Response to Debt/Deficit and inflation

[RandFan]

I've heard people make the "national debt is a good thing" argument, but they can only do so by completely ignoring the inflationary aspects of government debt. It's not free money at all. Everything government spends we pay for. We either pay for it now in the form of taxes, or we pay for it later in inflation. When milk is $2.50 instead of $2.00, essentially that 50¢ can be thought of as a hidden tax. (Not totally; as I mentioned above, there's a natural amount of inflation in any economy. But the overwhelming majority of it is due to government overspending.) Inflation was high (double digit under Richard Nixon and Jimmy Carter). After Reagan took office the national debt skyrocketed. Inflation fell and has been low ever since.

After the fed we experienced mostly sustained economic growth. It is true that we experienced a serious depression and some moderate recessions but it is hard to argue that the economy is worse today than it was before the Federal Reserve system. Please note your chart (see above) prior to the Fed what you call "the normal cycle of inflation" was actually markded by periods of significant recession and economic stagnation with no middle class. Just the rich and the poor and most were poor.

An inflation rate of 3 to 6% is fine so long as it is across the board and there is strong economic growth. If milk costs $2.50 instead of $2.00 what do you care if you are making $15.00 an hour instead of $12.00?

When Jimmy Carter was in office we had high inflation 10%+ and no economic growth. After Reagan, inflation was reduced significantly and we have had mostly sustained economic growth.

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Originally posted by Michael Redman
I think that's an absolutely critical point that is usually ignored by deficit spending proponents. If we didn't have this huge debt, we could increase spending and lower taxes a good deal at the same time. Or, we could choose one or the other. Hundreds of billions in interest payments are not the best way for our nation to use that money. It's not really that simple.

Let's say that we run a business and we sell x number of widgets.

Demand for widgets is up and the market is sufficient that if we could increase output we could increase widgets sold by a factor of 10. However we do not have enough cash to purchase the necessary equipment and fund the staff necessary to increase output by a factor of 10.

We could borrow the money but then we would have to "maintain" that debt. However, the net advantage would exceed the maintenance and would justify the borrowing.

Now, suppose we borrow the money and our profits have increased significantly. We could sit back and figure out how much money we would have if we didn't have to make our loan payments but such thoughts are fruitless exercises since we had to borrow to increase output.

Still this analogy is simplistic and doesn't exactly mesh with government debt. In fact it confuses the issue a bit (see below) however it demonstrates how debt in and of its self is not necessarily bad and we have to avoid possible false economies by imagining what the net would be absent debt.

Federal debt (http://www.kcmetro.cc.mo.us/pennvalley/biology/lewis/fedebt.htm)

The reason our catastrophic expectations regarding the Federal debt have not materialized is that we have tried to apply the economics of the individual to the economics of the nation. This is a confusion of the levels of organization as well as a confusion of the orders of abstraction. The Federal government is more than just a big version of Mom and Pop's Bakery. In Korzbyskian terms, we are dealing here with intentional evaluations of "business," "deficit," "debt," "borrowing," "bankruptcy" .... We project our generalizations from areas of personal and business finance to an area where they do not apply. We do not properly evaluate the differences, and so we have little predictability.


Not only did the United States survive the massive deficit spending of World War II, we entered an era of unprecedented economic growth. The warnings about the effects of massive deficit spending did not come true. Nevertheless, the terrorists who make their living by agitating the public over hypothetical risks kept right on spinning their tales of woe, much like a rabid fundamentalist preacher who shows up for the next sermon unrepentant after again wrongly predicting the demise of the world.

Federal Debt (http://www.econlib.org/library/Enc/FederalDebt.html)

The debt of U.S. businesses (excluding financial institutions) and households is $7 trillion, far larger than the federal debt. But business debt, it is argued, generally finances income-earning plant and equipment. And individuals borrow largely to purchase homes, which provide implicit income by

The federal government, though, also has real assets: interstate highways, public buildings, and federal land, water, and minerals. All these assets contribute to the national income and hence—indirectly if not directly—to the "earnings" or tax receipts of the government itself. Private businesses compute their net worth by subtracting liabilities from assets. The same should be done for the government. Most unofficial estimates suggest that assets directly owned by the federal government pretty much match the entire federal debt.

Economics is not an exact science and there are of course counter arguments to the ones that I have provided. I am not trying to sell anyone on the value of deficits or the national debt. Only saying that such notions of "how much money would we have if we didn't have the debt" are simplistic

[Michael Redman]

I understand the concept of borrowing to invest, but is investment money best spent by the government? Doesn't government borrowing use up funds that could otherwise be borrowed by widget factories, raising the cost of private borrowing? I am admittedly without an understanding of the fine details, but it seems to me that, while government borrowing may produce benefits which lessen the apparent costs (which is why the doomsayers are wrong), those costs still could be better borne, and a return more faithfully generated, if it were private actors, and not the government, borrowing and spending the money.

(Damn, I'm starting to sound like a libertarian or something. :confused: )

[RandFan]

Originally posted by Michael Redman
I understand the concept of borrowing to invest, but is investment money best spent by the government? Doesn't government borrowing use up funds that could otherwise be borrowed by widget factories, raising the cost of private borrowing?

I am admittedly without an understanding of the fine details, but it seems to me that, while government borrowing may produce benefits which lessen the apparent costs (which is why the doomsayers are wrong), those costs still could be better borne, and a return more faithfully generated, if it were private actors, and not the government, borrowing and spending the money.

(Damn, I'm starting to sound like a libertarian or something. :confused: ) I'm no expert and I know that government is inefficient when it comes to spending. So I would think that you have a point but I would have to defer to someone more knowledgeable. I only know that when it comes to deficits and debt they are not necessarily bad things. Economic growth and low inflation seems to be the optimum economic model (simplistic I know). That is my 2 cents.

[Cain]

Originally posted by Michael Redman
[B]I understand the concept of borrowing to invest, but is investment money best spent by the government

This is known as the crowding out effect. If the government runs a deficit, it must borrow money. Borrowing money increases the price of borrowing, thus driving up interest rates.

Doesn't government borrowing use up funds that could otherwise be borrowed by widget factories, raising the cost of private borrowing? I am admittedly without an understanding of the fine details, but it seems to me that, while government borrowing may produce benefits which lessen the apparent costs (which is why the doomsayers are wrong), those costs still could be better borne, and a return more faithfully generated, if it were private actors, and not the government, borrowing and spending the money.

It depends. According to the vast majority of economists (if that appeal to authority means anything), the private sector is much better than government at producing most goods and services. However, also according to most economists, there instances of market failure where it's necessary for government to intervene.

Public goods (national defense, roads) and the problem of externalities (air pollution, damage to ecosystems) are the best known examples for government regulation/interference.

Both lead to ineffeciencies and excesses. The military might budget $600 for toilet seats-- and rich people might pay thousands more for seats made out of solid gold.

The government could build a road from a private residence to a main city, but it won't do as much as good as a road connecting the city to the port (linkages).

[RandFan]

Originally posted by Cain
This is known as the crowding out effect. If the government runs a deficit, it must borrow money. Borrowing money increases the price of borrowing, thus driving up interest rates. Hi Cain,

Of course interests rates are tied to market forces. But there is a mechanism to help keep rates low and that is the Fed. Unfortunately low interest rates can drive up inflation. So long as inflation is low and the economy weak the Fed will lower rates. If the economy heats up then the fed will raise rates putting the brakes to the economy to slow it down.

That is why the rates are so low while government borrowing is at record highs.

[Cain]

Originally posted by RandFan
Hi Cain,

Of course interests rates are tied to market forces. But there is a mechanism to help keep rates low and that is the Fed. Unfortunately low interest rates can drive up inflation. So long as inflation is low and the economy weak the Fed will lower rates. If the economy heats up then the fed will raise rates putting the brakes to the economy to slow it down.

That is why the rates are so low while government borrowing is at record highs.

Randfan,

You'll find no disagreements from me on this point, but I think we need to distinguish between long-term and short-term interest rates.

Clinton's Sec. of the Treasury, Robert Rubin, argued that government debt (deficits on aggregate) keeps long term interest rates high. The Fed sets the interest rate at which banks borrow money for the short term.

[shanek]

Originally posted by RandFan
Inflation was high (double digit under Richard Nixon and Jimmy Carter). After Reagan took office the national debt skyrocketed. Inflation fell and has been low ever since.

Inflation was artificially high under Nixon's wage freeze, so this is hardly a fair comparison.

After the fed we experienced mostly sustained economic growth.

Uh, no...after the Fed, we experienced the biggest Depression the nation has ever seen as well as the worst banking crisis ever. And none of the economic booms since the creation of the Fed were as big as the economic booms before the Fed (and the busts are bigger busts).

Please note your chart (see above) prior to the Fed what you call "the normal cycle of inflation" was actually markded by periods of significant recession and economic stagnation with no middle class. Just the rich and the poor and most were poor.

That is so clearly and totally wrong it's astounding.

Demand for widgets is up and the market is sufficient that if we could increase output we could increase widgets sold by a factor of 10. However we do not have enough cash to purchase the necessary equipment and fund the staff necessary to increase output by a factor of 10.

That's what loans are for.

