Where has all the money in the world gone?
reddit.com
reddit.com
- http://www.divinecosmos.com/start-here/davids-blog/995-lawsu...
I liked the two whackos interviewing one another:
BF: They offered me at one point the job of Finance Minister of Japan.
DW: Finance minister of Japan. Right.
BF: They also, believe it or not, offered me General Electric and General Motors.
DW: Like you would be the CEO, or something?
BF: Yeah, and I guess the chief shareholder. The problem, of course,
is I had to go along with their plan to kill four billion people.
It’s the classic “sell your soul to the devil” situation.In the U.S. there is ~$14 trillion in government debt. There exists tens of trillion more in private debt. But only $2 trillion exists in bonafide, actual, real honest-to-goodness dollars (I'm including in that count accounts at the federal reserve, not just paper money).
How is this system sustainable? How can any of this debt ever be repaid? Well, since everyone knows the government can print money, most people do not worry about the government being insolvent. A dollar T-Bill is as good as a dollar green bill, both are backed by the full faith and credit of the USG. If the government needs to, it can always print money to redeem mature treasury debt. Since no one worries about insolvency, most people would rather have treasury bills (or a deposit account or CD backed by TBills) because they pay interest. So the $14 trillion rolls over in perpetuity. In reality, $14 trillion is not really debt, since it is nonsensical to speak of debt that one owes oneself and can negate by printing paper. The $14 trillion is the money supply - T-Bills are just a dividend paying form of money.
However, the situation in Europe is much more sticky. Europe runs the same type of monetary system. There are tens of trillions in Euro denominated debt, but only $1.3 trillion in actual bonafide Euros. However - unlike with the dollar - the countries that created this debt do not have the power to create Euros. So as suddenly as markets lose confidence in the debt, it becomes impossible to roll over the debt and pay it off. There simply are not enough Euros in the world to pay off even a small amount of debt. Every single country in Europe would be insolvent if investors look down and lose confidence. Even Germany could not pay its debt if investors demanded redemption at maturity The European Union government could order the european central bank to print money to buy out the debt, but this creates all sorts of political conflict as it results in transferring real wealth from country A to country B.
So that's why Europe is stuck. It adopted a monetary system that works when the government controls the currency, and adopted it in a situation where governments cannot print money. No one in Europe has the brains or authority to actually refactor and re-architect the system, so they are just muddling around, following the path of least resistance and putting in stop-gap measures.
My own pet solution is on my blog: http://intellectual-detox.com/europes-crisis/ If anybody from the ECB reads Hacker News, I am available for hire as a consultant at the low, low fee of 1 ounce of gold an hour :-)
Central Banks are meant to be independent of the government. Their mandates are: (a) Acting as a lender of last resort to banks (b) Controlling inflation/deflation through monetary policy (c) (In some cases, like that of the Fed) ensure unemployment does not breach an "acceptable" level.
In almost no mandate, is it mentioned that the Central Bank has to monetize sovereign debt (T-Bills, Treasuries, Greek Debt, Spanish debt etc). The ECB isn't legally allowed to do so for very good reasons. Even the Fed doesn't do that - all its Treasury and MBS purchases are from the secondary market.
In fact, when the Spanish government directed $19B ECB funds to Bankia via injecting Spanish debt into the bank, it was a covert form of sovereign debt monetization - something the ECB objected to vehemently, but couldn't stop.
Even Germany could not pay its debt if investors demanded redemption at maturity
They always demand redemption at maturity - every single one - however, it occurs via a debt-rollover, ie issuing new debt to repay older debt.
What Europe needs is that the distortions in the balance-of-payments between countries should be fixed - the liabilities of the Eurozone aren't evenly distributed amongst countries with respect to their capability to service those liabilities (and that indeed is due to irresponsible fiscal behavior). Bu this can't be controlled by monetary policy alone - it requires closer fiscal integration (and agreeing upon things like retirement ages, pensions, insurance and a whole lot of other stuff).
Minor nit: I believe they adopted the current monetary system in anticipation of future political union. Which was not unreasonable, extrapolating from the Franco-German steel and coal pact forward to the subsequent treaty system that created the EU -- but it got stalled when they diverted into expansion (from 12-17 states to 25+) instead of consolidation in the late 90s/early 00s.
And they'd still have been okay, in the short term, if the entire global economy hadn't caught a head-cold in 2007/08.
Disclaimer: some of my current open source work is supported financially by the EU
From here, it looks like Germany is now slowly getting, through economic means, what they were prevented from getting through military means during the last two world wars. I mean, sure, this is a hell of a lot nicer than fighting a war of that magnitude; I'm very thankful that I've never been in a situation where another human was seriously trying to kill me (and I've never been in a situation where I needed to kill another human, which, from what I hear, can often be more stressful and mentally damaging than being in a situation where someone else is trying to kill you, assuming you survive.) but... it just seems weird to me that the European community would let Germany reunite, then that they would almost voluntarily place them at the head of the European government.
How do Europeans feel about this? I mean, is my view of "give me the courts and the money supply, let the rabble have the rest" just not shared by most Europeans?
Is there a fear in Europe that Germany is taking over? I certainly haven't seen any of that in media coverage; but I would guess there would be some reluctance to express such feelings out of fear of appearing nationalistic or racist. (Of course, I'm aware that Europe is big; I imagine people in France and Italy, for example, have rather different feelings towards German dominance.)
Quite the contrary, people in the European Union hope that Germany will bail out everybody. In my opinion this is unlikely and if I were a German citizen I would not agree to have myself and my family indebted because of the EU ... however I hope that they'll understand that together we are stronger.
The EU is already the biggest economy in the world and if it survives this crisis it will also be the strongest for years to come.
Actually that was my political economy 101 course credo I took in uni.
69% of surveyed Greeks strongly agree that Germany wants to build a Fourth Reich. Ref: http://www.vprc.gr/uplds/File/banners/Diagrammatic%20Present...
