tag:blogger.com,1999:blog-64769899468860579002024-02-20T02:25:12.982-08:00 the Mechanical Money blog <i> Money and Economics from an Inquisitive Modern Mechanical Perspective </i>Roger Sparkshttp://www.blogger.com/profile/01734503500078064208noreply@blogger.comBlogger72125tag:blogger.com,1999:blog-6476989946886057900.post-42764682565150628382022-02-16T13:46:00.000-08:002022-02-16T13:46:42.284-08:00The Gift of 'Access into the Marketplace'<p><br /> Money would be much easier to understand if everyone started thinking about 'access into the marketplace'. Especially, it would easier to understand the creation of money.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEip47CKpTifRVoc1uel_go-P1Ipf6vJ5keXKpFDwk4JSsUXuIdvOzzDP8B45Nqds37jM64yWi8RdrVBCXH6dmTqCeoSAmkwuelrgIX4KD8VKKL2H6fQoPsG4ZvLB_olutEH-bQml19-aeFRa7TJfJtrg2vKCoOjtkyj8RVpjdrMU2ql20vXL3A0z4tVng=s972" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="706" data-original-width="972" height="232" src="https://blogger.googleusercontent.com/img/a/AVvXsEip47CKpTifRVoc1uel_go-P1Ipf6vJ5keXKpFDwk4JSsUXuIdvOzzDP8B45Nqds37jM64yWi8RdrVBCXH6dmTqCeoSAmkwuelrgIX4KD8VKKL2H6fQoPsG4ZvLB_olutEH-bQml19-aeFRa7TJfJtrg2vKCoOjtkyj8RVpjdrMU2ql20vXL3A0z4tVng=s320" width="320" /></a></div><p></p><p>The essence of the creation of money is the gift of 'assess into the marketplace'. Ownership of money is <i>ownership of tangible evidence that intangible 'access into the market' has been granted. </i></p><p>Owning money is like owning a ticket. If we characterized money as a 'ticket', we would intuitively understand that money embodies evidence of intangible 'assess into the marketplace'. Numbers on the ticket would represent the increment of access granted by each ticket.</p><p>We can still talk about money as we presently do. Just don't think of money as being debt or an IOU. Think of money as having the characteristics of a ticket which carries within it the intangible of access.<span></span></p><a name='more'></a><p></p><p>Of course, a ticket granting limited access into the marketplace would have a value depending, not only upon the numbers on the ticket, but upon the desire of people to access the marketplace. The more the desire, the more valuable the ticket. </p><p>If you or I made a loan of our own money, we would be intuitively thinking that we are delaying our own 'access into the marketplace'. Of course, we would like to get our money back from the borrower!</p><p>If we began talking about how banks create money, we would intuitively think that banks are granting 'access into the marketplace' each time they make a loan.</p><p>If we placed money into the bank for storage, safe keeping, and ease of transfer, we would intuitively think that those tickets would be there until we wanted to use them. </p><p>If we got to thinking about the bank possibly lending our deposit to borrowers, we would intuitively begin to worry. What if the bank loaned all of our deposits away so it came to pass that two people had claims on every deposit in the bank? It's better to think that every bank loan creates new money, so that we would have enough bank created money to repay every bank loan.</p><p>If we got to thinking about central banks, who own little money of their own, we would certainly wonder how they would differ from our local retail bank. It seems like when they made a loan, they would be granting vast access into the marketplace, the kind of access usually granted to governments in time of war.</p><p><b>Seigniorage</b></p><p>In addition to bank created money, there is paper (or other construction) money. Paper money costs very little to make while conveying the same newly granted marketplace access as does bank money. The difference between cost of production and the value of access into the marketplace, is a gain to the creating owner and is called "seigniorage".</p><p>In the case of bank created money, it is easy to see that the borrower gets most of the advantage of newly granted access into the marketplace. This advantage is typically diminished for the borrower by the requirement that the tickets be returned, often enhanced by interest payments.</p><p><b>Public Policy</b></p><p>Accelerated access into the marketplace rather obviously increases the immediate demand for goods and services. This has a number of effects, both good and some not so good, which we will generally not go into here. We will notice that when we combine the advantages of early access, near zero interest rates, and extended or avoidable repayment periods, we are giving the borrower a very big economic favor compared to those citizens later in the sequential ticket ownership chain. </p><p><b>Conclusion</b></p><p>Analogies are a wonderful way to convey a concept. Calling 'money' a 'ticket' inherently conveys the concept that money embodies evidence of intangible 'access into the marketplace'. Many economic concepts become intuitively understandable when that evidence is prepositioned in thought patterns.</p><p>(c) Roger Sparks 2022</p><p><br /></p><p><br /></p>Roger Sparkshttp://www.blogger.com/profile/01734503500078064208noreply@blogger.com2tag:blogger.com,1999:blog-6476989946886057900.post-20655385348314638212022-02-13T08:09:00.003-08:002022-02-13T15:08:31.000-08:00A Logically Coherent Theory of Retail Banking and the Creation of Modern Money<p> You don't need to be a banker to put together a logical theory of banking and money. You just need to lay all the clues into an interlocking order. We will try to do that in this article.</p><p>This becomes a story of banking and the creation of modern money. Printed money is not part of this story, nor is the valuation of money.<span></span></p><a name='more'></a><p></p><p>Money is used ubiquitously. Everyone has some familiarity with it. Nonetheless, we need to find some clues and make a few observations before we can get a sense of where money originates.</p><p>The first observation we have about modern money is that the supply of it is increasing. Because money is stored in banks, we can add all the deposits in the nation to see that this is happening (Figure 1).</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEg9fasEU9R6EBaL-pnTJeSSyGSSEPVyuFQjxbEUOxkuZlsjGvGokPTSxJnh50pHLGBS37nEaS_YU1_fMHTN6uT24Fu3AjY8MB06HI3lG69bh8FaY-biU6xklmhiXBx7bShEv5YTOm-nVDD0lRk4nagJtqTqsTNWcBAE8ax5b8JoCSy_ixGsszEMvX0ekw=s1168" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="450" data-original-width="1168" height="246" src="https://blogger.googleusercontent.com/img/a/AVvXsEg9fasEU9R6EBaL-pnTJeSSyGSSEPVyuFQjxbEUOxkuZlsjGvGokPTSxJnh50pHLGBS37nEaS_YU1_fMHTN6uT24Fu3AjY8MB06HI3lG69bh8FaY-biU6xklmhiXBx7bShEv5YTOm-nVDD0lRk4nagJtqTqsTNWcBAE8ax5b8JoCSy_ixGsszEMvX0ekw=w640-h246" width="640" /></a></div><div style="text-align: center;">Figure 1. Total Deposits in Commercial Banks</div><p style="text-align: left;">The second clue we have is that I can lend you money. Of course, I must first get money from someone else before I can do that. We can see intuitively that money gets passed around or, in a single word, reused.</p><p>Yet another clue is that banks make loans by assigning to a borrower an account preloaded with money. This newly assigned account is identical to all other accounts loaded by depositors who first earned money. A side question arises here: "Who was the owner of money placed into the borrower's account?" </p><p>This is a side question but very relevant. We will take a moment to consider it.</p><p>From the first observation, we know that the money supply increases. From the second clue, we know that money can be reused, which is not an increase in money supply. The question itself may be misleading. There may be no previous owner. The money preload itself may be newly created money.</p><p>The puzzle that we really want to solve is how money is created.</p><p>Let's assume that money is created when banks make an account preload. That accounts for the observation that the money supply increases. Of course, this money would be available for reuse until somehow it might be caused to disappear. </p><p>If it is this simple to create money, it must be simple to destroy money. That thought is nothing more than a logical extension of the probable life expectancy of anything that mankind might create.</p><p><b>Extending the Puzzle into Money Destruction</b></p><p>If we begin thinking about the destruction of money that we have previously assumed into existence, we would be expanding the scope of the puzzle, by a lot. Yet, destruction seems to be a necessary part of the money supply mechanism. We haven't yet any clues that destruction of money is possible except that we know intuitively that paper money can be destroyed by burning.</p><p>We aren't going to burn up bank accounts so what mechanisms can we find that might result in the destruction of money? </p><p>We can observe that borrowers are always asked to return borrowed money. More formally, a loan agreement is usually written. We should be able to safely assume that a return of borrowed money to the bank would 'uncreate' money.</p><p>We might have the complete answer to our puzzle. We have a coherent mechanism for the creation and destruction of money, but it is based on assumption following assumption. Can we make it robust in an accounting sense? </p><p>It seems that we can, but management of the money product is a necessary part of the story.</p><p>There should be no difficulty in accounting for creating money. The bank took a signed loan agreement in conjunction with preloading a borrower's deposit account. We can observe that two distinct types of wealth have been created, both subject to standard accounting methods.</p><p>Now we throw a wrench into our 'uncreating' assumption by assuming that the borrower defaults on the loan. It seems like this would leave money permanently present in the economy, unless there is another destruction mechanism in place just for this event. There is such a mechanism, a management mechanism, and it works like this:</p><p>Assume that the borrower has spent his preloaded money so that it comes to be owned by third parties and unavailable for repayment.</p><p>Further assume that banks are regulated with a requirement to absorb loan losses. Because money left the bank, loan default results in a loss of money that must be absorbed by the bank. This forces the bank to write down a deposit account owned by the bank. Thus, the bank needs to account for both a loss of wealth attributed to the loan document and a loss of wealth attributed to a deposit write down. In this case, both wealth and money would be destroyed by the rule of regulation. *</p><p>In one sense, upon default, banks are forced to revise history. Beginning with money creation, history records money supply increases. This increase is recognized repeatedly until, finally, the bank is forced to report the loss and recognize it on its balance sheet, thus reversing history. What seemed to be a history of money creation is rewritten to be a history of money reusage.</p><p>Strict regulation keeps money creation under control, preventing the money product from becoming worthless due to oversupply.</p><p><b>Conclusion</b>:</p><p>The theory presented in this article assumes that money creation occurs when banks preload a deposit account and simultaneously accept a signed loan agreement (bond). This action creates two units of wealth (money and bonds). Both money and the linked bond persist in the economy until the bond is retired. When bonds from the originating bank are retired, two units of wealth (money and bonds) disappear from the macroeconomy. The disappearance of money depends upon strict adherence to accounting rules that require disappearance.</p><p><b>Notes</b>:</p><p>* I don't know for certain if any existing government regulation actually forces this accounting method onto retail banks.</p><p><b>Acknowledgements</b>: </p><p>I would like to thank Mike King for his series of articles and comments. The first of these articles,<a href="https://stochasticpress.com/economics/2021/10/26/defining-money/"> "Defining Money",</a> can be found at:</p><p><a href="https://stochasticpress.com/economics/2021/10/26/defining-money/"> https://stochasticpress.com/economics/2021/10/26/defining-money/</a></p><p>The theory expressed here departs from the theory found in King's series.</p><p>(c) Roger Sparks 2022</p>Roger Sparkshttp://www.blogger.com/profile/01734503500078064208noreply@blogger.com2tag:blogger.com,1999:blog-6476989946886057900.post-29325067177531087742022-02-04T07:10:00.005-08:002022-02-05T06:17:13.369-08:00Adding Private Banks to the Mechanical Exercise<p>This is a follow-on for the recent post "<a href="https://www.mechanicalmoney.com/2021/12/a-mechanical-exercise-tracking-creation.html">A Mechanical Exercise Tracking the Creation and Lifespan of Fiat Money</a>" (METC). In the original exercise, the user made all of the economic decisions. Private banks were money users. In this post, we introduce private banks into the role of decision-making for the process of creating money.<br /></p><p></p><table cellpadding="0" cellspacing="0" class="tr-caption-container" style="float: left;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEgkIyVSUSKzxRLO7SGmzJ-d0lgo_eKfCTtSBJYDnca7ymut6nyuLynRi681DYJlSqat8sHHfK64VpZ4iY3OUAdOzQ8GwZ1g6mGgbQSa5nLrGgOWfekdUneRRJMnMJ7UA3qPbyxUtTfUVGpz3RplmDbUrr3mG4j8rZ4eEj8Wc4qKP1Q3QTWuAe5FIbpMRg=s766" style="clear: left; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img border="0" data-original-height="476" data-original-width="766" height="199" src="https://blogger.googleusercontent.com/img/a/AVvXsEgkIyVSUSKzxRLO7SGmzJ-d0lgo_eKfCTtSBJYDnca7ymut6nyuLynRi681DYJlSqat8sHHfK64VpZ4iY3OUAdOzQ8GwZ1g6mGgbQSa5nLrGgOWfekdUneRRJMnMJ7UA3qPbyxUtTfUVGpz3RplmDbUrr3mG4j8rZ4eEj8Wc4qKP1Q3QTWuAe5FIbpMRg=s320" width="320" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Figure 1. The raw material for money<br />creation by private banks.</td></tr></tbody></table>In METC, we needed a virtual storehouse to store real tokens that we could later call "money". Here we introduce a private bank's version of a virtual storehouse which is, of course, real all the time.<div><br /></div><div>In the drawers of this new storehouse (Figure 1), we have existing money sources that the banks can use to ensure that new borrowers have access to existing money. So how is it that new fiat money can be created in this new version of METC? Private banks take systematic advantage of the pool of money on deposit by making a loan without linking loan risk or deferred spending to any one account. The loan is made by creating a deposit account for the borrower. Loan risk is spread to the entire body of depositors, including the lending bank. Deferred spending is transformed into accelerated spending. As a result of the loan, the amount of money on deposit in the banking system is measured as increasing. *<span><a name='more'></a></span><p></p><p>Now to use money belonging to others sounds like a reuse of existing money. You might think of it as being the same as if I made a loan to you, wherein I clearly used money that I owned. Both cases reuse existing money. </p><p>So, what does the bank do that is so different? Because the bank is lending money that it does not own, bank borrowers do not need to first work for the position to which they are assigned in the banking system (All depositors are equally able to spend-out their account balances.). The bank has not only apparently created money, but the bank has also made available equal access into the marketplace. This has serious implications for what money really is, making it appear to be like a valuable ticket rather than being a pure expression of past work or wealth. [The tickets we envision here are like concert tickets that are valuable and tradable until they are finally put to conclusive use. Read "<a href="https://www.mechanicalmoney.com/2022/01/money-is-not-iou-its-more-like-ticket.html">Money is Not an IOU, It's more Like a Ticket</a>." for more on this alternative perception of money.]</p><p>If we use the "money is a ticket" analogy, then bank deposit records are the current ownership record of tickets past-issued. The sum of all deposits becomes the money supply.</p><p>Knowing how many tickets are currently available is a very useful management tool that can be used to prevent the over-issuance of tickets.</p><p>What happens when a currency issuing government borrows from private banks? The process is the same with one exception: A government bond is usually judged by bank regulators as being nearly cash. Therefore, government bonds can be substituted for holding actual cash reserves up to some limit. (Any interest payments on government bonds bought with funds provided by depositors can be a source of income for banks.) Of course, the indicated money supply goes up after each such borrowing event when the borrowed money is spent into the measured economy.</p><p><b>Using METC with private bank decision making ability</b></p><p>To run the actual exercise, we follow the original exercise by replacing the drawers with envelopes and coins. For each exercise transaction, relocate a loan document coin and fiat money coin to the appropriate sector envelopes. When drawers/envelopes containing preexisting coins become empty, you know it is time to relocate money from sector envelopes at least partially back into the common deposit drawers/envelopes (which completes one round of the exercise).</p><p><b>Notes</b>:</p><p>* There should be no question that the money supply owned by the private sector grows. To see the growth recorded as money supply and total of customer owned bank accounts, follow the links to the FRED sites <a href="https://fred.stlouisfed.org/series/M2NS">M2NS </a>and <a href="https://fred.stlouisfed.org/series/DPSACBW027SBOG">commercial bank deposits</a>.</p><div>(c) Roger Sparks 2022</div></div>Roger Sparkshttp://www.blogger.com/profile/01734503500078064208noreply@blogger.com4tag:blogger.com,1999:blog-6476989946886057900.post-21830168836560898732022-01-22T10:52:00.000-08:002022-01-22T10:52:10.811-08:00Money is Not an IOU, It's More Like a Ticket<p>In this post, we ask the question "What is money?". Mike King, in a series of posts beginning with "<a href="https://stochasticpress.com/economics/2021/10/26/defining-money/">1. Defining "money"</a>", starts us off along one path. To him, money is an IOU and the market has an obligation to those owning IOUs because these owners have done prior work.</p><p>Our analysis takes us in a different direction. Money is not an IOU, it's more like a ticket. This analogy makes sense because ownership of a ticket entitles the owner to privileges equal to those enjoyed by all other owners of similar tickets.</p><p>Now we need to justify this argument:<span></span></p><a name='more'></a><p></p><p>I like the logic game Sudoku. In Sudoku, the player is presented with a set of assumptions and is tasked with finding a conclusive pattern. The player follows a sequence of logical eliminations or certainties to reach a single correct arrangement. </p><p>We can use logic to better define "money". Let's make six assumptions about money: 1. New money is created when banks make loans. 2. All bank money is sourced from past loans. 3. Borrowers spend money from loans very quickly. 4. All money has an owner. 5. There are multiple owners of money. 6. Money is exchanged between owners.</p><p>With these six assumptions in place, we see that money seems to be a product created by an entity that has the ability to create money (banks in this model). A loan is involved so we will presume that the created product is provided on a loan-to-borrower basis. The borrower apparently has an obligation to return the product to the creator. There is nothing to make us think that the product is an IOU.</p><p>Once created, money has continuous life (until something not yet contemplated occurs). We can deduce that only the initial borrowers have ownership of money <i>which has not been spent first by others.</i></p><p><i>The first-spender is found to have a special place in the bank deposit accounting system. He is the only owner of money who has not done prior work in exchange for money. It seems like he has received a very special position in the economy, as if he has been awarded a valuable ticket.</i></p><p>King seems to think of money from the perspective of those doing prior work. This certainly does represent the vast majority of current money owners, but it is a distortion of the character of money as a product or object.</p><p>Mis-labeling money as an IOU takes readers down a thought path that completely misses the motivation that drives money creation. Borrowers and lenders act together to create money because the event of money creation increases the well-being of both borrower and lender. The borrower gets quick incremental access into the economic marketplace. The lender gets a claim on future wealth (assuming a loan document is signed). That's why the creation of money is like the creation of a ticket; a valuable, reusable ticket that has initial value by allowing the owner incremental access into the pre-existing economic marketplace.</p><p><b>We can expand our logical development of "What is money?".</b></p><p>Assume that a loan document is signed for every loan resulting in money creation. </p><p>Because money and loan documents both constitute wealth and both endure over time, we can deduce that the creation of money would proceed at the rate of two units of wealth creation for every unit of money creation. Recognition of this tie between wealth and money allows us to deduce that a destruction of money would occur when any loan <i>associated-with-money-creation</i> is retired.<br /><br /><b>The political implications of this model of money<br /></b><br />This model of money makes it very clear that money is very easy to create. The difficult question that must be asked is how can such an easily created product be made into a vital, ubiquitous, economic tool?</p><p>I won't try to answer that question in this post except to say that it can be done with astute management by government.</p><p><b>Conclusion</b></p><p>We have an answer to our question "What is money?". </p><p>Money is best described as being a ticket; a valuable, reusable ticket that has initial value by allowing the owner incremental access into the pre-existing economic marketplace.