[quoite]We could borrow the money but then we would have to "maintain" that debt.[/quote]

Well, duh—that's the whole idea! :rolleyes:

Anything you can do to get money without either earning it or maintaining as debt is the economic equivalent of counterfeiting.

[shanek]

Originally posted by Michael Redman
I understand the concept of borrowing to invest, but is investment money best spent by the government? Doesn't government borrowing use up funds that could otherwise be borrowed by widget factories, raising the cost of private borrowing? I am admittedly without an understanding of the fine details, but it seems to me that, while government borrowing may produce benefits which lessen the apparent costs (which is why the doomsayers are wrong), those costs still could be better borne, and a return more faithfully generated, if it were private actors, and not the government, borrowing and spending the money.

Absolutely. The government does not have the incentives that market players have to economize.

(Damn, I'm starting to sound like a libertarian or something. :confused: )

ONE OF US!!! ONE OF US!!! :D

[shanek]

Originally posted by RandFan
Of course interests rates are tied to market forces. But there is a mechanism to help keep rates low and that is the Fed. Unfortunately low interest rates can drive up inflation. So long as inflation is low and the economy weak the Fed will lower rates. If the economy heats up then the fed will raise rates putting the brakes to the economy to slow it down.

That is why the rates are so low while government borrowing is at record highs.

Unfortunately, the indicators that the Fed uses to make that determination are more chaotic than weather predictions, and they're much slower to respond than the market.

Loans in the market act just like everything else. On the supply side, banks are willing to give out more loans at a higher interest rate, but borrowers on the demand side are more willing to take a loan at a lower interest rate. So you have the same balancing factor that exists everywhere else in the market.

If the Fed sets the rate too low, you have a situation where more people are wanting to borrow money than the banks are willing to lend to. The result is monetary stagnation. If the Fed sets the rate too high, then there aren't enough people to take all the loans that the bank wants to give out. If the Fed happens to set it at the right level, then the result is no better than what the free market would do.

There's really no way the Fed can respond better than the free market, and the only possibilities other than the free market equilibrium harm the economy.

[RandFan]

RandFan
After the fed we experienced mostly sustained economic growth.

Originally posted by shanek
Uh, no...after the Fed, we experienced the biggest Depression the nation has ever seen as well as the worst banking crisis ever. Thank you for editing my post for rhetorical purposes. Let's get the whole thing in there ok,

RandFan
After the fed we experienced mostly sustained economic growth. It is true that we experienced a serious depression and some moderate recessions but it is hard to argue that the economy is worse today than it was before the Federal Reserve system. Please note your chart (see above) prior to the Fed what you call "the normal cycle of inflation" was actually marked by periods of significant recession and economic stagnation with no middle class. Just the rich and the poor and most were poor.[/b] So I mentioned the depression. There was also a dust bowl and lots of other factors more important it doesn't take away the fact that we did have the largest sustained economic expansion in history.

And none of the economic booms since the creation of the Fed were as big as the economic booms before the Fed (and the busts are bigger busts). My understanding is different. I'm trying to find proof. Do you have any evidence?

RandFan
Please note your chart (see above) prior to the Fed what you call "the normal cycle of inflation" was actually marked by periods of significant recession and economic stagnation with no middle class. Just the rich and the poor and most were poor.

That is so clearly and totally wrong it's astounding. Well you are good at gainsaying and bullying. Is that what passes for arguing in your mind?

Are you saying that we did have a middle class? Do you have any evidence to refute me? I am trying to find evidence to substantiate my point? Do you have any to support you. It's one thing to ask one to site proof it is another to claim that the other is wrong.

RandFan
Demand for widgets is up and the market is sufficient that if we could increase output we could increase widgets sold by a factor of 10. However we do not have enough cash to purchase the necessary equipment and fund the staff necessary to increase output by a factor of 10.

Shanek
That's what loans are for.

RandFan
We could borrow the money but then we would have to "maintain" that debt.

Shanek
Well, duh—that's the whole idea! Why the sarcasm? You admit I'm right yet say "duh". I'm answering a question. I don't say "duh" when you are answering a question. My point is that maintenance of the debt is not a valid reason for not going into debt. I have not been rude to you it is quite unnecessary for you to be rude to me.

Shanek,

I would be happy to have a debate on this topic if you are interested. Could we set some ground rules.

[list=1]
No Gainsaying
References with links and or footnotes
Respectful responses and no emotion or bullying
[/list=1]

I will state up front that I am not an expert and have never claimed to be. It has been 20 years since I studied economics. You will have to give me some time to do some research.

Fair enough?

[RandFan]

Originally posted by shanek
Unfortunately, the indicators that the Fed uses to make that determination are more chaotic than weather predictions, and they're much slower to respond than the market. I don't agree. I would be interested in any information that you have.

Loans in the market act just like everything else. On the supply side, banks are willing to give out more loans at a higher interest rate, but borrowers on the demand side are more willing to take a loan at a lower interest rate. So you have the same balancing factor that exists everywhere else in the market. But you only cite the cost of money from the banks to the borrower. The cost of the money to the banks is also a factor. If the banks can get money for less they can make loans at lower interest rates. Pass on the savings so to speak.

If the Fed sets the rate too low, you have a situation where more people are wanting to borrow money than the banks are willing to lend to. The result is monetary stagnation. If the Fed sets the rate too high, then there aren't enough people to take all the loans that the bank wants to give out. If the Fed happens to set it at the right level, then the result is no better than what the free market would do. When demand is high and the prime is high the supply is low and the rate to the borrower is high. When the prime is low and the demand is high then the rate to the borrower is low. This is documented btw. But I know, I will have to show proof. It will take some time. I am supposed to go out of town soon but I will see if I can get it before I leave.

There's really no way the Fed can respond better than the free market, and the only possibilities other than the free market equilibrium harm the economy. That is your opinion, yet we have had low interest rates for a sustained period of time. Inflation is low and the economy is expanding.

[Victor Danilchenko]

Shane,

I never pretended to be an economics buff -- unlike you, I know how little I know. Your economic errors, on the other hand, are not only blatant -- they also go ignored by yourself.

The money the government "borrows from itself" does not go into a hole -- it cascades through the economy, paying doctors and construction workers and park rangers in various ways. Hence the idea of keynesian counter-cyclical deficit spendings -- the government borrows money and pours it back into economy when the economy is in recession, jump-starting the whole shebang again.

In principle, government "borrowing money from itself" to invest it, is no different from the bank taking those 90 percent of deposits and investing it -- in fact, this is exactly what you described, for loaning the money out is in fact a form of investment. Had the bank invested the money by building a new office building from those 90 percent instead of from its profits, the effect would have been exactly the same; the point is that the money would get re-used. For that matter, "government borrowing money from itself" is not fundamentally different from the bank loaning out those 90 percent, only to have it be invested by paying the construction company, which company in turn would deposit the money back into the same bank. Either way, the funds keep cycling through the economy.

Whether the money get poured back into the economy by means of the banks investing the SS funds from the government accounts, or the governments investing those funds directly, the result is the same. The only two differences would be what the money gets invested into (whether the government or the bank decides what to do with it), and more importantly, what happens in case of economy downturn. Banks are FDIC-insured, you see, and so their risk-taking is underwritten by the government -- so in case of a bank collapse, the government is going to have to pay the invested funds back to itself, because the actual money would be out there in the economy, dispersed in the forms of loans and other investments, and partially un-collectable due to bankruptcy rules. Had the banks been taking their own risk rather than being FDIC-insured, government borrowing money from itself would have been the safest thing to do, as the government is better able to protect its investment than an un-insured bank, and SS funds is certainly not something that should be bet on absence of economy crashes.

No matter which way you slice it, government borrowing from SS funds is not fundamentally different from countless other things the government could do with the funds, depositing them into banks being one of such things; it's most certainly no more "legal counterfeiting" than the banks only keeping fractional funds on hand.

P.S. Dude, I don't know much about economics, but you clearly know just as little; I, however, realize my shortcomings in this area, and I furthermore realize that economics is not physics, and that many differences in it are indeed largely just differences or value and opinion. And you have the audacity to call your previous post an elucidation...

[Victor Danilchenko]

Michael Redman

I understand the concept of borrowing to invest, but is investment money best spent by the government?Well, that's the $1M question.

AFAICT, in most cases, the market can allocate funds more efficiently. There are two conditions when government can do better: in recession (when government is the only entity with enough clout to jump-start the economy via deficit spendings), and in a small number of domains where standard assumptions profoundly don't hold, which assumption failures would be:
imperfect information
imperfect competition
market failure in its three standard forms:
- public goods
- externalities
- increasing return to scaleI am admittedly without an understanding of the fine details, but it seems to me that, while government borrowing may produce benefits which lessen the apparent costs (which is why the doomsayers are wrong), those costs still could be better borne, and a return more faithfully generated, if it were private actors, and not the government, borrowing and spending the money.Much of the time -- but not in all cases -- this is true.

[Michael Redman]

I pretty much agree with that. That's why I don't see myself as a libertarian: Sometimes there are public goals that we can best reach through use of government. (And no, I'm not willing to get into that debate again.)

[shanek]

Originally posted by RandFan
Thank you for editing my post for rhetorical purposes. Let's get the whole thing in there ok,

So I mentioned the depression. There was also a dust bowl and lots of other factors more important it doesn't take away the fact that we did have the largest sustained economic expansion in history.

