Sunday, October 31, 2010

The Inflation Picture

Source: St. Louis Fed

To duplicate this graph: Click the link, click EDIT (at left, just below the graph), scroll down to the UNITS line below the red letter A, change the UNITS to "Change from Year Ago, Index 1982-84=100" and then click the REDRAW GRAPH button.

And There You Have It

I took the numbers from yesterday's graph and added in some more: Federal debt from the September 12, 1996 Z1 release (from the Fed), and M1 & M2 money from the Historical Statistics (Bicentennial edition).

There is a glitch in the matrix, a discrepancy in the money numbers between 1970 and '71, because I'm using "older" and "newer" sources. I have to look for more numbers, to see about getting around this glitch.

But the graph shows that Federal debt was higher than savings during the 1947-73 "golden age" and again approximately at the time of the 1995-2004 "golden decade."

And the graph shows that Federal debt was lower than savings when the economy's performance was less than golden.

Now that's remarkable.

Thanks again, Greg. Oh -- but I should point out that the Federal debt numbers are "outstanding" debt, not the domestically-owned portion of it.

Saturday, October 30, 2010

Federal Debt and Savings

This graph shows "Savings" (same as yesterday: M2 less M1) and the Federal Debt as given in FRB Z.1 (17 September 2010) table D3 (Debt Outstanding by Sector) in the "Federal government" column.

These are just raw numbers, no indexing or any manipulations.

I'd say the numbers are close.


Interesting on this graph: Federal Debt runs below savings from start-of-data (1976) to 1990 or so... Then higher, until 2000 or so... Then lower again.

The Federal debt is higher for a period of years close to the "golden decade" -- 1995 to 2004. I wouldn't expect that to be coincidence.

Now I need numbers from before 1976... I think they will show Federal debt higher than savings during most of the 1947 to 1973 "golden age." That would be somethin'!

Thanks, Greg!

Friday, October 29, 2010

Quick and Dirty in Excel

A response to Greg's comment on yesterday's post.

This one is not "national debt" but "Debt of domestic nonfinancial sectors", conveniently listed alongside M1 and M2 money in the Economic Report of the President. (2010 issue, or maybe 2009.)

I subtracted M1 from M2 to get "savings" ... I indexed "savings" and "Debt" on their average values (like Friedman explained in Money Mischief)... and plotted the index values.

The two lines are substantially similar. Can't say, however, how much of the similarity is due simply to "growth." Probably a lot.


Without indexing, the debt numbers are far higher than savings. National debt is a small part of total debt... I need another graph.

Thanks, Greg.


Thursday, October 28, 2010


Out with the dog this morning, thinking about Adam Smith's factors. My economic analysis, like Smith's, relies on a breakdown and examination of costs.

When Smith looked at the world around him, he saw a declining aristocracy, a rising business class, and the immortal laborer.

When I look, I don't see an aristocracy. Land has been pretty well distributed among businesses and working-people. But what I do see is a massive financial sector that did not exist in Smith's time.

The core concept of Arthurian economics is that the cost of interest -- the factor cost of money, to put it in terms Adam Smith might use today -- consumes so much out of wages and profits that our economy just doesn't work any more.

Some of the evidence that the factor cost of money is the problem:
1. Our massive accumulation of debt;
2. The growth of finance as a portion of GDP; and
3. The high portion of corporate profit that arises from finance.

But if the problem is that interest costs consume too much of personal and business income -- that is, if the problem is debt -- then we should be able to find additional evidence of it.

If we have a monstrous debt, then we must have done a lot of borrowing. So there must have been a lot of saving, which was loaned out to generate that debt. Thus if it is true that debt is the problem -- that the factor cost of money is the problem -- then we should expect to see an astounding level of savings.

See it, we do. This graph compares the amount of money in savings to the amount of money in circulation. The numbers come from newer and older sources that don't match perfectly. But you can see the amount of money in savings in recent years is very high by historical standards.

You can also see that saving reached a (much lower) peak just at the start of the Great Depression.

This little history of savings shows a pattern that corresponds to economic conditions. A high level of saving -- twice (that we know of) -- is associated with depression-like conditions.

The graph also confirms our simple prediction that the level of savings must be extraordinarily high to have allowed the level of debt to get so high.

Next we must try to explain our situation. What circumstances allowed the problem to arise? What process contributed to the massive accumulation of debt?

Is it concentration of income that allowed the problem to develop?

The Saez graph is a very good display of the concentration of income. This graph fascinates a lot of people.

Many people look to the concentration of income as a cause of our economic troubles. And indeed, it seems a great concentration of income would permit a great increase in savings.

But a quick comparison of these two graphs does not show much similarity. The concentration of income shown on the Saez graph is high but stable from the early 1920s to the start of World War II, drops sharply during the war, runs flat from 1943 until about 1980, and then takes off for the sky.

The graph of savings relative to money-in-circulation shows an entirely different pattern. The trend line falls from onset of Depression to end of WWII, then starts a relentless increase, interrupted only from the early 1980s to the late 1990s.

I don't see a similarity between the two graphs that would suggest a cause-and-effect relation between the concentration of income and the growth of savings. Therefore I cannot say that the concentration of income is what led to the great accumulation of savings and debt.

I can say, however, that even in conditions of absolute income equality it would be possible to accumulate too much saving and too much debt.

A Thought Experiment

Imagine a world where everybody gets paid exactly the same as everybody else, no matter what job they do or how good they are at it. Assume for a moment that such a world could exist, and that incomes are all still equal the next day, the next week, and the next year.

I like this little society of absolute equals, this Neverland, because it is easy to picture: everybody in it is exactly like me. But even in this hypothetical world it would still be possible for debt to accumulate to an excessive degree. All it would take is for people to think the same thing that we think: that credit use is a good thing.

Oh, credit use is a good thing, but that thought is unfinished. Credit use is a good thing when we have too little debt. Credit use is a bad thing when we have too much debt. And, yes, credit-use is good for growth, but too much credit-use is bad for growth. I don't like reducing things to "good" and "bad," but there it is.

So now, suppose we all get thinking that credit use is a good thing, and we all start using more credit. Well, pretty soon we start running out of money to borrow. So policymakers come up with policies to get us to save more. Problem solved.

But when we save more, we spend less. Solving one problem creates another. Demand grows less, because we're spending less. The economy slows.

But we know that credit-use is good for growth. Our economists and policymakers exhort us to go out and buy stuff to stimulate the economy, and put it on the credit card. And of course we want to do that. And we do.

Things pick up some, and policymakers see that their decisions are good. So to get the economy to grow more, they do things that encourage even more credit-use. And of course then they have to do things to encourage increased saving. And on the graph of saving relative to M1 money, the trend-line goes up.

After a generation or so we seem to notice banks becoming a more important part of our daily routine. And still we find our economy growing more slowly than we want.

And after a while our debt is so big, and our interest payments so burdensome, that they eat into our spending-money, and we have to cut back on our consumption. And interest costs in our businesses are eating into profits, so we have to raise our prices.

And after a while we had this mild but relentless inflation, and all that debt, and our living standards are not what they should be, and the world is going to hell in a handbasket, and the economy just doesn't work any more.

Thus we end up with excessive debt. But at least we're all in the same boat, right? I mean, we are in the middle of a thought experiment where there is absolute income equality.

