kinder, gentler debt ceiling discussion

[Riggerjack]

This is not to imply that modeling is useless, modeling is an excellent teaching tool. To understand why X tends to affect Y in such a way. To train the mind to look for patterns.
I really like the way Jacob brought in subtle game theory to the monopoly game for looking at change influence. Game theory has been summed up in pop culture with the prisoners dilemma, but the real point I took from it was that changing the setup of the model changes the optimal result. If you don't like the answer, make small changes to the question.
Folks advancing one model over another tend to recognize a starting set of assumptions that match up with their worldview

[Riggerjack]

With that preface, let me explain my preference for a balanced budget.

How do you define a recession? This is important. I think of the business cycle as an inevitable result of human nature. If your buddy gets rich doing X, you may be tempted to try X too. If X has worked in the past, you will tend to keep doing it. Some will do X at an increasing rate. Eventually X will have diminished returns. That's where the smart guys start pulling back, looking for a Y. The smart guys are always a minority. Eventually, X is nearly always losing money, this change causes fear, causing more folks doing Z and O to start pulling back. Recessions are caused by fear and uncertainty. You don't extend yourself when you fear getting smacked down. If the government never made a different rule or spent a dime more than an unchanging budget allowed, we would still have recessions. It is human nature.
But what if, in the middle of this contraction, that government does change rules? What if it also spends like a drunken sailor? There were assets not being used, having the government use them increases overall economic activity, right? But change causes uncertainty. This is why since introducing Keynesian policy to recession management has caused recessions to go from being deep V shapes, to a shallower check mark shape. As government increases spending, prime economic actors hold back. They know where that defecit spending is going to be paid from. Changing the rules in the middle of a recession is a recipe for making it worse. Different rules means more uncertainty.
This is how Hoover made a great depression out of a a deep recession, and then

[Riggerjack]

Sorry, posting by phone.
I meant this is how Hoover made a depression out of a deep recession, and how FDR made it great. It is how bush and Obama teamed up to create our current problems. How do we make it better? Stop rocking the boat. Stop deficit spending, stop messing with safety nets, entitlements, stop messing with health care! It doesn't even matter what the rules are, as much as it matters that you stop changing them.

[Riggerjack]

This is not to imply that the rules don't matter. The market will adjust to whatever the rules are. Don't know how Obamacare will affect you? Cut employee hours down til it's no issue. QE3 makes borrowing costs low? Borrow money for the automation to lower your headcount! Rules change when you go over 50 employees, outsource. And of course, every one of these changes cause changes of their own. And so forth.

[Riggerjack]

Oh, on that uncertainty thing. Manipulating price of money is a favorite way of modeling change. It's also a great source of uncertainty. What a wonderful way to discourage private investment. One more way Keynesian policy flattens out recoveries.
I don't have a problem with Keynes, he was brilliant. I have a problem with Keynesian policies that flatten recoveries and transfer wealth to the political class.

[Felix]

Ok, we seem to have wandered off topic a bit, so I don't feel guilty for going further off topic, talking about the economy as a whole.
I don't believe in any economic models. None of them. Models are simply tools for simplifying parts of a dynamic system, for teaching principals. Keynesian modeling is fun. It shouldn't be taken anymore seriously than that though.

What about the Austrian modeling you are basing your view on?

Think about it, you are trying to map in aggregate the actions of hundreds of millions of people, within a group of seven billion people. Most of those people don't even know about whatever change you are modeling. No matter how big it is.
No model's if X then Y is true. Only if X, then Y tends..."

Not really. I am mostly saying what happens to the accounts and how these accounts work. That's really just math (well, addition and substraction) and very basic accounting. No complex formulas. I am saying that if you drain the pool long enough, you will end up with a much emptier pool.

Folks advancing one model over another tend to recognize a starting set of assumptions that match up with their worldview

Yup.

How do you define a recession? This is important. I think of the business cycle as an inevitable result of human nature. If your buddy gets rich doing X, you may be tempted to try X too. If X has worked in the past, you will tend to keep doing it. Some will do X at an increasing rate. Eventually X will have diminished returns. That's where the smart guys start pulling back, looking for a Y. The smart guys are always a minority. Eventually, X is nearly always losing money, this change causes fear, causing more folks doing Z and O to start pulling back.