It's basically what I get from the media and stuff. You know.... whatever country you live in. They want to tell you that you are great, should be proud and only talk about other's problems. So usually it's best to watch foreign medias to get a good (or pessimistic) view on your country.
Actually. Sorry, if that sounds plain, but from my perspective the bigger fear is that the US or China are taking over.
Maybe it helps to see Europe more like the states, just still more decentralized. I never really thought about this. In fact this comparison comes from a now US citizen.
Of course Germany and France (as well as UK, but they don't really care too much about the EU anyway) are like two strong US states. There may be so rivalry, but with EU and stuff they have the same goals.
It isn't like people in US think that some state is going to take over, right?
And one doesn't really have to fear much, if it isn't by means of war.
I am not from France, so no idea, how exactly they feel, but you have to keep in mind that the "constitution" of the EU basically grants everyone very equal voting rights. In fact smaller countries would have gotten even more votes if they hadn't killed it off.
There also is no dictator, not even someone in sight. From a democratic point of view Europe's distribution of power is far more even that for example what you see in the US, especially with the recent laws. There is no single person in Europe that has as much privileges as the US president for example.
Lets pretend Germany would really take the lead and stuff making Europe one big Germany this wouldn't really harm anyone.
So that's why people here are more afraid of a state like the US, which invests way more money (and I speak about percentage) into military than every other nation and which also has a lot of power with IWF, world bank (which aren't even really governmental/democratic) and where they have pretty strong nationalism, etc.
Now, nobody really fears the US and stuff. Actually the opposite is partly true. They see how the US struggles with debts, old infrastructure, loosing power to China, etc.
What I want to say with all of this is that things like that are more likely to go on in people's heads.
And I know this sounded kinda bad, but I actually heard the "US is struggling with own problems and soon isn't a world power anymore. That's why they do war and tell others about how to do their economy" quite often lately. Just a few days ago they even showed on the news how all the infrastructure built in sixties makes problems in the US. I guess it was kinda exaggerated, but it sounded like it is a poor country. What I want to say with this is that countries are really, really complex. You can't really say general things about them, cause every time you try to you actually say something that's wrong.
So, maybe there are lots of people fearing Germany and I just don't see them. The only thing I can say is that whenever they show the heads of Germany and France they at least pretend to not have any problems with each other and they do it really well.
Even if that wasn't a clear answer I hope that helped a bit. Basically the only thing that people worry about currently are Greece, Spain and Italy. Maybe it even is too much. They'd be doing well, if there was no worry. They "just" have the problem of everyone worrying, so they don't get any loans, people pull their money from these countries and this creates troubles and it becomes a self-fulfilling prophecy.
To come back to the topic a bit. It's pretty much what all these rating agencies do. They say: This country may have troubles to pay back their debts, which causes them to have high interests and so it actually becomes true.
That made me chuckle. Yeah. France? My impression is that sometimes you are not so different from America as people think.
Oh yeah, speaking of nukes, last time I checked /everyone/ was stepping back from (civilian) nuclear power after the Japanese disaster. I know in the past France has been pretty dramatically pro-nuke; has this changed?
I'm very curious why debt should be repaid at all, care to explain?
(Note: I think one's own debt is different than the debt in an economic scale)
The entire monetary system is built off the idea of trading goods and services that are the products of human labor. Things like automated assembly lines are a precursor - when we had 3d printing, you remove all human factors in the creation of goods besides the raw resource acquisition, and sufficiently advanced printers can also decompose trash into reusable pieces so you don't even need raw materials any more besides power.
All our financial woes and economic malnourishment is the product of this system, beneath government welfare overspending the budget, it is why corporations post record profits while laying off thousands and why all that money goes to the top of the management. When the actual consumable and usable goods are not produced by people, the sale of individual units breaks down.
Look no further than media. Media is an upfront cost of creation, but reproduction is free. The current system is so broken because it tries to charge per unit as if unit production has an associated cost, where the cost is the funding, not the distribution. That problem only gets worse as we automate everything more and more (automated cars replace drivers, 3d printers replace small scale manufacturing...).
That leads to a big one. Automated mining and farming. Fully, with no human intervention, where you can set off a robot with some pre-programmed track of land to till or dig and it will extract all the resources from that area for you. Once that happens everything goes out the window, because a single point of sale unit of production (plus maintinance, which then gets ursurped by the singularity making machines improve themselves) where once one of these machines is available, resources are no longer scarce.
And then money breaks down. Because when human effort is no longer involved in the day to day operations of goods production, there is no continuous "cost" involved anymore, in the terms the Reddit thread describes, or how most people interpret goods and labor.
Crucially, and this is where the whole utopian post-scarcity dream falls apart, the cost of making movie B doesn't significantly depend on the cost of movie A. Because a movie isn't a "thing". Movie B is a different thing than movie A.
The economic problem here is fundamentally one of information and cooperation. As far as we know what we want we should share the cost of producing it (i.e. production should be of what is known to be wanted, and cooperation should be on shared goals). And where we do not know (e.g. the future) we should not prevent unpredicted gains from what has been produced (i.e. by charging for copies).
The practical problem is how to get information and how to promote cooperation -- this is where possible arrangements can vary. But the core theoretical structure is that our production should follow from information, and our consumption should not be hostage to lack of information -- this is what all arrangements should try to achieve.
We don't "need" to work more. The USA produces a substantial excess of food, even past the excessive eating habits causing the obesity epidemic, and we sell electricity to Canada and Mexico since we are completely self sufficient there as well. Almost all of our electrical infrastructure is 40+ years old, grossly outdated, but the initial costs are effectively gone. The cost of power is just the million year old dead plants to make it.
The problem is we have no social construct to distribute these non-scares resources in any way but through exchanges that treat them as scarce. And we still have farmers toiling in fields and operators of power plants that need to be compensated for their labors.
