tag:blogger.com,1999:blog-75475632687195527162023-06-20T21:09:05.748-07:00The Vanishing DollarAnonymoushttp://www.blogger.com/profile/13829102073305209917noreply@blogger.comBlogger39125tag:blogger.com,1999:blog-7547563268719552716.post-37754987379172553112013-03-28T07:01:00.001-07:002013-03-28T07:01:09.131-07:00Yglesias Persists in Misunderstanding Drug PolicyThis has little to do with economics but it popped up on Moneybox and I wanted to comment about it , so here goes. <br />
<a href="http://www.slate.com/blogs/moneybox/2013/03/27/mark_kleiman_washington_state_s_new_pot_czar_is_a_brilliant_academic_and.html#article_comment_box"><br /></a>
<a href="http://www.slate.com/blogs/moneybox/2013/03/27/mark_kleiman_washington_state_s_new_pot_czar_is_a_brilliant_academic_and.html#article_comment_box">Yglesias bloviates a bit today</a> about drug policy and decides that:<br />
<br />
<blockquote class="tr_bq">
One plausible story is that marijuana would <em>substitute</em> for
alcohol use, and since marijuana has fewer health risks than booze that
would militate in favor of policies designed to make pot at least as
easy to get as beer. Another also possible story is that legal marijuana
will <em>complement</em> drinking, and therefore exacerbate existing
alcohol-related problems. That would indicate that we should try to make
pot less widely available than beer currently is (though still more
available than under the status quo) along with higher taxes on alcohol.</blockquote>
Like much drug policy writing, this idea suffers from several fairly coarse assumptions but most importantly the failure to make a distinction between overall drug use and "problem use" that carries a significant social cost. <span class="echo-item-text">It's as if people were trying to reduce car accidents by making it harder to get a car. Yes, it may have some
effect, but you're sort of missing the point. <br /><br />Efforts to
prevent the population at large from smoking pot (or really, doing any
illicit drug) are doomed to be very ineffective. If you commit a
burglary your chances of getting caught are something like four hundred
times higher than if you consume illegal drugs (and your chances of
getting caught for committing a burglary are not that high.) <br /><br />There's
good news there, though, because the really harmful problem use in the
US is drug use by people who commit crimes. For many years it was
believed that drug use actually turned people into criminals, but this
was studied in the 1980's (check your university library for the
excellent work of James Inciardi among others) and found to be
incorrect. </span> <br />
<span class="echo-item-text"><br />It is actually very easy to lower the
drug use of convicted criminals by drug testing them several times a
week and imposing a mildly painful penalty like a small amount of
community service. Those who are addicted and truly cannot stop will
have to be provided with treatment (or, if you prefer, stiffer penalties
like incarceration), but it is known that most drug users are very
responsive to the costs - both monetary and other costs - of their drug
use and if those costs go up significantly and predictably, they will
use less. </span><br />
<span class="echo-item-text"><br /></span>
<span class="echo-item-text">This approach is known as "Coerced Abstinence" and with a google search you can read all kinds of stuff about it including a lot of scholarly research. It has been discussed since at least the late 1990's and has been implemented many places and its effects studied. </span><br />
<span class="echo-item-text"><br /></span>
<span class="echo-item-text">Long story short, it works very well, is cheap, and reduces the strain on the justice system. It also lowers drug use among criminals, which is a population whom EVERYONE, from prohibitionists to outright legalizers, agrees should not be using mind-altering chemicals recreationally.</span><br />
<span class="echo-item-text"><br /></span>
<span class="echo-item-text">This is not just an approach we should be trying. It is THE approach we should be trying. It makes sense. It works. It doesn't cost billions of dollars. What's the holdup?</span>Anonymoushttp://www.blogger.com/profile/13829102073305209917noreply@blogger.com0tag:blogger.com,1999:blog-7547563268719552716.post-1359787777809149342013-03-26T08:27:00.002-07:002013-03-26T08:30:01.499-07:00Bitcoin - Currency? Bubble? Both? Neither?Interesting post by Yves Smith over at <a href="http://www.nakedcapitalism.com/2013/03/bitcoin-bubble-or-new-virtual-currency.html#comment-1168831">Naked Capitalism</a> today regarding the phenomenon of Bitcoin. Smith's post is very long and I'm not going to take on all the points therein, but I did want to attempt a quick summary of my take on Bitcoin.<br />
<br />
The title of Smith's post is "Bitcoin: Bubble or New Virtual Currency?"<br />
<br />
The first thing I notice about this headline is that it's a false dichotomy. Of course it could be that Bitcoin is a genuine new virtual currency AND in a bubble. I imagine this is mostly pithy headline writing as I trust Yves Smith understands this fact quite well, but I feel it's important to be clear about these things.<br />
<br />
The second thing is that you can answer this question pretty easily. A currency in the modern context requires two things - a monopoly issuer and a taxation authority. <br />
<br />
Bitcoin has the first - there is a cryptography algorithm that issues Bitcoin, and that's the only source of net Bitcoin. So we're good there. The problem is with the second part of the life cycle - the taxation authority. Currently no entity exists that can levy Bitcoin-denominated taxes on real assets.<br />
<br />
Now, according to circuitist theory this is OK, as long as you have a legally recognized banking system that trades in Bitcoin-denominated debts, Bitcoin can still have value as a currency because the banks can levy a claim on other assets if the Bitcoin-denominated liabilities are not fulfilled.<br />
<br />
Unfortunately for Bitcoin triumphalists, that doesn't exist either. So, long story short: No, Bitcoin is not a currency. It may have some intrinsic or extrinsic value that does not arise from its value as a currency, but to the degree that its owners' expectations of value are connected to its future as a currency, those expectations are not reasonable.<br />
<br />
Which answers that first question about the bubble. Bitcoins are in a bubble, and indeed the bubble must inevitably pop. But remember always "inevitable" and "soon" are not synonyms.Anonymoushttp://www.blogger.com/profile/13829102073305209917noreply@blogger.com0tag:blogger.com,1999:blog-7547563268719552716.post-33135638202310485382012-12-12T12:04:00.002-08:002012-12-12T12:09:18.527-08:00The Myth of Expectations<span style="font-family: inherit;">Yglesias today has a post titled "</span><br />
<span style="font-family: inherit;"><a class="slb-post-title-link" href="http://www.slate.com/blogs/moneybox/2012/12/12/fomc_adopts_game_changing_conditional_inflation_targeting_rule.html#article_comment_box" style="color: #006699; outline: none; text-decoration: underline;">FOMC Adopts Game-Changing Conditional Inflation Targeting Rule</a>."If you've read his site much you can probably guess the rule - as Matt puts it the Fed "<span style="line-height: 17.983333587646484px;">has stopped screwing around and started doing real expectations-based monetary easing.".</span></span><br />
<span style="font-family: inherit;"><span style="line-height: 17.983333587646484px;"><br /></span>
<span style="line-height: 17.983333587646484px;">I've had beef with Matt about this expectations business for years, and I'm glad to see that Matt is enthusiastic about this change and not saying "well, true NGDP targeting would be better." He's recognizing that this is the idea Matt has been flogging and if it doesn't spur economic growth by easing monetary conditions, that's a bust to the idea.</span></span><br />
