Economic Fallacies

[secretwealth]

"alas, economics thinks it's like physics."
One of the greatest tragedies of the modern era--the arts and humanities are looked at with such contempt that economics has to keep emphasizing its quantitative side to keep people listening to them. If we valued the qualitative understanding of human nature, maybe our economic theories wouldn't be so polarizing and often wrong.

[Riggerjack]

Wow, I have had my last three posts in a row disappear. Maybe a third of my posts on this thread aren't here. Is there something I can do to improve that ratio?

[Dragline]

I've not had that problem, but what I would suggest is typing your post in a draft email or scratch pad and then copy/paste it. That way you won't lose it if it doesn't show up.
And you can pretend to be General Petraeus communicating with Paula Broadwell via a dummy email account.

[Seneca]

@Dragline- Bwahahahahah. Awesome.
As a mechanical engineer Second Law is always pervasive in my thoughts, I have used it many many times in economics discussions, politics/regimes etc etc. As always, my belief in my own brilliance was shattered when it was pointed out to me it wasn't a particularly unique idea, but hey, at least it wasn't one of my more stupid ideas.
I don't think MMT argues for infinite stimulus, I think it mostly points out how the modern fiat system works. I quoted a source both that blogger/author Wray and Krugman thought was good definition material, and it's pretty clear MMT itself doesn't argue for stimulus practically without limits. There are people like Wray that use it to make the point, just like there are Keynesians that do the same, but neither Keynes or MMT itself argues for this. Keynes argued for repaying stimulus debts in times of prosperity (ie expiration of tax cuts, reduced gov't spending on progroms etc), and MMT focuses on maintaining a strong currency. As the link I quoted pointed out, MMT specifically recognizes a fiat money is a confidence game. So Wray may dismissively discuss "hyperinflation hyperventilators", but in a fiat money system, right or wrong, those people and their opinions contribute directly to the stability of the system.
Remember Geithner in China? I was sure the US gov't would bail out the banks, but this was the biggest "uh oh" moment I had in the latest panic-
http://www.reuters.com/article/2009/06/ ... 5620090601
You guys ever seen the video "Leadership Lessons from Dancing Guy"?
I see far more economics theory value in this 2 minutes than all the time I spent reading Wray's bullshit:
http://www.youtube.com/watch?v=fW8amMCVAJQ

[Felix]

@Seneca:
I hope you at least got something out of the MMT perspective.
Let me try again. The MMT view of the government is that it is not like a household. So to look at the treasury bills it issues as similar to household debt is the wrong model.

Once you leave the idea that the government is like a household, you can build a new model based on the operational realities of the money system as MMT has done.
Basically, you end up with indeed strange results. The government issues money by crediting accounts. It also issues treasury bills. It doesn't have to, but it does. These bills are probably best thought of as an offer from the government to exchange money which doesn't pay interest for treasury bills which do. It's a way (nicely offered by your government) to collect interest on your money balance. It's like a bank offering a savings account. It's not like a personal household debt for a car or a house or anything like that at all.

The “debt” itself, the bonds, really shouldn’t be thought of as “debt”. Government debt is really more like “paper money that pays interest”.
That's what China has. They have their money in the savings account. If they "demand debt payment", they move the balance from the savings account to the checking account. And when they do that, they simply don't get any more interest payments from the US. No problem paying "debt" to China.
What people who misunderstand the moneysystem do is not cause price stability, but unemployment, a shrinking economy and all the other things that go with a recession based on creating unfounded panic over things that aren't even an issue.
I don't think that Wray, the director of the Center for Full Employment and Price Stability, argues for debasing the currency. All MMTers argue that in case of an inflation you need to lower government spending and/or increase taxes.