The system really evolved to combat Communism. The powers that be ran with the propaganda wars of the 60's and turned the USA hyper-consumer with tons of debt to combat Russia's ideology. Everyone jumped on board because socialism and the "other" were irrationally dubbed wrong and thus we must do the opposite.
Also, food is becoming more expensive faster as the reality that only 1% of our population produces the resources we need to survive and prosper sets in. Make that 2%, 1% to make food and power and 1% to maintain infrastructure (poorly) and keep a functioning supply chain in place.
The rest of us? Effectively useless, and where we should be trying to invest the largest fraction of unbounded intellectual freedom to innovate and create in history to get us some freakin starships and immortality and super AI, we squander it with an outdated economic model that has millions sitting at desks twiddling thumbs or manning store counters because they have no choice if they want to eat and have a bed.
In the end, the best things we can aspire to are just not profitable enough for the system in place, so we wallow with a population grossly underutilized.
A few months back I would have said the same thing. Then I watched this: http://en.wikipedia.org/wiki/The_Century_of_the_Self
It actually appeared to start post WWI, just the Cold War accelerated the effect.
The kind of mass consumption spawned from the US that has people sitting in front of their TVs 6 hours a day on average, obsessed with celebrity, eating fast food, getting fat, buying and hoarding tons of junk they hardly even use, being seriously in debt, working jobs they hate to keep the cycle going... stuff that is actually deleterious to physical and emotional health? No. And that documentary brings context to how this mess came about.
Just give it the first 15 minutes and find out how one man behind one public event changed the perception of women smoking forever:
"Bernays staged the 1929 Easter parade in New York City, showing models holding lit Lucky Strike cigarettes, or "Torches of Freedom". After the historical public event, women started lighting up more than ever before. It was through Bernays that women's smoking habits started to become socially acceptable."
http://en.wikipedia.org/wiki/Edward_Bernays
This same man, the double nephew of Sigmund Freud, also coined the term PR and got his start as a propagandist for the Wilson administration during WWI.
That's a good cognate to David Graeber's description of neoliberalism: a program of governance designed to bring down Communism and hail the glorious victory of Capitalism, no matter the actual economic consequences of doing so.
Ultimately, bonds, like much else, are priced by the market. A $1000 bond is only worth $1000 if the issuer does not go bankrupt before the bond matures. Therefore, the bonds are discounted by some amount that correlates with how high investors think the risk is that it will be paid back in full.
A concrete example: Spanish 10-year notes. At the start of the year, investors demanded about 5% interest to account for the risk that the Spanish government would not be able to repay its debts. This means that for the Spanish government to raise €1000, it has to pay investors €50 every six months. However, this week that rose to 7%, effectively increasing the amount of debt the Spanish government must take on to raise the same amount of money.
This effect can create a death spiral (as we saw with Greece) where skittishness in the market raises the cost of borrowing, which unnerves investors even more.
So there's no way for investors to force the government to pay back all the debt. However, they can make it impossible to raise more money in the future.
A US defective of $10T required 6% of the federal budget to service in fiscal year 2011. Currently, accrual of debt is outpacing both inflation, and increases in revenues.
This might still be fine _if_ the additional debt has a positive impact on GDP growth, but that's not entirely obvious. Japan has been in a similar situation for two decades. 25% of their national budget is used for servicing loans.
What is it that causes prices to change? Ultimately, prices in the real economy are changed by producers and vendors based on signals that they receive. The only signals that really matter in that regard are (a) cost of supply and labor, and (b) demand for their product.
So now we have all these trillions of US$ in as-good-as-money floating around, but they are essentially stationary wealth deposits, which is why we are not seeing inflation. What if this changes? This is where I believe most people become confused.
If the owners of those as-good-as-money treasuries suddenly decided that they'd rather own paper money as opposed to treasuries, then the US treasury would have to print the required paper money without there being any inflation at all. Instead of non-moving treasuries there would now be non-moving paper bills - there is no difference (except that treasuries pay a little bit of interest).
So clearly it cannot be the printing of paper that causes inflation.
However, if those people then decide to go on a spending spree, then it is quite possible that the additional demand drives prices up in the real economy. So it is the huge reservoir of wealth that, if it were suddenly released, could cause inflation.
If that's what you're worried about, then you have to think about ways to get rid of that wealth. Taxing the rich, perhaps?
This is very different from what InclinedPlane was talking about, namely paying back the debt by just printing money. And I'm not just talking theory here, but empirical observation, because this has already happened!
That's what QE is all about. The Fed creates a lot of money to buy treasuries, which is (from the perspective of the private sector) equivalent to printing money to pay back the debt. That hasn't caused inflation, and the reason for that is very simple. From the point of view of the private sector, exchanging treasuries for money is simply an asset swap. It minimally affects the yield curve, but that's it. The purchasing power of everybody stays the same, and therefore aggregate demand stays the same, hence no inflation.
Compare that to your scenario, in which the purchasing power of everybody is increased significantly, hence most likely aggregate demand would increase significantly, likely causing inflation. Very different scenarios with very different outcomes.
To sum it up: printing money is not inflationary. Spending can be inflationary, but then it doesn't matter who is doing the spending (imagine the richest 500 people in the US suddenly spending all their wealth - that would cause quite the spike in inflation!).
The problem is that new money was created to buy relatively worthless assets, increasing the money supply and decreasing the relative wealth of dollar holders to those that the fed bought "assets" from. Once the banks spend this money, the latent inflation occurs and prices increase, making everyone that had dollars poorer relative to those that received the fed bailout.
Perhaps to nitpick - as long as enough people don't believe their neighbors believe that their neighbors are looking down, things are fine. If I personally look down, it is doesn't matter.
10 years ago: 1 EUR = 0,95 USD
today: 1 EUR = 1,3 USD
As European I really like the 'Euro crisis'. I'd be pleased to get more of it.