</p><p>(c) Roger Sparks 2022</p>Roger Sparkshttp://www.blogger.com/profile/01734503500078064208noreply@blogger.com2tag:blogger.com,1999:blog-6476989946886057900.post-26458152771866864382021-12-26T16:26:00.000-08:002021-12-26T16:26:07.903-08:00A Mechanical Exercise Tracking the Creation and Lifespan of Fiat Money <p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEiCeC6X1e_8ZruxerXHiCt9GiGis_bZWLZPz03tNady5AIeibybisy70wvhubqdnNcaUgOI6t9Fd-8wGXpf76hi7Yg8vO2w3GaXxQu1Vk9POSwawMUYTh9q2-UY68J_bvBwReQ7sJ9oVLf9isuFlfbVHrWt6yrKWJgx66ZEls0n1phrdYENe15-PSS_OA=s4032" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="4032" data-original-width="3024" height="285" src="https://blogger.googleusercontent.com/img/a/AVvXsEiCeC6X1e_8ZruxerXHiCt9GiGis_bZWLZPz03tNady5AIeibybisy70wvhubqdnNcaUgOI6t9Fd-8wGXpf76hi7Yg8vO2w3GaXxQu1Vk9POSwawMUYTh9q2-UY68J_bvBwReQ7sJ9oVLf9isuFlfbVHrWt6yrKWJgx66ZEls0n1phrdYENe15-PSS_OA=w240-h285" width="240" /></a></div>Here's a little mechanical exercise that tracks the creation and lifespan of fiat money. We use coins to identify paper or electronic financial instruments and the backs of used envelopes to represent sectors which own financial wealth. This exercise should be comforting for those who believe that money might have a physical reality but may seem unrealistic to those who think of money as being purely virtual.<br /><br />Our stock of coins should include at least three different denominations. We need four envelopes to represent three financial sectors of an economy and a virtual storehouse.<p></p><p>I used quarters, dimes and pennies. Quarters were used as government bonds, dimes as mortgage-backed securities, and pennies as fiat money. <span></span></p><a name='more'></a><p></p><p>Mark the envelopes as "Central Bank", "Private Sector", "Government Sector", and "virtual storehouse". Later, we will trade our coins between these four storage surfaces.</p><p>The virtual storehouse is needed to store the yet-to-be-created fiat financial instruments. [Financial instruments do not exist until created but try that in the real world! Our coins need to exist, then we designate them as financial instruments when we 'create' financial instruments.]</p><p><b>How to run the exercise</b></p><p>Place all the coins on the virtual storehouse envelope. Then move a representative coin(s) to the appropriate sector envelope(s) as each financial transaction is contemplated.</p><p><b>Some examples:</b></p><p> We begin with all the coins on the virtual storehouse envelope, no coins on any sector envelope. This economy is not using fiat money.</p><p>Take some pennies from the virtual storehouse and place them on the private sector envelope. This economy is using fiat money. You may want to envision an intermediate condition wherein the bank or Government owns newly created fiat money, but money has not yet moved into private ownership. This to help understand the issue of seigniorage.</p><p>Consider the issue of government borrowing money from the central bank. The event causes the creation of fiat money, bank money, reserves, IOUs, or even 'ticketed access into the marketplace', with the descriptive name being dependent upon the framework being used to describe financial activity. If a bond is created as part of the creation process, take a quarter from the virtual storehouse as well as representative pennies, then move both instruments through the sequential ownerships until the long-term ownership condition is achieved. Probably, the bond will ultimately reside on the central bank envelope and the pennies on the private sector envelope,</p><p>Consider that government can borrow directly from the private sector.</p><p>Consider the use of mortgage-backed securities. These instruments can be traded for money within the private sector or traded to the central bank. Probably some will be found in both central bank and private sector ownership.</p><p><b>Foreign Trade</b></p><p>After becoming comfortable with the flow of fiat money and other fiat instruments, a second exercise system can be created to represent a second currency. We might do this to consider how trade in currencies might establish relative currency values. </p><p>A starting point might be to consider why a government might want to borrow a second currency--one it could not create. What if a government borrowed this currency and distributed it to citizens via helicopter drop? I won't even begin to consider why such an event might occur but examples of governments borrowing foreign currency are readily found.</p><p><b>Conclusion</b>:</p><p>The creation and life of fiat money can be modeled using real physical objects. This exercise should help those who might be confused or dismayed by the complexities and details used by modern bank operations. </p><p>(c) Roger Sparks 2021</p>Roger Sparkshttp://www.blogger.com/profile/01734503500078064208noreply@blogger.com1tag:blogger.com,1999:blog-6476989946886057900.post-77829257927536586762021-11-05T11:18:00.002-07:002021-11-06T13:29:40.670-07:00Framing the Economy Around a Banking-Money-Access Nexus<p>Modern Monetary Theory (MMT) has always bothered me in the caviler way it treats inflation. It recognizes the problem but assumes that it is easily managed. Here I present supporting empirical evidence that inflation is feature of the method used to create fiat money.</p><p>To find empirical evidence in a working economy, you first need a working definition of money, a source for creating money, a reason for expecting money to be used in the general economy, and then a theoretical link between money and prices. We will build a framework that will (hopefully) accomplish this.</p><p>Our framework will describe a system capable of including a nexus found between banks, money, and incremental access into the general economy. In the interest of brevity, we won't spend much time on definitions, depending instead upon the common knowledge of how all of us conduct business to provide most of terminology and associated relationships.</p><p>We try to keep it simple.<br /></p><span><a name='more'></a></span><p>Most of the money on deposit at banks is owned by people who traded something to acquire it. A fraction of deposits are owned by people who placed borrowed money on deposit. Both cohorts have equal access into the general economy, limited only by the size of their bank accounts.</p><p>We could add up all bank deposits and create a yearly report. This number would be unchanging if borrowers only took loans from people who first traded something to acquire money. The deposits number does change so money must be created in some fashion. New money must enter the general economy through some mechanical methodology. We'll put a methodology into our framework.</p><p><b>Definitions and Assumptions</b></p><p>We will define 'fiat money' as being that money used by the national government to pay it's bills [*]. This money must come from a source.</p><p>We will define the source of fiat money as being banks, both central and private. Private banks are assumed to operate under a government license so that they can legitimately create <i>real </i>fiat money [**].</p><p>We assume that banks create money when they make loans. This is a key assumption which is widely accepted by mainstream economic theory. To be granted a bank loan is quite a privilege [1].</p><p>We assume that most economic entities use fiat money for transactions and that this money is stored in banks during the time it is owned by any entity. Entities like to own money because the <i><b>ownership of money provides incremental transactional access into the general economy.</b></i></p><p>This concludes the list of basic assumptions that we need. We will make some procedural assumptions as we move along.</p><p>The first procedural assumption relates to who owns the money represented by bank deposits. We will assume that workers own the deposits created when they deposit earnings. In a similar fashion, we assume that sellers of material items own the deposits created as a result of making sales. Borrowers own the deposits created by borrowing from a bank.</p><p><b>We resolve the quandary introduced by the first procedural assumption.</b></p><p>We recognize that a quandary that has been introduced by the combination of our definitions and the first procedural assumption. Bank deposits represent both earned and borrowed money while, at the same time, <i>all </i>fiat money is created by borrowing. We resolve this ambiguity by assuming that a borrower's deposit is composed of newly created fiat money (created under license from government). Once borrowed money is spent, it moves into the ownership of entities who first trade labor or trade material property. You can see that the vast majority of money on deposit is owned by entities that first trade labor or trade material property. </p><p><b>Our assumptions are complete.</b></p><p>We have all the assumptions we need. Nearly all readers should be able to recognize familiar aspects of our assumptions. Next, we need to relate them to empirical data commonly found within macroeconomic analysis venues.</p><p><b>The Empirical Connection</b></p><p>Money supply and bank deposit data are routinely published by government agencies. We will use "Deposits, All Commercial Banks" to build a chart. This data gives us a measure of the money available to entities for making transactions.</p><p>It is great to know how much money is available for making transactions but we need to know more if we wish to relate money to the general economy. This task is not so easy to do. One routine report published by government, GDP, tries to do this but has many built in assumptions that seriously decouple the real economy from the money supply available to facilitate transactions. The GDP report tries to relate prices with total transactions, giving us an approximation of how much economic activity occurs within a time period. A simple relationship between total money supply and economic activity reported by GDP can be made (MV = PT) but I would call it somewhat contrived.</p><p>A tighter link between money and economic activity can be made if we take advantage of a distinction that we found in bank deposit ownership. We will focus on borrowing owners who would be spending newly created money. Newly created money would expand the measured money supply which would be detectable from periodic measurements as a change in totals. We can (safely?) assume that borrowed money would be rapidly spent in an event captured by a GDP measurement. It follows that changes in periodic GDP would be at least partly caused by a change in money supply, which would be the result of changed within-period borrowing. We will relate changes in GDP to changes in our measurements of money.</p><p>There are a lot of economic conditions that can change GDP measurements from year to year. External shocks (such as COVID) and borrowing based spending, can both cause rapid changes in periodic GDP measurements. Slower GDP changes occur due to inflation (meaning a price change without a change in volume), product preference changes, foreign trade, and evolving technology.</p><p>What does a graph of the periodic changes in deposits, and GDP look like? Figure 1 displays traces of the periodic changes (expressed as per cent) in "Deposits, All Commercial Banks" and GDP. </p><p><br /></p><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://fred.stlouisfed.org/graph/fredgraph.png?g=IoNp" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="322" data-original-width="800" height="326" src="https://fred.stlouisfed.org/graph/fredgraph.png?g=IoNp" width="640" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Figure 1. A comparison of the rates of change (expressed as per cent) of commercial bank deposits and GDP. Due to the formats used by each data set, the intervals used are not necessarily identical, which may distort the scaling. None the less, the correspondence is gratifying confirmation of our logic.</td></tr></tbody></table><p><b>Comments on Figure 1</b></p><p>The correspondence of traces in Figure 1 is both expected and surprising. Expected because it is what we theorized. Surprising because the GDP data is so imprecise and time periods between sets of data are likely unequal.</p><p>Newly created money is the cause of the increase in deposits. Inflation is likely the principal cause of persistent GDP changes in one direction. The correspondence found tempts us to think that newly created money is the cause of inflation. However, it may be more accurate to say that increases in the supply of money allows inflation to be spread over the economy and become embedded. Further study could be done on this topic.</p><p>I am going to refrain from further comments on Figure 1 except to notice that the chart's time span extends through some notable economic disturbances that might be reflected here, or maybe, surprisingly, not reflected:</p><p>Not reflected: The 2008-9 massive stimulus (in the bank deposits trace)</p><p>Reflected: The 1980's inflation and sharp recession, the 1992-3 dot-com building spree, the 2000 dot-com recession, the 2008-9 recession (in the GDP trace), the current COVID related economic distortions.</p><p>This chart is something I will puzzle over for a while. I can't recall seeing anything quite like it before. However, I am far from being a trained economist with a solid historical background. Probably others have seen similar charts, particularly if they are of the Monetarist theory persuasion.</p><p><b>The Framework in Nutshell</b></p><p>1. Government pays by using real fiat money.</p><p>2. Within qualifications, banks create new fiat money when they make loans.</p><p>3. Entities prefer to keep fiat money in banks because ownership of fiat money stored in banks allows easy access into the general economy. It is convenient to exchange money for labor and property, whereby a unique quantity of money[M] equals unique item of property[P] or [M = P].</p><p>Supporting real world evidence can be found by relating the change in the supply of fiat money to changes in the number of transactions and changes in the M = P relationship. The change in money supply can be found by taking advantage of two different methods of establishing a positive bank deposit balance.</p><p><b>Conclusion</b></p><p>Here, at the Mechanical Money blogsite, I've had a long search for a comfortable economic paradigm that fits the economic reality that I have experienced over many years. The assumptions and relationships presented here seem to conform to the real world very well. </p><p>The actual bank mechanics of creating and transferring money are not part of the macroeconomic framework presented here. [2]</p><p>The chart in Figure 1 reflects persistent increases in both money supply and GDP. This persistence can be explained by assuming persistent inflation. However, the fact of close association does not by itself establish a cause/effect relationship. However, it is easy to make a case that increased borrowing will stimulate demand for consumer goods that are ready for purchase.</p><p>A loan by a bank to a customer is the grant of quite a privilege. This loan establishes an account with a deposit which, from an access into the economy perspective, gives the borrower the same access into the economy as is enjoyed by those who worked or sold material property to gain access.</p><p>When new money is delivered to the borrower, borrowing from banks can be describe as taking the form of layers of money supply growing on a periodic basis. Because money is used in commerce, measurements of the amount of money used in commerce can be made. The paradigm incorporated here hinges around the ownership relationships found between banks, money and incremental access into the general economy.</p><p>I view economic theories such as Monetarist, Keynesian, and MMT as being mostly political formulations, valuable in a political arena but not mutually consistent in mechanical detail. When paradigms revolve around the Bank-Money-Access nexus, they seem more based in mechanical reality.</p><p><b>Notes</b>:</p><p>[<a href="https://www.mechanicalmoney.com/2021/08/government-always-pays-using-real-fiat.html">*] https://www.mechanicalmoney.com/2021/08/government-always-pays-using-real-fiat.html</a></p><p>[<a href="https://www.mechanicalmoney.com/2021/10/private-banks-in-real-fiat-money-world.html">**] https://www.mechanicalmoney.com/2021/10/private-banks-in-real-fiat-money-world.html</a></p><p>[1] The privilege granted is the ability to borrow from the generalized pool of existing wealth owned by the ongoing private economy. This action is related to a privilege belonging to government known formally as seigniorage. When exercised, both privileges increase the supply of money in the economy beginning at the instant of being recognized by the private sector.</p><p>[2] The concept of banks as financial intermediaries has been massively modified here. The intermediary argument depends upon bank's reuse of customer's money in the sense that banks 'borrow short and lend long' but does not provide for an increase in money supply. We could enter a long discussion of the merits of that approach but the discussion would take our eyes off the essential concept that must be kept in mind: the bank borrower receives a loaded bank account that gives him a spending position identical to the spending position enjoyed by people who work or make sales to achieve the identical spending position.</p><p>Some concepts of money have been discarded. Money is not debt of government. It is just a token that represents some measure of incremental access into the general economy. The value of the unique token, whether paper or electronic notation, can only be based on a history of usage of similar tokens. Private banks routinely extract a pledge from the borrower to return the borrowed tokens.</p><p>(c) Roger Sparks 2021</p><p><br /></p>Roger Sparkshttp://www.blogger.com/profile/01734503500078064208noreply@blogger.com0tag:blogger.com,1999:blog-6476989946886057900.post-87221378379425520272021-10-07T11:15:00.001-07:002021-11-01T05:51:16.390-07:00Private Banks in a Real Fiat Money World<br /><br /> Let's cut to the chase here. When any bank makes a loan, it is granting unequal access to the monetary machinery that defines an economy. Unequal access because one bank depositor must first earn money to put on account while the borrowing depositor only needs to have a consenting decision.<br /><br />Sadly, the title of this post comes close to being a canard. In fact, the whole discussion about two very different bank actions, whether banks create money or use money owned by others, comes close to being a canard. <br /><br />That said, how in the world did I come to this perspective shifting conclusion? It was after I wrote the following material discussing private banks in the world of real fiat money.<div><br /><span><a name='more'></a></span><br />Let's begin with some background observations: <br /><br />Money is mechanical but the users are human.<br /><br />Every monetary transaction has two decision makers involved--the money owner and the property owner.<br /><br />In the preceding post (<a href="https://www.mechanicalmoney.com/2021/08/government-always-pays-using-real-fiat.html">Government Always Pays Using Real Fiat Mone</a>y), we postulated that private banks were not allowed to create money. That assumption limited our thinking about private banks without changing one iota what banks actually do. In this post we will relax that stipulation to uncover some unexpected relationships. Hopefully, by doing this exercise, we can better understand the mechanics and inflationary implications of money creation.<br /><br /><b>The Duration of Money Issue<br /></b><br />Economist typically agree that money comes into existence mechanically upon the click of a bank record keeper or roll of the printing press. They also tend to agree that money disappears from existence when a bank debt is marked paid or paper money is recovered by the issuing authority. Between these two points in time, any money created continues to exist and will be claimed as wealth by some entity.<br /><br />As more money is created, the money supply must grow. Recorded histories of unchecked money supply growth coincide with bouts of unchecked inflation which takes us to the idea that average prices must somehow be related to the instantaneous supply of money.<br /><br />However, an instantaneous relationship of money supply to inflation is not supported by the historical record. There must be a time lag but what would be the cause of the lag?<br /><br />We will revisit the the entire inflation issue after we think a little about how money comes to have value.<br /><br /><b>The Valuation Issue<br /></b><br />When we examine the theoretical gap between money creation and the reuse of existing money, we uncover the question of valuation. Exactly how is money evaluated? There is a huge difference between the two bank actions involving money.<br /><br /><i>Real </i>Fiat Money (RFM) is money backed by governmental promise. Economist have always struggled in figuring out how RFM achieves relative value and we will continue to dance around that question. We will, however, take careful notice that there is a huge difference between how private banks and central banks treat the valuation of money. What we find here is a key to valuation. Private banks are careful to take collateral pledges in exchange for money loaned, and express reluctance at making personal loans based only on the pledge of the borrower to repay. Central banks [which many consider to be fundamentally government banks] on the other hand, routinely accept the pledge of government to repay, an action that equates to making a personal loan without collateral.<br /><br />This contrast of opinion on the importance of collateral takes us to the question of valuing collateral. There is simply no fundamental relationship between fiat money and the value of anything. There is only the instantaneous decision of two entities exchanging property and the historical record of exchanges thereby built. From the historical record of exchanges, we might come to expect a value of money. It follows that newly created money, so long as it indistinguishable from previously created money, should carry identical value. Thus, money created by the central bank should carry a value based on the national accumulated record.