The moral of the story: Even in a world of absolute equality, we could end up in the same mess we are in today: a mess of excessive debt and excessive savings and relentless inflation and perpetual sluggish growth. It does not depend on the concentration of income. It depends on the reliance on credit.

And the problem, in case you missed it, is that we use dogmatic, open-ended rules of thumb in our economic thinking, rules of thumb like printing money causes inflation and this one: "Credit use is good for growth."

Open-ended rules are rules we apply without letup. The inflation rule tells us that if there is inflation, they must be printing too much money. But the rule doesn't ever have us check to see if there is even any money left.

And the credit rule tells us that if we want the economy to grow, we need to use more credit. This rule doesn't ever have us stop to see if we've used too much credit already, if we've accumulated too much debt, if we've passed a Laffer Limit, if we've crossed the line. The rule just tells us to use more credit.

In the Arthurian view, these two rules of thumb together created the problems in our economy. We always restrict the quantity of money, and we always use more credit.

After you do those things for a good long time, the economy doesn't work any more.

Wednesday, October 27, 2010

A Defining Moment

There seems to be a little trouble with the notion of "making money."

Some people seem to think they make money by working. Well, that's how you earn money. But it is not how money is created. The difference is, if not enough money is created, it's difficult to earn money.

So now you will tell me that there is too much money. And I will say: No, that's credit.

What's the difference? Oh, that's easy: If you start with a dollar of credit, and you take away a dollar of money, you're left with a dollar of debt.

And there ya go: In our economy there is too much credit and not enough money. And the proof of it is something everybody already knows: We have too much debt.

Thing is, we can't solve the debt problem if we don't pay attention to money and credit.

Tuesday, October 26, 2010


My thoughts on Mish and M1 money focus on something Mish put in parentheses, something he thought important enough to mention, but just barely.

My problem with Robert Brenner's analysis lies not in what he observes, but rather in what he fails to observe.

In neither of these cases is it the main point of the discussion that concerns me. In both cases it is some minor point -- an incidental explanation, or something altogether overlooked -- that grabs my attention.

It is always the little things, the things we put our faith in, the things we see no need to reconsider, that turn out to be the stumbling blocks.

For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premisses.

Monday, October 25, 2010

It Is Remarkable

It is remarkable that, despite all our concern over money and credit, it is so rare to find someone who notices the difference between money and the more costly credit.

It is remarkable that policymakers have done nothing to place limits on the expansion of credit, but everything to induce the greatest possible expansion of credit.

It is remarkable that the balance between the quantity of money-in-circulation and the quantity of credit-in-use has been overlooked.

It is remarkable that no one has noticed there is a limited range within which monetary balance will minimize monetary problems and maximize economic performance.

It is remarkable that policymakers have done nothing to discourage accumulation of private-sector debt.

It is remarkable that so few analysts trace our problem back to a time before 2008 or 2007 or 2006.

It is remarkable that the problem of debt in the public mind has been reduced to the problem of public debt.

It is remarkable.

Sunday, October 24, 2010

One for the record book

Ask Marilyn

Somewhere at, apparently, they should have today's Ask Marilyn column. Maybe tomorrow it'll be there. Anyhow, here's the third question from her 24 October column in the newspaper, from Paul Klender, along with my accounting:

My brother and I each bought a box of cookies for $3.50. I asked him to pay for mine at the register, and I would reimburse him.

Paul owes his brother $3.50.

Outside, I asked him if he had a $5 bill. He said yes, handed it to me...
Now Paul owes his brother $8.50.

... and I gave him $1.50.

Now Paul owes him $7.00.

This was actually a good joke. If Paul gave his brother $5 and the brother gave Paul $1.50, they'd be even. The numbers are right, but the direction of payments is wrong. That's why the joke works, I think.

He said, I wasn't born yesterday. You still owe me $2 more. I gave him $2 and took the cookies.

The brother knew something wasn't right, but he was confused. Neglecting his own $5, he wants Paul's payment to add up to $3.50.

Paul is still $5 ahead.

I laughed all the way home and couldn't wait to tell my wife. But when I told her I was $5 ahead, she said I was only $1.50 ahead because I gave my brother $3.50....

The wife ignores the cookies-value.

Good one, Paul!

The IRS as Philosopher

Another look at yesterday's excerpt from the IRS:

This argument asserts that wages, tips, and other compensation received for personal services are not income, because there is allegedly no taxable gain when a person “exchanges” labor for money. Under this theory, wages are not taxable income because people have basis in their labor equal to the fair market value of the wages they receive; thus, there is no gain to be taxed.

The IRS asserts that there is "gain" when a person exchanges labor for money.

I would agree with the IRS. ("Let the wookie win.")

But I do want to point out the argument used by the IRS to justify taxing wages: that wages are "gain," and "gain" is taxed.

There is a rule of thumb that says: Every tax is a dis-incentive. Taxing "gain" is a dis-incentive to do gainful things.

There are a lot of philosophical problems like that in our tax code.

Saturday, October 23, 2010

The IRS as Comedian

Who's being funny, now?

At one finds The Truth About Frivolous Tax Arguments - Section I. There is really a pretty good collection of funny arguments people have made, to try to get out of paying their taxes. Here's one:

B. The Meaning of Income: Taxable Income and Gross Income
1. Contention: Wages, tips, and other compensation received for personal services are not income.

This argument asserts that wages, tips, and other compensation received for personal services are not income, because there is allegedly no taxable gain when a person “exchanges” labor for money. Under this theory, wages are not taxable income because people have basis in their labor equal to the fair market value of the wages they receive; thus, there is no gain to be taxed.

It is frivolous, says the IRS, to claim that your wages are not taxable by saying it's an even swap. According to the rejected argument, your time and effort are equal to the wages you got paid, so there is no "gain" and nothing to be taxed.

(That was the funny part.)

The IRS rejects that argument. Your wages don't have to be more than "fair market value" to be taxable. Not only the portion above "fair market value" is taxable, says the IRS. You don't get to subtract out fair market value and only pay tax on the balance.

Now, that gets me thinking: What about business income? Why is it that only the portion of business income that is over and above expenses is subject to tax? Why do businesses get to subtract out basically all of their expenses from their income, and only pay tax on what's left?

Sounds like a double standard to me.

Friday, October 22, 2010

ReadMe a Hundred times

Our economic policies since the end of World War II have
(1) Restricted the quantity of money in circulation (to fight inflation) and
(2) Encouraged the use of credit (to stimulate growth).

Since the use of credit is no less inflationary than money, monetary restriction had to continue to an excessive degree. And since monetary restriction is harmful to growth, encouragements of the use of credit also continued to an excessive degree.

This analysis of conflicting policy explains not only our inexplicable debt, but also why we don't have the money to keep ourselves out of debt.

The proper solution to the economic problem is to correct the imbalance we have created -- to increase the quantity of money in circulation while restricting the growth of credit-use. Thus the solution includes "printing money," but only up to the point where monetary balance is restored.

1. Our policies encourage spending but remove money from circulation.
2. Because of policy, we use credit for money.
3. When we use credit, we accumulate debt.
4. We could reduce debt by paying it off, but
5. The Fed takes that money, to fight inflation.
6. So we're left with more debt, and less money.

From this analysis of the problem, a solution arises.

