kinder, gentler debt ceiling discussion

[Riggerjack]

Eh. Since most of economics is quicksand, dressed up as solid ground, I'm just poking around looking for the places where it goes soft and murky.

The Austrian school is a fine basis, but anyone who has read any early Christian philosophy should be familiar with how far off base logic will get you. If/then statements don't allow for uncertainty, and this gets pretty clear early on.

Keynes was brilliant, and the was some great stuff in his work, but he didn't live long enough to recant the last book, and all the damage his following has done. It is the quintessential example of modeling ignoring reality. Still, a good model and mental exercise, just remember as you work thru it that it is a simplified model, good for teaching, not much else.
schumpeter is a good read, and I like his approach, but, again, I think his reach exceeds his grasp. He draws unwarranted conclusions.

In each of these criticisms, I may sound like I'm saying they are wrong. I'm not, I'm saying they are outside my preview. I'm interested in practical economics, practical to me. While theoretical economics is interesting, I find it to be more about acedemic standing than enlightenment. Having no skin in that game, it doesn't appeal much.

[jacob]

Put your money where your woo-do is?

[theanimal]

Maybe this thread should be moved under Politics and other eternal disagreements.

[Riggerjack]

BTW, goldbugs have very strange ideas about money. I see no benefit to basing a currency on a mineral. Once again, Felix, you are arguing angainst points you expect, rather than what I say.

[Riggerjack]

Felix, this is what I was hoping you would respond to

Look at the "recovery" of the last few years. in what tiny detail has it differed from what you propose? in the last 5 years, we've stimulated ourselves into recovery and growth,

Truly, as close as is possible, we seem to have conformed to your model. So, was this the recovery you wanted, or is there a deviation I missed?

[Riggerjack]

For me, an index investor, the stock market provides a good long term bet, but I like real estate as an investment vehicle. The rules are more easily understood, leverage is easy, perhaps too easy. And price manipulation is harder to disguise..
This is why I started digging into economic theory past macroeconomics, QE was messing with mortgage rates, I needed to know why, how, and what would happen at the end.

I don't think inflation is necessarily inherently bad, or that gold would make a better currency standard. I do believe there is a lot of information in prices, and am generally against price manipulation for that reason. This includes the price of cash.

That being said, with our debt where it is, I think QE is a good thing, I just wish they were selling longer term treasuries.

[Felix]

Well, apart from the initial stimulus (which was too small AND completely misdirected - giving it to banks saves the banks but giving in to those in debt would have saved them, too for the same money), the amount of deficit spending has been going down for the last three years and will likely go down further. At least that's the CBO's prediction. Either way, it should be going up to actually make up for private sector deleveraging. Given the downward-correction of created jobs yesterday, this shows that it's not enough (and probably going to the wrong sector of the economy).

Everyone believes what Mosler calls the innocent deadly frauds. Obama does, too. Everyone thinks that we need to do something about the debt, that it's a major issue, way bigger than climate change, demographic changes, unemployment, etc. which are real issues and that the government needs to balance its budget in the end and not "borrow too much". That when we have 1 young person to feed 3 old people, the main problem is that the old people do not have enough virtual paper money in their hands. And this is where it's heading, tea party or not: Austerity FTW!

As Koo says, it's pretty much exactly what Japan did 15 years ago. Monetary approaches (like QE) fail. Fiscal approaches are half-measures and being stopped out of budget-fears.

If we take enough money out of circulation, it will magically appear through all that freedom this creates.

I mean, talking about "the quintessential example of modeling ignoring reality", that's pretty much the definition of praxeology. Don't change your ideas, it is reality that is malfunctioning.

"Economics 101" with all their supply-demand curves, Philips-curves, and all the other oversimplifications that do not even apply to reality as an approximating simplification is merely the thin veneer of pseudoscience on an ideology that benefits rich people. What does it imply: no minimum wage, no unions, lowering or eliminating welfare and social security, low taxes for the rich, etc. Strangely one-sided. All of this is a manipulation of the economy. Take limited liability in investments. That's a major intervention. It used to be that you end up in debt prison to work off your debt if you screwed up your investments. Now you can just declare bankruptcy or just lose the money invested in the company. Why does the government interfere with the invisible hand here?

Take child labor. That used to be argued against based on free market ideas. Or slavery. If people want to sell their life, that's not where the government should interfere. Or inspecting the food produced, or licensing the sale of medicine. All those damned free-market interferences costing us precious efficiency and growth.

