Friday, September 24, 2010

Judging a Book by its Cover

So the wife signed up for some work-related schooling. One of the books she got is Winning the Cost War by Dale R. Geiger. Cover price $14.95 (between seven and 8 times the price of the Marc Bloch book from yesterday's post).

Even without opening the book, I wanted to base a post on its title.

First, the obvious: Of course it is necessary to pinch pennies and cut corners and otherwise alliterate, doing everything we can to stretch a dollar and make ends meet. It is necessary to cope with the cost problem. Not even I would deny it.


The cost problem is not the problem. The cost problem is a result of the problem. I don't want to cope with the cost problem. I'm tired of coping with the cost problem. I want to fix the underlying problem, and make the cost problem go away.

See where I'm coming from? I was trying to make the same point in my review of professor Mark C. Taylor's ideas here. Coping with a problem is not the same as solving the problem. Coping with a problem is fiddling while Rome burns.

The underlying problem is getting worse. Look: Everybody thinks they know we just have to balance the federal budget and that will solve the problem. And then they go off on a tangent about personalities and corruption and dishonesty and character.

But if the problem is economic, then the solution must also be economic.

The federal debt and deficit are the least of our debt problems. But set that aside, I don't care. Here is the simple fact: Debt is not the result of excessive spending... Debt is the result of credit use.

Now you're gonna say I want to increase government spending. Wrong: I don't care about the level of government spending. That's all politics, far as I'm concerned. If you want to have smaller government, that's fine with me. I don't care. But making the government smaller is not gonna solve the economic problem.

We have to solve the economic problem, the problem that creates all this debt. And separately, we can have whatever size government you want. Actually, the people who want bigger government will have no leg to stand on, after we fix the economy.

Why do we have all this debt? That's the problem, right?

We have all this debt because we use credit for money.

So, why do we use credit for money?

We use credit for money because everybody thinks using credit will help the economy grow. Because using credit, years ago, did help the economy grow. But it doesn't any more. It hasn't for a long time.

Actually using credit used to be great for the economy. But we just accumulated debt instead of paying it off. We kept old credit circulating. But old credit does nothing to stimulate the economy. Old credit is just debt.

We should have been paying down that old debt all along. Doing that, we would have removed money from circulation. Paying down debt destroys money, removing it from circulation.

Paying down debt destroys money, just as borrowing creates new money. We should have been paying down debt all along, completing those credit transactions, destroying the money we created by borrowing. But we didn't.

Instead, we let the Federal Reserve remove money from circulation in order to fight the inflation that was caused by money we created by borrowing.

So, we borrowed, which created new money and also created debt. And the Fed took the new money away, to fight inflation. And we were left with the debt, and no money to pay it off. This is our economic policy. This is our normal economic policy. It's why we use credit for money. Because of policy that encourages the reliance on credit.

Economic policy encourages the reliance on credit, and removes money from circulation without destroying debt in the process. That's why we have all this debt, and why we can no longer afford it. Because of policy.

If you want to win the cost war, fix the policy.


Gene Hayward said...

Art...Be patient with me as i use a simple example to illustrate what I think you are tying to say (I concede I may not be drawing the correct conclusion)..When I teach the fractional banking system I teach it as follows. The Fed buys a bond for $1.00. A bank now has one real, phisical, dollar. Assume the Res. Req is 10%, hence the money multiplier is 10 and the potential increase in the money supply is $10if the banks dont withold any of the excess reserves. Of this $10 only $1.00 is "real money" and $9.00 is credit. Now assume this $1.00 (or $10) causes enough inflation that the Fed decides to decrease the money supply by $1.00 by sellng a bond and taking the original $1.00 out of circulation. If they do that then there is still $9.00, not in money, but in "credit" that has been created and presumably cannot be retrieved by the Fed. At this point there is no real money to pay back the debt. This assumes you are sayng the money multiplier does not work in reverse, as the textbook suggests. Before I go off on any additional tangent, is this the crux of your argument on the money vs debt/credit issue? Thank you in advance for your reply...
Gene Hayward

The Arthurian said...

Hello again, Gene. I replied to your comment in our exchange on your blog. I have just a little more.

Since your comment of the 20th, I've been trying to figure out why other people don't distinguish between money and credit the way I do. Above, you write: "Now assume this $1.00 (or $10) causes enough inflation that the Fed decides to decrease the money supply..."

That's it, I think: I think your first instinct was to talk about the $1.00. And maybe you added "(or $10)" to allow for my way of thinking.

Since the Fed is in charge, I suppose it is standard practice to think in terms of the Fed's dollar. Left to my own devices, trying to understand the world, I see private lending/borrowing...

[ We need a word to indicate that borrowing and lending are the same act. How about blending?? ]

...I see private blending as competition for money-creation by the central bank. (See Item 3 here or pages 2 & 3 of my 12-page PDF.

My view is simple, Gene. I consider that the cost of interest is a significant difference between money and credit. And all of my ideas originate in an examination of the ratio between money-in-circulation and credit-in-use. It is beyond my understanding why economics ignores the factor cost of money.