What Does Paul Ryan NOT Understand about Reserve Banking?

[Capt Bringdown]

What Does Paul Ryan NOT Understand about Reserve Banking? (http://neweconomicperspectives.org/2013/04/what-does-paul-ryan-not-understand-about-reserve-banking.html)
It’s clear that Paul Ryan believes the Federal government uses money created by the U.S. banking industry for its sovereign spending. If this actually were the case, we’d be correct in believing that, like the rest of us, the Federal government has to EARN the dollars it spends—in its case, by collecting taxes, fines and fees—or it will have borrow them from someone who has more dollars than they need. There would also be some justification for Congressman Ryan’s fearful belief that the Federal government is spending a whole lot more dollars than it “earns” and, as a result, is having to borrow way more dollars that it can ever pay back.

In truth, however, the Federal government does NOT use money created by U.S. banks—it is the other way around: U.S. banks have accounts at the Federal Reserve which they use to leverage money created by the Federal government. And this operational relationship leads inexorably to three apparent realities that Congressman Ryan would do well to consider and understand before he succeeds in leading our nation into poverty.

--more-->> (http://neweconomicperspectives.org/2013/04/what-does-paul-ryan-not-understand-about-reserve-banking.html)

[CosmicCowboy]

That's one of the dumbest things I have ever read.

[boutons_deux]

Repug, tea bagging extremists, libertarian politicicians may or may not actually know something, but they in public they spout non-stop bullshit, lies, propaganda with absolutely no interest in advancing the coutnry or in governing. Ryan is another absolute clown, a fool with his 100% magic budgets, that 100% of House Repugs vote for.

[CosmicCowboy]

That's one of the dumbest things I have ever read.

Correction

I wasn't counting all of Boutons posts.

[Winehole23]

http://en.wikipedia.org/wiki/Chartalism

[Winehole23]

calling it dumb won't make MMT, neo-chartalism, post-Keynesianism -- whatever one wishes to call it -- go away. it's so counterintuitive to common sense and the common experience of money it seems it could not possibly be right, and in fact it sounds very silly. that doesn't make it wrong. I'm not sure I could put my finger on where it is wrong.

can you, CC?

[CosmicCowboy]

I'm not saying that a certain level of deficit spending is bad. It's like chemotherapy for a sick economy. The question is, at what level does it eventually kill the patient?

[CosmicCowboy]

Deals like this are the beginning of the end for the US's ability to keep printing money like drunken politicians.

http://www.channelnewsasia.com/news/business/international/china-australia-start/633936.html

[Winehole23]

It's like chemotherapy for a sick economy. The question is, at what level does it eventually kill the patient?dunno. no political state lasts forever.

another would be, what level of deficit spending is good, and why?

[boutons_deux]

Deals like this are the beginning of the end for the US's ability to keep printing money like drunken politicians.

http://www.channelnewsasia.com/news/business/international/china-australia-start/633936.html

Repug/tea bagger/Fox propaganda hiding their real objective: cut taxes on the corps and 1% even more, either by tax rate reduction or more loopholes.

govt employment at all levels AND federal spending are down versus the growth in population, and down since the criminal Repugs left office.

the govt austerity CC and other (wealthy) right wingers masturbate after will worsen the deficit just as we see in yet another factual, irrefutable proof, in Europe, that austerity in deep recession makes the economy, and thereby deficits, worse.

[Capt Bringdown]

Michael Hudson: Government Debt and Deficits Are Not the Problem. Private Debt Is. (http://michael-hudson.com/2013/03/government-debt-and-deficits-are-not-the-problem-private-debt-is/)

So governments from the United States to Europe face a choice: to save the economy, or to save the banks and bondholders from taking a loss by keeping the debt overhead in place and re-inflating real estate prices to a level high enough to cover the debts attached to the property whose underwater mortgages are weighing down the banking system.

The problem is that rising housing prices increase the cost of living, and hence of employing labor. When I started to work on Wall Street fifty years ago, banks had a basic rule in lending mortgage money: mortgage debt service should not exceed 25% of family income. A year ago Sheila Bair recommended limiting mortgage lending to 32% of income. Washington’s most recent rules for providing housing loan guarantees raised the ratio to 43%.

When it comes to analyzing comparative advantage among nations, the key no longer is food or prices for other goods and services. Financial charges and taxes are the key. The typical blue-collar family budget provides the explanation for why the United States is losing its industrial advantage:
Housing (rent or home ownership) 40%
Other bank debt 10 to 15%
FICA wage withholding 13%
Other taxes 15%

Only 20 to 25% of the family’s budget is free to buy the commodities being produced. This means that Say’s Law – the circular flow of income and spending between employers and their work force – is diverted to pay debt service, and also to pay including Social Security and Medicare taxes as a user fee instead of these services being paid for out of the general fiscal budget by progressive taxation falling mainly on what Adam Smith, John Stuart Mill and their Progressive Era followers urged: land rent, natural resource rent, monopoly rent, and luxuries.

A Keynesian economist would point to excess saving as the problem. But debt repayment has changed the character of saving in today’s debt-ridden economies. In the 1930s, Keynes pointed to savings being a leakage from the economy’s circular flow. What he meant by “saving” was mainly non-spending – keeping income in bank accounts or other liquid or illiquid financial investment.