<span style="font-family: inherit;"><span style="line-height: 17.983333587646484px;"><br /></span>
<span style="line-height: 17.983333587646484px;">The thing Matt - and many others - fail to understand about the so-called "expectations channel" is that it's something that occurs as a result of other consequences of a policy, not as something unique unto itself. The Fed makes a policy change, the policy change makes an impact, and then there is additional impact because people's expectations about economic performance change.</span></span><br />
<span style="font-family: inherit;"><span style="line-height: 17.983333587646484px;"><br /></span>
<span style="line-height: 17.983333587646484px;">The idea that economic conditions today are being impacted by expectations about Fed action in 2014 is completely unfounded. The new Fed targeting model may well be a great idea! It could lead to better policy! Hooray!</span></span><br />
<span style="font-family: inherit;"><span style="line-height: 17.983333587646484px;"><br /></span>
<span style="line-height: 17.983333587646484px;">What the new model doesn't do is give the Fed new policy tools. Fed policy is the same as it was yesterday - as expansionary as possible for as far as the eye can see. Expectations don't change conditions, conditions change expectations. THEN expectations can theoretically have an accelerating effect. </span></span>Anonymoushttp://www.blogger.com/profile/13829102073305209917noreply@blogger.com0tag:blogger.com,1999:blog-7547563268719552716.post-49981678561403762892012-06-16T06:40:00.002-07:002012-06-16T06:44:53.745-07:00A Balance Sheet Recession in a NutshellThe Financial Times is occasionally refreshingly good. Yesterday <a href="http://www.ft.com/cms/s/0/50b8a556-b6d9-11e1-8c96-00144feabdc0.html#ixzz1xxlJD0DP">Martin Wolf put the essential problem of a balance sheet recession very succinctly:</a><br />
<br />
<blockquote class="tr_bq">
<span style="background-color: white; font-family: inherit; font-size: 16px; line-height: 22px;">[T]hose who are creditworthy do not wish to borrow; those who want to borrow are not creditworthy...</span></blockquote>
This is the problem in a balance sheet recession. Policymakers, who overwhelmingly have banking backgrounds, want to solve these problems through the banking system - by setting interest rates and letting banks create money by lending. <br />
<br />
However, banks cannot create net financial assets - every time a bank makes a loan, it creates an equivalent liability for each asset it creates. So if private sector balance sheets are strained, banks don't lend, no matter what the interest rate is and no matter how much the government might want them to. <br />
<br />
The solution to this problem is fairly simple; unfortunately ideological orthodoxy tends to assume it away. From a different part of the same article:<br />
<blockquote class="tr_bq">
<span style="background-color: white; font-family: inherit; font-size: 16px; line-height: 18px; text-align: left;">Mr Osborne repeated the orthodoxies of the government’s approach to fiscal policy (it needs to be tight), monetary policy (it needs to be loose) and debt (it needs to be reduced).</span></blockquote>
The problem is, in a balance sheet recession, if fiscal policy is tight, balance sheets stay strained because no net financial assets are being transferred to the private sector, and thus no amount of "loosening" of monetary policy (which really just means low interest rates) can actually produce an expansion of private credit.<br />
<br />
The most crucial part of the quote, though, is that bit at the end about debt needing to be reduced. Whose debt? For private balance sheets to "deleverage" (that is, to pay off debt) government debt must be increased. There is no other source for the money needed to pay private debt off - that's what it means to be a monopoly issuer of a currency.<br />
<br />
The simplest way for the UK and US to jumpstart their economies would be to target the people whose balance sheets are in the worst shape - the unemployed. The government could hire the unemployed to perform useful work in their communities for $8/hr until such time as the private economy was ready to hire those people again.<br />
<br />
It really is quite simple, but orthodoxy has a way of blinding people to obvious solutions that don't fit their prejudices.Anonymoushttp://www.blogger.com/profile/13829102073305209917noreply@blogger.com2tag:blogger.com,1999:blog-7547563268719552716.post-47595840345968835352012-06-12T10:25:00.000-07:002012-06-12T10:25:02.829-07:00Are Liberals Ignoring Monetary Policy?One accusation that's been flying around a lot over at Yglesias' place is that liberals are ignoring monetary policy. Matt makes the assertion today in a post called <a href="http://www.slate.com/blogs/moneybox/2012/06/12/job_creation_is_the_fed_s_job.html">Job Creation is the Fed's Job</a>. The story, basically, is that liberals know that the Fed could easily create millions of jobs by changing its policies, but we're fixated on fiscal policy.<br />
<br />
Of course this is not the case. The problem is that lots of us, myself included, don't believe that the Fed can do much right now. One thing that's been suggested is that the Fed could increase its inflation target from 2% to something higher. I favor that but don't think it will help the current situation. Another is that the Fed should target NGDP growth instead of inflation. I think that's an interesting idea but don't think it will help the current situation.<br />
<br />
Yglesias keeps hammering on two ideas to justify his fixation with monetary policy - one, that Bernanke himself says that the Fed has tools that could help the economy but isn't using them for some reason. This isn't true - Bernanke says the Fed has things it might try if conditions warrant. That's not the same as saying there are things that would help now that he's refusing to do.<br />
<br />
The second idea is that there are central banks around the world that are succeeding with the monetary policy ideas he's hawking. Matt's first obsession was Sweden - he linked to an article about Sweden setting its policy rate negative. Unfortunately Sweden never set a negative policy rate - it was an apparent misunderstanding by a reporter <a href="http://economix.blogs.nytimes.com/2009/10/01/negative-interest-rates-in-sweden/">that had been debunked </a>before Yglesias ever got involved. <br />
<br />
Yglesias continues to claim that Sweden did what they did not do, and has never addressed the Economix piece to my knowledge. And now he's got a new dead horse to flog: Bank of Israel's alleged targeting of NGDP growth. Evan Soltas started a rumor that Bank of Israel was NGDP targeting and that this policy had led to Israel's impressive growth path since the 2008 financial collapse.<br />
<br />
Once again, though, Matt has simply catapulted a myth into the mainstream. Bank of Israel is not NGDP targeting. Sweden never had a negative policy rate. All these little mistakes add up to a big imaginary set of data that monetarists seems to have agreed to pretend is actual data. This is no way to discuss the finance policy of the most important nation in the world.Anonymoushttp://www.blogger.com/profile/13829102073305209917noreply@blogger.com0tag:blogger.com,1999:blog-7547563268719552716.post-53421135412322298022012-06-12T05:59:00.000-07:002012-06-12T05:59:03.172-07:00Proving that Bank of Israel is Using an Inflation TargetEric, one of the more rabid market monetarist commenters at Yglesias' place, is still insisting that I prove that Bank of Israel is not using NGDP targeting. So, here goes.<br />
<br />
1. Bank of Israel's published policy is a 1-3% inflation target.<br />
2. Bank of Israel publishes a report every quarter explaining how it arrived at its policy by targeting 1-3% inflation.<br />
