I Hereby Resolve...

"How to get out of debt in '10"

That's the page-one teaser in my local paper: Get out of debt. Story, page 32.

From page 32:

Get your financial house in order

It may be difficult, but it's not that complicated. Much of it is what our grandparents taught us. Don't owe a lot of money. Don't buy what you can't afford. Put something aside for a rainy day.

After the year the economy's had, no doubt many people are making resolutions to get their own finances in order.

And really, who could blame them?

Gresham's Law Redux

"Good Money"	"Bad Money"
Not Debased	Debased
Heavier	Lighter
More Valuable	Less Valuable
More Expense	Less Expense
More Costly	Cheaper

Reviewing the previous post, one finds a number of ways to describe good and bad money. (See table at right.)

These days we associate fiat money with inflation. But the debasement of gold or silver coin also caused inflation. And sometimes the debasement was government action, the way printing money is government action. But sometimes it was not.

Sometimes the debasement was by the public. People did it, scraping a little gold off the edge of a coin before passing it on to the next guy. Today we worry about the government causing inflation. We forget that given the chance, people will also do things that cause inflation.

We forget that inflation may come from human nature.

If inflation is a natural result of human nature (and you can't change human nature) then the only way to avoid inflation is to put a device in the system to prevent it. That may be one reason many people support the gold standard. It's one reason that I do not totally reject the gold standard.

But that's not why I called this meeting.

Gresham's Law

This evening, the Wikipedia article Gresham's Law opens with this statement:

Gresham's law is commonly stated: "Bad money drives out good", but more accurately stated: "Bad money drives out good under legal tender laws".

Well, I never heard it put that way before. The "more accurate" version is probably a twist of history inserted by the Austrians. You have to be careful with the economics in Wikipedia. The Wik is full of Austrianisms made to look like part of mainstream thought.

I've heard the five words: Bad money drives out good. I came looking for more, because I wanted to know what Gresham meant. Not what somebody wanted to make it sound like.

Like a Coin...

Like a story...

There are two sides to every economic act.


For every buyer there is a seller.
For every borrower, a lender.
For every dollar of debt, a dollar of credit in use.
For every dollar received, a dollar paid out.
For every purchase, a sale.

The economy is transaction

Samuelson

Excerpts from Chapter 1 of Paul Samuelson's Economics (1958 edition)

"Take a good look at the man on your right and the man on your left, because next year one of you won't be here."

Surprise! Yesterday's newspaper says:

Slow going for stimulus funds  BY CHRIS MCKENNA As construction grinds to a halt for the winter, less than 40 percent of the $47.1 million in federal stimulus money budgeted for road, bridge and sidewalk improvements [in the region] has trudged through bureaucratic obstacles to the contract stage, state Department of Transportation figures show. And only about 10 percent of the money has made it into the economy so far as incremental reimbursements to the contractors who are doing the work.... How many jobs the local road-and-bridge work has saved or created is impossible to say.

What I said.

The Missing Puzzle-Piece

So I read this Animal Spirits post on John Williams' prediction of hyperinflation, and it got me thinking: We don't have an anti-inflation policy anymore.

Yeah, we have the Fed. But the Fed's policy these days seems to be to avoid deflation. That's pro-inflation policy.

What else have we got? Nothing. We've got fiscal policy, which is always stimulative because the budget is never in balance. And we've got the tax code, which is always pro-growth or pro-spending (or pro-investment; but investment is spending), and therefore pro-inflation. And we've got the Fed, trying to keep prices from dropping.

No anti-inflation policy.

Clarity

This is a summary of the December 16 post

The problem is debt. We need to reduce debt.

Debt Does Not Exist

...Debt does not exist, except as a measure of credit in use.

Debt is an accounting of the use of credit. If you borrow a dollar, you put credit to use. If you borrow a dollar and spend it, the credit remains in use until you repay what you borrowed. Debt is just a measure of money borrowed. The only way to reduce debt is to reduce credit-in-use.

Well, This Is Depressing

In his 1995 book To Renew America, Newt Gingrich wrote:

The power of economic growth was driven home to me by a study that suggested that a 1 percent increase in our economic growth rate would shrink the federal deficit by $640 billion over the next seven years, would increase federal tax revenues by $716 billion without a tax increase, and that each and every adult citizen would earn $9,600 more than they would in the current growth projection.

In this world of merely 1 percent higher growth, the Social Security Trust Fund never runs out of money....

Part Four of Three

You have to go where the numbers take you, that's what I think. But after I finished the first three posts of my "On the Growth of Government" series, I realized that I could have achieved the same result by making just one adjustment to Federal spending. Instead of three.

I adjusted for inflation, population, and living standards. But in the living standards adjustment, I had to disallow inflation and population because those adjustment were already made. So I ended up using "real GDP per capita."

If I didn't adjust for inflation separately, I could use "nominal GDP per capita." And if I didn't adjust for population separately, I could drop the "per capita." So now I want to look at Federal spending growth again, adjusted only for the growth of "nominal GDP."

The accuracy will be much better, I think, using this approach. Using only one tweak.

I really don't see how this "unified" graph -- annual change in Federal spending growth, less annual change in Nominal GDP -- can look like my final graph from Part 3. Because I've heard too many horror stories of "Federal spending relative to GDP." Those stories always tell the tale of excessive Federal spending.

Okay. So now it's even more important to do the new graph.

Supply Side Economics?

Scouring a set of drawings for some key information, I ran across this note at work:

Jake? Jake??

Awww...

On the Growth of Government (Part 1 of 3)

If you run a business you'll probably compare this year's sales to last year's, to see how much your business has grown. If sales are up 6%, you could say your business has grown 6%.

I want to look at government spending by that standard: year-over-year change.

On the Growth of Government (Part 2 of 3)

If you run a business you may compare this year's sales to last year's, to see how much your business has grown. If sales are up 6%, you could say your business has grown 6%. But if prices went up 4%, then really your business grew only 2%. To get a better gauge of how much your business grew, you have to adjust for inflation.

I want to look at government spending by that standard: adjusted for inflation.

On the Growth of Government (Part 3 of 3)

So your business got 6% bigger, but 4% was inflation and only 2% was growth. You're not doing as well as you hoped. So then, how are you doing? How does your business growth compare to your competition? How does it compare with the economy, overall? ...And can we ask similar questions of government spending?

Jacob Claus

My grandson at 12 weeks...