by Shapley » Sat Nov 07, 2009 10:00 pm
GCR,
Thank you for your kind words regarding my assessment of your Keynesian explanation. I would,
however, like to make a few points:
In defense of Keynes
It may seem odd that I would defend Keynes, but I don't think he was totally wrong, although he
missed one key item. Let's look at GCR's example of earlier.
The government spends a dollar to buy a newspaper from GCR's newsstand. I don't know why
GCR picked a newsstand, but it is useful for this discussion, as it speeds things up. In the old
days, newspaper publishers did not charge newsstands for the papers. The papers sold them and
kept all of the money they made. Newspaper publishers made money selling paper space, and the
distribution was essential to that sale. The newsstands were happy to sell the papers because they
earned almost pure profit. I don't know if this is still the case, something in the back of my mind
tells me that the system changed in the 80s or 90s as newspaper prices began to rise markedly,
but I could be mistaken.
Nonetheless, let us assume that this is still the case. Thus, GCR's overhead consists of the
maintenance cost of his little plywood newsstand with no utilities, the pittance of rent that he
pays the city for that little square of sidewalk it is located on, and the cost of his vendor's license.
We will assume that he makes 91¢ on the sale of a $1.00 paper. He now takes that 91¢ and a
copy of The Daily Track Report to the little shop on the corner and buys a $1.00 candy bar.
The Daily Track Report sells for 10¢, of which GCR makes 9¢. The kid makes 20¢ on a
$1.00 candy bar. Thus far, then we can deduct that the $1.00 spent by the government has
directly produced more than its value - 91¢ on the sale of the paper and 11¢ on the sale of the
candy bar (10¢ of that sale $1.01 transaction came out of GCR's pocket) for a total transaction
value of $1.02.
This is money made directly on the sale. There were other monies made on the transaction (the
invisible hand) such as the manufacturer, warehouser, and distributor of the candy bar. We could
trace the candy bar back to the raw materials required to manufacture it, and add that to the costs
associated with the manufacturing, warehousing, and distributing of it to find the total
transaction value of the candy bar sale. Since we are assuming the government did not routinely
by newspapers from GCR, this purchase theoretically increased the newspaper circulation by 1,
which would equate to a corresponding increase in the value of the paper space they sell. But,
we're talking about direct impact here.
Where Keynes went wrong.
This is all well and good, if the government has the money to give. That is to say, if the
government does not borrow the dollar, it helps the economy by more than a dollar. This is the
same as a dollar from any other source. The problem, as Haggis noted, is that the government
does not have the dollar. It borrows the dollar, putting the transaction $1.00 in the negative
before we even began. Thus, instead of producing $1.02 in value, we've only thus far generated
2¢. We have to move the dollar though many more transactions before we can generate an
additional $1.00 in value for the $1.00 spent, if we ever can. I find it doubtful that we could
move it through enough transactions to generate a full dollar before it is consumed.
The problem with our government is that it is fueled by debt. We spend more than we make in
good times and bad. When there is money flowing in, we increase expenditures because "we can
afford to do so". When the money dries up, we increase expenditures "to help the economy" or
"to help those harmed by the economy". Presumably, we also do this because "we can afford to
do so". Some state and local governments establish "rainy day funds", which allow them to
accumulate a level of surplus funds for a variety of functions. Such a fund could serve to make
the Keynesian model work - having stimulus money on hand to stimulate when a stimulus is
needed. But we don't. The government, and presumably Mr. Keynes, does not distinguish
between a dollar owned and a dollar owed.
Is all borrowing bad?
I've defended borrowing before. The business of lending money to produce value is a legitimate
business, and one on which much of our economy depends. Many businesses would not be in
business if they had to wait until they had acquired the assets free and clear necessary to operate
before opening their doors. The intent is to grow the value of the borrowed dollars at a faster rate
than interest on the loan reduces it.
I put money in the bank, into Certificates of Deposit, and into stock in order for my money to be
lent to persons and businesses that will use it to grow its value. I am rewarded for the use of my
money in the form of interest payments and dividends. It's a nice relationship. I've also pointed
out in the past that the government does provide some valuable and necessary services for the
monies they receive. Sometimes they borrow the money to provide those services, through the
sale of bonds and treasury notes, among other things.
Two types of borrowing.
I've pointed out before that government debt is divided into two types: Public Debt and
Intergovernmental Holdings. Public Debt is debt incurred through the sale of instruments of debt,
such as bonds and treasury-bills. The Constitution gives the government the authority to incur
such debt, and does not specify a time frame for its repayment.
Intergovernmental Holdings are monies the government borrows from itself. Some departments
of the government do not spend all of the monies they are allotted, and they lend the remainder
back to the government. Social Security is the most notable of these. The monies raised for
Social Security are owed to Social Security, and legitimately must be repaid when the time
comes that they are needed. In the meantime, the Social Security programme earns interest on the
surplus funds, which they turn around and lend out the following year.
