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77 Responses to “Innocent Frauds (draft in progress) (full) (Updated March 16)”
RooseveltÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢s Civil Works Administration hired actors to give free shows and librarians to catalog archives. It even paid researchers to study the history of the safety pin, hired 100 Washington workers to patrol the streets with balloons to frighten starlings away from public buildings, and put men on the public payroll to chase tumbleweeds on windy days. – With good reason, critics often referred to the WPA (”Works Progress Administration’ , successor of the CWA) as ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œWe Piddle Around.ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â In Kentucky, WPA workers catalogued 350 different ways to cook spinach. The agency employed 6,000 ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œactorsÃƒÂ¢Ã¢â€šÂ¬Ã‚Â though the nationÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢s actorsÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢ union claimed only 4,500 members. Hundreds of WPA workers were used to collect campaign contributions for Democratic Party candidates. In Tennessee, WPA workers were fired if they refused to donate 2 percent of their wages to the incumbent governor. By 1941, only 59 percent of the WPA budget went to paying workers anything at all; the rest was sucked up in administration and overhead. The editors of The New Republic asked, ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œHas [Roosevelt] the moral stature to admit now that the WPA was a hasty and grandiose political gesture, that it is a wretched failure and should be abolished?ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â The last of the WPAÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢s projects was not eliminated until July of 1943. – from Martin M. Wooster’s ‘Bring back the WPA?’).
- Just as loans create deposits, investment creates savings (equivalent logic for balance sheets and income statements).
- Deficit spending directly adds to our savings (government/ non government mode).
- Domestic credit is funding foreign savings (domestic/foreign mode).
- The consequences of overspending might be inflation or a falling currency, but never bounced checks (operational mode, presumably true in the case of both government deficits and national deficits).
- Any distribution deemed unreasonable by the political forces at any time can be readily altered (ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œintergenerational imbalancesÃƒÂ¢Ã¢â€šÂ¬Ã‚Â are really current distribution imbalances).
- They would realize the issue is equity, and possibly inflation, but never government solvency (operational mode for the intergenerational issue).
It seems to me that the fallacy of composition applies in a recurring way throughout here ÃƒÂ¢Ã¢â€šÂ¬Ã¢â‚¬Å“ credit / money, investment / saving, government deficits / non government saving, domestic deficits / foreign saving, and the stock market ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œsolutionÃƒÂ¢Ã¢â€šÂ¬Ã‚Â for social security.
What appears plausible at the micro level is wrong at the macro level.
Ironically, it only takes operational knowledge to demonstrate this.
see intermixing of “Chinese” Motor car company and “German” Motor car company:
“Domestic credit is funding foreign savings”
“So where do things then stand?
You exchanged the borrowed funds for the car, the Chinese car company has a deposit in the bank, and the bank has a loan to you and a deposit belonging to the German car company on their books.”
Well, we could make retirement a public, rather than a private responsibility by turning SS into a real pension, keyed to some percentage of average earnings and “funded” out of general revenues instead of a regressive payroll tax. You could actually still have some sort of tax-advantage for savings, since money saved is demand you don’t have to tax away, so you get it “for free”…
Not to mention the old industries that have union-negotiated pensions left over from before Reagan killed the unions and came up with the joke that is the 401(k)…
Everyone likes to beat up on the Detroit automakers, but they have so many costs left over from the postwar settlement which used them to replace a real social policy, that it’s like they have couple lead weights chained to their legs when they try to compete with their domestic or their foreign competition. Put stuff like providing health insurance and pensions in public hands where they belong, and then see who can compete at the actual business of making cars…
“try to compete with their domestic or their foreign competition”
Looking at a really big picture, several hundred to thousands of years, it is hard for the society that has grown affluent and whose members do not reproduce to compete with the less “entitlement expectation” society where they breed with reckless abandon. This can be illustrated by looking at the wealth distribution of the USA within the latino community versus the african american community. Decades of child labor laws, worker safety issues, etc etc are being dismantled because a huge exogenous population is competing – they are growing faster than they can be absorbed into the existing western institutional structures. This is sending us into a modern day “dark ages” where long term benefits of the more advanced/developed society have to be learned and fought for all over again – this is no way to grow the world. Where are the big thinkers who are talking about global public policy of child birth as compared to ability of the developed world to incorporate all the new souls into the borg?
IÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢d be very interested to hear what anybody thinks about this piece by John Taylor, excerpts and the link are below.
I think itÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢s mostly wrong.
Also, I donÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢t understand why the usual reaction like this almost NEVER refers to the first round effect of such a reserve expansion on M1, which I think is the only legitimate effect to be analyzed, given that credit creates money and the Fed decides on the supply of reserves.
Also, we know that the multiplier concept is bogus. But is any modification to that (correct) thinking required when the Fed is supplying, not only required reserves, but the extraordinary excess reserves that itÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢s doing now? I suspect not, much but IÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢m not fully sure. What I am sure of is that there is some extraordinarily misleading multiplier analysis being done out there, spun in the usual false generic sense, but positioning the current quantitative ease level of reserves as a doomsday machine based on that generic error.
ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œThe Fed creates money in part by printing it but mostly by crediting banks with deposits at the Fed. Those deposits are called reserve balances and are the key component ÃƒÂ¢Ã¢â€šÂ¬Ã¢â‚¬Å“ along with currency ÃƒÂ¢Ã¢â€šÂ¬Ã¢â‚¬Å“ of base money or central bank money which ultimately brings about changes in broader money supply measures…
These deposits or reserves have been exploding as the Fed has made loans and purchased securities. Six months ago reserves were $8bn, in a range appropriate for its interest rate target at the time. As of last week, reserves were nearly 100 times larger at $778bn, the result of creating money to finance loans to banks, investment banks, AIG, central banks and purchases of private securities…
The growth of reserves has led to an increase in the growth rate of the broader money aggregates, but less than proportionately because banks are still holding excess reserves.ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â
Is it just me or are Taylor’s writings getting increasingly less sane? As I’ve said before, the only good thing about this is that high-ranking economists are exposing their lack of understanding in an exceptionally clear manner with each one of these absurd pieces . . . maybe someday when/if more people understand the monetary system, this will come in handy in exposing them. I was trying to find anything in his piece that was accurate . . . he even got the data on reserve balances 6 months ago wrong! (not surprising that he doesn’t know how to make his way around the Fed’s balance sheet)
Regarding your query on excess reserves, these in no way fund bank lending. Loans create deposits … that’s it. Reserves ONLY settle payments and meet reserve requirements, and the Fed necessarily names the price at which it will provide them for carrying out these activities. In Canada, overnight reserves have been 0 for about a decade, as there are no reserve requirements and all final settlement can be made with intraday reserves (less complex payments system there than in the US). If excess reserves in Canada suddenly rose to a percent of GDP equivalent to the current size of excess reserves in the US, would anyone suggest that the banks there could now finance more loans than before? Obviously not.
JKH: I have tried to engage more deeply with Sumner a couple of times — I think there is something there but am not sure what, yet. Sumner is, in some ways, the anti-Mosler (I think) but fiscal and monetary are, at the limit, very similar. I will spend time on your links — I look forward to learning from them.
I also think that your point about the day to day realities of commercial bank reserve managers is very good. Most people do not believe in or understand the paradigm, so their actions are often self defeating. As moldbug once said, everyone acts as if the world is still on the gold standard even though it isn’t. In terms of predicting actions, the paradigm is not helpful, as it does not guide policy makers.
Although I am not an economist either, I do have some training in the field, and I find the paradigm to totally demolish almost everything in finance or macro, but saying little about increasing the real quantity of goods and services available in an economy (the realm of micro). Certainly in understanding this crises, you need the paradigm, and Fisher’s debt deflation.
Valiant effort at explaining this to others, JKH. Interesting that some disagree with you while admitting they don’t understand the Fed’s balance sheet or specific details about recently created Fed standing facilities. Multiply that by a few million (or more) and that’s what we’re up against.