Thursday, October 21, 2010

The Waste Land

In a Macrobuddies post from June of last year, Murph quotes Michael Hudson and then summarizes:

The Government has committed Trillions of dollars (over $12 Trillion and counting) to bail out institutional Creditors (Banks) rather than Debtors (Citizens), in the misguided belief that we need more lending. "Hair of the dog" may be an effective pallative for a hangover, but a crisis caused by overindebtedness is unlikely to be cured by creating additional debt.

Then Murph quotes John Hussman and summarizes again:

A point made in both articles is that government aid to financial institutions, rather than directly to distressed debt relief, has been misguided.

In other words, don't print money and use it to buy up bad debt from banks so that banks can make more loans... Print money and use it to pay off debt!

So lessee... We have Michael Hudson... John Hussman... Murph... JBPeebles... and me. That's five. Anybody else wanna fix the economy?


Must Reduce Debt


Irving Fisher, quoted by The London Banker, 31 July 2008:
[I]n the great booms and depressions, each of the above-named factors has played a subordinate role as compared with two dominant factors, namely over-indebtedness to start with and deflation following soon after...

Robert P. Brenner, JapanFocus, 7 February 2009:
Households had long counted on rising house prices to enable them to borrow more and to do their saving for them. But now, because of the build-up of debt, they will have to reduce borrowing and increase saving at the very time that the economy most needs them to consume.

SE, The Secret Economist, 8 May 2009:
The global economy cannot return to health until households have worked off at least part of their excess debt. So far they have made little progress.

Tundra Kat, Frozen Arctic Tundra, 25 September 2009:
Combined private and corporate debt reached 230pc of [Spain's] GDP, funded by French and German savings.

Jake, EconomPic, 9 November 2009:
But in the long run we need debt levels as a percent of GDP to rebalance. There are only two ways to do this... decrease the numerator (i.e. delever) or increase the denominator (through growth or inflation).

Janet Daley,, 19 December 2009:
The banking crisis certainly had its roots in the international nature of finance, but the way it affected countries and peoples varied considerably according to the differences in their internal arrangements. Britain suffered particularly badly because of its addiction to public and private debt...

Martin Wolf,, 23 December 2009:
Thirty years of surging growth in private sector leverage, in the balance sheets of the financial sector and in notional profitability of the financial sector in the US and other high-income countries has ended in calamity.

Sackerson, Broad Oak Blog, 24 January 2010:
A recent study of national economies in the last 800 years by Reinhart and Rogoff strongly suggests (as common sense would also suggest) that when debts are very heavy, the economy tips over into recession as we try to repay loans and rebuild savings.

Paul Krugman, The Conscience of a Liberal, 3 May 2010:
American households have to bring their debt levels down.

Stuart Staniford, Early Warning, 3 July 2010:
My operating assumption is that the main current problem with the US economy is Too Much Debt in the private sector, and that all will not be well until both the household and financial sectors have deleveraged back down at least to something like the levels of the 1990s (at a rough guess).

Paul Krugman, The Conscience of a Liberal, 25 September 2010:
I think it’s fair to say that a majority of economists believe that excessive private debt played a key role in getting us into this economic mess, and is playing a key role in preventing us from getting out.

Wednesday, October 20, 2010

More History of Money

From: Soft Currency Economics, by Warren Mosler

The Gold System as the Basis for Bank Reserves

The gold standard was established in the U. S. in 1834. Under a gold standard the price of gold is set in terms of the dollar. The dollar was defined as 23.22 fine grains of gold. With 480 grains to the fine troy ounce, this was equivalent to $20.67 per ounce. The monetary authority was then committed to keep the mint price of gold fixed by being willing to buy or sell the gold in unlimited amounts.

The gold standard was suspended from 1861 to 1879 due to the Civil War. The variant which prevailed in the U. S. from 1880 to 1914 was a fractional reserve gold coin standard. Under that standard both government issued notes and notes issued by commercial banks (also deposits) circulated alongside gold coins. These forms of currency were each convertible on demand into gold. Gold reserves were held by the issuers to maintain convertibility.

In 1934 the Gold Reserve Act devalued the dollar by increasing the monetary price of gold from $20.67 to $35.00 an ounce. The Act put the U. S. on a limited gold bullion standard under which redemption in gold was restricted to dollars held by foreign central banks and licensed private users.

As a domestic monetary standard, gold reserves regulated the domestic money supply. In a fractional reserve gold standard the money supply was determined by the monetary gold stock and the ratio of the monetary gold stock to the total money supply which consisted of gold coins, fiduciary notes and bank deposits. Money creation was determined by the amount of gold reserves. Bank deposits depended on 1) the level of gold reserves held by commercial banks and the central bank, 2) the preferences of the public for gold coins relative to other forms of money, and 3) legal gold reserve ratios.

Reprinted from Soft Currency Economics

Tuesday, October 19, 2010

Money before Lincoln

Excerpts from the Introduction

Standard Catalog of U.S. Paper Money

Ninth Edition

by Chester L Krause and Robert F. Lemke

Robert E. Wilhite, Editor

With states denied the power to issue money by the Constitution of the United States, and the powers of the Federal Government to do so left unspecified; various private issues of banks, railroads, utilities, and even individual citizens, cropped up, with varying resources to guarantee their value, until the Government halted the practice in 1863.

Beginning in May, 1775, the Congress of the newly unified former colonies began the issue of Continental Currency to finance its fight for freedom.

The Continental paper dollar was able to hold its value at par with a specie dollar only until October, 1777, by which time widespread counterfeiting by British, Tories and opportunists conspired with the natural inflation of a printing press economy and increasing uncertainty as to the outcome of the war to push the exchange ratio of the Continental Currency to $11 in paper for $10 in specie.

After that point, the devaluation accelerated. October, 1787, amid speculation that the Continental Currency might never be redeemable, it was selling at the rate of $250 paper for $1 specie. Eventually, the Government issued 6% interest bearing bonds at the rate of $1 for every $100 of Continental Currency turned in.

Issued current with the Colonial and Continental currencies were numerous privately-sponsored paper monies emitted by banks (as early as 1732 in Connecticut), utilities, merchants, individuals, and even churches.

These issues continued after the Revolutionary War, and proliferated in the 19th Century. entire industry sprang up to supply banks and merchants with accurate, timely information about which notes would pass current, which should be accepted only at a discount, and those from an issuer who had gone "broken."

The only restraints on the issue of paper money at that time were those which the individual states cared to apply, and such restraints were infrequent and ineffective.

The Federal Government put an effective end to these halycon days of currency free-for-all in 1863, by imposing a 10% tax on outstanding notes; and later through the 14th Amendment to the Constitution, forbidding the private issue of circulating media of exchange altogether.

I picked up the United States Paper Money book years back, at a coin shop. The introduction contains some of the best history of money I ever read.

LINKS: Krause Publications (Coins and Paper Money) Reprinted with permission.

Monday, October 18, 2010

Lincoln the Unifier

Lincoln abolished slavery. He did it 30 years after the slave trade was abolished in the United Kingdom, and almost one hundred years after slave ownership was abolished in England and Wales. What else did Lincoln do?

He held the nation together, preventing the secession of the Confederate states.

He tied the nation together, supporting construction of the First Transcontinental Railroad.

He unified the nation's economy, supporting the National Bank Act and creating a national currency. (The goal of political unification via currency unification is in our time being attempted with the Euro, a currency that entered into circulation on January 1, 2002.)

Before Lincoln's time, it is said, people spoke of these United States, but since Lincoln people speak of the United States.

