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18 April 2015

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Charles I

Pretty hard not to favor capital when the people that write the trade laws are the same talent pool appointed to international enforcement tribunals.

One more thing to consider is the aging populations and declining birth rates in the macroeconomic scheme of things. The services wealth transfer opportunities abounding in serving the aging and decrepit boomers in the style they are accustomed to as public spending is constrained should concentrate quite a bit of their stock and real estate capital gains upwards.

Towards those who employ those who write the tax and spending laws.

MRW

Monetarily sovereign countries like Great Britain, Canada, US, Japan, Australia are not constrained by deficits. In fact, look at Canada. In August 2008 it started running a deficit and the Canadian economy boomed. Weather the financial crisis better than us.

Now, it's back to its balanced budget BS and impoverishing its people again.

Japan has a debt-to-GDP ratio of something like 200%, and has had for 20 years. Yet's its interest rate and inflation are close to zero. It has one of the most powerful currencies in the world, and a world-class living standard. Tremendous education. Universal health care. And a credit rating lower than Botswana. HOWEVER. It denominates its debt in its own currency. The bond vigilantes can't touch it.

Greece is the opposite. Because it gave up its sovereign currency for the Euro. Greece is like the US state of Georgia; it can't create its own currency.

MRW

Thanks.

MRW

"No doubt you will explain to all pension funds, mutual funds etc. that it is an error to believe that they are due any payment for lending to the Federal Government."

pension funds, mutual funds, corporations, and individuals do NOT lend to the federal government. They exchange their cash for treasury securities at interest. Safest financial instrument in the world.

Why do they do this? Because certainly the federal government does not have to issue treasury securities to balance out congressional spending, or restore the money supply to balance. Canada doesn't do this.

It's because of the FDIC. The FDIC does not insure commercial bank accounts for more than $250,000. Before 2008, it was $125,000.

So if a commercial bank goes belly-up and you have more than $250,000 in any single bank account, you lose it. That's what happened to a lot of people's retirement accounts in 2008.

Therefore, people and industries put their excess cash into treasury securities, and get interest for it.

Media stalwarts with no command of the English language or any understanding the system refer to it as the federal government "borrowing" the people's money. The so-called "crowding out of private investment." What a crock.

But the federal government came first. It ISSUED the damn dollars to begin with. Out of thin air. Just as Congress spends out of thin air.

The US federal government has issued $719 trillion marketable ("Public Debt Cash Issues") and non-marketable (government-agency bonds, 'special' treasury securities for Social Security, Savings Bonds, etc) since 1998. It has redeemed $701 trillion since 1998. The remainder is $18 trillion. That's the "National Debt" or "Debt Held by the Public." And that so-called national debt is in everyone's bank accounts, including yours, to the penny.

Babak Makkinejad

There are constrains in software systems but in their context of operations - which is tied to the physical machines - such as amount of available memory or band-width.

But software itself, in its design, is not constrained by any "Laws of Nature".

Market Economy is a specific way of arranging the economic life of a society; subsistence farming was another. In both, performance and output were constrained by the physical environment & context but not the organization of economic life itself.

MRW

Correction. Only the "marketable" treasury securities are called "Public Debt Cash Issues." Those are the bills, notes, and bonds sold at auction.

T-bills mature in a year or less.
T-notes mature between 2-10 years.
T-bonds mature between 10-30 years.

Here is the latest April 16, 2015 Daily Treasury Statement: https://www.fms.treas.gov/fmsweb/viewDTSFiles?dir=w&fname=15041600.pdf

Look at TABLE III-A - Public Debt Transactions.

Look at what the federal government has issued so far in this fiscal year (since October 1, 2014): $40,253,671 million, or $40.25 TRILLION.

Look at the "Government Account Series" amount: $36,257,362 million, or $36.26 TRILLION. That's what the government has spent since October 1, 2015 to run itself. The federal government has also redeemed $36,273,566 million, or $36.27 trillion "Government Account Series."