Your comment on the importance of operational realities is spot on. The way I say it to my students is that every single transaction in the economy affects financial statements, and if you can’t show how the transaction affected the financial statements of those involved, you don’t understand the transaction. The danger, of course, is that if you go off and draw a supply and demand to explain the transaction without understanding the financial statements, you may be analyzing the wrong thing, however internally consistent the analysis may be (loanable funds theory or the money multiplier being two of the more important cases in point).
Thanks for having a look. Yes, I found a wall of fortification in that discussion against what is essentially a single idea. Ironically, that idea in theory should be able to vaporize (or seduce) that wall out of existence. I guess it takes time. Also difficult in my case, unfortunately, is an affinity for an operational paradigm that is supplemented by an intuitive discomfort for supply and demand curves. That overall mix is not a great setting for robust communication.
JKH: I read both threads on sumner’s blog. Both interesting. I need to re-understand what impact FFR (and farther our portions of the yield curve) actually have on the economy. Mosler says they are “not much”, and he may be right, but I still need to think this through more operationally and see how it impacts (or does not) the broader economy. Certainly, interest income is higher, which is good for AD, an aspect I had not considered previously.
Given that banks do not need deposits to make loans (opposite) and deposits don’t count as capital towards capital requirements, why do banks compete for deposits at all? When someone transfers a deposit from one bank to another, the liability of that bank goes up, but what asset goes up? Not cash.
Probably the wrong forum for this, but now that I don’t think deposits are required for lending any more, i don’t know What they do
First, the reason banks want deposits is because it is the cheapest liability possible. The traditional bank business model is to profit on the interest rate spread b/n assets and liabilities.
Second, when a bank receives a new deposit, it could very well be an increase in reserves on the asset side (depends on net payment flows for the day). Overall, on any day, if the bank has more reserves than deemed necessary to settle payments and meet reserve requirements, it will try to lend them in the federal funds or other money market (assuming the fed funds rate is above the rate paid on reserves). In the aggregate, this doesn’t change the qty of reserves (unless the bank buys newly auctioned Tsy’s, obviously), but for an individual bank it does.
By complete coincidence, I put this up in a separate discussion with Winterspeak today:
It may be possible to consider a corollary to the paradigm here.
Banks create new money (deposits) by extending new credit. This works at the micro level and the macro level. ItÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢s the fundamental credit money causality that is generally overlooked, leading to a common misinterpretation of money dynamics.
That obviously doesnÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢t preclude banks from competing for existing deposits, where deposits attracted on a competitive basis lead to a central bank surplus, or replace deposits that may have been lost on a competitive basis.
The second mode doesnÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢t contradict the first.
ItÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢s just that the popular tendency is to construct a world view of finance and economics on the basis of the second interpretation, which is literally a derivative one, rather than the first interpretation, which is the true foundation of credit money linkage.
P.S. this is the commercial banking case that parallels the discussion you and I have had regarding the idea of government surpluses, where taxes operationally can precede expenditure, although only in a derivative sense relative to the true cumulative causality, which is that expenditure precedes taxation.
JKH: where is that discussion? thanks! (ps. it makes sense to me. It also strikes me, though, that banks create Federal Govt insured liabilities whenever they make a loan, since the deposit exists in an FDIC insured account. Nice trick).
“I would rather get stung by one bee everyday for a year than by 100 bees 1 time a year – why is this system better?”
Seems to me that a fiat money system under flex fx and with an appropriate countercyclical macro strategy accomplishes this far better than a gold standard. It’s a straw man to critique the former with the worst-case scenarios or examples of its mis-application. The gold standard’s effects on prices and real GDP were quite variable in real time, even if over long periods prices evened out. I’d much rather have the far less than perfect experience of the last 75 years w/o gold than the experience in the preceding 75 w/ gold.
“you can only sustain output and employment with non convertible currency and floating fx.”
Tampa is about to lay off one thousand government workers because the city government is broke. They cannot deficit spend because they have turned all thier local power over to a central body that is far away from then and thier problems. Washington DC and the NY Fed boyz are trying to micromanage a network that is overwhelming thier puny efforts. If tampa had thier own currency they could deficit spend it. If Detroit had thier own currency they could deficit spend it. Instead they are all having to wait on a central body at the top of the national government who may have all kind of crony lobbyists doing evil things that doesn’t help these cities.