They argue against such a policy in a recession.
If you don't like Wray, I would highly recommend Mosler, that's the guy I learned MMT from:

http://moslereconomics.com/wp-content/p ... s/7DIF.pdf

[Riggerjack]

Back to the stimulus folks: I can't seem to find any particulars. You all seem to agree that when there is a recession, the Gov needs to increase spending to maintain demand.
My question is, How much?
More! Seems to be the answer from Krugman and his ilk.
Is there a guideline on how much gov spending should be increased?

[Dragline]

I believe the answer to that is "SWAG". Scientific Wild-Assed Guess -- or Stupid Wild-Assed Guess if you prefer.
Not to be confused with Schwag, which are the doo-dads and freebies given away at meetings and conferences.
I think it would be hard to even do a SWAG without taking into account what kind of stimulus it is (yet another variable) and that old velocity of money problem as well at the rate private debt is contracting or expanding.
For an example, compare the tax rebate stimulus plan of early 2008 (http://en.wikipedia.org/wiki/Economic_S ... ct_of_2008),

with the indirect method of "Quantitative Easing" or building new roads. My guess is that you'd get more bang for your buck up front from the former than the latter, although the latter might have more significant impact months or years later.
The more important lesson to learn from those episodes is that its clear that politicians neither understand nor really give a rat's ass about economic theories, given the former was approved by huge majorities in both parties. See http://www.foxnews.com/story/0,2933,329565,00.html Anyone who voted for a "stimulus" in 2008 who is now running around telling us that "economic theory" says it doesn't work is just a hypocrite with a capital H. Thus, the real lesson is that resort to "economic theory" as a basis for a decision is almost always a disguised political argument about preferred constituencies (and re-election), or at best, a moral argument about the appropriate relationships between creditors and debtors.

[Felix]

Here's Mosler's Plan, short version:

http://moslereconomics.com/2008/09/30/m ... t-version/
It appears that since this is hard to guess correctly, the basic idea is to start building up the deficit using tax breaks for the general working public and removing them once there are first signs of inflation.

[Riggerjack]

I'm still reading the links form above.

This is from http://bilbo.economicoutlook.net/blog/?p=3773
"Responsible fiscal practice
Now at the risk of repeating myself a million times, this is the macroeconomic sequence that defines responsible fiscal policy practice. This is basic macroeconomics and the debt-deficit-hyperinflation hyperventilating neo-liberal terrorists seem unable to grasp it:
1. The sovereign government, which is not revenue-constrained because it issues the currency, has a responsibility for seeing that the workforce is fully employed.
2. Full employment means less than 2 per cent unemployment, zero underemployment and zero hidden unemployment."
So, is anyone convinced by someone who thinks the government has a responsibility to meet meet a goal of 2% unemployment when the lowest rate for as long as we've tracking it was 3% back in 1952? Seriously? Some of what he says about Zimbabwe is based on the same world I live in, and from there he takes a left turn and drives far into fantasyland.

[Riggerjack]

Felix, mosler's plan forgot to include the middle step.
http://avionod.wordpress.com/2009/04/06 ... e-happens/

[secretwealth]

On the issue of how responsible government spending is, this article may be of interest: http://finance.yahoo.com/blogs/the-exch ... 30367.html

[jacob]

Here are some more fallacies
1) Believing people are rational.

2) Thinking that people will become rational when subjected to rational arguments.

[Riggerjack]

secretwealth. That chart shows the effects of QE I II and III in dropping the interest rate on the debt. The interesting thing is the average maturity of treasuries is around 3 years. In the midst of interest rates on our federal debt at manipulated historic lows, we are using short term financing.
homebuyers who used 0% down variable rate loans in 2006 during a period of low rates were called irresponsible when the rates reset after 2 years and the loan's affordability dropped.
How is this different?

[Riggerjack]

Felix, I read mosler's short plan.

he forgot the middle step:
http://avionod.wordpress.com/2009/04/06 ... e-happens/

[Felix]

@Riggerjack: Here's a pdf with some graphs on the US stimulus:

http://www.pitbulleconomics.com/stimulus.pdf
I may sound like a broken record by now, but it's different because the government is not a currency using household and doesn't need to finance its spending through debt. It's an additional and optional offer to anyone who holds US dollars to earn interest on that balance.