PS: What media has written about the financial crises since 2008 is mostly nonsense. In fact, we have seen a deep media crisis. Media is not able any more to give a remotely adequate picture of reality (not limited to financial aspects of course).
(http://epp.eurostat.ec.europa.eu/statistics_explained/index....)
http://www.shadowstats.com/alternate_data/unemployment-chart...
The numbers in the EU are also manipulated, but not by such a wide margin. When Europeans talk about unemployment, the statistic they're using is equivalent to the broadest US U6.
Let's poke at it a bit. Does "long-term discouraged worker" mean that if someone works for a few years in their 20s, experiences some obstacles in pursing their preferred career, and decides stay-at-home parenting is more to their liking anyway, are they now permanently "unemployed?" How do we recognize the difference between a detached person who's taken up sculpting and a desperate person living at wit's end?
Do you count as a "long-term discouraged academic" if you once made strides toward pursuing an academic career but strayed into industry? Do we have an economic crisis in the professional sports sector because millions of aspirants are being trained but over 90% of them ultimately can't find jobs playing baseball?
There may be some value in exploring how we define employment, but categorically calling those stats "real" and other stats "manipulated" trips my tinfoil detector, especially since I never see actual economists referencing this data.
> 2001: US 4,8; Euro area 8,1
> 2011: US 8,9; Euro area 10,2
Now: 1 Eur = 1.25 USD
That looks a little different.
PS: There are valid reasons for treating bonds as cash equivalents, but M1, M2, M3, etc are simply different ways of looking at the money supply.
To me the eurocrisis seems primarily a US/UK media thing...
The US is in much worse shape than most are willing to admit or accept, but the US has the global reserve currency it gets to abuse. That changes the game dramatically for the US. If the Eurozone had properly integrated its system, they might have stood a better chance, as it would have been easier to inflate, issue Euro bonds, and buy a lot more time as the US is doing. The EU is half a properly integrated system.
However, you refer to the US Dollar vs the Euro, but then you pick one specific country on the bond yield. Why not pick Switzerland? They have negative yields.
How about the bond yields for Spain, France, Portugal, Italy? France is going to explode next, so we can throw them in as well.
But I agree with you on the source of the problem - socialism or uneconomic regulation. That is visible in the doing business rankings of the world bank (http://www.doingbusiness.org/rankings). Ireland(rank 10), France(29),Portugal(30) will hopefully be fine. Spain at 44 is troubling; I'm only really worried about Italy (87) and Greece (100).
However Portugal+Spain+Greece have voted in conservative governments, Italy has an interim economist technocrat government. There is the European Fiscal Compact (http://en.wikipedia.org/wiki/European_Fiscal_Compact). And Germany is pushing very hard for economic reforms in the bailout countries.
Overall it is just a problem with a few countries with bad governments/regulation, not a "Euro" problem and certainly not a European Union problem... And we seem to be taking more steps dealing with it then the US or UK with their problems!
I compared to the US$ because the import/export in USD or GBP is incredibly more significant than the few currencies the Euro has done badly against, like the Swiss Francs or Japanese Yen or Norwegian/Swedisch Krones etc...
Note that the socialist nordic countries have stellar economies.
I've noticed a lot of Americans blame the euro crisis on socialism which,is interesting since it doesn't seem to hold up to scrutiny. I'd be interested in hearing why this is. Is it the media, an American distrust of socialism or something else?
As you point out, the nordic countries show that perverse incentives don't necessarily follow from Socialism. And indeed, America has its own non-Socialist perverse incentives such as encouraging pollution by not enforcing payment of the environmental externalities.
But all things considered globally, more socialism does tend to imply more perverse incentives.
However you end your comment by an unfounded claim that more socialism tends to imply perverse incentives. The same could be claimed of capitalism (or probably any other ..ism), see the banking sector and American healthcare for good examples.
In the rather socialist Denmark (where I happen to be from) when you break a leg you go to the doctor to get it fixed for free, and then you call your employer and tell him you won't be working for the next week, but you'll receive your paycheck nonetheless. When you get a child you take 9 months off work with full pay so that your offspring can get a good introduction to life. When you're out of a job the state will take care of you indefinitely.
Despite of this denmark has a consistently strong economy, is one of the richest countries in the world, and has for many years been in the top three of both the happiest country and the least corrupt country in the world.
Is that the Flexicurity system? How does that work?
It's the modern "communism", without invoking the spirit of McCarthy.
* University of California, Berkeley
* University of Washington, Seattle
* University of Massachusetts, Amherst
* Texas A&M
* University of Wisconsin, Madison
Shall I go on?
I have used this analogy several times recently. Good to see it here.
http://www.youtube.com/watch?v=L6fhxL_Njyg
Paul Murphy and the Destroyers have another answer to the question, but localised to the original crash.
What I want to know is: does anyone rate the rating agencies? We now have a situation where some geezers in NY can issue a 'rating' on a whole country and cause that country extreme difficulty.
Why can't we think of eu members like states of a larger country?
http://www.reuters.com/article/2011/10/24/usa-states-debt-id...
Also, aren't a lot of individual US cities in trouble?
http://news.sky.com/home/world-news/article/16135233
Michael Lewis (author of The Big Short) in his latest book "Boomerang" takes a tour of the places involved in the ongoing financial crisis: Iceland, Greece, Ireland, Germany (as a "victim") and, last but not least, California and the city of Vallejo.
Iraq and Iran threatend to sell oil in €, for several reasons, they couldn't and didn't deliver, unfortunatly.
The BRICs countries establishing their own trading in other currencies than $. So this dominating role of the US will end long term.
I don't really understand why this is considered so important. Big deal, so oil is priced in dollars. Say I have some Euros and want to buy €100 worth of oil. I trade the €100 for $X, buy $X worth of oil 100 microseconds later, and now I have the €100 worth of oil I wanted. What difference did it make to me if $X was $0.01 or $10,000? I'm trying to buy oil, not currency.