If it is a good idea for a bunch of non convertible currencies at the nation state level to float against each other, why not disperse that even further down to the state or county or even city level?
Reversely if your answer is it is better to have one governing body at the top – then why STOP at the nation state level and why not just adapt 1 global currency for the whole planet? Gold does that and that is why central banks probably still trade in it.
Zanon suppose this blog “the center of the universe” had a server crash – where would all the USERS of this blog then go to share ideas and congregate? It is not wise to have everything centralized.
The fed govt being the sole issuer – This was not always so, in the past in just this country alone there used to be many seperate currency issuers. I have also read in similar times as these in other countries where unemployment was skyrocketing that the local cities or regions began to issue a local currency and trade picked back up on a local level and the local pain at least began to moderate.
Don’t forget Zanon that warren is short euro and long gold mines, so he must be expecting regional currencies to take over as well – Volker has said something similar:
Fiat currency is an extension of sovereignty. If you can demand taxes, you can create currency. The reason the US does not have states issuing their own currency is because state and local Governments, fundamentally, are not sovereign. The Federal Government is.
There may certainly be downsides to this, but there are benefits too.
I have recommended stated do use their own currency in the form of vouchers similar to what california used during a past crisis.
the simply paid their employees in script they would accept for payment of state taxes. this could be phased in when offering new jobs and making new purchases and eventually largely replace the use of $US. This looks to me to be a positive both for the state and the US govt.
Zanon, sovereign taxing power in places where where warren lives like the USVI, seychelles and other offshore tax havens seem to be biased in favor of the rich, powerful, and well connected. A poor guy like me can’t afford the time to figure out all the tricks and I don’t have the money to hire an expert who can. You have to admit Zanon that for a motivated tax cheat, there are many loopholes and tricks to play with the very obscure tax code. I read about land owners having 5 or 6 virtual farm corporations based on the same plot of land getting all kinds of subsidies and breaks. Warren isn’t suffering the hurricanes of the USVI because he wants to give his fair share of taxes back to the government.
MIAMI (AP) — The prosecution has rested in the Miami tax evasion trial of Brazilian race car driver and “Dancing With The Stars” winner Helio Castroneves (EHL’-ee-oh kas-troh-NEH’-vehz).
Warren, I don’t have state taxes, how does your idea help florida citizens? Would it help the various cities/metro areas within florida to offer their own voucher?
And regarding taxes, the govt writes the tax code to direct behavior.
they want home ownership so they have a homeowner deduction for mortgage interest. You may not agree with this policy, but does that mean that anyone utilizing that deduction isn’t paying his fair share?
Same with the VI program. It was implemented to try to help the economy here. It was also aggressively promoted by the US govt.
RICHARD: What can I say? It’s good to be King, or at least good friends with the King. That will never change, but we can hope for a King who knows how to run his country, no? Also, you should not limit your description of biased tax regimes to USVI and seychelles!
WARREN: I have my doubts as to how much CA scrip the good people of California would want to hold. Not to say mixed currency regimes don’t work–they can and do–but I just don’t see demand for saving in CA scrip being that high. I could be wrong!
Several weeks ago I ran into a man who worked in my state treasurers office (Maryland). I mentioned Warrens ideas about tax warrants in lieu of vendor payments (and that I (a vendor) for one would be willing to accept such, at least a certain amount, we could get banks to broker at say 0.1%). It was above his pay grade but he made a point to say that its all about “the credit rating” above all else at the office, so anything would have to be looked at thru that lens.
PS I’m trying!
The issue in terms of acceptability is whether or not the scrip can be used to settle tax liabilities. Do that, and the demand exists, by definition. The exchange rate b/n the scrip and the dollar will vary based upon the qty of scrip circulating vs. the tax liability payable in scrip, but setting the tax liability in the scrip ‘does the trick,’ as Georg Friedrich Knapp put it (I think).
No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.
However, given that our illustrious representatives in Washington don’t actually understand what money is, or reserve accounting, or the basics of monetary policy, the question is would they realize that California was coining its own money?