3. Bank of Israel's policy changes are consistent with a 1-3% inflation target (their stated policy) and inconsistent with an NGDP target (their alleged secret policy that a prep student invented by writing a blog post.) We know this because in late 2009 Bank of Israel <a href="http://www.bankisrael.gov.il/deptdata/general/infrep/eng/inf0903e.htm">tightened rates to curb inflation </a> despite the fact that NGDP growth was below the alleged target rate of 6.5%.<br />
<br />
I really, really hope that does it. But somehow I think that it won't.Anonymoushttp://www.blogger.com/profile/13829102073305209917noreply@blogger.com0tag:blogger.com,1999:blog-7547563268719552716.post-31635708633974563312012-06-11T20:15:00.003-07:002012-06-11T20:48:47.532-07:00The Bank of Israel is not using NGDP TargetingA couple days back Scott Sumner approvingly linked to a piece by a little-known blogger named Evan Soltas in which Soltas <a href="http://esoltas.blogspot.com/2012/06/israel-targets-ngdp.html">alleged that the Bank of Israel is using NGDP targeting</a>. <br />
<div>
<br /></div>
<div>
Then Matthew Yglesias approvingly linked to the Scott Sumner article, and now around the web you're seeing market monetarists in comment threads bringing up how wonderful NGDP targeting is and wouldn't it be nice if all central bankers were as smart as the ones at Bank of Israel.</div>
<div>
<br /></div>
<div>
Well, there's a problem. The Bank of Israel is not using NGDP targeting. Soltas' "evidence" that the Bank of Israel was using a 6.5% NGDP target is that Israel's NGDP growth rate has hovered around 6.5% the past few years. Seriously, that's the evidence. </div>
<div>
<br /></div>
<div>
Sumner, who despite being by all accounts a nice guy traffics in these kinds of flimsy free-associations all the time, took Soltas' post at face value, and Yglesias, who is not known for his rigor, catapulted the whole myth into what passes for the blogosphere's "mainstream." </div>
<div>
<br /></div>
<div>
This is the same thing that happened with Sweden's fictional negative interest rate policy - Yglesias linked to an old article that had since been corrected and now the myth keeps popping up because Yglesias never, ever corrects anything. </div>
<div>
<br /></div>
<div>
I defend Matt a lot to people who think he's a real nuisance, but this sort of thing makes it hard. Correct the record, Matt. Bank of Israel is not using NGDP targeting - they're using a 1-3% inflation target. Full stop.</div>Anonymoushttp://www.blogger.com/profile/13829102073305209917noreply@blogger.com0tag:blogger.com,1999:blog-7547563268719552716.post-41657202899577430752012-06-07T20:56:00.001-07:002012-06-07T20:56:49.248-07:00The Television Addiction SituationOnce upon a time there were two children who were very smart and very obedient but whose parents had made a very serious miscalculation. The parents had allowed the children to become addicted to television.<br />
<br />
Every morning upon awakening the children would demand television. They would demand to have it before breakfast, and when they were told they could not have it before breakfast, they would demand to have breakfast WITH television, and when they were told they could not have breakfast with television, they would collapse on the floor in tears and refuse to do anything at all for the rest of the day.<br />
<br />
The parents were beset by offers from friends and neighbors to break the children of their unhealthy reliance on the glowing storybox, but the parents, being an odd sort of parents, saw in their kids' affliction an opportunity. <br />
<br />
One morning when the children awakened they were greeted not with the normal trip to the breakfast table but to a strange room that they had never noticed in the house before. Inside were stacks of cards, each identical to the next, with a drawing of a snake wrapped around a staff, and the signature of the mother and father in the bottom left and right corners, respectively.<br />
<br />
The children were told that from now on in order to watch one television program each child must remit one card to either the father or the mother. The cards were acquired by doing chores - one card for sweeping the kitchen, two for cleaning out the shed, and three for planting a berry bush or suchlike improvements to the home.<br />
<br />
At first the children worked only for the television they wanted to watch each day, but soon Ruby, who was older, said to her little brother "Luke," for that was her brother's name, "we should spend a day doing chores so that the next day we can spend the ENTIRE DAY watching television."<br />
<br />
The prospect of an entire day of doing nothing but watching television so inspired the little one that he did twice his normal work - though it was still a fraction of what his sister could do - and the two saved enough cards to make their dream come true. They could hardly contain their excitement as they lay their heads down to sleep.<br />
<br />
When they awakened they did not demand television before breakfast but ate their fill, knowing that a glorious day of television watching lay ahead of them. After finishing their meal they sat down and watched all their favorite movies, and all the best episodes of the very funniest shows. <br />
<br />
At lunchtime they ate thoughtfully and talked about their cards. They loved television but they loved the power of the cards as well, and they didn't want to be without television the next day. In the end it was decided that they would go to a friend's house for the afternoon, and use their cards to watch television the next day.<br />
<br />
As time went on the children began to acquire so many cards that they could not imagine ever using them all. It was then that things began to get complicated.Anonymoushttp://www.blogger.com/profile/13829102073305209917noreply@blogger.com0tag:blogger.com,1999:blog-7547563268719552716.post-4767370626514323952012-06-04T11:09:00.001-07:002012-06-04T11:13:41.745-07:00Yglesias Comment MirroringI've been unable to force myself to post here enough to get the blog going, so for at least a while I'm going to try cross-posting my substantive comments from Yglesias' blog. Perhaps after a while this will get me in a good enough posting habit that I can do something a bit more reader-friendly. For now, here goes:<br />
<br />
Today <a href="http://www.slate.com/blogs/moneybox/2012/06/04/what_s_holding_back_the_federal_reserve_.html#article_comment_box">Yglesias links</a> to a <a href="http://www.nextnewdeal.net/rortybomb/what-constrains-federal-reserve-interview-joseph-gagnon">Mike Konczal interview</a> of former Fed staffer Joe Gagnon. <br />
<br />
Yglesias:<br />
<span style="color: #3a3a3a; font-family: inherit; line-height: 16px; text-align: left;"><br /></span><br />
<blockquote class="tr_bq">
<span style="color: #3a3a3a; font-family: inherit; line-height: 16px; text-align: left;">After all, right now the European Central Bank is refusing to engage in the volume of monetary activism that the European Union needs and the Fed is refusing to engage in the volume of activism that the United States needs. </span></blockquote>
<span style="font-family: inherit;"><br /></span><br />
<span style="color: #3a3a3a; font-family: inherit; line-height: 16px; text-align: left;">This is quite a triple bank shot, but the reasoning is more or less sound. More than anything it points up how ludicrous our self-induced paralysis is - it can't be the case that a currency war between the two most important economies in the world would maximize human welfare. There MUST be better policies available. </span><br />
<span style="font-family: inherit;"><br /></span><br />
<span style="color: #3a3a3a; font-family: inherit; line-height: 16px; text-align: left;">As for the linked post, I appreciate learning that the Fed is currently authoritzed to buy FCR in large quantities as I wasn't sure that was the case. </span><br />
<span style="font-family: inherit;"><br /></span><br />
<span style="color: #3a3a3a; font-family: inherit; line-height: 16px; text-align: left;">I hope that people read the full interview, especially the part where Gagnon makes it ABSOLUTELY CLEAR that the only impact of Fed asset purchases of bonds is through the interest rate channel: </span><br />