Or the existence and defense of private property itself. That is pretty much the prime job of the government. To prevent the tragedy of the commons. Because we all know that investors have the long-term interest in mind, not the maximization of shareholder value. That's why industrial agriculture is permaculture and investors never break down companies to sell the parts or do LBOs. That's why we don't just burn oil.

I could go on about this for quite a while actually.

What is free about having no negotiating power in determining your wages? What's free in having no alternative to make a living than a job? What's free in having no vacation time?

Everyone is worried about redistribution. But what about the initial setup of distribution? Is that fair and just? Is that "the way of nature"? No. It's a political decision on how to set the boundary conditions of the economy. It is just as unfree and government-force-based as a Swedish model. No nature involved.

As Keen defined it, neo-liberal economics is bad maths applied to wishful thinking.

[Riggerjack]

the amount of deficit spending has been going down for the last three years and will likely go down further. At least that's the CBO's prediction. Either way, it should be going up to actually make up for private sector deleveraging.

This. This is where I think we disagree. You seem to think the money supply is somehow tied to government spending, and that its decrease is somehow related to recession?

I think that with fractional reserve lending, money supply is tied to credit worthy borrowers, and if that were constrained, increased velocity would still nearly make up for it.

Or have I misstated your idea?

The rest of your post is strawman arguments. The day I start talking about feeding bad meat to child labor forces, feel free to saddle up that high horse. Until then, it's just distraction from your economic ideas.

[Spartan_Warrior]

You seem to think the money supply is somehow tied to government spending, and that its decrease is somehow related to recession?

I have no skin in this thread and am simply learning from the back and forth, but I have to point out that this is the very crux of the Modern Monetary Theory that Felix is arguing. If you are still saying things like "you seem to think", it kinda looks like you are just not understanding what he's saying.

Since fiat money is not tied to anything physical--no gold standard, etc, just digital account balances at the Federal Reserve--the only way that money can come into existence in a fiat system is literally through government spending. The government has to issue the money (e.g. pay it out, e.g. "spending") before it even exists in the private economy. That's the whole idea.

I also noticed earlier that you more or less disregarded Mosler's theory as "woo" without reading it.

I don't think it's possible to soundly disagree with someone if you don't first understand their position.

May I cordially invite you to join the ERE Book Club, where we're currently reading Mosler's "Seven Deadly Innocent Frauds of Economic Policy"? I honestly would like to hear your opinion on the actual text.

EDIT: Sorry in advance, this came off as snarky. I really am interested in your opinion on the book. I think these discussions benefit from everyone having a mutual understanding and reference point.

[Riggerjack]

Wow, rereading your post, I completely Misinterpreted the arguments I called strawmen earlier. Sorry.

I don't want to sidetrack from the money supply issue above, so I'll comment on the rest of your post after we work out money supply.

[Felix]

the amount of deficit spending has been going down for the last three years and will likely go down further. At least that's the CBO's prediction. Either way, it should be going up to actually make up for private sector deleveraging.

This. This is where I think we disagree. You seem to think the money supply is somehow tied to government spending, and that its decrease is somehow related to recession?

I think that with fractional reserve lending, money supply is tied to credit worthy borrowers, and if that were constrained, increased velocity would still nearly make up for it.

Or have I misstated your idea?

Spartan Warrior has had a very good answer to this. Basically, the dollar is a creation of the US government. So arguing for the government to stay out of money is like arguing for the government to stay out of your medicare. It is inherently a government thing. The dollar is "what you pay your taxes with in the US". Additionally you have government-licensed banks who are allowed by law to increase this money supply according to certain rules.

This bank-created credit is, however, always offset by corresponding debt. The bank creates new deposits out of thin air but also creates the same amount of debt. It adds up to zero. So while banks can create new money, they cannot create net money.

It is similar with the US government, given that it tends to issue government bonds when spending more. But the issue remains that the money to buy these government bonds as well as the money to pay your taxes has to come from the US government (just as the money the banks can increase has to come from the government initially). Banks can increase this, but logically, if the government taxes enough money out of existence, no bank can work against it as their capital shrinks eventually and they are no longer allowed to lend more.

In the current environment in the US you have businesses paying back debt. This removes money from the economy. Debt is canceled and money is gone.

Theoretically you could have more borrowing offsetting this. But this is where Koo's description of the balance-sheet recession comes into play. Businesses simply do not (and often cannot) borrow new money even at record-low interest rates.

With banks out of the game, this leaves only government spending to avoid a deflation.

