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Deficit Spending And Money Printing: A German Point Of View
Submitted by Dr. Ulrich Salzer, a German economist and banker, Munich
Deficit spending And Money Printing: A German point of view
The leading macroeconomic Nobel-Laureates, the Central Bankers as well as most Politicians have reduced their economic judgment on how to get the economies in Europe and Japan back to sustainable growth on just two recipes: public investments in infrastructure to be financed by additional public debt and, second, an expansive money market policy based on printing more money and reducing interest rates to zero or even beyond zero to negative rates!
And if the capital markets don’t swallow additional public debt, then the Central Banks will step in eagerly as Investors – regardless if this is in line with their statutes!
The expected results, backed by the leading macroeconomic wisdom, should be to kick-start economic growth, to induce private industry to invest and banks to lend to private investors, and thereby to reduce unemployment, and get deflationary tendencies back to an inflation rate that is now officially regarded as ideal if it oscillates around 2 % p.a. When and why this “two-percent” benchmark was introduced for the first time I can’t remember, but everybody today takes it for granted and repeats it like as an undisputed target of Central Bank’s money market policy. Included in this assumption is ever more public debt as the guarantor for lasting GDP-growth!
I never understood why macroeconomics should be regarded as an academic discipline if it is in practice reduced to these rather simple theories of how to handle a recession or even deflation! Maybe Alfred Nobel was just as clear-sighted as I am, and consequently never introduced a Nobel-prize for economics. That was done after his death by the Central Bank of Norway, which also contributed the required funds. It still does so, and not the Nobel foundation!
My personal advice is to stop handing out any more Nobel-prizes for economics to any more American professors on any new theory how to steer economic development and sustainable economic growth, because none of them has ever worked.
There is a lot of blame offloaded onto Maynard Keynes by critics of the present ruling opinion of more deficit spending by governments. But I don’t believe that Keynes would approve any of today’s Nobel-Laureates who saw no other way out of recession than by money printing in unlimited amounts and years of deficit spending by already over-indebted economies. According to Keynes public investment on deficit could be regarded as an “ultima ratio” to re-kick-start a slow economy, but he would never have advised any government that is already highly indebted to increase this debt even more!
In his theory, deficit-spending should be a limited action in time and amounts, and directly afterwards this debt should be repaid by the additional tax income from the stronger revenues of industry and private individuals who have profited from the intervention of the State.
But what our economists and central bankers are recommending nowadays is completely different from “short-term-kick-starts” – our systems are so full of the sweet drug of government deficit spending that (like a drug-addict) it constantly needs heavier doses of the same drug!
It was not long ago that the American Treasury Secretary publicly blamed Germany for not using its remaining credit standing for another round of deficit-spending in order to help Italy, France and other Southern European countries. As if more public debt and burning straw in Germany would have any impact on the southern countries’ economies without any serious political and economic reforms in those countries themselves to fight the weakness at its real source!
As long as our “economy doctors” don’t know anything better than to prescribe more drugs instead of getting the patient off the needle and help him to abandon the ever increasing drug doses, we will never get our economies “back to normal”!
We should never forget that at least the European economies had no real problem as long as the public debt to Gross National Product ratio remained within the Maastricht limits of 60% and before liquidity in the banking sector was multiplied without limit, thereby creating big bubbles in the financial assets of the banks which finally led to the financial crisis of 2008.
Japan is the very best example to prove that the therapy of deficit spending and money printing is dangerously wrong: it is now 25 years since Japan has adopted this cure. If anybody needs proof that the prescription was unprofessional and ineffective, he should look at the results to the Japanese economy and its public debt. Although hundreds of billions of Dollars have been spent during this period on programs to stimulate the Japanese economy the effect was that Japan fell from one recession into the next depression and the public debt ratio to GNP has meanwhile reached the astronomic bench mark of 230% (!!), which is double that of Greece and four times higher than the Maastricht criterion!
I am certain that Maynard Keynes would turn in his grave if he knew to what extent his theory was misinterpreted and misused! Of course it’s a big temptation for every politician to utilize the sweet but toxic medicine of deficit spending and more public debt rather than to introduce hard reforms on public budgets, on social spending and other benefits to their voters.
It’s also a big mistake that European governments have disregarded the traditional role of the European Central Bank as the watch-dog against inflation. In creating the ECB, Germany never consented that it should have more responsibilities and more authority than the Deutsche Bundesbank ever had.