<span style="font-family: inherit;"><br /></span><br />
<blockquote class="tr_bq">
<span style="color: #3a3a3a; font-family: inherit; line-height: 16px; text-align: left;">In the Treasury market, yields on three-year notes are only 0.3 percent, so the Fed must buy five-year to 30-year bonds to have any effect. With the 10-year yield at 1.5 percent, the scope for further effects is modest. Even if the Fed bought every 10-year Treasury, it would be hard to get the yield much below 1 percent, because the risks on such a bond become tremendously skewed toward future losses. </span></blockquote>
<span style="font-family: inherit;"><br /></span><br />
<span style="color: #3a3a3a; font-family: inherit; line-height: 16px; text-align: left;">Gagnon is exactly right - since Fed policy operates through the interest rate channel, when rates are as low as they go Fed policy doesn't do anything. The point of "unconventional" monetary policy is NOT to stimulate the economy directly but to lower long rates. Once long rates hit bottom Fed asset purchases no longer have any effect. </span><br />
<span style="font-family: inherit;"><br /></span><br />
<span style="color: #3a3a3a; font-family: inherit; line-height: 16px; text-align: left;">So, if the Fed bought every MBS in the economy Gagnon believes we could lower the mortgage rate for prime borrowers to somewhere a shade under three percent. Would that impact lending? Of course! It would mean that people who are not creditworthy at 3.75 percent but are creditworthy at, say, 2.75 percent could get a loan. That would be stimulative. </span><br />
<span style="font-family: inherit;"><br /></span><br />
<span style="color: #3a3a3a; font-family: inherit; line-height: 16px; text-align: left;">So, I will direct to this post anyone who accuses me in the future of saying the Fed is powerless. The Fed has the power to set interest rates, and could lower long rates a bit more by buying up mortgage backed securities. The Fed could also theoretically buy foreign currency. It has no other powers. </span><br />
<span style="font-family: inherit;"><br /></span><br />
<span style="color: #3a3a3a; font-family: inherit; line-height: 16px; text-align: left;">For the record I don't at all share Gagnon's belief that it would be a good idea to authorize the Fed to intervene in the stock market.</span>Anonymoushttp://www.blogger.com/profile/13829102073305209917noreply@blogger.com0tag:blogger.com,1999:blog-7547563268719552716.post-42895834016064821542012-05-23T17:04:00.001-07:002012-05-23T17:04:31.659-07:00A Place for The Yglesias Banking System DiscussionMy wife's out of town so I'm hanging out a lot over at Yglesias' place discussing the banking system. It's getting a little tedious to use the comments over there for such a long discussion, so here's a place we can discuss it. Hopefully I can get Adam to come over here and continue our session, and perhaps some others will follow as well.Anonymoushttp://www.blogger.com/profile/13829102073305209917noreply@blogger.com0tag:blogger.com,1999:blog-7547563268719552716.post-70969753060912194912012-02-09T10:18:00.000-08:002012-02-09T10:34:05.899-08:00Russ Roberts Interviews William BlackReally good interview via <a href="http://disqus.com/forums/neweconomicperspectives/new_economic_perspectives_william_k_black_on_financial_fraud/trackback/">New Economic Perspectives</a>.<div><br /></div><div>I especially like the explanation of the type of fraud that allows banks to continue to report good earnings while they're actually going under. </div><div><br /></div><div>Basically, as Black explains it, let's say I'm a bank that made a dumb $60m commercial real estate loan to a developer. The developer never makes any money, so he never pays back any part of the loan. Thus I, the bank, am the new owner of a $60m development that's almost certainly not worth $60m. </div><div><br /></div><div>However, I don't want to eat the loan because it will hurt my profits and I might not get my bonus. So the next time someone darkens the door of the bank, I talk him into taking out an $80m loan to buy my worthless development for $78m and then have $2m "walking away money." Now, I've kicked the can down the road because 1) I sold the property at a profit and 2) the new owner of the development can use some part of his $2m to service the debt for a little while.</div><div><br /></div><div>During this time, of course the bank is in even worse objective shape (since it's now loaned $80m against the same property we know wasn't even worth $60m) but I can continue to collect bonuses and possibly even stave off regulators if they don't stick their noses too far up into my business.</div>Anonymoushttp://www.blogger.com/profile/13829102073305209917noreply@blogger.com0tag:blogger.com,1999:blog-7547563268719552716.post-6606733080103864472012-01-20T18:35:00.000-08:002012-01-20T18:50:36.395-08:00Unvanishing the Vanishing Dollar<span><span >Lots of good stuff going on right now making it difficult for me to blog. However, I wanted to highlight this conversation I had with the Internets about private sector savings and federal deficits.<br /><br /></span></span><div><span><span><span >Yglesias: </span> ""A path to an increased national savings rate over the long-term that opens with a gigantic increase in public sector debt doesn't make any sense.""<br /><br /></span></span></div><div><span><span><span >ApeMan:</span> Actually, it does! I don't favor a cut in the capital gains rate for fairness reasons, but in fact public sector deficits are the ONLY source of net financial savings by the private sector. <br /><br /></span></span></div><div><span><span>Private sector saving equals, to the penny, public sector deficit. The only source for net financial saving is money creation by the currency issuer.<br /><br />This is the piece of information that is preventing you from understanding economics, Matt. You MUST think about it and try to understand it. If you don't the confusion you sow will continue to offset the good work you do. It's really critical.<br /><br />This is why it's misleading to think of deficit spending as "borrowing." It isn't - not really. It's the creation of net financial assets.<br /><br /></span></span></div><div><span><span>Here's a simple way to think about it in lay terms. The federal government creates a certain number of dollars in a given year. Some of those dollars are accumulated by foreigners - that's the trade deficit. Thus for savings by Americans just to get to zero, the government has to create dollars (deficit spend) equal to the level of the trade deficit. For Americans to actually accumulate net dollars (save money) the government must create a number of dollars GREATER THAN the level of the trade deficit.<br /><br />The government does not, of course, borrow these dollars from anyone. It just creates them. If it creates fewer net dollars than are sent overseas, Americans wind up with less savings. If it creates more than are sent overseas, Americans wind up with more savings. It's so simple, as I think Galbraith wrote, that the mind recoils from it.<br /><br /></span></span></div><div><span><span><span >Steve:</span> I don't understand, ApeMan. I thought money is created by people and corporations who </span></span>borrow from banks.</div><div><span><span><br /></span></span></div><div><span><span><span >ApeMan: </span>Money is indeed created by bank loans. However, when a bank loan creates money it also creates a corresponding private sector liability (the note itself), so the total operation nets to zero. Total private savings are unaffected. </span></span></div><div><span><span><br />When the currency issuer creates a dollar, no corresponding private sector liability is created, so the total operation has a net positive impact on private sector savings.