This is akin to you or me borrowing from our 401(k) or other retirement plan. The money is set
aside for a specific purpose (retirement), but it is our money. We are justified in taking it.
However, if we take money out of our retirement today to buy a new Mercedes, we will have to
repay it if we intend to maintain our lifestyle after retirement. Then again, since it is our money,
we can decide that a new Mercedes today is more important than a retirement income forty years
from now, so we can choose not to repay the debt. We are perfectly justified in relieving
ourselves of debt to ourselves. We merely have to be aware of the consequences of doing so.
The government, also, can decide at some point that it is not in its best interests to repay the
monies it has borrowed from itself. I've posted links, including links to Social Security's own
website, that show that the ‘promise' of Social Security is as empty as the hollow of one's hand.
The government of tomorrow is not bound by the promises of the government of today. If they
decided that there are better things to spend Social Security taxes on than Social Security, they
can cut benefits or abolish the programme altogether, if the cost of repaying the debt becomes
insurmountable. I believe it will at some point in the near future.
The problem today.
The current problem, as Haggis has noted, is that the government has no holdings to borrow
anymore. Until late last year, about half of the total national debt was Intergovernmental
Holdings. All borrowing today is Public Debt, which has to be repaid (unless we choose to
default). If you look at the Treasury's "Debt To The Penny" website, you'll see that nearly all of
the borrowing that has occurred this year has been Public Debt. The Social Security surplus is
gone. We are having to go, hat in hand, to borrow the $1.00 to buy that newspaper. That is not
good.
It's also significant to note how far we've sunk into the mentality of debt. A politician is now
considered a fiscal conservative if they seek to drive us into debt slower than the other
politicians. There is no plan in place to get the United States out of debt. None.
A bit on the value of money.
Money only has value if it is backed by goods or services. Until the ‘70s, our money was backed
by the gold we had tucked away in Fort Knox and elsewhere. Now, our money is backed by the
‘full faith and credit of the U.S. government'. That is to say, it is backed by GDP and our
government's ability to access it. This is why the GDP number is so important. It's also why the
money supply is so important. This is also why it has to be a number that can be quantified. OT
seems to think that I am hypocritical in accepting the government's reported value of GDP while
not accepting other government-generated numbers, such as the CBO's projected cost of the
health-care bill. However, I am satisfied that the bean-counters that count GDP beans can count
reasonably well. I am not satisfied that the bean-estimators that estimate projected future quantity
of beans can do so accurately. They are two different kinds of beans.
If we begin to produce large quantities of monies without increasing the goods or services that
back them, we devalue that money. Apparently, the Treasury thinks it can put lots more money in
circulation, about twice as much as GDP supports, and then withdraw it gradually without the
World's financial markets noticing. I don't think it's working.
Conflation time.
Now it is time to conflate this with my political viewpoints, as I am wont to do. Those of you that
don't like it when I do this, can stop reading now.
We didn't like the Soviet Union very much. It was all well and good when they were serving as a
market for our goods and services, but we thought their military was too big, we were afraid of
their nuclear weapons, we thought they were trying to undermine our system of government, and
we didn't like their habit of overthrowing foreign governments . Ronaldus Maximus determined
that we could beat them financially more easily and less messily than we could defeat them
militarily. Thus he set out to drive them into spending vast sums of money they didn't have to
prop up their failing economic system. It worked. He didn't even try to hide it. Several noted
writers explained the plan as it was unfolding. The Russians either didn't read enough or didn't
care enough to prevent it from happening.
Now, Ronaldus Maximus caught a lot of grief for our own increases in debt during that time.
However, GDP grew at a faster rate than the debt, and we defeated an enemy without going to
war. This earned the President the title of Ronaldus Maximus in my estimation, and began the
Pax Reagana that allowed President Clinton to begin a process of deficit reduction through
military-spending reduction. He also lowered taxes on the rich, but that's another topic.
What has this to do with today's situation? Well, the Chinese don't like us very much. It's all
well and good when we're serving as a market for their goods and services, but they think our
military is too big, they are afraid of our nuclear weapons, they think we are trying to undermine
their system of government, and they don't like our habit of overthrowing foreign governments.
Now, Mr. Hu may or may not be China's Ronaldus Maximus, but I don't doubt for a minute that
they have studied the events of the Cold War and the fall of the Soviet Union. Mr. Geithner went
to China and told them that their investment in the United States was safe, and they laughed at
him. Now, if they do not believe that they are investing in a sound financial system, what other
reason could they have for pumping so much effort into increasing our debt?
During the massive oil price increases that took place from about 2006 until the collapse in 2008,
Iran bragged that the mechanism was in place for the financial collapse of the West. Was this just
hot air being spewed by people noted for spewing hot air, or did they know something?
V/R
Shapley
Quod scripsi, scripsi.