It’s just like with deficit spending Keynes had recommended under certain conditions: it may be acceptable if the Central Bank acts as “Lender of last resort” in case of actual liquidity crisis. But this should be strictly on short-term basis. What we experience today is completely contrary to the German (maybe not the U.S.) understanding of the role of the Central Bank. The ECB has now assumed a role not only to protect the value of our common currency against inflation but also to take action as if it is responsible to create economic growth and full employment with instruments like money printing, zero interest rates and unlimited investments in bonds which the free market is rejecting.
We pay a high price for the chimera that we need constant economic growth and that it is a stigma if our GDP-growth is only 1.5% p.a. Can’t we accept that after 50 years of undisturbed peace and continuous prosperity we have reached a certain degree of personal satisfaction where we don’t need a new car every year, another cell-phone, additional furniture, more TV-sets, more laptops etc, etc. Why do we insist upon economic growth, if we don’t actually need the products which are additionally produced every year?
Is it really worth it to increase the already heavy burden of public debt, which our children must service someday, by accepting even more debt in a vain effort to increase public demand? Let’s instead be happy with zero GDP growth, zero inflation and zero growth of public debt! That could be a more rational solution. Why don’t we consider it?
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America needs deficit spending for all the wars it is continuously waging. The wars in Iraq and Afghanistan cost $6 trillion and the Fed could easily handle that by printing trillions.
The Vietnam war cost only $738 billion in 2011 dollars and yet forced the US off the gold standard on August 15, 1971.
So America needs deficit spending for its massive military, 900 military bases in 130 countries, infinite spying by the NSA, and waging constant wars (The Nobel Prize Winner has bombed 7 Muslim countries). In short, deficit spending is needed to serve the needs of the MIC and empire, not to create new jobs or improve the economy for the ordinary citizen.
US Wars in Afghanistan, Iraq to Cost $6 trillionhttp://www.globalresearch.ca/us-wars-in-afghanistan-iraq-to-cost-6-trill...
This:
The Vietnam war cost only $738 billion in 2011 dollars and yet forced the US off the gold standard on August 15, 1971.
Well, true, but don't forget the huge Great Society programs either.
Was "Guns & Butter", not just "Guns".
Dont forget the Marshall Plan and the Korean War and space programs and national freeway system. America was spending like mad in the 3 decades leading up to the collapse of the Bretton Woods gold system
Marshall Plan was largely supplying US Dollars to US companies like Ford in Europe to buy US tooling to re-start production. It was a huge injection into the US economy and the UK which got more than Germany used it for financial engineering not production like with KfW
I recently looked up how the Marshall Plan actually worked. It was not really a loan from what I glean. The US supplied goods that Europeans wanted to buy, but Europeans had to pay for these goods in their own currency into what was called a counterparty fund. The money of that counterparty fund could only be spent on projects Americans approved of. So if you write that UK "got" more than Germany, it actually means UK decided to import more from the US, and if you write the UK used it for financial engeneering, that can only have happened with consent of the Americans. Have I got that right ?
What we have here folks, are grade A FAILURES!
please enlighten me with your knowledge then
The Euro collapses when Germany leaves
Not Greece, Italy, or Spain
No growth means those in charge cannot by bombs with money they don't have to kill people they don't know half way around the world. I like this guy.
Yes, because German believe in making physical stuff which people can use their daily life. where as we believe in paper shufflers and GDP on paper.
I thought it was a failure to communicate?
No, because the Labour Government nationalised transport, mines, electricity, gas, haulage and set up the NHS - all of which the US opposed.
Germany was an Occupied Country split into 4 zones until 1948. Stalin rejected Marshall Aid for his Occupied Territory in Europe which included Austria until 1955, so it was not something Germany had much control over save that Ludwig Erhardt was an exceptional Finance Minister who created the German Paradigm whereas Britain was saddled with War Debt having been insolvent since 1940
"Labour Government nationalised transport, mines, electricity, gas, haulage and set up the NHS - all of which the US opposed."