Don't look now, but you just edited [/i]my[/i] post "for rhetorical purposes." I was showing how in no way do we have "the largest sustained economic expansion in history." Especially since our biggest booms have only grown the economy by 3% every year, much lower than the booms that existed before the Fed.

And the flux of CPI before the Fed, as I already pointed out, is the result of the business cycle doing what it's supposed to. That has been abrogated by the Fed.

Why the sarcasm?

Because you presented it as if there were something wrong with it.

[shanek]

Originally posted by RandFan
I don't agree. I would be interested in any information that you have.

This has been covered to death in other threads. I'm fscking sick and tired of doing all of that work to have others ignore it and insult me. Check the older threads. GDP is not aq very accurate measurement for reasons I've elucidated in detail. Same with what level represents full production. Not only that, these are concepts you learn in a basic macroeconomics class.

But you only cite the cost of money from the banks to the borrower. The cost of the money to the banks is also a factor.

True, I was keeping it simple, but really banks borrowing from a district or central bank is really no different than people or companies borrowing from banks.

That is your opinion, yet we have had low interest rates for a sustained period of time. Inflation is low and the economy is expanding.

Why is that an indication that it is working? What are you comparing it to? You're basically saying, "It's doing what it's doing, therefore it works."

[shanek]

Originally posted by Victor Danilchenko
I never pretended to be an economics buff -- unlike you, I know how little I know.

That has not been your behavior every other time an economic subject has come up. You speak like an authority, and insult and belittle me when I refute it.

The money the government "borrows from itself" does not go into a hole -- it cascades through the economy, paying doctors and construction workers and park rangers in various ways.

And money I would counterfiet for my own spending does the same thing. Do you even think your posts through?

In principle, government "borrowing money from itself" to invest it, is no different from the bank taking those 90 percent of deposits and investing it

I have already shown how that is absolutely not the case. As is typical for you, you just repeat the same thing with no regard for my prior comments.

Had the bank invested the money by building a new office building from those 90 percent instead of from its profits, the effect would have been exactly the same;

No, it wouldn't. Where did the money come from, Victor?

You've basically just said that borrowing money is no different crom counterfeiting.

[Victor Danilchenko]

shanek

That has not been your behavior every other time an economic subject has come up.yes, it has. in fact, I have explicitly admitted my ignorance of economics on numerous occasions, and once (in the thread about gold standard) bowed out due to lack of knowledge.

However, I have been reading up on economics, and I can see your bullsh*t for what it is better and better.

And money I would counterfiet for my own spending does the same thing. Do you even think your posts through?You said that the money the government borrows from itself could have instead been allocated usefully; my response was that it's allocated usefully anyway. Are you always in habit of not thinking about what a given statement is in response to?

I have already shown how that is absolutely not the case.No, you simply asserted that there is some magical difference between bank effectively creating extra money by loaning out deposits in excess of the reserve, and government effectively creating extra money by doing the same -- except that the government loans money to itself instead of depositing it into a bank, and thus re-circulates money itself instead of having the bank do it. As best as i could discern it, your position was that the said magical difference lies in the fact that the banks will only loan money out when they expect adequate return on them -- in which case, by your argument, making a bad loan is what amounts to counterfeiting money, and the government is only doing so if they invest money poorly. So now, if my understanding of your position is correct (which you will of course disagree with), instead of 'government deficit is tantamount to legalized counterfeiting", we are at 'government deficit, when spent badly, is tantamount to legalized counterfeiting' -- a rather different, and rather silly, statement.

As is typical for you, you just repeat the same thing with no regard for my prior comments.As is typical of you, you regard any disagreement with you as intellectual dishonesty or outright falsehood.

No, it wouldn't. Where did the money come from, Victor?From the excess above reserve deposit. Whether the said remainder is invested by being loaned out, or invested by building a new building, makes little difference, as long as the investment is sound.

You've basically just said that borrowing money is no different crom counterfeiting.No, dude, what i have said is that recycling money through the bank investing excess deposits is not fundamentally different from the government recycling money by investing excess funding from SS. In both cases, what has to be maintained is enough to ensure proper payoff to those who would require it -- proper SS benefits to the beneficiaries, or proper funds for withdrawals for bank customers. Everything in excess of the funds required to service the customer needs can be safely re-invested, improving the economy in general.

[shanek]

Originally posted by Victor Danilchenko
You said that the money the government borrows from itself could have instead been allocated usefully;

Where did I say that? It isn't a question of allocation; it's a question of having it twice.

No, you simply asserted that there is some magical difference between bank effectively creating extra money by loaning out deposits in excess of the reserve, and government effectively creating extra money by doing the same

It isn't magic, it's basic macroeconomics, and if you'd really done any reading up on it you'd know that! I even explained it above. The government borrowing from itself is equivalent to me firing up a press and counterfeiting money—in fact, in a very real sense, that's exactly what the government is doing! They are literally causing more money to be printed without a comparable rise in the number of goods and services in the economy!

I'll explain it once again although I have no doubt you'll just ignore it again:

If I loan money to build my house, then not only am I creating jobs for carpenters, plumbers, etc., but I'm also increasing my productivity because I now have to work to pay off the loan. Whereas if I just counterfeit the money, I lose my boost in productivity because I don't have to pay it back; but the carpenters etc. are still given the jobs. Your problem is that you keep looking at the jobs created by spending the money as a basis for legitimacy when that happens with counterfeiting too!

the government is only doing so if they invest money poorly.

IT HAS ABSOLUTELY NOTHING TO DO WITH HOW IT'S INVESTED!!!! I can counterfeit money and invest it very wisely and it's still counterfeit money creating inflation in the economy!!!

All those fake Bank of England notes Germany spent in the British economy were spent very well; but there was nothing really to back that money up, and so Britain experienced hyperinflation.

a rather different, and rather silly, statement.

It is a very different and silly statement. And as always you attribute such a statement to me even though it's not at all like what I said.

From the excess above reserve deposit.

There ISN'T a reserve deposit when the government borrows from itself! It just takes the money! In order to do what you describe, they would have to issue bonds, in which case they aren't borrowing from themselves anymore.

Whether the said remainder is invested by being loaned out, or invested by building a new building, makes little difference, as long as the investment is sound.

Irrelevant. The question is, does it get invested once or twice?

No, dude, what i have said is that recycling money through the bank investing excess deposits is not fundamentally different from the government recycling money by investing excess funding from SS.

Same thing. You're still equating one form of money creation with another.

In both cases, what has to be maintained is enough to ensure proper payoff to those who would require it -- proper SS benefits to the beneficiaries, or proper funds for withdrawals for bank customers.

For the fiftieth time, THAT DOESN'T HAVE ONE SMEGGING THING TO DO WITH IT!!!!

Answer straight: How is the government borrowing money from itself different from counterfeiting? What aspects does one have that the other doesn't?

[RandFan]

Originally posted by shanek
This has been covered to death in other threads. I'm fscking sick and tired of doing all of that work to have others ignore it and insult me. Check the older threads. GDP is not aq very accurate measurement for reasons I've elucidated in detail. Same with what level represents full production. [/b] Ok, I get the hint. We can just disagree.

Not only that, these are concepts you learn in a basic macroeconomics class. Yeah, and what I learned in my macroeconomics class dispute your assertions.

True, I was keeping it simple, but really banks borrowing from a district or central bank is really no different than people or companies borrowing from banks. Well sure it is. The Fed can raise the rate to slow inflation and lower the rate to help the economy.

Why is that an indication that it is working? What are you comparing it to? You're basically saying, "It's doing what it's doing, therefore it works." We have a strong economy, we are one of the wealthiest nations on earth. We have a large middle class and low unemployment rates, low inflation and low interest rates so people can buy homes.

Sure things could be better but besides the 50s I think that we are in the best period of our entire history. Hey, I have an idea, could you tell me a period in American history that was better for either the average American or for most Americans and why? That way I can compare.

Or should I go read other threads?

[RandFan]

Originally posted by shanek
Don't look now, but you just edited [/i]my[/i] post "for rhetorical purposes." I was showing how in no way do we have "the largest sustained economic expansion in history." Actually you didn't show anything. You just said that we didn't. Sure you made the point about the depression but as I said there were other factors and the depression can't take away the 50 years since, the creation of the middle class and yes we did have the largest sustained economic expansion in history. You don't have to believe me. I will get the figures. But untill then all you can do is disagree absent any proof on your own.

Especially since our biggest booms have only grown the economy by 3% every year, much lower than the booms that existed before the Fed. Please look at my claim again. "the largest sustained economic expansion in history". It's called compound growth?

And the flux of CPI before the Fed, as I already pointed out, is the result of the business cycle doing what it's supposed to. That has been abrogated by the Fed. Then you could point to a period of history that is demonstrably superior than the period we are now in.

And by your logic things are a lot worse than they used to be. What with runaway inflation a worker has to put in many more hours to purchase a pound of apples or a pound of steak than he did before the fed, right?

How much time did a blue collar worker have to work prior to the fed to purchase a pound of apples or a pound of steak? And how much does he have to work now? By your theory a LOT more.

Historical Data (http://www.riley.d21.k12.il.us/assignments/math_trail_2003.html)

All of the theory is useless without real world examples.