The key difference was Kentucky created a state bank, and then used its notes instead of directly issuing them itself. So for California to do this, it would first need to create a State Bank of California.
SCOTT: Accepting script to settle tax liabilities will create demand for it, but that says nothing about the demand to *save* it (demand for *extra* scrip). If people want scrip to settle taxes, but nothing more, then G=T. That will help support aggregate demand, but the State will not be able to run much of a deficit without triggering inflation.
“And regarding taxes, the govt writes the tax code to direct behavior.”
You once told me we have to deal with the cards dealt us, but then I think why would a guy make ANOTEHR supercar when there are already so many ferrari, corvette, viper, bughatti, lamborghini, porsche, etc etc already. Did the founding fathers accept the cards dealt to them before fleeing europe? Did martin luther king? The tax code is such a massive leviathon, no “government” has written it – that seems to infer there was a structure and guiding process instead just a mish mash of self contradicting obscurity, and no “government” official understands it all. The mere complexity of it makes it nonsense.
“Same with the VI program. It was implemented to try to help the economy here. It was also aggressively promoted by the US govt.”
It is so beneficial Warren, like you and I am sure so many others, I am motivated to move there and get my own piece of that tax savings.
“Zanon: ItÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢s good to be King, or at least good friends with the King. That will never change, but we can hope for a King who knows how to run his country, no?”
I used to have long debates with my poli sci professor who wanted to convince me the best form of government was benevolent dictator. The KING is limited by his nueral connections in his brain Zanon, it is a HARD PHYSICAL limit, that is why you design things in such a way where they are efficient at the local distributed level and not require a central point of control. Our whole system of government has not scaled has the population levels have grown. 100 senators, a few supereme court justices and 1 president cannot effectively represent 350 million citizens, not even close.
As IBM was firing thousands of American workers last week, the U.S. Patent and Trademark Office published Big Blue’s application to copyright a computerized system that calculates how to offshore jobs while maximizing government tax breaks.
SCOTT: I know. *My* point is that savings desire can change. If there is no savings desire for CalScrip, then the state of California’s T has to equal its G. This limits its ability to raise G without also raising T.
MR MAGOO: I hear what you are saying. Just pointing out that any engineering solution needs to also acknowledge the fact that you will have a King. How do you keep a decentralized solution decentralized? Didn’t work for the US. Didn’t work for China. Isn’t working for Europe. Not saying there’s any easy answer, just pointing out reality.
Zanon in previous monetary experiments, the reason for wrestling control away from a single point went along the lines below – seems not much has changed in 200 years – what I don’t understand is that many pundits said Kerry lost to bush because he talked about the “global test” but today it seems america has had a shift and loves to be globalists – yesterday CNBC ran a story on the cars driven by Obama’s economic team – Orzag, geithner, Summers – etc – most had a foreign automobile – Summers a 1995 Mazda mx3?! and some of the others with a toyota highlander or honda odyssey.
(from Wikipedia) The Second Bank of the United States was authorized for a twenty year period during James Madison’s tenure in 1816. As President, Jackson worked to rescind the bank’s federal charter. In Jackson’s veto message (written by George Bancroft), the bank needed to be abolished because:
It concentrated the nation’s financial strength in a single institution.
It exposed the government to control by foreign interests.
It served mainly to make the rich richer.
It exercised too much control over members of Congress.
“And domestic credit creation-the bank loan- has funded the Chinese desire to hold a $US deposit at the bank.
Whereâ€™s the â€˜foreign capital?â€™ There isnâ€™t any! The entire notion is inapplicable.
Instead, they are dependent on our domestic credit creation process to fund their desire to save $US financial assets.”
There seems to be a lot of debate at the moment about whether or not the time will come when the Chinese and the other BRICs will stop wanting to invest in $ financial assets. What happens then? Presumably the $ will fall in value (whatever that means) and the US consumer will be worse off? Inflation will rise? US consumers’ $ savings will decline in real value (purchasing power) and therefore US consumers will be worse off?
It can’t all be as simple as changing entries in a giant monetary spreadsheet?