But savings rates have risen since 2008 for quite a different reason. America’s recovery of savings rate from zero in 2007 is not a result of people building up saving for a rainy day. What the National Income and Product accounts report as “saving” is actually paying down debt. It is a negation of a negation.

This is what debt deflation means. The antidote should be more government spending and larger deficits – as well as debt forgiveness.

Bank lobbyists are urging just the opposite set of policies. They have implanted a false memory and a false economic theory blaming hyperinflation on deficit spending. The reality is that every hyperinflation in history has come from paying foreign debts, not domestic debts.
--more-->> (http://michael-hudson.com/2013/03/government-debt-and-deficits-are-not-the-problem-private-debt-is/)

[Capt Bringdown]

dubble post

[RandomGuy]

That's one of the dumbest things I have ever read.

How exactly is it dumb?

Be specific.

[boutons_deux]

How exactly is it dumb?

Be specific.

Won't happen, other than right wing propaganda

[CosmicCowboy]

How exactly is it dumb?

Be specific.

It ignores the way commerce works and assumes all payments originate with the government and a 1/1 ratio of payment/tax would be required to balance the budget. It completely ignores the fluid nature and velocity of money as it flows from person to person and business to business where the same dollar is taxed multiple times as it changes hands.

[Winehole23]

are the claims you ascribe to MMT in the previously posted?

I do not find the assumption that all payments originate with the government, whatever that means, nor do I see how you point about taxation relates.

[RandomGuy]

It ignores the way commerce works and assumes all payments originate with the government and a 1/1 ratio of payment/tax would be required to balance the budget. It completely ignores the fluid nature and velocity of money as it flows from person to person and business to business where the same dollar is taxed multiple times as it changes hands.

It was a simplifying example, meant only to address Mr. Ryans statements. The concept of velocity of money, and multiple taxation were not needed, and outside of the scope of the article's main idea. If you toodle around the the website there, I would be willing to be one of the other authors, or even that author might address just that. My lunch hour is up, or I would help you out and offer a link or two.

All payments exactly originate with the government in fiat currencies, by definition. You are too focused on the medicare payment part, and forget about the fact that the Reserve bank has to create funds before a bank can issue them. Re-read it a bit, and this may become a bit clearer.

[CosmicCowboy]

are the claims you ascribe to MMT in the previously posted?

I do not find the assumption that all payments originate with the government, whatever that means, nor do I see how you point about taxation relates.

go to the posted link. I was referring to the whole article linked (that I read) and not the snippet clipped by the original post. I can see how it was confusing.

[CosmicCowboy]

It was a simplifying example, meant only to address Mr. Ryans statements. The concept of velocity of money, and multiple taxation were not needed, and outside of the scope of the article's main idea. If you toodle around the the website there, I would be willing to be one of the other authors, or even that author might address just that. My lunch hour is up, or I would help you out and offer a link or two.

All payments exactly originate with the government in fiat currencies, by definition. You are too focused on the medicare payment part, and forget about the fact that the Reserve bank has to create funds before a bank can issue them. Re-read it a bit, and this may become a bit clearer.

Sorry, but oversimplifying by leaving out the velocity of money when discussing necessary tax rates to balance the budget was a HUGE flaw in his argument.

[RandomGuy]

Sorry, but oversimplifying by leaving out the velocity of money when discussing necessary tax rates to balance the budget was a HUGE flaw in his argument.

hmmm. I will go back and re-read it when I get time.

[Winehole23]

Sorry, but oversimplifying by leaving out the velocity of money when discussing necessary tax rates to balance the budget was a HUGE flaw in his argument.Hudson's argument, or the OP? my impression is that both deemphasize the importance of balancing the budget and in fact, think it a bad idea to do so.

[Winehole23]

for macroeconomic reasons a bit beyond my ken, i must admit . . .

[CosmicCowboy]

Hudson's argument, or the OP? my impression is that both deemphasize the importance of balancing the budget and in fact, think it a bad idea to do so.

I think it's irrational to ever think we can balance the budget, but slowing down the geometric growth of debt is certainly a reasonable goal IMHO. The pain that would be necessary to truly balance the budget is just not politically expedient for either party.

[Winehole23]

I think it's irrational to ever think we can balance the budget, but slowing down the geometric growth of debt is certainly a reasonable goal IMHO.has anyone suggested that isn't a reasonable goal?

[LnGrrrR]

calling it dumb won't make MMT, neo-chartalism, post-Keynesianism -- whatever one wishes to call it -- go away. it's so counterintuitive to common sense and the common experience of money it seems it could not possibly be right, and in fact it sounds very silly. that doesn't make it wrong. I'm not sure I could put my finger on where it is wrong.

can you, CC?

To be fair, quantum mechanics does pretty much the same thing with physics.

[Winehole23]

Not helpful. I don't understand quantum physics either.

[LnGrrrR]

Not helpful. I don't understand quantum physics either.