If the US opposed it, no counterparty fund money was likely involved, the money could not be used without a green light from ECA ( Economic Cooperation Administration, a US government agency ). I know little about this topic, but what you write is simply inconsistent with what I read about the subject recently.
sandmann's inconsistency is in the fact that the British nationalizations were not dependent from the Marshall Plan, at least not directly. they might not have been possible without it, but that's the beauty of money/credit, isn't it? fungibility. that's my take on this subject, though I have to admit that it's not one on which I'm an expert
but yes, this was a time when America was looking in horror at the British and French nationalizations, and cemented an American view of Europe being hopelessly socialist which is often parroted around since then
all in all, the Marshall Plan was very beneficial for American industries. on this, there should be little debate, or so I thought
I think it was beneficial for European economies as well. As harshly as I criticise America on many issues, the Marshall plan seems to be some sort of victory of a more liberalist international perspective, an effort to create win-win situations. We might have to return the favour sooner than you think Ghordius :-)
Marshall Plan was largely supplying US Dollars to US companies like Ford in Europe to buy US tooling to re-start production. It was a huge injection into the US economy and the UK which got more than Germany used it for financial engineering not production like with KfW
After the freeways were built, US taxpayer spending power had been converted to a real, durable, useful asset.
Wars, on the other hand, only bring the 'good' of avoiding invasion.
So if your proposed enemy is a long way away, and doesn't really pose much of a threat to the homeland anyway, maybe you should stay out. But Presidents have Pride/Guts/and a need to appear Strong. And the MIC needs feeding too.
Suggested cure: Introduce a dose of grass-root democracy.
Pass a law that says:
1. US can react militarily immediately to offensive action against US territory or citizens; but
2. in the absence of such offensive action, US cannot (by Presidential Order or otherwise) start a war without a referendum in favour.
Seems only fair to me: guys (and gals) who get to vote are (broadly) those expected to carry a rifle and get shot at...
In fact (rather OT) an awful lot of problems, in many countries all over the planet, would be cured if the people had a simple _direct_ right to influence government policy. Switzerland is a very successful country, bearing in mind no natural resources, awkward terrain, surrounded by those who fight each other at regular intervals....
Watson
The direct-democracy idea sounds wonderful, until you examine the election results in the USA over the last few cycles. The electorate votes for self-destructive policies and personnel every time.
The reasons for that are manifest and off topic, but it is safe to assume they are self propagating and highly destructive. And given the results of last weekend's Swiss vote, let's not hold those people up as a model either.
_The electorate votes for self-destructive policies and personnel_
To me, the electorate votes for whatever 'package' (consisting of sub-package of policies, attractiveness of politician, etc.) appeals most at the time of the election.
The advantage of the referendum is that it is _not_ a package: it is a vote on a specific well-defined issue.
You could support or reject that issue _irrespective_ of whatever your elected politician supports, or said at the time of the last election. It could easily happen that you think your elected guy is generally OK, but just has the wrong idea on this issue.
This way the electorate get _exactly_ what they want, not something pulped up through the political party machine.
You may not like what the Swiss voted for, but they were at least given a choice...governments 'in our best interests' always seem to be trying to take choice away.
Lyndon Johnson seemed to be 'stuck' with Vietnam. He never seemed to really want it, but felt stuck with it for reasons of pride and prestige.
He could have called a referendum, got a 'No' vote, and saved much American misery.
Even if the vote had been 'Yes', a lot of damaging uncertainty would have been removed.
I think the US has much to learn from the Swiss in this respect.
Watson
+1 imho the Swiss lesson on referenda is that you have to have a habit of referenda, a culture of having often referenda, even on the same matter again and again
Lyndon Johnson seemed to be 'stuck' with Vietnam. He never seemed to really want it, but felt stuck with it for reasons of pride and prestige.
Lyndon Baines Johnson (LBJ) was one of the most corrupt politicians to ever hold that Presidency. Nobody could have believed that anybody could be worse. Then we had following that asshole, the Presidencies of Richard Milhous Nixon and James Earl "Jimmy" Carter.
LBJ had Kennedy offed to get that war in Vietnam. It was the Johnson Administration that staged the Gulf of Tonkin False Flag Operation, a False Flag publically admitted to by his former Secretary of Defense Robert McNamara in 2003.
Kennedy was planning to pull out of Vietnam and dismantle the CIA.
Bullshit. Johnson craved that war.
1. US can react militarily immediately to offensive action against US territory or citizens; but
2. in the absence of such offensive action, US cannot (by Presidential Order or otherwise) start a war without a referendum in favour.