<br /><br />However, there is the human trait of predicting the future to consider.<br /><br /><b>Inflation and the Spending Habits of Borrowers<br /></b><br />Now we'll return to some thoughts about inflation.<br /><br />When a borrower accepts loaned money, he is accepting the same economic spending position that is enjoyed by other people <i>who have first earned money to achieve that position.</i> For people who have earned money, the size of their account is their record of success at working. For the borrower however, the size of the deposit account is of little matter--it's all presently unearned so it's in the 'yet-to-be-earned' category. This disparity sets up conditions that result in a time lag between money supply and prices.<br /><br />Any inflation that results from money supply increases is due to borrower spending habits. Now here we have an important difference between borrowers representing the private sector and borrowers representing the public sector. Private sector borrowers tend to borrow to build a specific project or purchase an identified property. Proceeds from this type of borrowing (noticed by increases in money supply) could be expected to be spent rapidly [which sets up conditions for business cycles. Both borrowers and lending agents see the same conditions so all players tend to act together. Hence, when conditions are favorable, everyone wants to borrow (or lend). A situation that reverses when conditions look not-so-good.]<br /><br />In contrast, entities borrowing for the benefit of the public sector tend to disperse borrowed funds over longer time periods to members of the public that may be less than eager to spend/re-spend. Many members of the public are themselves saving for personal business reasons and will not spend rapidly any windfall that comes their way. For at least these two reasons (there may be more), money borrowed (or created) by the public sector should not be expected to generate price increases as rapidly as those observed from private sector borrowing.<br /><br /><b>A Revisit: Do Private Banks Create Money?<br /></b><br />As we discussed the issue of RFM and private banks, we seemed to be focusing more on borrowers rather than on lenders. This makes sense. All banks create money by making a deposit entry. The borrower assumes the same spending position in the economy as that enjoyed by deposit account holders who first deposit funds earned by hard work.<br /><br />All banks expect borrowed money to be returned by borrowers. If all borrowed money was returned at one instant, there would be no money remaining in the economy! That thought sets us up for considering what happens when defaults occur.<br /><br />When private bank lending encounters a default situation, borrowed money has been declared uncollectable. This does not mean that the money is nonexistent. It means that the money can no longer be legally collected by force of law from present money owners. At this moment, we can say that private banks have successfully 'printed' money into existence and money is now in the ownership of the general public.<br /><br />The thought of default on loans highlights what happens when money is created. With normal private bank lending, each loan only increases the money supply during the life of the loan.<div><br />What about central banks? In my view there is no money creating difference between private and central banks but there is a huge difference between private and government borrowers. Both are expected to repay lenders but government has a weighted preference for loan rollover rather than loan payoff. Obviously, if a loan is rolled over forever, there is never an instant in time where there is no money in the economy. This is the second circumstance, along with default, where we can say that we have 'printed' money permanently into the possession of the general public. <br /><br /><b>Concluding Comment and Conclusions<br /></b><br />The actual, behind the scenes, mechanical act of creating money has little importance in economics. It is the actions of the borrower and successive money owners that have economic effects.<br /><br />Private banks increase the money supply when they make loans. They, at the same time, allow a borrower access to the existing money supply and economic structure. Thus we see the money supply as measured by bank deposits increase while, at the same time, existing money seems to be reused thereby leaving the existing money supply unchanged. This situation gives rise to the idea that we need to have at least two valid ways of measuring money supply.<br /><br />Central banks, as an arm of government, can make a choice of deciding whether they are relending money they previously loaned into existence or or are lending newly created money. Economist can ponder and write about the paradox.<br /><div><br /></div><div>(c) Roger Sparks 2021</div></div></div>Roger Sparkshttp://www.blogger.com/profile/01734503500078064208noreply@blogger.com0tag:blogger.com,1999:blog-6476989946886057900.post-53988292225930803032021-08-30T14:00:00.014-07:002021-09-13T11:12:08.542-07:00Government Always Pays Using Real Fiat Money<p>Advocates of the Modern Monetary Theory (MMT) emphasize that government never needs to default on it's obligations because it can always pay by using fiat money. What they intend to convey, although they may not realize it, is that they expect that government can pay using <i>real </i>fiat money that government itself creates. We will outline a conventional ontology, typified with a descriptive phrase, so that we can better understand the mechanics of MMT when making policy decisions..</p><p>Why is this important? MMT proposes government spending unburdened by limits of taxation, funded as necessary by the creation of money. We need a standardized way of describing the MMT vision of creating money, We'll propose a common sense catchphrase that starts the user down a pathway of common understanding.<span></span></p><a name='more'></a><p></p><p><b>In Defense of a Catchphrase</b></p><p>We will follow an unusual method of development. We will throw out a logical catchphrase, almost a slogan, and then see if we can logically defend it. The beginning thought is that government would always want to settle debts with a r<i>eal </i>currency that is clearly not counterfeit. <i>Government always pays using <b>real </b>fiat money.</i></p><p>Government can do this. The power to create money is reserved by law to the central government. It logically follows that we would expect that the only <i>real </i>fiat money is that money created by those authorized by government to create it. In the United States, that authority is given to the Federal Reserve System*, a central bank (CB). </p><p>Next we observe that this authority is jealously guarded by government. Private banks are not allowed to create money, nor are private citizens. It naturally follows that private banks and citizens can only reuse the fiat money previously created by government. If we follow this logic, we can only conclude that private banks, when they make loans far larger than the amount of fiat money that they own, must be making loans of <i>real </i>money owned by others. That action places the private bank at risk of having a money shortage should all depositors request their money back at one time (in a bank run). We won't discuss this risk here.</p><p>Of course, government could also reuse money it had previously allowed. Government could borrow from private banks, a useful way to control the money supply. Government could 'borrow up' money, thereby reducing the amount of <i>real </i>money available to the private sector.</p><p>Real fiat money is easily created by the central bank. The central bank merely makes a notation in a record of deposit in favor of any entity, identical to the method used by private banks in making loans. In the United States, the central bank is (generally) prohibited from making loans directly to the central government but the CB <i>can </i>own bonds issued by the central government. Therefore, to create fiat money while complying with the law, the central bank will increase it's internally held deposit level, trade that increase for a privately owned government bond, and then claim ownership of a government bond. This series of actions leaves leaves no money left on the books as being owned by the central bank but places more <i>real </i>fiat money into the ownership of the private sector (which has seen a increase in owned money on deposit), allowing the private sector to continue buying government bonds.</p><p>This is effectively the system we have in place today in the United States. Money created by the central bank is usually called "reserves".</p><p>If we want to know how much <i>real </i>fiat money has been issued by the central bank, we can look to the total assets owned by the central bank. We know this must be close to the correct number because of this regulatory background: <i>Central banks have no budget allowance from government and must return all profits to government.</i></p><p>Having no real source of money for asset purchases, we can consider that so called <i>CB total assets</i> are more appropriately considered as a place-holder for deposits previously created by the CB and traded away.</p><b>Conclusion:</b><p>A simple catchphrase,<i> government always pays using real fiat money</i>, has more implications than first apparent. It assumes a complex network of sequential deterministic actions occurring in the day-to-day world. It symbolizes an ontology of money that is in use in modern fiat currency economies. </p><p>The writing in this blog has been underlain by this ontology for quite some time. I propose that other MMT writers also keep this catchphrase and ontology in mind as they write.</p><p>*Here we are thinking about money of record, ignoring the actual printing of green money and coin.</p><p>PS. I invite readers to comment. I am certainly no expert on the subject of money supply expansion but the guideline proposed makes logical sense so far as I know. I specifically invite readers to point out any logical or factual errors and to offer better a explanation.</p><p>(c) Roger Sparks 2021</p>Roger Sparkshttp://www.blogger.com/profile/01734503500078064208noreply@blogger.com1tag:blogger.com,1999:blog-6476989946886057900.post-37266397607859402732021-08-16T09:08:00.000-07:002021-08-16T09:08:03.532-07:00 Shockwaves from a Lumberman<p>Years back, a wealthy lumberman came into a small western valley and decided here would be a good place to start a large cattle ranch. There being no large cattle ranches in the area, he decided to buy up small farms. He proceeded to do this and built a ranch big enough to be noticed but not big enough to be self-perpetuating. Today the ranch is being subdivided for housing. Part has been sold back to the state for wildlife enhancement.<span></span></p><a name='more'></a><p></p><p>This lumberman's efforts were not universally appreciated. First of all, his efforts raised the average price of land and attendant taxes. There was little, if any, change in productivity of the land acquired so product prices were not impacted. Some took advantage of the opportunity to sell at very good prices and some stayed put, suffering through the higher taxes. </p><p>Noticed by economist, there was a social shift away from several local land-owning producers to be replaced by employees working for an absentee owner. Prospective land buyers found themselves forced to rethink their aspirations. This local area had enjoyed/suffered an economic shockwave.</p><p><b>Commentary</b>:</p><p>The sudden infusion of a large block of money (from outside the area) into a small economic system had large and lasting effects. Some people enjoyed immediate benefits; some people had long term, arguably less beneficial, impacts.</p><p>If we found time to think about it, we could draw parallels between this event and what the Federal Government is doing today.</p><p>Under free market capitalism, the lumberman was simply exercising his freedom to use his wealth as he saw fit. Under a more socialist market system, he either would have never achieved the wealth or would have had oversight committees to work past (maybe both).</p><p>The actual event began roughly 70 years back.</p><p><b>Concluding Observation:</b></p><p>This real life shockwave began with a monetary event--the arrival of outside/new money. If we cared enough to look today, we could trace an ancestry tree back to this one common money source.</p><div>(c) Roger Sparks 2021</div>Roger Sparkshttp://www.blogger.com/profile/01734503500078064208noreply@blogger.com2tag:blogger.com,1999:blog-6476989946886057900.post-49611125562771201482021-04-22T06:52:00.004-07:002021-04-25T09:03:45.803-07:00Money Creation and Pricing Signals<h2></h2><p></p><p>In <a href="https://www.blogger.com/#">the last post</a>, we postulated a money creation event and then lightly explored responses from decision makers who had two different theories of money positioned in their minds. Disruptions to otherwise stable work patterns and resource allocations were found. Here we focus more carefully on the financial and economic forces at work when money is created.<span></span></p><a name='more'></a><p></p><p></p><blockquote>[In the ontology of money followed here, fiat money is a product of government, benignly produced to act as a store of value for the enhancement of trade.* To the extent that money becomes an accepted store of value, money represents wealth. Hence, if government creates new money, government is at the same time creating wealth.** Hence, when government spends newly created wealth, it is effectively rebalancing the existing wealth of the economy. Therefore, when rebalancing wealth, government is acting as if it was the de facto owner of the economy and all the assets within it.***]</blockquote><p></p><h3 style="text-align: left;"><b>About Money</b></h3><p>We begin by noticing that the private sector does not have the ability to create fiat money. This ability is reserved to government or government authorized institutions (such as a central bank). Hence, the private sector always gets it's fiat money by interacting with government. We can therefore safely say that <i>government never makes payment in anything other than genuine base fiat money</i>. This description does not disallow government from obtaining fiat base money through taxation [which creates a stable economic situation], nor does it disallow the private sector from leveraging the base money it has by using a lending process through private banks.</p><p>We shouldn't let ourselves be diverted with arguments of exactly when fiat money is created. The only important point in time is when government first interacts with the public sector to deposit newly created money/wealth into private ownership. After this transaction occurs, public sector owners can be measured as having incrementally more <i>financial </i>wealth.</p><p>Once presented and accepted into the private sector, money may go into hiding in the hands of some owners for long periods of time. Despite not moving, this money will have a continuing measurable presence as base reserves in non-government owned bank accounts or in government obligations owned by either the private sector or central bank.</p><h3 style="text-align: left;"><b>A Look at a Proposed Spending Plan</b></h3><p>We can use the proposed Biden infrastructure plan as model for how this all works. This proposal is for government to spend more money in a number of subareas of the presently semi-stable economy. We will be looking at the caregiver enhancement program as a typical example:</p><p>We already have caregivers working in the economy but they are not considered as being highly paid workers. To improve their situation, government may offer (or even mandate) a subsidy that could be claimed by people needing care, then passed on to caregivers. Government would pay for this with newly created money.</p><p>To accomplish this, government would employ people to administer the program, which would boost employment numbers. Employment would get a further boost from an expected increase in the number of caregivers in the field. How many of these new program funded workers would come from present, presumably inferior paying jobs, is hard to predetermine. Some displacement of present workers seems inevitable. Some upward pressure on average wages seems inevitable. The magnitude of displacements is impossible to predict at this time .</p><p>As soon as the first program paycheck is delivered, the privately owned money supply will have grown. This is true no matter how the money is spent. New money will begin a life within the ownership confines of the private sector. This life of money will continue until government recalls and pays down debt (even if the debt is to government itself via the central bank).</p><p>The frequency of re-spending each unit of new money will depend upon private owners. In the modern western economies, the frequency of repeated spending rapidly falls as money becomes aggregated into the vaults of debt and pension asset managers to be used as position collateral. Money held in reserve in bank vaults can be loaned, thus speeding up spending frequency but this activity places the lending bank in a somewhat risky position.</p><p><b>The Broader Financial Effects of the Caregiver Program</b></p><p>Those workers getting program checks are first in line to benefit from the new program. They will be getting, on average, the best economic exchange available to them. They will be able to compete at the broad economic table with more money in hand than they would have had without the program. On the other hand, all the other participants in the market, having earned their money without enhancement from the care giving program, will observe more competition for the limited supplies of products available.</p><p>Government is sending several pricing and management signals to the domestic private sector when it uses this newly created money:</p><p>1. Government does not need private money before increasing it's spending. The idea of the private sector saving money for lending is discouraged; government simply does not need that money. </p><p>2. Government pays better than the private sector. This realization makes most private sector jobs seem like inferior jobs. A side effect here is to encourage the more-talented workers to migrate to government supported jobs, to the detriment of the remaining private sector.</p><p>3. The availability of money as a rationing mechanism is distorted. In it's place, money takes on an expanded role as a mechanism for direct government guidance of economic activity.</p><p>Combining the effects of these three price signals, we have <i>government setting or modifying effective prices</i> in an extremely wide swath across the economy. The role of government here can be best described as being that of a de facto owner of the entire economy. doing for the entire economy those things a store owner might do for his own store. Government, acting as a single decision maker, is replacing the collective pricing decisions of many money owners and supply owners.</p><p><b>What Pricing Signals are Being Sent to Foreign Suppliers?</b></p><p>We can envision three ontologies of foreign suppliers:</p><p>1. The supplier is interested in a near-barter trade wherein money is a temporary placeholder. This supplier would not be very interested in the long term value of money.</p><p>2. The supplier is interested in becoming a long term owner of a foreign currency for one reason or another. This supplier would be concerned about long term relative value stability.</p><p>3. The supplier is interested in utilizing surplus labor to produce something that brings at least a veneer of long term value. The trade here is labor for a veneer of paper based possibilities. Real world examples can be found in the ownership rolls of government bonds.</p><p>In the real world, foreign suppliers interact with currency traders to establish relative values among currencies. Sharp changes in relative values can follow dramatic central bank policy changes, which seems to be a demonstration of a predictive element in play. Apparently the currency market takes note of changes such from competitive pricing to government set pricing.</p><p><b>Fairness to All Workers</b></p><p>We have already mentioned that when government creates money and spends it into the economy, government is acting as if it de facto owned the economy and had the right to rebalance wealth as it sees fit. We can easily extend this thought to recognize that ALL workers are de facto government employees. It becomes unrealistic to think of present government workers as the ONLY government employees. Following this view, government needs to ensure that all employees see the improvements made available to caregiving workers.</p><p><b>Is the Biden Infrastructure Plan Inflationary?</b></p><p>The proposed caregivers program has been analyzed as presenting increased competition for products in the marketplace. Increased demand is widely accepted as an effect that puts upward pressure, inflationary pressure, on marketplace prices. With that said, there are also other forces present in the marketplace:</p><p>1. Increased productivity that lowers cost of products in the consumer marketplace.</p><p>2. Foreign based production from nations that are following ontology 3 (described above) which is surprisingly insensitive to market based rewards.</p><p>Both of these factors may be present to counter the upward pressure on prices from increased demand.</p><p><b>Will Presently Working Employees Benefit Financially From the Biden Infrastructure Plan?</b></p><p>It is hard to see how this group might benefit. Because they are already working, they are part of the status quo. Viewed as a whole, the gains of the caregivers can only come from the present status-quo working-group's production; we are seeing a rebalancing of future purchasing power. Most workers, including self-employed workers, will see an effect of same-work exchanged for slightly less purchasing power.</p><p><b>Conclusion:</b></p><p>A particular ontology of money (outlined at the beginning of this post) led us down a logical path of cause and effect. This is not a new path to those who believe government has been of a money-creation mental persuasion for the last 80 years or so.