Social Security is a part of that. FICA taxes DO NOT pay for Social Security, BTW. All Social Security payments are made by law, and have nothing to do with FICA taxes. The payment amounts are determined by Congress.

The social security administration creates "special treasury securities" to 'fund' the payments. Yes. Makes them up 'out of thin air' as an accounting artifact so the books balance. There's actually no such thing as a Social Security Trust Fund. That's an anecdotal name for a basket of government insurance policies, like the old-age pension, disability insurance, and the like.

So why do we pay FICA taxes (because there is no reason why we can’t scrap them tomorrow)?

Originally, back in 1935, Social Security was created as a tax because the Chief Justice whispered to Frances Perkins, the Labor Secretary, at a tea party that the Supreme Court could not throw it out if it were a tax; everyone knew the Republicans were going to fight it. The Constitution gives Congress the sole right to tax, the Chief Justice told Perkins, and the Supreme Court could not throw it out as a result. Perkins tells this story herself in an audio available on the Social Security website.

Fast forward to 1983 when Reagan hired Wall Street bank lobbyist Alan Greenspan to look at Social Security, and whether we could afford it in the future. Reagan had been a state governor and had NO CLUE about federal accounting. Greenspan said FICA taxes had to be increased. So they were. 6% for individuals, and 6% for employers. And Greenspan put an income cap of $110,000 at the time for taking money out of people’s earnings.

Stop and think about this scam for a minute. A $110,000 cap? He proposed not taking any more money out of rich people’s income, but claimed Social Security would be in trouble?

Why? The ostensible reason was that rich people didn’t need it.

The real reason was that he hoped the *hoi polloi* would revolt against this punishing regressive tax, and demand that Social Security be privatized. A goldmine for his Wall Street buddies, had it happened.

Everyone back in 1935 knew that the Social Security tax was a “useful fiction” to allow the average worker to maintain some dignity, and not think he was on the dole after the Great Depression. The first Social Security payment was $0.65.

Don’t believe me? Read the short "Luther Gulick Memorandum re: Famous FDR Quote,” which only came to light in 2005. http://www.ssa.gov/history/Gulick.html

For the link-lazy, here is the salient quote, Gulick speaking:

"In the course of this discussion I raised the question [with FDR] of the ultimate abandonment [of] the pay roll taxes in connection with old age security and unemployment relief in the event of another period of depression. I suggested that it had been a mistake to levy these taxes in the 1930’s when the social security program was orgiginally [sic] adopted. FDR said, 'I guess you’re right on the economics. They are politics all the way through. We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren’t a matter of economics, they’re straight politics.'

"FDR also mentioned the psychological effect of contributions in destroying the 'relief attitude.'”

different clue

baoutsi,

China hopes to create and lead the Greater Euro-Asia Co-Prosperity Sphere . . . under any other name.

Laura Wilson

MRW…thank you.

William R. Cumming

Agree and thanks for this comment!

William R. Cumming

Thanks for this excellent comment. Yes David Rothkop does seem to get "it"!

And unfortunately IMO Dr. Malthus was prescient.

William R. Cumming

YUP! And the reasons why both nation-states and businesses often self-destruct.

Tyler

Jack,

Thanks for reading through all that sophistry and formulating a response. Damned if I was going to do it.

If you can't acknowledge what happened during Weimar and still claim nations can't go broke you're basically living in a different world (as MRW, GCP, Wilson, and the rest of the Fellow Travellers here have demonstrated).

Imagine

MRW, readerOfTeaLeaves, thank you very much for important discussion/points.

1) I hope to create a dynamic simulation of the economy (including psychology) sometime next year when there's time. What are your favorite deep/high-end textbook(s) on the school of thought you present?

2) Are you conflating the Treasury with the Fed? Treasury is public, owes interest/profit to the Fed, which is semi-private. So perhaps it seems US DOES owe money. Does this change things?