They use False Flag Operations to justify wars..fake attacks. The public buys into these.
Your proposal is idealistic and totally unworkable.
Public power to force referenda could only improve the situation.
It would cost almost nothing - far, far less that just one unpopular military adventure.
Watson
The Vietnam war cost was so large that it killed the Great Society programs:
The Vietnam War also killed the Great Society. President Lyndon Johnson, with a large Democratic majority in Congress after the 1964 elections, enacted sweeping reforms in education, health care, and transportation, along with landmark civil rights legislation. But the pressure of spending on the Vietnam War — the guns vs. butter debate of the 1960s — eventually brought this last, great program of genuine American liberalism to a halt and scuttled the hopes of its architect for a second presidential term.
http://fpif.org/good_war_vs_great_society/
And most people are not aware that US security spending is nearly twice what people are told:
The Real Defense BudgetWhile everyone knows that the defense budget is large -- even in the numbers that the public sees as the formally admitted figures by the Department of Defense -- the truth is that when one scratches beneath the bureaucratic veneer, national security spending is much larger, nearly double the amount US citizens are told.
http://www.theatlantic.com/politics/archive/2012/02/the-real-defense-bud...
Also around that same time Johnson removed silver from American coins-
http://www.presidency.ucsb.edu/ws/?pid=27108
It's no surprise that the silver content in UK coins was reduced to 50% in 1920, then 0% in 1947. Inflation and devaluation are one of the oldest tricks in the book to pay off war debts.
The Vietnam war cost only $738 billion in 2011 dollars and yet forced the US off the gold standard on August 15, 1971.
What PERCENTAGE of total US National Debt was that back in 1971? Most of it?!?
Yes. When a Nation borrows exclusively to engage in Warfare very bad consequences happen.
What PERCENTAGE of total US National Debt was the costs of the Iraqi and Afghani Quagmires?
As I wrote when a nation borrows exclusively to engage in Warfare very bad consequences happen.
Krugman is spitting mad now and will feel the need to reply. He's a sociopath and NEEDS to have the last word on this.
We don't consider it because that policy wouldn't benefit the right people.
This dude is never getting a job at the Fed or any other central bank, that's for damned sure.
Have we not passed the point of need for logic at this point? I mean seriously, who the hell is going to listen to ANY rational argument when they all call for short-term pain?
Anyone who thinks we're still at a juncture where a logical solution can be implemented are arguably more deluded than those who think things can persist in their current state forever. We're gonna run this thing till it breaks completely and then we're going to fight it out for who gets what of whatever is left over. Period.
Can't disagree with you, there.
To the victor go the spoils.
Agreed, except that the fighting over what's left has already begun.
Shhhh! Stop speaking ugly truths.
Receives what money can’t buy.
the vassal (regretably) germans will get in line no matter what. too bad they can't muster the stones to break it off.
POS CBs just got owned by dis dude! Your welcome!
The "Viewpoint" German does not interest me while Germany is an occupied country.
hehe.
Perhaps Putin think so, with good reason!
Neither the German gold they managed to repatriate!
Europe has a big leech on the other side of the Atlantic, the trunk of the leech is called NATO.
HEHE.
The point of money printing, QE, increased debt is NOT about economies and recovery, it is all about political and geopolitical ends.
Don't forget enrichment of the few.
I'm curious if you accidentally said "few" when you meant another word that is remarkably close to it, and also 3 letters long?
Sorry, accidental double-post.
Merkle is the US sex doll... she will do as she is told in the end.
That's not a pretty thought.
Sir, you deserve the highest accolades. You are spot on. We have let fairy tales get in our way and the American Public like to hear them especially from Krugman et al. We are going to awaken to a bad dream.
We have been distracted by blacks carrying sandwiches who get shot while fighting with police.....
And of course Bill Cosby lifetime achievement awards...
"We are going to awaken to a bad dream."
We? No, not we. The Sheep are goimg to awaken to a very bad PsyOp.
'We printed some money and gave it to some folks'
Now it's "Nein", but it once was "Ja". We all know what happened after that.
Central Banks have NO ROLE. You are just supporting the Central Bank Disinformation Network when you write crap like this, silly stupid German.
The German Economic Miracle, 1945 - 1955 when they revived a bombed out country and made it more prosperous than it had ever been, was done WITHOUT inflation.