Wikipedia (3 October 2010) says:

The National Bank Act (ch. 58, 12 Stat. 665, February 25, 1863) was a United States federal law that established a system of national charters for banks, the United States national banks. It encouraged development of a national currency based on bank holdings of U.S. Treasury securities, the so-called National Bank Notes.

Under the National Bank Act, private banks issued national currency backed by government debt.

Since the time of Lincoln, our money has been backed by government debt. We still do that today. G. Thomas Woodward writes:

A great deal of concern is often expressed about what "backs" Federal Reserve Notes. Technically, the notes are collateralized by holdings of securities -- mostly those of the United States government.

And then there is this, from

The national crisis of the Civil War pushed the federal government to reenter bank regulation. The war required vast amounts of money and credit, and difficulties in financing the war were draining the nation's gold supply...

To help finance the war, in 1861 Treasury Secretary Salmon P. Chase recommended the establishment of a national banking system. National banks could be chartered by the federal government and authorized to issue bank notes secured by U.S. government bonds. Chase's plan would have ensured a market for federal debt, since the new national banks would be required to buy the bonds.

Oh, to be as clever as Salmon!

Sunday, October 17, 2010

What I was doing in 1977

And I'm still saying some of those things:

An economy "is" the interaction of buyers and sellers. The economy is transaction
The problems that were so successfully solved in the 1960s were solved by careful control of the supply of money. Those policies solved the problems of too much money and too little debt. The problems were solved in the 1960s
The solution to inflation is "less money." The solution to unemployment is "more money." ...we use stimulative fiscal policy and restrictive monetary policy at the same time.
The solution to that problem is to do two contradicting things to the money supply. The key to understanding Arthurian Economics is to notice the conflict in policy...
Our government has two major ways to control the amount of money in America. [Krugman] still separates the monetary policy from "the rest" of policy.
If the government were to collect more in taxes than it spent, then the surplus, idle money would be "out of the system." When the government spends more than it collects, thus running up a debt, that debt represents extra money put into the system. Interestingly, it may be that after the economic problem is solved, the deficits will be small enough that printing money could cover them and more, and still not be inflationary.
The solution that has generally been used by our government is to let the direct approach handle inflation; and to use the indirect approach against unemployment. Sometimes you have to stop doing the thing that was always the right thing to do.

What Krugman was doing in 1978

And Krugman is still talking about this thing.

Loose Ends (from my recent notes on MMT)

The problem is imbalance between money and credit. This problem cannot be solved simply by printing more money, because in a growing economy our financial system takes every new dollar and uses it to create $30 of new debt. The imbalance cannot be corrected unless a policy of "printing money" is accompanied by a policy for reducing the reliance on credit, and by a policy for accelerating the repayment of debt.


For some time I've been wanting to write a book called The Management of Fiat Money but I don't yet know near enough about it. Mosler might; but he has yet to work out the theory behind it, or adopt the one I've worked out here.


I loaned a friend $50 once, some 40 years ago. He never paid me back. Obviously I still remember it. And I do not hold that friend in high regard. So much the worse, if it was not my friend but my government that stiffed me.


Saturday, October 16, 2010

Dishonest in Dallas

I'm gonna go back to Warren Mosler's Dallas address, because that way I don't have to transcribe Mosler's words. He opens the Dallas address with these words:

Honesty in government is a core value of the Tea Party movement and the most basic value in any representative democracy. Accordingly, my first proposal is that all candidates for public office be sworn in: ‘I solemnly swear to tell the truth, the whole truth, and nothing but the truth, so help me God.’ As a consequence, any subsequent lies are perjury, and punishable by law.

And this is relevant because...

Suppose you have $5,000 in your bank account and you write a check to the government for $1,000 to pay your taxes. What happens? You can see it on your computer screen. The number 5,000 changes into the number 4,000. The number 5 changes to the number 4. All the government did is change the number in your bank account. They didn’t ‘get’ anything. No gold coins dropped into a box at the Fed. Yes, they account for it, which means they keep track of what they do, but they don’t actually get anything that they give to anyone. The man at the IRS simply changes numbers down in our bank accounts when he collects taxes. And, if you pay your taxes with actual cash, they give you a receipt, and then shred it. How does taking your cash and shredding it pay for anything? It doesn’t. Taxes don’t give the government anything to use to make payments.

So the absolute fact of the matter is, the government never has nor doesn’t have dollars. It taxes by changing numbers down, but doesn’t get anything. It spends by changing numbers up and doesn’t use up anything. Government can’t ‘run out of money’...

Warren Mosler's words take the value out of money. He speaks of "changing numbers up" and "changing numbers down" as though no transfer of value was involved. That is completely false.

The government "didn’t ‘get’ anything," Mosler says. But of course they got something. They got paid. The numbers "went up" in the government bank account, and the number "went down" in your bank account. An obligation was met. A bill was paid. A transaction was completed. Mosler can say again and again that they "didn’t ‘get’ anything," but it just ain't so.

"Taxes don’t give the government anything to use to make payments," Mosler says. So, let's turn that around: If Mosler is right, then paying taxes doesn't really take anything away from you. It's just a matter of changing numbers.

It's just nonsense, that's what it is.

If you pay your taxes in cash, Mosler says, they give you a receipt and then shred the cash. Well, okay. But they also record your tax payment in their account. By recording your tax payment, they transfer the purchasing power into their account so they can spend it. After that, if they spent the cash too, it would be like counterfeiting.

They shred that cash because the money-value has been transferred out of your cash and into their account. Mosler has to know this. He just doesn't tell that part of the story, that's all. Mosler doesn't tell the whole truth.

Friday, October 15, 2010

The Payroll Tax Holiday

Q: Would it have a significant impact on federal government finances?

A: Yeah:

This remarkable graph comes from the Tax Policy Center.

I'm 61...

...old enough that I don't really have much time to waste. But I did watch the 5-part, 75-minute Warren Mosler interview recently recommended here by Greg.

My reaction? Yeah, okay: Mosler is the kind of guy that (to use the George W. Bush standard) I'd like to have a beer with. Anytime, Warren. I always have time for a beer.

A problem with the money

At 4:48 into Part 3 of the interview, Mosler says:

The monetary system will facilitate the execution of any strategy we want as long as we have the real resources available.

That is right. The economic problem of our time is monetary imbalance, and the problem could be solved quite easily. There is no reason our monetary system should hinder "any strategy" if we have "the real resources" to support it. Mosler and I arriving independently at the same conclusion strengthens this argument.

Belaboring the obvious

But I don't understand Mosler's appproach. Everybody on the planet already knows the dollar is backed by nothing, and is printed into existence. Yet Mosler dwells on that point and tries to recreate the world upon it.

I completely agree with Mosler that fiat money works by different rules that gold-standard money. But there is more to the story than simply suggesting we can print whatever money we need at any point in time. The suggestion creates false illusions inside and ill will outside the MMT (Modern Monetary Theory) camp.

Mosler avoids offering any hint of theory regarding the management of fiat money, but simply suggests over and over that all we need to do is go ahead and spend what we think we need to spend.

And what does he get for it? A following.

Did a helicopter just go by?

Warren Mosler wants a "payroll tax holiday." He wants to stop collecting Social Security taxes. For how long? "Indefinitely," he says (six minutes into Part 2). Forever. With no hint of addressing any concern that Social Security may be going broke.

