilet paper…they just pay more for it. I fail to see how that helps the average consumer. This is only nothing to worry about if you want to measure the impact to the average consumer via geometric weightings. But the average consumer just getting by doesn’t live their life and go shopping via a geometric weighting. So things like chained CPI-U measures don’t tell us a thing about what is actually happening to the working class in the face of less purchasing power.

      “If you want to reduce deficits reduce the amount of wealth individual agents are allowed to accumulate.”

      Yes…that will create quite the productive society. We can then all be good little Marxists. That’s approach has a wonderful economic history of success.

      “An hour of my labor today will buy me much more than it would 40 years ago”

      That is hardly true. The value of the US dollar does not buy more on a relative basis than it did 40 years ago. Which is precisely why we have more two family incomes than ever before.

      “Currency has no "value". It is an index mechanism…scorekeeping…a measuring system.”

      That is true in that currency has no intrinsic value as any kind of an asset. And as a measuring system, the consumer is forced to live under this measuring system of the nation in which they reside. And our measuring system has been taking a beating and having a greater impact on the lower end consumer. Rich people own more assets like commodities. Poor people consume them. Buying less of them with each unit of this measuring stick does not help the poor. It hurts them. Rich people don’t suffer from a devalued currency the way poor/working class people do.

    • LandmarkWealth profile image

      LandmarkWealth 3 years ago from Melville NY

      Something tells me this is not helpful to the working class when they go to the grocery store.

      http://www.indexmundi.com/commodities/?commodity=c...

    • stanfrommarietta profile image

      stanfrommarietta 2 years ago

      John, I know you wrote it 17 months ago, but you thought then that the Fed's Quantitative Easing was a waste of time.

      I don't think so. I know the ostensive reason for Quantitative Easing was to relieve banks of toxic assets like collateralized debt obligations, subprime mortgages, so that banks could once again regard one another as capable of paying back debts on borrowing reserves between banks. It was hoped, they (Bernanke et al.) that this would 'ease' the stress felt between the banks. But one thing the Fed was also buying from the banks was US Treasury securities.

      Note that QE was not for buying from individual investors in these securities. Only for banks.

      And how did the banks come to get those securities? They got them from the Treasury in return for money the banks created out of thin air (it's fiat money, remember) in lending to the Treasury for deficit spending authorized and directed by Congress.

      While banks would also acquire securities during inflations when ordered to buy them by the Fed, their money came from their reserves and were stored in time-deposit accounts at the Fed.

      But not the money for deficit spending securities. That got spent into the economy.

      When the deficit spending securities matured, the Treasury had to swap new securities for banks' mature securities and include the interest (also borrowed by Treasury), and do this over and over forever. There was no time-deposit savings account at the Fed corresponding to the securities to draw upon.

      So, that meant that the Fed interfered in this cycle of swapping during the collapse into the Great Recession by doing QE and buying the banks' Treasury securities.

      Now what does it mean when the Fed buys Treasury securities from anyone?

      It means that the Fed has cancelled the government's debt to the banks. That is, it is canceling a portion of the national debt to the banks.

      Still it isn't too clear (because no one tells us) what the status is of those securities the Fed now possesses. Does the Treasury owe the Fed for them? In any case the debt obligation still remains between government and holder to pay on demand at maturity. In the old securities that was stated on the face of the bill.

      But the Fed is problematic here as a holder. Is the Fed a government agent just holding the securities for another government purpose, and not as a source of its own wealth (other than 6% of the interest as a transaction fee to fund its operations).

      So, if the Fed in QE is camouflaging its efforts to cancel the national debt to the banks by buying these securities along with all these toxic assets, isn't that a useful thing?

      The Fed will next wait until inflation develops and then take its mature securities to the Treasury and swap them for new securities, which the Fed will impress on banks to buy and also encourage private and foreign investors to buy, to drain money out of circulation.

      I think the Fed tends to buy securities during deflations in order to gain a supply of them to sell during inflations.

      And whenever the Treasury gets back a mature security it had issued, it extinguishes the security. That completes the debt cycle of selling IOU's, getting money for them for whatever, then getting the IOU's back when the loan is paid. The IOU is torn up, burnt, shredded.

      And there is no need for a platinum coin when the Fed is retiring the debt for the Treasury with money Fed creates out of thin air.

      But one other point. I hope others here are coming to the realization that the greatest growth in the national debt is NOT due to increased deficit spending. The major portion of the securities constituting the national debt are held by private and foreign investors, and that has been growing rapidly in recent years, probably due to the massive amounts of dollars foreign manufacturers have drawn out of our economy with our buying their imports to us. They have elected not to buy great amounts of things, assets and real estate from us and instead have parked their dollars in US-Treasury-securities time savings accounts. Perhaps with all the deficit spending conducted they did not want to have additional money coming back to them from these export sales and causing inflation.

    • LandmarkWealth profile image

      LandmarkWealth 2 years ago from Melville NY

      @ stanfrommarietta

      The percentage of debt issuance being bought by foreign govt’s and foreign investors has increased in recent years. There are many variables as to why. In China it’s been a result of excess reserves over the last 2 decades. However, very recently due to the mass chaos in Europe, yields have spiked so high in places like Greece that many investors ran to Germany looking for a place to park cash, since that is the most productively sound EU member. In doing so, they pushed yields so low that investors were forced to pay banks just to hold their cash. So wealthier investors, unwilling to accept negative yields began moving money into US treasury debt as well as investment grade corporate debt and pushed our treasury yields back down again. The latter is temporary in nature. Whenever Europe recovers…who knows when that will be…much of that purchasing of US debt will cease.

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