It may well be that QE lowered the effective average total interest rate in the end by buying up the older higher-interest-paying long-term bills. Now that the short-term rate is set that low, the result is less total interest payments from the government to bond holders.

The US government starts issuing long-term notes, tips and bonds again.
http://www.treasurydirect.gov/instit/au ... stable.htm
But it bought most of the already available long-term debt in the three QEs.

[Felix]

I'll just leave this here:

http://monetaryrealism.com/just-a-remin ... ing-fruit/

[Stahlmann]

any new perspectives with additional 7yrs of experience with the market/economy?

tbh, I bumped this bc I was looking for post on longterm prediction of exchange rates for currencies.

[Mister Imperceptible]

I guess @RJ had championed the Austrian view so much that he got bored of doing so, to the point a few years later he to some degree took the other side, when disaffected Millenials @Jean, @BRUTE, and @MI picked up the torch in the thread regarding the Swiss vote to end fractional reserve banking.

Wolf Richter has done a good job cataloguing the use of all this QE.

America Convulses in Pain, Fed Bails Out the Wealthy

What’s so insidious about the Fed’s bailouts of investors in hedge funds, mortgage-REITS, stocks, bonds, leveraged loans, and other often risky assets? The destruction of capitalism.

What Unicorn Money-Sinkholes Actually Disrupt

What do the companies Wayfair, Zillow, Uber, Lyft, WeWork, Carvana, Tesla, Airbnb, Casper Sleep, Zume, and many others have in common in addition to their current or former status as unicorns with huge valuations?

There is one fundamental thing they all have in common: Supported by what seemed to be an endless flow of investor money, they barged into profitable industries, such as retailing furniture, house flipping, real estate brokerage, taxi operations, serviced temporary offices, selling used cars, manufacturing new cars, retailing mattresses, pizza delivery, and the like, and they disrupted them by throwing around often billions of dollars that they obtained in wave after wave from investors.

And in these profitable industries, they accomplished an amazing feat: they managed very successfully to lose a running ton of money, not just the first year or two while getting their feet on the ground, but year after year, in many cases for over a decade, without hopes of ever making a profit as defined, not by their own home-made metrics, but by Generally Accepted Accounting Principles, or GAAP.

And in the process, they turned themselves into money-sinkholes, supported and subsidized by investors’ willingness to throw good money after bad, right into that sinkhole. That’s how these companies disrupted: They turned classic profitable business models – from house flipping to used car sales – into endless cash-burn machines. And it took a lot of genius to accomplish that.

https://wolfstreet.com/2020/05/29/fed-t ... s-stalled/

If…

Since March 11, the Fed has printed $2.78 trillion to inflate asset prices across the spectrum and bail out those that owned those assets. The Fed also wanted to restart the chase for yield that makes investors reckless and trains them to count on future bailouts when it hits the fan again.

If the Fed had spread that $2.78 trillion equally over the 130 million households in the US, each household would have received $21,426 – welcome help in this crisis for less-well-off households. But this was not for them. It was helicopter money for Wall Street and asset holders.




The post in this thread that most succinctly captured the truth:

Wide income differences provide incentives for people to work hard, start businesses and take risks. As a result, you get a growing economy. Once in a while, you even hit a jackpot like Microsoft or Apple. But you also get large income differences.
Taxing the rich to pay for various equalizers reduces the incentive to work crazy hours and take risks in starting up your own business. The largest experiment to date with equalizing was the old Soviet Union. The factory worker made about the same as the doctor. Collective property rights also means nobody had any incentive to take risks or work harder. We all know the outcome of that experiment. Less economic growth but more income equality.
There is no magic to this. Human nature is the same all over the planet. We get in trouble when we think incentives do not change human behavior. Having less economic activity in return for more income equality may well be a worthwhile trade-off. It's just that we have to be comfortable recognizing that it is a trade-off.