What exactly is X? An investment, right? We do agree that the business cycle is a private debt bubble? It is unclear from this description.

Recessions are caused by fear and uncertainty. You don't extend yourself when you fear getting smacked down. If the government never made a different rule or spent a dime more than an unchanging budget allowed, we would still have recessions. It is human nature.
But what if, in the middle of this contraction, that government does change rules? What if it also spends like a drunken sailor?

...or shuts down the government without a viable reason and risks spending cuts by 25 percent for an uncertain amount of time or stops making the payments it has written into law 3 years ago.

Yes, that increases uncertainty quite a lot and is very harmful when you are still recovering from a recession. Indeed.

There were assets not being used, having the government use them increases overall economic activity, right? But change causes uncertainty.

The government jumping in when the private bubble bursts lessens the trend in the economy towards leaving assets unused (and people unemployed). There is less uncertainty when you know that the government keeps the game going.

This is why since introducing Keynesian policy to recession management has caused recessions to go from being deep V shapes, to a shallower check mark shape. As government increases spending, prime economic actors hold back. They know where that defecit spending is going to be paid from.

Can you elaborate on that?

Changing the rules in the middle of a recession is a recipe for making it worse. Different rules means more uncertainty.

Given how much you emphasize this, it is a bit odd that you argue for such a drastic and sudden change in government action.

Stop rocking the boat. Stop deficit spending, stop messing with safety nets, entitlements, stop messing with health care! It doesn't even matter what the rules are, as much as it matters that you stop changing them.

You mean stop providing safety nets, entitlements and health care out of a misplaced fear of government debt, which would be a drastic change in policy, because the market does not like changes in policy?

Oh, on that uncertainty thing. Manipulating price of money is a favorite way of modeling change. It's also a great source of uncertainty. What a wonderful way to discourage private investment. One more way Keynesian policy flattens out recoveries.
I don't have a problem with Keynes, he was brilliant. I have a problem with Keynesian policies that flatten recoveries and transfer wealth to the political class.

Which is why MMT advocates keeping a constant interest rate of very close to zero to decrease government meddling with interest rates.

[44deagle]

The problem with a balanced budget in a debt based money system is that eventually you need to create more money just there is enough money in the system to pay interest on debt.

Even in a perfect scenario where all the base money is lent out 10 to 1, a balanced budget will only make it so far. Eventually new money will have to be injected into system through deficit spending.

Someone correct me if I'm wrong but that is my understanding.

[Riggerjack]

Yes, Austrian modeling is modeling. Same criticism applies.

X is an economic activity. Job,business, investment, racketeering whatever activity gathers wealth.
Your model requires it to be a private debt bubble. It doesn't at all, think Oklahoma dust bowl.

Yes, sharply harmful at any time to make sudden change, i'LLC elaborate this afternoon on why I advocate such a disaster.

[Riggerjack]

Ok, admitting that the sudden move to a balanced budget would be bad for the economy while still cheering the possibility seems contradictory.
It isn't. Any sudden change will cause uncertainty, and we already have uncertainty, so this isn't a good time, right? We haven't had a balanced budget in my lifetime. We've seen lots of recessions, so in my mind, the risk is worth the reward.
Of course, I'm not part of the 1/3 of 1% of the workforce that would be seeking private employment in that scenario, so I may come off as callous. Ultimately long term benefits of a balanced budget are economic stability and the greater prosperity that is sacrificed to deficit spending.
also, if you look at charts of the GNP, both overall and private, you will clearly see the trend I spoke of earlier, of Keynesian stimulus flattening recovery. A balanced budget may be the only way to get the feds to release the resources taken out of the economy following the recession.
when I get home, I'll follow up with some links, and direct answers to Felix's questions.

[Riggerjack]

OK, for clarification, I'll respond in red

Riggerjack wrote:
Ok, we seem to have wandered off topic a bit, so I don't feel guilty for going further off topic, talking about the economy as a whole.
I don't believe in any economic models. None of them. Models are simply tools for simplifying parts of a dynamic system, for teaching principals. Keynesian modeling is fun. It shouldn't be taken anymore seriously than that though.