3) Where does real wealth creation come from (IYO)?

Thank you!

JerseyJeffersonian

Charles I,

Yes, this is the Assisted Living/Reverse Mortgage Complex. Sucking the bones of the not-quite-wealthy-enough-to-be-able-to-preserve-wealth-for-their-progeny cohort. That's most of hoi polloi, no matter their having been at one time considered "middle class".

And not content with strip mining the marginally well off to forward this form of upward wealth transfer, the Wall Street Boyz want to privatize Social Security, too, so they can rehypothecate themselves to infinity.

And then, when they've got the next generations where they want them - i.e., helpless to resist - the new feudalism is to be capped off with "Trade Agreements", conveniently refereed by corporate lawyers, national and regional governance be damned. Hot, hungry masses below, a thin managerial class of technocrats above, assisted by security forces/police to keep the aforementioned hot, hungry masses where they "belong", and riding on top, the transnational overlords, brutal, inhumane, and organizing things so that they continue in their impunity from consequences. This is the aspirational ideal of finance capitalism starkly portrayed.

Not a pretty picture, is it? But there are limits to the carrying capacity of this good earth, and maybe even limits to the patience of hoi polloi, so the "end of history" envisioned by the transnational overlords just ain't so.

JerseyJeffersonian

Charles I, along with anybody still checking on this thread,

And speaking of international enforcement tribunals, consider the ills that will inevitably rain down on society with the acceptance of the horrifying Investor-State Dispute Settlement mechanism central to the proposed TTP and TTIP "trade agreements":

http://www.nakedcapitalism.com/2015/04/tpp-toward-absolutist-capitalism.html

If you want your national, state/provincial, and local sovereignty to be vitiated in toto, these "trade agreements" are the way to do it. And no, I don't consider this to be merely alarmist talk.

William R. Cumming

BTW the federal income tax returns of public profit-making corporations by law are not public. Their figures often completely contradict SEC filings. There should be a single accounting system for both taxes and SEC regulation IMO!

Ingolf


Yes, thanks Jack. I tried to clarify some matters about banking, money and debt for MRW last March in the "Obama and the 'Mommas'" thread. No luck at all; his enthusiasm knew no bounds then and apparently still doesn't.

http://turcopolier.typepad.com/sic_semper_tyrannis/2014/03/obama-and-the-mommas-by-thomas.html

That seems true of many (most?) "converts" to MMT (Modern Monetary Theory). They truly believe they've discovered something novel and that most of the economic ills of the world could be easily righted if only the idiots currently in charge would wake up and listen to them.

It's not that MMT doesn't contain some useful insights: indeed its more sophisticated theorists are exceptionally well-informed about the detailed workings of fiat monetary systems and the implications for government funding and so on. Not that any decent monetary theorist from a century ago would find any of it particularly surprising.

The main problem is an air of magic hovers around it. The sheer ease with which fiat money can be created is intoxicating; why not use it to fix everything! There's no need to be bound by tedious constraints like debt limits or funding constraints; just print some more money and spend it. If things heat up too much, withdraw some of it by raising taxes! And so on. It's hard to keep a sense of measure when the abracadabra wand is apparently in one's hand. Of course all self-respecting MMT'ers stoutly maintain they would never issue enough fresh money to cause serious inflation. And they may well mean it. To the extent they do, however, the supposedly open-ended virtues that flow from their theory lose most of their potency. Instead, we're back to the often surprisingly intractable real world.

There, economics is principally about coordination, meshing the infinitely complex desires and capabilities of all of us with the physical realities we have to work with. Together with our accumulated skills, knowledge and capital, the most critical element in making this coordination work is the accurate and free flow of information. Key to that in turn is a relatively stable monetary (and hence pricing) system. Central banks, together with the fiat fractional reserve banking system they preside over, already heavily distort many of those pricing signals, in particular interest rates. The full on application of the sort of theories MRW seems so keen on would exponentially increase the distortions. Long-term planning for the private sector would become ever more difficult and governments would tend to consume more and more scarce resources in their dirigiste efforts. Plus of course there's the very real danger (as Jack noted) that confidence in the monetary system itself would be undermined. When that happens, true catastrophe follows.

