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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 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.

    • 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 4 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...

    • LandmarkWealth profile image

      LandmarkWealth 4 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.

    • pjmeli profile image

      Paul Meli 4 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 4 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.

    • LandmarkWealth profile image

      LandmarkWealth 4 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.

    • pjmeli profile image

      Paul Meli 4 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.

    • JohnfrmCleveland profile image
      Author

      John 4 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.

    • LandmarkWealth profile image

      LandmarkWealth 4 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 4 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 4 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.

    • pjmeli profile image

      Paul Meli 4 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 4 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 4 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 4 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.

    • LandmarkWealth profile image

      LandmarkWealth 4 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.

    • pjmeli profile image

      Paul Meli 4 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.

    • pjmeli profile image

      Paul Meli 4 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.

    • JohnfrmCleveland profile image
      Author

      John 4 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.

    • LandmarkWealth profile image

      LandmarkWealth 4 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
      Author

      John 4 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 4 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
      Author

      John 4 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 4 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.

    • LandmarkWealth profile image

      LandmarkWealth 4 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.

    • pjmeli profile image

      Paul Meli 4 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…

    • JohnfrmCleveland profile image
      Author

      John 4 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 4 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.

    • LandmarkWealth profile image

      LandmarkWealth 4 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 4 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 4 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.

    • LandmarkWealth profile image

      LandmarkWealth 4 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.

    • JohnfrmCleveland profile image
      Author

      John 4 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 4 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.

    • profile image

      John H. 4 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...

    • JohnfrmCleveland profile image
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      John 4 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.

    • LandmarkWealth profile image

      LandmarkWealth 4 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
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      John 4 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 4 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 4 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.

    • profile image

      John H. 4 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?

    • LandmarkWealth profile image

      LandmarkWealth 4 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.

    • JohnfrmCleveland profile image
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      John 4 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 4 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...

    • LandmarkWealth profile image

      LandmarkWealth 4 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.

    • JohnfrmCleveland profile image
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      John 4 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 4 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 4 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 4 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 4 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 4 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 4 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.

    • JohnfrmCleveland profile image
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      John 4 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.

    • LandmarkWealth profile image

      LandmarkWealth 4 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 4 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 4 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-...

    • LandmarkWealth profile image

      LandmarkWealth 4 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.

    • JohnfrmCleveland profile image
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      John 4 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 4 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.

    • profile image

      John H. 4 years ago

      "Velocity declines along with saving. "

      http://research.stlouisfed.org/fred2/graph/?g=orV

      So it does!

    • pjmeli profile image

      Paul Meli 4 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.

    • LandmarkWealth profile image

      LandmarkWealth 4 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 4 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 4 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 4 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 4 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.

    • LandmarkWealth profile image

      LandmarkWealth 4 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.

    • JohnfrmCleveland profile image
      Author

      John 4 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.

    • pjmeli profile image

      Paul Meli 4 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.

    • LandmarkWealth profile image

      LandmarkWealth 4 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 4 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).

    • JohnfrmCleveland profile image
      Author

      John 4 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.

    • LandmarkWealth profile image

      LandmarkWealth 4 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 4 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 4 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

    • pjmeli profile image

      Paul Meli 4 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.

    • pjmeli profile image

      Paul Meli 4 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 4 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.

    • LandmarkWealth profile image

      LandmarkWealth 4 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.

    • LandmarkWealth profile image

      LandmarkWealth 4 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 4 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 4 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.

    • JohnfrmCleveland profile image
      Author

      John 4 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.

    • JohnfrmCleveland profile image
      Author

      John 4 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).

    • pjmeli profile image

      Paul Meli 4 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?

    • pjmeli profile image

      Paul Meli 4 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 4 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 4 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.

    • LandmarkWealth profile image

      LandmarkWealth 4 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.

    • LandmarkWealth profile image

      LandmarkWealth 4 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.

    • pjmeli profile image

      Paul Meli 4 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.

    • pjmeli profile image

      Paul Meli 4 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 4 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.

    • LandmarkWealth profile image

      LandmarkWealth 4 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 4 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.

    • profile image

      John H. 4 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.

    • JohnfrmCleveland profile image
      Author

      John 4 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?

    • LandmarkWealth profile image

      LandmarkWealth 4 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.

    • LandmarkWealth profile image

      LandmarkWealth 4 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.