</p><p>When government prints money, it's acting as if it was a de facto owner of the economy. Unfortunately, this places one or just a few government decision makers in the position of displacing many owner decision-makers.</p><p>The presentation has been very mechanical, intentionally so, trying to avoid a sense of politics. That said, hints of politics did creep in through the use of terms and phrases characteristically heard in an economy with decision makers who are owners. The mechanical aspects of money tend to flow smoothly from microeconomics to macro economics. The political effects of money creation flow not so smoothly between ownership ontologies.</p><p>A brief look at the possible pitfalls of money creation is planned as a subject for a future post. </p><p>Notes: </p><p>* This is the base case for fiat money. It's the economic mechanism that remains after the politically soothing 'frosting' is removed.</p><p>** When well-run central banks create money, they at the same time require a bond guaranteeing repayment. Both money and bonds represent wealth, hence we can say that wealth is always created two units at a time. (M + B = 2W where M is money, B is bond, W is wealth)</p><p>*** Only owners of assets have the the legal right to relinquish ownership. Ownership of assets becomes the bright line of difference between the economic philosophies of Marxism and Capitalism.</p><p>(c) Roger Sparks 2021</p>Roger Sparkshttp://www.blogger.com/profile/01734503500078064208noreply@blogger.com0tag:blogger.com,1999:blog-6476989946886057900.post-49566005273767643892021-04-10T09:28:00.000-07:002021-04-10T09:28:06.169-07:00Model Justification for "Trade Between Ontologies Needs Hard Money"<p><br /></p><p>The essay "<a href="https://www.mechanicalmoney.com/2021/03/hard-money-soft-money-and-economic.html">Hard Money, Soft Money, and Economic Ontologies</a>" described the differences between hard <i>physical </i>money and soft <i>ethereal </i>money in a very general way. It then went on to build on the concept that trade between ontologies depends upon physical money. Here we will use a model to demonstrate why this might be correct and add some reservations related to valuation over time periods.</p><p>We will build the model by using what might (at first) be considered a two sector model. To dismiss the model as a simple two sector economic presentation would be to miss the essence of the concepts presented. This model is about two ways of economic thinking driven by two different circumstances positioned in the minds of decision makers in each of two ontologies. We use the word <i>ontology </i>in place of 'sectors' to emphasize that the two groupings have, for good reasons, different time-related concepts of 'money'.<span></span></p><a name='more'></a><p></p><p>The Model</p><p>Imagine a national economy with the majority population dependent upon manufacturing and regionally located some distance away from the food producing agricultural region. It doesn't take much imagination to draw borders around each region and then imagine transportation between regions. Each region forms an ontology. The assigned circumstance of two distinct economic bases will lead to two different ways of thinking about money. We will keep it simple by allowing both regions/ontologies to use the same currency under a single government.</p><p>We will inject a little real world reality into the model by including seasonality. The agricultural region only produces one supply per year and only needs one supply of each of several crop production inputs each year. (I am thinking of machinery, fuel, fertilizer, etc.) Seasonality drives the difference in economic thinking that divides the two ontologies.</p><p>We can imagine the chaos introduced if money changes value from year to year, especially if the value of money goes down. <span style="font-size: x-small;">[Notice how the role of an owner/decision maker slips in here]</span> Farmers, acting as owners, sell a crop once a year for a price that allows them to recover the cost of growing. Failure to recover the cost of production leaves farmers unable to buy supplies needed to produce the next crop. Seasonality is the dominate constraint of the Ag ontology. </p><p>We will inject a little more real world reality into the model by refusing seasonality for the manufacturing ontology. This lack of seasonality allows the decision makers in the manufacturing ontology to be much less dependent upon the long term value of money. This ontology can quickly change prices and manufacturing schedules in response to monetary value changes. This ability to be economically quick allows the entire sector to act as if they were consumers rather than suppliers with a long building chain.</p><p>Inject Real World Changes into this Model</p><p>Let's take a look at three possible events and judge for ourselves how decision makers in each ontology might react:</p><p>The First Event</p><p>In the first event, one of several crops in the Ag ontology suffers a 50% below average yield, leaving the nation (and both ontologies) short of normal food supplies. Absent external supplies, the first thing that likely happens is the the suffering crop will experience product price increases that act to shift demand toward substitute products. The average price of food will probably rise due to the competition for remaining supplies of the constrained product. There is no reason the think that this event would change the supply of money, nor is there any reason to think that the price of manufactured products should increase. On the contrary, the price of manufactured products might fall due to food consumers wishing to spend more on food on the average rather than on manufactured products.</p><p>The decision makers here would be customers and farmers (farmers who presumably will seek higher average prices to do nothing more than regain the cost of production). It is hard to see which ontology might truly benefit from these conditions.</p><p>This this seems to be a hard money example. Real world people adjust to changing conditions by spending limited resources (money is a resource) as each owner individually decides.</p><p>The Second Event</p><p>In the second event, the manufacturing ontology decides to raise average prices on the supplies needed by agriculture. It does't matter why prices might rise, nor which decision makers have their way, only that prices rise across a spectrum of products needed for agricultural production.</p><p>The likely effect of this price rise would be to create an insufficiency in the income from last seasons crop which is needed to buy inputs for this years crop. The reader can imagine what this might do to farm budgets if the increase was in double digits for year after year. Farm decision makers would be forced into a search for financial solutions across a broad spectrum of inter-relationships, and then need to ultimately decide if <i>holding this years crop for sale next year</i> is more profitable than <i>selling followed by growing a replacement crop</i>.</p><p>Decision making farmers would look at this example as a soft money situation. The value of money has changed, not the needed transfer of real labor hours and physical materials. They would see the situation as one wherein consumers are failing to replace the inputs just consumed. <i>Therefore, the price signal sent is 'reduce production'</i>.</p><p><span style="font-size: x-small;">[Some readers might think of this event as an example of 'inflation'. I'll not go into the general concept of a sustained increase in the average price level in this essay.]</span></p><p><span style="font-size: x-small;">The Third Event</span></p><p>For the third and final event, the national government decides to undertake a new project or program and plans to borrow from the central bank (thereby creating money) to make the first payment. <span style="font-size: x-small;">[Subsequent payments might come (at least partly) from increased tax revenues generated by the addition of more money flowing within the economy but that is not part of this example.]</span></p><p>The creation of money and subsequent spending into the private sector in this example results in an obvious increase in the money supply owned by the private sector (as theorized by MMT). As a base case, this should bring about an increase in measured GDP and a small increase in the velocity of money (the ratio of GDP to money supply). <span style="font-size: x-small;">[This increase in velocity would flow from the reality that in the steady state economy, part of the money supply is at rest at all times. (In other words, part of the money supply is not used at all during any particular measurement period.) The creation of new money, when spent, would result in a money flow that would not occur otherwise, thereby temporarily adding to the steady state flow.]</span> This velocity signal could easily be made invisible in the monetary data noise generated by a central bank managing interest rates and money supply.</p><p>It is easy to theorize how private sector decision makers in both ontologies would analyze this event. Government is planning to destabilize the economy by employing workers and consuming resources, as if a new consumer had come onto the scene. Government will pay for this by creating money. People will change their present work habits and there will be increased competition for available resources. Those closest to the new program will benefit first and probably <i>more </i>than those not so close.</p><p>By creating money out of thin air, money has taken on an ethereal aspect. Decision makers in both ontologies would view this as a soft money event but what should decision makers do? If suppliers of materials raise prices in anticipation of bigger demand, subsequent users/builders (downsteamers who use materials to build for resale) may cut back consumption--unless downstreamers also agree with the optimistic assessment. It should not be forgotten that this projected price rise would force downstreamers to invest more money (which they might not yet have) into the building process. It seems to this author that every decision maker will need to analyze the situation carefully and anticipate the effects as they might particularly flow to him.</p><p>This soft money event acts to destabilize the economy.</p><p>We have not specified how government will spend this new money. Details matter here. It is easy to see that politics will decide who the initial winners will be. </p><p>So, Does Trade Between Ontologies Need Hard Money (With Stable Value)?</p><p>The first event demonstrated the need for hard money in supply systems that function over longer time periods. Ownership was important here. Owners who build products incrementally over time prefer steady-value monetary conditions between time-distanced sale events. Owners who build products over shorter time spans are less concerned with a stable monetary value.</p><p>The second event was a clear example of a value of money change during a measurement period. It was disruptive to an ontology dependent upon recovering the entire cost of production in real physical terms during every cycle repetition. </p><p>The third event was a clear example of money creation. How this money was to be used and who might benefit was not specified. Competition for available resources was increased and the stable economy destabilized.</p><p>One lesson learned from the third event was nearly the opposite of that learned from the first event; a lesson about money as a rationing tool. Since this essay is about the use of money between ontologies, we won't build upon this lesson.</p><p>The combined effects of these examples seems to reinforce the idea that an exchange event completes the supply side story for one owner and the beginning of a new physical money holding period for one owner. Money is seen to be a place holder for valuing past accomplishments and, at the same time, an enabler of future efforts by it's owner.</p><p>The answer to the question seems to be yes and no. 'Yes' because a trade using money leaves the accepting money owner to assume the future value risk of the physical object 'money'. 'No' because the prospective owner of money is freely able to accept money which carries an unstable valuation. It should be obvious that there can be no trade using money if neither potential trader owns money in the first place.</p><p>Conclusion</p><p>We should not be saying "Trade between ontologies needs hard money.", we should say "Trade between ontologies is a trade of two physical products, one of which is money." Deciding if the money part of the trade is only pseudo-physical or will retain value over time is to delve into further questions.</p><p>But if money is physical, it's 'hard' isn't it?</p><p><span style="font-size: x-small;">[Afterthought; </span></p><p><span style="font-size: x-small;">In the common vernacular, when differentiating the ability of money to retain value over time, 'hard money' is preferred over 'soft money'. Hence, physical gold may be favored over fiat. </span></p><p><span style="font-size: x-small;">Economist often argue whether fiat money represents debt or whether money represents an obligation. This is a choice between two kinds of ethereal representation because neither debt nor obligation represents a physically present object. However, even here, the ethereal can be made much more physically real by linking debt and obligation to a contract that can fail, thereby delivering a real loss to the owner.</span></p><p><span style="font-size: x-small;">In my opinion, <i>to own money</i> is to own a risk of change in exchangeable value. This would make it best to consider money as a <i>physical asset;</i> an asset to be avoided if the desire is to trade one valuable item for a second valuable item <i>if the trading was not done so quickly that it could be considered as being a barter trade in fiat disguise</i>.]</span></p><p>(c) Roger Sparks 2021</p><p><br /></p><p><br /></p>Roger Sparkshttp://www.blogger.com/profile/01734503500078064208noreply@blogger.com0tag:blogger.com,1999:blog-6476989946886057900.post-76737944297998113692021-03-31T11:26:00.002-07:002021-04-01T05:28:24.760-07:00Hard Money, Soft Money, and Economic Ontologies<p> V. Ramanan gave my thinking quite a boost <a href="https://www.concertedaction.com/2021/03/25/neochartalism-and-international-acceptance-of-currencies/">when he posted his comments</a> on a recent critique <span face=""Open Sans", Helvetica, Arial, sans-serif" style="background-color: white; color: #444444; font-size: 21px;">of "neochartalism by Costas Lapavitsas and Nicolás Aguila at the </span><a href="https://developingeconomics.org/2021/03/17/monetary-policy-is-ultimately-based-on-a-theory-of-money-a-marxist-critique-of-mmt/"><em style="background-color: white; border: 0px; color: #444444; font-family: "Open Sans", Helvetica, Arial, sans-serif; font-size: 21px; margin: 0px; padding: 0px; vertical-align: baseline;">Developing Economics</em><span face=""Open Sans", Helvetica, Arial, sans-serif" style="background-color: white; color: #444444; font-size: 21px;"> blog titled </span><em style="background-color: white; border: 0px; color: #444444; font-family: "Open Sans", Helvetica, Arial, sans-serif; font-size: 21px; margin: 0px; padding: 0px; vertical-align: baseline;">Monetary Policy Is Ultimately Based On A Theory Of Money: A Marxist Critique Of MMT</em><span face=""Open Sans", Helvetica, Arial, sans-serif" style="background-color: white; color: #444444; font-size: 21px;">." </span></a></p><p><span face=""Open Sans", Helvetica, Arial, sans-serif" style="background-color: white; color: #444444; font-size: 21px;">Ramanan's contribution to my thinking revolved around the idea that the international acceptance of currencies does not fit into a soft currency framework. This realization fits perfectly with my earlier thinking that society functions systematically with the private economy operating under a hard, Physical Money constraint at the same time that the government sector acts out a soft, Ethereal Money existence. As both Ramanan and C.L. with N.A. point out, international trade also functions systematically under a Physical Money constraint.</span></p><p><span face=""Open Sans", Helvetica, Arial, sans-serif" style="background-color: white; color: #444444; font-size: 21px;">It turns out that this realization is an important part of building a better understanding of the effects we might expect as MMT style fiscal policies come to be practiced more vigorously around the world.<span></span></span></p><a name='more'></a><p></p><p><span face=""Open Sans", Helvetica, Arial, sans-serif" style="background-color: white; color: #444444; font-size: 21px;">Ownership Styling Defines </span>Ontologies</p><p><span face=""Open Sans", Helvetica, Arial, sans-serif" style="background-color: white; color: #444444; font-size: 21px;">All economic theories operate within an envelope of decision making abilities. Within each envelope, humans act in some role to make decisions, whether as individuals or as the decider for the collective group. Perhaps we can describe this envelope as being economic 'group thinking', perhaps a societal 'paradigm', or we could use C.L. with N.A.'s word 'ontology'. The decisions-to-be-made are always made as if the decision maker had ownership of the entire affected structure.</span></p><p><span face=""Open Sans", Helvetica, Arial, sans-serif" style="background-color: white; color: #444444; font-size: 21px;">The point to be understood is that economic rules guiding decision makers determine the flow of money and resource ownership within each framework. On the other hand, an economic flow between frameworks is between ontologies [1] and therefore is dependent upon Physical Money as if each ontology was privately owned. And of course, we have the possibility of 'no money' ontologies wherein trade becomes barter.</span></p><p><span face=""Open Sans", Helvetica, Arial, sans-serif" style="background-color: white; color: #444444; font-size: 21px;">At this point in this essay, we need to contrast 'hard money' with 'soft money'. Hard money is treated as if it were indeed a physical object, indifferent as to being an actual physical presence (as a currency) or simply in existence as a numerical recording. On the other hand, soft money is easily created and destroyed, and has little permanence in meaningful economic terms. Soft money is one step above no money at all in the sense that decision makers can use soft money as a tool in allocating resources.</span></p><p><span face=""Open Sans", Helvetica, Arial, sans-serif" style="background-color: white; color: #444444; font-size: 21px;">Surprise: A Theory of Money Merges With a Theory of Ownership</span></p><p><span style="background-color: white;"><span face="Open Sans, Helvetica, Arial, sans-serif" style="color: #444444;"><span style="font-size: 21px;">A truly satisfying theory of money needs to embrace the ownership span between Marxism and Capitalism, monetary conditions between hyperinflation and disinflation, and economic wealth differences between tribal isolation and globalism. Money as an owned store of value becomes a key concept when considering trade of goods between economic ontologies. </span></span></span><span style="background-color: white; color: #444444; font-size: 21px;">Money as a measurement tool is but one aspect of the much broader role that money needs to play.</span></p><p>Let's look at the span we need to cover: </p><p>The private sector, in order to function smoothly, needs to economically focus on an fair exchange of goods and services. Labor must be exchanged in some manner for goods, and goods are exchanged for goods. We are talking about physical, measurable quantities here. It is certainly possible that money can be one of these physical quantities, even if money is represented only by marks in a ledger. Physical Money can be managed to be a very stable, durable, hard, physical-like, object.</p><p>On the other hand, money can be made ethereal as in Venezuela today. </p><p>Factors that promote durability include the persistence of debts, the persistence of currency, the consistency of acceptance in exchange, and 'sticky' prices. Factors that promote a soft, ethereal money include a rapid change in perceived money supply, rapid changes in exchange value, and soft legal support by governments.</p><p>One precondition of monetary thinking is that the private sector cannot produce money. So far as the private sector is concerned, all money is hard, enduring, and accessible only as a element in an exchange. On the other hand, government has not only the option to act as if it were a private economic entity with ownership rights, government has the ability to create money. This flexibility gives government the ability to act either in a hard money or soft money fashion.</p><p>We can think of money as existing only when it is owned by members of the private sector. In this way of thinking, money can have real and, enduring value that can be transferred between economic members. While government can be treated as just one of the economic members, more often (in the Western economies) government depends upon creating new money rather than purely upon taxation (thereby acting as if it was a powerful private entity). This sets up economic conditions wherein hard money is diluted with soft money at the same time that money is physically one universal construct. Hence, modern societies must somehow simultaneously accommodate hard Physical Money and soft Ethereal Money. Someone owns this money, no matter whether considered Physical or Ethereal. Money is always someone's property. To have ownership of money is to have ownership of keys to further ownership opportunities. Woe to those without ownership rights.</p><p>Summation and Conclusion</p><p>At this point we can begin to relate divergent economic theories such as Marxism and Capitalism. Capitalism depends extensively upon private ownership which (in turn) depends upon hard Physical Money to continue acquired ownership value seamlessly through multiple exchanges of unlike kind. A soft money condition compromises value relationships extended over longer periods of time.