<br /><br />This sounds complicated but in fact it's quite simple - when you borrow money from your bank, you wind up with two accounts, a deposit account (positive) and a loan account (negative). When you get a check from the federal government, you wind up with one account, a deposit account (positive.)<br /><br />The government's account with the Fed is debited, of course, but the government's account with the Fed is purely notional - the federal government doesn't have "savings."<br /><br /></span></span></div><div><span><span>In a way it's actually easier to understand if you look at the way it used to work. Banks used to create their own money, such that when you took money out of your bank it would say "Bank of America Note" on it instead of "Federal Reserve Note." Banks had various agreements about honoring each other's notes.<br /><br />Eventually everything was standardized when the Fed declared that notes issued by legitimate banks would clear "at par" with federal reserve notes, at which point there was no longer any need for individual banks to issue their own notes. That's why now we just use nothing but federal reserve notes.<br /><br />The only downside is that it's harder to demonstrate conceptually that some money is "bank money" and some money is "state money" since now it all looks and acts the same, regardless of where it originated.<br /><br />The one key is: bank reserves - and thus savings - are still always state money. That's why deficits are the norm for modern governments. It's a feature of the system, not a bug, and present deficits do not necessitate future tax increases. It's a misconception.<br /><br /></span></span></div><div><span><span><span >LD:</span> Why would 'net private sector savings' be zero?<br /><br /></span></span></div><div><span><span><span >ApeMan:</span> Imagine I'm the currency issuer. I issue $100 in notes. Now people have $100 in savings. Then at the end of the quarter I tax them back again. Now people have $0 in savings.<br /><br /></span></span></div><div><span><span><span >LD:</span> That would only be if the tax equaled the entire money supply, but maybe I'm not understanding your argument.<br /><br /></span></span></div><div><span><span><span >ApeMan:</span> No, the money supply is the total amount of money in existence, not the NET money in existence. Savings is net money. The private sector can't create savings by borrowing, obviously.</span></span></div><div><span><span><br />To extend the example, I'm the currency issuer and I issue $100 of state money. Bank A now has $100 of reserves and a deposit account in the amount of $100. Now Bank A makes loans in the amount of $100, so now Bank A still has $100 of reserves but it has $200 in deposits ($100 in bank money, $100 in state money) and $100 in loans.<br /><br />The total NET savings in the economy is still $100, no matter how much money Bank A creates by lending.<br /><br /></span></span></div><div><span><span><span >LD:</span> If I might adjust your example?<br /><br /></span></span></div><div><span><span>Currency issuer issues $1000 at $100 each to 10 banks.<br /><br />Banks loan out with 10% reserve, implying a total money supply of $9000. Let's say the banks make 5%, for a total profit of $450.<br /><br />On tax day, Gov'mint takes 10%, $45, and spends $45.<br /><br />First, you assume money supply=tax rate or government expenditure. Second, even if the net savings is '$100', or $1000 in my scenario, this is not dramatically affected by the tax imposition such that "money injected into the economy by the federal treasury would be taxed back out again"<br /><br /></span></span></div><div><span><span><span >ApeMan:</span> Right but you're confusing yourself by equating "savings" with "money." Savings is NET money, not total money. Total money is only slightly affected by taxation because most money is bank money. But ALL net money is state money.<br /><br /></span></span></div><div><span><span>The easiest way to see it is to look at the POV of the customer of the bank. He can take out loans in any amount the bank will allow, but his net position will still be zero unless and until he gets a check from some outside entity. if you aggregate the entire private sector together, obviously the only remaining outside entity is the currency issuer.</span></span><div><span style="color: rgb(58, 58, 58); font-size: 12px; line-height: 16px; background-color: rgb(236, 239, 245); font-family: Arial, sans-serif; "></span> </div></div>Anonymoushttp://www.blogger.com/profile/13829102073305209917noreply@blogger.com0tag:blogger.com,1999:blog-7547563268719552716.post-60844691556978353852011-07-15T18:53:00.000-07:002011-07-15T18:59:40.162-07:00More on Debt Ceiling Fight From MSNBCMSNBC's First Read <a href="http://firstread.msnbc.msn.com/_news/2011/07/14/7085201-reid-and-mcconnell-work-on-a-fail-safe-debt-limit-plan">has this tonight</a>:<br /><blockquote><strong><br />"In addition, McConnell said the hope is to also include spending cuts agreed upon by the White House and House Republicans. He said that is the key. Will the White House agree to enough cuts to pass the House."<br /></blockquote></strong><br />So this is the key bit I was mistaken about. In addition to creating another catfood commission, the plan will include actual spending cuts that have already been agreed to in principle by the White House and the House Republicans.<br /><br />So the main questions are whether those cuts will in fact be included in the Senate bill, and if so whether it can pass the House. I'm still hoping No on the first and Doesn't Matter on the second, but it seems we just don't know yet.Anonymoushttp://www.blogger.com/profile/13829102073305209917noreply@blogger.com0tag:blogger.com,1999:blog-7547563268719552716.post-32701875045110318452011-07-15T18:29:00.000-07:002011-07-15T18:51:02.611-07:00Wait A Minute, Is This Thing Over?Is this debt ceiling fight over and nobody told me?<br /><br />I'm hearing from Republican contacts that the current state of play is that the GOP has essentially punted after a falling out between Boehner and Cantor about whether or not the GOP could marshal the votes in time for a passage of a Grand Bargain-type legislative package.<br /><br />Harry Reid and Mitch McConnell then stepped in and fashioned a compromise, which compromise involves Obama submitting a bill full of cuts at some point in the future which will almost definitely not be passed by Congress. In exchange for this "concession" Obama gets control over the debt ceiling until the end of FY2012, a provision that will presumably be extended in an election year without much fuss.<br /><br />Is that right? I don't get the sense at all from liberal blogs and commentators that the Democrats have won, but I get that sense from the Republicans I'm talking to. What gives?<br /><br />***UPDATE***<br /><br />So, here's the bare bones of the Reid/McConnell plan, <a href="http://thehill.com/homenews/senate/171845-reid-and-mcconnell-expect-to-unveil-plan-b-next-week">via The Hill</a>:<br /><blockquote><strong><br />The proposal McConnell introduced would authorize President Obama to raise the debt limit by $2.5 trillion in three requests.<br /><br />Under the plan, Obama would have to make three requests to Congress which lawmakers could block only through a resolution of disapproval. It gives Obama nearly unilateral authority to raise the debt limit because it would require only 34 votes in the Senate or 146 votes in the House to sustain a veto of a disapproval resolution. <br /><br />Reid is talking with McConnell about adding $1 trillion to $1.5 trillion in spending cuts to the authorizing legislation.<br /></blockquote></strong><br /><br />Now what I heard, which I'm still trying to find evidence for, is that the cuts aren't even part of the actual legislation, that they are a sort of floater that requires an up or down vote on a slate of Obama cuts. That's not what this piece says so that bit may be wrong. I'll continue to update as I have more information.Anonymoushttp://www.blogger.com/profile/13829102073305209917noreply@blogger.com0tag:blogger.com,1999:blog-7547563268719552716.post-14325952714100593122011-07-14T19:49:00.000-07:002011-07-14T19:53:31.246-07:00ECB Could Just Print the MoneyI admit I got this via Atrios, but he didn't really add much so I'll just cheekily link to the original post at CEPR pointing out that <a href="http://www.cepr.net/index.php/blogs/beat-the-press/italys-crisis-the-ecb-could-just-print-the-money">the European Central Bank can solve the debt crisis any time it wants to</a> by creating money and granting it to member states to pay their bills.