It's alright, not many people do, and those that do really don't understand why. :) Suffice to say that quantum mechanics isn't about what is or isn't, but the probabilities of what might or might not be. To give a simple analogy, let's say you flip a coin. It lands on your hand and you cover it. It's obviously either heads or tails. But in quantum mechanics/physics, it's actually both heads and tails, until you "collapse" the possibilities by lifting your hand and revealing heads or tails.

It's EXTREMELY counterintuitive, but it happens, and it is "right".

[baseline bum]

It's alright, no people do, and those that do really don't understand why. :) Suffice to say that quantum mechanics isn't about what is or isn't, but the probabilities of what might or might not be. To give a simple analogy, let's say you flip a coin. It lands on your hand and you cover it. It's obviously either heads or tails. But in quantum mechanics/physics, it's actually both heads and tails, until you "collapse" the possibilities by lifting your hand and revealing heads or tails.

It's EXTREMELY counterintuitive, but it happens, and it is "right".

FIFY

[baseline bum]

dp

[scott]

Looks like everything is under control here

http://global3.memecdn.com/Expert-Mode_c_138758.jpg

[2centsworth]

I think it's irrational to ever think we can balance the budget, but slowing down the geometric growth of debt is certainly a reasonable goal IMHO. The pain that would be necessary to truly balance the budget is just not politically expedient for either party.

Please explain the downside to this "geometric growth"? Quantify the risks and tell me when these consequences are going to happen.

[CosmicCowboy]

Please explain the downside to this "geometric growth"? Quantify the risks and tell me when these consequences are going to happen.

Good question. I figure 5-10 years till the tipping point. US currency has been THE reserve currency of the world. There are demands for dollars to do currency exchanges worldwide. As the US government and the Fed continues to shit massive amounts of "new" currency into the market to finance deficits as far as the eye can see the rest of the world is looking for dollar alternatives. When they find it the dollar is gonna go to shit.

I am literally betting my financial life on it. Fuck Dave Ramsey. By the end of the year I will literally have over a million dollars of low interest long term fixed interest dollar debt placed in hard assets that can roll with inflation.

[boutons_deux]

"When they find it the dollar is gonna go to shit."

which is great for USA exporting industries, while making Chinses garbage more expensive to import, so corps start mfr more garbage in the USA.

[Big Empty]

"But with an inverse yeild curve, the us currency is destined for deflation. Thus allowing us to dig for gold to back our fiat currency, which in turn would allow exports to rise against our dowluh. And then we can deciminate our deficit, and cosmic cowboy can make another million dollars"
"http://t1.gstatic.com/images?q=tbn:ANd9GcSdLvdA5EM9obCBoKML0wBzspyEwna7e QYfD31X7PYWSSH6k99GWg_EMES4_A

[Winehole23]

Looks like everything is under control here

http://global3.memecdn.com/Expert-Mode_c_138758.jpglittle help?

[2centsworth]

Good question. I figure 5-10 years till the tipping point. US currency has been THE reserve currency of the world. There are demands for dollars to do currency exchanges worldwide. As the US government and the Fed continues to shit massive amounts of "new" currency into the market to finance deficits as far as the eye can see the rest of the world is looking for dollar alternatives. When they find it the dollar is gonna go to shit.

I am literally betting my financial life on it. Fuck Dave Ramsey. By the end of the year I will literally have over a million dollars of low interest long term fixed interest dollar debt placed in hard assets that can roll with inflation.

here is what I think you should consider.

1. Most hyperinflation proponents thought the tipping point was 2012(i.e Bill Gross, Mark Faber, Peter Schiff, etc...) In fact, Stansberry(hugely circulated in conservative circles) predicted the US would lose their reserve currency status in 2010.

2. Our currency really only amounts to credits and debits on a spreadsheet at the Fed. If you take $100,000 of cash (currency) to the IRS to pay your taxes, the IRS will just shred your dollars and credit your account. This means the fed just keeps score and can boost accounts, like they've done significantly over that past 4 years, and still have interest rates collapse. What happened to interest rates when the ratings agencies downgraded US debt? they went down and investors bought more.

3. Velocity is way more inflationary than total debits and credits(dollars). Employment participation rates are at historic lows, incomes continue to shrink and there's a lack of innovation that requires manpower, so the outlook for velocity is dim IMO.

4. Japan, whose debt is also sovereign, has 200% Debt/GDP vs 90% in the US, and Japan continues to struggle with deflation in part because of their aging population.


My experience with conservatives, and I'm not necessarily accusing you of this, is that the root of their anger is a fundamental belief that entitlements are fundamentally wrong and destructive long-term. Though I can go along with that somewhat, I wish their underlying anger wasn't aimed at dark people, but instead pointed at the biggest drivers of those entitlement debts, anglo retirees who have not paid in nearly as much as they will receive in benefits from the governement. Yet, Republicans will continue to talk about welfare babies and foodstamps like those programs even come close to the handouts received from Medicare. It's called demagoguing the white vote, and yes I understand the other side demagogues too.

[CosmicCowboy]

We are clearly in uncharted waters. Logic dictates that the Fed will eventually have to unwind it's position which should have the reverse effect on interest rates.

