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A fruitful conversation

I find it remarkable how essentially aesthetic elements keep creeping into the discussion of political economy.

Sharp-elbowed dialectics could, of course, present these elements in a harshly critical light — distributists with their romance of small property, hard-currency men with their romance of gold, supply-siders were their mystical images of the feast, where the rich man's riches become enjoyment for all — but I prefer a more relaxed approach. Each field of emphasis yields its own truths. Observe.

(1) Without small property no free political economy can exist. We find the very shield and portion of liberty when private ownership is widely dispersed, firmly held, and defended at law. Small property is varied property: it is property held for future capital gain, alongside property for current enterprise, alongside property held as historic trust, alongside property for worship of God, alongside many thousands of private homes. This arrangement of free, various private ownership is the ballast of republican liberty.

(2) The debasement of currency for gain by a few: why it is nothing short of theft. Ruinous inflation has laid countless countries low. Government abusing its power to control currency is one of the oldest spectacles of tyrannical fraud evidenced in history.

(3) At the root of free enterprise is not, in fact, greed but more nearly generosity or greatness of spirit. The man who risks his capital on a new idea cannot know it will succeed. He cannot possibly count on his own accomplishment of great wealth. He can only work hard, overcome setbacks, adapt and adjust on his feet; above all he must delay his own gratification. Many are the capitalists whose early gains were made by what we might truly call a monkish existence: extreme thrift and industriousness, disciplined service toward future rewards.

And yet.

And yet each of these truths also suggests a valid criticism:

(1) Truly varied property includes large property. Given the size and menace of the modern state, the sentinel for tyranny might even take solace in the fact that Apple and Walmart are global in reach. Perhaps there are some parts of these enterprises the American bureaucrat cannot reach. Moreover, while there are undeniable problems arising from the privileges that our law grants to the business corporation, this system has provided for the greatest gains in prosperity for the most people of any in human history. The number of human souls raised from subsistence to some comfort, and from minimal comfort to affluence and security, by the achievements of the American business corporation, must be staggering to compile.

(2) The old serpent in human economics lies in this: that gold equal wealth. Or, suitably updated for our day, that wealth lies in liquid assets that can be hoarded. The truth is that hoarding assets defeats their liquidity. The deeper truth is that liquidity depends on human psychology. Even gold is only valuable because of the human sentiment that attaches to it. Hard currency is no escape from the vulnerabilities that human sentiment introduces. And nothing is more destructive to prosperity than the frightened scramble for perceived hard assets in a panic. Between persistence deflation and persistence inflation, wisdom still prefers the latter. As we can observe today in Europe, the embrace of a dearer currency is fraught with potentially dire consequences.

(3) Greatness of soul is no protection against a will bent by sin. It is very difficult to distinguish extravagant generosity from concupiscence. Our own nation’s recent history demonstrates beyond cavil the dangers that great affluence has on the sources of prosperity. How often the generous spirit of the enterpriser is dissipated by his listless children. How easily material comfort can engender an attitude of entitlement. It is often when we are most secure in our economic prosperity that we indulge in our most reckless schemes of governmental meddling. The idea of government providing freedom from want had to wait until capitalism made it even imaginable. Moreover, the same restless spirit which drives the capitalist to build and create may incline him to back schemes of government meddling, especially when his enterprises stand to benefit. Finance has greatly facilitated this gradual blending of the capitalist class and the governmental class. There is a perfect poetry in our country’s most prominent capitalists signing on with Leftist adventures.

Thus it seems to me that each of these viewpoints, identifiable by their apparently aesthetic concerns, both has something valuable to offer and is susceptible to valid criticism from the others. The conversation will continue fruitfully, unless dogmatism curtails it.

Comments (160)

Paul, in the spirit of encouraging that fruitful dialogue, I present the following suggestion, with which you may disagree: A dearer currency, criticized in the second #2 above, can be a real bulwark against the use of the government by the unscrupulous, described in the second #3 above. All the more so if accompanied with strict limits on deficit spending. If there is a hard limit to the extent to which government can just hand out benefits, then there is less power in government and less apparent gain to be had from the alliance you speak of. Bailouts to crony favorites will be severely limited. The limitation both on government's ability to take on and to monetize debt will help to put a ceiling on the entitlement mindset or on any notion that government can make things free or produce freedom from want out of a hat. The fact that nothing comes from nothing will be made far more stark and evident in the wheels and gears of power, the illusion of the philosopher's stone or of the perpetual motion machine will not be created on a vast scale, and the desire for self-enrichment at the expense of future generations will have many fewer opportunities for gratification. In short, there will be more reality checks left in place and, hence, more motivations to thrift and independence both from government meddling and from government cossetting. Greed thrives on the notion of something for nothing.

If we are worried about the encouragement of greed, it seems to me our biggest concern should not be with free enterprise per se but with a warped "free enterprise" that occurs in the context of an illusion of something for nothing. _Of course_ the latter is going to encourage people to act like pigs racing to a trough, all across society. Greed? You bet.

These seem to me to be pretty strong arguments for a dear currency (and for making it difficult for government to inflate that currency) and a hard limit on deficit spending, despite other drawbacks of those policies.

Lydia,

We ought to go one step further and pass a constitutional amendment outlawing any form of bailout or even lending to private businesses except those businesses that are under contract to provide a service pursuant to one of the enumerated powers. That is, Lockheed can get a $500m 0% loan from the feds to build a prototype weapon system, but it would be unconditionally illegal for Goldman Sachs to receive any assistance.

A dearer currency [. . .] can be a real bulwark against the use of the government by the unscrupulous.

It's possible, but I see no necessary connection. The euro is unquestionably a dearer currency than the drachma and the lira, but it has abetted the gradual surrender of Greek and Italian sovereignty to bureaucrats in Brussels and Frankfurt, whose scruples I leave for readers to estimate.

The adoption of a dearer currency, no matter what it is, will invariably present periods of extreme informational asymmetry. Those who get out ahead of the trades will be made fabulously wealthy by dint of that informational advantage. This is not unlike the spectacle of savers left holding the bag when a government devalues its currency.

Drastic transformations in currency settlement, whether inflationary or deflationary, strike me as equally risky moves in the abstract. It's all about the specific circumstances whether that risk should be run. (For instance, in Greece the crisis may well be so acute that an enormous devaluation back into the drachma is the wisest course of action.) Also, it's one thing to say we should have never left the gold standard; quite another to say we should restore it now.

Nor do I see deficit spending in terms of moral absolutes. It is decidedly unwise to issue debt in excess of what can be realistically paid back; but there are times when deficit financing is the wise course of action; and there are times when failing to issue debt on ideological grounds would be unwise. Keep in mind that the other side of debt is savings. The primary holders of US Treasury debt are institutions whose purpose is the preservation of the savings of middle class folks.

From a financial perspective our problem is not deficit spending as such, but the enormous social democratic promises we have made, which cannot be fulfilled but by ever-increasing debt issuance. Entitlements drive deficits, not the other way around.

Mike T --

Should we take you to mean, then, a repeal of the Federal Reserve Act and an sharp termination of the "lender of last resort" function by any public institution?

The euro is unquestionably a dearer currency than the drachma and the lira, but it has abetted the gradual surrender of Greek and Italian sovereignty to bureaucrats in Brussels and Frankfurt, whose scruples I leave for readers to estimate.

I'm not sure I follow you here. Surely it's evident that the Greek crisis itself was fueled by a perception on the part of the Greeks that they could get something for nothing. That seems evident to me, anyway. Yes, the loss of sovereignty is a bad thing, and I, too, favor the return to the drachma. But things have come to this pass because the Greeks refused to recognize the no free lunch principle and thought, instead, that they could have the advantages of a respected currency backed by more sober countries _and_ the advantages of wild spending without any limit in sight. They didn't get it, did they? Now the chickens are coming home to roost.


Also, it's one thing to say we should have never left the gold standard; quite another to say we should restore it now.

I agree. But if we could recognize the source of many of our problems in the concept that something comes from nothing and the encouragement of this concept by the never-ending borrow-print cycle, we might at least get a better idea of where we should be _aiming_ to go. This is rather like a drug addict recognizing that the drug addiction is his problem. It doesn't follow that he won't die from going cold turkey right now. Perhaps he would die if he tried that and therefore shouldn't go cold turkey right now. But he should try to get off the addiction somehow, especially if he can tell that the addiction itself is killing him.

Entitlements drive deficits, not the other way around.

This is a pretty evident false dichotomy. If one applies it on the individual level, one sees the falsehood of the dichotomy readily. Suppose that an individual believed that he could get unlimited credit for whatever he wanted. Suppose that he were able to continue in this illusion for a long time until everything came tumbling down. Is it not self-evident that this illusion would encourage him to make commitments and to buy things that he could never pay back in his lifetime or the lifetime of many generations? That it would distort his whole economic approach? Naturally, the things he dreams up to do with his allegedly unlimited wealth will in a sense "drive" his increasing debt. These might include entitlements. Perhaps he'd decide to try to alleviate all the poverty in his country using his unlimited credit. If he were a man of little imagination or less disastrously "good" intentions, he might not get into as much fiscal hot water. In that sense, entitlements drive deficit. But _of course_ his initial and on-going perception that he can go on borrowing ad infinitum for whatever he thinks "needs" to be done is a major source of the ensuing problems.

Should we take you to mean, then, a repeal of the Federal Reserve Act and an sharp termination of the "lender of last resort" function by any public institution?

Yes. Our reaction in 2008 shouldn't have been loans. It should have been for the President to order the FBI and each state's attorney general to launch a reign of terror on the banking apparatus in response to the pervasive and systematic criminality that lead to that fiasco. Something on the level of a biblical punishment that ends with "and the people shall see this, and become very afraid and this wickedness shall never be done again in your land so says the Lord."

Surely it's evident that the Greek crisis itself was fueled by a perception on the part of the Greeks that they could get something for nothing.

That's part of it, for sure. (Another part is the German desire to import demand from the European periphery.) What I don't see is how floating currency introduces (or perhaps dramatically increases) the belief in getting something for nothing. Precious metals are pretty reliable storehouses for wealth (though dollars might still be better) but they are not wealth. They represent wealth; they do not create it. To mistake gold for wealth is a variation on believing you can get something for nothing.

This is rather like a drug addict recognizing that the drug addiction is his problem. It doesn't follow that he won't die from going cold turkey right now. Perhaps he would die if he tried that and therefore shouldn't go cold turkey right now.

The analogy assumes that one shares the view that fiat currency is comparable to drug addiction. I must respectfully demur from that judgment.

the President to order the FBI and each state's attorney general to launch a reign of terror on the banking apparatus

And here people think I'm a radical for wanting to break up big banks and push securities shops into private partnerships.

I would say my analogy is between drug addiction, on the one hand, and fiat currency cojoined with functionally unlimited deficit spending, on the other. What I called the unending borrow-print cycle. I can't believe that you can't see that frenetic cycle as a destructive thing.

By the way, on whether "entitlements drive deficits" or vice versa, surely you can see the connection between the constant liberal push for more and more huge entitlements (such as Obama's present push in the healthcare industry) and the possibility of wholly or partly financing these through deficit spending. If someone could just say, or could have said at many points along the line, "Well, even if you want that, we can't do it anyway, because we don't have the money," and made it stick, that would have been the end of that. Liberals can't just keep making government bigger and bigger if they can't at least make someone think that they have the money to do it. Deficit spending is an important part of this. I note here Obama's recent arm-twisting on Congress to increase the debt ceiling.

And here people think I'm a radical for wanting to break up big banks and push securities shops into private partnerships.

What is radical about having the government enforce the laws against perjury, securities fraud and tax evasion against the banks? The way the big banks handled asset transfers through MERS and are now handling the foreclosures are a truly epic case of them violating those laws and more. We ought to be dumping non-violent drug offenders by the thousands from the system to make room for these people.

"Finance has greatly facilitated this gradual blending of the capitalist class and the governmental class."

Right, which is my beef in a nutshell. The problem is that the left tends to downplay the problems of the government side of this blend, while the right downplays those of the capitalist side.

This is why I believe it's profitable to read those writers who are able to see that the problem lies on both sides, not just on one or the other.

Mike T, I'm all for prosecutions for MERS-related and foreclosure fraud. But I see no reason to connect that to dismantling the Federal Reserve and abandoning the principle of lender of last resort.

The analogy assumes that one shares the view that fiat currency is comparable to drug addiction. I must respectfully demur from that judgment.

It's funny, but I think I agree with both of you, Paul and Lydia - even though you disagree with each other. That's weird, huh?

First, I think it is not intrinsically evil to have a fiat money arrangement. Whatever _works_ better is fine. I just don't know that a good strong case can be made that fiat money is likely to work better over the long haul, like longer than 4 generations.

A fixed hard currency has a huge advantage, in that the darn stuff is definitely quantifiable in principle. It isn't subject to ephemeral shenanigans. You know who has it and how much there is. You can't pretend there is more of it for purely policy purposes.

It also has a disadvantage, one that I think is smaller but I could be wrong: the fixed commodity is subject to fluctuation in value due to changes in culture, industry, government practice, and sentiment. Being an actual commodity with uses / purposes / value relationships all its own under its own substantial being (not as money), these relationships do not automatically keep parallel with changes in the economy in OTHER value relationships. An ounce of gold may represent 200 loaves of bread today, but it may represent only 160 loaves of bread tomorrow. That means that gold's (or any other hard item's) value as money is in principle limited. Or, as Paul puts it, its capacity to act as a storehouse of value is limited and subject to several factors.

My solution runs along different lines. Yes, have a hard currency, but also to promote giving rather than hoarding. It's a little different from most heavy metals like gold or platinum. Instead, use plutonium. Anyone who hoards too much is done for, and the darn stuff is so poisonous that nobody will want to actually handle it. :-))

(Except the terrorists).

What is radical about having the government enforce the laws against perjury, securities fraud and tax evasion against the banks? The way the big banks handled asset transfers through MERS and are now handling the foreclosures are a truly epic case of them violating those laws and more. We ought to be dumping non-violent drug offenders by the thousands from the system to make room for these people.

Oh dear. Mike, which part of the MERS system do you believe to be a clear violation of law? Or is the mere intent to reduce transfer taxes paid to government now to be deemed illegal?

And I am aware of very few allegations of foreclosure fraud, as opposed to robo-signing, which was a case of (probably unintentional) perjury by mid-level employees of some banks, but mostly of processing companies. Mostly these are just poor shlubs trying to get an overwhelming job done as best they could. They clearly screwed up but I suspect the error was in not recognizing that the same business processes they used to streamline mortgage processing (private business) were not appropriate in processing foreclosures (court filings), rather than some intent to defraud. And you want to put these guys in prison? Really?


Paul, I don't think you're radical at all. In a fractional reserve system we need to recognize banks as utilities. IOW, small depositors are protected and "Banks" have access to fed funds and lender of last resort protection, but in exchange are strictly regulated as to the risks they can take (i.e., NO trading for their own book) and the compensation they can pay. Good pay, but for risk averse, boring banker's hours kind of work. I.e., what used to be understood as the business of banking. The other side of the finance industry, securities and investment/merchant banking (and their hedge fund and private equity siblings) should be mostly unregulated but limited by size in relationship to the size of the US economy. Too big to fail is too big. Something in the range of $250 billion in assets is probably about right. IIRC, that's about the size of Bear Sterns, and WaMu (which caused no crisis when it went down). That's probably a little small, but we are talking about systemic risk and some conservatism is appropriate. And I agree certain types of securities businesses should be in partnerships, where ALL of the assets of each general partner are on the line to back up firm losses. Then we can tell the Goldmans of the world: "Go, make a fortune. If you fail we will let you. If you succeed we will toast you and rejoice with you in God's blessings." But then, maybe I'm a radical too?

I don't actually hold that a fiat currency arrangement is evil inherently. I just think you would need to have superhuman self-control not to cause harm with it, even with the best intentions in the world. It's a bit like being told, "Here, here's the philosopher's stone. It really will turn lead into gold. Just don't do it too often or you might flood the market." What if you really believed that you could turn lead into gold? How long would you be able to observe the "don't do it too often" caution?

JohnS's last graph is the sheerest music to my ears.

Lydia, by the analogy, when gold was the currency, the man who could pull it out of the ground was the monopolist of philosopher's stones.

Gold is not productive of anything, though. And in the end wealth is increased by productivity. Human labor is the root of it, and making that labor more and more productive is what we humans can add. If your currency retards that, then it's failed as a currency and good riddance. Tony says it brilliantly: "Whatever _works_ better is fine."

the man who could pull it out of the ground was the monopolist of philosopher's stones.

Well, no, not at all. If the philosopher's stone worked and you had it you could go on doing it again and again. No labor or resources required, no limitations. That was kind of the point; that was why everyone was looking for it. It was supposed to be the ultimate denial of any axiom of limitation. Reality checks could be avoided forever. "I will ascend into the heavens. I will be like the most high."

I must say I'm a tad surprised at any attempt to cast me as the abstract theoretician here. "Whatever monetary system works is fine." I'll sign onto that. We're swiftly taxing, borrowing, spending, and printing our way to hell. In 2008 when it all came crashing down, what worries were being raised? War with China, our biggest foreign creditors! Riots in the streets (shades of Athens). It should be pretty obvious at this point that what we're doing _doesn't_ work, that it's ruinous. Our leaders are learning no lessons whatsoever from Greece, either. And my analogy to a drug addiction is supposed to be an example of abstract theory taking precedence over facts on the ground?