<br /><br /><blockquote><br />The European Central Bank (ECB) can just print euros which can be used to address any potential default risk among its member countries. There would be little obvious economic downside to this policy since most European counties have large amounts of unemployment and excess capacity due to inadequate demand.<br /></blockquote><br /><br />If this were done as a per capita grant to all Eurozone members, it wouldn't cause a race to the bottom - in fact it could be contingent upon following certain budgeting guidelines, if you're into that sort of thing.<br /><br />There's no technical reason it can't happen, only political reasons.Anonymoushttp://www.blogger.com/profile/13829102073305209917noreply@blogger.com0tag:blogger.com,1999:blog-7547563268719552716.post-23856279609259239452011-07-13T12:39:00.000-07:002011-07-13T12:45:38.418-07:00Yglesias At It AgainAfter I praise a post of Matt's he usually turns around and posts something that's wildly mistaken. Today is <a href="http://thinkprogress.org/yglesias/2011/07/13/268522/if-people-had-more-money-they-would-spend-it-on-things/">no exception</a>":<br /><br /><blockquote><br />Banks penalized for holding excess reserves will presumably lend to someone. Make the penalty large enough, and banks may even lend money at negative rates. Alternatively, they’ll just go out and get fancier office furniture. Either way, money gets spent.<br /></blockquote><br /><br />This exposes Matt's fundamental misunderstanding of how banking works. Banks cannot use their reserve accounts to go out and buy office furniture. They park those dollars in Fed deposits, Treasury securities, and other more complicated financial instruments as a way of maximizing their interest income. They cannot spend it on office furniture or ANY real goods and services. <br /><br />Also, for the millionth time, BANKS DO NOT LEND THEIR RESERVES TO THE PUBLIC.<br /><br />And of course Sweden did not do what Matt says they did. I really wish I could get him to pay attention on this, it's just really embarrassing.Anonymoushttp://www.blogger.com/profile/13829102073305209917noreply@blogger.com1tag:blogger.com,1999:blog-7547563268719552716.post-4478527511778814532011-07-13T11:25:00.000-07:002011-07-13T11:53:27.852-07:00Balance Sheet RecessionEverybody's talking about the balance sheet recession today, as we find <a href="http://krugman.blogs.nytimes.com/2011/07/13/this-morning-in-peevishness/">Paul Krugman</a>, <a href="http://delong.typepad.com/sdj/2011/07/why-oh-why-cant-we-have-a-better-press-corps-peevish-in-the-morning-edition.html">Brad DeLong</a> and <a href="http://thinkprogress.org/yglesias/issue/">Matthew Yglesias</a> discussing <a href="http://www.tnr.com/article/the-vital-center/91856/economy-recovery-foreclosure-housing-prices?page=0,1">William Galston's piece for The New Republic</a>. <br /><br />Delong and Krugman are both ticked off that Galston seems to have called out liberal economists for not saying something that both of them in fact said several times, starting a good while ago - that the US and the world are suffering from a "Balance Sheet Recession."<br /><br />So what is a balance sheet recession? In plain English, a balance sheet recession is when households suddenly become unable to continue spending money because they owe too much money against too few assets. <br /><br />The reason I want to highlight this is because this is intimately connected with the discussion we've been having at Yglesias' place about monetary policy. As I've noted before, banks always lend when they can find creditworthy borrowers at prevailing interest rates and never otherwise. You can increase the supply of creditworthy borrowers by lowering the interest rate, but you can't increase it beyond a certain point because households that have strained balance sheets aren't creditworthy at ANY positive interest rate. <br /><br />To fix a balance sheet recesssion, you have to fix household balance sheets. You can do that in a lot of ways. One way is directly, via mortgage modification which would work immediately, another is by deficit spending which operates on a bit of a lag. <br /><br />At current rates, as Galston notes, at the current rate of deleveraging it's going to be a LONG time before we're back to normal levels of household indebtedness. That means a long recession. If you want to jumpstart the recovery you have to repair those balance sheets faster. Regardless of who said what when, maybe now we can all agree that this is the current situation and start discussing how to approach it.<br /><br />Matt actually gets us started:<br /><br /><blockquote><br />[T]he best resolution would be to set a higher Nominal GDP growth target and clarify that the Fed is willing to accommodate Reagan-era levels of inflation if that’s what’s necessary to achieve it.<br /></blockquote><br /><br />I don't actually think that would work (the Fed can set whatever target inflation rate it wants, but it can't actually cause that inflation to happen), but bravo to Matt for pointing us in the right direction - toward solving the problem instead of arguing over who diagnosed it first.<br /><br />In my view the best resolution would be to send everyone a $500 check every month until we get back to a normal level of household indebtedness. This program would cost 150 billion dollars a month. That's a lot! It wouldn't pay for itself. It would increase the deficit! It might even cause INFLATION!!!!!!one!1! It would also repair the balance sheets, and the economy. <br /><br />Not the best sales pitch, I know. But it has the advantage of being completely accurate.Anonymoushttp://www.blogger.com/profile/13829102073305209917noreply@blogger.com0tag:blogger.com,1999:blog-7547563268719552716.post-78175466950066387982011-07-12T10:46:00.000-07:002011-07-12T10:50:50.960-07:00Sweden AgainSo, <a href="http://thinkprogress.org/yglesias/2011/07/12/266245/the-feds-not-out-of-ammunition-its-just-not-firing/"> the otherwise good Matt Yglesias is at it again</a>, hyping Sweden's famous "negative interest rate" experiment. <br /><br />As I've noted before, <a href="http://vanishingdollar.blogspot.com/2011/03/sweden-and-negative-interest-rates.html">this entire story is the result of a misunderstanding</a> and nothing that Matt has said on the subject is true. <br /><br />To recap:<br /><br />1) Sweden never paid a negative interest rate on overnight reserves, and in fact they never stopped paying positive interest rates on overnight reserves. <br /><br />2) Paying interest on reserves does not cause banks to "hoard reserves" and refuse to loan them out because banks <strong>do not loan their reserves to the public. Ever.</strong>Anonymoushttp://www.blogger.com/profile/13829102073305209917noreply@blogger.com4tag:blogger.com,1999:blog-7547563268719552716.post-81965245972754134702011-03-30T08:14:00.000-07:002011-03-30T08:27:25.598-07:00Austerity and Household DebtEconomics as a discipline has a lot of problems owing to its relative newness, but one thing that's nice about it is that it's backed by another discipline where all the science is known - accounting.