Truth is, I think if the public understood the radically ephemeral nature of fiat money, things would become a whole lot more volatile. That's one of the things that worries me; ultimately, proponents of radical monetary policy (like MMT enthusiasts) are dancing on the rim of a volcano.

Sam

All

This comment by MRW is utter nonsense!

The Fed is not the "banker" of the Treasury. It is by law an independent institution chartered by Congress to be a lender of last resort to the banking system as well as to conduct monetary policy by setting the funds rate through open market operations (expanding/contracting its balance sheet). The Fed chairman is nominated by the President and approved by the Senate for a 7 year term precisely so that it is independent of the Treasury. The Fed does not pay vendors of the Treasury. They don't issue a check to Lockheed or pay a federal worker.

It seems MRW has never paid any federal taxes or else he would know that a check is written to the US Treasury. The US Treasury collects taxes which goes into its account. They pay vendors directly.

Similarly, the Treasury sells bills, notes and bonds directly to the public via TreasuryDirect. This is borrowing by the Treasury directly from the public. The money goes directly to the Treasury's account. The Treasury also sells bills, notes and bonds to primary dealers who then resell it to pension funds, mutual funds and other investors. Quantitative Easing was the Fed using its open market operations to expand its balance sheet by purchasing Treasury bonds from primary dealers and other investors. Why did they do this? Because, they are prohibited by law to monetize the federal governments debt.

This is some crazy theory to prove that a government can spend unlimited amounts of money in the currency of a nation with no repercussion. Tell that to France, Germany, Italy, Argentina, Venezuela, Zimbabwe and every other country that has tried that in the past when they had a sovereign currency that went bust impoverishing the people. The Continental Dollar also went the way of the dodo.

MRW

"The notion that MRW claims with great certitude that a nation that "prints" it's own currency cannot go broke is a canard. History is replete with examples of currencies becoming worthless."

Name one in the modern era.

MRW

The Weimar had to exchange its gold for foreign currencies to pay reparations.

GulfCoastPirate

JerseyJeffersonian:

At this point I think the only thing that prevents Hillary from being elected is if the Democrats help Republicans ram these trade treaties through Congress. I simply can't figure out what Obama and Congressional Dems are thinking.

different clue

Babak Makkinejad,

Now I understand your meaning. Yes, you are correct. I remember reading a "parallel version" of this once discussed years ago in a book by Charles Walters Jr. He referrenced John Stuart Mill as having written that after we produce whatever economic product we have produced within the constraints we have produced it in, we are free to divide up that product and distribute it and assign pieces of it to this and that in any way we like. Of course Mill used language so flowery and "high literary" that I can't remember the actual quote. But that was the basic meaning.

different clue

All fans of MMT,

I have been reading about MMT for quite a while now at Naked Capitalism. The arguments for it are couched in brilliant bunches of prolix prose. I am expected to be impressed by the stunning intellectuality of it all. After all, its "modern".
But every time I hear about MMT, it keeps sounding like "Magical Monetary Thinking".
Either I am too dumm to get it, or the MMT theorists are too smart to see the problems with it.