Oh dear. Mike, which part of the MERS system do you believe to be a clear violation of law? Or is the mere intent to reduce transfer taxes paid to government now to be deemed illegal?

How about the issue of MERS' transfers not actually being legally valid title transfers.

That was a bit snarky of me...

The issues with MERS are myriad, but two of the key ones are that it doesn't actually have the legal authority to transfer electronically titles in most, if not all, jurisdictions. MERS has been getting pretty hammered in the courts for attempting to foreclose on houses after the judges noticed that there was no proper assignment down at the courthouse.

Second, it moves from attempting to reduce taxes to outright evasion when you conduct a transaction which is not legal in the first place and the only way to do it necessarily entails paying a transfer tax (which is usually not much at all).

There is nothing libertarian, conservative, capitalist, etc. about supporting MERS under the current legal regime; title laws are the sine qua non of property rights. Any merchant or bank who attempts to work outside of them ought to be denounced as a rogue who threatens the system of private property as much as any jackbooted thug.

The Market Ticker has down yeoman's work documenting the problems with MERS and many other aspects of the crimes that lead to the 2008 crash. I would suggest you dig through Karl's archives. It's a treasure trove of well-documented information on the subject that is very eye-opening.

I withdrawal the monopolist blabber.

In 2008 when it all came crashing down, what worries were being raised? War with China, our biggest foreign creditors!

Who raised that worry? I don't remember it at all.

In 2008 when it all came crashing down, what worries were being raised?

The main worry that struck me was the idea of the commercial paper market freezing and every US corporation being suddenly unable to write paychecks to their workers. The reality of this worry I take to be confirmed in the fact that nonbank corps like McDonalds and Harley Davidson had to access the lender of last resort funds of the Fed in order to keep the lights on for a few months.

Who raised that worry?

Zippy. As I recall.

Gold is not productive of anything, though. And in the end wealth is increased by productivity. Human labor is the root of it, and making that labor more and more productive is what we humans can add. If your currency retards that, then it's failed as a currency and good riddance.

I don't quite see the point of that, Paul. Gold has inherent usefulness in a myriad of applications, from the tips of speaker wires to a foil covering of satellite parts. Some of these things, in the right application, are productive of other goods.

Making human labor more productive means things like arranging that labor so that it produces more quantity or better quality per unit of time. I don't see that money qua MONEY - in whatever form - is ever the DIRECT cause of an improvement in productivity. It is always money qua the machinery it can buy, for example, that makes the hour of labor more productive. Labor never works on money itself as its own direct object (unless you are running the Bureau of Engraving and Printing), it is always labor on something that money bought.

I think, with Lydia, that the more abstract the monetary system gets, the more likely you are going to have people (a) think that they don't NEED any rational human good to inform their reason to acquire more money; (b) think there is such a thing as a free lunch; (c) that money OUGHT to make monetary babies independently of human effort on some real valuable object, good, or service. These are perhaps not absolutely necessary accoutrements of a fiat money system, but the lack of solidity of the money lends itself to these intellectual and moral errors. My comment about "whatever works" was meant to be taken in terms of a human whole: whatever BOTH cooperates with economic development AND encourages appropriate human visions of wealth management - because inhuman versions of same typically tend toward mismanagement and then system failure (i.e. "not working").

What I don't see is how floating currency introduces (or perhaps dramatically increases) the belief in getting something for nothing.

Here's a generic answer. The actors may be governmental or private, except when we get to the monetization step, where the actor has to be the government. And a step may need to be added where the private problems get shifted to public shoulders through bailout. But roughly, like this:

Step 1: Make big plans for doing something fiscally risky which you definitely don't have the money to do now.

Step 2: Damn the torpedoes and go into debt to try to do it anyway, because you assume that it'll all work out in the end somehow and either you really want to do it for personal gain or you have an ideological drive to do it because it "needs to be done." We're the richest nation in the world. Surely we can afford this.

Step 3: Realize that things are starting to go wrong. Either you can't pay back, or you can't pay your commitments from #2, or the economy is going south, or you're going bankrupt, or some combination thereof.

Step 4 (optional): Go into more debt to shore things up for the moment.

Step 5: Monetize debt to try to ease the pressure and make things better for a while.

Lather, rinse, repeat.

Would the continual increase in debt be regarded as possible if government abracadabra making money were not an option? I rather doubt it.

Recently when Obama was having trouble getting the increase in the debt ceiling from Congress, to shore up our faltering credit rating, there was talk of coin seignorage as a "solution" to the problem. If that isn't the perfect example of the something for nothing principle coming together with the perceived power of the government to make money out of thin air, I don't know what is.

Lydia, how would you distinguish that sequence from, say, primitive commercial paper, underwritten by private banks that are state-regulated only (that is, no federal interference) and issued in notes redeemable in precious metal?

A politician could very certainly fund his adventures with the connivance of the banks, based on this bare-bones hard currency CP market. He could go around to all the local banks, promise future government contracts in perpetuity, and walk away with a hoard of bank notes to form the capital for whatever strikes his fancy. Aaron Burr and Wilkinson did this sort of thing. Another of their investors was the Spanish Crown.

I'm having trouble, in other words, accepting your emphasis on currency as the only method by which the unscrupulous will defraud us. It works, as well, with securities of all kinds, public and private.

Also, monetizing debt doesn't happen very often in large diverse economies. It's usually undertaken reluctantly. The Fed operations of 2007-09 were in many cases novel or had not been used in many decades. Furthermore, Fed policy three decades back became aggressively counter inflationary. This Great Moderation of the inflation menace is what set the stage for the Great Securities Chase of recent decades. Reagan sent deficits through the roof for his project of defeating Communism and the debt ended up only minimally affecting us, financially or otherwise, in a negative way, while the boon of that spending was the ruin of the Evil Empire. Before Bush's tax cuts, the Reagan deficits were on the verge of flipping to surplus. All of which throws doubt, in my mind at least, on the "lather, rinse, repeat" narrative.

Tony's correction on my point about gold is well-taken. Of course the metal has intrinsic uses.

Making human labor more productive means things like arranging that labor so that it produces more quantity or better quality per unit of time. I don't see that money qua MONEY - in whatever form - is ever the DIRECT cause of an improvement in productivity.

I don't either. But I do see it as a potential detriment. If money supply cannot expand to reflect the growth of an economy, it will stall that growth with deflation.

This Great Moderation of the inflation menace is what set the stage for the Great Securities Chase of recent decades.

What set up the Great Mortgage-Back Securities Chase that crashed our economy in 2008 was a combination of artificially low interest rates and systemic fraud on the part of the major lenders and MERS that resulted in untold billions of dollars of junk securities. The Fed was indeed involved, insofar as the Fed kept rates down--which it is still doing to the detriment of savers and letting the pricing mechanisms respond to actual market conditions.

But I see no reason to connect that to dismantling the Federal Reserve and abandoning the principle of lender of last resort.

The Federal Reserve is the unconstitutional mechanism by which these institutions make the public take responsibility for their malfeasance. Under Bernanke, the Fed has done some wildly dangerous things ranging from picking and choosing winners in the bailouts outside their mandate, to giving trillions in loans to foreign banks without political oversight.

Back then, I told Zippy that he was wrong for supporting the bailouts and federal intervention. I said that we needed the "come to Jesus moment" that was only possible by having these corrupt, criminal corporations fall on the bed of knives they'd made for themselves and the public and then bleed to death. Like many conservatives, Zippy was so womanish about it that a little public instability was too scary to realize that continuing down that path would lead to far worse. Instead of the sort of semi-violent street activity they had in Iceland, God only knows what waits us at present course in the next few years as the feds continue their "see no evil, hear no evil, smell no evil" routine with the financial sector.

Public stability was saved temporarily, but at what cost?

Lydia,

An example of why I am being so harsh on the banks:

http://market-ticker.org/akcs-www?post=202336

What set up the Great Mortgage-Back Securities Chase that crashed our economy in 2008 was a combination of artificially low interest rates and systemic fraud on the part of the major lenders and MERS that resulted in untold billions of dollars of junk securities.

Incomplete. These factors were important, no doubt, but to confine the causes to mortgage paper is to narrow our field of study to the detriment of our understanding.

For instance, the above statement sheds precisely zero light on the Long-Term Capital Management panic in 1998. That was a financial crisis which had the potential to ramify to wider markets much like 2008, but disaster was staved off and few paid attention what might have been. I have little patience for theories of the causes of the 2008 crash that cannot account for LTCM in 1998. (FYI: the Fed Funds rate at late 1998 was around 5%; in 2008 it was 1%; in both environments exotic securities trading triggered a potentially calamitous high-tech bank run.)

Incomplete. These factors were important, no doubt, but to confine the causes to mortgage paper is to narrow our field of study to the detriment of our understanding.

I think they are fairly complete since I narrowed my point to mortgage-backed securities, which are highly problematic because of the way so many pension funds and insurance companies bought into them.

Well, I've explained why I think the MBS narrative is inadequate. I'd only add this: Mortgage-backed securities are not, in my judgment, "highly problematic." There's nothing inherently suspect in this form of debt security. Given the historic American reliability in making mortgage payments, I'm inclined to say that functioning secondary markets for mortgages, even mortgages packed together into larger bonds, remain sound and largely stable components of the financial industry. What made them problematic was, among other factors, the fraud you've adduced, the complexity of their derivative products, and the lawlessness of the shadow banking environment into which the poured.

Note: I never said that they're inherently problematic.

It is highly questionable whether they are particularly lucrative investments if the banks actually follow the law. Lot's of paperwork involved with that which increases the cost of doing business substantially. Hence their use of MERS and all that happened with that.

The great problem with the MBS scandal is that if and when the public finds out about what really happened, and the public realizes how it has been repeatedly swindled by the bankers and their friends in government, it could have ruinous implications for the legitimacy of the federal government and the willingness of many to obey the law. And why should they? Why should someone shafted by the banks and then forced to help fund a bailout of the same give a damn what some law and order conservative or hand-wringing liberal says about the law, public good, etc. when they've been robbed at home, their pension, etc.?

Zippy was so womanish ...

Yeah I'm a real girly man, Mike. And not nearly as knowledgeable about how finance and capitalism actually work in the real world as you are.

Good grief. Say it to my face some time.

Paul, I'm afraid you will find it as impossible to break through "free market" utopianism as it is to break through crypto-Marxist utopianism. People believe in these things that not only don't exist in our actual world, but can't even exist in principle; and there is no shaking those beliefs.

Speaking of which, Bank of America moved $80T worth of CDS into their depository arm a few months back. Their executives probably thought that they're being really f#$%ing clever doing that--putting 12% of American deposits up for hostage if BoA goes bankrupt. With that asset distribution across such a wide body of society, who among them doesn't want to bet that if they go bankrupt and their creditors use the 2005 bankruptcy law to eat up all of the depositors' life savings that someone won't hoist the Jolly Roger?

Paul, the more diversified any attempts are to "print money" the less damaging they are. If something taken as a proxy for money (securities, in your example) has to be gathered by going around to various banks, there's far less centralization of that power and hence less certainty that the power will be forthcoming. It's a bit like the difference between legislation at the state level and legislation at the federal level. You have to work harder, do it on a case-by-case basis, and the terms or specifics of it may vary from one state (bank) to another. Moreover, the individual bank's securities, or even the pile of them gathered together, won't have the behemoth force and perceived security that the "full faith and credit" of the wealthiest nation in the world has. This is in my opinion a _good_ thing. It is the latter (that perceived security of the U.S. government) in part that encourages the "something out of nothing" appearance and makes people really believe in things like "too big to fail," really believe that the can can be kicked down the road world without end, amen. The sheer size and scope of what the U.S. federal government can do at a stroke is part of the problem. Scale matters.

Somewhere in here the legal tender issue comes into play, as well. The securities of X bank in X city are not legal tender for all debts private and public.

Yeah I'm a real girly man, Mike. And not nearly as knowledgeable about how finance and capitalism actually work in the real world as you are.

I never claimed to match you on either. I am mocking you for being so afraid of a little social upheaval in 2008 that you backed a plan that you knew would lead to out of control deficit spending and continuous Keynesian bailouts that would lead us to a point where our national finances are now somewhere between Italy and Greece. We're already over 100% GDP by several wide strides if you factor the 1.5T of deficit spending out of GDP numbers.

In 2014-2015, when the US is either at 160% GDP and bleeding like a stuck pig with its hind legs in a sausage grinder, you'll probably be singing a different tune.

Mike, I'd like a cite on that $80T assertion, but honestly it would not surprise me. Remember, I want depository banking to function much like a regulated utility, and to be firmly quarantined from exotic securities trading. Let the securities hotshots to whatever they want, so long as they do it with their own capital only: that is, with their own personal capital at risk in the firm.

Mike: your description of the 2008 situation merely showcases the ignorance you concede.

My bad, looks like it was "only $75T"

http://seekingalpha.com/article/301260-bank-of-america-dumps-75-trillion-in-derivatives-on-u-s-taxpayers-with-federal-approval

I would really hate to have any professional affiliation with Bank of America if they go bankrupt.

Reading this thread it seems to me only the FOFOA worldview is powerful enough to address all the issues raised. To recap, that worldview is as follows: Prior to 1971 the world was on a gold-exchange standard via the dollar except with international gold flows sterilized by the world's central banks via the London Gold Pool preventing international trade from stabilizing and the fixed nature of Bretton Woods was draining all the gold from the U.S. The world needed gold to float in price so it could flow to where it was needed and thus Bretton Woods was ended. However, when the world went to a purely fiat dollar standard it found out just how brittle the dollar had become so world economic forces (Europe, oil states) backed the dollar until an alternative (the Euro) could be created.

So the world went from one system (pre-1971) which was rather restrictive, as Paul points out, but had a relatively stable store of value which prevented bond speculation (ie. LTCM) and made chasing yield unnecessary (ie. mortgage and other asset-based securitizations) to a new totally unrestricted monetary system where genuine growth could never be inhibited by a shortage of exchange currency but which had no stable store of value to anchor the financial world to the physical world. Some kind of compromise between the two is needed.

All of the imbalances in the world today exist because international trade is transacted in fiat exchange currencies and any resulting surpluses are also saved in fiat currencies, specifically debt denominated in fiat. Net-producing nations trade with net-consuming nations and the surplus is cleared in fiat and placed in the banking system and the banks then buy debt, often the debt of the consuming nations -- Greece, Italy, U.S. etc. This creates more buying power in the consuming nations and more demand for goods from the producing nations which generates more surpluses which get recycled back into the banking system. Lather, rinse, repeat. The imbalances keep growing and, in the case of Europe, it has nothing to do with sharing the same currency. The same dynamic held between China and the U.S. for a decade.

If the producing nations, really the individuals within those nations, saved their surplus in say, gold bullion, then the price signals would reverse and turn surplus towards deficit and deficit towards surplus. International trade would be stable. Currencies would be stable. Interest rates would be stable. Bond valuations would be at the mercy of savers rather than bureaucrats, raiders and vigilantes. This was the future that the Euro was designed for, where gold trades in a physical-only market and floats in price against world currencies as the global reference point of value which ties the financial world to the physical world.

Mike: your description of the 2008 situation merely showcases the ignorance you concede.

Likewise, nothing about your solution appears to have actually done more than stave off the day of reckoning that the banks will face. Their losses were too large to socialize.

Yes, yes, I know: the zombies are going to get us anyway, so it would have been better to just lay down and die on the first invasion:

http://www.youtube.com/watch?v=AjcH2UmK1uo

(The solution I supported has been fully paid back, with profit on top, precisely as I predicted it would. By the way. Maybe you are man enough to concede the point).

Thanks for the Seeking Alpha link, Mike. Good read. I'll note that it appears that we talking about derivatives of all kinds, including (presumably) basic interest-rate swaps and the like, many of which are purchased on both sidse of a potential move, as a hedging mechanism, which means their value nets out; and that we're talking about the notional value of the derivatives, which is just the posited value of the underlying bond for pricing purposes, not the value exposed to loss or gain. So the $75 trillion number is not as useful as one might think.

Another interesting comment by Andrew E. You goldbugs are nothing if not industrious.

(The solution I supported has been fully paid back, with profit on top, precisely as I predicted it would. By the way. Maybe you are man enough to concede the point)

I am. You were right that it "worked" in the short run.

So the $75 trillion number is not as useful as one might think.

Perhaps not, but it is my understanding that those CDSes are handled before the depositors can get to their savings in the event Bank of America goes bankrupt due to the 2005 bankruptcy law changes. It wouldn't take more than a few trillion of those to actually be "really bad" CDSes to wipe out the depositors or at least all but ruin many of them.

People tend to respond far more violently to having their life savings literally stolen from them by creditors who have no moral right to them, than going a few months without a paycheck.

Another interesting comment by Andrew E. You goldbugs are nothing if not industrious.

Thanks. FYI, physical gold advocates and goldbugs are two very different groups.

"...solace in the fact that Apple and Walmart are global in reach. Perhaps there are some parts of these enterprises the American bureaucrat cannot reach."