So there is no magic to it. Economic and political theory fed to us all just post hoc justification to advance the interests of the rich and powerful. Rich people make the rules. Change them as they see fit. Throw crumbs to the poor. The middle class (or what was left of it) supports everyone. If we think prosperity comes magically without producing goods and services then collapse is inevitable. Unless collapse is already inevitable because of resource exhaustion, and the rich are just husbanding the totality of the wealth, to survive the coming episodes of mass death.

Certainly a few nerdy NTs at the corner of the internet will change nothing. Understandable to take the perspective that one may as well game the system until it breaks. Which may be soon.

Everybody Knows

Everybody knows that the dice are loaded
Everybody rolls with their fingers crossed
Everybody knows the war is over
Everybody knows the good guys lost
Everybody knows the fight was fixed
The poor stay poor, the rich get rich
That's how it goes
Everybody knows
Everybody knows that the boat is leaking
Everybody knows that the captain lied
Everybody got this broken feeling
Like their father or their dog just died
Everybody talking to their pockets
Everybody wants a box of chocolates
And a long-stem rose
Everybody knows
Everybody knows that you love me baby
Everybody knows that you really do
Everybody knows that you've been faithful
Oh, give or take a night or two
Everybody knows you've been discreet
But there were so many people you just had to meet
Without your clothes
Everybody knows
Everybody knows
Everybody knows
That's how it goes
Everybody knows
Everybody knows
Everybody knows
That's how it goes
Everybody knows
And everybody knows that it's now or never
Everybody knows that it's me or you
And everybody knows that you live forever
When you've done a line or two
Everybody knows the deal is rotten
Old Black Joe's still pickin' cotton
For your ribbons and bows
And everybody knows
And everybody knows that the Plague is coming
Everybody knows that it's moving fast
Everybody knows that the naked man and woman
Are just a shining artifact of the past
Everybody knows the scene is dead
But there's gonna be a meter on your bed
That will disclose
What everybody knows
And everybody knows that you're in trouble
Everybody knows what you've been through
From the bloody cross on top of Calvary
To the beach of Malibu
Everybody knows it's coming apart
Take one last look at this Sacred Heart
Before it blows
Everybody knows

[Riggerjack]

Oh, yeah. I forgot about this thread. Fun stuff.

I guess @RJ had championed the Austrian view so much that he got bored of doing so, to the point a few years later he to some degree took the other side, when disaffected Millenials @Jean, @BRUTE, and @MI picked up the torch in the thread regarding the Swiss vote to end fractional reserve banking.

Well, I began my economics self education with von mises, so I imagine that championing from the Austrian perspective was natural. But I don't limit myself to Austrian perspective. See BRUTE's thread about libertarianism, I barely touched it.

My goal was something akin to the blind men elephant problem. I knew that what I was describing wasn't what others were describing, even when we were trying to describe the same thing. So instead I tried to simulate other's perspectives. Shift position on the elephant, if you will. Then I could get a better feel for what aspects of what I am describing are artifacts of position/perspective, and which aspects hold in multiple positions/perspectives.

Odd that this is such a strange approach to complex problems.

For what it's worth, I love and respect markets, while despising regulation and capitalism. I very much like libertarianism, but at best it's less than half right. Which makes it closer to a default position than anything else I have run across... (Very rarely is anything in the overton window close to half right)

And that doesn't seem to fit anyone else's views, so I can't link anyone to my views. I haven't, and probably never will write them down. Though I hope to demonstrate them.


This was merely a method of better understanding the world we live in. Not to convince anyone of my views.

I didn't expect to find a solution. And I did meet that expectation.

[Riggerjack]

Also, Lenard Cohen is a genius. Thanks MI.