<br /><br />Dig deep enough into the accounting side of a bad economic policy and you'll always find something alarming. In the case of the UK's <a href="http://www.businessinsider.com/dixons-profit-warning-2011-3">disastrous plan to cut government deficits during a deep recession</a>, the accounting problem comes in the form of household debt projections, which <a href="http://krugman.blogs.nytimes.com/2011/03/30/austerity-games-here-and-there/">Krugman brings us today </a> via <a href="http://www.nakedcapitalism.com/2011/03/links-33011.html"> Yves Smith </a>(whose charts are always awesome). <br /><br /><blockquote><br />Because the only way the economy can avoid taking a hit from government cuts is if private spending rises to fill the gap — and although you rarely hear the austerians admitting this, the only way that can happen is if people take on more debt.<br /></blockquote><br /><br />Why is that? Can't households theoretically make more money? No. Since US deficit spending is the only source of net US dollars, households as a class cannot gain dollars unless the government provides them via deficit spending. The only way they can increase their spending power in the face of falling deficits is to borrow. <br /><br />We don't need more consumer debt - we need less.Anonymoushttp://www.blogger.com/profile/13829102073305209917noreply@blogger.com3tag:blogger.com,1999:blog-7547563268719552716.post-87728529425766904062011-03-23T18:24:00.001-07:002011-03-23T18:35:02.278-07:00Schumpeter and Clean Energy ResearchThere's a bit of an off-topic debate over at Yglesias' place - <a href="http://yglesias.thinkprogress.org/2011/03/the-prospects-for-martian-socialism/#comment-170209628"> the post itself </a> is about Martians but commenter <strong>njorl</strong> had a very good comment about so-called Cap and Trade:<br /><br /><blockquote><br />People don't like carbon emissions, rather, they like energy which has a byproduct of carbon emissions. By taxing carbon emissions, you squeeze energy production from CO2-producing fuels to non-CO2-producing fuels.<br /></blockquote><br /><br />This is a good description of what cap and trade COULD accomplish. However, we need to be realistic about the fact that what makes Cap and Trade necessary is that we have underprioritized clean energy research as a nation for far too long.<br /><br />If we had known in advance that fossil fuels would damage the ecology of the planet, which of course we didn't for most of the 20th century, we could have chosen to put research dollars into clean energy and possibly develop those technologies to the point where they could compete with fossil fuels now, in 2011. <br /><br />We didn't do that. Too bad! So now we need to intervene in the market to slow the environmental damage from overconsumption of fossil fuels. As economic conservatives will always (correctly!) point out, such interventions often have unforeseen and chaotic effects. <br /><br />These interventions are necessary in the short and probably even the medium term. But long-term the task remains the same - we MUST prioritize clean energy research much more highly than we currently do, and undertake the long-term, serious and difficult process of finding the technologies that will provide for the energy needs of the 21st century. <br /><br />The bit of cap n trade/carbon tax triumphalism I object to is the idea that it will somehow magically force the nation to develop clean energy technology. It won't. It will incent the use of existing clean energy technology. It's tempting to think that this would increase the basic research being done in that field, but in fact there is no market mechanism by which that can happen. Basic research in clean energy, like ALL basic research, must necessarily be a policy choice. <br /><br />As Schumpeter pointed out many decades ago, capitalist markets chronically underinvest in basic research because its commercial benefits are too far in the future. A dynamic actor such as the state is able to correct this over the long term, but for the last 50 years we have focused almost all of our significant nonmedical high-tech research efforts on developing weapons, and we are now reaping the whilwind of that disastrous miscalculation in the form of an antiquated energy production system.Anonymoushttp://www.blogger.com/profile/13829102073305209917noreply@blogger.com0tag:blogger.com,1999:blog-7547563268719552716.post-37833965269402912532011-03-08T17:15:00.001-08:002011-03-08T17:30:43.743-08:00The Annoying, Barking Mad Genius of Morgan WarstlerAs many who read this blog (if any section of this blog's readership can be usefully called "many") probably already know, there is a person out in Internet-land who calls himself Morgan Warstler. <br /><br />He's a blogger for the odd, ugly, and mostly useless righty politics site <a href="http://biggovernment.com">Big Government</a> (full name: "Andrew Breitbart presents Big Government featuring editor in chief Mike Flynn," and no I am not making that up). He's a gadfly on several well-known economics blogs including <a href="http://www.themoneyillusion.com/">Scott Sumner's The Money Illusion</a>, but most of my dealings with him have been at <a href="http://yglesias.thinkprogress.org">Yglesias' place </a> over at <a href="http://thinkprogress.org">ThinkProgress</a>. <br /><br />All in all, the guy is a nutcase, and I really don't recommend listening to him, reading him, or talking to him at all. It will just make you angry and confused.<br /><br />That said, the Warstler may well be a genius. He's fallen in with the wrong people and has couched his policy recommendations in politically toxic, morally bankrupt packages. But the man is onto something. <br /><br />I know, I know. Forty-two loyal Yglesias fans (the entire readership of this blog, sadly) just threw up a little in their mouths.<br /><br />But Morgan's Guaranteed Income plan is sort of on to something. I'll explain later. Just wanted to warn you, sort of an econ version of the "trigger warnings" on sites that focus on social issues. I will be taking up a lukewarm defense of Warstler this week. Consider yourself on notice.Anonymoushttp://www.blogger.com/profile/13829102073305209917noreply@blogger.com5tag:blogger.com,1999:blog-7547563268719552716.post-5279155376822268402011-03-08T15:23:00.000-08:002011-03-08T17:02:54.801-08:00Back from Vacation: Theory vs FactOne very strange* and ubiquitous problem in economics is people's tenndency to skip over operational fact on their way to making their theoretical analysis. <br /><br />Take by analogy this account of my trip home from my parents' house this afternoon.<br /><br />I was driving home from my parents' house this afternoon and I was pulled over by a police officer and given a ticket. (Thankfully this last bit did not actually happen. At least, it did not happen today.)<br /><br />The ticket was for speeding. I will now have to appear in court or pay a fine. <br /><br />All these things are observations that illustrate <em>operational facts</em> about the relationship between a certain member of the public (me) and certain institutions of government. <br /><br />If a police officer sees me driving over a certain speed, she will stop me and give me a ticket that will result in my having certain liabilities toward the government. <br /><br />I may try to come up with some ideas, based on my experience, how I can avoid getting a ticket in the future. Any such analysis should be based on the operational facts above. If I am unaware as to the operational reason I incurred these liabilities I will be in trouble.