Better the bureaucrat be answerable to a board controlled by one family in Arkansas? Or in the PRC? Came across this which is about when we built things,

"In fact, the only companies today capable of producing Heavy Press-size equipment are in the backwaters known as Germany and Japan, with companies in Russia, Korea, and China rapidly catching up and the UK actively rebuilding its top firm, Sheffield Forgemasters, through cheap government loans. Just last year four Japanese companies joined forces to build a new 50,000-ton press for the aerospace and power industries, and while I was working on this piece China Erzhong, a nationalized conglomerate, announced that it will build an 80,000-ton press — the biggest ever — to support its nascent aerospace industry."

http://boingboing.net/2012/02/13/machines.html

Discerning folks will note when Mesta went bust.

Paul, your six just-so stories provide absolutely no insights into our present circumstances and, in fact are distractions. You were doing better with usury but where that led was too scary, I guess.

Paul,

I just wanted to say I loved the OP -- a succinct and well-thought out summary of some of the recent arguments we have had here at W4 on political economy. You have a way with words.

Slightly OT, but related to some of the comments, if you haven't seen it already, Paul Samuelson's big book review ("Reckless Optimism") on the 2008 financial crisis is top notch (unfortunately not available yet online). His review of the literature to date supports your more balanced view of the crisis ("In short, we lulled ourselves into a false sense of security. The very belief that we had entered a new era of ever diminishing risk and ever growing prosperity led to decisions by governments, investors, businesses, and consumers that augmented risk and jeopardized prosperity.")

Also, if you didn't see this excellent Ponnuru piece on the Fed and monetary policy, I recommend it highly:

http://www.nationalreview.com/author/49289/latest

If the producing nations, really the individuals within those nations, saved their surplus in say, gold bullion, then the price signals would reverse and turn surplus towards deficit and deficit towards surplus. International trade would be stable. Currencies would be stable. Interest rates would be stable. Bond valuations would be at the mercy of savers rather than bureaucrats, raiders and vigilantes.

Andrew, a great deal of this is sensible, but it is subject to one main criticism. That is one that I have made in the past and Paul has made here as well:

If money supply cannot expand to reflect the growth of an economy, it will stall that growth with deflation.

In essence, a commodity-backed money is constrained by the fact that the growth of the money supply has nothing that directly relates it to the growth of total wealth. Deflation is a constant danger.

Seems to me that what we need is a combination of an objective stable-value basis in back of money to keep everyone grounded in reality, but an additional mechanism to increase the money supply in reflection of the real change in wealth over time. Only the two needs seem contradictory in practice. Is it possible to have a money supply backed by something similar to the S&P 500 (only not using stock but actual commodities - maybe the whole set of metals?), i.e. where the money is actually backed by some set thing(s), (so it is not fiat), but the large group of things can be adjusted over time to correct for oddities in value relationships, and the overall TOTAL supply of the commodities is likely to track the real wealth growth? Or is that just a completely circular bit of nonsense?

What I'm describing is not commodity money. It is not a new gold standard. The problem we have now is that savers save in the same thing that the printers print, fiat. Similarly, under a traditional gold standard the savers would sometimes hoard that which was needed to pay fixed debts. So let the savers save and the printers print but let them be in different mediums. If the savers save in physical gold coin and bars (not futures, not ETFs, not GLD, not certificates, not unallocated) then when the printers print the savers are protected because their wealth lies outside the banking system. And when gold isn't needed as a medium of exchange, the propensity for savers to hoard gold has no negative consequences on the economy since gold isn't good for much except (big exception!) preserving purchasing power through time--which is all savers are concerned with as opposed to investors.

The dollar's role as reserve currency is winding down, this is what we're seeing at a macro level. The world markets are collectively groping in fits and starts for a new system which brings prices far more in line with value. In this new paradigm, soveriegn currencies won't be backed by anything explicitly. They will simply compete for usage value. In a post-dollar world, the various currencies will compete to transact as much international trade as possible because the biggest currencies will get the best prices (so you could say the currency that wins the bulk of the oil trade is, in a sense, backed by oil but not in the sense you mean). But they won't be used as reserves except over short time periods. We're already starting to see the various currency zones emerge. The euro has been around over 10 years now, China is building a trading zone in Southeast Asia based around the yuan, India and Iran have an agreement over oil trade, Venezuela and other nations are discussing a currency zone in South America and there's even been talk of various African nations joining together in a new currency union. And the dollar will survive (a new dollar likely, after hyperinflation of the current one) as a transactional currency but at a significantly reduced value in the world economy.

"If money supply cannot expand to reflect the growth of an economy, it will stall that growth with deflation"

Is it some kind of (non-Austrian) axiom?
How do Austrians reply to this "problem"?

Won't the interest rate adjust themselves to the gold standard and expectation of deflation?

Andrew, I am having a hard time seeing how multiple major currency zones of fiat money is going to improve anything. Sure, there will be competition among the currencies so that will restrain some nonsense. But how will it restrain someone like BoA from using all of those fiat currencies to fund ultimately insane finance schemes? In the times of greed, won't the currencies (i.e., the major entities using that currency) compete to get in on the scheme at the ground floor and not be left behind? I am puzzled as to why a multiplicity of fiat moneys prevents the ills of fiat money.

Gian, I think it is some kind of axiom. If your money supply is growing at a 1% rate per year, and your economy is growing at a 2% rate, then the same unit of money is going to be able to by more actual wealth after a year. Deflation. Interest rates can deal with it to some extent, I guess, but maybe not everywhere for all purposes: are you going to lend at negative interest rates?

Andrew E -- It is sometimes rather difficult to distinguish savers from investors. Think IRAs, 401Ks, etc.

The dollar's role as reserve currency is winding down, this is what we're seeing at a macro level.

Possibly, but that is still conjecture. The euro looks to be winding down more rapidly than the dollar at the moment.

Jeff Singer -- Thanks for the book and essay recommendations. I gather than Ponnuru is persuaded by monetarist arguments from Scott Sumner.

I am puzzled as to why a multiplicity of fiat moneys prevents the ills of fiat money.

I imagine it wouldn't prevent them all, but wouldn't it help? Again, as with securities from banks and the analogy to state vs. federal law, competition among paper promises probably means that a) it's harder to get mountainous paper promises all together in one place, hopefully making people do fewer wildly risky things, b) each kind of paper promise doesn't have as much monopolistic, you-have-to-believe-this-forever power. Hence less opportunity to get in over one's head by relying on paper.

I must say, people can say what they will, but I think the discussion with Andrew E. is the most fruitful conversation going on here.

Lydia,

The flip side is that the issues would have incentive on the other hand to make sure that you always had cheap money from them. It would be a matter of which incentive they feel is worth a stronger response: keeping the value of their fiat currency higher than the next issuer's or keeping the money supply generously high so it's easier to use it.

Tony, currency zones are not the solution just what I see as the response to the solution which is separating the functions of money into different mediums. Fiat for medium of exchange and unit of account and physical gold for store of wealth. (Handy slogan: fiat is for spending, gold is for saving) So all that will be left for fiat is to transact as much trade as possible which is easier done in currency zones where nations join together. But when the savers have an out, a place which allows them to withdraw their wealth from the system for safe and indefinite preservation, the printers of fiat will act much differently than they do today.

Why will they choose gold? Remember that gold is objectively the best choice since it alone among metals and commodities has, by far, the fewest practical uses and is thus well-suited to being hoarded by savers. And we already have plenty of signs that major players are coalescing around gold when we look at the central banks of the world (ie. they don't list silver as part of their reserve assets), we know that the oil states value gold highly from the oil crises of the 1970's and there is of course the volume of gold trading out of London which clears as much trade in gold every couple days as is mined in a year. Clearly, major global wealth has been moving lots of gold around the world. Why? Because it's being treated like a currency, despite what the MSM tells us, by those with much wealth to preserve?


Andrew E -- It is sometimes rather difficult to distinguish savers from investors. Think IRAs, 401Ks, etc.

Paul, yes but if those with 401ks and IRAs end up losing most of their savings in the transition to a new monetary system, they will likely think very differently about what to do with their savings going forward.

Possibly, but that is still conjecture.

Yes, still just conjecture at this point.

It would be a matter of which incentive they feel is worth a stronger response: keeping the value of their fiat currency higher than the next issuer's or keeping the money supply generously high so it's easier to use it.

Mike, that's doubtless true, but separate currency issuers could, then, fail if they allowed themselves to devalue too much. Especially if they weren't national in scope.

One of the things I find very disturbing in so many of these conversations is the fact that people who disagree with me don't seem to understand the importance of the possibility of failure. Sometimes things do really need to crash and burn. That's a reality check. The longer a person, a bank, a company, or a nation thinks they can go on doing unprofitable things without failing financially, the worse trouble they get into and the worse the crash is when it comes. A smaller crash earlier would have been better.

And if things are broken up somewhat, one failure doesn't bring everything else down with it. It's a little bit like Detroit. If Detroit is determined to be a loser city, I would rather let Detroit go down by itself than be dragged down with it. If that sounds ruthless, so be it.

Mike, that's doubtless true, but separate currency issuers could, then, fail if they allowed themselves to devalue too much.

Lydia, this is correct. The biggest reason for the creation of a new transactional currency in the euro was so that world trade wouldn't again be held hostage to the quality of a single reserve currency, as was the case with the dollar in the 1970's.

Ugh. Since I'm already in this thread (thanks Mike T), and I can hardly stand watching a few good friends take this foolishness seriously, I just want to say that putting your savings into either just cash or just gold would be the height of foolishness. Cash is for exchange, yes, and should not be thought of as a stable storehouse of value (any decent portfolio manager ought to be able to tell you this). No decent asset allocation includes anywhere near a majority in cash (actual cash, not non-cash liquid assets). Savings ought to be kept in a diversified portfolio of assets, especially when the portfolio goal is wealth preservation rather than growth. Putting your life savings into one single class of assets, let alone one specific commodity, is a recipe for personal financial disaster. (Many people whose entire life savings is wrapped up in their homes have discovered this bitter truth since 2008).

I agree with "cash for exchange"; but "gold for savings" is dumb, dumb, dumb. Just put a gun to your head and save yourself the trouble.

Also, there are already tens of thousands of different currencies out there, de facto if not de jure. The idea that only governments issue currency or have a monopoly on currency is quaint mythology. I myself have done very large transactions involving no cash. There may well be a problem of the relative scale/influence of dollars vs other currencies; if so, though, that reflects the actual relative scale/influence of the USG vs other governments and institutions. You won't fix that problem of relative scale - if it is a problem - by jiggering currencies. You can only change the size/influence of the USG vs other institutions by actually changing the size/influence of the USG vs other institutions.

I just want to say that putting your savings into either just cash or just gold would be the height of foolishness.

For once in this thread, we agree. Diversity is for asset portfolios, not ethnic composition.

I myself have done very large transactions involving no cash.

On which, I would guess, you had to pay whatever the relevant taxes were, maybe quite a lot, in U.S. dollars.

I've heard many times over the last few years the assertion, or what I take to be the assertion, that U.S. fiat currency is just like commercial paper, or something like that.

You know, I don't buy it. The disanalogies are obvious even to a layman like me.

I've just mentioned one: The U.S. government has the power to compel you, on pain of going to jail, to pay taxes in USD on transactions done in other media.

But really, that's just the beginning. Here are a few others: The USG doesn't have a clear balance sheet listing its own assets, and if USD are supposed to be credits issued on those assets, we don't know what that means, because unlike corporations, the government doesn't have to have accounting done in the same way and to the same extent.

Moreover, dollars are supposed to have some relation to/represent the total wealth of the nation, not just to the government's own assets. This isn't true of the commercial paper of one company, however large. Yet we surely don't want all of our private assets, all the wealth of the country, to be considered to _be_ the assets of the government and "seizable" in the event of forfeiture. That's a nightmare thought. And if it were true, it would just be a further disanalogy between dollars and other "paper money" such as corporate paper.

Third, the stakes are much higher for the people in the country if there really were such a thing as bankruptcy of the entity issuing dollars. In fact, we don't even know what that would mean (see #1), but would it mean that another government who was our creditor (e.g., China) would literally take over our country by taking over the assets of the government? Those are stratospheric stakes having to do with a lot more than finance. Another disanalogy.

Finally, to this:

You won't fix that problem of relative scale - if it is a problem - by jiggering currencies. You can only change the size/influence of the USG vs other institutions by actually changing the size/influence of the USG vs other institutions.

I would answer as follows: If we, the American people, recognize that the power to do more and more deficit spending and to monetize debt, put together, are storing up grave economic harms for future generations, and maybe even for the nearer future than some realize, we can and ought to choose to limit those powers. By statute, by constitutional amendment, by some means that is part of our governmental apparatus. It is by no means inevitable that we will continue going deeper and deeper into crazy levels of debt as a country, borrowing more all the time just to service that debt, and monetizing with QE1-QEn in a desperate attempt to "get things going again." None of that is inevitable simply from the fact that our government has a large amount of size and influence. Therefore, if as I believe it's a profoundly destructive set of policies, it should be changed. For our own sakes, if for no one else's.

Zippy is describing the rules of the current paradigm. I am describing a new paradigm where the rules will be different.

That said, in terms of practical action today, if someone can't put 5% of his savings into physical gold in his possession then I would call that the sheerest pigheadedness.

I certainly didn't mean to imply that commercial paper is just like fiat currency. CP is a short-term security circulating only in capital markets.

But it is simply a fact that when a bank makes loans on a fractional-reserve basis, new sums of money are created. A man deposits $10 in cash and the bank loans out $100 -- voila, $90 in new money, with no government action at all. Demand deposits are almost always calculated as part of nation's money supply, and some measures even include time deposits like CDs.

Lydia: no. The transaction (a stock swap, roughly speaking; a reverse triangular merger, more technically) was not taxable itself, period. Later sales of swapped assets were taxable, but the transaction I was thinking of in particular was not a taxable event.

Observing that the USG requires taxes to be paid in USD does not alter any point I've made, as far as I can tell.

Anyway, I said what I had to say: that dressing up goldbuggery in putatively different clothing just gets you the same old buggery. I think it would be tragic for any of my friends to foster illusions otherwise.

a reverse triangular merger, more technically

Forget gold, now there's a term that will help grandma sleep soundly at night.

if someone can't put 5% of his savings into physical gold in his possession then I would call that the sheerest pigheadedness.

Two problems I see with that:

1) The USG taxes re-sale of physical gold coins (which would be an obvious and sensible way to do this) at a higher collectibles tax of, last I checked, 25%. That's a real disincentive, unless one just wants to set out to break the tax laws, which is not my idiom.

2) There's the little problem of storage and insurance against theft, getting sucked up in a funnel cloud, or whatever. That can eat a chunk of your expected return on investment, and that return on investment is, in any event, a guess. The cost for storage at an insured location, on the other hand, is a certainty.

Lydia writes:

I've heard many times over the last few years the assertion, or what I take to be the assertion, that U.S. fiat currency is just like commercial paper, or something like that.
They are both liquid currencies. That doesn't mean they are "just like" each other. All the other diverse currencies Andrew E is proposing, as if they were something new, are also different from each other in various ways.
The U.S. government has the power to compel you, on pain of going to jail, to pay taxes in USD on transactions done in other media.
That would presumably remain the case in the brave new world (which is already here, and has been here for longer than we've been alive) of diverse currencies.
The USG doesn't have a clear balance sheet listing its own assets, and if USD are supposed to be credits issued on those assets, we don't know what that means, because unlike corporations, the government doesn't have to have accounting done in the same way and to the same extent.
I've been making that point myself for at least fifteen years.
Moreover, dollars are supposed to have some relation to/represent the total wealth of the nation, not just to the government's own assets.
I don't believe that that is the case, at all, and see no reason whatsoever why I ought to believe it. The money supply should have some relation to current trade liquidity or whatever, I suppose, but I don't get where it either actually does or should in principle represent the total wealth of a country.
would it mean that another government who was our creditor (e.g., China) would literally take over our country by taking over the assets of the government?
Of course not! I've pointed out before that when China lends lots and lots of money to the US, that increases the power the US has over China, not vice versa. Try lending, say, a third of your total assets to the next person you see, and tell me whether, in that transaction, his relative power over you has increased or decreased.
I would answer as follows: ...
In the paragraph to which you are replying, wasn't addressing everything everyone might say about the government's power to issue its own currency, what limits should be placed upon it, etc. (Though there is plenty in what you say that I find agreeable). I was addressing Andrew E's claim that as the world's "sole reserve currency" (whatever that means) the dollar has been especially problemmatic. The dollar never has been the world's "sole reserve currency" in any categorical sense. It is just that the US economy has been and continues to be a lot bigger and more secure than any other economy. That relative scale is the specific subject I was addressing: you won't make the dollar less appealing as the world's (non-categorical) reserve currency without dramatically changing the relative power of its guarantor - the USG - versus other institutions. Concomitant to downgrading the dollar's status as a desirable reserve currency is a downgrade in the (relative) power and stability of the USG.

Andrew E writes:

Forget gold, now there's a term that will help grandma sleep soundly at night.
I think diversified ownership of equity in productive corporations is a far, far safer asset than any singular commodity. Even so, a good portfolio is not limited to one asset class, so there ought to be other kinds of assets in the basket. I'm not even dead set against owning gold: I think buying gold is making a bet on a certain category of groupthink irrationality, and betting on groupthink irrationality in groups of human beings often pays off.

