Tuesday, February 1, 2011

An Ongoing Exchange


Tschäff and I are going back-and-forth on money here.

In order to have a coherent thought, I find myself pruning off branches of the discussion that I really don't want to lose. So I will look at some of those branches in this post. Hopefully, it is all ONE branch, so we have a new coherent thought here.

Tschäff writes:

Money is always someone's liability, so by definition it is debt. The only exception is if you use cowrie shells, cigarettes, or some other commodity.

and (earlier) he says:

You're still thinking about money like it is some commodity, and missing the much bigger picture that it is always created as credit. By using double entry book keeping, you're able to find for every dollar that exists there is a creditor and a debtor.

But I think -- this is just a gut reaction, but I think it must be right -- even if we use cowrie shells for money, money is someone's liability. I don't think it is "what we use for money" that makes money a liability. I think it is keeping track of it in a ledger book that makes it a liablity. Or with accounting software. It is accounting that views everything as assets and liabilities.

And you can't get around it by saying, "Oh in places where they use cowrie shells for money, they are too primitive to do accounting." They can use sticks with notches.

//

Okay, Tschäff, I am picturing the "Federal Debt Relative to GDP" graph for some reason. The great peak of federal debt that is associated with World War Two. And the "golden age" which came soon after all that debt was created. And it was definitely "debt" to the government. But it was "money" to the recipients on the other side of all those government spending transactions.

But I want to look at the percentage of the federal debt that was held by the Federal Reserve. How much of it was "monetized" in other words -- and (it may be said) was no longer debt, perhaps.

//

And this is definitely a different branch now... But I must raise the question: "Why did the vast federal debt lead to an economic boom following World War Two, while the vast federal debt of recent times does not?"

I ask, because I have the answer. The Great Depression caused (or was caused by) a great decline in the accumulation of private-sector debt. World War Two continued that decline (relative to the quantity of money). After the war, people had a great deal of money and very little debt. People were then perfect customers, so the economy was able to grow.

In recent times, however, the growth of federal debt has been accompanied by an even greater growth of private-sector debt. Until recently, we had no great decline in the accumulation of private-sector debt. Therefore, debt remains a burden that chokes off growth despite the growth of federal debt. And that is why I always call for policies to reduce the accumulation of private-sector debt.

Prune this!

3 comments:

Tschäff said...

But I want to look at the percentage of the federal debt that was held by the Federal Reserve. How much of it was "monetized" in other words -- and (it may be said) was no longer debt, perhaps.

This is a big branch that I don't even know where to start with. Maybe the first is to recognize that the central bank, with minor exceptions, doesn't create net financial assets. It changes the composition of them. A govt bond is sold to the Fed, and in it's place the Fed gives reserves to the seller. That's the essence of it, by doing this they are able to control interest rates. From there maybe we can talk about the effects of interest rates on the economy. Or how the Fed's liabilities are Treasury Assets, and how Treasury liabilities are Fed assets, and how they are like a husband and wife in a household, and the finances between them aren't important to the rest of the economy, but the liabilities issued by the household to the rest of the economy does matter a lot, given the rest of the world has historically desired every year to save net assets and reduces consumption to do it.
---
even if we use cowrie shells for money, money is someone's liability.
Commodities are an asset only for the holder, no one's liability.

And you can't get around it by saying, "Oh in places where they use cowrie shells for money, they are too primitive to do accounting." They can use sticks with notches.
Sticks with notches was one of the first known credit systems. Again, not a commodity.
---
As for your last comment about why the national debt isn't creating a boom it's not too far off the mark. First you have to consider leakages from the trade deficit reducing the funds available to the domestic non-government sector, thus what is able to be spent on domestic business. We didn't have such a huge trade deficit back then. Then you have to consider what people and businesses are doing with their income. If they are using it to pay down debt or save, that's not going to generate jobs either. If you check out the fred2 graph on aggregate profits, they are at record highs now.

I'll quote from the best paper I've ever come across explaining where profits come from regarding the post war economy:

At the time, many feared that the falloff in defense spending and the discharge of ten million soldiers and sailors from the military would throw the economy back into depression. However, the difference between private sector balance sheets in 1929 and at the end of the war was like night and day. Instead of dangerously high asset valuations, extensive excess business capacity, and high levels of debt, by 1946 businesses and households had little debt and were awash in cash. The red-hot wartime economy had created strong incomes, yet personal consumption and business investment had been severely curtailed by quotas and shortages, forcing vast private saving and debt reduction. When wartime restrictions were lifted, there was not only enormous pent-up demand for both consumer goods and business plant and equipment, but also the cash with which to buy and a great capacity to add debt. GI bill financing further expanded household spending capacity. In the early postwar period, business investment boomed, personal saving plunged, and profits soared. From the profits perspective, the prospects for a great period of prosperity were readily apparent at the end of World War II.

Source: Where do profits come from?

The Arthurian said...

Tschäff --
Commodities are an asset only for the holder, no one's liability.

You are more patient with me than I sometimes deserve. Thank you.

But look at this, from your "Where do profits come from?" excerpt:

...the difference between private sector balance sheets in 1929 and at the end of the war was like night and day. Instead of dangerously high asset valuations, extensive excess business capacity, and high levels of debt, by 1946 businesses and households had little debt and were awash in cash.

Businesses and households were awash in cash. And there was little debt, rather than high levels of debt. So... I want to say again that there was an increase in non-credit money, and a relative decline of debt. I think you want to say "all money is debt" but that doesn't help me understand the change that is captured in your excerpt.

Patience is a virtue :)

Tschäff said...

Its a pleasure and useful to me- it challenges me to explain things in a way anyone can understand, and I get active feedback where I learn what people object to. Both of these skills are useful if we have any shot at economic policy that has any chance at serving the interests of the majority.

Govt debt grew as a result of the new deal, and grew rapidly during the war. That govt debt is what we use as money, so it was a critical component in Americans ability to pay off private debts, save and consume. The depression also forced banks to write off loans, compare that to now where banks were bailed out but not borrowers who are reducing consumption in order to repay debt. I always tell people if A owes B who owes C, why give money to C and not A? Socialism they cry, but somehow if it is given to the essential banks it is necessary. Anyways the govt debt doesn't need to be, nor can it be paid off like household debt. It is govt debt always adds to non-govt savings to the penny. Durring WWII that huge runup in the national debt was politically possible. Today I don't think so- and the Japanese won't save us this time.