[2centsworth]

We are clearly in uncharted waters. Logic dictates that the Fed will eventually have to unwind it's position which should have the reverse effect on interest rates.

they don't have to unwind because they are not accountable to anyone, which means all debtors accept fed notes. Now if debtors required the fed to repay in gold or in Euros our economy would collapse much like Weimar Germany that was required to repay their debts in currency other than their own.

We are blessed as a country.

[CosmicCowboy]

I read the same opinions that you have that deficits don't matter.

I understand we can run deficits forever but rule of thumb is the percentage of GDP shouldn't exceed the inflation rate + GDP growth or around 5%. Running annual deficits of 10% of GDP is unsustainable IMHO.

[ElNono]

Next time you hear a politician dumbing down the world economy by comparing it with a household economy, run as fast as you can...

[2centsworth]

I read the same opinions that you have that deficits don't matter.

I understand we can run deficits forever but rule of thumb is the percentage of GDP shouldn't exceed the inflation rate + GDP growth or around 5%. Running annual deficits of 10% of GDP is unsustainable IMHO.

I'm not totally disagreeing with you, but what makes 10% deficits unsustainable (we are running at 6.25% 1/16)? Rhetorical question so I'll answer, interest payments, because like taxes and spending cuts, interest payments take money out of the economy.

Here is where we probably will agree, Obama is clueless.

[CosmicCowboy]

Next time you hear a politician dumbing down the world economy by comparing it with a household economy, run as fast as you can...

That is a dumb analogy but there ARE limits and just because we don't know exactly where they are doesn't mean we should ignore them.

[ElNono]

Tangential... did you guys heard about Japan's announcement they're doubling their monetary base in two years?

They're targeting an annual 2% inflation rate, and that's basically what it would take for them...

http://uk.reuters.com/article/2013/04/10/uk-japan-banks-idUKBRE93916B20130410

[2centsworth]

That is a dumb analogy but there ARE limits and just because we don't know exactly where they are doesn't mean we should ignore them.

there are limits like global warming alarmist believe there are limits. however, to live like it's a imminent threat is a huge mistake when we should focus on creating good paying jobs and inventing great new labor intensive technologies.

[ElNono]

That is a dumb analogy but there ARE limits and just because we don't know exactly where they are doesn't mean we should ignore them.

We certainly know other countries have tested such limits much farther than we have and are still fighting with deflation... so we definitely know where some of those limits are not at.

But the analogy is dumb way before then: Households don't control their own currency.

[CosmicCowboy]

there are limits like global warming alarmist believe there are limits. however, to live like it's a imminent threat is a huge mistake when we should focus on creating good paying jobs and inventing great new labor intensive technologies.

Oh, I think a 5-10 year window is reasonable for inflation induced by the actions of the Fed to return with a vengeance. Like I said, I'm betting a lot of money on that opinion.

[2centsworth]

Oh, I think a 5-10 year window is reasonable for inflation induced by the actions of the Fed to return with a vengeance. Like I said, I'm betting a lot of money on that opinion.

here's an excerpt from ElNono's post "But with the central bank now on track to buy up 70 percent of the Japanese government bonds issued each month...." imagine that talk in the US hahahaha

[2centsworth]

Oh, I think a 5-10 year window is reasonable for inflation induced by the actions of the Fed to return with a vengeance. Like I said, I'm betting a lot of money on that opinion.

well at least we know 6trillion in 4 years wasn't enough of a trigger. In fact, that was a real downer.

[CosmicCowboy]

well at least we know 6trillion in 4 years wasn't enough of a trigger. In fact, that was a real downer.

Yeah. We will probably do at least that in the next 4 years as well. Certainly doesn't bode well for the dollar.

[2centsworth]

Yeah. We will probably do at least that in the next 4 years as well. Certainly doesn't bode well for the dollar.

the projection is 3.8.

[CosmicCowboy]

the projection is 3.8.

Yeah, that's why I figure 6.

[CosmicCowboy]

Yeah, that's why I figure 6.

They aren't counting on millions of small businessmen like me being rational and saying "fuck you and your Obamacare minimum insurance mandates" and dropping our health insurance and moving our employees into the Federal system.

[ElNono]

They aren't counting on millions of small businessmen like me being rational and saying "fuck you and your Obamacare minimum insurance mandates" and dropping our health insurance and moving our employees into the Federal system.

I would argue that's exactly what they want.

[2centsworth]

Colossal Policy Mistake: Campaigns to Preserve the Static Buying Power of a Dynamic Asset (http://mikenormaneconomics.blogspot.com/2013/04/colossal-policy-mistake-campaigns-to.html)
Commentary by Roger Erickson

Recent discussions with co-authors here at MikeNormanEconomics drove home how vast our distributed policy mistakes are becoming. It all seems to stem from a fundamental decline in Situational Awareness. We're simply not sharing enough operational information, across disciplines. The consequences are devastating. Failing to appreciate the most basic aspects of fiat currency operations is one glaring problem, but not the only one. Lets look at fiat currency operations.