What about the Austrian modeling you are basing your view on?
Yes, Austrian modeling is modeling. Same criticism applies.
Quote:

Think about it, you are trying to map in aggregate the actions of hundreds of millions of people, within a group of seven billion people. Most of those people don't even know about whatever change you are modeling. No matter how big it is.
No model's if X then Y is true. Only if X, then Y tends..."


Not really. I am mostly saying what happens to the accounts and how these accounts work. That's really just math (well, addition and substraction) and very basic accounting. No complex formulas. I am saying that if you drain the pool long enough, you will end up with a much emptier pool.
This is a function of your model. your math works right, every time, by deciding to make you math work, every time. This is not the way the world works, it is how your model works. If your model were an accurate representation of the world, you could just use the world. a model is a Simplification. if not, why not study the real thing. take for example the model we all did as kids, building a model solar system. even if the scale between panetary bodies was right (rare) the scale of distances was wrong, because nobody had a full gym to use for their model, even then, materials, densities, temperature, all these things were wrog, because they weren't necessary for a model. models are teaching tools, but the most important lesson is what was simplified to make the model, the point isn't to understand the model, it is to understand the principle of the world. But, hey, it's nice that the math is easy.
Riggerjack wrote:
Folks advancing one model over another tend to recognize a starting set of assumptions that match up with their worldview

Yup.

Riggerjack wrote:
How do you define a recession? This is important. I think of the business cycle as an inevitable result of human nature. If your buddy gets rich doing X, you may be tempted to try X too. If X has worked in the past, you will tend to keep doing it. Some will do X at an increasing rate. Eventually X will have diminished returns. That's where the smart guys start pulling back, looking for a Y. The smart guys are always a minority. Eventually, X is nearly always losing money, this change causes fear, causing more folks doing Z and O to start pulling back.


What exactly is X? An investment, right? We do agree that the business cycle is a private debt bubble? It is unclear from this description.
X is an economic activity. Job,business, investment, racketeering whatever activity gathers wealth.
Your model requires it to be a private debt bubble. It doesn't at all, think Oklahoma dust bowl.

Riggerjack wrote:
Recessions are caused by fear and uncertainty. You don't extend yourself when you fear getting smacked down. If the government never made a different rule or spent a dime more than an unchanging budget allowed, we would still have recessions. It is human nature.
But what if, in the middle of this contraction, that government does change rules? What if it also spends like a drunken sailor?


...or shuts down the government without a viable reason and risks spending cuts by 25 percent for an uncertain amount of time or stops making the payments it has written into law 3 years ago.

Yes, that increases uncertainty quite a lot and is very harmful when you are still recovering from a recession. Indeed.
yes. I agree. short term pain for long term gain. It is worth the hit. no denying there would be a hit. I'll get into Keynsian stimulus suppressing recoveries on another thread, it will take time i don't have tonight, and graphs and pictures!

Riggerjack wrote:
There were assets not being used, having the government use them increases overall economic activity, right? But change causes uncertainty.


The government jumping in when the private bubble bursts lessens the trend in the economy towards leaving assets unused (and people unemployed). There is less uncertainty when you know that the government keeps the game going.
see above
Riggerjack wrote:
This is why since introducing Keynesian policy to recession management has caused recessions to go from being deep V shapes, to a shallower check mark shape. As government increases spending, prime economic actors hold back. They know where that defecit spending is going to be paid from.


Can you elaborate on that?
yes. not tonight
Riggerjack wrote:
Changing the rules in the middle of a recession is a recipe for making it worse. Different rules means more uncertainty.


Given how much you emphasize this, it is a bit odd that you argue for such a drastic and sudden change in government action.

yes it is. I address this below

Riggerjack wrote:
Stop rocking the boat. Stop deficit spending, stop messing with safety nets, entitlements, stop messing with health care! It doesn't even matter what the rules are, as much as it matters that you stop changing them.


You mean stop providing safety nets, entitlements and health care out of a misplaced fear of government debt, which would be a drastic change in policy, because the market does not like changes in policy?