The money supply should have some relation to current trade liquidity or whatever, I suppose, but I don't get where it either actually does or should in principle represent the total wealth of a country.

Anyone I read from a monetarist perspective argues that we need fiat currency so that the money supply can grow to reflect increases in total wealth in the country! That point has been made repeatedly in this very thread. If the money supply has no correspondence to the wealth of the country, and isn't supposed to, why do monetarists make this argument? They also argue that the money supply needs to be able to be continuously tweaked so as to maintain prices at a certain level or let them rise only at a predictable level. Again, this seems to relate the money supply to the amount of "stuff" in the country generally.

All the other diverse currencies Andrew E is proposing, as if they were something new, are also different from each other in various ways.

Maybe I was not clear. In this hypothetical I was discussing currencies with reserve assets made up of primarily (>90%) of gold bullion. The central banks would buy and sell bullion into the global market to regulate the value of their respective currencies. And this would allow far more independence in enacting monetary policy than is possible today when foreign currency reserves (mostly but, yes Zippy, not entirely dollars), the value of which is highly dependent upon the actions of the issuers of such currencies, make up the bulk of the reserve assets on the balance sheets of the world's central banks. Whether likely or desirable, this would certainly be something new.

If the money supply has no correspondence to the wealth of the country, and isn't supposed to, why do monetarists make this argument?
Possibly because they are in the grip of an ideological delusion that money stores value, as opposed to providing a medium of exchange? I mean, all I can do is speculate when it comes to what the psychological causes are of people holding what seem to me to be crazy unnatural ideas.
Again, this seems to relate the money supply to the amount of "stuff" in the country generally.
Not at all. It seems to relate to what is voluntarily exchanged in commerce on any given day, not the total assets of the country, as far as I can tell. To relate it to the total assets of the country is to assume that all assets in the country are equally liquid and fungible, and can therefore be treated as some giant uniform fungible aggregate proportioned out by dollar-claims, which is just ludicrous. I can't give someone a dollar and thereby force him to hand over some arbitrary piece of property to me: whatever else it may be, currency is most definitely not a legal claim to the total wealth assets of the issuing country.

Again there is this confusion in thinking of money as something which stores real value as opposed to acting as a medium of exchange in the daily marketplace. It all goes back to usury, in a way: money, despite being issued by the Prince, has a nature which is independent of what the Prince wills. (Much as a house built by a builder has a nature independent of what the builder wills: if what he has made is a house, he can't will it into an airplane; if what the Prince issues is money, he can't just will it to be equity ownership of all of a nation's assets). When people use money in ways contrary to its nature - even when those misuses are to some extent self-fulfilling, like the wrongheaded notion that money provides some storage of real, actual wealth can be self-fulfilling in a perverse and temporary way - the result is all sorts of irrationality and dysfunction.

Andrew E wrote:

In this hypothetical I was discussing currencies with reserve assets made up of primarily (>90%) of gold bullion.
I retract the suggestion that you were advocating diverse currencies.

Three quick points:

1) The Samuelson book review is in the latest Claremont Review of Books;

2) Paul, you are right that in the essay I linked to and in previous essays, Ponnuru has expressed sympathy for the Sumner "market monetarist" viewpoint. However, he also (mischieviously) mentions a very interesting CATO Institute paper that suggests that the U.S. economy has done better without the Fed than with the Fed:

http://www.cato.org/pub_display.php?pub_id=12550

3) Lydia and Zippy -- perhaps part of the confusion regarding monetary policy is the claim, made by monetarists, that there is a link between the real economy and the monetary one, usually expressed with this equation: M*V = p*q. Whether or not Zippy considers the claims of folks like the late Milton Friedman worthy or not, there is apparently a substantial body of empirical work done on this subject that suggests some sort of link is real and meaningful.

Possibly because they are in the grip of an ideological delusion that money stores value, as opposed to providing a medium of exchange? I mean, all I can do is speculate when it comes to what the psychological causes are of people holding what seem to me to be crazy unnatural ideas.

Well that's a relief. At least I, with some sympathy for something akin to the gold standard or commodity-based money, have some company when it comes to being thought by Zippy to be in grip of a crazy unnatural idea about money. The monetarists, who are quite opposed to the goldbugs, are in that same boat with me. ;-)

1) The USG taxes re-sale of physical gold coins (which would be an obvious and sensible way to do this) at a higher collectibles tax of, last I checked, 25%. That's a real disincentive, unless one just wants to set out to break the tax laws, which is not my idiom.

Lydia, what I'm not talking about is not so much an investment but the wealth holding for a lifetime. So I suppose what's most relevant here is how tax law would treat one passing this form of wealth on after death. Perhaps this is unfair, but I expect the law to treat this event seamlessly long before it becomes relevant in my case.


2) There's the little problem of storage and insurance against theft, getting sucked up in a funnel cloud, or whatever. That can eat a chunk of your expected return on investment, and that return on investment is, in any event, a guess. The cost for storage at an insured location, on the other hand, is a certainty.

For the average family, I imagine 5% of total savings may not even be enough to purchase a tube of 10 1oz gold coins. I think wealth that fits in the palm of your hand, a few times over, provides a lot of flexibility in terms of storage options.

Sorry, that first sentence should start: "Lydia, what I'm talking about is not so much..."

Zippy, a couple of your comments puzzle me.

Possibly because they are in the grip of an ideological delusion that money stores value, as opposed to providing a medium of exchange?

I think I see the difference, and see that notionally that difference is real and significant. Money MUST provide a medium of exchange, that is the very essence of what it is for.

What puzzles me, though, is that it seems that money cannot successfully serve as the medium of exchange without one of 2 options behind it: (1) that it temporarily stores value, or (2) that the velocity of money is infinite. (I will accept a modification of (2), it would be sufficient for the velocity to be functionally indistinguishable from infinite, but not actually infinite.) For (1), the money you receive in one exchange is the very same money you expect to use in a later exchange. If you have no expectation that the money will store value, then you have no expectation that you can use it in the later exchange, and then you won't accept in as a medium of exchange in this transaction - at least, not as money. To get out of this dilemma, it would be sufficient (2) if every time you accept money for something you have an immediate expenditure upon which you use it, so that you never have it sitting in your hands. Since I take (2) to be virtually impossible for the whole economy, it seems that (1) must be true in some fashion.

I would think that the hyperinflation events of Germany 1924 and China 1946 would illustrate the problem: when money doesn't store value, it doesn't work very well as a medium of exchange very well either.

Of course not! I've pointed out before that when China lends lots and lots of money to the US, that increases the power the US has over China, not vice versa. Try lending, say, a third of your total assets to the next person you see, and tell me whether, in that transaction, his relative power over you has increased or decreased.

I think I see the force of this, but I wonder: to what extent is the point dependent on a couple of assumptions? Namely, that (a) the debtor is understood to continue to be willing (and theoretically able) to meet his obligation, and (b) there is some kind of recourse, other than armed take-away, that the lender can appeal to in order to enforce the obligation. If your neighbor figures out that the only way he will ever get his money back is by some other power than your (nonexistent) willingness to repay, AND he finds out that the government will neither be that other power to intervene and force repayment, nor will intervene if he takes it back by main force, then the relationship changes. THEN your owing him doesn't put him in your power in any worthwhile sense, all it does is give him a reason to start sharpening his knives and plan for that armed take-away.

Not at all. It seems to relate to what is voluntarily exchanged in commerce on any given day, not the total assets of the country, as far as I can tell. To relate it to the total assets of the country is to assume that all assets in the country are equally liquid and fungible, and can therefore be treated as some giant uniform fungible aggregate proportioned out by dollar-claims, which is just ludicrous. I can't give someone a dollar and thereby force him to hand over some arbitrary piece of property to me: whatever else it may be,

The last sentence is of course true, but nobody is claiming otherwise. If he holds some asset that I want, and I cannot induce him to want to sell it to me by offering a satisfactory price, then there is no transaction.

But the first part might need an adjustment: Shouldn't the money supply and its value relate to not only what is actually in trade on any given day (or, better, any suitable measuring time period - which may be longer for some purposes), but all that wealth that MAY BE put in trade with suitable monetary inducement? In one sort of standard wording, my house is not a liquid asset, and I am not currently interested in selling it, but if someone were to come along and offer me $5 million in cash, I would be much more likely to sell it on the spot than if he offers me exactly what the current standard price is for houses in the neighborhood. It may be up for exchange based on monetary inducement. Isn't that sufficient to put it into the scales against which the value of the money supply must relate?

I think that fiat money is perfectly OK when all parties are reasonably convinced that the ultimate "guarantors" of it are both willing and able to meet all obligations. When that condition fails, fiat money's utility tends to go out the window. Which wouldn't be a serious problem with using fiat money, if it didn't appear to be ALSO true that fiat money lends itself especially well to shenanigans in ephemeral senses of assets and values, which of themselves tend to undermine the guarantors ability to meet all obligations.

So I suppose what's most relevant here is how tax law would treat one passing this form of wealth on after death.

As a portion of the estate in the form of a collectible. One thing I'm not sure of is whether the "basis," for later taxability of sale by the heirs if they keep it and don't sell it for a while, would be the value at the time of the testator's death or the testator's own basis, which is to say, what he paid for it. In any event, my understanding is that any amount regarded as profit above the basis would be taxable at 25%. What puzzles me a bit is that you don't seem to see that this fairly steep (more so than, say, capital gains) level of taxation reduces the return on investment for the asset. Return on investment has to be thought of in terms of the value of the sale of the asset at a given time--what the asset would bring in if it were sold today--even if one doesn't intend to sell it. So obviously any high rate of taxation on sales has to be taken into account in thinking about whether and how much, e.g., you're beating inflation by having invested your dollars in that collectible item.


I think wealth that fits in the palm of your hand, a few times over, provides a lot of flexibility in terms of storage options.

Yes and no. If you're risk averse and think seriously about the possibility of theft (depending on, say, what neighborhood you live in), and if this is a significant proportion of your investment capital, then you aren't simply going to want to stick it in a basement drawer. Even the smallest _insured_ storage facility costs, not a lot, but enough to cut annoyingly into the speculative growth in the value of the asset.

Tony makes an excellent point:

to what extent is the point dependent on a couple of assumptions? Namely, that (a) the debtor is understood to continue to be willing (and theoretically able) to meet his obligation, and (b) there is some kind of recourse, other than armed take-away, that the lender can appeal to in order to enforce the obligation. If your neighbor figures out that the only way he will ever get his money back is by some other power than your (nonexistent) willingness to repay, AND he finds out that the government will neither be that other power to intervene and force repayment, nor will intervene if he takes it back by main force, then the relationship changes. THEN your owing him doesn't put him in your power in any worthwhile sense, all it does is give him a reason to start sharpening his knives and plan for that armed take-away.

Precisely. Now, suppose that the debtor _isn't_ willing and able to continue meeting his obligations. That is to say, oh, maybe debt servicing has come to be so onerous to him because he's taken on so much debt that he keeps frantically borrowing from one lender just to pay the interest on another loan, and then eventually other lenders won't lend to him anymore, and he tells the creditor that he can't keep paying him the interest. Just to give a scenario. And suppose there is no "government," because the two entities _are_ governments.

This is the sort of situation we usually think of as calling for bankruptcy proceedings. But what if there are no orderly or clear rules for bankruptcy proceedings? Because, you know, the two entities involved are two governments. Then what?

Yeah, actually, things could get rather unpleasant.

And besides, even if there _were_ bankruptcy procedures, that would usually mean that the debtor would have to have his assets sold to pay off his creditors. Do we really want all the assets of the US government sold to the highest bidder at auction to pay a large sum to the Chinese? Well, no, I didn't think so.

I'm sorry, but the individual-to-individual analogy either doesn't work *at all* (in which case we might as well consider war as one possible outcome of default) or else has some very disturbing implications if we try to press it. Take your pick.

One thing I'm not sure of is whether the "basis," for later taxability of sale by the heirs if they keep it and don't sell it for a while, would be the value at the time of the testator's death or the testator's own basis, which is to say, what he paid for it.

Generally for an estate, the heirs' basis in the property becomes the stepped-up value of the asset at the date of death. At least in principle, the estate tax (levied on the whole value of the property transferred to the heirs) takes care of taxing the difference between the basis the decedent had before death and the value at death.

I don't know whether there is a special rule for basis in collectibles that makes them different from the general treatment of basis, but I cannot see why there would be.

(There is a slight adjustment for estates in 2010, when the estate tax lapsed. If I understand it properly (and due to a law re-instating the estate tax passed at the end of 2010 when Congress didn't want to appear to levy an ex-post-facto tax), the estate has an election: it can treat 2010 as if the estate tax was in force for that year and pay any estate tax, and get the usual step-up in basis for the assets transferred, OR it can treat 2010 as having no estate tax, but the heirs' basis remains the basis the decedent had before death.)

What puzzles me a bit is that you don't seem to see that this fairly steep (more so than, say, capital gains) level of taxation reduces the return on investment for the asset....Even the smallest _insured_ storage facility costs, not a lot, but enough to cut annoyingly into the speculative growth in the value of the asset.

I think part of the disconnect here is that I keep referring to gold as wealth and you speak of it as an investment. What about thinking of your 5% in gold as a form of insurance for the other 95%. That is, with $1.5 trillion in annual fiscal deficits and $500 to $600 billion in annual trade deficits, with the Federal Reserve entering into currency swaps measured in the trillions (and surely much more we don't even know about yet), if you're not at least 5% concerned that our monetary system will face total collapse in which all paper assets will burn, then I think that can be fairly described as pigheaded. In this context it should be worth it, whatever the insurance or storage fees or the taxes you may have to pay in the future.

that our monetary system will face total collapse in which all paper assets will burn

But if that happens, with the resultant chaos, shouldn't I instead be investing in solar powered generators, remote property, and ammo? I mean, under those circs, how exactly am I going to trade extremely valuable gold coins for the necessities of life for myself and my family, anyway? (Clarification for all the "we're watching to see if you sound whacked-out" people who may read this: No, I am _not_ saying that I'm actually investing in remote property and ammo. This is a hypothetical example, got it?)

Of course not! I've pointed out before that when China lends lots and lots of money to the US, that increases the power the US has over China, not vice versa. Try lending, say, a third of your total assets to the next person you see, and tell me whether, in that transaction, his relative power over you has increased or decreased.

Yes, I'm not sure I see it this way either. As I see it, everything China has lent us we've consumed. It's gone. It's not like we turned all that Chinese savings into productive assets throwing off new and additional wealth. And our society has become accustomed to a certain trajectory of material living which we are unable to maintain through our own production. So if China chooses to cut off the flow of consumption goods into America, that could have very serious social consequences here. Sure, China would be out the savings they lent us but they still have all their productive assets and they could start consuming their own production themselves instead of continuing to lend it to us.

But if that happens, with the resultant chaos, shouldn't I instead be investing in solar powered generators, remote property, and ammo?

What I had in mind was a classic hyperinflation. Devastating for most financial assets and things may be bad for 3 or 6 months but I don't think modern civilzation would collapse.

RE: deflation

Again I ask how do Miseans deal with the problem of deflation that is supposed to be caused by gold standard.

Also, isn't it the usual thing that rising wealth means one buys more with the fixed amount of money? Why is it supposed to be a bad thing here?

Let me assure my friend Zippy that he has nothing to fear in the manner of me signing on for goldbuggery. But one need not embrace Andrew E.'s solution to find his presentation of the problem compelling and thought-provoking.

On these matters of political economy, my posture is profoundly Burkean, so much so that from many perspectives it looks (what is a common criticism of Burke) unprincipled. I don't really care, as a matter of principle, about either fiscal deficits or monetary stimulus.

I do think there is a non-trivial chance of drastic dollar inflation in the medium- to long-term, but my sense is that for most families the physical gold hedge Andrew speaks of is probably provided for already -- in jewelry and silverware, mostly. In a hyperinflation event, many banks would fail, but not all of them would: and the remainder would undoubtedly take jewelry, silver, collector coins, whatever, as security on apparently jawdropping sums of cash. ("Why yes, sir, our cash lending rates on silver dessert spoons range from the high hundred billions to the low trillions.") It's all digital anyway, so the German "wheelbarrows of cash for bread" imagery is fun but asinine.

I also think there's a non-trivial chance of something much worse: what stared us in the face back in fall of 2008. I mean the full-bore collapse of world capital markets. If that happens, the only possible savings would be practical prudence and luck; and the only investment worth a darn your local Body of Christ.

That we faced such a prospect and avoided it is the root of my apparent insouciance about the less happy consequences of the avoidance.

Now of course I am aware that some folks disagree with my estimate of whether we indeed faced the doomsday prospect. There's nothing for it. That disagreement will remain. But here I find some of those same people presenting me with doomsday scenarios ("stratospheric stakes") based on similar projections of failure due to fiscal and monetary profligacy. This time we'll go bankrupt and be conquered by our creditors! This time deficit spending along with loose money will ruin us.