Our starting premise is that a "fiat" currency regime exists only if both foreign exchange (Fx) rates and the entire national currency supply actually float freely, in every sense of the word. A national currency is always first and foremost a dynamic unit of account, whose volume must float freely with net economic activity. No liquidity, no economic activity. Consequently, our ongoing effort to stabilize the static buying power of an inherently dynamic asset is our most fundamental and colossal mistake.

What kind of fool would try to save "fiat?" For example, I can sit in a deck chair with a cold beer - ostensibly saving "fiat" all I want, smugly consoling myself that all my saved initiative is steadily appreciating in real value. NOT! By the time I decide to put all that saved initiative to actual work, I might not even be capable of shaving myself unassisted! Repeat after me. Fiat is a dynamic, not a static asset! Ditto for fiat currency.

The advantage of fiat currency is a growing policy space and unlimited policy agility. Those benefits are more than worth having - but ONLY if it they are utilized aggressively, with a bias to action.

Yet our vast financial system is applying astounding, inappropriate pressure to coerce us into trying to save fiat! Why? Whatever the diverse reasons, ALL of them are tragically misguided.

Logic dictates that we should use liquidity to grow capabilities, not fail to put currency to work. The whole concept of currency-based savings is illogical, and criminally tragic. The better lesson is to accumulate appreciating assets, and use depreciating assets ONLY for liquidity, when and as necessary - so that we can be agile, when executing real transactions with real returns.

Let's describe some basic fiat currency operations. In any fiat currency regime, the currency supply automatically follows net actions of the electorate, not the reverse. Note the following observations.

1) A fiat currency issuing government COMMITS TO ACTION FIRST, then appropriates and issues a 'floating' amount of fiat currency as a consequence. The currency issuer guarantees it's own liquidity.
2) Then, that government destroys some small amount of currency, by collecting some small amount of taxes per arbitrary policy (to fine tune both aggregate demand & particular activities). The net currency left in play constitutes the net private stock of currency savings.
3) Only after that does it coincidentally issue T-Bonds - and then ONLY to drain excess banking-reserves, which only exist as a historic relic of happenstance (http://www.epicoalition.org/docs/pavlina.htm).
4) Subsequently, for any and all transactions opened and closed by non currency-issuing citizens, the nation's licensed banking sysem guarantees real-time "liquidity" for real assets, by automatically issuing and slowly destroying temporary changes in currency supply - as the difference between [honestly appraised?] credits to sellers accounts and unpaid debits to the accounts of supposedly qualified buyers. That way, the electorate guarantees it's own liquidity too, insured by the currency issuer.
[Note that in a fiat regime, all the emphasis shifts from controlling the currency supply itself, to regulating White Collar Crime, or credit fraud. That transition requires accelerating agility of supposedly-accredited bank operations and their supposedly-vetted loan recipients. We want the added policy space and economic agility, so we must invest a fraction of the net returns into adequate regulation - otherwise we quickly produce our current problem, TBTJ banksters who think they own us, and our little government too.]

Next, as an example, note the following, simple consequences.

Within the huge market in fiat-currency T-bond trading, many traders erroneously assume that T-bonds occur in a buyers, rather than a sellers market. Just think about that for an instant. Does any issuer of fiat really depend on a bond buyer to get the fiat it can supposedly issue in unlimited quantities, at will? Wouldn't it behoove any T-bond trader to look into the real operations of CB/Treasury bond sales, and ask how they actually proceed, and why they bother with the T-bond process at all? What if one of the core axioms held by many bond-portfolio traders was simply completely backwards (http://finance.yahoo.com/news/pimcos-gross-turns-bullish-us-100107348.html)? An understanding of actual reserve-banking operations can save bond traders from significant losses. A great example, involving pre-euro, Italian gov bonds is described here (http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf) (note that this occurred back when Italy still had it's own fiat currency, before ceding fiat to a foreign entity in Brussels, which had "other" primary interests and was immune to most feedback from Italy, or Greece for that matter).

Next, consider the national budget projections (http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/tables.pdf) regularly released by the US OMB. Again, if you don't know the context, the data is meaningless.

Context for fiat budgets.

Consider the DoD alone, and the institutional momentum it adds to the political arena. The DoD operates on a Planning, Programming, and Budgeting System (http://www.challengemagazine.com/extra/054_069.pdf) (PPBS), which continously works on 3, overlapping, 5 or 6 year Future Years Defense Plan (FYDP) - plus a Quadrennial Defense Review (QDR) every 4 years, as a "fix" for the deeply flawed PPBS! Meanwhile, Congress appropriates annual budgets, yet it takes at least eighteen months to prepare an FYDP, so defense staff "can be working on as many as three FYDPs at one time: the budget plan currently before Congress, finishing the budget plan the president will submit in January, and the early stages of preparing the FYDP the president will submit a year later."

Similar but less convoluted processes go on in every single one of the smaller Federal agencies.

So now what do you think of our ongoing Balanced Budget Debates? It's clear, as many experienced Senators and Representatives will readily admit, that we decide what to do first, and THEN we simply appropriate a budget to denominate what we'll have to hire ourselves to achieve. Paralysis from our current policy debates - in both major parties - could go down in history as one of the classic policy and/or military blunders of all time. Balancing our own fiat? What does that even mean? It's lazy, disorganized semantics, nothing more and nothing less, and it's embarrassing to see it tying up our entire Congress, POTUS and electorate.