<br /><br />What does this have to do with macroeconomics? Well, a commentator on <a href="http://yglesias.thinkprogress.org/2011/03/stagnation-and-monetary-policy/#comments">Yglesias' blog</a> called <strong>halfkidding</strong> said recently:<br /><br /><blockquote><br />So-called monetary policy with all its tools and mechanisms is used to do one thing. That is to increase or decrease the amount of credit in the system. <br /></blockquote><br /><br />It's fine to believe, as many fine economists do, the theoretical assertion that monetary policy can increase or decrease the amount of credit in the banking system. However, it's crucial to retain the knowledge that <em>in operational fact</em> what the central bank is doing is setting the interest rate. There are various theoretical mechanisms by which this can increase or decrease the amount of lending in the system, but the magic Fed lever controls the PRICE of funds, not the AMOUNT of funds. <br /><br />As a matter of operational fact banks determine the amount of credit (thus money) in the system by their lending decisions, which are influenced by the prevailing interest rate but also by the availability of creditworthy borrowers. <br /><br />*At least I think it's strange. Researchers of other disciplines could probably say better than I can.Anonymoushttp://www.blogger.com/profile/13829102073305209917noreply@blogger.com1tag:blogger.com,1999:blog-7547563268719552716.post-1610851828112976332011-03-06T14:05:00.001-08:002011-03-06T14:06:50.140-08:00Innes: What is Money?studentee pointed out in comments that <a href="http://www.ces.org.za/docs/what%20is%20money.htm">Innes' "What is Money?"</a> is a good introduction to these ideas and his articles on the topic are the foundation for much of modern thinking about currency. <br /><br />Worth reading if you can get past the density of the prose.Anonymoushttp://www.blogger.com/profile/13829102073305209917noreply@blogger.com0tag:blogger.com,1999:blog-7547563268719552716.post-78958000931810183192011-03-05T10:06:00.000-08:002011-03-05T10:19:06.712-08:00The Origins of MoneyThe conception of the origin of money I alluded to in my earlier post about liberalism is not, of course, the one with which most people are familiar.<br /><br />In the standard telling, originally people used a barter economy, where (to oversimplify the story a bit) a chicken farmer would carry some eggs to market and exchange them for other things he needed, like sugar or flour. <br /><br />Eventually certain commodities, especially precious metals but also fishhooks and other oddities, became accepted as the standard medium of exchange, leading eventually to paper currency that was "backed" by some commodity.<br /><br />It's not clear exactly who originated this story, but it's been disproven for some time by anthropological research. The details of the story are interesting (if you like that sort of thing) but kind of involved, so if you really want to know the ins and outs of how money originated you can check out L Randall Wray's <a href="http://books.google.com/books?id=6PMuExCtMe8C&pg=PA46&lpg=PA46&dq=hazelwood+tallies&source=bl&ots=GiJ7FraHMg&sig=qdT_9jiZ4M2P-70lXdZTfxAZJJ8&hl=en&ei=-3xyTdS0JpLogQeEuo2EAQ&sa=X&oi=book_result&ct=result&resnum=1&ved=0CBoQ6AEwAA#v=onepage&q=hazelwood%20tallies&f=false">Understanding Modern Money</a>. Thankfully the relevant portion is currently available on Google Books' preview so you can read it without finding a copy of the book. <br /><br />The key point, though, is that money never really derived its value from any commodity, and did not evolve as a lubricant to the barter system (which never really existed.) Attempts have been made from time to time to peg the value of a currency to the price of a certain commodity (especially gold) but the value of money comes from its status as TWINTOPT - That Which Is Needed To Pay Taxes.Anonymoushttp://www.blogger.com/profile/13829102073305209917noreply@blogger.com2tag:blogger.com,1999:blog-7547563268719552716.post-78716410262084352582011-03-04T16:03:00.000-08:002011-03-04T17:34:01.141-08:00Money, Taxes, and Property Rights<a href="http://bhl.typepad.com/bleeding-heart-libertaria/2011/03/neoclassical-liberalism-how-im-not-a-libertarian.html">This post over at Bleeding Heart Libertarians</a> got me thinking about the monetary system (surprise!) and the fact that while I don't really care that much about these meta-theory type questions ("are you a classical liberal or a high liberal?") I'm glad people are out there writing about them because it can really give you some useful terminology and frameworks for thinking about things in a straightforward way.<br /><br />For example, Brennan explains that<br /><br /><blockquote><br />One way to distinguish among kinds of liberalism is by their differing conceptions of economic liberty. Classical liberals and libertarians affirm what we might call a thick conception of economic liberty; high liberals, a thin conception.<br /></blockquote><br /><br />Brennan goes on to explain what these terms mean, and it's interesting, but what jumps out at me even at this early point in his discussion is the way this question about the character and importance of economic liberty relates to the battle lines that get drawn in real-world political fights over economic policy. <br /><br />According to anthropologic research (much of it done in France) the human monetary system was conceived as a response to a specific situation - an entrenched overclass who participated in a "gift economy" that was closed to the majority of the population (the underclass.)<br /><br />The government (this was at the dawn of democracy) created a system by which they would pay out tokens to the population and levy a tax on real property, compelling the owners of the real property to participate in the private economy in order to acquire these coins. <br /><br />Thus money became was a way for the people to compel the property-owning overclass to employ their considerable resources (chiefly land and the associated raw materials) to produce value not only for themselves and their friends but also for the benefit of the public at large. <br /><br />Now, this development was not welcomed by the overclass by any means, but it was such an ingenious system that it stuck around (with some hiccups over the centuries, to be sure) to the present day. <br /><br />Thus we would expect libertarianism, accurately characterized in Brennan's excellent post as being close to absolutist in its conception of individual property rights, to be hostile to the very idea of the human monetary system wherein the government levies taxes on property in an effort to compel property owners to produce value towards the public good. <br /><br />Despite libertarian claims to love "the free market" we see libertarianism's true colors in the foundational myth of modern libertarianism, "Atlas Shrugged." <br /><br />John Galt objects to the very idea that he should be compelled to use his property for the public good. In the myth he is attacked for "producing too much" but of course the underlying philosophy (also reflected in Heinlein's seminal libertarian/militarist fantasy "The Moon is a Harsh Mistress") clearly abhors the fact that the world's Atlases are being forced to produce value for the undeserving masses. <br /><br />The reason the system persists is that while rightists love to rhetorically conflate taxation with the stealing of physical property, in actual practice property owners who would never tolerate having their physical property seized by the government will in fact submit willingly to turning over some government tokens a few times a year in exchange for the right to go on being wealthy property owners. <br /><br />Thus what the overclass is left with is to do their best to install people sympathetic to their interests at the levers of power, so that the system can be tuned to allow them the maximum advantage despite the persistence of the basic structure that forces them to produce for the public good. In a democracy, of course, this tends to work only in fits and starts, since politicians who prevent the system from working properly tend to get voted out of office. <br /><br />It's a fascinating and elegant design, at least compared to the available alternatives. Not perfect by any means, but at least we can agree preferable to the lot of an ancient Greek slave or a Medieval serf. <br /><br />For some reason the discourse on liberalism reminded me of my favorite quote from Machiavelli:<br /><br />"It ought to be remembered that there is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. The innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the new."<br /><br />With that I'll leave you alone. G'night.Anonymoushttp://www.blogger.com/profile/13829102073305209917noreply@blogger.com1