I do think Mosler's tax holiday would really boost the economy. For one thing, it increases our take-home pay by 8% (that's Mosler's number). For another thing, the benefit to business is twice that much, because employers match the FICA tax that comes out of our paychecks -- and (though he isn't explicit about it) all of that cost is eliminated under Mosler's plan. In addition, the business cost that is reduced is a labor cost. So it is employment that Mosler's plan stimulates.

Mosler wants a payroll tax holiday. But he says nothing of how to pay for it, except that the Treasury should make the payments for us. The "how," of course, is by printing money, or borrowing money, or waiting for money to fall from the sky.


To be perfectly clear: I do not object to the view that the economic problem is a problem with the money. I do not object to the view that the solution must include "printing" money. And I do not object to Mosler's plan to stimulate the economy with his payroll tax holiday.

I object to the justification that MMT provides for all of this. The "T" in MMT stands for "Theory." You'd think, with a name like that, that MMT would offer better arguments than "changing numbers up" and "changing numbers down".

Then too, because Mosler lacks a good theory, his solution is a shot in the dark. He is only guessing what solution we need.

Mosler's tax holiday is a solution to the problem of a slow economy. But a slow economy is not the problem. The cause of the slow economy is the problem. That cause is the accumulation of private-sector debt. (See also my 4-page Austeria PDF.) Mosler does not address the problem of excessive private debt, though it would add much to his argument, and would take nothing from it.

I would hope to find Warren Mosler among the first to grasp this concept. Over a beer, perhaps?

Thursday, October 14, 2010

"The Heart of the Crisis"

UPDATE: Try this link to the Brenner interview.

Blended Purple links to an interview with Robert P. Brenner. From that interview:

The basic source of today’s crisis is the declining vitality of the advanced economies since 1973, and, especially, since 2000. Economic performance in the U.S., Western Europe, and Japan has steadily deteriorated, business cycle by business cycle, in terms of every standard macroeconomic indicator -- GDP, investment, real wages, and so forth. Most telling, the business cycle that just ended, from 2001 through 2007, was -- by far -- the weakest of the postwar period, and this despite the greatest government-sponsored economic stimulus in U.S. peacetime history.

Brenner and I agree on the 1973 date. We agree there has been a long decline.

Since the start of the long downturn, state economic authorities have tried to cope with the problem of insufficient demand by encouraging the increase of borrowing, both public and private. At first, they turned to state budget deficits, and in this way they did avoid really deep recessions. But, as time went on, governments could get ever less growth from the same amount of borrowing. In effect, in order to stave off the sort of profound crises that historically have plagued the capitalist system, they had to accept a slide toward stagnation.

Brenner and I agree that credit-use has grown, that increasing credit-use is a policy choice, and that credit efficiency has fallen. He and I seem to agree that the powers-that-be do not really know how to solve the economic problem.

In the U.S., during the recent business cycle of the years 2001-2007, GDP growth was by far the slowest of the postwar epoch. There was no increase in private sector employment. The increase in plants and equipment was about a third of the previous, a postwar low. Real wages were basically flat. There was no increase in median family income for the first time since World War II.

In 2001, the rate of profit for U.S. non-financial corporations was the lowest of the postwar period, except for 1980. Corporations, therefore, had no choice but to hold back on investment and employment, but this made the problem of aggregate demand worse, further darkening the business climate. This is what accounts for the ultra-slow growth during the business cycle that just ended.

Brenner and I agree that business performance follows business profit. If profits are good, business is good; if profits are not good, business is not good. Profit, as Keynes observed, is "the engine which drives enterprise."

The interviewer asks:

Even if one grants that postwar capitalism entered a period of a long downturn in the 1970s, it seems undeniable that the neoliberal capitalist offensive has prevented the worsening of the downswing since the 1980s.

Robert Brenner responds:

If you mean by neoliberalism the turn to finance and deregulation, I do not see that it helped the economy. But, if you mean by it, the stepped-up assault by employers and governments on workers’ wages, working conditions, and the welfare state, there can be little doubt that it prevented the fall in the rate of profit from getting worse.

The problem Brenner identifies is the falling rate of profit. The "solutions" he reviews here include the increased reliance on credit, deregulation, declining wages, and cuts to social programs. So his concerns include falling profit, falling wages, and falling social spending.

Oddly absent from Brenner's list is any concern regarding the cost that is the focus of Arthurian economics -- the cost of "encouraging the increase of borrowing, both public and private":

Since the start of the long downturn, state economic authorities have tried to cope with the problem of insufficient demand by encouraging the increase of borrowing, both public and private.

How does Brenner miss the increasing cost of finance? He knows that our reliance on credit increased since the long downturn began. He knows that increasing the reliance on credit was a conscious policy choice. And he must know that the increased reliance on credit increased both the cost of doing business and the cost of living. Yet he fails to notice that this cost, the factor cost of money, competes with wages and profits.

He knows that wages and profits are down. And he knows interest costs are up. But he does not put one and one together. He does not acknowledge that interest costs are consuming income that would otherwise go into wages and profits.

Brenner also fails to observe that even the onset of the long decline was a result of our excessive reliance on credit. Long before the start of the long downturn, economic authorities had for years encouraged the increase of public and private borrowing. By 1973, the cost of credit-use was already hindering economic performance.

The policy decision to "cope with the problem of insufficient demand by encouraging the increase of borrowing" was the wrong choice. The more we "encourage the increase of borrowing," the higher the factor cost of money. The higher the factor cost of money, the more it must draw from profit, and the more it must draw from wages.

Wednesday, October 13, 2010

Adam Smith Explains the Demise of Aristocracy

(Just a bit more from Book One, Chapter VI of The Wealth of Nations)

As any particular commodity comes to be more manufactured, that part of the price which resolves itself into wages and profit comes to be greater in proportion to that which resolves itself into rent.

Arthur Shipman Explains the Demise of America

As any particular economy comes to rely more on the use of credit, that part of price which which resolves itself into interest comes to be greater in proportion to that which resolves itself into wages and profit.

Tuesday, October 12, 2010

Factors (2)

A little more from Adam Smith on the factors of production:

But the whole price of any commodity must still finally resolve itself into some one or other, or all three of those parts; as whatever part of it remains after paying the rent of the land, and the price of the whole labour employed in raising, manufacturing, and bringing it to market, must necessarily be profit to somebody.

So there are three factors by definition. I find that interesting.

Regarding the cost of interest, Smith writes:

Wages, profit, and rent, are the three original sources of all revenue as well as of all exchangeable value. All other revenue is ultimately derived from some one or other of these.

The interest of money is always a derivative revenue, which, if it is not paid from the profit which is made by the use of the money, must be paid from some other source of revenue...

Smith's use of the word "derivative" does not, of course, refer to modern derivatives, but simply to the fact that the money to pay interest originates in and must be pulled from one or more of his three factor incomes -- profit, wages, and rent.

Monday, October 11, 2010




I change spelling (LABOUR) and punctuation, and paragraph breaks.
I hesitate to change the words of Adam Smith. I omit some words, and change an occasional word.
When you see the words "the profits of stock" think: The profits of capital.


We live in a fast-paced world. I recommend reading Adam Smith slowly, and savoring his words. If it helps, remember that he lived at the peak of the cycle of civilization, and we live amid accelerating decline.

The Wealth of Nations

by Adam Smith
Book One, Chapter VI

Of the Component Parts of the Price of Commodities

In that early and rude state of society which precedes both the accumulation of stock and the appropriation of land, the proportion between quantities of labor necessary for acquiring different objects seems to be the only circumstance which can afford any rule for exchanging them.