</p><p>Marxism concentrates ownership into the realm of government, effectively concentrating decision making into the purview of those few individuals in control of the government. Ordinary individuals take roles akin to members of ship's crew, guests on paid-in-advance cruise, or students in a college dormitory environment. Economic decisions are still made, just not on a daily individual ownership basis.</p><p>Both Capitalism and Marxism exist in a real world that economically interacts. The challenge for both systems is to value unequally distributed resources when a need to trade occurs. Marxism hardly needs money, the private sector depends upon hard money, and governments of all ontologies can create soft money. These are ingredients for a potential economic maelstrom.</p><p>Proposed MMT prescriptions can be seen as efforts to shift the ontology envelope in one direction or another.</p><p>[1] A good description of the use of the word 'ontology' can be found at <a href="http://www-ksl.stanford.edu/kst/what-is-an-ontology.html">http://www-ksl.stanford.edu/kst/what-is-an-ontology.html</a>.</p><p>(c) Roger Sparks 2021</p>Roger Sparkshttp://www.blogger.com/profile/01734503500078064208noreply@blogger.com0tag:blogger.com,1999:blog-6476989946886057900.post-1001818991249143682020-09-10T06:39:00.000-07:002020-09-10T06:39:34.987-07:00Imagining a MMT style JG World<p> This morning, I am imagining a MMT styled world wherein I am trying to decide if I should become a barber (one who cuts hair). I know that the government will give me a guaranteed job doing something; why shouldn't the job be barbering (the job might also doing social work or any other productive effort).<span></span></p><a name='more'></a><p></p><p>OK, the government will give me a job with decent pay so long as I work as a barber.</p><p>Now what should I charge for each hair cut? How many cuts per day do I need to bring off the street to make my (not the government's) personal goal of generating an acceptable income?</p><p>Hmmm. I can imagine that there are a lot of people asking the same question. Being a barber in a Job Guaranteed (JG) world would be a relatively peaceful way of life. I could probably read a lot of interesting books while I waited for customers.</p><p>Hmmm. I definitely would need a place to set up shop, and would need to pay rent. Monthly rent would be just like a tax to me. It would be worse than a sales tax on each hair cut because it would need to be paid whether I had customers or not. There would probably be power and heating bills as well, acting again like a monthly tax billing.</p><p>Hmmm. I guess that depending upon the JG program by itself for income is not enough. I would need to price the haircuts high enough to cover rent, power, and heat, and then hope to get enough numbers (of customers) to make the math work. In a competitive world.</p><p>Hmmm. City, county, and state governments would also need to have funding sources. Would they continue to tax haircuts in a JG world? Probably not because JG could include jobs representing government work.</p><p>Hmmm. I would only work as a barber if working at that profession made my life better in some way. Maybe government work would be better but probably not at a JG wage level.</p><p>Hmmm. In a competitive world, everyone could be getting a JG payment, so long as they are doing something. The cost of rent, power, and heat seem to be the only unavoidable constraints. Presumably food would be covered by the JG wage but it might not be the best food available.</p><p>Hmmm. What more is there to think about? Maybe government can pay the rent, power, and heat bills. Then I could be a barber and read all day without customers. Perhaps if I charged a high price for each cut?</p><p><br /></p><p><br /></p>Roger Sparkshttp://www.blogger.com/profile/01734503500078064208noreply@blogger.com0tag:blogger.com,1999:blog-6476989946886057900.post-37745702059763997162020-05-28T08:38:00.000-07:002020-05-28T08:38:16.230-07:00Proposing Zero Percent, Standardized Loan DocumentsI like Brian Romanchuk's work. While I often challenge his thinking, I find his work tantalizing. His latest tantalus[1], entitled "<a href="http://the%20incoherence%20of%20yield%20curve%20control/">The Incoherence Of Yield Curve Control</a>", was incomprehensible to me and now I think I know why. I needed a key.<br />
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Bonds and interest rates meet in the bond market where bonds are bought and sold. Sometimes you even find new loans coming out of this market. Where it gets confusing is how pricing is conducted.<br />
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I'll not try to explain pricing today. I am not the expert to undertake such an effort. My mission today is to propose a simpler way to understand market basics. I will propose that we follow the sometimes expressed preference of Modern Monetary Theory (MMT) advocates who want to have universal interest rates set at zero.<br />
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I propose accomplishing the zero interest rate goal by passing a national law stipulating that all forthcoming loan documents be limited to a zero percent annual interest rate. Nothing would be said about discounts or cost of fees.<br />
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Going forward, borrowers would have the advantage of loans that had a zero per cent face rate. All they would need to worry about would be their monthly payment, which would presumably be fixed until payoff or sale of the loan obligation with supporting assets.<br />
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Here's the 'catch' in this proposal: The initial loan would have a stated rate of zero but what would the apparent rate be? The lender would charge initialization fees and may also propose a 'discount'. The discount could include any justification what-so-ever, including the shape of the <i>yield curve</i>.<br />
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The reader may pause here; How can there be a yield curve if all loan contracts (including bonds) have a legally set interest rate of Zero? The yield curve should be flat!<br />
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Well, how should we consider the bond <b><i>resale </i></b>market? After all, many people want to sell bonds (that they own) long before the bond approaches payoff date. Lenders have the option of either buying resale bonds or buying a brand new bond. How do they value bonds with a zero percent interest rate on the resale market?<br />
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Presumably a spectrum of bonds (all bearing a zero rate stipulation) with differing remaining times to payoff would be on-offer. Potential buyers of these bonds would be willing to offer different discounts for each different time duration. A time based chart of these discounts, translated into interest rates, would generate a yield curve.<br />
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Golly! It seems that zero based interest rates may not be zero interest at all. At least not if the lender wants to calculate the <i>true </i>return, expressed as a rate of interest, over the remaining life of the loan.</div>
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<b>Return to Reality</b></div>
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My proposal for legally set zero interest rate contracts is made with 'tongue-in-cheek'. The concept helped me understand the bond market by taking the variability of contract interest rates out of the valuation schedule. That leaves fees, discounts, and time as variables in an apparent interest rate calculation. I thought I would share the idea with my readers; what you just read was my method of sharing.<br />
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Conclusion</b><br />
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I think I have the key to Brian's post now. Apparent interest rates are set in the bond resale market (which makes new loans as well). Central Banks enter this market to influence interest rates (and the yield curve) by buying or selling bonds. Perhaps most important: a formula is used to calculate apparent interest rates for yield curve construction. Only accidentally does the actual interest rate displayed on any particular issue correspond with the yield curve rate.</div>
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Again a disclaimer: I am making a proposal with 'tongue-in-cheek', not offering investment advice.</div>
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<br />
[1] tantalus:<span style="background-color: white; color: #222222; font-family: roboto, arial, sans-serif; font-size: 16px;"> "</span><span style="background-color: white; color: #222222; font-family: roboto, arial, sans-serif; font-size: 16px;">2 not capitalized : a locked cellarette with contents visible but not obtainable without a key" (<a href="https://www.google.com/search?rlz=1C1CHFX_enUS532US532&ei=QEvNXo2_E5j_-gSp1ZbYDw&q=tantalus+meaning&oq=Tantalus&gs_lcp=CgZwc3ktYWIQARgIMgUIABCRAjICCAAyAggAMgIIADICCAAyAggAMgIIADICCAAyAggAMgIIADoECAAQRzoHCAAQRhD5AVDI0wJYvp4DYMr6A2gAcAF4AIABYIgBmAKSAQEzmAEAoAEBqgEHZ3dzLXdpeg&sclient=psy-ab">Thanks to Google Search</a>. Click "What does it mean to call someone a Tantalus.")</span><br />
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<span style="background-color: white; color: #222222; font-family: roboto, arial, sans-serif; font-size: 16px;">(c) Roger Sparks 2020</span></div>
Roger Sparkshttp://www.blogger.com/profile/01734503500078064208noreply@blogger.com0tag:blogger.com,1999:blog-6476989946886057900.post-24922172509715899642020-05-02T06:42:00.000-07:002020-05-02T06:42:29.388-07:00Rethinking the Business Control StructureThis covid-19 pandemic and world wide response has certainly thrown the economy some unexpected economic shocks. Shocks styled in ways that I have never seen considered in economic models. The first shock comes from a division of the economy into essential and non-essential sectors. I wrote about that surprise previously.[1]<br />
<br />
A second shock comes from seeing government shut down a large segment of the economy. I guess I knew that government could do such a thing but dismissed it as a meritless concept. In reality, this action should open our eyes as to who controls what in the business sector. We briefly explore the business control structure in this post.<br />
<br />
<a name='more'></a>I think most mainstream economic thinking about business is done from a micro-ownership perspective. Figure 1A represents this structure. The owner of a business takes all the factors of production into consideration and makes go/no-go decisions. Government (appearing here in the guise of <i>taxes</i>) is just one factor among many, albeit a factor appearing on many levels (not shown). Despite a multi-level appearance, government (to the micro-owner/decision maker) is just a cost of doing business.<br />
<table cellpadding="0" cellspacing="0" class="tr-caption-container" style="float: left; margin-right: 1em; text-align: left;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi4LBX1Ids0w0Hb_hrfHNXD67Kua3ML5tHjCX8Y85IPTagoyclLXGVujEbLiCy32IWJPkUk5JU3c5BfxPnpoXBHT-O1BHuXBLoU0Icdgo4hfdd_a5eCWLb-PEpYICuhBIlLFtB9ZX2hsOuS/s1600/Micro_Macro+Control+Structure.png" imageanchor="1" style="clear: left; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img border="0" data-original-height="429" data-original-width="822" height="331" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi4LBX1Ids0w0Hb_hrfHNXD67Kua3ML5tHjCX8Y85IPTagoyclLXGVujEbLiCy32IWJPkUk5JU3c5BfxPnpoXBHT-O1BHuXBLoU0Icdgo4hfdd_a5eCWLb-PEpYICuhBIlLFtB9ZX2hsOuS/s640/Micro_Macro+Control+Structure.png" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: left;">Figure 1. The perceived business control structure depends upon whether a micro-economic or macroeconomic perspective is most appropriate.</td></tr>
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<br />
<br />
<br />
The same thing is true of any debt structure that might be in place. To the business owner/manager, debt and debt administration becomes nothing more than a cost of doing business.<br />
<br />
This coronavirus shock has pointed out a more serious possibility of government control (and debt)---the possibility that government could decide (for reasons important to government) to seemingly arbitrarily shut down a business abruptly. This is an ownership action completely beyond owner/management control. Government has been revealed as having more control than normally assumed.<br />
<br />
Turning to the increased role of debt, abrupt business shutdown was probably not contemplated when a debt structure (if any) was put in place. This coronavirus response shockingly brought that oversight to forefront. Suddenly, small businesses and large were faced with massive drops in revenue, bring debt repayment into question. Small business is often tasked by lenders to have key person life insurance policies but what happened in virus response dwarfs key person losses. Entire business sectors face restructuring due to now-apparent excessive leverage.<br />
<br />
It seems to me that our collective eyes have been opened to the real control structure that is deeply in place in our macro economy without most economist paying much attention. Figure 1B shows the control chain revealed in the wake of coronavirus response. <i>Government is a the top of the control structure, followed by lenders (if any), followed by the nominal owner/manager.</i><br />
<br />
Our eyes have just begun to open to this dual structure. Some lessons learned so far (some subtle, some suspected):<br />
<br />
1. Lenders are taking a position in the success of the business<br />
<blockquote class="tr_bq">
The banker's dilemma: Failure of a small loan is the borrower's problem. Failure of a large loan is the bank's problem.</blockquote>
2. Owner/manager's task is to tease diverse components into a functioning system.<br />
<blockquote class="tr_bq">
Macroeconomic models have been tasked with problem of modeling money behavior. The more appropriate task may be to model human behavior.</blockquote>
3. Easy money leads to overbuilding industrial capacity.<br />
<blockquote class="tr_bq">
We point to the crude oil supply industry as a prime example.</blockquote>
4. Classic American economic models seem to have been micro economic based---with diffuse, strong ownership control. The current coronavirus response has revealed an economic model with government ownership holding concentrated (singular) control.<br />
<br />
5. One monetary response of governments in industrialized nations world wide has been to advance 'stimulus'. This stimulus is in the form of a flood of newly created money flowing into the private sector. The effect is parallel to efforts of private business to pay employees and stimulate sales by offering gift certificates. I described the parallels between <a href="https://www.mechanicalmoney.com/2016/11/national-gift-certificates-as-analog-to.html">money and gift certificates previously</a>. [2]<br />
<br />
Concluding comment:<br />
<br />
This coronavirus response event is only about five months old as this is written (5/2/2020). The macroeconomic waves are just beginning.<br />
<br />
[1] "<a href="https://www.mechanicalmoney.com/2020/04/mmt-style-economic-distortions.html">MMT Style Economic Distortions</a>" and "<a href="https://www.mechanicalmoney.com/2020/04/relief-money-doesnt-just-disappear.html">Relief Money Doesn't Just Disappear!</a>"<br />
<br />
[2] As I point out the parallels of money and gift certificates to friends (few actually listen), I mostly get a blank stare. It makes sense to me but not to them. I think an easier case can be made by comparing money to stock-in-private-entities. Companies routinely pay employees with stock in special circumstances. Both gift certificates and company stock are defined entitlements to entity assets.<br />
<br />
(c) Roger Sparks 2020<br />
<br />Roger Sparkshttp://www.blogger.com/profile/01734503500078064208noreply@blogger.com0tag:blogger.com,1999:blog-6476989946886057900.post-60950297436428183402020-04-24T08:09:00.000-07:002020-04-24T08:09:37.072-07:00Relief Money Doesn't Just Disappear!I've been pondering where the money from a massive coronavirus stimulus will go as the weeks and now months pass. After all, nearly $3 trillion in new government spending must go someplace.<br />
<br />
Strangely, or maybe not so strangely, government has provided a clue by dividing the national work force into segments labeled 'essential' and 'non-essential'.<br />
<br />
$3T doesn't just get spent and evaporate. Someone has title to the new money and more wealth to spend. Who?<br />
<br />
<a name='more'></a>The answer almost jumps out at you when you take a look at a locked-down barber and his expected customer. The barber is not working due to the coronavirus lock down. He has no income for the duration. On the other hand, his expected customer, ready to come in the day of lock-down, has money ready to spend. This ready-money is destined to await spending for the duration.<br />
<br />
The barber has become income destitute. The customer has become a forced saver.<br />
<br />
A similar thing is happening (albeit on a different scale) in the airline industry. The aircraft transportation industry has been 80-90% shut down for the duration. The customer flyer has money ready for spending but this money is now held in-pocket for the duration. The customer has become a forced saver.<br />
<br />
<b>The Analysis</b><br />
<br />
There really isn't much debate about the wisdom of helping workers through this crisis. Something needs to be done. We are going to think about where relief/help in the form of dollars-from-government will linger for a while at least.<br />
<br />
First, notice that customers were judged to have money ready to spend the moment the lock down order arrived. This money will not disappear from bank accounts.<br />
<br />
Next, notice that government relief must come from borrowed or newly created money. Government could borrow from banks (who hold customer money-suddenly-frozen), or government could borrow from the central bank (who has no money to lend but can create money). Either way, relief money flows to people unable to earn in a normal fashion, thus increasing their wealth.<br />
<br />
Now observe that government has effectively divided the nation into essential and non-essential work sectors.[1] The <i>essential </i>sector (food, some medical, government, and more) mostly continues to work as usual (albeit with increased risk) and continues to take home near normal income. On the other hand, the <i>non</i>-<i>essential </i>sector (air transportation, personal care, sports, many more) has been asked (forced) to shut down. This sector suffers grievous loss and severe income damage,.<br />
<br />
Being a government induced wound, it is logical to help the non-essential sector. <i>Here is where the logic gets interesting</i>. Helping the non-essential sector allows non-essential sector participants to cover <i>essential </i>costs and prepare for their own <i>non</i>-<i>essential </i>spending---non-essential spending that they will need to delay for the duration.<br />
<br />
Whoa! Are we saying that at least part of government relief will go to savings because only the essential spending portion will actually filter down through the economy? Yes, that is exactly what we are saying. To the extent that stimulus replaces spending otherwise saved but destined for non-essential consumption in normal times, a savings overhang will be built.<br />
<br />
<b>Estimating Macro Effects</b><br />
<b><br /></b>
We shouldn't need to worry about <i>near term</i> inflation from a wealth spike. The <i>near term</i> economic bias is strongly toward savings because of government mandated income redistribution.<br />
<br />
We could make a very rough estimate of the potential savings buildup. Assume complete income replacement by government relief programs <i>and then </i>estimate the amount of non-essential spending foregone. The estimated amount of delayed non-essential spending should be the amount of expected wealth increase.<br />
<br />
<i>However, this would not equal the total wealth buildup expected in the private sector.</i><br />
<br />
At least part of the relief money would be used to make payments to preexisting loans. To the extent that loans are paid down at a rate greater than created, money based wealth will appear to be destroyed. In a situation where government is providing relief money ultimately used to repay loans, government debt will replace private debt. In a macroeconomic financial sense, the economy can be expected to behave in a stable fashion except for displaying an increase in government debt levels.<br />
<br />
Of course, if the private sector pays down debt during the coronavirus response period, the private sector will have a continually improving balance sheet.<br />
<br />
<b>Conclusion</b><br />
<br />
There we have it. Assuming that all income lost by the non-essential sector is replaced by government relief, the essential sector will have near normal income while the non-essential sector will be a relief beneficiary. Participants in both essential and non-essential sectors will become (perhaps unwillingly) savers to the extent that they have locked funds available for non-essential spending. All of this locked money would potentially be available for rapid deployment at the end of the coronavirus event.<br />
<br />
Careful readers will observe that some of the actual government relief is targeted toward the essential sector. Rather than being called 'relief', this portion of government dollars transferring ownership is better called 'stimulus'. What ever the actual name, the majority of actual dollars transferred could be expected to onward flow through the non-essential sector or onto loan repayments.<br />
<br />
Brian Romanchuk has an article <a href="http://www.bondeconomics.com/2020/04/the-pandemic-normal-whither-income-flows.html">"The Pandemic Normal:Whither Income Flows?"</a> that takes quite a different tack[2] on roughly the same subject.<br />
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[1] This post builds on a previous post <a href="https://www.mechanicalmoney.com/2020/04/mmt-style-economic-distortions.html">"MMT Style Economic Distortions".</a><br />