BTW, you never did respond to the fact that we now have a middle class, do you think that is a good thing? Also, what difference does it make if milk costs $2.50 instead of $2.00 if you are making $15.00 an hour instead of $12.00?

Because you presented it as if there were something wrong with it. I don't think so. I was responding to a question that had nothing to do with you.

[Underemployed]

Dear All,

Victor Danilchenko's assertion that banks lending out money is no different to government borrowing from it's own funds really made me think. Thank you! What, essentially, is the difference?

Shanek's bold statement that putting 100 bucks into a bank creates 1000 also made me ponder. It made me think why we have banks and, fundamentally, why we have money at all. It's not as easy a question as it sounds. Perhaps for another thread.

The "100=1000 when given to a bank" is a best-case scenario assuming every part of the process is 100% efficient, but the basic premise is sound. By allowing your capital to be pooled and loaned out to others, wealth is created. It does not devalue your intitial $100 because the total amount it can loan out does not exceed the total resources available to the bank (this is why the BCCI scandal happened - they were criminally irresponsible in allowing traders to bet more than they could afford).

In the example of the Social Security funds, the situation is different and cannot be compared. The money 'given' to the SS fund is not an interest-bearing deposit account, it is an active pool of money meant to provide for SS needs as and when they arise. If a government chooses to reallocate money from this fund to another, it is not 'borrowing' in any sense of the word. There is no interest paid back to the fund nor is there any intent in paying back the principle. It is taken, pure and simple.

There is nothing wrong with this per se. Companies shift money around various departments and accounts all the time for numerous reasons. It only becomes a problem when you indulge in Enron-style accounting. Governments do this all the time.

In the UK, the railway network company Railtrack was recently re-nationalised and turned into the Strategic Railway Authority (SRA). The SRA was initially sold to the public as an entity that was not a governmental body, yet also not any sort of private company (!) so that the billions in debt it accrued were off-balance sheet. By chance the recent Enron dealings made people more wary of such schemes and the SRA's debt is now back on the governments accounts.

It is these practices which amount to legalised counterfeiting. Enron took losses from one area of the business and disguised it through fictitous incomes, which is exactly what the government borrowing from itself is. One way or another, the shortfall in the SS fund will have to be made up.

Victor is also assuming that the SS money is going to be invested to generate more income, just like a bank loan. It's not. It's going to pay for goods and services which should have been paid by other funds. It's filling a hole, and no amount of wordplay can get around the fact that borrowing money from yourself and spending the proceeds is a one-way ticket to penury.

Go ahead and try borrowing from yourself at market rates and do the math - unless you fully account for the liability (which the government tends not to do) then you're having your cake and eating it.

[Underemployed]

On a separate note, the meaning of Randfan's Historical data (http://www.riley.d21.k12.il.us/assignments/math_trail_2003.html) is a little unclear to me.

For instance, it says that in 1940 the minimum wage was $0.30 and in 2000 it was $5.15.

Ignoring taxes this means a 40-hour week got you $12. In 2000 it was $206. Sounds like a big increase, eh? Especially considering the shopping basket also used as an example is a much smaller percentage of the weekly wage for the year 2000 worker.

But sadly, unlike famous movie star Max Williams (read the link) the minimum wage-earners of today are not entertaining the President with home cooking. Try a link like this (http://www.cdfohio.org/ohioissues/fam-econ/family_budget/fam_budget.html) and you will see that real world examples show that families on the minimum wage are, at best, no better off than they ever have been for as long as the minimum wage has existed.

Whether or not this is due to inflation, government interference or any other instrument you care to name is beside the point. Things have not gotten any better for those at the bottom.

[Victor Danilchenko]

shanek

There ISN'T a reserve deposit when the government borrows from itself! It just takes the money! In order to do what you describe, they would have to issue bonds, in which case they aren't borrowing from themselves anymore.No, they simply put the equivalent of IOUs into the SS fund; just as I might borrow money from my computer upgrade piggybank -- while i am waiting to accumulate enough, I might as well put that money to good use... which is fine, as long as the money will be there when it's time to actually use it for the computer upgrade.

Irrelevant. The question is, does it get invested once or twice?Once. just as I might make a bank deposit into a closed account, and then take out a loan with that deposit as security.

Answer straight: How is the government borrowing money from itself different from counterfeiting? What aspects does one have that the other doesn't?because when you counterfeit, you actually create money where there was no mney before. When you borrow from yourself, you temporarily shift money from one account to the other.

[Victor Danilchenko]

Underemployed

In the example of the Social Security funds, the situation is different and cannot be compared. The money 'given' to the SS fund is not an interest-bearing deposit account, it is an active pool of money meant to provide for SS needs as and when they arise.Yes; but there's also a pool of money that serves as a buffer between contributions and payoffs -- SS is not hand-to-mouth, it's not paying this week's benefits from this week's contributions with no reserve to cover the payoffs in case contributions drop off.

It is these practices which amount to legalised counterfeiting. Enron took losses from one area of the business and disguised it through fictitous incomes, which is exactly what the government borrowing from itself is. One way or another, the shortfall in the SS fund will have to be made up.Yes, they will; but the government has always made good on its debts. Enron's problem was that they committed fraud -- they accumulated more debt than they could service, and concealed it from the shareholders and the stock market. The counterfeiting part comes in the fact that Enron deceived everyone by projecting false picture of their financial status, thus unduly increasing their capitalization.

Victor is also assuming that the SS money is going to be invested to generate more income, just like a bank loan. It's not. It's going to pay for goods and services which should have been paid by other funds.So? Other funds aren't there, and SS money is. That's like me borrowing from my above-mentioned computer upgrade piggybank to pay the electric bill. The only real question is whether I will be able to return the money into the piggybank when it's time to use it.

Now mind you, this is not necessarily a sound fiscal strategy; but it's not legalized counterfeiting, nor fraud.

It's filling a hole, and no amount of wordplay can get around the fact that borrowing money from yourself and spending the proceeds is a one-way ticket to penury.That may very well be the case; then again, it all depends on how the borrowed money is spent. Regardless, it may be a bad fiscal policy, but it's not fradulent.

Go ahead and try borrowing from yourself at market rates and do the math - unless you fully account for the liability (which the government tends not to do) then you're having your cake and eating it.yes, I will borrow from my piggybank at, say, 5%, and invest it into something that gives me 10% return, and be able to liquidate the investment by the time o fthe computer upgrade -- that's good fiscal policy, and it will increase the $$ in by piggybank.

I am not saying that this is the case with SS; my point simply is that government borrowing from itself is neither legalized counterfeiting nor any other sort of fraud.

[shanek]

Originally posted by RandFan


Then why in all those years did the economy only grow an average of 3% a year?

[b]Please look at my claim again. "the largest sustained economic expansion in history". It's called compound growth?

It's every bit as "sustained" as before the Fed. We have booms and busts now just as we did before (and the Fed was supposed to eliminate them).

And by your logic things are a lot worse than they used to be. What with runaway inflation a worker has to put in many more hours to purchase a pound of apples or a pound of steak than he did before the fed, right?

Where did I ever say that? Stop putting words in my mouth.

Historical Data (http://www.riley.d21.k12.il.us/assignments/math_trail_2003.html)

Okay, I'll give it a shot:

1. What was the federal minimum wage in 1960?

A: $1 hour. Given.

2. What was the average pay per hour for a factory worker who earned $100 for a 40 hour week during the 1960's?

A. $100/40 hours, or $2.50/hr. Note that this would also have been their pay without a minimum wage, as this is the market equilibrium and the minimum wage only affects market wages below the minimum wage.

3. What was the difference between his earnings per hour and the minimum wage?

A. $1.50/hour.

4. 4 If in 1970 a factory worker earning minimum wage put in an extra day's hours during one 40 hour work week, what would s/he earn for that week?

A. Given time-and-a-half for overtime like the site says, $83.20.

5. Does an increase in the minimum wage mean that workers will be able to purchase more goods and services?

A. NO. A worker who is making the minimum wage will probably not even have a job after the increase is put into effect. Think about it: What would happen if the minimum wage were suddenly increased to $100/hr? Most people would go to work the next day to find that they no longer had their jobs because their employer could no longer afford to pay them. A small increase in minimum wage works the same way, it just doesn't affect as many people.

Go back to your supply/demand model and modify it for wages instead of prices. Now consider a minimum wage above the equilibrium wage. You'll see that, compared to the equilibrium, the supply of workers has increased while the demand for work has decreased. Who do you think those extra workers are? The workers who can demand the new wage. Who do you think the few remaining jobs will be given to? Those who demand the higher wage. Those who would be working at the lower wage level aren't being helped at all—they're being priced out of the market!

All of the theory is useless without real world examples.

Okay, fair enough:

A study of an increase in New Jersey's minimum wage was conducted by David Neumark and William Wascher. Using information from actual payroll records, they found that "the New Jersey minimum wage increase led to a 4.6 percent decrease in employment in New Jersey relative to the Pennsylvania control group."

http://papers.nber.org/papers/W5224.pdf

Also, Prof. Kevin Lang of Boston University studied the effect of minimum wage laws and concluded: "When the minimum wage is set above the level that would be offered by low-wage firms in the absence of legislation, low-wage jobs become attractive to some high-quality workers .... The employment rate for low-quality workers will generally fall as may their expected wage."

http://www.epionline.org/study_lang_01-1995.html

I don't think so. I was responding to a question that had nothing to do with you.