No, i meant what i wrote. I know, you have a series of arguments you expect me to make. please read the arguments i actually make. Yes, trimming these programs would help with base unemployment. as such, addressing them in the good years may be appropriate. if you want to recover from a recession quickly, the answer to to change as little as possible. let greed work. greed works better, when price is the main worry.
houses are dropping in value. when i think it's near bottom, "i'm buying!"
vs.
houses are dropping in value. "treasury doubled the cash in the system, Quantitative easing?!? obamacare, what? the mortgage interest rates are crazy low! QE3 tapering? not tapering? I think i'll just hold on to what i have..."
which one of these is going to get us back on our feet?

Paulson's shady maneuvers are worthy of a separate thread, as well.


Riggerjack wrote:
Oh, on that uncertainty thing. Manipulating price of money is a favorite way of modeling change. It's also a great source of uncertainty. What a wonderful way to discourage private investment. One more way Keynesian policy flattens out recoveries.
I don't have a problem with Keynes, he was brilliant. I have a problem with Keynesian policies that flatten recoveries and transfer wealth to the political class.


Which is why MMT advocates keeping a constant interest rate of very close to zero to decrease government meddling with interest rates.

Price manipulation is price manipulation. good for modeling, bad for the economy. There is a huge amount of information in prices. Price manipulation causes distortions, those distortions are rarely anything but bad.

[Riggerjack]

The problem with a balanced budget in a debt based money system is that eventually you need to create more money just there is enough money in the system to pay interest on debt.

Even in a perfect scenario where all the base money is lent out 10 to 1, a balanced budget will only make it so far. Eventually new money will have to be injected into system through deficit spending.

Someone correct me if I'm wrong but that is my understanding.

This is an artifact of your model, see comments about modeling, above.

Let me counter with another model (yes, it will be inaccurate)

Imagine a world entirely separate from government, yet with force of law. so we are discounting taxes, deficit spending, all the economic impacts of government. that means no fed manipulation of money supply.

your model above worries about money creation. that with an expanding economy, there won't be enough money.

this is where fractional reserve lending comes in. A deposits $100 in the bank. B, C, and D each get loans of $80 from the same bank, to buy houses from X, who then deposits $240 in the bank.

WAIT!!! you can't make $240 worth of loans off a $100 deposit! and yet you can. it's called fractional reserve lending. been going on since the Italians were lending $ to nobles for armor, so they could beat down other nobles, and tax their peasants in the late middle ages. Google it, it'll blow your mind.

Anyway, this is just the simplest way I could think of to show that the world is not encompassed by your model, and when they are in conflict, the world is right.

[Felix]

Banking is itself artificial. Accounting is nothing but numbers in accounts. So when I say that the numbers have to add up, I merely restate a basic rule of accounting. This is not some economic model even, but simply the rule that the accounts have to match.

This is not like physics or economics (writing these two that closely together hurts) where you simplify the things you want to describe to have a model you can work with. Here you describe the real thing, because it itself is artificial. If you remove money from an account, you remove it from the account. That is as direct as it gets.

We have a different model of what a recession is. What your general model describes is simply diminishing returns in a new area of business. The Oklahoma dust bowl is a natural disaster, which is yet another thing, and is a local phenomenon.

So you have housing values dropping vs. (housing values dropping + low financing costs + expectations of inflation). Wouldn't the second scenario be more favorable to buying real estate?

Quantitative easing did and does very little, btw. There should have been horrible hyperinflation by now if the interpretation you are referring to were true. What QE is is a switching of bank reserves (=government deficit) for treasury bills (=government deficit). It's the same thing. Only now the government has to spend less in interest.

The natural rate for public debt of a money-issuing government is zero. (I think I posted this before.)
http://moslereconomics.com/mandatory-re ... t-is-zero/

Hence the MMTers want to keep it there instead of artificially increasing it.

And finally:
Banks don't lend deposits. They create new ones out of thin air when they have enough capital and the person wanting to borrow is creditworthy. If they did not have enough reserves at the time of lending, they will get these reserves after the loan to meet banking regulations.

This goes back to my original point. What I am trying to say pretty much as the underlying theme of all my posts on these topics is that it is important to understand these accounting and banking operations otherwise you say things and believe in models that contradict simple facts of basic accounting.

The problem with rising private debt is that the correspondingly rising debt service payments can at some point no longer be met, triggering a vicious cycle of defaults, falling prices, less business activity and falling income.