Probably not, in my estimate. And in turns out that we will enjoy a protracted and instructional observation of what does happen when whole huge postmodern nations find their debts unbearable and their creditors approaching like vultures. It's called Europe. Greek is an interesting spectacle, but have you ever looked at UK and French bank exposure to Greek debt? Those pathetic lenders need the ECB and Federal Reserve liquidity as much as the Greeks need their bailout.

Andrew also writes that, "everything China has lent us we've consumed. It's gone. It's not like we turned all that Chinese savings into productive assets throwing off new and additional wealth." That's a serious overstatement. Trade imbalances and capital market distortions by the Asian savings glut are nothing to sneeze at, but the situation is not so bleak as the summary implies. Numerous productive American businesses have been built in part by Chinese savings. The very word consumption can be misleading. Right now I'm "consuming" a machine built in China by an American company. It was purchased fairly cheaply, but it's better than 99% of the computers built a decade ago and better than any computer on earth when I was born. The next commenter might compose his comment as "consumer" of Chinese-made hand-held device more sophisticated than the rocket science of the Apollo Program. Add the fact that Chinese (and Indian, and Brazilian, etc.) consumption of these goods is growing even faster than American consumption, and you'll see why I also agree with Zippy's view that "diversified ownership of equity in productive corporations is a far, far safer asset than any singular commodity."

goldbuggery

If that's not a double entendre, I don't know what is...

Briefly:

Money has no intrinsic value, and therefore stores no value[*]. It represents a gentleman's agreement to ignore the limitations of space and time in order to make barter vastly more liquid and efficient. Although its velocity is not actually infinite, the reason it works is because of the civilized convention of treating it as if its velocity were infinite. Absent this convention - the stability of which does rest on price stability - there is no money, just wheelbarrows of useless paper.

If you have money, it means that you have an incomplete barter transaction pending. It does not mean that there is any ontologically real value stored in your money. The idea that there is real value stored in money is as false as the notion that money is fertile, and that therefore charging interest (on full person-recourse loans) is just.

There is, in my understanding, no necessary connection between the money supply and the total assets of the nation. There may be an accidental relation based on the liquidity and trade activities of that nation; but that can change and there is no reason to think it won't (unless one is so ideological that one believes that everything of value should be completely liquid and fungible).

[*] The reason gold was used as "money" early on was because gold actually does have intrinsic value, while being portable enough to act as a simulacrum of money. The obsessions of goldbugs rest in the fact that they haven't accepted that money is just a token (which presumes a civilized order protected by some authority as context) representing an incomplete barter, and has no intrinsic value. Aquinas recognized many centuries ago that the commodity aspect of the token is ultimately irrelevant: that the nature of money is to facilitate exchange, not to store ontologically real value. Modern economic theorists are relativists though, and think that value is something assigned by the human will rather than perceived by the senses and intellect. So every modern economic theory rests on one sort of insanity or another, as far as I have been able to tell.

Zippy, one thing I find rather interesting is that in your repeated insistence that money doesn't have intrinsic ontological value you seem to me to be closer to "goldbugs" than you realize. After all, if we went to something more like a full barter system or something where currency was not treated as a store-place of value (which, like it or not, is certainly how it is presently treated pervasively), that would be far more like what "goldbugs" actually want. It could potentially restrain the negative effects of fiat money, for example.

Paul, electronic or not, I would assume that you regard hyper-inflation as a bad thing, right?

Lydia,

Re: goldbugs, I wouldn't want to embrace a crazy falsehood just because doing so might have salutary effects. And I'm not confident enough in my (or anyone's) ability to predict economic effects and externities to find the notion appealing even from a utilitarian perspective. Better just for the truth to set us free, and all that.

Yes, Lydia; a very bad thing. Nevertheless, there are worse things.

Interestingly, it sounds like Zippy and the main Austrian economists are not far apart when it comes to the nature of money:

Carl Menger: [I]t appears to me to be just as certain that the functions of being a "measure of value" and a "store of value" must not be attributed to money as such, since these functions are of a merely accidental nature and are not an essential part of the concept of money.

[...]

[M]oney is the most appropriate medium for accumulating that portion of a person’s wealth by means of which he intends to acquire other goods (consumption goods or means of production).

[…]

But the notion that attributes to money as such the function of also transferring “values” from the present into the future must be designated as erroneous.

http://mises.org/etexts/menger/eight.asp


Mises: Money is a medium of exchange. It is the most marketable good which people acquire because they want to offer it in later acts of interpersonal exchange. Money is the thing which serves as the generally accepted and commonly used medium of exchange. This is its only function. All the other functions which people ascribe to money are merely particular aspects of its primary and sole function, that of a medium of exchange.

http://mises.org/humanaction/chap17sec3.asp

Hayek: If I were responsible for the policy of any one of the great banks in this country, I would begin to offer to the public both loans and current accounts in a unit which I undertook to keep stable in value in terms of a defined index number. I have no doubt, and I believe that most economists agree with me on that particular point, that it is technically possible so to control the value of any token money which is used in competition with other token monies as to fulfill the promise to keep its value stable.

http://mises.org/daily/3204

Well, Zippy, how would you propose to dispel the illusion, which is _built into_ our present economic and fiscal set-up, I truly believe, that currency stores value?

I mean, I'm open to lots of ideas.

Consider: Why is anyone ever excited about a vote for a rise in the minimum wage? Because they think of money as inherently valuable. Otherwise, why should they care? The push for such a rise occurs because people truly believe that the workers will just, boom!, *have more* if the government forces their employers to pay them more. But of course it all comes out in the wash. They have more only in the short term until prices catch up. Point this out and one gets blank stares.

Why do people propose asinine, magical-thinking ideas such as that the central bank (!) should simply give out money to every man, woman, and child in the country as a means of livelihood, getting it from God knows where, because money produced by the central bank is "the common property of the people"? Because they think of money as having value intrinsically, even if it is simply printed by the central bank! There is zero understanding there of wealth as consisting in goods and services produced by people.

It's what I just recently called on my personal blog Rose of Gold economics. In an old fairy tale I have in a book, a fairy gives the hero a rose that he can just shake to get more gold whenever he needs it. So he goes about doing this happily and has adventures.

We must break the illusions of Rose of Gold economics, that by good will we can simply create wealth out of nowhere, out of the ground, and give it to people. This illusion takes many forms. Another one is asking why things can't just simply "be free." It's my belief that the twin U.S. governmental powers of issuing fiat currency which is used by all of us ordinary blokes for our daily transactions for food and stuff, plus the power of functionally unlimited deficit spending, _vastly_ encourage these illusions. I'm looking for ways to get people back to the idea of wealth as products and services that must be produced by real people.

By the way, I've always been curious: What would happen if after some round of QE or on the cusp of hyperinflation a given store owner said, "Nope. I'm not going to accept U.S. dollars anymore for food. I want you to pay me instead in ___________"? It needn't be gold. It could be something else. Ammo, even. :-) But suppose he were insisting on barter.

Would he simply go out of business because people would think he was crazy? Would there be legal recourse against him? I find it a kind of interesting question.

Lydia,

If you were to teach people basic economics in the public school system, a significant percentage might get it. Your question reminded me of a liberal my wife used to work with who, while generally educated, had absolutely no idea that printing more money had a direct relationship on the increase in inflation. He mocked my wife as uneducated for telling him printing more money would just impoverish the workers until she asked him "just what the heck do you think causes inflation, if not a big increase in the money supply?" Sadly, there are a lot of people similarly "educated."

For better or for worse, more people seem to be waking up to this particular aspect of the system because Bernanke is so public about his efforts to red line the printing presses right as most workers see prices shooting up.

...and you'll see why I also agree with Zippy's view that "diversified ownership of equity in productive corporations is a far, far safer asset than any singular commodity."

Paul, yes what is it the Capital Asset Pricing Model says? The ideal portfolio from a risk/return perspective is to own the entire market? Perfect diversification. Well similarly, just as a thought experiment, what if all the savers in the world, via some kind of network effect, did happen to gravitate towards a single commodity with which to store surplus value over long periods of time? I suspect the value of such a commodity (apart from being significantly higher to its value pre-network effect) would be incredibly stable and thus viewed as the premiere wealth asset. What could possibly precipitate such a network effect? It could be that truly big wealth has already made the move and at some point this shift by the big boys will become apparent to the billions of us shrimps of the world and we'll simply "follow in the footsteps of the Giants" (as FOFOA would say). Hmm, maybe.

Lydia: the older I get, the less of a clue I have as to how to stop people from thinking insane thoughts. I doubt there is any technical solution, such that if we restructured things in some way or other people would stop being insane about money.

It's all digital anyway, so the German "wheelbarrows of cash for bread" imagery is fun but asinine.

Hmm, I think hyperinflation, properly understood, results not from excessive inflation but rather from loss of confidence in the currency. In other words, hyperinflation is a demand-side phenomena not a supply-side phenomena. The massive printing follows the collapse in demand, not vice versa. When a currency is no longer trusted, credit money is the first to disappear. Vendors no longer accept credit cards or any other kind of digital transfer, only cash money will do. So all those bank accounts with digital dollars go to zero. If this were to actually happen I suspect institutional action would be taken for the same reasons Paul said our officials couldn't just stand by in 2008 and let the system implode. The Bernank would fire up the presses and begin his helicopter drops of actual cash money to replace all those digital balances that went poof! Maybe Paul sees it differently.

For better or for worse, more people seem to be waking up to this particular aspect of the system because Bernanke is so public about his efforts to red line the printing presses right as most workers see prices shooting up.

But apparently not everybody sees that, Mike T. I mean, here are all these intelligent wonks, both known to me and referred to in links, that keep insisting that actually we need to drop more helicopters of money and try even harder to inflate our way out of the current crisis.

Perhaps Zippy and I agree after all: You can't stop people from thinking stuff.

Andrew E writes:

Hmm, I think hyperinflation, properly understood, results not from excessive inflation but rather from loss of confidence in the currency.
I agree with Andrew here. (I don't agree with many of the Austrian quotes he notes as similar to what I said; but a proper fisking would be a sidetrack and in any event I don't have the time or energy).

So-called "hyperinflation" is not "really fast inflation," and has nothing much to do with ordinary inflation or deflation (price fluctuation). "Hyperinflation" is what happens when the tokens used for money no longer function as money, because the prerequisite civilized gentlemen's agreement, upon which the very existence of money -qua- money rests, has broken down.

Note that this can happen to so-called 'hard currencies' as easily as to fiat bux (and quite possibly more easily; certainly it is far from obvious to me that 'hard currency' is in any sense more secure than fiat currency). A hard currency supposedly provides a kind of hyperinflation insurance policy for the note holder, because if nobody else will take his money he can (at no cost to himself, I am sure) go running to the government and demand his share of the stockpile of commodity. But since the hyperinflationary event just is a loss of confidence in the stability and promises of that very government, at the end of the day it isn't much of an insurance policy. And 'hard money' at the same time leads quite directly to all sorts of distorted and incorrect notions about money. Its main function is to validate a whole class of gross misunderstandings, while providing not the least hedge against the real risk.

A hard currency supposedly provides a kind of hyperinflation insurance policy for the note holder, because if nobody else will take his money he can (at no cost to himself, I am sure) go running to the government and demand his share of the stockpile of commodity. But since the hyperinflationary event just is a loss of confidence in the stability and promises of that very government, at the end of the day it isn't much of an insurance policy.

I really don't grasp the logic of that. If a hyperinflation event starts because everyone loses confidence that the government can hand over his share of the stockpile commondity, then the government really and truly having a full set of the stockpiled commodity sufficient to meet everyone's monetary share would, perforce, subdue worries that the government can't hand over the correct amount of the commodity.

Has there been a hyperinflation event, where the people lost confidence in the government's dealing with currency, WITHOUT the condition of the government going haywire about how it is handling the currency?

Money has no intrinsic value, and therefore stores no value[*]. It represents a gentleman's agreement to ignore the limitations of space and time in order to make barter vastly more liquid and efficient.

If we go back to the first coined money, I think that it always had a prior independent value. (I won't say "intrinsic" because that is subject to some ambiguity.) It always had barter value before it became money. Therefore, it was a suitable object to become the token for the gentlmen's agreement. When the first people first made coins out of silver and gold, the token value wasn't "token" at all, it was simply the prior value that that amount of gold had carried in barter anyway. It was only after the system got rolling that people were willing to grant the coinage a set value reflecting historical rates, based on prior experience that the coins had this value for some time. The token-ness of the value accrues over time based on experience grounded in non-token barter value. Thus, the "gentlemen's agreement" is, principally, a shared history of mutually respecting the still earlier history rooted in barter value.

I've got the solution: I'll start asking my employer to start paying me in a portfolio of stocks and commodities: 1/8 ounce of gold, 2 ounces lead, 2 tons of wheat, 1/8 head of cattle, 12 shares of Microsoft, and so on, all catalogued in a broker's ledger (though stored elsewhere). Eventually everyone does this. When we tally what everyone got paid last month, it will come to a pretty sizable picture of the country's tradable wealth.

I was going to say something similar to what Tony said. One of the points of a harder currency is supposed to be to _prevent_ that loss of confidence, not to assume that a radical loss of confidence and hyperinflation is just fated to happen but that now we have some kind of "insurance" for when it does happen.

I agree with Tony as well that in the first instance things used as a medium of exchange had value in barter and that this is how they came to be a common medium of exchange. Salt, for example. As in "worth his salt" or "true to his salt." Salt was a pretty valuable commodity in barter, which is how it came about that soldiers were paid in it.

I like your idea, Tony. :-)

I already brought up the historical picture above. The change from bartering actual commodity coins to bartering through the medium of money happened long enough ago that it was taken for granted in the writings of the medievals. Heck, it was taken for granted in pagan Roman law, so the mythology of non-token intrinsically valuable commodity money occupies approximately the same intellectual space as Hobbes' state of nature. And I fail to see the difference between Tony's proposal and the proposal "get rid of all money, and go back to barter".

I have a feeling though that my capacity to add anything useful to the discussion has reached its own limit. Time to run off to Fort Knox, get in line, and cash out for whatever you can get.

Zippy, it seems to me that your repeated insistence that people shouldn't view money as a store of value is very barter-friendly. I remember once you even suggested, if only half-seriously, that money should be printed with an expiration date on it to discourage the idea that money is a storehouse of value. This should lead not to hostility towards barter-like suggestions but to a realization that you're actually nearly _proposing_ a return to barter. I would think any expired-date money scheme would have the effect of increasing the use of barter vastly in very short order.

But apparently not everybody sees that, Mike T. I mean, here are all these intelligent wonks, both known to me and referred to in links, that keep insisting that actually we need to drop more helicopters of money and try even harder to inflate our way out of the current crisis.

All I can say to that is that there is a special kind of stupid that comes with a certain degree of intelligence and education.

I was going to say something similar to what Tony said. One of the points of a harder currency is supposed to be to _prevent_ that loss of confidence, not to assume that a radical loss of confidence and hyperinflation is just fated to happen but that now we have some kind of "insurance" for when it does happen.

Another benefit of a hard currency system is that foreign coins of similar or identical weights or even bullion slugs like the ones some private bullion vendors sell could be used as currency. If a 1oz Gold Eagle had a face value of $500.00, a 1oz Austrian Philharmonic could be used in its place. Heck, a Kitco silver slug that's 1oz .9999 pure silver would be readily accepted as an alternative to a 1oz Silver Eagle if things got tough with the government's supplies for a time.

** granted, that's assuming we have something similar to the 19th century greenbacks where the feds used both gold coins and green backs that were tied to a physical stockpile.

Lydia:

I am barter-friendly, and in the past I believe I have pointed out that a lot more 'barter' - that is, asset swaps involving no cash intermediary - happens in the corporate world than you might expect.

I'm also in favor of some rather radical economic reforms. But I favor them for moral reasons, not based on the hubristic idea that I can predict positive utility as a result of implementing them. I think people who propose radical economic reforms on utilitarian grounds, because it is proposed that the reforms will produce this or that salutary effect, most definitely don't know what they are talking about. It isn't that I don't understand what effects their proposals will have: it is that I am absolutely certain that they have no idea what effects their proposals will have. It is that my hubris detector screams so loud that I can't possibly take them seriously, no matter what argumentative machinery they have employed to convince themselves of their rightness. It is not epistemically possible for them to know what they claim to know. (This goes for the doomsayers as much as for the optimists, by the way).

So I automatically reject any and every proposal for radical economic reforms based on anything other than moral justification. And I suggest that everyone ought to take the same approach I do, because I think I am right to take that approach, that is, to require moral justification for any radical economic reforms and to reject the hubristic idea that if we just pull the levers of the big machine the way Bob proposes we pull them, why, all this great stuff will happen and no bad stuff will happen.

Among the radical reforms I would propose, on moral grounds, is to have government refuse to enforce the terms of usurious loans, where a usurious loan is understood to be any and every person-recourse (as opposed to specified-asset-recourse) loan for profitable interest. When there is a default on a non-charitable loan, the lender should have recourse to the assets used as security and only the assets used as security for recovery of principal and interest. If no asset was assigned as security, well, tough cookies: don't make unsecured loans for profitable interest, boys and girls, because that is just usury and has been known to be morally despicable practice for millennia.

But I am not in favor of some radical move away from fiat currency. I'm especially not in favor of some 90%-100%-reserve gold-backed currency scheme, which as a de-facto matter is the same as simply eliminating money entirely and returning to an all-barter economy.