When did I say you did?

(edited to add links)

[shanek]

Originally posted by Underemployed
The "100=1000 when given to a bank" is a best-case scenario assuming every part of the process is 100% efficient,

Of course. I said at the time that I was simplifying. Realistically, the money won't all go into the same bank, and each bank may have a different reserve rate (although by law it must be set at at least the Federal Reserve minimum).

If a government chooses to reallocate money from this fund to another, it is not 'borrowing' in any sense of the word. There is no interest paid back to the fund nor is there any intent in paying back the principle. It is taken, pure and simple.

And yet, the original amount is still said to be in the fund. Hence, it's no different from counterfeiting.

Victor is also assuming that the SS money is going to be invested to generate more income, just like a bank loan. It's not. It's going to pay for goods and services which should have been paid by other funds. It's filling a hole, and no amount of wordplay can get around the fact that borrowing money from yourself and spending the proceeds is a one-way ticket to penury.

Absolutely right. Well said.

[shanek]

Originally posted by Victor Danilchenko
No, they simply put the equivalent of IOUs into the SS fund; just as I might borrow money from my computer upgrade piggybank -- while i am waiting to accumulate enough, I might as well put that money to good use... which is fine, as long as the money will be there when it's time to actually use it for the computer upgrade.

That's not what the government is doing, though.

Once.

No, twice. It's still in the SS budget after they spend it in the main budget.

just as I might make a bank deposit into a closed account, and then take out a loan with that deposit as security.

It's not the same at all!!! You aren't even listening!!! (as usual)

because when you counterfeit, you actually create money where there was no mney before.

And that's exactly what the government is doing here! They're taking an amount of money and spending it twice! It would be like you withdrawing $100 from your account but not being deducted the $100!

[shanek]

Originally posted by Victor Danilchenko
Yes; but there's also a pool of money that serves as a buffer between contributions and payoffs -- SS is not hand-to-mouth, it's not paying this week's benefits from this week's contributions with no reserve to cover the payoffs in case contributions drop off.

Come on, you know it doesn't work that way. The budget is a yearly thing, not a weekly thing. Each year, the government budgets how much will be paid out in SS benefits, and they budget how much will be taken in SS taxes. It is exactly like that, and you can't use the fact that the time period is a year instead of a week to weasel out of it.

By the way, by admitting that the buffer exists, you just belied your previous post when you said the money was taken out. That buffer represents the exact money they're taking to spend on general budget items!

[RandFan]

Originally posted by shanek
Then why in all those years did the economy only grow an average of 3% a year? You are missing the point. The 3% a year is compounded.

It's every bit as "sustained" as before the Fed. We have booms and busts now just as we did before (and the Fed was supposed to eliminate them). No, that is not quite true. We have bull and bear markets and recesions but since the depression our economy has grown more than it ever has in past history. I haven't had the time but I will get the numbers.

Where did I ever say that? Stop putting words in my mouth. I did not put words in your mouth. I said "by your logic" it is the logical conclusion of your argument.

Look, you are saying that the Fed is a bad thing right? Ok, if it is bad then what are the negative consequences? You mentioned earlier that we had "runaway" inflation, right? Well if we have had 50 years of runaway inflation since the depression (see your chart) then it would follow that a person would have to work many more hours to purchase the same goods and services in 2000 than 1950, right?

Fortunately that is not the case hence my question, what difference does it make if milk costs $2.50 instead of $2.00 if you are making $15.00 an hour instead of $12.00?

Go back to your supply/demand model and modify it for wages instead of prices. Now consider a minimum wage above the equilibrium wage. You'll see that, compared to the equilibrium, the supply of workers has increased while the demand for work has decreased. Who do you think those extra workers are? The workers who can demand the new wage. Who do you think the few remaining jobs will be given to? Those who demand the higher wage. Those who would be working at the lower wage level aren't being helped at all—they're being priced out of the market! Again, your scenario raises a question, what was the unemployment 70, 60, 50, 40, 30, 20 years ago? By your logic unemployment should rise with every increase in minimum wage and we should expect to see a much higher unemployment in each succesive decade.

A study of an increase in New Jersey's minimum wage was conducted by David Neumark and William Wascher. Using information from actual payroll records, they found that "the New Jersey minimum wage increase led to a 4.6 percent decrease in employment in New Jersey relative to the Pennsylvania control group." My link was not about minimum wage just the hours needed to work to purchase a pound of apples or a pound of steak or whatever.

The fact is that the amount of time needed to work to purchase goods and services has not changed much. Therefore, inflation is only relevent when it is rising faster than the economy.


When did I say you did? Come on this is getting old.


Smalso
And the maintenance of the national debt is a large chunk of the budget; and that contributes to even more deficits.

Michael Redman
If we didn't have this huge debt, we could increase spending and lower taxes a good deal at the same time. Smalso points out the negative aspects of debt, Michael Redman agrees and notes the benifits of getting rid of the debt.

Soooo...... I give an example of why debt is at times necassary and how imagining all of the good things that could be had if one could magically erase the debt is perhaps fruitless since the debt is part of the equation that got us to the point that we are now.

RandFan
Demand for widgets is up and the market is sufficient that if we could increase output we could increase widgets sold by a factor of 10. However we do not have enough cash to purchase the necessary equipment and fund the staff necessary to increase output by a factor of 10.

We could borrow the money but then we would have to "maintain" that debt. However, the net advantage would exceed the maintenance and would justify the borrowing.

Now, suppose we borrow the money and our profits have increased significantly. We could sit back and figure out how much money we would have if we didn't have to make our loan payments but such thoughts are fruitless exercises since we had to borrow to increase output.

Still this analogy is simplistic and doesn't exactly mesh with government debt. In fact it confuses the issue a bit (see below) however it demonstrates how debt in and of its self is not necessarily bad and we have to avoid possible false economies by imagining what the net would be absent debt. And your response --

Shanek
That's what loans are for.

RandFan
We could borrow the money but then we would have to "maintain" that debt.

Shanek
Well, duh—that's the whole idea! My point was a valid response to Michael Redmans point about debt maintainence. "Well, duh" is sarcastic and unnecassary. If my logic is wrong then by all means show me where I am wrong. But "well, duh" is a poor replacement for logic.

[Victor Danilchenko]

shanek

No, twice. It's still in the SS budget after they spend it in the main budget.It's in SS, but it's not SS budget in any relevant sense -- that money is not slated for being spent on SS when it's being borrowed. SS payoffs come from ongoing contributions -- SS is not a saving account.

And that's exactly what the government is doing here! They're taking an amount of money and spending it twice!OK, they spend it once by borrowing it for the general budget; what is this second allocation of the SS funds? Please tell me, Shane.

[RandFan]

Originally posted by Underemployed
On a separate note, the meaning of Randfan's Historical data (http://www.riley.d21.k12.il.us/assignments/math_trail_2003.html) is a little unclear to me.

For instance, it says that in 1940 the minimum wage was $0.30 and in 2000 it was $5.15.

Ignoring taxes this means a 40-hour week got you $12. In 2000 it was $206. Sounds like a big increase, eh? Especially considering the shopping basket also used as an example is a much smaller percentage of the weekly wage for the year 2000 worker. My only point is that inflation is of little or no consequence if the economy is expanding at or near the same rate as inflation. To have a negative impact inflation would have to significantly outpace the economy thus reducing by a significant amount the goods and services that one could get for an hour worked.

Question, what is the over all impact of inflation on the average worker?

[Victor Danilchenko]

shanek

Come on, you know it doesn't work that way. The budget is a yearly thing, not a weekly thing.true. I was making a figurative point, comparing SS mechanism to a more familiar one -- weekly paycheck. just as it's possible to have a weekly paycheck that gets spent right away on necessities, without any buffer, so it's possible to have SS where payoffs are allocated from current contributions, without any buffer; but that's not the case for SS.

Each year, the government budgets how much will be paid out in SS benefits, and they budget how much will be taken in SS taxes. It is exactly like that, and you can't use the fact that the time period is a year instead of a week to weasel out of it.You have this bizarre weasel fetish, dude. You should see a therapist abuot it.

By the way, by admitting that the buffer exists, you just belied your previous post when you said the money was taken out. That buffer represents the exact money they're taking to spend on general budget items!yes, that buffer is what the money is borrowed from; how have I contradicted myself?

[shanek]

Originally posted by RandFan
You are missing the point. The 3% a year is compounded.

So? Are you saying that economic growth wouldn't be compounded without the Fed?

Look, you are saying that the Fed is a bad thing right?

I'm saying it isn't doing the things it was created to do. It was created to curb inflation. We have unprecedented sustained inflation. It was created to end the cycle of boom and bust. We still have the cycle, but the booms aren't as big and the busts last longer. It was created to avoid a banking crisis, and it is responsible for the worst banking crisis in American history!

By what measure can it be said to be a success?

Well if we have had 50 years of runaway inflation since the depression (see your chart) then it would follow that a person would have to work many more hours to purchase the same goods and services in 2000 than 1950, right?

No, that has nothing to do with it. It has to do with how much investments are worth one year when compared to the next.