I see.
Wow, that's broken.
And since the producer can only sell oil in $ they have no choice but to lend to you - so oil in $ and owning the $ machine gives you a certain advantage over having to actually export somethign to balance our payments
On the other hand, it is very obvious that the fact that the Chinese government is buying up treasuries is what prevents the USD from dropping versus the RMB. So China is effectively giving the US a whole bunch of real goods for free, by buying up those treasuries. This may be irrelevant from the financial perspective, but in real terms, this is a huge benefit for the US.
That said, the fact that China buys lots of USD doesn't have anything to do with the whole petro-dollar thing. It just so happens that their industry is geared towards exporting to the US, and it is not possible for them to restructure their industry quickly. So in a sense, the article is still correct on the whole petro-dollar front, but misleading in others.
I think the only way this could collapse Wile E. Coyote style was if the trade routes in the Atlantic and the Pacific developed a huge problem with highwaymen and the US military couldn't lock it down.
The thing is tho', you want other countries to accept seashells too, places where you have no political or military control. The way this happens is that those seashells can be exchanged for goods and services provided by your citizens, who need seashells anyway to pay their taxes, so might as well use them for everything else too. Therefore the value of a seashell on the currency market (i.e. outside your borders) is backed by the industrial power of your country.
So to sum up, a military backs a currency only in the sense that the military holds borders in which industry can operate safely - and not in the sense of military as ultimate debt collectors. At least, the Greeks better hope not.
Of course, weak countries must pay their debts (even when a military dictatorship racks up odious debt), which is a lever to force them to ruin their societies through austerity programs.
However, the US could push a button and 'print' $2 trillion tomorrow morning in a monster QE3, and then hand Japan and China each a trillion dollars and nearly pay them off completely. All it would do is probably push the dollar index back down into the mid 70's, where it was 9 to 12 months ago. The bigger problem would actually be confidence, such a move would freak everybody out. Instead the Fed prefers to gradually inflate the value of Chinese and Japanese debt holdings away (which is also why China has taken such a liking to gold).
Since the credit worthiness of a country ultimately depends on its ability to tax its citizens you will see a very different market response to the same debt level.
There also isn't a fixed pie. A software company can turn $1M in salaries into $10M in revenue. This isn't new debt, but new wealth.
What GP is saying is that if the owners of treasuries were unhappy with those treasuries and preferred holding on to cash, the government could just create that cash and nothing would change.
This would not change prices, since if the owners of treasuries just swapped those treasuries for cash, businesses would not see their demand increase, and nobody would have any reason to raise the prices they ask.
Printing money is not inflationary, but spending money can be.
Those 14 trillion USD in government debt is held in bonds precisely because those wealthy enough to own them do not want to spend them. So if, all of a sudden, the Fed prints a lot of dollar bills to pay the US debt, what this really means at an operational level is that they print those dollar bills to buy treasuries on the open market and/or buy directly from the government.
This simply means that the demand for treasuries increases, which drives up the price of treasuries, which is equivalent to driving down the interest rate on treasuries.
To sum it up: if the Fed does what you say, the interest rates will drop further closer to zero, but that's pretty much all that will happen.
Now if you think that decreasing interest rates can have secondary effects, then we can talk about those. But given that the interest rate is almost 0% already anyway, it seems unlikely that a small downward change would have a big economic impact.
Perhaps you're confusing paying back the debt with actual spending. Paying back the debt is simply an asset/liability swap that doesn't change anybody's wealth, and therefore cannot have inflationary effects. Actual spending is something else, and can be inflationary - though in the current economic climate, you could probably increase government spending significantly (by a trillion or so per year) without creating inflationary trouble.
QE is the Fed printing money; lots and lots of money. Around 2 trillion so far. And very little has changed.
Everyone would stop accepting $ since there was a risk that the government would print 20% next month. The value of the US $ would crash as other countries suddenly stopped accepting it or wanted much more of it to cover the risk - so the price of imports would rise.
The price of oil would soar (in $) or only be available from some markets if you paid in euro/gold.
As twisted as it is, the US has an interest in seeing the Euro destroyed. It would leave the dollar as the only standing potential global currency (until perhaps China unlocks their currency, but who knows when that would be). Then the US could abuse the dollar at a much greater scale, with fewer competing major currencies for money to escape to.
He is on much shakier territory when he starts to enter into the economists' domain. He's probably correct when he declares that the inefficient pre-money "barter economy" has never actually existed, but then he breaks his arm patting himself on the back to say he's smarter than all the economists who always use this as an example when explaining why we have money.
When it comes time to actually try to explain debt itself, he's really lost. He starts the book by posing a question: how is it that the language of debt got so wound up in the language of morality; by extension, why do we think it's immoral to not pay our debts? He never seems to come around to the obvious answer: that a debt is a promise, a promise of money later in exchange for money now, and that breaking your promises is seen as immoral because it breaks the reciprocity that underlies almost all human interactions. He seems to have a mental image of "debt" as something that a loan shark puts you in so that he can break your legs afterwards, rather than the vast majority of the world's responsible debt arrangements which wind up beneficial to both parties.
Anyway, I'd say Graeber's "Debt: The First 5000 Years" has some interesting bits but a bunch of flaws. And this comment is only this long because I don't have an account on Amazon.
And so on. Might want to read more than "chunks" of a book before lecturing the world on what's not in it.
The extent of my knowledge of your book (I'm assuming you are the author), is only what people are discussing here, but my quick impression was that the person you responded to characterized your view of debt pretty well.
He seems to have a mental image of "debt" as something that a loan shark puts you in so that he can break your legs afterwards, rather than the vast majority of the world's responsible debt arrangements which wind up beneficial to both parties.
planetguy said:
"He seems to have a mental image of "debt" as something that a loan shark puts you in so that he can break your legs afterwards, rather than the vast majority of the world's responsible debt arrangements which wind up beneficial to both parties."