If among a nation of hunters, for example, it usually costs twice the labor to kill a beaver which it does to kill a deer, one beaver should naturally exchange for, or be worth two deer.

In this state of things, the whole produce of labor belongs to the laborer; and the quantity of labor commonly employed in acquiring or producing a commodity is the only circumstance which can regulate the quantity of labor which it ought commonly to exchange for.

As soon as stock has accumulated in the hands of particular persons, some of them will naturally employ it in setting to work industrious people, whom they will supply with materials and subsistence, in order to make a profit by the sale of their work, or by what their labor adds to the value of the materials.

In exchanging the complete manufacture, over and above what may be sufficient to pay the price of the materials, and the wages of the workmen, something must be given for the profits of the undertaker of the work who hazards his stock in this venture. The value which the workmen add to the materials, therefore, resolves itself in this case into two parts, one of which pays their wages, the other the profits of their employer...

In this state of things, the whole produce of labor does not always belong to the laborer. He must in most cases share it with the owner of the stock which employs him.

As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce. The wood of the forest, the grass of the field, and all the natural fruits of the earth, which, when land was in common, cost the laborer only the trouble of gathering them, come to have an additional price fixed upon them.

This portion, or the price of this portion, constitutes the rent of land, and in the price of the greater part of commodities makes a third component part.

In every society the price of every commodity finally resolves itself into some one or other, or all of these three parts; and in every improved society, all the three enter more or less, as component parts, into the price of the far greater part of commodities.

The revenue derived from from labor is called wages. That derived from stock, by the person who manages or employs it, is called profit. The revenue which proceeds altogether from land is called rent, and belongs to the landlord. All taxes, and all the revenue which is founded upon them, all salaries, pensions, and annuities of every kind, are ultimately derived from some one or other of those three original sources of revenue.

A brief summary of a very important concept. And a great pleasure to read.

Sunday, October 10, 2010

600 days and counting...

The Origin of Credit

I'll gladly pay you Tuesday for a hamburger today

I once read that credit was invented long before money. I think that must be true. A minor point from yesterday's post:

If my clan recently graduated from hunter-gatherers to an agricultural society, and I lend a neighbor some wheat, I expect him to pay me back (and then some) after the growing season. That's a credit transaction, even if it takes the whole growing season. Or maybe because it takes the whole season.

It is the delay before completion of a transaction that makes it a credit transaction. That explains the origin of our word "credit" in the ancient Latin word for belief: I must believe you will honor our agreement, because we do not complete the transaction on the spot.

Buy now, pay later.

Saturday, October 9, 2010

M1 and Shostak and Mish, oh my!

Dear Mish,

Back in July '08, you took a look at various measures of the money supply in relation to changing prices. You wrote:

The True Money Supply (TMS) was formulated by Murray Rothbard and represents the amount of money in the economy that is available for immediate use in exchange.

That's what we want, a measure of spending money. Spending-money is the money that affects prices. Spending-money facilitates transactions. The level of, and the changes in, money that facilitates transactions -- this is what affects prices.

Anyway, Mish, you then quoted Shostak, and you said:

Shostak rightfully excluded savings deposits because they are credit transactions (savings deposits are immediately lent out and are not really available on demand).

That's my focus here. Shostak excludes savings from spending-money, and Mish says Shostak has it right.

If you will allow me to reduce an economist's complicated discussion of TMS and MZM and M3 and M-prime and who-knows-what-all, to a simple, old-fashioned discussion of M1 and M2 money --

M1 is spending-money. M2 is M1 plus money in savings.

-- then we can say Shostak and Mish and I agree we should count M1 but not the money in savings. That's good. It is a mistake to think of M2 as the cause of inflation, because money in savings isn't spending-money and is not facilitating transactions. However, economists often do think of M2 money as a cause of inflation. (Maybe they got that from Milton Friedman and his MRTO graphs.)

By the same token, if we're considering the money that facilitates transactions, we probably ought to be considering the use of credit.

Anyway, I'm glad I'm not the only one who doesn't want to count the money in savings when we worry about inflation. There are at least three of us. Thanks, Mish.

But, Mish...

Shostak rightfully excluded savings deposits because they are credit transactions

I always thought of saving as not-a-transaction. I never thought of it as a credit transaction. But I think you're right, Mish. If my clan recently graduated from hunter-gatherers to an agricultural society, and I lend a neighbor some wheat, I expect him to pay me back (and then some) after the growing season. That's a credit transaction, even if it takes the whole growing season. Or maybe because it takes the whole season.

And if I save a dollar today, I expect to get it back with interest at some point down the road. It is a long-term transaction. A credit transaction. Mish, you're right about that.

(savings deposits are immediately lent out and are not really available on demand)

But I don't accept your claim that "savings deposits are immediately lent out." They are probably lent out -- in a growing economy, anyway, and the more so when the reliance on credit is excessive -- lent out more quickly than I imagine. But not immediately. It's just not realistic to say that.

And as for my savings being "not really available on demand," that's nonsense. As long as we don't all go down to the bank at once to get our savings, the money really is available on demand.

So Mish, (even though I do agree with you and Shostak, that savings ought not be counted in with the money that contributes to inflation) I do not buy at all your reason that savings should be excluded. I think you are trying too hard to find an explanation.

The thing is, Mish, people save money in order not to spend it. We don't want to count savings in with our spending-money, because we want to save our savings.

Doesn't that just make more sense, Mish? Yours,


Friday, October 8, 2010

A Spontaneous Definition of Credit

Any private sector “money” that costs interest and/or must be paid back, is CREDIT.

The Key


The key to understanding Arthurian Economics is to notice the conflict in policy, and to realize that this conflict has created monetary imbalance.

Policy is the root of the problem. But the problem itself is best described as monetary imbalance. One can see the problem as an imbalance between the components of M2 money -- between money in circulation and money in savings. Or one can see the problem as an imbalance between money in circulation and credit in circulation. (Of course: Credit in circulation is created largely out of money in savings.)

If you want to see the cost problem associated with the imbalance, look at the imbalance between circulating money and credit. Every dollar of credit is just like a dollar of circulating money, except that it costs interest, and it has to be paid back besides. Is there much credit in circulation? Yes: Every dollar of debt identifies a dollar of credit in circulation, costing interest, and awaiting payback.

If you want to see the payback problem associated with monetary imbalance, look again at circulating money and credit. Circulating money, when it comes to you as income, can be used to pay down debt, or to pay interest on it, or for other things.

But because of the imbalance, chances are good that the money that comes to you is somebody else's credit in circulation. You can use it to pay down your debt, sure. But if everybody starts paying off debt -- as we've been doing lately -- all the money must be soon used up, while plenty of unpaid debt remains.

If you want to see why savings rates were low, look at the imbalance between the two components of M2 -- money in circulation, and money in savings. There is already so much of M2 in savings, and so little in circulation, that we simply could not afford to save more. (And saving just a little more, as we've been doing lately, has been enough to create "the worst recession since the great depression.")

It is a natural tendency, the tendency toward monetary imbalance. It is a product of human nature. That is why, before the Federal Reserve was created, we had financial panics on a regular basis: a natural result of human nature. But in our time the natural tendency toward imbalance has been exaggerated by policy, for policy is designed by people, and human nature is mixed up in it.