What did we say? In any fiat currency regime, "a government COMMITS TO ACTION FIRST, then issues fiat currency as a consequence, and then collects taxes per arbitrary policy, and only after that does it coincidentally issue T-Bonds - and then ONLY to drain excess banking-reserves (http://www.epicoalition.org/docs/pavlina.htm)."

Once again, if you stop and think about this, it drives home the point that a "fiat" currency regime exists only if both Fx and the entire national currency supply actually float, in every sense of the word. A fiat currency automatically denominates any and all real transactions, NOT the other way around.

The real meaning of a fiat currency regime is NOT that we can "spend" or print any amount of currency that we want to. Rather, it means that we can denominate ANY real transactions that any people in our country can convince us to let them execute, from local to national. Fiat simply means actions first, then obligatory accounting recognition of what has occurred in the real world - as an automatic stabilizer of real, dynamic-outcomes-accounting or functional finance. It all comes down to our methods for linking fiat to adaptive function.

That finally acknowledges that the real causality of any currency system is officially inverted from former theory. Prior to John Law (http://en.wikipedia.org/wiki/John_Law_%28economist%29), we simply had it backwards - same as for many other things that we only sorted out after the fact. Progress always follows the same principles. First we invent and explore unpredictably emerging options. Then we rationalize surprises through initially formulaic theory that eventually always turns out to be embarassingly inept - in retrospect. Finally, we eventually discover even more options to explore, by forgoing obsolete form in return for emerging function - thereby imposing the need to realign outmoded theories and entire paradigms.

Note that most of our frictions involve previously exalted theorists being repeatedly embarrassed by emerging realities on the ground. Sound familiar? Every capable grandchild can learn at least one new principle that their grandparents and/or parents were completely clueless about. Our practiced skill in absorbing unchanged principles while also openly admitting unpredictable errors is how we increase, or decrease, our Adaptive Rate.

The overall lesson is to just follow the emerging operations, and let the theory follow ... as fast as it can. This shouldn't be news to anyone, but we've allowed an entire generation of isolated economists to be surprised by the mundane - and another crop of the same is on the way. Better brace yourself. And if you can think of a way to head that inept army off at the pass - please do so immediately, for the sake of your country. Otherwise, we'll get ongoing austerity-insanity and national self-suicide, as we pursue the unattainable and unwanted goal of preserving the static buying power of a dynamic asset ... our fiat currency.

How does all this play out, in a population our size? In the case of fiat currency systems and current fiscal policy, everything subsequent comes down to nth order feedback loops among hundreds of millions of people. All those feedback loops sum - randomly or in an organized pattern - and the sum feedbck then affects what we all think one another should or should not do. One impact is indirect pressures to underfund and overtax activities which given groups don't initially approve of in other groups - especially if they aren't intimately familiar with one another.

The outcome? If there isn't adequate interaction and coordination between all subgroups, then absolutely appalling mistakes, lost opportunities and a growing Output Gap may ensue - as we flounder between alternately narrow policy positions. That's a tragic outcome for a nation of capable but dissociated citizens, because we're failing to grow the astounding potential return on optimal coordination.

When disorganized people try to manage a fiat currency system, a common blowback is that unprepared citizens hoarding fiat currency suddenly get an interest in preserving the static buying power of that dynamic asset. Once that occurs, they may easily lose track of the bigger option - utilizing "fiat" as an unlimited, coincidental outcome of fully floating and un-suppressed coordination. Things get sticky once that becomes an issue, because by then the complaining party has - by definition - already lost sight of the bigger options exposed through national affinity.

To understand organization, affinity and return on coordination, it's useful to keep a simple system mantra in mind.

Interactions drive awareness.
..Awareness exposes group opportunities.
Opportunities demand timely, coordinated actions.
..Coordinated actions drive interaction.

Organization is a positive feedback loop, referred to as autocatalysis (http://en.wikipedia.org/wiki/Autocatalysis). It is a runaway proces, but only if we set it in motion and keep it running freely.

In short, we as a nation, are what we practice. Fiat bookkeeping to track the dynamic value of diverse transactions is just one of the many, trivial data patterns we use. They're all coincidental to the outcomes we as a people desire and of he efforts we organize to achieve those outcomes.

If we don't let our aspirations as a nation float freely, then we cannot maintain a functional fiat currency - only a growing Output Gap. Our pursuit of our aspirations comes first, and the tangible measures of fiat follow coincidentally ... if we let them.

Posted by Roger Erickson (http://www.blogger.com/profile/17515506247888521516) at 11:10 AM No comments: (http://www.blogger.com/comment.g?blogID=2761684730989137546&postID=8326837099615095325) (http://www.blogger.com/email-post.g?blogID=2761684730989137546&postID=8326837099615095325)

[2centsworth]

Yeah, that's why I figure 6.

so if we don't experience hyperinflation in 6 years will you change your tune? that will be 11 yrs since Obama and his "money printers" began.

[CosmicCowboy]

I would argue that's exactly what they want.