In 1945 American economic experts advised German bankers and government officials that they needed inflation to stimulate the economy.
The reply was "we don't dare. The German people have seen their money reduced to nothing 3 times in the last 40 years. One sign of inflation and the economy will grind to a halt".
Wonder if they still have the same wisdom.
There is nothing more stupid and at the same time dangerous than an "American Economic Expert"
Not true, there was inflation 1945-47 and people lost a bundle when the D-Mark came in 1949.
This does provide an ideal insight into German thinking, and why there is a fault line in Europe that eventually undo the Euro (sooner, one hopes, rather than later).
Dr. Salzer, the whole thing has been a "Ponzi" from the beginning, so it needs to grow otherwise it collapses. By nature there is no stable point in between.
Actually, at the times of Keynes, finance (rentiers) had money (gold) and lent this money to producers, and was pro-deflation to increase the purchasing power of money. Today finance has debt and owns assets (has stocks and left bonds to the mutual funds), and is pro-inflation to reduce the size of its liabilities and inflate the price of its assets. This implies that if one wants to achieve the goals set by Keynes or Roosevelt, and reduce the size of finance, one must aim at deflation to reduce its liabilities.
"Can’t we accept that after 50 years of undisturbed peace and continuous prosperity we have reached a certain degree of personal satisfaction where we don’t need a new car every year, another cell-phone, additional furniture, more TV-sets, more laptops etc, etc."
Absolutely correct.
Keynesianism is as you say meant to be applied in short doses not for ever.
I learned economics and realised whow much of the body of knowledge I was regurgitatin in my exams was absolute bollocks. "Ceteris paribus" my arse!
You learned dogma
How to cure a patient who as a body doesn't exist, the economy.
What is existing is the game of dominance whith whatsoever is able to print it out. The economy for instance.
The malady there is, we have yet not the patient, only - to say - his cloths.
But a full spectrum of treatments.
Magicians, warlocks, wizards to the front.
Dr. Ulrich, I suggest you drive carefully on the Autobahn, stay away from nailguns and although you may dance like Jagger, don't ski like Bono. Just a suggestion.
"In his (Keynes) theory, deficit-spending should be a limited action in time and amounts, and directly afterwards this debt should be repaid by the additional tax income from the stronger revenues of industry and private individuals who have profited from the intervention of the State.
But what our economists and central bankers are recommending nowadays is completely different from “short-term-kick-starts” – our systems are so full of the sweet drug of government deficit spending that (like a drug-addict) it constantly needs heavier doses of the same drug!"
balanced budgets, bitchez. funny, though, that all the "Austrian School" proponents of ZH come out in masse for general discussions, like here, but when I'm fighting a specific "Big Spender To Prosperity And Eternal Growth" proponent on this blog regarding european matters... crickets
Yeah, we never like the second half of that equation. Just too painful. Here, have another sip from the punchbowl.
Nice article, but let's look at Germany's main motor, the car industry. A perfectly serviceable older car is hit by a truck driver moving into his middle lane on the autobahn (unusual ? hell no !).
The car is an economic write-off. How is that ? Well the labour cost is pumped up by social security taxes, VAT at 19%, and the requirement that new parts be used and the driver keep the car for 6 months after repair.
So a serviceable older car MUST have new manufacturers parts and suddenly we find it is more economic to pay someone a pittance without VAT to buy another.
Energy is expended crushing the old car and energy is expended making new cars daily. Why do we need fields in Bavaria full of unsold BMWs, or car rental agencies with the latest Mercedes C200 ready to be swapped out after 6 months just to keep the inventory moving ?
This is economic madness driven by taxes and an economic calculation changed whenever government increases taxes
Of course this is exactly what a country with record low unemployment would say about fiscal stimulus. Which incidentally the Germans applied liberally throughout their own recession just a decade ago.
Mmmmmm, yes maybe the seed of a different way of thinkng about economies and the people who 'work' in them. Instead of GDP increasing, by skuldegery and sleight of hand, by including drugs and prostitution in the total output.
Think about reallocation of qualified and capable people, to assist in developing countries who need the people to exploit their natural resources and reserves.