Again, your scenario raises a question, what was the unemployment 70, 60, 50, 40, 30, 20 years ago? By your logic unemployment should rise with every increase in minimum wage and we should expect to see a much higher unemployment in each succesive decade.

I've already posted studies confirming this.

My link was not about minimum wage

It sure seemed to mention minimum wage a lot... And the site pretty much agrees with me, by the way.

The fact is that the amount of time needed to work to purchase goods and services has not changed much.

Nor should we expect it to. Since wages rise with inflation as well as prices, we should expect it to be in balance. But it does have a big effect on investments, as I have already said.

If we had no inflation, you could probably get a loan at about 2-3%. But there's no way a bank can give you a loan at 3% when the inflation rate is 3% and still make money. So they have to charge you 6% to make the same amount of money they would at 3%. This is why loans in the 70s were so big. If the inflation rate is over 10%, of course the rates are going to be 15% or more!

I give an example of why debt is at times necassary and how imagining all of the good things that could be had if one could magically erase the debt is perhaps fruitless since the debt is part of the equation that got us to the point that we are now.

That doesn't mean it was helpful and not detrimental in doing so.

[shanek]

Originally posted by Victor Danilchenko
It's in SS, but it's not SS budget in any relevant sense

Yes, it is. The money is considered to still be in the SS budget and therefore the economy is affected as if the money were really there.

OK, they spend it once by borrowing it for the general budget; what is this second allocation of the SS funds?

The fact that it's still considered to be in the SS budget to be used for future SS payments.

[shanek]

Originally posted by Victor Danilchenko
yes, that buffer is what the money is borrowed from; how have I contradicted myself?

Because you realize the significance of the buffer being there.

[RandFan]

Originally posted by shanek
So? Are you saying that economic growth wouldn't be compounded without the Fed? Shanek,

Let's employ a little logic here ok? Please look at your chart reposted at the bottom of the page.

What do we see? A cycle of inflation and deflation right? In the past the economy would also rise and fall. Now, look at the chart after the fed. Inflation moves only in one dirrecton. Now if the economy did not expand at aproximately the same rate then inflation would grow much faster than the economy and we would expect to have to work much much more for the same goods and services (the purpose of my link was to demonstrate this fact and no, I have not been talking about minimum wage in this thread. Minimum wage was the only measure I could find.

Fact: Inflation has not outpaced the economy. Therefore the economy has been growing at a steady pace and the growth is compounded.

NO, the economy did not expand at a compounded growth rate in the past. It simply went up and down (see chart). Yes this is for inflation but use some logic and imagine what would hapen if the economy did not expand to meet inflation.

If you deny that the economy has not expanded in proximity to inflation then you will have to give the examples of average goods and services that an employee must work longer to get.

And BTW my link proves this contention and this is the only contention that I am making. If you want to start another thread about minimum wage that would be fine. I am not discussing it right now, ok? The minimum wage from the site is only a measure, got it?

I'm saying it isn't doing the things it was created to do. It was created to curb inflation. We have unprecedented sustained inflation. And we have unprecedented sustained economic expansion.

Come on Shanek, if inflation was growing allot faster than the economy then it would take allot longer to work to pay for a pound of apples or a pound of steak.

It was created to end the cycle of boom and bust. We still have the cycle, but the booms aren't as big and the busts last longer. This is not true. We have an unprecedented expansion. Yes there are troughs but NO busts. We don't go all the way back down to zero. The market my fall but it doesn't go back to the base line.

It was created to avoid a banking crisis, and it is responsible for the worst banking crisis in American history! I don't know enough to dispute this outright but it seems quite specious. The Fed was new and there were lot's of other variables that you won't eve acknowledge including greed and over extending credit on stocks that were worth a fraction of their value with no assests to back them up. It was a house of cards that the Fed was ill equiped to deal with at the time. Coincidently we also had a devestating dust bowl. But you simply ignore these factors and put the blame on the Fed?

In the 50 - 60 years since the depression the banking industry has become a solid institution with nations all over the world putting their trust in it. The green back is the single most trusted currency. When Saddam made his $1,000,000,000 withdraw from the bank much if not most of it was US curency.

By what measure can it be said to be a success? Open your eyes, we are a powerful and wealthy nation. Our poor have TVs and cars. Check out the poor in other nations. They have nothing but rickets and other starvation related diseases. Check the CDC and see who many cases of starvation related diseases were reported in this country last year. Our middle class (which you refuse to acknowledge) is vast and unprecedented in the world.

Before the Fed we were not the sole economic and military superpower. We are now. I will not say that this is all because the Fed. I will say it helped and it certainly didn't hurt.

RandFan
Well if we have had 50 years of runaway inflation since the depression (see your chart) then it would follow that a person would have to work many more hours to purchase the same goods and services in 2000 than 1950, right?

Shanek
No, that has nothing to do with it. It has to do with how much investments are worth one year when compared to the next. [/b] I don't know enough about inflation to provide an argument. I know that inflation eats into investments but then so does a shrinking economy. An expanding economy is good for investments.

RandFAn
Again, your scenario raises a question, what was the unemployment 70, 60, 50, 40, 30, 20 years ago? By your logic unemployment should rise with every increase in minimum wage and we should expect to see a much higher unemployment in each succesive decade.

Shanek
I've already posted studies confirming this. Oh come on, unemployment since Carter have been in the single digits. By your logic they would have to be double digit by know. We don't need studies we only need to look at the unemployment rate.

I don't need to tune into the weather chanel to know if it is raining. I don't need studies to tell me that during the Great Depresion the unemployment rate was 25%. The minimum wage has been rising steadily since 1938 and the unemployment rate is around 6%. It does not steadily rise with increases to minimum wage. It might go up but it always comes down.

Unemployment Rate (http://www.csus.edu/indiv/j/jensena/sfp/us/US-UR-50.htm)

It sure seemed to mention minimum wage a lot... And the site pretty much agrees with me, by the way. On this thread? I posted the site to shows simply that inflation has not outpaced the economy. And it does that right nicely.

Nor should we expect it to. Since wages rise with inflation as well as prices, we should expect it to be in balance. But it does have a big effect on investments, as I have already said.

If we had no inflation, you could probably get a loan at about 2-3%. But there's no way a bank can give you a loan at 3% when the inflation rate is 3% and still make money. So they have to charge you 6% to make the same amount of money they would at 3%. This is why loans in the 70s were so big. If the inflation rate is over 10%, of course the rates are going to be 15% or more! Absolutely, no argument. But can you demonstrate that our standard of living is demonstrably worse today than before the fed or that our standard of living would be significantly better sans the Fed. As you have said the market is complex. There is no gurantee that we would be better. Yet we enjoy a very high standard of living and I have not seen any emprical evidence to prove that our lives would be markedly different if we did not have the Fed. Economics is not an exact science. If it were every economics professor would be calling for an end to the Fed.

That doesn't mean it was helpful and not detrimental in doing so. Please excuse me but what on earth are you talking about? If you are going to make such accusations could you repost the dialog and demonstrate how it is detrimental and not helpful?

[Victor Danilchenko]

shanek

Yes, it is. The money is considered to still be in the SS budget and therefore the economy is affected as if the money were really there.First of all, this circumstantial effect is much less than the effect of actually spending the money. Believing that you have $1K in your pocket will affect my actions, but not nearly as much as you actually spending the said $1K.

Secondly, everyone knows that the SS funds are being borrowed, and thus it would take a moron to base their expectations of government actions on the assumption that the government will use those borrowed SS funds a second time. Banks don't base their expectations of receiving the buffer SS funds in deposit, because they know that the government invests those funds by spending in on itself instead of depositing them into an interest-bearing bank account.

The picture you are painting now is quite different from the government actually spending money twice, and it's still incorrect.

The fact that it's still considered to be in the SS budget to be used for future SS payments.So? The fact is that that money is spent once, and only once -- by government borrowing it. The SS payments are maintained from current contributions, and the buffer is borrowed from in such a manner as to not impact the actual SS payoffs. Where is the problem?

[shanek]

Originally posted by RandFan
Let's employ a little logic here ok? Please look at your chart reposted at the bottom of the page.

What do we see? A cycle of inflation and deflation right? In the past the economy would also rise and fall.

In the past??? Are you saying the business cycle is no longer in effect?

Now, look at the chart after the fed. Inflation moves only in one dirrecton. Now if the economy did not expand at aproximately the same rate then inflation would grow much faster than the economy

BS. Inflation is happening because the money supply is growing faster than the economy. That's what inflation is! Now you're trying to twist it so that it's the rate of inflation that's somehow magically tied to economic growth. If you have inflation, then the money supply is growing faster than the economy!

and we would expect to have to work much much more for the same goods and services

I've already refuted this. Inflation causes wages as well as prices to increase, so no, we wouldn't expect that at all!

Inflation has not outpaced the economy.

The money supply is outpacing the economy, and that's why there's inflation! This is very basic economics here.

Therefore the economy has been growing at a steady pace and the growth is compounded.

Does not follow, by any measure whatsoever.

NO, the economy did not expand at a compounded growth rate in the past. It simply went up and down (see chart).

Why do you think the CPI is any indication of economic growth?

Here's a graph of GDP over the last 15 years. See it go up and down?

http://www.cepr.org/data/eurocoin/zoom_graph.gif

So, CPI is not an indication of economic growth, it's an indication of the growth of the money supply relative to economic growth.