One of the pro-MMT posters once put it basically this way: the Fed has emitted trillions of "dollar equivalents" worth of credit and targeted it at favored recipients of the FIRE sector class. That shows right there that the government or its proxies can decree trillions of dollars into existence to give to preferred targets. Therefore (the comment said), a pro-public Progressive government could simply print or decree or whatever the same number of trillions of New Dollars to give to Progressively chosen targets to spend creating new wealth into existence with.
But blogger Ian Welsh noted the problem with this vast money-emission in a post called Sneering That There Is No Runaway Inflation Misses The Point. He describes how the Fed money-emission was entirely targeted at the crony-insider FIRE-sector upper class and they used the money to wildly inflate the price of particular types
of assets, securities, etc. which only THEY are in a position to buy because only THEY got the several Free Trillions from the Fed. Here is the link.
http://www.ianwelsh.net/sneering-that-there-is-no-runaway-inflation-misses-the-point/
So what do I think that has to do with MMT? If a Progressive government were to emit trillions of free dollars to The People or Progressive Projects, whatever those people or projects try to buy will also have its prices inflated the same way. Does this mean that government could not emit ANY money and spend it into targeted areas of the economy without stimulating the actual creating of new wealth by people currently not having the money to buy or do things which "could" have been made or done if people "would have had" the money to pay the makers or doers to make or do them? No, I don't think it means that . . . within very careful limits. During WWI when the FedGov was going to build a big power dam at Mussel Shoals, the FedGov was going to sell bonds to pay for it, decreeing new "credit" into existence which would be treated as money and spent to inspire the creation of some new wealth which people were not at-the-time being inspired to do. Thomas Edison and others pointed out that if Government could "lend and sell" a certain amount of new money into existence, Government could just as well print the same denominated amount of new money into existence its own self to engender the same wealth-creating result as if Government had lent credit and sold bonds. Here is a little article about that.
http://prosperityuk.com/2000/09/thomas-edison-on-government-created-debt-free-money/

So . . . "follow the money" , yes. But what is "money"? How does it get that way? What puts the "oney" in money? We need to think about these things and until
the MMT people think their way through to the limits on usefulness of money creation, their theory will remain so much Magical Monetary Thinking.

Jimmy_W

MRW,

I understand your frustrations with the mismanagement and lack of strategic insight at the very top level of our Republic. I share many of these frustrations as well. However, there are a couple of things you seem to be missing with your currency/USD analysis.

1. If the US were to renege on its debt obligations (a major step involving the cooperation of all 3 branches of government and the Fed), what will happen next? Even if the US were to only renege on foreign obligations, all of the domestic bondholders will be at risk as well. (Assuming we can fully distinguish between the domestic bondholders and the foreign owners who invest in domestic Fed bond funds.) They (including many retirees) will suffer a dramatic hit to their networth (50% loss or more easily foreseeable).

Argentina (and many other places) have tried this maneuver before. They have all suffered an immediate liquidity crisis. No one would lend them any money without hard collaterals (land, etc). Such a credit stain was only erased upon a complete change of government (new constitutions, etc).

2. Ah, but you say, the US government prints its own money. So it does. What is the point of having a Federal budget in the first place then? Argentina and Venezuela print their own money right now, too. And no country would sell them anything except in barter. Their own people keep track of their savings in terms of USD, EUR, or gold. In Turkey and India, other chronic inflaters, people track savings in terms of foreign currencies or gold, too.

America is bigger and can better withstand such a currency shock, but shock it will be. And the domestic manufacturing base, for replacing imports, is not here, and would take a long time to stand back up. In the mean time, there will be severe economic and political turmoil, very possibly leading to a new constitution. Destruction of livelihoods for sure.

Now, we're probably going in this direction anyway, with The Coming Generational Storm, like Laurence Kotlikoff says. But we should try not to hurry up toward it. Babak, Norbert, Fred, Jack, and Tyler, fully agree, too.

Sidebar: Government does important things, but, except in limited instances, it does not create economic value. Keynesianism and all others miss the important value of recessions in exposing the fraudsters that always show up in a bull market. Deficit financing to "fight recessions" always keep these fraudsters in the market, further eroding trust in the economy.

GulfCoastPirate

Tyler wrote:

'If you can't acknowledge what happened during Weimar and still claim nations can't go broke'

This statement shows you have no idea what happened during Weimar.

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