This seems extremely in-line with what you just posted:
"What is a debt, anyway? A debt is just the perversion of a promise. It is a promise corrupted by both math and violence..."
This does strike me as needlessly negative, too, as many debts are mutually beneficial, no?
You're right, page 4 does mention the idea that a debt is a promise. But it's immediately pooh-poohed as an idea that's "dangerous because it's self-evident". And the last paragraph does call a debt a "promise corrupted by both math and violence", but it's not clear how anything is "corrupted" here. So yeah, you acknowledge this self-evident idea, but only to dismiss it without a proper argument.
Also while you're here (actually yours is exactly the kind of book that I read while wishing that I could argue with the author about certain points, so it really is a privilege to have you here and I hope that doesn't sound like a backhanded compliment), the other point I think you dismiss without enough of a fight is the idea that all human interactions are based on reciprocity. There is of course one counter-example, the child-parent relationship in which the parent is generally happy to give selflessly, but that's a special case which seems to be more-or-less hard-coded into our genes; our minds are programmed to give selflessly to our children since from our genes' point of view they're nearly equivalent to ourselves. Once we step outside the parent-child relationship, however, your other examples of non-reciprocal human behaviour (apart from outright theft, extortion and other forms of behaviour where one party isn't consenting) don't ring true. Two labourers working on the same project will, of course, pass each other hammers, but there is an expectation of reciprocity even in group work, as anyone who has ever worked in a group with someone not pulling their weight will know.
In conclusion, you've written an interesting history of debt, but I think you've started off with some kind of antipathy towards debt which has stopped you from really gaining a good perspective on it. I still don't understand the objection to the basic concept of debt: that if Alice has something and Bob needs it then Alice can lend Bob that thing and get it back in the future, for mutual benefit. I find that to be a glorious example of human interaction at its best. But then again, I've already paid off my mortgage.
There's many ways where those with surplus wealth can give it to those with insufficient wealth. Anyone here on HN can name multiple forms of investment/subsidy (such as venture capital, or the goverment subsidy which led to computers and the internet), and some may even be at work at more advanced forms of credit unions (such as Mike Leung's work on participatory credit unions).
Furthermore, anyone who's skimmed the book's first chapter can see that this poster's original post was beyond uninformed, taking a point _Debt_ carefully discusses in the first few pages, and presents it as if the author never anticipated it. Same with the book's discussion of commercial reciprocity vs. mutual aid in chapter 5.
David just helpfully posted here to point out the obvious...
However, surprisingly, I couldn't find any good opposing analysis to his book. Maybe because it's too newly published. But, the ones that I did find, seemed to appeal to authority: That Graeber wasn't an economist and was only an anthropologist meant that he didn't really get it. I didn't find those arguments particularly useful. If you can lead me to other materials, I'd be happy to read them. I'm still trying to make sense of it, myself.
Anyway, I can see why you took away what you did. Graeber frequently attacks the establishment and makes some analogies that are somewhat painful to my market-conditioned, western brain. But, my takeaways were still very different.
I'd forget the argument-from-authority, though, and just say that Graeber went into this project with some kind of irrational antipathy towards "debt", which despite years of careful research he's been unable to shake. Much like if a KKK member decided to write the definitive history of the US Civil War [substitute less inflammatory example if you feel like it] he might put together a really well-researched, well-footnoted piece of writing but still be just plain missing some fundamental piece of understanding due to the blind spots he had when going in.
The history of debt, in all its glory, is a fascinating subject. There have been debts which turned out mutually beneficial, debts which drove debtors to ruin, debts which drove creditors to ruin. There have been debts imposed under terms unfair to one party or the other, and debts between close friends where the terms are kept extremely lenient both ways. There have been formal debts and informal debts, debts of money and of literal backrubs. But Graeber, for some reason, seems to skip over all those debts which make the concept of "debt" look good and only describe those which make it sound bad.
It's frankly just plain weird. It reminds me of Eric Cartman's class report on Asian culture: "Asian culture has plagued our fragile planet for centuries. It must be destroyed."
This is the part where I think he actually is on pretty solid historical ground. Almost every society in history has had significant problems with, and a backlash against, at least certain kinds of debt, where it didn't really seem to be in the interest of both parties. They don't really seem like outlier cases. Most societies seem to have dealt with it by deciding that it's not actually good to require repayment in every circumstance, especially if the debt persists for a while. That's why you have things like the biblical Jubilee---periodic cancellation of all debts---in many societies.
I mean, did the credit market dry up overnight? Once the precedent has been set that the king can cancel everyone else's debts for no reason, what reason would anyone have for lending money? Or did some folks come up with "un-cancellable" debts which are deemed not to be cancelled in jubilees (under penalty of private leg-breaking)?
The part I found interesting, and wanted to read more about, was the Golden Age of Islam, in which a financial and commercial system developed (in fact, developed free-market ideology) entirely without usurious debts of any kind.
Basically, these wealth were expectations.
Anyone who misses this fact is very unlikely to give a correct explanation. And the explanation is in an Econ 101 course.
...it looks like this is the distinction you're making when you say Aggregate demand, I'm really just adding this comment to help other people better understand your comment.
Essentially, the 'money supply' is determined by the central bank, since they are the issuers of money. You can read on your US dollars that they are issued by the federal reserve. An excellent measure of the money supply is NGDP, since this is the number of dollars traded every year (that sort of quantifies how many dollars are available to be captured by working, trade, etc.). Unfortunately, in 2008, the US Fed decided to adopt an ultra-tight monetary policy, resulting in a severe drop-off in NGDP relative to previous trend (the worst since the Great Depression, graphs here: http://marketmonetarist.com/2012/06/19/guest-post-measuring-...)
It does not look like it will ever recover to the previous trend, so the money supply is much smaller than people would have expected before 2008. In theory, the nominal value of money shouldn't matter in the long run. However, since people before 2008 signed contracts (read, 30-year mortgages) anticipating a much higher aggregate money supply, this has triggered a shortfall in demand ever since, which has left our economy in the tank.