Yes this is for inflation but use some logic and imagine what would hapen if the economy did not expand to meet inflation.

Expand to meet inflation??? You have no clue how the business model works, do you? Economy does not "expand to meet inflation"!!! Inflation is a slowing force on the economy which naturally happens when the economy overproduces. By artificially creating inflation, the government has put a drag effect on the economy!

Again, basic economics.

If you deny that the economy has not expanded in proximity to inflation then you will have to give the examples of average goods and services that an employee must work longer to get.

No, no, no!!! WAGES INCREASE WITH INFLATION TOO!!!! WHY DON'T YOU GET THAT???

This is not true. We have an unprecedented expansion. Yes there are troughs but NO busts.

What we're going through here is actually worse in both extent and duration than any bust before 1913.

We don't go all the way back down to zero.

The economy never did anyway.

But you simply ignore these factors and put the blame on the Fed?

Yes. The economy has ways of dealing with the other problems you mentioned. But the Fed, by hitting the brakes on the money supply, made sure that the money wasn't there for any kind of recovery! We didn't get out of the depression until the Fed started to release money into the economy, pressured by the government to do so to fund the war effort.

[much irrelevant bragging deleted]

Oh come on, unemployment since Carter have been in the single digits. By your logic they would have to be double digit by know.

How do you figure that?

On this thread? I posted the site to shows simply that inflation has not outpaced the economy. And it does that right nicely.

And it's completely irrelevant. The existance of inflation means that the money supply is outgrowing the economy. I don't know how many times I can say that, but I'll keep on saying it until you acknowledge it and admit that your "inflation hasn't outpaced the economy" crap is an irrelevant canard.

Absolutely, no argument. But can you demonstrate that our standard of living is demonstrably worse today than before the fed

Of course not, because the economy has grown since then, and would have with or without the Fed. Stop playing games.

If it were every economics professor would be calling for an end to the Fed.

Many of them are.

Please excuse me but what on earth are you talking about? If you are going to make such accusations could you repost the dialog and demonstrate how it is detrimental and not helpful?

Accusations??? How is asking if your contention, that debts have happened and they're a part of the system now, means that they're advantageous or detrimental in any way an accusation??? It's obvious now that you're only holding on to your position out of personal preconceptions.

[shanek]

Originally posted by Victor Danilchenko
First of all, this circumstantial effect is much less than the effect of actually spending the money.

But they are spending the money! :rolleyes:

They are spending the money, and they still consider it to be there! Hence, inflation! No way around it!

Secondly, everyone knows that the SS funds are being borrowed, and thus it would take a moron to base their expectations of government actions on the assumption that the government will use those borrowed SS funds a second time.

If you really think that's how it works, you have no clue how the economy works. But you've demonstrated that sufficiently anyway. People don't go around thinking, "Oh, the government's borrowing money from SS so I'll have to change my borrowing and spending habits accordingly." The simple fact of the matter is that there is an increase of dollars in the economy without a corresponding increase in goods and services. This leads to inflation. Period.

You're doing your usual distraction and obfuscation, but you can't even respond to that very simple and basic point.

[Victor Danilchenko]

shanek

But they are spending the money! :rolleyes:Yes, once -- by borrowing it.
They are spending the money, and they still consider it to be there!They still consider it to be there in that the borrowed $$ will be repaid, and in no other sense.
If you really think that's how it works, you have no clue how the economy works. But you've demonstrated that sufficiently anyway.Are you done with insults? I thought you were, but apparently your newfound humility didn't last.
People don't go around thinking, "Oh, the government's borrowing money from SS so I'll have to change my borrowing and spending habits accordingly." The simple fact of the matter is that there is an increase of dollars in the economy without a corresponding increase in goods and services.But there is the corresponding increase -- the borrowed money is spent and re-circulated.

[RandFan]

Originally posted by shanek
In the past??? Are you saying the business cycle is no longer in effect? No, I'm saying that it is trending upward (growing) more than it did before the fed.

BS. Inflation is happening because the money supply is growing faster than the economy. That's what inflation is! Now you're trying to twist it so that it's the rate of inflation that's somehow magically tied to economic growth. If you have inflation, then the money supply is growing faster than the economy! Now you are putting words in my mouth. I said that if the economy did not grow at or near the rate of inflation then we would have to work more to pay for the same goods.

I've already refuted this. Inflation causes wages as well as prices to increase, so no, we wouldn't expect that at all! Oh really,

Here is a question for you

What if the effect of rising inflation and rising wages and a stagnant economy?

The money supply is outpacing the economy, and that's why there's inflation! This is very basic economics here.

Does not follow, by any measure whatsoever.

Why do you think the CPI is any indication of economic growth?

Here's a graph of GDP over the last 15 years. See it go up and down?

So, CPI is not an indication of economic growth, it's an indication of the growth of the money supply relative to economic growth.

Expand to meet inflation??? You have no clue how the business model works, do you? Economy does not "expand to meet inflation"!!! Inflation is a slowing force on the economy which naturally happens when the economy overproduces. By artificially creating inflation, the government has put a drag effect on the economy! I never said that CPI is an indiction of economic growth. My point is simple, if the economy does not grow at or near inflation then there are negative aspects that we can expect to see.

What we're going through here is actually worse in both extent and duration than any bust before 1913. I'm not buying it. I can accept the argument that things could be better. There is too much governmental interference, too much regulation but there is just so much efeciency in any system and we are doing pretty damn well.



Accusations??? How is asking if your contention, that debts have happened and they're a part of the system now, means that they're advantageous or detrimental in any way an accusation??? It's obvious now that you're only holding on to your position out of personal preconceptions. Here we go again, honestly, I have no clue what you are saying.

Look, here is the dialog. Could you read it and explain how your comments have any relevancy at all.

Smalso
And the maintenance of the national debt is a large chunk of the budget; and that contributes to even more deficits.

Michael Redman
If we didn't have this huge debt, we could increase spending and lower taxes a good deal at the same time. Smalso points out the negative aspects of debt, Michael Redman agrees and notes the benifits of getting rid of the debt.

Soooo...... I give an example of why debt is at times necassary and how imagining all of the good things that could be had if one could magically erase the debt is perhaps fruitless since the debt is part of the equation that got us to the point that we are now.

RandFan
Demand for widgets is up and the market is sufficient that if we could increase output we could increase widgets sold by a factor of 10. However we do not have enough cash to purchase the necessary equipment and fund the staff necessary to increase output by a factor of 10.

We could borrow the money but then we would have to "maintain" that debt. However, the net advantage would exceed the maintenance and would justify the borrowing.

Now, suppose we borrow the money and our profits have increased significantly. We could sit back and figure out how much money we would have if we didn't have to make our loan payments but such thoughts are fruitless exercises since we had to borrow to increase output.

Still this analogy is simplistic and doesn't exactly mesh with government debt. In fact it confuses the issue a bit (see below) however it demonstrates how debt in and of its self is not necessarily bad and we have to avoid possible false economies by imagining what the net would be absent debt. And your response --

Shanek
That's what loans are for.

RandFan
We could borrow the money but then we would have to "maintain" that debt.

Shanek
Well, duh—that's the whole idea! My point was a valid response to Michael Redmans point about debt maintainence. "Well, duh" is sarcastic and unnecassary. If my logic is wrong then by all means show me where I am wrong. But "well, duh" is a poor replacement for logic.

[shanek]

Originally posted by Victor Danilchenko
Yes, once -- by borrowing it.

And then again on down the road as part of the SS budget.

They still consider it to be there in that the borrowed $$ will be repaid,

When have they ever repaid any of it? (And by "repaid," I don't mean "taken more money in taxes to cover it.")

But there is the corresponding increase -- the borrowed money is spent and re-circulated.

Again, counterfeited money is spent and circulated in the economy, so how is it any different?

[shanek]

Originally posted by RandFan
No, I'm saying that it is trending upward (growing) more than it did before the fed.[/b[/][quote]

Okay, well, my figures say otherwise, but you're certainly welcome to post the source material that leads you to that conclusion.

[quote][b]Now you are putting words in my mouth. I said that if the economy did not grow at or near the rate of inflation then we would have to work more to pay for the same goods.

It amounts to the same thing. You're still ignoring that wages as well as prices increase with inflation.

What if the effect of rising inflation and rising wages and a stagnant economy?

I am honestly unable to understand the question. Could you rephrase?

I never said that CPI is an indiction of economic growth.

You've been using it as such. You made the clear implication when you referred to the graph again.

My point is simple, if the economy does not grow at or near inflation then there are negative aspects that we can expect to see.

Why? How is the rate of inflation (as opposed to the rate of growth of the money supply) in any way an economic growth indicator?


My point was a valid response to Michael Redmans point about debt maintainence.

But it was my response to you, saying that that was why loans existed, that you replied to when you said, "We could borrow the money but then we would have to "maintain" that debt." As if there were something wrong with being loaned the money in the first place.

Maintenance of debt is very important. In order to pay my morgage, I'm having to work and produce goods and services in the economy. It's kind of like being paid before you do the work.

But if there's no work, no increased productivity involved, then the money creation is tantamount to counterfeiting.

Understand now?

[Victor Danilchenko]

shanek

And then again on down the road as part of the SS budget.but SS payoff are budgeted from incoming contributions; so the buffer $$ in SS fund aren't used anyway.