In the current environment, money velocity is in no position to offset anything as people in aggregate just save whatever they get:

[Felix]

The Australian government, a conservative government, raised their debt ceiling by two-thirds. That would be the equivalent of an $11.4 trillion increase here in America. And they did it without a shutdown or holding anyone hostage or asking for an equivalent amount of spending cuts.

Here are the words of Australia's Treasurer, Joe Hockey:

"The debt limit needs to be set so as to provide sufficient headroom to ensure there is stability and certainty for the financial markets about the government's capacity to finance its operations for the foreseeable future.”

[GandK]

Felix:

The degree to which the dollar is ephemeral, or the creation of a government, is not interesting to Joe Investor. However, the degree to which his debt, savings, and investments are affected by tinkering with said currency is very interesting to him.

How is your model applicable to Joe? Or, to put this another way, how should an investor/voter behave if you're right?

[Felix]

It has implications about what policy changes do in an economy. So if the Fed does QE and you hear everyone screaming that there is going to be hyperinflation and that you have to go long gold and that it's the end of the dollar, you can just relax and don't lose money when the gold bubble bursts.

That's a clear plus.

When the government aims to cut spending and/or raises taxes to lower the deficit in an already deflationary scenario (high unemployment, businesses deleveraging) you go bearish and very sceptical of what appears to be the end of a stock market boom (and very much so on a balanced-budget-shutdown).

I would also guess that the dollar will gain in value (similar to what happened to the Euro).

All of these things follow from this model, at least. Will be an interesting reality-test.

If these predictions don't hold true long term (short-to-middle-term, it's mostly psychology), the model has a flaw somewhere.

Here are Mosler's predictions:
http://moslereconomics.com/2013/10/09/r ... ood-thing/

[Seneca]

The Australian government, a conservative government, raised their debt ceiling by two-thirds. That would be the equivalent of an $11.4 trillion increase here in America. And they did it without a shutdown or holding anyone hostage or asking for an equivalent amount of spending cuts.

Here are the words of Australia's Treasurer, Joe Hockey:

"The debt limit needs to be set so as to provide sufficient headroom to ensure there is stability and certainty for the financial markets about the government's capacity to finance its operations for the foreseeable future.”

What is the point you are trying to make?

Everything I've ever read says we are all out on new territory here, how this ends is anyone's guess. Caution and prudence seems to be more than a bit called for.

I have read many of his links you've posted (including the one just above), but not sure I know what his model predicts long term...what does Mosler argue will happen due to the incredible debts he advocates, "to my children and grandchildren" he so quickly dismisses others's, extremely well founded, concerns about?

[Felix]

The point I am trying to make is that not everyone is making a big fuss about virtual issues.

Mosler addresses the "Think of the children"-argument in his book, in fact it is "Deadly innocent Fraud of Economic Policy" Nr. 2: "With government deficits, we are leaving our debt burden to our children."

[Seneca]

The point I am trying to make is that not everyone is making a big fuss about virtual issues.

Which makes it neither right or wrong, of course.

Mosler addresses the "Think of the children"-argument in his book, in fact it is "Deadly innocent Fraud of Economic Policy" Nr. 2: "With government deficits, we are leaving our debt burden to our children."

Ah, maybe if the library gets it I'll read it. I am not sending Mosler my money.

EDIT- Book club had a link, I'll put it on the pile.

[Felix]

You're in for a treat.

[Seneca]

You're in for a treat.

Mosler's monetary stuff about fiat money is fine reading...how he believes he's not doing his level best to blow up the economy in unseen scale with his unlimited stimulus advocacy...I'll make a guess chap 2 elicits more than it's fair share of muttered "bullshits" around the household this weekend.

I just started Popper's The Open Society and It's Enemies, and the library got in my interlibrary loan of Man, Economy, and State, so at least I'm well set to cleanse the palette.

[Felix]

Kudos for picking up the book.

Yes, I remember my reactions when I first read it, there were quite some "bullshit" remarks there.

It goes against some very deeply held beliefs.

If you prefer the more detailed money system stuff, I think soft currency economics could also be of interest:

http://www.mosler.org/docs/docs/soft0004.htm

It goes more into the specifics of the monetary system than 7DIF. But 7DIF would be a nice starting point, I think. There he goes right into all the popular arguments brought forward which make little sense if what he says is true.

Mosler goes better with Popper than Rothbard does, I think.

I'm knee-deep into Man, Economy and State myself right now ... muttering bullshit a lot.

The shit I put up with just to do something to deal with the Cosmic Schmuck Principle. Oh well.