It's not as simple as that. The amount of money in public circulation is largely determined by banks, because every loan given increases the amount of (electronic) money in circulation. The central bank then adjusts the amount of central bank money (reserves) by open market operations, but it does so defensively, to defend its interest rate target. So yes, with an interest rate target of essentially 0%, they can increase the amount of reserves out there, but this does not translate to more money in public circulation.
Modern Monetary Theory contains probably the best summaries of how this works.
Sorry just noticed this. This is a common misperception. They have been using QE to create more money in public circulation now that interest rates are 0, and there's nothing ineffectual about that.
To see why this is possible, just consider the question, could the Fed create inflation at the 0-lower-bound by saying they will print money until they get it? The answer is clearly yes. Actually the Bank of Switzerland did that recently to set a Euro peg.
As for targeting the money supply, you're right, they could do that, and in fact they did try it a few decades ago. The problem that was observed is that it created extreme volatility in the interest rate. The lesson learned from the experiment is that either the interest rate or the money supply has to be volatile, and there's general consensus that a volatile interest rate hurts the economy, whereas a volatile money supply has marginal effects at best.
Definitely worth reading for those of us five-year-old-equivalents in terms of knowledge of macroeconomics.
> So now you're still growing apples, but instead of trading them for deer-haunches and shoes, you trade them for Loddars. So far, so good. Once again, you want some meat, except harvest time hasn't come yet so you don't have any Loddars to buy meat with. You call me up (cellphones have been invented in this newly-efficient economy), "Hey otherwiseyep, any chance you could kill me a deer and I'll give you ten Loddars for it at harvest-time?" I say, "Jeez, I'd love to, but I really need all the cash I can get for every deer right now: my kid is out-growing shoes like crazy. Tell you what: if you can write me a promise to pay twelve Loddars in October, I can give that to the shoe-maker." You groan about the "interest rate" but agree.
Did a lightbulb just go off? You and I have once again created Money. Twelve loddars now exist in the town economy that have not been printed by the central bank. Counting all the money trading hands in the village, there are now (a) all the loddars that have ever been printed, plus (b) twelve more that you have promised to produce.
"Loddars" are essentially dollars, a physical form of currency. The apple farmer does not have any loddars, but he promises to give twelve loddars to the hunter at harvest-time. The loddars come from people purchasing his apples, which have already been printed, thus are already in the system. Since loddars have been standardized by the central bank by this point, an apple farmer cannot simply 'create loddars' out of thin air. He can promise loddars, but that's very different than actually creating loddars. New money has not entered the economy.
Look more closely. The deer hunter gives his dollars to the apple farmer. But he then BUYS SHOES WITH AN IOU FROM THE APPLE FARMER. And the shoe maker can then trade that promissory note to others if he desires as well. The point is that the promissory note is no different in function or substance than money. Money isn't a thing, it's just a universally recognized form of transferable debt.
- In the same way that apple- and potato-certificates could have different values, how do you know which IOUs you can trust?
- Someone says: "Hey, instead of giving IOUs to each other, come to me. I'll figure out if the person is actually able to pay it back later and give him money." Instead of having the IOU accepted by everyone in the village (a seller won't accept an IOU unless he knows he can trade it with other people, so a buyer needs to prove his credit to everyone), there's only one person/system who needs to accept it.
When you create this new IOU you basically start to repeat the process that resulted in Loddars in the first place; you could theoretically repeat it with the new IOU. Isn't it getting recursive? :).
Greg gets a loan from the Bank for $5000. Greg gives Stacey the $5000 to buy her car. Stacey deposits the $5000 in the bank. Bob gets a loan from the Bank for $4500. Bob deposits this $4500 in his bank account to spend. Mark gets a loan from the Bank for $4000. And it goes on.
In the United States: Of less than $11.5 million have no minimum reserve requirement; Between $11.5 million and $71.0 million must have a liquidity ratio of 3%; Exceeding $71.0 million must have a liquidity ratio of 10%.
That means mosts Banks only have to retain 10% of their money as cash and can continue to recursively loan out the rest of it.
It seems this explanation is somewhat of a rehash of that book. The book is relatively short and well worth your time if you found this reddit answer interesting.
we produce money as a form of IOU against the future production of the economy, (apples).
This debt is really an increase in the money supply
each year the government borrows some more - increasing the supply by hopefully an accurate guess of future production
if it's a bridge I get it. Gov borrows 1 bn, builds a bridge, there is a new billion dollars worth of value in the economy
but apples? If I eat an apple and throw away the core do we then have to reduce the money supply by the price of an apple? When and how is this done?
I can see some of the value of the IOU I used to buy the apple hanging around in forms of greengrocer shops, farm worker jobs etc. But some of it really is now, gone
maybe I should have listened more carefully in economics lectures.
Value is a very strange concept, if there were no people then apples would be of no value. If there were people but they all agreed they didn't want apples and weren't prepared to work for them then they wouldn't have any value. They value of apples is defined by how many other people want them and how hard they are prepared to work in return for them. When you eat an apple you stay alive and thereby increase the value of all future apples.
Money is debt, and debt is slavery. Shhh! You're not supposed to look behind the curtain.
Note that this is just a political arrangement that prevents the parts of a government that spend money from conjuring it out of thin air. For example, in the U.S., President Obama can’t just call Ben Bernanke and demand that the Federal Reserve issue more money to pay for the federal government’s expenditures; instead, the federal government must either collect additional taxes or borrow funds from investors, and the Federal Reserve independently gets to decide if, how, and when to issue new money (or take it out of circulation) to fulfill its dual objectives of monetary and financial stability.