Of course that's what they want, but thy damn sure didn't budget for it. It's the back door to single payer created by the (surprise!, surprise!) unexpected cost of obamacare.

[CosmicCowboy]

so if we don't experience hyperinflation in 6 years will you change your tune? that will be 11 yrs since Obama and his "money printers" began.

I don't blame this on just Obama. Most Republicans are just as spineless.

[CosmicCowboy]

so if we don't experience hyperinflation in 6 years will you change your tune? that will be 11 yrs since Obama and his "money printers" began.

Oh, and I never said HYPERinflation. If it just hits 5-10% I make out like a fat cow.

[jag]

This thread just blew my mind. My mind came all over the place.

[2centsworth]

If we see 5-10% inflation it will have mostly to do with an improving economy and jobs situation and very little to do with government debt.

[CosmicCowboy]

If we see 5-10% inflation it will have mostly to do with an improving economy and jobs situation and very little to do with government debt.

This will be a dollar value driven inflation this time around IMHO.

[CosmicCowboy]

At the rate things are going in 20 years the Yuan will be the accepted reserve currency and the Dollar will be like the Euro.

[2centsworth]

This will be a dollar value driven inflation this time around IMHO.

we're going in circles. monetary policy doesn't drive inflation. Otherwise, the opposite of what's happened the past 4 years would have occurred. You guys were wrong, simple as that.

[2centsworth]

At the rate things are going in 20 years the Yuan will be the accepted reserve currency and the Dollar will be like the Euro.


yeah, they're doing great.:lol:lol

[CosmicCowboy]

we're going in circles. monetary policy doesn't drive inflation. Otherwise, the opposite of what's happened the past 4 years would have occurred. You guys were wrong, simple as that.

LOL @ "you guys".

There was a fortuitous confluence of world events that has kept the dollar strong. I don't expect that to keep bailing us out.

As for your defense of unlimeted QE that's like a drunk saying "I drank an 18 pack of beer without puking...that proves there is no limit to the amount I can drink"

[ElNono]

Of course that's what they want, but thy damn sure didn't budget for it. It's the back door to single payer created by the (surprise!, surprise!) unexpected cost of obamacare.

It actually makes managing cost much easier when you have a centralized buyer.

[2centsworth]

LOL @ "you guys".

There was a fortuitous confluence of world events that has kept the dollar strong. I don't expect that to keep bailing us out.

As for your defense of unlimeted QE that's like a drunk saying "I drank an 18 pack of beer without puking...that proves there is no limit to the amount I can drink"

using your own words, looks like the deficit/GDP (http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/tables.pdf) is not projected to exceed 3.5% over the next 10 years, so we should be fine by you. Using your analogy, if a guy doesn't get drunk on 18 beers he surely isn't going to get drunk on 6. However, 45million people receive food stamps and Obama is inviting rappers to the white house, but I digress.

[RandomGuy]

At the rate things are going in 20 years the Yuan will be the accepted reserve currency and the Dollar will be like the Euro.

No, it won't.

Given the Chinese goverment's industrial scale cyberhacking, their lack of action on climate change, and a ton of other things, very few clear eyed policy wonks would trust a currency in which the same actor that creates the currency also owns so many large corporations.

China is not doing anything to build any level of trust on the part of most of the rest of the world.

[RandomGuy]

LOL @ "you guys".

There was a fortuitous confluence of world events that has kept the dollar strong. I don't expect that to keep bailing us out.

As for your defense of unlimeted QE that's like a drunk saying "I drank an 18 pack of beer without puking...that proves there is no limit to the amount I can drink"

No, it isn't. It is absolutely nothing like that.

[RandomGuy]

This will be a dollar value driven inflation this time around IMHO.

This fantasy has been stocked by the gold mongers who have every motivation to push this theory for their own personal gain. Their propaganda is very effective because it pushes peoples fear button, and has become a dangerous sort of dogma by many on the right.


Data be damned, inflation will be a problem.

[CosmicCowboy]

This fantasy has been stocked by the gold mongers who have every motivation to push this theory for their own personal gain. Their propaganda is very effective because it pushes peoples fear button, and has become a dangerous sort of dogma by many on the right.

*shrug*

I've got about 1/2 pound I bought at $350 an ounce. I don't think it is just propaganda and hysteria that has the price at $1500 now.

[RandomGuy]

*shrug*

I've got about 1/2 pound I bought at $350 an ounce. I don't think it is just propaganda and hysteria that has the price at $1500 now.

There does appear to be some underlying physical demand for it from India and China. With economic growth that is likely to continue for some time.

I have always wondered why it was so high, but still have no doubt it will fall back to its historical levels at some point.

Propaganda and hysteria drive all sorts of bubbles.

[TeyshaBlue]

There does appear to be some underlying physical demand for it from India and China. With economic growth that is likely to continue for some time.

I have always wondered why it was so high, but still have no doubt it will fall back to its historical levels at some point.

Propaganda and hysteria drive all sorts of bubbles.

The demand from India and China are structural, not hysteria. I bought a crap load of Krugerrands in the late 70's and early 80's. They have saved my bacon on more than one occasion. As a long term investment (40+ years for me), it seems to have done fairly well.