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[2] "tack", a sailing term meant here to imply a different course of travel.<br />
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(c) Roger Sparks 2020<br />
<br />Roger Sparkshttp://www.blogger.com/profile/01734503500078064208noreply@blogger.com1tag:blogger.com,1999:blog-6476989946886057900.post-68415234198484061092020-04-11T12:41:00.000-07:002020-04-25T05:11:56.906-07:00MMT Style Economic DistortionsJ.D. Alt has an <a href="http://neweconomicperspectives.org/2020/04/standard-money-theory-and-the-coronavirus.html#more-11698">interesting post</a> wherein he compares government to "the Ouroboros—the mythical snake eating its own tail". He makes the case that MMT should not--as a theory--take an economy to self-destruction but should enable it grow in beneficial ways. I made two comments, the first warning of the dangers of misguided monetary distribution and the second pointing out what I see as being an MMT style economic distortion occurring now due to misguided covid-19 responses. The second comment is reproduced here.<br />
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[4/25/20 UPDATE: This second comment seems to have failed moderation. Despite two submissions, I never could find it present. There have been no site updates since April 13.]<br />
<a name='more'></a><br />
<b>Roger's second comment:</b><br />
<br />
The vision of " .... sovereign government as the Ouroboros" is a good place to start, yet not an accurate depiction of the economic effects of the covid-19 response. Clearly, government is 'consuming' part of the private economy today by effectively shutting down the 'non-essential' sector. Left 'unconsumed' is the 'essential' part of the private sector--mainly the food sector.<br />
<br />
From this observation, we (who are interested in macroeconomic sectors) can see that government (the sector in control) has divided the private sector into two sub-sectors; 'non-essential' and 'essential'. Non-essential includes the aircraft industry, travel/lodging, construction, retail stores, restaurants, and entertainment industries. Essential includes the entire food chain, medical related to pandemic care and government itself. Non-essential sectors are expect to shut down activity, thereby becoming effectively 'consumed'.<br />
<br />
Government is well aware that 'non-essential' workers and business owners are placed into dire economic straits by forced 'consumption'. Government has enacted several programs costing trillions of dollars that government does not have, relying on MMT recognized methods of financing (direct government printing) for funding sources.<br />
<br />
But here is the alarming aspect of one program--the helicopter drop of money (approximately $1200) to all adult citizens who filed a Federal tax return. Both the government sector and essential private sub-sector will continue getting near normal income during the coronavirus emergency economic shutdown. These sectors do not need MMT style money-drop help. On the other hand, members of the shutdown 'non-essential' sector clearly do need help and a one-time payment of $1200 is unlikely to be fair compensation the economic hurt inflicted.<br />
<br />
This one program, MMT style, seems destined to magnify the economic divide between government and 'essential' private sectors and contrasting 'non-essential' private sub-sector.<br />
<br />
Perhaps additional (expected) future government support programs will address this looming economic distortion.<br />
<br />
(c) Roger Sparks 2020<br />
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Roger Sparkshttp://www.blogger.com/profile/01734503500078064208noreply@blogger.com2tag:blogger.com,1999:blog-6476989946886057900.post-60233805540059693362020-03-18T20:29:00.001-07:002020-04-24T08:32:22.281-07:00Where are the Reference Points?[What follows is rather raw reaction and thoughts <span style="background-color: white; color: #878787; font-family: "roboto" , "arial" , sans-serif; font-size: x-small;">scribed </span>in an effort to focus my own thinking. The reader may wish to read the section written March 16 (which follows the March 18 text) first.]<br />
<br />
As I write (1:22 PM, March 18, 2020) chaos does indeed seem to be occurring. Congress just passed a $1.3T? relief package and there's panic talk on CNBC (Bill Ackerman). Of course the solution is more money from government.<br />
<br />
Or is it?<br />
<br />
<a name='more'></a><br />
We need to ask ourselves why we have stockholders? It is not so the people can make money, as if money making was the only thing that could happen. No, the real reason for stockholders to exist (as a class) is to absorb risk when the venture fails. Yes, stockholders do expect to make money as a result of owning stock and taking risk but success is not assured. Certainly we can see that today as the market craters.<br />
<br />
After some 70 years (more or less) of declining interest rates and the increasing use of debt to increase return on capital, interest rates have reached zero and the coronovirus has arrived. It seems that every company I looked at (and certainly every one I own stock in) has a large debt overhang that now threatens to become an iron collar on all swimmers. A very ugly picture.<br />
<br />
I think we are likely to move into a new world financial order. I have no idea of where the reference points might be. Of course, interest rates are basically zero. Oil (which reached into the low $20's today) is a very disconcerning reference point. Gold, long the reference point in times of trouble, has also lost value but by a modest amount. (Apparently people are buying gold just about as fast as it it sold.) Virus related shutdowns have thrown profit expectations into a tizzy for nearly all business entities.<br />
<br />
We are living through a learning opportunity--especially when viewed from a macroeconomic perspective. My natural inclination is to look for evidence that interest rates matter (should not be zero) and stock owners provide capital for firms (avoiding banks in normal times).<br />
<br />
What will tomorrow bring?<br />
<br />
<b>[from earlier in the collapse event]</b><br />
<br />
As I write (6 AM, March 16, 2020) the U.S. market is a half-hour away from opening. The first open with zero interest rates a present reality. Futures are locked down limits. What to do?<br />
<br />
Not only are the futures locked down, the national economy is nearing lock-down with coronovirus fears.<br />
<br />
On top of that, a prolonged period of declining interest rates has preceded this day. In fact, we could say that ever since the beginning of WW2, the history of interest rates is a story of decline. Lower interest rates predict increased economic activity with increased wages--inflation.<br />
<br />
Inflation has been built into asset prices everywhere but especially into the prices of fixed assets such as land and housing. Mathematically, we could predict the future value of assets by discounting the future earning power by the expected interest return. An asset earning a free cash flow of $512 facing an asset (such as savings) earning 3% interest would have a present value of $512 / 0.03 = $17066. (A quick but perhaps controversial method of establishing value.)<br />
<br />
What is the value of $512 if interest rates are zero? $512 / 0 is infinity. Obviously a ridiculous answer. Pick your own acceptable interest rate if you expect a sensible answer.<br />
<br />
So what has the Fed done when it sets interest rates at zero? It has removed the economic reference point called 'interest rates'. Now it it up to every decision maker to set his own interest rate. Chaos!<br />
<br />
(c) Roger Sparks 2020Roger Sparkshttp://www.blogger.com/profile/01734503500078064208noreply@blogger.com0tag:blogger.com,1999:blog-6476989946886057900.post-88091735220145458382020-02-14T14:37:00.000-08:002020-02-14T14:37:22.480-08:00Toward a Comprehensive MMT<span style="font-size: large;">T</span>he name <i>Modern Monetary Theory (MMT)</i> implies that we have a comprehensive theory of fiat money and monetary policy. Unfortunately, most MMT authors limit their discussions to the creation aspect of money, thereby avoiding the mundane (but more important) discussion of using money for everyday transactions. To be comprehensive, MMT needs to embrace theory describing both the creation of money and the use of money--two distinctly different monetary events.<br />
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<a name='more'></a><b>Two Distinct Events</b><br />
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Why might we think these are two distinctive monetary events? The study of economics is interested in exchanges between individuals. Money exchanged for something else is a monetary exchange. On a daily basis, during private trade between individuals, there is an expected increase in wealth of both traders, else they would not trade. <i>However,</i> there is no increase in <i>macroeconomic wealth</i>. Because there is no increase in macroeconomic wealth, a private trade of <i>money</i> for something else may as well be a <i>barter trade</i>.<br />
<br />
On the other hand, the creation of money is an event of quite a different character:<br />
<br />
First, in a macroeconomic sense, money springs into existence from nothing, with sudden appearance.<br />
<br />
Secondly, at the first trade of money, nothing (fiat money has an intrinsic cost of near zero) is traded for something of value (another macroeconomic event).<br />
<br />
Thirdly, the creation of money represents an increase in the ambient amount of macroeconomic wealth.<br />
<br />
The second point (nothing is traded for something of value) is the reason that the creation of money is reserved to government responsibility. If every citizen could create money, money would have no reliable value as a standard of trade.<br />
<br />
To differentiate the two models within one theory, we will call call the creation model MMT creation (MMTc). The daily use model will be called MMT daily (MMTd). We will discuss MMTd first.<br />
<br />
<b>MMTd</b><br />
<br />
Daily monetary trade gives every thinking citizen a background by which basic economic theory can be understood. Economic axioms like "money is a store of value", "money is a medium of exchange", and "money is a unit of account" are quickly comprehended by most students and attentive listeners. The three axioms each result as a consequence of some degree of expected monetary stability <i>of monetary value</i> over time. The <i>importance</i> of daily monetary stability is a harder concept to introduce and comprehend.<br />
<br />
Figure 1 is a crude attempt to depict a stable economy. Production morphs into supply. Supply is exchanged for money. Money diffuses back through the production stream to be reused for consumption.<br />
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiQdPCSEZQG6BWtjt7EDTdX3X7cyjVj-qE9qWzeSTz785r8wLDW6NAAgPp2G0rmnoDW7xVhkfTnMsmTm0jfixBoqdNbhRyj4Sg4uHBP5cipKq0f52LewNxlfJR5OTp4NRSpBlP-ho6iQKJw/s1600/Stable+Econ.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="688" data-original-width="746" height="368" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiQdPCSEZQG6BWtjt7EDTdX3X7cyjVj-qE9qWzeSTz785r8wLDW6NAAgPp2G0rmnoDW7xVhkfTnMsmTm0jfixBoqdNbhRyj4Sg4uHBP5cipKq0f52LewNxlfJR5OTp4NRSpBlP-ho6iQKJw/s400/Stable+Econ.png" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: left;">Figure 1. A stable economy. [Money flows opposite to production/supply as time slips by. There is a division of material consumption and money between the private sector and government. Production/supply comes from the private sector. Government provides a stable (or unstable) framework wherein the private sector may flourish (or not). Because the private sector cannot create money, the amount of money present in the economy is constant irrespective of money flows.]</td></tr>
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Modern daily economic life is filled with stable predictions involving the future value of money. The (stable) monthly social security check received by the elderly can pay the (stable) rent. With monetary stability, products taking months to build (like food) can have predicted sale values (allowing for replicated yearly production if predictions are realized). Basic consumer economics can be described as (mostly) stable replications of past exchanges, each exchange fulfilling human needs and desires.<br />
<br />
<b>MMTc</b><br />
<br />
Daily monetary trade gives every thinking citizen a background by which the creation of money can be understood but with initial misdirection. Citizens <i>work or sell assets to obtain money</i>--only counterfeiters 'create' money.<br />
<br />
The creation of money is the opposite of stability. Creation is something from nothing, a sudden monetary impulse into the monetary cycle.<br />
<br />
Well, (not only counterfeiters!) governments also 'create' money and may do so in such a slow, replicated fashion as to create an illusion of monetary stability. For example, a replicated annual four percent increase in the money supply can become the stable, expected macroeconomic condition of the economy. [The path of money entry is by government spending more that it stability extracts in the form of taxes and fees.]<br />
<br />
The stable creation of money can be compared to the function of a gasoline engine in a car. The explosive ignition of air and gasoline can be harnessed to provide a smooth flow of propulsion forward. The key to success is predictability which results in stability (or is it <i>stability which results in predictability</i>--which should come first?).<br />
<br />
MMT writers need to assimilate the notion that modern industrial economies have been steadily stimulated with newly created money injections since the WW2 period. This is Keynesian stimulation, MMT style (but not Job Guarantee style), for the past 80 years (more or less). Modern fiat economies have been distorted from the stable MMTd model for such a long time that actual monetary stability is nearly incomprehensible.<br />
<br />
<b>Political MMT</b><br />
<br />
Much of MMT writing begins with MMTc and goes on to describe the Job Guarantee program. The concept advanced is that the full productivity of the economy is not reached with workers idle. If the private economy cannot employ all wanting work, then government should employ the idle. In a nutshell, the proposal is for government to provide jobs and create money to pay the ensuing wages.<br />
<br />
An absurdity flows from the notion that expanding government by <i>employing more workers and paying wages with newly created money</i> can help the private sector with more income which turns into wealth. The reality is that additional newly created money would disturb the stability of the present (MMTd) economy, transferring more <i>labor and resource wealth</i> from the private sector into the government sector than we presently find. How that would play out in terms of increasing disparity of incomes and increasing disparity of remainder-wealth* is a subject needing more attention from MMT writers.<br />
<br />
<b>Conclusion</b><br />
<br />
Modern Monetary Theory is a great title for a theory that sounds modern about money. In reality, as presently discussed by most writers, only MMTc is advanced. The effects of MMTc on MMTd are overlooked with the result that Political MMT is the outcome.<br />
<br />
*<span style="font-size: x-small;">Remainder-wealth is the monetary/wealth overhang that results when money is created. When more money is placed into the macro economy each year, private wealth increases unavoidably. Private wealth is attached to ownership, unavoidably. The notion that the public '<i>wants to save, therefore refuses to spend</i>' is nonsense when government is trying to increase the amount of money in existence.</span><br />
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(c) Roger Sparks 2020<br />
<br />Roger Sparkshttp://www.blogger.com/profile/01734503500078064208noreply@blogger.com0tag:blogger.com,1999:blog-6476989946886057900.post-72693037660442617552020-01-19T14:37:00.000-08:002020-01-19T15:28:40.175-08:00Notating Discontinuities in Long Time SeriesA <a href="http://www.bondeconomics.com/2020/01/the-monetary-monopoly-model.html#more">Brian Romanchuk post</a> uses math that requires a starting point in a time series. Starting something creates a discontinuity in any temporal display that might appear in a chart. I would like to suggest a better way to notate the time series used by Brian.<br />
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<a name='more'></a><br />
We have a continuous time series -N...-3,-2,-1,0,1,2,3....N which contains one or more discontinuities. The first discontinuity is introduced at time-point 0. This discontinuity would be displayed on a chart by a jump in a continuous line linking all time values.<br />
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Having organized our time series around time-point 0, we find the need to enter further discontinuities into the chart. It is very unlikely that any further discontinuities will occur exactly at labeled time-points--instead, they will occur during the time-spans between time points. This gives us the need to label point events more precisely.<br />
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The usual way to notate events that occur in a time series is to label the event as x and the time-point as (t), thus we would write x(t) and assign a value as needed.<br />
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Notice that this method only allows one value for every time-point. There is no method for indicating events that occur between time-points except to force it in at the next occurring time-point. This becomes a problem when we try to build precise theory (as Brian was trying to do) from averaged data locations.<br />
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Improved notation is easily achieved by subdividing the time-points by writing x(t.t). The first 't' is the location in the basic time series; the second 't' is the count number of the discontinuity event. For example, the fifth event occurring in the time-span following the zero point would be labeled x(0.5).<br />
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Notice that this system introduces a third dimension into our notation system. Term 'x' is the first dimension, the first 't' is the second dimension and the second 't' is the third dimension (still 'time' but on a different scale). Each can be assigned a single value and located on a chart. [This precision can be very useful when we discuss the introduction of fiat money into an economy.]<br />
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In reality, only two dimensions can be displayed on a chart unless we break a rule of some kind. The rule we break here is the rule of scale. For the first 't', the conventional time series scale applies. For the second 't', the time-span between time-points is re-scaled to accommodate the number of events occurring during each time-span--it may be one point; it may be a million. We will restore accounting accuracy for the second 't' by labeling the last eligible event as x(t.N) and assigning the same value to the next occurring position label x({t+1}.0). Thus, x(t.N) and x({t+1}.0) have identical values and occupy the same position on the time series scale.<br />
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A little practice in using the system would help here. Let's assume that purely fiat money is introduced into an economy for the first time at t=0. This t is placed on the time series scale.<br />
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The first fiat transaction is for $100. (Brian uses M(0) = 0.) We could label this in four different ways by using two notating systems:<br />
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x(0) = $100<br />
x(-1,N) = x(0,0) = $100<br />
x(0.1) = $100<br />
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A second fiat transaction for $200 occurs during the first time span. The amount of fiat in circulation would increase to $300 but how would we label it using each of the two notating systems?<br />
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x(1) = $300<br />
x(0.1) = $300 (If the author chose x(0.0) as the starting point)<br />
x(0.2) = $300 (If the author chose x(0.1) as the starting point)<br />
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If there were no further increase in fiat, we could correctly write<br />
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x(1) = $300<br />
x(0,N) = x(1.0) = $300<br />
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Readers can easily see the added precision gained by using the more precise notation system.<br />
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<b>Conclusion and Comment</b><br />
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Economics is a rather strange study. Individual exchanges are always discrete, unique events which are effective discontinuities in the economic life of each individual. On the other hand, the discipline depends upon data collected over time which can only result in imprecise time localization. We are reduced to working with averages.<br />
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Precise theory, such as Brian seeks, needs theoretical precision at the expected data placement level. Without precision, we risk taking shortcuts to skewed conclusions without even knowing that we have a problem.<br />
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[Disclaimer: I am not a mathematician. What seems to me as a simple and obvious method of time differentiation may have been used by others many times previously.]<br />
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(c) Roger Sparks 2020<br />
<br />Roger Sparkshttp://www.blogger.com/profile/01734503500078064208noreply@blogger.com0tag:blogger.com,1999:blog-6476989946886057900.post-48169795103100192122019-12-14T10:13:00.000-08:002019-12-14T10:13:48.838-08:00A Mechanical View of SFC Modeling for Beginners[Disclaimer: I am writing this article as a method of personally improving my own SFC techniques. (Over the years, I find that new material is understood much quicker and with more comprehension if I first <i>try </i>to put-it-together myself. It's kind of a<i> 'put-it-together first, then read the instructions' </i>approach.)]<br />