Typically, central banks like the Federal Reserve issue money (or take it out of circulation) via two mechanisms:
(1) The central bank can buy and sell government bonds to expand or contract the amount of money in circulation and/or push interest rates up or down. When a central bank buys such bonds, it pays with newly issued money, thereby replacing one government obligation (bonds) with another (money) of equal present value; and when the central bank sells any government bonds it holds, the money it receives is taken out of circulation (i.e., destroyed).
(2) Certain private-sector financial firms can borrow directly from the central bank, which lends them newly issued money, thus acquiring a new financial instrument (a loan to a private-sector entity) and issuing a new obligation (money) of equal magnitude; when the loan is repaid, the central bank takes the money out of circulation, reducing government claims and obligations by the same magnitude.
The money issued by a central bank, which is held only by depositary institutions like banks, is called “reserves.” The aggregate of all bank reserves (plus all paper currency in circulation, to be precise) is called the “monetary base.”
In normal times, whenever bank reserves grow beyond required legal minimums, banks supposedly make more loans, thereby increasing the amount of money flowing through the economy and promoting economic growth. In other words, an increase in the monetary base is supposed to result in an increase in the money supply.
However, at present, for whatever reasons (and there is much debate among professional economists as to what those reasons might be), the monetary base has grown immensely[1], but banks are not making the expected additional loans, so the amount of money flowing through the economy is not growing as economists would expect in normal times.[2] “Money velocity” (a measure of the number of times money gets turned over in the economy) has collapsed.[3]
So, that’s the answer to the question, “where has all the money gone?”
--
[1] You can see the incredible growth in the U.S. monetary base here: http://research.stlouisfed.org/fred2/series/BASE/
[2] You can see the incredible growth in excess reserves in the U.S. banking system here: http://research.stlouisfed.org/fred2/series/EXCRESNS?cid=123
[3] You can see the dramatic drop in U.S. money velocity here: http://research.stlouisfed.org/fred2/series/M2V?cid=32242
Thinking about the liquidity trap: http://web.mit.edu/krugman/www/trioshrt.html
The source material on liquidity traps (written in 1936): http://ebooks.adelaide.edu.au/k/keynes/john_maynard/k44g/
An alternative explanation on why they happen (written in 1933) here: http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf
And yet another alternative explanation here: http://www.levyinstitute.org/pubs/wp74.pdf
All three explanations written by people who lived through the Great Depression of the 1930's. All three worth reading IMO.
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Our government would both print and tax, as many other governments throughout history with an abusive printing press have done. Just because a government has a printing press, they never stop taxing.
Governments print and tax because they can, it slows down the rate of inflationary pressure that printing would generate if that's all you did. As it is, they like to keep inflation hidden as much as possible by keeping it moderately low so you don't notice it year to year. The whole point is to boil the frog without the frog jumping out of the pot.
The best evidence that people really like to have transferrable currencies is that they develop independently in just about every market in the world. For example, ancient Africans used Cowry shells. Players of the videogame Diablo 2 used a particular ring, the Stone of Jordan.
While there's certainly fraud and even systemic failure at times, it's hard not to appreciate all that liberal economics has done for our quality of life.
And they also make the strange assumption they'd be engaging in the "spot trade," which also is ahistorical. It's not like you'd come to me with shoes and I'd hand over a sack of potatoes. If we're neighbors, our relationship wouldn't be about market transactions (unless I suppose we're hostile and untrusting, so we'd better trade simultaneously so we don't rip each other off).
I think Graeber's _Debt: The First 5,000 Years_ is the most illuminating source on the subject. (http://www.amazon.com/Debt-The-First-000-Years/dp/1933633867)
Of course much of that network got wiped out in the 30s recession.
I think there may be an evolutionary factor involved, easier to survive in a group so there is an incentive not to harm those around you. Able bodies can warn of nearby danger and help fight off threats, as long as you aren't a threat to them and they aren't a thread to you you're golden. There's also the fact that most people are fairly content in society and like things to stay relatively constant. Nobody wants to risk the rest of their life by doing something dumb like even accidentally injuring someone, let alone purposefully killing someone.
Nevertheless, look at folks like Ted Bundy who had a very specific target for his murders and yet still killed dozens of people in his life.
I've learned a bit about money, and this comment strikes me as conspiracy theory having nothing to do with "how money really works".
It doesn't matter how you design the monetary system, what matters is that it's centralized -- a mandated system backed by SWAT teams. Create that, and you've just created a system that will inevitably result in sweeping financial destruction throughout the economy.
What we need is the diversification a free market money system would provide.
I don't follow. Can you elucidate how the first sentence leads to the second?
Assume we were on the gold standard. The amount of gold in the world is limited. Most importantly, it does not grow exponentially with our economy (which is in fact the product of two exponentials -- population growth and technology growth). A gold standard is therefore deflationary in nature, meaning that the value of 1 oz of gold grows over time. This means that on the gold standard, interest rates would be FAR lower (probably even 0%) due to the inherent "interest" built into gold. However the article assumes both a gold standard (in the first paragraph), and moderate interest rates (5%). Therefore the article is inconsistent and illogical.
Let us instead limit our scope to risk-free loans (e.g. T-bonds). Take risk out of the equation and interest rates simply counteract inflation, meaning that the buying power of your loaned money remains constant. However, the article assumes both risk-free loans (since it does not account for losses due to defaults), and that one can purchase absurd quantities of goods with interest compounded over several years (which is not true if buying power remains constant). Therefore the article is inconsistent and illogical.
Furthermore, you did not state how this relates to the first half of what I quoted -- something about SWAT-team enforced standards. I am still utterly in the dark about the relevance of this to monetary policy. (Wouldn't any policy, e.g. gold standard, require some form of law enforcement to keep people from robbing each other?)
"anyone attempting to trade in truly non-dollar- denominated terms will eventually find themselves on the receiving end of a SWAT team."
This part of our system doesn't make any sense to me. What makes you think someone's gonna have more incentive to "pay up" if they now have to work twice as hard?