I've pointed out before that the loans made by people or other countries to our government can scarcely be called asset-recourse, since there is no designated collateral as security and no laid-out process for bankruptcy. As I recall, for whatever reason, this argument didn't impress you. But consider: The borrowing that the USG does is gigantic. If "usurious loans" are immoral (and, I would assume you would agree with Paul, also have bad effects, perhaps because they are immoral) between and among individuals, what does it say that we have these mind-blowingly huge loans taken by governments that emphatically are not clearly understood to be asset-recourse? And in fact, we don't know at all clearly what would happen, and in particular what non-disastrous thing would happen, if the government could not continue to service those loans. How can that be either moral or wise?

I also am not at all sure that I agree with you that only moral arguments should be brought to bear. After all, it's a little difficult to understand all monetary policy or fiscal policy as _necessarily_ moral in nature. Surely these would seem to be paradigmatically areas where the virtue of prudence would be relevant--which means attending to consequences.

I certainly know that Paul's own concerns about what he calls our "usury crisis" are motivated in no small measure by what he sees as the disastrous consequences of previous policies. I certainly don't see that form of argument as _wrong_. "This policy is going to bring us to rack and ruin" has got to be relevant in the area of economics!

One thing I am sure about is that when the government issues a T-bill, it is not 'borrowing' in the same univocal sense as an individual taking out an unsecured loan. In fact I think an entirely different word ought to be used, to avoid equivocation. The government is the authority which issues currency, for one; it is an institution not an individual, for another. If we must analogize them though then the "asset" is the government's unique capacity to produce currency on demand combined with its tax revenue annuity and other assets. The latter is similar to an "unsecured" corporate loan, where the corporation's revenues are one of the assets pledged, de facto, as security.

In general, institutional "borrowing" is categorically different from personal borrowing, because institutions are not persons and thus can themselves constitute collateral. But it would never be permissible for an individual to pledge himself as collateral: that is effectively usury. (Note that these are moral, not practical, concerns: it may be foolish for an institution to pledge itself and all of its assets - full faith and credit - as collateral, but it isn't usury for a lender to lend to an institution on those terms).

Also, I didn't say that practical considerations should never come into play in making economic policies. I said that practical considerations are epistemically useless - outright deceptive even - as justification for radical economic reforms, by which I mean major game-changing moves like going back to barter or banning usury properly understood.

By that analogy, then, if the USG cannot keep up with its debt obligations, it stands in danger of bankruptcy and of having its assets sold (which I assume is what would happen with a corporation if it totally defaulted). In this case, you're saying that those assets include the ability to produce U.S. currency. I mean, wow! Whether that is usury or not, it sounds like an insane thing for us to have ever consented to. And call it radical or not, but it seems to me it would be a good idea for us to confront that wild imprudence and see what is to be done about it, what _can_ be done about it.

By the way, if I understand you correctly: You are saying that loans to an institution *cannot* be usurious? Is that correct?

Just so there is no confusion, when I talk of a possible solution to current world economic troubles, it is not a solution I expect to be discussed, debated, legislated and then enacted. It is my opinion that the collective will of the global market will bring about the change to a new system capable of maintaining equilibrium in international trade, accomplished chiefly through a revaluation of gold bullion and setting the price free from all currency. And most of the governments/official institutions of the world (excepting the ECB) will be left scrambling to play catch up with the market after the fact. But this is not a new gold standard. In fact, here is recent and very interesting blog post on why a return to the gold standard in the U.S. could not work even if we wanted it.

http://victorthecleaner.wordpress.com/2012/02/22/currency-wars-why-the-united-states-cannot-return-to-a-gold-standard/

Strictly speaking, loans to an institution which do not pass through as personal obligations of individuals surviving the dissolution of that institution cannot be usury, correct. Usurious loans are person-recourse loans for profitable interest; and institutions are not persons, they are things. Institution-recourse loans aren't usury (which isn't to say that they are always by definition good, wise, or whatever: they just aren't usury, as I understand the term).

It is not possible for the USG to be literally incapable of paying its debts, because the USG issues the very currency in which those debts are denominated. If I am a quadrillion dollars in debt but can print a quadrillion dollar bill any time I choose, I am always capable of paying the debt. It is only possible for the USG to be unwilling to do so, perhaps out of fear of currency debasement or whatever. And in any situation in which the USG is unwilling to print the money, I can guarantee you that it will also be unwilling to turn over the keys to the Capitol building to the Chinese.

Obviously, lenders to the USG have the expectation that the USG will service the debt on time and that any currency debasement will not render the loan unprofitable. Obviously, it is possible for the USG to screw that up and default. And further obviously, the market has discounted the probability of that actually occurring to pretty much nil. Now maybe the market is crazy; but I wouldn't bet on it.

It is not possible for the USG to be literally incapable of paying its debts, because the USG issues the very currency in which those debts are denominated.

Well, that's saying it outright. I appreciate your candor and clarity.

Let me, then, put this in fairly direct terms: The USG buys real things with the money that it borrows. Drugs for the elderly, food for the poor. Weapons, surgery, high-tech jets, ocean-going vessels. Good things, bad things, indifferent things. But real things. Very costly real things, costly in real terms of effort and materials.

If we really want to take it literally that the USG can a) borrow money from another country to b) purchase real goods and services and c) pay for these simply by printing "dollars" to repay the debts, then this strongly confirms what I have said all along: Namely, that somewhere in all of this we are pretending that something comes from nothing. That something is strictly speaking free.

It is the sheerest metaphysical nonsense to say that I or anyone else can simply print off paper into the indefinite future and thereby literally pay for goods and services that take tons of raw materials, many man-hours, and loads of human know-how to produce.

If the U.S. government believes that it can do this and conceives of itself as purchasing things with loans which it *cannot be incapable of paying* because it can always just print money wherewith to pay them, and if it is doing this on a large scale that is essential to our present economy, then, as I have suspected for a long time, our entire present economic system is based on a massive lie, and fiat money is deeply connected with that lie.

The natural law theorists of the Roman Catholic Church spend large amounts of time carefully making metaphysical arguments about the things we say with our actions and with our bodies and about the metaphysical significance of these, about what things we should not do because, the argument says, these amount to telling lies by our actions.

I submit to you, Zippy, based on what you have just said, that the economic system we are discussing here amounts to the government's telling a lie with the U.S. economy and the federal budget. That's a moral argument, by the way. And I'm afraid there will be hell to pay for it consequentially as well.

Normally, when the government inflates the currency, it doesn't get something for nothing (it can appear to be something for nothing due to other factors influencing prices, but all else equal inflation raises prices). Inflation devalues the current liquid assets of everyone, so if the government printed a trillion dollar bill it would be like taking some value out of all the liquid assets in the country and transferring that. People who have liquid assets got a tiny bit poorer, while one person, the seller, gets much richer.

The debt-inflation state works because this is done slowly enough that no one really notices. If it is done quickly, then no one takes the funny money anymore, because the time-loss of value is too great--hyperinflation. The government sells a 100,000 dollar bond, and then inflates slowly slowly slowly, until that 100,000 dollar bond represents a tiny fraction of the total debt holdings. I'm told that the British government still has Crimean War debt on its books. Only now, it's a drop in the ocean.

Under this system, then, the interest rate is all that really matters. If a government can pay the interest payments, then the principal of the loan is just inflated into triviality. Back during the stupid debt-ceiling boondoggle, all the breathless reports that the government was this close to default were all garbage...the only way that the government could default is to fail to service the debt, and tax revenues cover interest payments and then some.

All this to say that I think I agree with Zippy--this system, regardless of its merits, is far more resilient than so many on the right want to believe. People on the right, God bless them, see a huge number like 14 trillion and think bankruptcy is right around the corner. A perfectly natural conclusion, and entirely wrong. In the long run, the system may be unsustainable (what system isn't?) but I'm convinced it'll outlive me.

Also, Lydia, just to re-emphasize what Zippy said: the market is pricing US sovereign debt as one of the safest assets in the world; so safe, indeed, that most other debt instruments are priced by comparison with US Treasury bills and notes. Keep in mind, as well, that dollar devaluation has positive effects on US exporters, because as the currency declines, they are paying their costs in a cheaper currency and bringing in their revenue in dearer ones. This effect has already set off a trend of "re-shoring" because the gap between, say, cheap Chinese manufacturing inputs and US inputs has narrowed.

Finally, the USG is not now paying its debts in newly-issued currency. The QE schemes over the past few years have entailed direct purchases of Treasury debt by the Fed.

What Matt said: issuing more currency is like a company issuing more stock. It doesn't create value out of nothing. It dilutes the value of what is presently in circulation. (Destroying currency is analogous to a stock buyback).

In general, people who treat money as something it isn't, by (say) keeping it in a mattress, lose the most. People who understand what money is, and immediately complete the incomplete transaction that money represents to acquire something with actual ontological value, are least harmed. So it seems to me that, beyond usury, the moral imperative is to get people to understand what money is and is not. Banning usury is itself an enormous step in that direction.

But I'm not convinced that there is anything morally wrong with the sovereign issuing more currency, per se. (Again it could be wrong as a matter of prudence, since it amounts to a kind of non-obvious tax on hoarding cash).

Matt,

The threat to the dollar will not come from our inability to make our debt service payments. As Zippy pointed out it's technically impossible for us to default on our debt. The threat to the dollar is our massive trade deficit and our inability to live within our means. You say our tax revenues easily cover interest on the debt, but our exports are not enough to cover our imports and it's not even close. We'll be in serious trouble when the physical plane of goods and services we seem to require for our national life but can't afford no longer bid for our dollars in the financial plane. That is when confidence in the currency collapses and the race is on between prices and the printer to which is the first to a gazillion.

tax revenues cover interest payments and then some.

But not interest payments plus all the other outlays and commitments of the government, such as statutory entitlements. That, after all, is why there is so much deficit spending every year.


all else equal inflation raises prices

The current "bring on more helicopters" folks tell us that isn't so, that it isn't happening. But I certainly agree that it does happen, all else equal. Of course inflation devalues the dollar; hopefully no one disagrees there. That's the part of the problem that is often ignored.

If it is done quickly, then no one takes the funny money anymore

So it becomes funny money if they do it too quickly, but it was respectable money with some sort of meaning before?

Look, Zippy said it first, I didn't. He said that it is impossible that the U.S. government should be incapable of meeting its debt obligations, because the USG issues the very currency in which those debt obligations are denominated! So then it's just a matter of the _will_ of the government to print the money if necessary!

I mean, how much clearer does the bizarre, incestuous relationship between debt and money-printing have to get? How much clearer does it have to get that the normal reality-checks that would apply to a company and prevent it from dragging the whole world, or at least the whole country, down with it are not operating properly here?

issuing more currency is like a company issuing more stock.

But no company could actually do what the USG could do, to which you referred: Issuing stock with no balance sheet, with from the world's perspective a black box for its assets, to repay (or to pay interest on) huge sums of money, where it would literally not permit its assets to be taken in the case of a default anyway.

The disanalogies are just screaming. What astonishes me is the way that, "It's all right, it's okay" folks go back and forth between the analogies and the disanalogies. It's not a metaphysical problem, because money is like stock. Only there's also no problem, because the government can never really go into default! (Which would not be the case of a company issuing stock.)

It's not really something for nothing, because if the government did trigger a hyperinflation event, then _that_ would be the price we would all pay for what had gone before. This is supposed to be comforting? After all, I'm the one saying there's not _really_ such a thing as a free lunch. I'm the one insisting it'll all have to be paid for in the end. The problem is, in the meanwhile, the _massive appearance_ of something for nothing that leads us further and further into deep doo-doo.

Paul asked me above, with puzzlement, what fiat money could have to do with the appearance of something for nothing. I replied that it was the combination of fiat money and the massive borrowing with no end in sight that creates this appearance. I think the ensuing discussion has borne this reply out amply.

Paul,

the USG is not now paying its debts in newly-issued currency.

Yeah, I know that. Zippy brought it up as a hypothetical: The USG can't go into default, because it _could_ print the currency. Moreover, the proposal to mint two trillion dollar coins or whatever it was this past year came darned close to that, especially since the concern there was debt servicing--paying the interest on present debt.

What we're doing periodically is monetizing our debt. The government prints money to "purchase" U.S. debt, which it then owes to itself. This is just another loop in the chain. It's just another way of doing it (and making it all more confusing and complicated). It's also, now, treated as a regular and necessary part of our economic system! Is this supposed to be somehow less objectionable than paying, say, the interest on the debt with newly coined money? Not that I can see.

But not interest payments plus all the other outlays and commitments of the government, such as statutory entitlements. That, after all, is why there is so much deficit spending every year.

Right, but if a few monkeys don't get their bananas for the day, it isn't the downfall of civilization and doesn't constitute a default. Debt servicing comes early in the spending priorities because it is the foundation of the whole system.

It's a perception thing. If a bond buyer believes that they can spend that interest payment before it is devalued significantly, then they treat it roughly as a hard asset. If they think 2 hours after they collect the payment it will be worth 60%, then they don't buy.

It's impossible that the government should be unable to pay its debts by virtue of not having enough money. All of us understand the situation if you have $50 and a bill for $100, but the government doesn't have that situation because of printing. However, real-world constraints mean that governments can't print willy-nilly, as it amounts to a capitulation on any future confidence in the currency. But if you print just a little, 2% a year, you can go for a very long time, possibly forever.

To add, when the government is faced with a $100 bill and has $50 of reserves, it will borrow the other $50, and then let the normal expansionary money policy go its course until one day that $50 is sitting on a balance sheet of $500,000--i.e. has basically been devalued to nothing.

But it isn't free--in reality the original $50 and interest has been slowly drained out of all the liquid assets in the country over all that time. This is what is so unintuitive about it all, which I don't like. How is any given person to understand that they shouldn't hold on to large sums of cash because of this effect? How are they to know what kind of interest rate is necessary to offset it? It's all very shadowy and not well explained, and unless you have the wherewhithal to figure it out you'll just think the natural thing...the government is like you with much bigger numbers.

Look, the fact that the USG doesn't do FASB accounting like a corporation means that it doesn't have a balance sheet: that is, it doesn't have all of its assets and liabilities accounted for on paper using modern accrual accounting techniques (though technically, new techniques would have to be invented to deal with disanalogies to corporations; and in any event it isn't as though accounting is an exact science, at all). But not having them accounted for on paper in the form of a balance sheet (as well as cash flow and P&L) doesn't mean they don't exist. All sorts of businesses existed before modern accounting. It is true to say that they didn't have balance sheets in an epistemic sense, but it is not true in some existential, ontological sense. That is, they definitely had the sorts of things which would be recorded on a balance sheet. Same for the USG today.

I've been saying for at least fifteen years now that nobody really knows whether our debt levels are bad or good, because the accounting needed to make that determination doesn't exist. Nevertheless we have - for my entire adult life at least - been bombarded by predictions of imminent doom on the one hand, and "nothing to see, move alongism" on the other. Me, I'm pretty sure the apocalypse isn't going to happen until after I've paid my bills. And if it does happen, I'm virtually certain that there isn't anything little old me can do about it. So I base any radical reforms I advocate on moral concerns, and I just don't see - for reasons already given - anything per se immoral about the sovereign issuing more of his own currency in his own name.

All sorts of businesses existed before modern accounting. It is true to say that they didn't have balance sheets in an epistemic sense, but it is not true in some existential, ontological sense. That is, they definitely had the sorts of things which would be recorded on a balance sheet. Same for the USG today.

I don't think that's a good analogy, because it was a lot easier for a lender to figure out roughly what kinds of assets the business did have, or at least to make an educated guess. Besides, there really was a government over both of them and ways of enforcing debt payment in the event of a default. There wasn't the combination of, on the one hand, a totally black box of assets that you could scarcely even guess the contents of and, on the other hand, the fact that never, under any circumstances, would there actually be an orderly, comprehensible bankruptcy or foreclosure process to make use of those assets anyway, leaving the "what-ifs" entirely to guesswork and possibly to main force.

How is any given person to understand that they shouldn't hold on to large sums of cash because of this effect? How are they to know what kind of interest rate is necessary to offset it?

And even if they can understand, how can they _get_ those interest rates? If you know of even a CD selling right now that ordinary people can afford for inflation-offsetting interest rates, please share. I don't.

The fact that ordinary people don't understand things is, I agree, part of the problem. I would just state the matter a lot more strongly, obviously--namely, that the entire system is seriously deceptive. I would guess even some creditors are deceived.

So I base any radical reforms I advocate on moral concerns,

I am good with that too. We should pay attention to the moral principles primarily. Good idea, Zippy. One of the primary ones is not to charge usury on loans.

where a usurious loan is understood to be any and every person-recourse (as opposed to specified-asset-recourse) loan for profitable interest.

Well, I think usury is a little differently defined. The fundamental evil in usury is stated in one of two ways: either by charging something for what is nothing, or by charging twice for one thing. If I sell you a potato, I cannot charge once for the potato itself, and once for the use of the potato separately. That's what happens in usury.