[Winehole23]

They aren't counting on millions of small businessmen like me being rational and saying "fuck you and your Obamacare minimum insurance mandates" and dropping our health insurance and moving our employees into the Federal system.
Sixty-nine percent of benefit professionals responding to an International Foundation of Employee Benefit Plans survey said their employers “definitely will” continue coverage next year for full-time employees, while 25% said continuation of coverage was “very likely.” Just 2% said it was “somewhat unlikely” that coverage would be continued, and only 1% said coverage definitely would not be offered or that it was very unlikely that coverage would be provided in 2014.http://www.businessinsurance.com/article/20130410/NEWS03/130419983?template=mobileart

[Winehole23]

not statistically significant or scientific perhaps, but this data is from the Beige Book:
Given its requirement that full-time employees receive health insurance, critics of the law, for example, believe many employers will shift to more part-time workers. So far, that appears not to be the case, according to a recent Minneapolis Fed ad hoc poll of more than 200 contacts from around the district (see methodology below).


The survey asked: Has your company or organization shifted to more part-time workers in response to the Affordable Care Act (federal health insurance requirements)?


Only 4 percent said they had shifted to more part-time workers, while another 7 percent said they planned to do so. But 89 percent said they had not made, nor were planning, such a move. http://minneapolisfed.typepad.com/roundup/2013/03/like-it-or-not-the-affordable-care-act-will-offer-an-interesting-economic-experiment-on-incentives-or-punishments-dependin.html

[Th'Pusher]

Yeah. We will probably do at least that in the next 4 years as well. Certainly doesn't bode well for the dollar.
What's going to replace the dollar as the reserve currency? The yuan? :lol

http://www.abc.net.au/news/2013-04-18/auditor-warns-china-debt-crisis-could-dwarf-gfc/4636648?section=business

[CosmicCowboy]

What's going to replace the dollar as the reserve currency? The yuan? :lol

http://www.abc.net.au/news/2013-04-18/auditor-warns-china-debt-crisis-could-dwarf-gfc/4636648?section=business

It doesn't have to be a country currency. It could be a global GDP based bond issued by the IMF (or someone else) whose return changes yearly with global gdp and each individual countries currency floats against that bond. I am summarizing the most logical proposal I have heard. The US simply can't keep abusing it's position or SOMETHING will replace the dollar.

[Winehole23]

It doesn't have to be a country currency. It could be a global GDP based bond issued by the IMF (or someone else) whose return changes yearly with global gdp and each individual countries currency floats against that bond. I am summarizing the most logical proposal I have heard. The US simply can't keep abusing it's position or SOMETHING will replace the dollar.it would have to be something clearly better. alternative reserve currencies don't lie ready at hand; they inhabit kooky schemes like the bolded.

[CosmicCowboy]

alternative reserve currencies don't lie ready at hand; they inhabit kooky schemes like the bolded.

Hey, I didn't think it up.

At the same time there are almost 7 billion people in the world and only about 314 million of them are in the US.

It is not logical that the other 6.7 billion people are going to sit back and just let the US shit all over the current reserve currency and not do something about it.

[Th'Pusher]

Hey, I didn't think it up.

At the same time there are almost 7 billion people in the world and only about 314 million of them are in the US.

It is not logical that the other 6.7 billion people are going to sit back and just let the US shit all over the current reserve currency and not do something about it.

We'll give up that reserve currency when they pry it from our cold dead hands.

[Winehole23]

lbg6xoS3K3U

[Winehole23]

so if we don't experience hyperinflation in 6 years will you change your tune? that will be 11 yrs since Obama and his "money printers" began.Riposte, CosmicCowboy?

[CosmicCowboy]

Riposte, CosmicCowboy?

Meh...time frame may have been wrong but the trend is still there. We currently owe 'ourselves" almost 6 trillion dollars which was borrowed from the "lockbox" to pay future "benefits". We owe outsiders another 16 Trillion. We are now running trillion dollar annual deficits as far as the eye can see. Politicians on both sides of the aisle understand we are hooked on the deficit crack and can't ever get off it. They know there will be an ultimate reckoning, they just all hope they can kick the can down the road till it's not their problem.

[SnakeBoy]

Meh...time frame may have been wrong but the trend is still there. We currently owe 'ourselves" almost 6 trillion dollars which was borrowed from the "lockbox" to pay future "benefits". We owe outsiders another 16 Trillion. We are now running trillion dollar annual deficits as far as the eye can see. Politicians on both sides of the aisle understand we are hooked on the deficit crack and can't ever get off it. They know there will be an ultimate reckoning, they just all hope they can kick the can down the road till it's not their problem.

True, but that's a millenial/GenZ problem. I don't understand why you would make investment decisions now on something that "may" be a problem 20-30 years from now.

[CosmicCowboy]

True, but that's a millenial/GenZ problem. I don't understand why you would make investment decisions now on something that "may" be a problem 20-30 years from now.

I have done really well in these easy money times and am pretty well set financially barring a total breakdown of the economy. I do question your 20-30 year time frame though. It could easily be sooner than that. You never know what combination of events could trigger things.