Good policy would counteract the effects of human nature, and keep the components of money in balance.

Thursday, October 7, 2010

The Growth of Federal Spending

This graph uses the same numbers Perot uses.

By the last few years shown in this chart, we had even managed to balance the budget.

So, what happened?

Growth is measured by GDP

The line of reasoning that says our economy's slow growth is due to the increase in government spending, is supported by evidence showing an increase in government spending relative to GDP.

That argument is circular.

Wednesday, October 6, 2010

What's wrong with this picture?

From The Washington Independent
A Decade of Slow Growth, Followed by
Two Decades of Slow Growth

By Annie Lowrey 10/5/10 10:58 AM

Northwestern economist Robert Gordon brings the gloom:

According to Gordon’s research into the long-term determinants of growth, America’s next two decades are going to be disappointing. He predicts that between 2007 and 2027, gross domestic product per capita will grow at the slowest pace of any 20-year period in U.S. history going back to George Washington’s Presidency...

Why? The Baby Boomers will retire, meaning millions of them will stop contributing to the economy and will start living off of state programs like Social Security, disability insurance and Medicare. No technological revolution, like the internet, is on the horizon to juice growth either.

What's wrong with it? Where do you want to start?? Our economy has been slowing for 40 years. Now Robert Gordon predicts 20 more years of even slower growth.

Then what? the article doesn't say. But you can imagine things may just slow down even more. This trend isn't gonna change by itself.

That's item one. Item two: The blame is placed on my parents, and the parents of other baby-boomers, for having too many kids all in a bunch, and having too few thereafter. And the rest of the blame is placed on technology, for not being there when we need it.

These are only distractions.

When money is out of balance, everything it touches goes bad.

"There cannot, in short, be intrinsically a more insignificant thing, in the economy of society, than money ... and ... it only exerts a distinct and independent influence of its own when it gets out of order." - John Stuart Mill, quoted by Milton & Rose Friedman in Free to Choose, Chapter 9, p.249.

When we choose to use economic policy to fix the monetary imbalance, things will turn around very quickly.

Civilizations die from what??

Schumpeter's theory is that the success of capitalism will lead to a form of corporatism and a fostering of values hostile to capitalism.... The intellectual and social climate needed to allow entrepreneurship to thrive will not exist in advanced capitalism; it will be replaced by socialism in some form.

Schumpeter emphasizes throughout this book that he is analyzing trends...
From Wikipedia, the free encyclopedia: Joseph Schumpeter (27 Sept 2010)

In Schumpeter's view it is the success of capitalism that leads to the demise of capitalism. Or as Toynbee put it, "Civilizations die from suicide."

Tuesday, October 5, 2010

It's a Balancing Act

Over at The Troublesome Economist, Allan Schmid says

Joseph Stiglitz in his excellent latest book, "Freefall," advocates the creation of a new global reserve currency (ICCs) with "annual emissions."

I don't know about stripping the US Dollar of its status as the currency of international trade. But Stiglitz wants to print money and pass it out. So does Allan Schmid. And so does Warren Mosler. And so, it seems, does Modern Monetary Theory.

So do I. But you can't just print money. You must also avoid the inflation that comes from printing money.

My solution is to print money and use it to replace credit-in-use. I increase the quantity of money, and at the same time reduce the growth of debt. The channel of circulation, if I may be allowed such an expression, will remain precisely the same as before. Inflation, therefore, need not be such a concern.

I do not increase the total of the stuff we use for money, but instead reduce the total carrying cost of that stuff. I reduce the factor cost of money.

I reduce the reliance on credit, and increase reliance on the dollar.

Monday, October 4, 2010

Just Changing Numbers

A review of Warren Mosler's Dallas address.

These first few excerpts summarize Mosler's economic plan:

"I believe that the surest engine for full economic recovery is a full payroll tax holiday."

"This fixes the banks and fixes the economy, from what I call the bottom up."

"And what all businesses need most to expand output and employment is people with spending money who can buy their products."

I agree with that one. One thing every business needs is customers with money.

"What I don’t see is how any self respecting Democrat can allow this tax to stand for a single moment. It is the most regressive, punishing tax we’ve ever had. It starts from the first dollar earned with a cap at $106,800 per year."

Okay, he's talking about a Social Security tax holiday. Hmmpf.

"Let’s now back up and review how we got to where we are at this moment in time. Headline unemployment is unthinkably high at 10%, and if you count workers who have given up looking for a full time job, it’s over 17%. As you all know, it’s about the financial crisis. The banks got in trouble when their loans went bad. Well, what makes a loan go bad? Only one thing- people who can’t make their payments. If people make their payments, the loans are AAA. If people don’t make their payments the loans are junk and toxic waste. No matter what the security is- a loan, a cmo, cdo, clo, or whatever, it’s all the same. If people are making their loan payments there is no financial crisis. Unfortunately, instead of attacking the problem from the bottom up with a payroll tax holiday, we have an administration that thinks it first needs to fix the financial sector from the top down..."

Yeah, yeah, yeah. First of all, "the financial crisis" is not "how we got to where we are at this moment in time." If you want to look at the problem and see how we got here, you have to start back when the economy was still good. The 1950s maybe.

the blogosphere is full of concern about how high the unemployment number goes "if you count workers who have given up looking for a full time job." Where was all that concern, back when they decided to stop counting those people as unemployed? I remember it in the news, early in the Reagan years if memory serves. It was wrong, then. Similarly, in the Clinton years (again, if memory serves) they fiddled with the way they figure inflation, to make the inflation number sound not so bad. That was wrong, too. But I guess it worked, because nobody complained about inflation for a long time.

Third, Mosler is right -- finally! -- about the bottom-up thing. He is right that it's "people who can’t make their payments" that make loans go bad. And the payroll tax holiday, while it does not address the underlying cause of our troubles, certainly would provide some relief.

But remember: it does not address the underlying cause of our troubles. Suppose we go with Mosler's payroll tax holiday, and the economy recovers, and growth resumes, and debt growth resumes. Then what?

Pretty soon, another financial crisis. Then we'll need an income tax holiday. They again maybe the economy recovers, and debt grows for a while again. And then we have another financial crisis.

What do we holiday then, excise taxes?

Meanwhile, we've painted ourselves into a corner, and we're printing more and more and more money, and serious inflation is starting to become a reality.

The alternative that I see is to rely more on "printed" money, but also we must rely less on credit. We should use credit for growth, not for everything. In a static economy we shouldn't need any credit at all. In an economy that has grown too slowly for too long -- our economy -- we should have very little credit in use. Credit is for growth.

Actually, if our economy had very little credit in use, we would have very little debt. And if we had very little debt, our economy would be growing like crazy. And then, yes, debt would be accumulating. And we would need to deal with that.

Again, again, again I say: We must then use tax incentives to accelerate the repayment of debt. This will stabilize debt at a low enough level that debt does not hinder growth. And since debt repayment drains money from circulation, it will help us fight inflation.

But that's just me.

"This has been a trickle down policy where nothing has trickled down, because there is no connection between funding the banks, and the incomes of people trying to make their payments. The answer, of course, is instead of giving trillions to the banks, to simply stop taking away trillions from people still working for a living."

It's not the answer, but it is an answer. It does not directly address the problem because, contrary to everyone's pocketbook opinion, taxes are not the problem. Taxes are only a problem. But if we actually fixed the problem, taxes would not be a problem. Meanwhile, Mosler's solution would ease the pain as we draw closer to calamity.