The Church used to promote loan societies (not like banks) that charged interest, and said this was not only OK, it was a positive GOOD. But note, the interest charged was not for profit. The interest was always limited to OTHER reasons for charging something over the amount loaned: to cover the risk of loss for defaults; to cover the actual expenses of the loan society in processing the loans, were two reasons. In other words, they never allowed a charge of interest merely on account of the loan itself, i.e. simply for the USE of the money loaned. The correct charge for the use of money is the amount of money for which the person is granted the use, not ANOTHER charge in addition to the amount of money loaned.

There is no reason to limit this to personal loans and non-recourse loans. The issue of collateral, security, asset-based recourse, is NOT fundamentally that of charging twice for the money used. Therefore, I think, yes you can have usury for asset-backed loans. Also, it is irrelevant whether the entity lending or borrowing is a human being or an associative entity: you can charge twice for the same money either way.

There is no reason to exempt the USG from this moral principle. It should neither charge interest for the use of money, nor should it intentionally establish borrowing based on the same concept.

Borrowing on FUTURE devaluation of money is basically a shell-game trick worthy of street-side con men: can we fool people into holding their money long enough that we get the value out of them? It is just as dishonest as the con men's game. On moral principles, it ought to go also.

Right, but if a few monkeys don't get their bananas for the day, it isn't the downfall of civilization and doesn't constitute a default. Debt servicing comes early in the spending priorities because it is the foundation of the whole system.

Matt, I think this is far too flippant. Way, way too flippant. Imagine a scenario in which *nearly all* government expenditure went to debt servicing and the government just ceased doing virtually everything else. Your tone here would seem to indicate (though this is an interpretation) that it really doesn't matter what percentage of our GDP every year is going to debt servicing. But of course that could well be a problem. And if things get sufficiently economically worse, what you said earlier is no longer going to be true--namely, that actual tax revenues could in theory pay for the interest on the debt. Tax revenues depend, inter alia, on how well the nation is doing economically. You can't wring blood from a stone.

Although I don't have time to comb through and look it up, IIRC Paul Cella, who doesn't agree with me on much else economically, has indicated concern here at W4, if only briefly, about the extent to which debt servicing is coming to dominate America's fiscal landscape.

Lydia:

I don't think that's a good analogy, because it was a lot easier for a lender to figure out roughly what kinds of assets the business did have, or at least to make an educated guess.

As an experienced investor, I could not disagree more. It is a -lot- harder to assess the risk of lending money to some corporation than it is to assess the risk involved in purchasing a T-bill.

I think usury is a little differently defined.
That's why I said "usury as I understand it". I'm not interested in debating the definition of usury; everything you bring up has been discussed, debated, and researched ad nauseum elsewhere and elsewhen, over the course of several years; an experience I don't care to repeat. I am completely satisfied that my own understanding is the right one.

Lydia:

And even if they can understand, how can they _get_ those interest rates?

If you want to buy investments which are "unhooked" from the value of a dollar, you have to buy equities or commodities; preferably the former. The best long term hedge against dollar fluctuations is to purchase productive assets with real, ontological value not directly tied to the value of the dollar.

The "safe return" investments most people seem to believe in and want are mythological. Entropy and all that.

It is a -lot- harder to assess the risk of lending money to some corporation than it is to assess the risk involved in purchasing a T-bill.

My understanding is that one's bet on the risk involved in purchasing a T-bill isn't the same thing as what I mentioned regarding the assets of a corporate entity. When I spoke of a black box, I meant a black box containing the *actual assets*. I wasn't talking about global risk-assessment of investment in a T-bill, which will have a lot of purely psychological and even something like self-referential aspects to it (self-fulfilling prophecies and all of that).

I was flippant because I was thinking about all the hysterics during the debt 'crisis' last year, when it was obvious that there would be no default.

You're right, of course, that interest payments can get too high, which is why mainstream commentators usually talk of some threshold of debt, or debt + interest rate, at which the situation starts looking grim. I sometimes hear 100% of GDP, but it's very generic. Japan has significantly more than that, but a lot of it is domestic debt and so they're better off than, say, Greece. That level is about where we're at, but the markets haven't really shown any concern--people still want to give the US government their money at negative real rates.

A quick google search tells me that interest payments are 230bn on total revenue of 2.3tr, meaning servicing is taking up 10% of revenue. That's nowhere near squeeze levels, but the trend isn't good.

Another thing people are missing is that when the sovereign issues currency, he creates real value in the form of liquidity: if I want to trade my piano for an organ, I can do so at far lower transaction cost by using cash as intermediary. If the sovereign taxes cash-hoarding by slowly debasing the currency over time, that seems perfectly reasonable: cash creates transaction efficiency only by circulating, so hoarders are charged a de-facto fee for keeping it out of circulation when the sovereign has to issue more to "keep up". Furthermore, if the sovereign takes a cut of the transaction efficiency his cash enables, that also seems perfectly just.

Like Matt, I see nothing wrong with this per se. In fact it is perfectly just. I just wish people understood it: that it was more transparent.

If you know of even a CD selling right now that ordinary people can afford for inflation-offsetting interest rates, please share. I don't.

I Savings Bonds and Treasury Inflation-Protected Securities (whose rates are tied to the CPI and can be bought in amounts as little as $100) are designed for that purpose.

The "safe return" investments most people seem to believe in and want are mythological. Entropy and all that.

Zippy, a CD was merely chosen as an example in response to Matt's reference to the difficulties with investors' knowledge of what interest rate is necessary to beat inflation. My point was that knowledge of such a rate is not the only factor, since it's not simply a matter of "ask and have." Moreover, of course, CDs are doing as badly as they are in reflection of the fact that the economy as a whole is doing badly. There have certainly been other times when one could readily find an inflation-beating CD.

Perseus, good point about the I-bond.

Tony, thank you:

Borrowing on FUTURE devaluation of money is basically a shell-game trick worthy of street-side con men: can we fool people into holding their money long enough that we get the value out of them? It is just as dishonest as the con men's game. On moral principles, it ought to go also.

Now that you guys understand the nature of money, though, you can't really complain about being deceived anymore, can you? Nobody is forcing you to hold cash.

I think that if you REALLY want to unhook from the currency and at the same time insure yourself against major monetary freak-outs, you want to invest in commodities that have inherent value regardless of what the economy is doing: wheat, beef, oil. Stocks can devalue really fast if the economy falters to the point where businesses lay off left and right, etc. But no matter how bad the economy is, people will want to eat: the demand will be there as long as the people are there. The relative value against some other things may go up or down for a while, but when push comes to shove, it will have SOME value. But that doesn't mean investing in this will grow your portfolio.

So, Zippy: Should people also be punished as "hoarders" if they put the money in a bank--say, in a money market account? Or is it only people who keep physical cash who deserve to be punished by the deliberate deliberate debasement of currency? Are there other financial decisions (perhaps investing in foreign currencies) that should be punished by the government for their inefficiency or illiquidity?

Long term cash hoarders are "punished" by the nature of money combined with their own ignorance, not by the government.

And interest bearing deposits in a credit union are called "shares" rather than "cash" for a reason: they are not really cash, they are senior investments in the banks's operations. Same with money markets, savings deposits, etc. As credit instruments their purchasing power is subject to the price stability of the currency though: buyer beware, and take responsibility for your own portfolio.

Why is it that everyone has to take responsibility for understanding the assets they hold, and managing them prudently, unless it happens to be cash?

Look, Zippy said it first, I didn't. He said that it is impossible that the U.S. government should be incapable of meeting its debt obligations, because the USG issues the very currency in which those debt obligations are denominated!

Lydia, with respect, the idea may be new to you, but it is not new to others. Control of the currency is one of the attributes of sovereignty. Ask Greece. Folks there gave up this attribute (in return for cheap borrowing rates) to the Eurozone and now they're in the process of losing their sovereignty completely.

After all, I'm the one saying there's not _really_ such a thing as a free lunch. I'm the one insisting it'll all have to be paid for in the end.

Not necessarily. Again, look at Greece. In the recent negotiated deal Greek creditors (mostly Eurozone banks, I gather) are suffering severe haircuts. A lot of that Greek debt just won't ever be paid off. The creditors will eat big losses. (They'll call these loss "voluntary" in order to avoid triggering CDS contracts.) Meanwhile, to soften this blow, the ECB has undertaken a huge short-term lending facility to banks at extremely favorable interest rates.

Should people also be punished as "hoarders" if they put the money in a bank--say, in a money market account?

Hoarding physical cash has little relation to deposits of any kind. When you deposit money in a bank, you are lending to that institution. That cash does not sit around inert. It almost immediately becomes the capital base for other kinds of lending operations. Money market accounts are even more active: they are a vital part of overnight lending between banks, commercial paper trades, etc. Money market accounts give the small investor access to capital markets.

Another way to look at it is to say that when you lend to a bank, you provide it with the means by which to create new sums of money. That's the essence of fractional-reserve banking.

Now, of course, we've thrown in another wrinkle: deposit insurance. By means of this policy, the lending to banks in the form of deposits is assumed to be risk-free. I remember back in 2008 there was a lot of talk of the FDIC's reserves being depleted, which would be disastrous -- until you remember that the FDIC has access to the printing press.

There wasn't the combination of, on the one hand, a totally black box of assets that you could scarcely even guess the contents of

Government assets are very far from being a "totally black box." Two assets stand out immediately, in the case of the US: the printing press for what is still, despite a lot of disruption, the world's reserve currency, and regular tax revenues from the world's most productive economy. In comparison to other nations there are all kinds of other assets: the rule of law, which will usually generate a process by which defrauded investors are made whole to the best of the prosecutor's ability (see MF Global); fabulous natural resource wealth, some classes of which resources are enjoying an enormous boom right now; numerous mutually-beneficial trading relationships (the US-Canada trading relationship is the largest in the world); a military might that is without serious competitors anywhere in the world. I could go on. The point is that anyone can see why investors favor US sovereign debt as a low-risk asset.

Paul, your answer to Lydia's saying TANSTAAFL is:

Not necessarily. Again, look at Greece.... Meanwhile, to soften this blow, the ECB has undertaken a huge short-term lending facility to banks at extremely favorable interest rates.

And then? The problem isn't that the other shoe is going to drop today, or tomorrow, it is that the shoe-support is designed in such a way that it has to drop at some point.

The way the system is being described here, there are 3 different layers of "gentlemen's agreement" about money. The first is the obvious one that we are all familiar with: paper money is a token with an assigned value (now we include electronic money too). We nod at each other when we use it, agreeing that we will honor the assignment (more or less, watch out for the "less" part).

The second level agreement is that the first-level agreement, the assigned value of the tokens, isn't a fixed agreement: the government will go around and about the business of RE-assigning value - by devaluation - in an orderly and predictable manner, with understood rates of change. We'll print more and feed it into the economy, says they. (Of course, they use the round-about mechanisms like fractional reserve banking to do it - wouldn't it be more honest to do it directly?) It's an indirect tax, of course, and it taxes some more than others, and (because it is done indirectly and therefore not as well understood) those it taxes more are UNAWARE of bearing the brunt of this tax. Hey, buyer beware, and we did say "more or less", didn't we?

The third level of agreement is that the second-level agreement will only hold until we can't make it hold anymore: if debt gets ahead of us, we can run the printing presses at red line and screw the "orderly and predictable" rates of re-assigning value. Government is sovereign over what assignment of value it shall make use of, and that's the end of it.

Well, what's wrong with that? In principle, nothing, if everyone were to be fully in the know. But everybody isn't in the know. And then we manipulate the markets and money supply in such a way that we HAVE to resort to the third level. If people begin to catch on and stop going along with the second-level agreement, hyperinflation is one of the resulting options. I refuse to accept that a hyperinflation event is (or ought to be) considered "one of the ways an economy works". You can re-assign the value of token money, you cannot re-define what it means to be a successfully working economy.

In comparison to other nations there are all kinds of other assets: the rule of law, which will usually generate a process by which defrauded investors are made whole to the best of the prosecutor's ability

Paul, I agree that the rule of law is immensely valuable. I don't think it belongs in the category of "asset" for these purposes: it isn't something that people (or governments) can "trade" to or for. And, by the way, it is precisely the "rule of law" reality that begins to be a problem when the government is playing funny-money. People imagine that the second-level agreement is secure, that the government will go about the business of re-assigning value in an orderly and predictable manner, based on ideas and constraints under the rule of law - like, for example, the existence of the Fed as a separate entity. When you re-write the laws at will, or in some cases simply "interpret" them to imply a lot more latitude for freedom of government action (and action by others in cahoots) than people understood in going along with the second-level agreement, you undermine that secure general embrace of the rule of law that is critical to the whole enchilada working. Take away everyone's belief that his neighbor will follow the law, and you cease to have the rule of law in any effective manner.

and regular tax revenues from the world's most productive economy.

Similar issue: FUTURE earnings are, by definition, not an asset in exactly the same sense as 1000 sides of beef. They don't exist yet, they are only possible assets. Sure, we all make promises based on future earnings. A promise to do something in the future is, by definition, not the same thing as doing it. Treating it as if it were the same OFF the balance sheet would get you put in the loony bin. Treating it as if it were ON the balance sheet, without making any distinctions is just obscuring reality. It can work ok if you understand and keep track of all the ramifications of that being simply a promise rather than a thing in hand, you can be safe. But we often lose track of the different ramifications when they are simply put in the "asset" list as just one more asset. Like, the asset can disappear altogether if you move manipulate your (other) assets and liabilities so that the economy doesn't work.

Excellent points, Tony. Let me again bring up that coining a couple of coins with something like a trillion dollars apiece simply stamped on them in order (voila!) to take care of debt management was an actual suggestion made within the past year.

If someone truly believes that that sort of power is a) not dangerous, b) not a problem so long as, in some sense, people "understand" that it's a possibility, and c) not making a pretense of something for nothing, then that person and I just have a great gulf fixed between us and are never going to agree about much of anything economic.

Paul, regarding "things have to be paid for," says,


Not necessarily. Again, look at Greece.

Wow, so Paul, you really _do_ subscribe to the idea that something is free. I don't know any other way to interpret this comment. As long as those mean old creditors can simply be made to eat their losses, to take a deep haircut, we're done. "Nothing is free. This will have to be paid for in the end." Paul says, "Not necessarily." Now I think I understand better your calls for a "jubilee," Paul. We can just make problems go away that way, perhaps? And whatever people have bought or done with the money they borrowed for which they are given a "jubilee" will then be...free.

I think I should probably rest my case there. Anybody want to comment on my new threads?

Zippy, you're changing what you're saying. Now you say:


Long term cash hoarders are "punished" by the nature of money combined with their own ignorance, not by the government.

Previously, you said,

Another thing people are missing is that when the sovereign issues currency, he creates real value in the form of liquidity: if I want to trade my piano for an organ, I can do so at far lower transaction cost by using cash as intermediary. If the sovereign taxes cash-hoarding by slowly debasing the currency over time, that seems perfectly reasonable: cash creates transaction efficiency only by circulating, so hoarders are charged a de-facto fee for keeping it out of circulation when the sovereign has to issue more to "keep up".

Say what you will, this amounts to a justification for what could just as easily be a _deliberate_ punitive tax on "hoarders." What difference does it make that the government usually actually inflates the currency for some other reason? You just gave an argument that justifies doing it _on purpose_ to punish hoarders and to keep velocity rates on cash money high to some degree deemed to be ideal.

So is it the government's responsibility to educate and certify a citizen before that citizen is allowed to use cash? Or is it the individual's responsibility to know what he is doing when he invests?

Cash is (and always has been) a creation of the sovereign, and subject to the sovereign will. That fact is printed all over it, like warning labels on a pack of cigarettes. Concomitant to that fact is that the sovereign has the power to manage cash as he sees fit; get a bad sovereign, and you'll get bad management (unstable prices). Good management will get you stable prices at least in the short term, so a responsible user of cash can complete the barter it facilitates without loss. Hoard cash, though, and you take your chances: cash hoarders are basically speculators in the virtual value of incomplete barter transactions. The sovereign can't create or destroy real value, but he can (and does, and always has) create and destroy the virtual value of the incomplete barter transactions that cash represents.

All the outrage in the world over the nature of cash isn't going to change its nature. (If anything, the old "hard currency" approach was more deceptive, since it could lead the ignorant to believe that they could exchange their notes for gold, when in fact they could not).

Wow, so Paul, you really _do_ subscribe to the idea that something is free. I don't know any other way to interpret this comment.
He didn't say that. I hate to break it to you, but sometimes, in the real world, loans don't get paid back. Yes, it really happens, and people/institutions walk away and dust themselves off and go on to do other things.

If cash were printed with warning labels saying something like "WARNING: The purchasing power of this dollar can change over time, and will likely deteriorate over the long term." --- if that were done, would that little bit of nanny statism placate the outrage? Or is what we are dealing with a rebellion against the very nature of the thing?

(If anything, the old "hard currency" approach was more deceptive, since it could lead the ignorant to believe that they could exchange their notes for gold, when in fact they could not).

Except for the matter that for the period of about 600 BC (when mankind started coining for real) to about 1600 AD, the "hard currency" could, in fact, always command an equal amount of gold or silver - because it WAS gold or silver. It wasn't deceptive then.