When have they ever repaid any of it? (And by "repaid," I don't mean "taken more money in taxes to cover it.")Why not? Repayment from taxation is still a repayment. It may not be nice, but it doesn't make SS borrowing be "using money twice".

Again, counterfeited money is spent and circulated in the economy, so how is it any different?<patiently> Because the money is borrowed rather than counterfeited.

[shanek]

Originally posted by Victor Danilchenko
<patiently> Because the money is borrowed rather than counterfeited.

<even more patiently> What aspect of this "borrowing," ASIDE FROM ANY BENEFITS OF THE SPENDING ITSELF (which you would also have if you were counterfieting; IOW, no stuff about more jobs etc.), increases the amount of goods and services in the economy by a comparable amount?

[Victor Danilchenko]

shanek

<even more patiently> What aspect of this "borrowing," ASIDE FROM ANY BENEFITS OF THE SPENDING ITSELF (which you would also have if you were counterfieting; IOW, no stuff about more jobs etc.), increases the amount of goods and services in the economy by a comparable amount?it's the spending itself that creates value -- and it's different from spending counterfeited cash, because the borrowed money has to be paid back eventually. The money isn't created, it's moved from one account to the other. Government borrowing money from itself no more "creates" cash, than would be "created" if the money was put in a bank and then loaned out to home-buyers.

Just keep thinking about the analogy of me borrowing money from my own piggybank -- and contrast that with me counterfeiting the same amount. The difference is that by counterfeiting X, I get to spend 2X -- the fake $$ and the $$ from my piggybank; but government spends the money only once, and leaves IOUs in its place; and it doesn't pay the SS benefits with those IOU's backing cash, but rather with current contributions. If the government ultimately doesn't pay the money back, this still will not amount to counterfeiting -- it will amount to stealing money from SS recipients: bad, immoral, illegal, but emphatically not counterfeiting.

[shanek]

Originally posted by Victor Danilchenko
it's the spending itself that creates value

If that's the case, then counterfeiting creates value.

and it's different from spending counterfeited cash, because the borrowed money has to be paid back eventually.

No, it's no different from countefeiting because there's no appropriate increase in goods and services in the economy. Did you even read my question?

Where, OTHER THAN THE SPENDING, is there a comparable increase in the number of goods and services in the economy?

Just keep thinking about the analogy of me borrowing money from my own piggybank

Why? I've already explained why that's nothing like what's going on.

[Victor Danilchenko]

shanek

If that's the case, then counterfeiting creates value.it creates cash in excess of the value it creates, and that's the problem.

No, it's no different from countefeiting because there's no appropriate increase in goods and services in the economy.The only increase is that brought about by the spending, true; but the same is the case if I take my piggybank stash and spend it!

Where, OTHER THAN THE SPENDING, is there a comparable increase in the number of goods and services in the economy?Where, OTHER THAN SPENDING, is there a comparable increase in the number of goods and services in the economy when I take $100 from my piggybank and spend it? Why, in the fact that I first creates $100 of value and got $100 for it. Well, guess what? SS contributions are similarly backed by the value SS contributors created but didn't get money for.

The value equivalent of SS $$ is the value that citizens created, got paid for, and got th epay witheld for SS. That's the value that backs SS $$, and that's the same value that still backs the SS $$ when they are moved from SS fund into operating budget.

[RandFan]

Originally posted by shanek
But it was my response to you, saying that that was why loans existed, that you replied to when you said, "We could borrow the money but then we would have to "maintain" that debt." As if there were something wrong with being loaned the money in the first place. Qutie to the contrary, my point is that loans ARE good and that the ends (increased profits) justifies the means (loan maintanence)

Maintenance of debt is very important. In order to pay my morgage, I'm having to work and produce goods and services in the economy. It's kind of like being paid before you do the work. No argument, if the mortgage provides a benefit then the maintenance is justified.

But if there's no work, no increased productivity involved, then the money creation is tantamount to counterfeiting. Fortunately there is increased productivity. The proof is in a strong dollar and prosperity. If a nation prints money with no increase in productivity then inflation will eventually drive down the value of the monetary unit and the country will eventually have to devalue their money or declare bankruptcy.

Understand now? I don't understand the relevancy of your response, NO!

[shanek]

Originally posted by Victor Danilchenko
The only increase is that brought about by the spending, true; but the same is the case if I take my piggybank stash and spend it!

NO, IT ISN'T! Money from your piggy bank is money you have ALREADY earned and are going to spend ONCE! If you want to replenish the money in your piggy bank, you have to work and put a certain amount of productivity back into the economy to pay for it!

That, as I've explained to you many times, is NOT how the government does it! What the government takes out is a pseudo-receipt.

The money from your piggy bank is money that you earned and put there. The money from your loan is money that you WILL earn at a later date. The government DOES NOT earn the money it takes from the SS fund, and that money IS NOT tied to goods and services in the economy. I don't know how many different ways I can explain this to you.

Here's something you really need to read:

http://www.mises.org/money.asp

Where, OTHER THAN SPENDING, is there a comparable increase in the number of goods and services in the economy when I take $100 from my piggybank and spend it?

The increase caused when you worked to earn the money.

The value equivalent of SS $$ is the value that citizens created, got paid for, and got th epay witheld for SS. That's the value that backs SS $$, and that's the same value that still backs the SS $$ when they are moved from SS fund into operating budget.

You're stuck, though. If the value moves when the money is borrowed, it isn't in the SS fund. If the money remains in the SS fund, it isn't moved when it's borrowed. Either way, someone's spending money without the requisite value added to the economy!

[shanek]

Originally posted by RandFan
Qutie to the contrary, my point is that loans ARE good and that the ends (increased profits) justifies the means (loan maintanence)

Then I misunderstood you, and I can only apologize.

Fortunately there is increased productivity. The proof is in a strong dollar and prosperity. If a nation prints money with no increase in productivity then inflation will eventually drive down the value of the monetary unit and the country will eventually have to devalue their money or declare bankruptcy.

Well, as I've shown, inflation is driving upwards. The only thing that saved us on the foreign market is that many other nations made the same bad monetary choices we have, some with disastrous results (remember Argentina?).

[Victor Danilchenko]

shanek

NO, IT ISN'T! Money from your piggy bank is money you have ALREADY earned... as I noted further down in my previous post. So let's move to your reply...

You're stuck, though. If the value moves when the money is borrowed, it isn't in the SS fund. If the money remains in the SS fund, it isn't moved when it's borrowed. Either way, someone's spending money without the requisite value added to the economy!The exact same argument applies when I deposit $100 into the bank, and the bank loans out $90. Do I have that money? Yes. Does the borrower of the $90? Yes! is this counterfeiting? No! the problem only arises when i try to spend the $100 that I put into deposit -- but the government doesn't do that, it pays current SS payoffs from current contributions rather than from the buffer stash.

The mere fact of this sort of usage of money is not the same as counterfeiting. All the arguments you give for illegitimacy of SS-borrowing can be used equally well to shoot down your own arguments about fractional reserve. What makes fractional reserve work is that the money loaned out is (on average) sure to be repaid with interest, so when I want to withdraw my $100, I will have it; and while i wasn't using the said $100, it was put to good use in the economy, just as the government puts the SS $$ to good use by paying teachers, building roads, supporting sciences, etc. -- pumping up the economy and improving the society's welfare. The problem arises when, for some reason or another, the bank cannot back its deposits; but then it's not counterfeiting but bankruptcy and contract breach, because the bank will have effectively failed to make good on the contract with me, the account holder.

Similarly, as long as the government is solvent and makes good on its debts, no problem arises with it loaning SS funds to itself; but even if it had failed to do make good on the SS debts, the problem would be with illegitimate requisition (removal of funds from SS account), not with counterfeiting.

Shane, you just have to let go of the idea that government borrowing from itself is equivalent to counterfeiting. It's not. Such a policy may have many practical flaws, and you would be better served to concentrate on those; but it's not counter-feiting.

[shanek]

Originally posted by Victor Danilchenko
The exact same argument applies when I deposit $100 into the bank, and the bank loans out $90. Do I have that money? Yes. Does the borrower of the $90? Yes! is this counterfeiting? No!

BECAUSE THE PERSON WHOM THEY LOANED THE MONEY TO WILL WORK TO PAY IT BACK!!!!! How many times do you have to hear it before it sinks in? When I borrow money, I'm not only spending the money, I'm working to provide goods and services in the economy to pay it back!

the problem only arises when i try to spend the $100 that I put into deposit -- but the government doesn't do that, it pays current SS payoffs from current contributions rather than from the buffer stash.

What the government does is similar to if you were to take out the $100 but then hack into your bank's computers and put the $100 back. That's really a subtle form of counterfeiting.

All the arguments you give for illegitimacy of SS-borrowing can be used equally well to shoot down your own arguments about fractional reserve.

No, they can't, and I've already explained why several times.

What makes fractional reserve work is that the money loaned out is (on average) sure to be repaid with interest,

While the person works to put that amount of production back into the economy. The very aspect I keep repeating, and the very aspect you keep ignoring.

Answer me: Where are the ADDITIONAL goods and services when the government "borrows" from SS? (And remember, that they get from spending the money itself DOES NOT COUNT!!!!)