[jacob]

@Felix - Here's one way to see the purpose of having a debt ceiling... for reasons other than flipping numbers on a spreadsheet.

As far as I'm aware, governments can command resources in four ways
1) Conscription (not done) where the conscriptee pays the price (in life energy)
2) Borrowing where holders of assets pay the price (because the government makes existing assets worth less)
3) Taxing transactions where, typically, those with income pay the price (because the government takes a fraction of wages, dividends, capital gains, consumption)
4) Monetizing where those with cash (short term securities really) assets pay the price.

There's also a fifth way, namely taxing assets, but since most assets produce some kind of income or are "needs" (housing and transportation), assets are nicely taxed by the income they produce already.

(1) and (3) are checked by voting power.
(2) and (4) can't be checked by voting power since, typically, a minority holds the wealth. Consequentially they are checked by the debt ceiling.

[Felix]

@jacob:

The minority holding the wealth has more influence on politics than the voters. (And also a lot of power over the voters via propaganda - like the Fix the debt campaign.)

There is a striking difference between a balanced budget (which is fine to argue for) and the debt ceiling. The balanced budget keeps the government deficit in check (why this would be helpful to anyone is still not clear to me, but okay, I'll wait for Riggerjack's next posts). The debt ceiling keeps the treasury from making the payments determined by the budget. If you want the government to have less power and less influence in this manner, you do it via the budget. The debt ceiling just makes it look incompetent, maybe there's an emotional benefit to that, I could see that and have to chuckle at it a bit myself - as sad as I think it is.

You can argue for a balanced budget, the debt ceiling, not so much.

But you are right that the debt ceiling works for the wealthy. The main goal of this is the removal and/or privatisation of government-provided social services.

If "someone else always has to pay the price", this implies the government always takes resources away from the market. This is not the case. Hiring unemployed people to produce things does not take anything away from anybody. Providing businesses the funds to hire them does not take anything away from anybody.

Government spending -especially in a low-demand environment like when recovering from a recession, is rarely taking anything away, but rather increasing the real-world output of the economy.

One could even argue that paying interest on bonds and welfare simply provide the funds to these parts of the private sector to decide what to do with idle resources.

The following is not MMT-related but simply my view on things:

Looking at your 4 ways to exert systematic power, I had to wonder:

Why only limit government power?

It seems to me that there is way more of that power mechanism at work for corporations and their owners:

1) wage slavery - standard for most people (yes, you can choose your master and call it freedom)
2) socializing the cost for the protection of this wealth and "externalities"
3) taking a cut out of wages by lowering them, all dividends, all capital gains, and a cut called profit from all consumption (Yes, it's in the dividends and capital gains)
4)(only applies to banks, but then again ... Volkswagen has a bank, Porsche has a bank ...) interest on fiscal money creation, a "necessary economic function" granted and protected by the government

In all of these, voters have zero influence, making this in practice more like a totalitarian dictatorship with a hierarchical organization.

Where's the debt ceiling for that?

[vivacious]

So should we all pull out of the market while it's still doing ok or what?

It hung on this week but it could get bad pretty fast.

[Felix]

If the government goes into default on October 17th, I am bearish.

[vivacious]

I'm feeling bearish already. I think the market will go down the closer we get to the 17th, though it didn't really this week.

[Felix]

There are already suggestions out there to invest in companies that produce chicken wings for all the unemployed government workers...

[vivacious]

http://www.dailykos.com/story/2013/10/0 ... government

As far as I know filing a discharge petition with a previous bill on Oct. 14 is the best there is right now.

These so called "moderate Republicans" are greasy though, contradicting themselves by the day. So we'll see.

[slimicy]

If "someone else always has to pay the price", this implies the government always takes resources away from the market. This is not the case. Hiring unemployed people to produce things does not take anything away from anybody. Providing businesses the funds to hire them does not take anything away from anybody.

I disagree with this paragraph wholeheartedly. The government hiring unemployed people to produce things means either there's no real market demand for those things or the government is undercutting the market, taking money away from the person that's already creating them. If this was as easy and straightforward as you're attempting to make it sound then there wouldn't be such things as welfare and foodstamps, the government could just make more jobs!