The transition from hard currency that was as hard as gold to a currency using paper rested on a number of factors, but very large among them was GOLD and other hard items: Goldsmiths were operating as holders / storers of other people's gold and valuable items. These people sometimes wanted to make exchanges, but didn't want to be bothered to go to the goldsmith to get their stuff out of storage, make the exchange, and then have the buyer simply put the gold back into storage: they asked the goldsmith to make a change in his accounts. Then, sometimes these transactions were loans: the owner asked the goldsmith to simply testify that he really did have X amount in storage to back up the loan. Or, the goldsmiths just issued a note promising to pay the stated amount upon redemption. These notes of credit from the goldsmiths could be traded just like the gold could. Paper testimony of the actual amount of gold in storage and theoretically available is (at least in large part) the modern origin of paper money. See here, for example.

http://projects.exeter.ac.uk/RDavies/arian/amser/chrono7.html

In fact, the entire history at that website is worthwhile to peruse.

The "nature of money" today may be different from what paper notes were in 1600, but that's not because it has to be intrinsically.

Except for the matter that for the period of about 600 BC (when mankind started coining for real) to about 1600 AD, the "hard currency" could, in fact, always command an equal amount of gold or silver - because it WAS gold or silver. It wasn't deceptive then.
That just isn't true, precisely because gold and silver were used as money, not as raw commodity with intrinsic value. Rather than debate whether money is or is not the creation of the sovereign with you though, I'll just refer you to the words and actions of Christ in Mark 12:16-17.

Christ in Mark 12 didn't speak to its value, only as to who made it.

Tony:

the "hard currency" could, in fact, always command an equal amount of gold or silver

Zippy:

That just isn't true,

Let me get this clear: are you proposing that a person with a gold coin could not command the amount of gold in the gold coin? Just trying to understand what you are saying.

What isn't true is that the nature of money has changed in the last 400 years (if literally quoting Gospel and Verse won't do there, I don't know what would) and, more particularly, that ignorant users of "money" even in the barter regime you described could not be deceived by fluctuations in its purchasing power: that if we returned to some paleofinancial barter regime (which would be completely unworkable in modern economies anyway, since things like gold are basically irrelevant -- if all the gold in existence disappeared, the modern global economy would hardly notice), the putative 'deceptiveness' (which is really ignorance, despite the existence of pervasive warning labels on money SINCE BEFORE CHRIST, AND AS RECORDED IN THE FREAKING GOSPELS) could be ameliorated.

The nature of money in the world we live in is as I said it is, and this was at least partially confirmed by the words of Christ Himself recorded explicitly in not one but three Gospels two thousand years ago, for crying out loud. (The same Gospels which say very little about all sorts of doctrinal issues, BTW). Citing the use of a horse and buggy by some persons somewhen and somewhere doesn't alter the nature of an airplane, and what you are dealing with for, oh, the last half millennium or so even under your own narrative, is money with the nature I described.

You guys either have to accept that and work out its implications, or live in denial. That's up to you.

Now I've gotta go to Urgent Care and get some antibiotics, and I really am done commenting here.

Paul, I agree that the rule of law is immensely valuable. I don't think it belongs in the category of "asset" for these purposes: it isn't something that people (or governments) can "trade" to or for.

Fair enough. What I had in mind relates to the narrowing of the cost gap between Chinese and US manufacturing that I mentioned upthread. When Chinese labor is 20% of the cost of US labor, even the lawlessness of the Chinese regime is endurable; but once it rises to 45-50% of the cost of US labor, the far superior rule of law in America bridges the rest of the gap. And that's what we're seeing.

For the record, Lydia, I thought that coin seigniorage notion circulating among leftists last year was appalling and pernicious.

Similar issue: FUTURE earnings are, by definition, not an asset in exactly the same sense as 1000 sides of beef.

Okay, but future earnings can certainly count as assets. The bank holding my mortgage counts it as an asset, and it depends on my future earnings being diverted, in part, to pay the note. Or again, my job (and its future earnings) is an asset; it's the chief reason the bank lent me money for the mortgage.

Lydia, the Greek example was presented to show that debts sometimes don't get paid. This happens regularly in the corporate world. It's called "strategic default." Businesses try to avoid it, of course, but once they calculate that the long-term costs of paying the debt outweigh the costs of default, they won't hesitate. The private equity business includes a lot of these sorts of calculations.

When it comes to Greece and Eurozone banks, these creditors are big boys and lending is a risky enterprise. But if you take me to be saying that all this has been without costs to Greece, that it's all been free, then I want to disabuse you of that notion.

But if you take me to be saying that all this has been without costs to Greece, that it's all been free, then I want to disabuse you of that notion.

Well, okay, then, I was right the first time. Not to mention the cost to the "big boys." Nothing is free, period.

Look, Paul, I'm afraid this just looks like contradicting me twice so that we come back to my being right the first time around. While making it look like I was wrong twice. That's a little frustrating. Yes, I'm not ignorant: I do know that it is possible to trash your economy and your credit rating, stick it to your creditors, stick future generations with harsh "austerity measures," and see your country descend into civil chaos *as opposed to* restraining yourself and taking on only debt that you can actually keep up with. This is hardly a course of action to be recommended, nor does it mean that a statement like, "This all has to be paid for in the long run" is _false_. Nor does it remove the extreme difficulties created by borrowing by an entire country with no clear default/bankruptcy procedures in place. It just means that one way of paying is screwing everybody up. Congratulations to Greece. As a response to TANSTAAFL, "Look at Greece" sounds like a parody.

By the way, one other thing I do note: On the one hand, we are being told that the government is the sovereign and can devalue dollars at will to service loans if necessary and therefore can never default, we all just have to hope and bet that they won't do that too fast.

On the other hand, we're being told that people are just ignorant and imprudent (including, presumably, the little kid with a couple hundred bucks saved in a piggy bank, or his parents) for not "taking into account" the fact that the government very slowly and predictably devalues the currency.

So on the one hand we're being confronted with an impossibility of default because of the governmental power of arbitrary, unpredictable, and swift currency inflation. But on the other hand people who keep cash on hand are being smirked at as stupid hoarders, deserving of their devaluation fate, because they don't take into account the government's power of currency devaluation! And a mere bit of information and warning is being treated as the solution to the whole problem.

I mean, my gosh. Even Ramesh Ponnuru in the article Jeff Singer linked above seems to acknowledge the need for some kind of _rule_ for government money printing, which he acknowledges we presently do not have!

For crying out loud, if this sort of unrestricted power is something that stupid people should just take into account by never keeping cash, why the heck do we prosecute counterfeiters??? "Oh, we had a massive counterfeiting event, and your money was devalued? Oh, well, stupid you. You shouldn't have been hoarding cash. If you'd been buying Zippy-preferred equities, you could have ridden this out just fine. Live and learn."

Paul, I'm very glad you were horrified by the coin seiniorage notion. One of my points is that it, and/or a fed equivalent, is presently a _power of the government_, and that this is a problem. Indeed, that very type of power of the government has been brought up in this very thread as, somehow, an answer to my criticisms. Either that power and its relation to debt is a problem or it isn't. I contend that it is a problem.

The bank holding my mortgage counts it as an asset, and it depends on my future earnings being diverted, in part, to pay the note.

Well, yes. I am glad you brought that up, it is exactly the example I was thinking of too. 'Cause the bank not only looks at my earning power, it ALSO looks at the value of the house I am buying. In fact, it won't lend me the money even if my future earnings expectation are well in excess of what they would otherwise require, if the house isn't worth it. Say the house is appraised at 200,000, and I have bid 300,000 on the house because the person who bought it paid 300,000 and can't get out of their mortgage - and because I really like the house, and the view, and the street, and I think prices will "bounce back" next year. If the bank would normally say I need to be making 100,000 a year for a 300,000 mortgage, and I am making 150,000 a year, they STILL aren't going to lend me 300,000 on the house that appraises at 200,000. So, in reality, the bank is not counting my future earnings as an asset in the same way they are counting holding the security of the house itself as an asset. They are counting on my future earnings in a significantly different way. (Otherwise requiring BOTH evidence of earning potential AND proof of house value would be double-dipping - requiring twice as much to back a loan as it is worth.)

Businesses try to avoid it, of course, but once they calculate that the long-term costs of paying the debt outweigh the costs of default, they won't hesitate.

Would this lead to the (morally dubious) conclusion that when a business or person gets in that condition, they OUGHT to default as good stewardship, even if they could in fact pay off the debt in time and would be willing to do so?

By the way, in England in the 18th century, clipping off the edges of coins could get you hanged, drawn, and quartered if convicted. I leave it to the reader to draw the obvious conclusion for any thesis that once something is designated as money by the government it doesn't really matter, historically, what it's made out of or how much precious metal it contains, because it's "just a medium of exchange."

Oh, Paul says,

Businesses try to avoid it, of course, but once they calculate that the long-term costs of paying the debt outweigh the costs of default, they won't hesitate. The private equity business includes a lot of these sorts of calculations.

This continues to ignore my point that when government borrows from government, default procedures have to be made up on an ad hoc basis. As Zippy pointed out above, the USG is never going to give the Chinese the keys to its buildings. The disanalogies between business defaults and government defaults are simply screaming. In the case of Greece, my understanding is that nobody really knew what was going to happen ahead of time. Some deal had to be hammered out among various entities such as the EU, the creditors, the Greek government, and so forth. Nor have the results been happy ones, from any perspective. Something similar happening to America would be disastrous and would harm enormous numbers of innocent people.

Then there is the small question of whether it is honorable deliberately to take on debts one knows one cannot keep up with, with the intention ahead of time to default on them. I would argue that it is not. It especially seems dishonorable if one's creditors have not had a definite outcome to bet on in that case--e.g., the bank will get your house. In that latter case, at least there is a clear contract and a clear agreement ahead of time about penalties in the case of default.

No orderly, clear, and set out ahead of time asset forfeiture like that even begins to apply to U.S. government debt. It is a point I have made repeatedly, and it is just one of the factors that folds into the "something for nothing" appearance of our present system.

We prosecute counterfeiters for the same reason the English hanged coin-clippers: it's an attack on one of the sovereign's most important attributes.

Lydia, my apologies on the confusion emanating from my Greece examples. My basic point is that we're all getting an instructive view of what ad hoc governmental default and bankruptcy looks like. A sizable portion of outstanding Greek debt will not get paid off. According to The Economist, it's around a 53% writedown.

But I think the key fact you're overlooking in the Greece crisis is the lack of a sovereign currency. The burden of the euro on Greece produced ruinous deflation, which compounded Greece's internal imbalances deriving from its over-generous welfare state. In deflation, debts and obligations gain relative value against incomes and revenues. Two massive bailouts later and we still don't know if the problems can be fixed. A year or 18 months for now we may be talking about a third bailout. It may be that the only way out for Greece is outside the euro: through traditional currency devaluation. Who knows?

The Fed is actually under statutory rules in abundance. In addition to lender of last resort, Congress has subsequently added price stability and full employment as the central bank's governing principles. So in theory monetary policy is subordinate to these goals, and they are not always easy to reconcile because rising employment often generates rising inflation, i.e., price instability. Or again, from the other side, Paul Volcker's harsh medicine to quell inflation produced a very sharp recession and 10% unemployment.

Then there is the small question of whether it is honorable deliberately to take on debts one knows one cannot keep up with, with the intention ahead of time to default on them.

That's not an accurate characterization of a strategic default. Even the most hardnosed junk bond traders do not undertake their deals anticipating default, much less deceitfully planning on it. They'd be open to fraud prosecution if they did.

The typical private equity strategy is to gain control of the target company by means of very risky debt, a lot of it, collateralized by the target company's assets (so that the PE firm is not itself heavily exposed). The hope is that, upon acquisition, the capital can be used to restore the company to profitability, which in turn pays for retiring the junk debt. A default means a failure. Think of a strategic default as a orderly retreat. Everyone would prefer victory, but orderly retreats are a lot better than disorderly ones; and many a general as survived to fight again because he managed to achieve the orderly one.

Paul, the value of gold is not the human sentiment that attaches to it. Although humanity loves gold, its value is that it is a rare commodity and at one time, kept the dollar stable. Keynes fixed that by separating the dollar from a fixed value which allowed government to begin devaluing the dollar in a wholesale fashion. Since that fateful decision, government has gone hog wild spending, printing money, spending, printing money, spending - you get the idea. It is a small distinction but one that has created all the financial chaos that we are now facing.

Even the most hardnosed junk bond traders do not undertake their deals anticipating default, much less deceitfully planning on it. They'd be open to fraud prosecution if they did.

I would argue that the only reason America's government cannot be thus characterized is because of the Looking-Glass World nature of USG debt. For example, the that you "cannot default" because you could always print more money to pay the interest. But that would be a crazy thing to do, so everyone is betting you won't. Or, for example, that no one even knows what a default would actually look like. Or, for example, that our government debts are *not* collateralized by our assets and that no orderly plan B has been set up if we cannot in the normal course of events continue to service our debts.

The list of disanalogies just goes on, but the fact is that if we were deliberately getting in over our heads and intended, one way or another, to stick it to our creditors, there would be no way to prove it even if men of good sense could see that we had every reason to know perfectly well that we were getting in over our heads.

Moreover, a continual atmosphere in which paying one's debts is not particularly applauded, creditors are portrayed as the bad guys, "haircuts" are seen as noble, and excuses are made for the recklessness of USG debt is hardly an atmosphere to encourage care and prudence. Not to mention the fact that it's at such an insane level now that paying it off is no longer realistic. Read back over the comments in this thread from those who disagree with me and ask yourself honestly: Is there anything there at all that implies that the United States has any actual duty to honor its debts, or that honor is involved in the matter at all, even in the matter of paying interest, for that matter? You have to be kidding. It's all just people betting and betting on bets, and issuing money backed by nothing at all except psychology, and, as commentator Matt said above, the deliberate intention gradually to devalue the currency over time so as to make a debt negligible.

Of course this is all just about keeping things running as long as possible. It isn't about even giving a clear meaning to the country's debts, much less figuring out what to do about them. And of course, the deficit spending will go on and even grow, with no end in sight.

It sounds like what you want, Lydia, from my point of view, is the elimination of sovereign currency entirely; and you want that on moral grounds. I'm sympathetic, since I think enforcement of all person-recourse loans for profitable interest (usury, as I understand it) ought to cease on moral grounds. I think the impasse is that you believe that there may be some sort of "old school" sovereign currency tied to gold or whatever that would not have the characteristics you see as immoral (in addition to being practically destructive); and I think those "old school" currencies do nothing to address your concerns, since they remain sovereign currency: the sovereign can and will adjust reserve ratios, etc as he sees fit, and the commodity value will necessarily distort because of its use as monetary reserve to the point where its intrinsic-value-as-commodity is irrelevant. The whole thing is an illusion, designed to comfort the gullible. So in my view there is no getting around the fact that sovereign currency requires a good sovereign in order to not be dysfunctional; there is further no denying that the present sovereign regime is utterly dysfunctional in important ways. I think, briefly, the modern monetary theory types (as with Austrians and Keynesians) get some things right and a lot of things wrong, and that returning to commodity-reserve money would be both pointless and destructive.

A big part of the problem is anti-essentialism when it comes to value: a belief that value is subjectively assigned by human wills, as opposed to being something ontologically real which is subjectively valued-because-perceived. It follows that (in Aquinas footsteps) money has no intrinsic value, only virtual value (my term): its only natural purpose is exchange, a nature which is not capable of transubstantiation according to the whims or misperceptions of human beings.

It seems likely that a lot of the problems would go away though if usury were once more taken seriously. Savings in the form of accumulating objects of real value - especially productive value - would be greatly encouraged. (Remember in the Little House on the Prairie series, when Almanzo immediately invests his money in a horse, IIRC? A far better choice than the mattress, it seems to me.) Viewing money as something transitory - which is what it actually is in reality, of only virtual value as representing an incomplete barter transaction in a civilized context - would reduce a great deal of its mystique. "Lending" to the sovereign would be understood more by everyman as what it is already known to be by any reasonably sophisticated investor: a promise by the sovereign to return a fixed sum of his currency - which in the end he has the power to create or destroy as much of as he pleases, though not without external practical constraints - to you in the future. The power in his currency can be seen for what it is: the only real substantive requirement imposed is that when you pay taxes to the sovereign, you must do so in his currency, which is why there is demand for it. The bigger the economy and the tax base, the more demand the sovereign wields for his own purposes.

The reason I argue with you on the subject is not because I invalidate your concerns about the abuse of sovereign power, etc. It is not because I agree with the "dump helicopters of cash" monetarists on policy. It is because I think you are simply wrong to think that there is some sort of "hard currency" solution, wherein that hard currency is sovereign currency, which solves much of anything. That path is illusory. I know that "hard money" advocates say what they say because they want to take power which can be and is abused away from the sovereign. I just don't think the steps they advise actually accomplish that, at all, and in addition have many negative effects.

If we were to come to an agreement that what you are really after is the elimination of the sovereign's power to issue currency at all - which as I said, is what I think you want in the end, because of the nature of money itself, which is quite different from what children brought up with piggy banks are led to believe - I don't know that I would be on board with it. I suspect that it is better for the power of the sovereign to tax to be limited to the capacity to tax in his own currency and based on transactions valued in his own currency, rather than being empowered to demand (say) some quantity of gold. I keep wondering if you have quite grasped the implications of that for sovereign power.

But I'm not intransigent on the point, and am still pondering all of the interconnections and implications.

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