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The <a href="https://en.wikipedia.org/wiki/Stock-Flow_consistent_model">Stock-Flow consistent (SFC) model</a> technique is a method students and thinkers can use to build models by using consistent money flows and stocks. Accounting principals are followed by ensuring that all monetary trades are balanced with an exchange of product and monetary equivalent.<br />
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SFC models can be built to display the NIPA sectors and GDP, or they can be built to display other economic events. The focus here will be to build two progressively more detailed SFC models, thereby preparing the reader for the next step of understanding the yet more detailed models found in 'beginning' texts.<br />
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The Concepts Underlying SFC Models<br />
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The first concept we will identify is that a sector can both divest itself of money and buy a substitute product by interacting with another sector. Thus, we can have the Household sector buying food from the agriculture sector (here represented by "Firms"). The two simultaneous transactions are recorded in two sector columns on a single line. (See Figure 1a.) The line total (shown at far right) will be zero if the exchange was equal in both directions.<br />
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<table cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi96OWmZCJHsZxWR6A7lpGHW96Trej2ViVPALT-8FYQljX8R22W0enwDSzCzUKVAuYJMCMIO8N7DIzuFVadUpCR8yGfgmXwcSIhyphenhyphenDv7IHnqultIN-ckFSJaPHAHWqV4mIhF3oIKRDkdHUq4/s1600/SFC+BeginnersModels.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="488" data-original-width="564" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi96OWmZCJHsZxWR6A7lpGHW96Trej2ViVPALT-8FYQljX8R22W0enwDSzCzUKVAuYJMCMIO8N7DIzuFVadUpCR8yGfgmXwcSIhyphenhyphenDv7IHnqultIN-ckFSJaPHAHWqV4mIhF3oIKRDkdHUq4/s1600/SFC+BeginnersModels.png" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: left;">Figure 1.* Two SFC models demonstrating technique and the flexibility of the SFC method</td></tr>
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Restated in a slightly different way, rows record the instantaneous exchange of product and money (usually of equal value) so that the value change from a macroeconomic perspective will be zero. The zero sum will be recorded in a separate value column at far right.<br />
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A plus value will always represent inventory of money. Negative values will carry dual representation. A negative sign indicates both that a monetary inventory has flowed away from this sector and that another counter-flow inventory of product/services, labor or some other exchangeable has been substituted. (As with all models, beware of exceptions to any of these 'rules'.)<br />
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In Figure 1, the actual products exchanged are identified using a 'a<>b' style of notation.<br />
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Vertical columns are intended to cover period of time so that additional rows detailing additional events can be recorded. The productive effort of labor (resulting in a sequenced replenishment of products for future sale) is a good example of an exchange taking time to develop but settled instantaneously. The time period is usually assumed to be one year.<br />
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Vertical columns, when used to represent sectors, need to sum to zero in an absolute monetary sense if we are to achieve accounting accuracy. Simply stated, when money flows away from a sector, it must be replaced. In Figure 1a, we replace money used to buy products with money earned from firms by selling labor. Column sums of zero (at the bottom) indicate that stability has been achieved.<br />
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Memo lines can be inserted to convey additional information. In Figure 1a, the total output of firms could would be indicated with the term "[Y]".<br />
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How to Model an Outrageous Event [an exercise]<br />
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Boy-oh-boy--are the SFC models flexible! Next we will consider an outrageous but possible event that can occur in any economy. We could have a counterfeiter at work. We will assume this guy prints green money good enough to fool at least some people (sales clerks). How would we enter his activity into our SFC model?<br />
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Here we will give the counterfeiter a line of his own. We could give him an entire column but here we will just call him a deviant consumer and consider how he might affect the stability of the otherwise stable system. In Figure 1b you see a SFC matrix displaying the author's description of how the event would go down:<br />
<blockquote class="tr_bq">
"The culprit fooled the clerk with bad money, got a product and left the store. The money made it to the next level but not before the event was counted as an GDP output event. At the next money level, the fraud was discovered and reversed out of the Firms sector. The Household sector entry was also reversed but no decision was made on what might have been exchanged."</blockquote>
By now, the reader has gained an inkling of the flexibility of this modeling system. As is always true of models, the model builder decides what the model is to say. Models don't give us answers--they only help us convey ideas that are better connected mechanically.<br />
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Now Read the Book!<br />
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If you are still reading, you should have gained an appreciation of the flexibility and power of SFC modeling. If you want more information, try the <a href="https://en.wikipedia.org/wiki/Stock-Flow_consistent_model">Wikipedia article "Stock-Flow consistent Model".</a><br />
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For university level information, try Wynne Godley and Marc Lavoie's co-authored "Monetary Economics". The authors develop and explain extensive macroeconomic SFC models ready for computer simulation.<br />
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Hopefully, with a little mechanical SFC background in mind, the reader has gained confidence to undertake further study using advanced texts. Perhaps the reader can also articulate and present his own views and visions more accurately. [Writing this post helped this author]<br />
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*The matrices found in Figure 1 originated in the Wikipedia article "Stock-Flow consistent Model".<br />
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(c) Roger Sparks 2019Roger Sparkshttp://www.blogger.com/profile/01734503500078064208noreply@blogger.com6tag:blogger.com,1999:blog-6476989946886057900.post-68125023014815530862019-12-04T09:05:00.001-08:002019-12-06T08:29:44.702-08:00Two Intuitive Conflicting Models of Money<span style="font-family: inherit;">Money is quite a puzzle to economist. They can't quite figure it out. For sure, it's not exactly the 'stable' medium of exchange that people think of when they consider their 'cash'. Stability is fleeting at best.</span><br />
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<span style="font-family: inherit;">'Value stability' is the issue we will consider. We are not going to worry about the size of money or whether it is backed by gold. We will be thinking about paper money as commonly used. (An economist would call it <i>fiat money.</i>) We're going to think about how this money gets value and holds it.</span><br />
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<span style="font-family: inherit;">Now, I am not a trained economist. What you will be reading is meant to be intuitive and logical, not quotes from a text book or academic article. The goal is to meld everyday observations about money into a coherent framework.</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">So what is money? In this post, we are going to look at money from two perspectives, one stable and one unstable. Paradoxically, they both must be true. Coherent logic convinces us the we must have two models of money. The real macro economy must operate with effects from both models contributing to the <span style="background-color: white; color: #878787;">maelstrom</span>. Our task is to match components with models.</span><br />
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<span style="font-family: inherit;">Before we get into discussing models, I want to warn some readers away. The readers I want to warn away are those who are convinced that money is not a real physical reality (thereby arguing with maybe 99% of the public). As in all the articles you will find in the Mechanical Money blog, money is assumed to be physical, whether green or on electronic deposit. This physical reality demands that there be present a way that humans can both create and uncreate money. Goodbye ephemeral money advocates!</span><br />
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<span style="font-family: inherit;">Stable Money Model</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Stable money is by far the easiest to understand. We who live in an industrial economy have daily contact with stable money. It's in our wallets and in our bank accounts. We earn it or maybe receive it as a gift or pension distribution. It has pretty much the same value each month, and becomes a dependable source of funds for spending of all kinds. Usually, the only problem is that there isn't enough money to do everything we would like to do.</span><br />
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<span style="font-family: inherit;">This is the stable money model. Economist build equations and flow charts in an attempt to explain how the macro economy works to keep real production in balance with resources. These models can work quite well so long as money operates within the bounds of the stable money model.</span><br />
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<span style="font-family: inherit;">Bounds of the Stable Money Model</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">What might be the bounds of the stable money model? One bound would be that money needs to have a nearly constant value in relation to real production and resources. Not that the value needs to be identical across entire national regions-- we certainly can allow for regional resource access differences. Constant value needs to be found over time periods so that $100 will buy about the same quality and quantity of food this year and next year. <i>The model stability we are looking for is value durability over the passage of time.</i></span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">When we have value durability over time periods, an economy can build complicated supply chains, using complicated tools, that take long time periods to build. Value can be predicted which allows contribution to the bigger effort to be parceled out with the result that early contributors can have an <i>already earned</i> share in the final result.</span><br />
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<span style="font-family: inherit;">There is really no other bound. Stability is a boundary, a condition-- by definition. The word "stability" says it all. Economist looking for additional boundaries can only find conditions for instability.</span><br />
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<span style="font-family: inherit;">The Unstable Model</span><br />
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<span style="font-family: inherit;">Our searching economist looking for stability boundaries must, at some point, ask how money is created in the first place. Money is a human creation and someone must create it. Creation out of nothing is instability on steroids. Somehow, we must incorporate instability into our models for fiat money.</span><br />
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<span style="font-family: inherit;">Mainstream economist commonly describe bank loans (from both private banks and central banks) as the source of modern fiat money. We will agree and proceed to parse between stable loan sources and unstable sources.</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Before parsing, we need to make another intuitive assumption. We will intuitively assume that value is proportional to the amount of money available. In other words, the total amount of money available can be divided by the total <i>second-value</i> (valued a second way) of objects available. Described a third way, 100 items in a small store could each be worth $1 or 100 yen, the choice being made by the creator of money. <i>Hence, more money entering an economy would be expected to reduce the value of each money unit.</i></span><br />
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<span style="font-family: inherit;">Now we can parse bank loans into stable and unstable sources.</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Loans from individual entities (not banks) would be stable. There is no increase in amount of money available to the macro economy. Individual entities would have first earned the money they are about to lend. (Individual entities cannot create money.) Bank lending that moved money directly tied to depositors (with a bank acting as agent for depositors) would be stable for the same 'first earned' reason.</span><br />
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<span style="font-family: inherit;">Loans from banks that did not tie loan risk to a specific supplier of money would result in the appearance of an increase in the amount of money on deposit at banks. This would be an unstable increase of money, and would therefore follow the unstable model parameters. The lending bank would become at-risk of bank runs when depositors became aware of deposit claims in excess of money actually available for distribution.</span><br />
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<span style="font-family: inherit;">Loans from the central bank are inherently unstable. Central banks have no money of their own to lend because they are restricted to being caretakers of money owned by others. Despite having no money of their own, central banks can create new money in exchange for a promise to repay. Usually, only governments get money via this path but we also have modern examples of central banks buying securities from private owners. Central banks are immune from bank runs because they can always create more money.</span><br />
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<span style="font-family: inherit;">Additional sources of instability can be found. Physical destruction from fire, record loss, and government monetary recall come to mind. More common than any of these three, a broad recall of risk-unassigned loans by banks would result in a rapid money supply reduction.</span><br />
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<span style="font-family: inherit;">Parsing complete, we can see that lending does not need to be a source of instability. Stable lending depends upon tying risk of repayment to lending entities. Without repayment risk assignment, there need be no rational expectation of loan limits or possible future money supply reduction.</span><br />
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<span style="font-family: inherit;">That completes the description of the unstable money model. Instability comes from a change in the amount of total money available to the macro economy.</span><br />
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<span style="font-family: inherit;">Stability and Instability in SFC Models</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Stock-flow consistency (SFC) models can be used to show stocks and flows under stable and unstable monetary conditions. We begin with a very <a href="https://en.wikipedia.org/wiki/Stock-Flow_consistent_model">simple model found in Wikipedia, Figure 1</a>. This model assumes government borrowing from the household sector and is therefore, a model of an economy with a stable money supply. We know the economy is monetarily stable because the flow balances (found at the bottom and right sides) are all zero. This would be true despite the household money supply (∆Hh) and government money supply (∆Hg) being labeled differently. Here ∆Hh equals ∆Hg.</span><br />
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPbHSwSLkenMHll1Dm8eEU3i4gr0GUQYj33s6U4TdYrcZnQPQ5rivGwjnOcbFefVyR1BJdSDaSe7Af55NpKIlNW0-mukPiVO_rsiITa6BjaIjww3QfcsupOsckXCE1DTXfzw8WpzAyRQgU/s1600/SFC+Wiki+Model.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><span style="font-family: inherit;"><img border="0" data-original-height="284" data-original-width="546" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPbHSwSLkenMHll1Dm8eEU3i4gr0GUQYj33s6U4TdYrcZnQPQ5rivGwjnOcbFefVyR1BJdSDaSe7Af55NpKIlNW0-mukPiVO_rsiITa6BjaIjww3QfcsupOsckXCE1DTXfzw8WpzAyRQgU/s1600/SFC+Wiki+Model.png" /></span></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-family: inherit;">Figure 1. Stock-flow consistent model from Wikipedia</span></td></tr>
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<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">In Figure 1, money borrowed from the household sector flows from household bank accounts to government and then back into private ownership. Money supply therefore remains constant in the banking system. (We are assuming household money is stored in the banking system.) This represents a stable money supply situation with loans causing changes in the liquidity conditions of sectors.</span><br />
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<table cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhF8B2s-8ENnLod18KT_G3AIZfTSfyC8QFc_Ks_PfhjHr5hL4a5ptguilPDHL7gfU4G2CBftdFegP7a-zFwIZW1HvxvF8peIjG7EMAiyyrdCd6SA1Lle45d-DjiFNIB9jM6Cr6TwNvAX0mj/s1600/Three+SFC+Macro+Models.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="779" data-original-width="529" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhF8B2s-8ENnLod18KT_G3AIZfTSfyC8QFc_Ks_PfhjHr5hL4a5ptguilPDHL7gfU4G2CBftdFegP7a-zFwIZW1HvxvF8peIjG7EMAiyyrdCd6SA1Lle45d-DjiFNIB9jM6Cr6TwNvAX0mj/s640/Three+SFC+Macro+Models.png" width="434" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><div style="text-align: left;">
Figure 2. Three SFC models showing three methods of introducing stability or instability into a monetary model as a result of bank lending.</div>
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<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">In Figure 2, we have changed the labels to show money being owned by either banks or households. This is done to allow an illustration of bank loans made with and without risk assignment. (While the lending bank may be at risk, deposit insurance (for the most part) protects the depositor from risk.) Having no perceived risk, the household sector is the beneficiary of bank loans and will perceive an increase in wealth realized through the income stream (identified as wages paid by firms).</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Assigning Value to Newly Created Money</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Early in this article, we recognized an intuitive relationship between the amount of money available and value of any physical item. We went on to say that any subsequent increase in money supply would intuitively decrease the value of each monetary unit. With all that said, how might small, measured increases in money supply be valued?</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Still thinking intuitively, small increases should enter the payment stream valued as if they were an undifferentiated member of the existing, stable money supply. New money should have the same value as previously issued money. Applied to a practical example, a plumber, asked to repair a plugged drain, should charge the same hourly rate to both a customer with saved money and a customer with borrowed money.</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">We can extract an intuitive lesson from the plumber example. The creation of money <i>by itself </i>does not create economic disturbance. Economic disturbance occurs when both saved money and borrowed money want to buy at the same time. The degree of economic disturbance can be predicted as ranging from near zero to hyper inflationary (as when two customers get into a bidding war). We won't examine all the economic disturbance possibilities here.</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Taming the Unstable Model</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">This article has placed a lot of emphasis on the unstable model of money. That said, the money we are familiar with using is relatively stable. Why do we see stability?</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Still working from intuition but adding logic to extract probable supports for stability, we can think of several reasons of why a human creation becomes stable:</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">1. Human creators fundamentally want stability.</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">2. Instability is principally caused by creation and destruction of money. Since creation and destruction are controlled by banks, control of stability is a reachable goal.</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">3. Controlled instability can be used to improve the well being of the controller. While stability may be necessary for money to function, the controlled positive effects of monetary creation can be utilized/captured by controllers.</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">We won't discuss these three stability-tending reasons here. Our monetary system fundamentally works and we will leave it at that.</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Conclusion</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">I have to wonder if this whole article is somewhat trivial in nature. What is being pointed out that we don't already know? My response is that an intuitive investigation cannot really be expected to reveal anything not already known. On the other hand, emphasizing the unstable aspects of our perceived-as-stable monetary system can help us better understand paths to manipulation. Monetary manipulation can be good or bad---it's all in the eye of the beholder.</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">(c) Roger Sparks 2019</span>Roger Sparkshttp://www.blogger.com/profile/01734503500078064208noreply@blogger.com11tag:blogger.com,1999:blog-6476989946886057900.post-438057461417913872019-08-28T09:31:00.000-07:002019-09-17T16:50:02.741-07:00A Micro-Economic Analogue for MMTMMT describes how modern governments can create money at whim and goes on to describe how government can give everyone a job. This attractive theory lacks a micro-economic analogue which hinders in understanding the implications of MMT. This post will outline a micro-economic analogue to complement macro MMT.<br />