Next, Mosler gets into the same "how government spends" thing that I criticized two posts back. He even uses the same Bernanke quote. And then he says

"All government spending is simply a matter of changing numbers upward in our bank accounts. It doesn’t come from anywhere. Just like when you kick a field goal and get 3 points. Where does the stadium get those points? Right, they don’t come from anywhere. It’s just scorekeeping."

Retard. The stadium doesn't get the points, the team does. And it is almost always a struggle to get them. The struggle is one of the great things about football. Nobody goes to the stadium to watch numbers change. People go for the game.

With football it's the struggle. With money it's the obligations. It's not just a number. It represents work, value, struggle, and achievement.

Mosler says; "Government can’t ‘run out of money’ ... There isn’t anything to run out of. It’s just data entry, it’s score keeping." Yeh, score-keeping, plus the struggle to get to the goal line. Plus the obligations. Mosler is just plain wrong about this.

What else? Well, Mosler says, "we are grossly overtaxed." And he wants a payroll tax holiday. But he doesn't say how he would pay for it. He doesn't say he's just gonna print money. He only keeps talking about "changing numbers up" and "changing numbers down."

He should be embarrassed to say such foolish things.

A Second Chance for Warren Mosler

I didn't get far into Mosler's 117 pages in my previous post. But I was interested in what he had to say because I think he's part of the "Modern Monetary Theory" (MMT) fraternity. And I'm interested to learn more about MMT. So I decided to give Mosler another shot. I searched his PDF for "Modern Monetary Theory."

No matches were found. I searched for "MMT." No matches were found.

Maybe it's the wrong guy.

The Seven Deadly Innocent Frauds of Warren Mosler

An assessment of Mosler's 117-page PDF.

On page 13, Warren gets us started:

In the next few moments of reading, it will all be revealed to you with no theory and no philosophy- just a few hard cold facts. I answer this question by first looking at exactly how government taxes, followed by how government spends.

I'm not gonna be able to do this. The writing is just so totally dumbed-down, Mosler obviously has no respect for his reader's intelligence. Mosler takes two pages (14, 15) to say basically that our money is just accounting notations. He explains at length that when you pay taxes,

all the government does is change the number in your checking account “downward” as they subtract the amount of your check from your bank balance.

and that when you got your Social Security check, all the government did was

change a number in your bank account by making data entries on its own spreadsheet, which is linked to other spreadsheets in the banking system.

I don't believe that. The government doesn't have a spreadsheet where it can change a number to change the balance in my bank account. This is an over-simplified, made-up story.

Anyway, after that nonsense on how the federal government taxes and spends, Mosler offers a quote from Federal Reserve Chairman Ben Bernanke to prove his point:

The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed.

But the Federal Reserve does not do the taxing, nor does it do the spending of the federal government. The Federal Reserve is a bank that lends money to other banks.

Immediately after the Bernanke quote, Mosler gets to his point:

The Chairman of the Federal Reserve Bank is telling us in plain English that they give out money (spend and lend) simply by changing numbers in bank accounts. There is no such thing as having to “get” taxes (or borrow) to make a spreadsheet entry that we call “government spending.” Computer data doesn’t come from anywhere. Everyone knows that!

Computer data doesn't come from anywhere. Everyone knows that! What does that even mean??? And Mosler is still mixing up bank activity with government spending and taxation. And, yes, our money is just accounting notations. It's not a big deal.

Finally (on page 16) Mosler asks and answers a question:

You now have the operational answer to the question: “How are we going to pay for it?” And the answer is: the same way government pays for anything, it changes the numbers in our bank accounts.

That again. But it's not just numbers in bank accounts. It's obligations. I can't read any more of this. Oh and I just noticed "" in his URL. He's a politician.

I wouldn't vote for him.

Sunday, October 3, 2010

From an Email

In The Wealth of Nations (Book Two, Chapter II, "Of Money Considered...") Adam Smith writes of a "channel of circulation." Smith assumes that "the whole circulating money of some particular country" (at a particular time) amounts to "one million sterling" and talks about what might happen if bank notes came into circulation in addition to the sterling.

He says that one million pounds is sufficient to support current production -- it fills the channel of circulation -- and so on. I really like the "channel of circulation" image: A particular amount of money is required to support a given level of economic activity.

If you look at our "channel of circulation" the money that fills it is almost all red, almost all credit-money. I want to drain out about half that red and then fill the channel with green, with non-debt money. After this has been done, there will be just as much money as before, and just as much economic activity. But the money itself will be less costly, and therefore (says I) the economy will perform better.

The thing is, we don't need to punish anybody for using credit. We just need to fix the imbalance in the money.

Art vs MMT

This will be unfair to Modern Monetary Theory, because I still don't have a good grasp of its basic views. But according to Bolo at The Agonist, MMT holds that

taxes do not pay for any federal government expenditures. Taxes are instead a form of private sector demand reduction.

MMT, then, would let the government print money and spend it without regard for debt or deficit. And MMT would have the government use tax increase as an inflation-fighting tool.

Doesn't sound very good, the way I put it. (I did say it would be unfair to MMT.)

To make a short story shorter, MMT wants to fund federal spending by printing money rather than by taxes. I bring this up in order to show how my views differ from MMT (or at least from my understanding of MMT).

I want to print money enough to correct the monetary imbalance, and keep a good balance but otherwise stick with the old economics, the economics that used to work.

In other words, the problem I see is the imbalance between money-in-circulation and credit-in-use. I think if we fix that problem, we solve the economic problem.

What is the right balance, exactly? Well I don't know, exactly. But I know we need to decrease our reliance on credit and decrease our debt, and at the same time increase our reliance on the dollar, on non-credit money, on fiat money if you will. In the 12 pages I suggested as targets (1) cutting our reliance on credit in half and (2) doubling our reliance on non-credit money.

I don't know what the right balance is. But surely we have too much debt now. Surely the balance is not good. And surely there is a limited range within which monetary balance will minimize monetary problems and maximize economic performance. We must design policy to find that range and keep us there.

In the past -- in the 1970s, as rumor has it -- we tried increasing the quantity of money at a rapid rate. The result we got was a really bad inflation because we failed to restrict the growth of credit

I want to substitute the use of inexpensive non-credit money for the more expensive credit. One result of this substitution is that we will reduce the cost of finance that is so thoroughly embedded in the economy. A second result is that we reduce our debt and find ourselves -- as if by magic -- with more spending money.

And that's gotta be good for the economy.

Saturday, October 2, 2010

The Endless Puzzle

The economy includes everything. That's why it's complicated. Everything we do is part of the economy either directly, like working and shopping and vacationing, or it influences the economy anyway -- like a decision not to go shopping.

Like a puzzle, the economy has a million pieces. And we hope it doesn't come crashing down around us. We hope it continues. So it is, in that sense at least, endless.

Obviously, there are plenty of ways to start putting puzzle pieces together. That's why different people can look at the same facts and draw different conclusions. It is largely a matter of prioritization, or which puzzle-piece you choose to start with. The trouble is, if you start with the wrong pieces you can you can make lots of false progress, or perhaps never get it together at all.

Lots of people have grabbed one brightly-colored puzzle-piece, and they all want to start with it. That piece is the federal debt. Well, that certainly needs to be put in its place. But that is not where we must begin.

I begin with "when times were good" and work forward from there.