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First the Similarities<br />
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Our analogue model will be a small business whose owner has the ability to offer price relief by making valuable coupons available to customers. Coupons are redeemed in the issuing store for merchandise whose price is effectively reduced by the value represented by coupon. The use of coupons is a common practice in the retail sector.<br />
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We now claim that a small business which offers discount coupons is effectively creating a locally-valuable money. This locally created, locally valuable money is used to discount posted prices in hope of improving sales. A customer in possession of locally produced money takes it into the issuing store and receives credit as if he was bringing in normal money. Intellectually, both customer and store owner know that the effective price-at-time-of-sale has been reduced to the extent that a coupon has been presented and accepted.<br />
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Crucial to understanding the implications of this model is the realization that locally created coupons are created without expenditure of meaningful amounts of labor or resources. Equally crucial is the observation that two customers, one with coupon in hand and one with only normal money, will pay the same price for an item. That noted, the one with a coupon will receive the item with less actual effort having been expended in acquiring money for purchase. The coupon owner comes into the store in a wealth enhanced position when compared to the no-coupon buyer.<br />
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A fundamental nexus of unequal pricing has been created to the extent that the store owner has given coupons to some buyers and not to others.<br />
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When government issues new money (whether created by actual new printing or by borrowing without intent to reduce total borrowings) government is acting as if it were the owner of a national store who elects to issue coupons. Similar to the small business owner, government is looking for enhanced product movement. For example, government can borrow money and give it to people needing health care. Health care sales should improve which would be the desired outcome. The customer would be indifferent to the actual cost to the extent that part of the cost is a gift. Government knows (or should know) that the macro economy has actually collected less money than was received because some fraction of the collected money was first produced locally at no cost in labor or resources expended.<br />
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A fundamental nexus of effort-exchanged-for-effort has been broken when government prints money as if it were a coupon to be used to reduce prices to improve sales.<br />
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When a store prints coupons, the printing store will have some estimation about how the local money will be used. The net effect will be to reduce gross-retail-valuation by the amount of local money redeemed. Merchandise will leave the store in exchange for a reduced collection of base money. This will obviously have serious implications for a store's cash flow position and net wealth position, implications which the merchant will certainly take into consideration.<br />
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Merchants create coupons for a number of different purposes just as government may create base money intended for a variety of economic enhancements. The exact micro or macro-economic effect of each enhancement would depend upon the circumstances surrounding each unique event.<br />
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Now the Dissimilarities<br />
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While the business enhancement parallels of this analogue fit together well, the duration of the two types of coupons (local and government) are vastly different. A look at the differences is instructive.<br />
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Coupons issued by small business have a very limited lifespan. On the other hand, coupons printed by government are not redeemed or canceled when they are used, giving them unlimited longevity. First we look at the balance sheet implications for small business.<br />
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A small business owner who considers offering a discount coupon must remember that he is about to give away some part of the gross value of his store. No longer will the apparent value of merchandise be calculated by multiplying posted prices times stock numbers. The existing apparent gross value will be reduced by the expected return of valuable coupons. The act of offering valuable coupons increases the wealth of customers at the expense of the merchandise owner. The same thing occurs when government prints coupons.<br />
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When government prints money, the measurable monetary wealth of the nation must instantly increase. The individuals receiving this money will have a wealth increase that comes at the expense of those who do not get a direct payment. One group receives a printed-money enhanced government check while the second group must both work to achieve the same monetary position and endure increased competition for available goods.<br />
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General Comments<br />
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There is no reason that either small business or government needs to limit coupon issue to a one-time event. Both can issue coupons repeatedly.<br />
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In the case of repeated coupon offers, small business simply builds a probability based coupon-return-rate into it's business model. The gross value of merchandise would be reduced by the value of expected coupon return. Additionally, knowing that coupons are coming, customers routinely wait before buying until the coupons arrive. Coupon practices get built into the economic environment. The same thing happens when government repeatedly issues coupons.<br />
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When government routinely, repeatedly, increases the wealth of the nation by sequentially issuing more money, the economy creates a business model built around that expectation. A central bank expectation of a 2% annual inflation rate is a good example of a national business plan built around continued coupon issue.<br />
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Conclusion<br />
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MMT describes how government can issue money pretty much at whim. Small business can do the same thing by issuing coupons.<br />
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Small business is careful to not 'give away the store' by unlimited coupon issue. Government needs to be equally careful.<br />
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(c) Roger Sparks 2019Roger Sparkshttp://www.blogger.com/profile/01734503500078064208noreply@blogger.com0tag:blogger.com,1999:blog-6476989946886057900.post-24072258202928107322019-05-30T11:38:00.000-07:002019-09-17T16:44:40.193-07:00Finding a Justifiable Tariff Rate in a Floating Currency WorldPresident Trump recently announced a tariff increase from 10% to 25% on a basket of Chinese products with American officials charging "backtracking on commitments". This seems to be a political reason, not an economic reason, to raise tariff rates. That said, can we find an economically justified tariff rate for products in a floating exchange rate world? We will try to find a logical answer to that question over the course of this post.<br />
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<b>The political backdrop</b><br />
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Trade between nations with different currencies is essential to solve resource unbalances on a world wide basis. If this trade is roughly financially equal, there is little long term concern. Political concern develops when the financial trade is unequal for long periods of time. The cumulative American trade history with China yields one such example.<br />
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When we see every modern industrial nation spending far more than possible with taxation alone, we can deduce that, world-wide, we live in a subsidized economy. This subsidized macro-economic environment includes a subsidy enhanced export environment characterized by floating currency relationships. Having created imbalances that have gone on for many years at an increasing pace, the political climate has reached a point in time where finger-pointing has been replaced by real actions to change perceived imbalances, primarily job displacement. Tariffs are the tool of choice now being used by the American government.<br />
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<b>National resource imbalances</b><br />
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Not only are there wide differences in resource bases between nations (some have oil, some have iron, some have labor, etc), there are wide differences of willingness to expend national resources to keep people working productively. A strong case can be made that export industries will be economically favored when a currency is weakened, putting people to work at the cost of an internal shift in the distribution of wealth. Of course, increased exports from one nation will likely result in increased competition with reduced prices and jobs in the importing nation.<br />
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A strong argument can be made that China (as a nation) has subsidized it's labor and absorbed the results of a currency mismatch, enabling China to export into America and maintain an unhealthy trade imbalance over a period of many years. In the process, America has exchanged paper money for goods. China has built a cash investment exceeding $1 trillion in the U.S. while the U.S. has enjoyed consumption of perishable goods (as seen from a longer perspective). The Chinese earned their money fair and square, but at the same time, this trade has come at the cost of American job loss.<br />
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Job losses means fewer people working to pay taxes. This is a real problem for a share-the-wealth, semi-socialist economy. When taxes fail to pay the cost of government, government borrows and increases benefits! The alternative to borrowing, increased taxes on domestically produced products, makes products more expensive, thus increasing the attractiveness of foreign production, such as those from China. A vicious circle develops and we are seeing the advanced results after some 40-50 years of expanding effect.<br />
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<b>A philosophy of taxes</b><br />
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The link between taxes and products is inescapable. Taxes are levied so that real physical products and valuable productive time can be purchased by non-producers (whose services may or may not be needed to keep the economy running). Producers are taxed so that they will share the products they make by fruitful utilization of their time and materials.<br />
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Taxation on production begins at the very roots of production. Materials coming from the ground first pay property taxes (which can be considered as rental fees conferring conditional ownership). Labor used in extracting and building product pays employment taxes before sale of the product, and later, income taxes. These tax sequences do not occur when the finished product is imported. Granted, foreign producers also pay taxes on production using a foreign currency but none of these taxes come into the coffers of the importing nation. Not a problem when trade is balanced but a huge problem when a trade unbalance exists for many years.<br />
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<b>The General Effect of Taxes by Type</b><br />
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We will not try to broadly examine the economics of taxation here but we need to do at least a swipe at the issue to even start finding a economically justified tariff rate. We will limit our examination to sales taxes and income taxes.<br />
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We can easily see that a tariff is a sales tax levied on a selected product that originated outside of local tax control. General sales taxes are a levy on goods of any source, locally paid when the product is purchased. Payment of a tariff is unlikely to result in avoidance of an additional general sales tax.<br />
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Income taxes are taxes on the income stream of citizens. They are commonly graduated and partially excused following a general pattern of improving income distribution and encouraging economic behavior.<br />
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<b>Subsides are an inversion of taxes</b><br />
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Subsidies are an enhancement of income in some fashion, often hidden for political reasons. A good example of hidden subsidy is found in the expenses of the U.S. Government. Government spends far more than it has available from tax revenue, balancing it's annual budget with borrowed money. This borrowed component can only be viewed as a massive macroeconomic subsidy benefiting with full effect those getting payments directly from government. Citizens not getting direct payments from government benefit indirectly from a macro-economic money flow that is larger than could be sustained by tax revenues alone.<br />
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A favorite tactic of governments trying to improved exports is to under-tax the favored industry. A very subtle way of doing this is to reduce the purchasing power of the exporting currency, thus increasing the purchasing power of the targeted importing nation. This action favors exporters and their workers at the expense of the broader domestic economy.<br />
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<b>Impossible to tax imports until they are under local control</b><br />
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Imports yield in no government tax income until they enter local control. As a consequence, we can say that imports as tax generators have not contributed to the local tax base via production taxes in all their local forms. Foreign workers do not pay income taxes, property taxes, sales taxes on raw materials, or any of the taxes on production that serve to sustain a local economy. The first local tax on imports is often a local sales tax.<br />
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<i>Without full taxation on production, we can easily see that imports have the potential to completely destroy a narrowly based local economy.</i><br />
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<b>An initial attempt to find a fair import tax rate.</b><br />
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In the United States, federal government tax revenue is roughly 19% of GDP. On an individual basis, the income tax rate graduates into the 35% range, but is near zero for a high percentage of the working population. Not usually considered an income tax, Federal Insurance Contributions Act (FICA) taxes<span style="background-color: white; color: #545454; font-family: "roboto" , "arial" , sans-serif; font-size: x-small;"> </span>are income based and functionally flat at about 15% (when employer and employee taxes are combined). Of course, workers building imports pay no share of this.<br />
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Based on Social Security taxes alone, we might agree that a 15% tariff on all imports would be reasonable. Finding few exceptions to paying FICA taxes, we would have no favored products.<br />
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FICA taxes are not part of the revenue stream resulting in a tax rate calculation of 19% of GDP. We should be able to add a lost tax component approaching 19% to the FICA justified tariff rate. We could modify this by adding the avoided taxes replaced by borrowing. The income tax rate component would approach 25% if we took this approach. [<i>This is a VERY rough estimated tax rate component.</i>]<br />
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We could combine the FICA component and income tax rate components to conclude that a tariff rate of 40% on all imports is not unreasonable.<br />
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Wow! The American economy would certainly feel the distributional effects of the implementation of that kind of tariff rate, <i>but we would be making a economically justified rate choice</i>!<br />
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<b>The effect of foreign local taxes on exports</b>.<br />
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It is logical for the reader to say "Whoa! Foreign workers making export products pay their own local taxes. Why should we double tax them?"<br />
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My answer is bound to be controversial. When two currencies are involved, with product made using one currency and sold to a second currency, we have no natural value adjustment mechanism to use. All values are relative, which explains why currencies have floating value relationships. A full application of the lost tax rate is the most severe economically justifiable rate possible.<br />
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A less severe tariff rate could be negotiated in an effort to find an average of the two country tax rate. The idea would be that each nation will charge tariffs on imports, with the goal to be an average rate representing the expected loss income to each entity. I would suggest that the relative amount of government funding imbalance should also be a factor. It seems to me that avoiding double taxation would be a very desirable economic enrichment necessity.<br />
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(c) Roger Sparks 2019<br />
<br />Roger Sparkshttp://www.blogger.com/profile/01734503500078064208noreply@blogger.com1tag:blogger.com,1999:blog-6476989946886057900.post-87565558735132486132019-04-11T09:03:00.000-07:002019-06-25T09:32:10.720-07:00A Travelers Definition of InfinityNow I am not a mathematician nor is the upcoming subject the usual fare for this blog, but here goes anyway.<br />
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The concept of infinity has bothered me for a long time. It first really bothered when I was learning calculus and heard that there is always a very small remainder in the typical calculus answer. I foolishly allowed this trivial observation to undermine my confidence in the mathematical strength of calculus. In my mind, I was learning a failed technique that was not perfect. Now, some sixty years later, I am confident that any calculus calculation can be as accurate as we desire, despite being incapable of achieving absolute perfection.<br />
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So what might an infinitely small error look like?<br />
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I was recently on a long drive in the Moses Lake, Washington area, traveling at the speed limit, when a container truck passed me. After complaining silently about his excessive speed, I began to wonder about the included angle made by the two sides of the rapidly disappearing truck. The angle was large when the truck was close but rapidly became smaller as it increased distance. The angle would become infinitely small at some distance (I thought) but no, it would never become zero. So, I wondered, what is infinity?<br />
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This must be a case of defined infinity. Here, "infinitely small" must be a shorthand term for 'too small to worry about'. We could always find an included angle with a value, even if the truck was located on a planet orbiting a distant star. The result would be real but how could it possibly have a physical influence on our local reality?<br />
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With this example in my background, I am free to think about the equation<br />
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Y = A_infinity x 1/B_infinity.<br />
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Does Y equal 1, zero, or infinity? It would depend upon the equality of the two infinities.<br />
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So there you have it. A travelers definition of infinity.<br />
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<br />Roger Sparkshttp://www.blogger.com/profile/01734503500078064208noreply@blogger.com0