Unfortunately, religious, nationalistic and elitist attitudes may inhibit the movement of people, to put/get them where the would do most good. Would love to see some bankers, politicians or civil servants, on sites, trying to build roads, bridges, housing, utility services like Gas, Electricity, Water, Sewerage, Telecommunications, Oil, etc.,and in the winning industries, for minerals and ores................ The mind boggles!!
And the financial packages and remuneration they think they would be worth?!?!? Talk about inflation, deception and fantasising about capability.
Apropos Marshallplan": In many articles here in Germany I read that during the last five years Greece received already more than 100 times more money to fix its spending problems & corrupt international banks and to kick-start it's economy than Germany ever got from Marshallplan. The consequences of 7 years drug-addiction caused by a currency which doesn"t fit to the Greece and corrupt bankers mentality can be watched by everyone: Too much drugs in the hand of dealers causes headache, letargy and pensioneers from 50 to 150 years old, Islands full of blind people, tax-free yachtowners and 24 hours party on base of olive-export. And the attidude: Never repay your credits.
Germany Loves Taxes.....Global Ones Especially
http://newworldorderg20.wordpress.com/2014/11/01/germanys-minister-of-finance-wolfgang-schauble-promotes-globalist-tax-collection-for-e-u/
http://newworldorderg20.wordpress.com/2014/12/03/communist-e-u-and-america-gorge-on-taxes-and-want-laws-to-make-lower-taxes-illegal/
aslo in U.S. http://newworldorderg20.wordpress.com/2014/11/01/fed-pushes-banks-to-govern-data-preperation-for-global-tax-collection/
and more.....http://newworldorderg20.wordpress.com
At least Bruce Wild's relentless blog ads put the figleaf up over the paperhanging. He re-posts old reposts of misspelled post snippets. You just throw a headline up, and get to business.
Nice to see the Tylers spreading their legs like this.
Germany Loves Taxes.....Global Ones Especially
Yeah a_t
Bet that Nation and it's economy would be completely different without U.S. military bases in it's country for the last 69 years and it's GLD left to the "winners" on Liberty Street in Manhattan?!
I agree with this guy 100%. NONE of the negative comments here bring up any better option.
Spending increases debt and has no benefit but to keep the pitchforks out of DC. Impoverishing the majority for the benefit of an unproductive minority is no solution, merely suicide.
What people miss about Japan is that it is a cossetted society but the Japanese have been treated like children. The government took every penny earned by the excellent work of their people and held it in Dollars in New York. They printed Yen and pointed to the rising "national" wealth, an accounting entry in Tokyo, their "Dollar reserves". American should hear Japanese on every street corner as the Japanese auto worker spent his Dollars earned. But it did not happen. Japanese men had to borrow on credit card to have a night out in Tokyo. Associates Corp made a multi-billion dollar business out of lending for sake and women. Tavern lending, essentially. THey kept people quiet, but at the expense of a population growth. Combine that with birth control and you have a society that has committed suicide. Income distribution by work - NO. Only by government largesse.
My personal advice is to stop handing out any more Nobel-prizes for economics to any more American professors on any new theory how to steer economic development and sustainable economic growth, because none of them has ever worked.
My personal advice is to hand out one to the economist that "states" (doesn't theorize) the obvious:
The foundation is as follows:
Money is obviously "a promise to complete a trade". This is obvious from examining trade. It happens in three steps: 1) Negotiation; 2) Promise to deliver; 3) Delivery. In simple barter,(2) and (3) happen simultaneously on the spot. Money just allows (2) and (3) to happen over time and space. In this case money is just another simple item of barter. Let's see why.
Here's how it works. The "manager" of the Medium of Exchange (MOE) certifies all trader's promises to complete trades (i.e. creates certificates in common denominations ... money ... that then circulate as the most desirable item of barter ... because they're welcome everywhere and never lose or gain value over time and space). He then reclaims these certificates as the trader delivers on his promise. He monitors for failure to deliver (DEFAULT) and collects INTEREST in equal amount (using actuarial techniques to maintain INTEREST and DEFAULTs in lock step just as insurance companies keep CLAIMS and PREMIUMS in lock step).
For example, take yourself as one trader and the seller of a house as the other party. In exchange for his house, you want to trade 360 equal monthly future payments and he wants all 360 payments right now. The MOE manager records your trading promise, creates the certificates we know as money, and you give them to the seller and he gives you title to the house. Then, every month, for 360 months, you return 1/360th of those certificates to the MOE manager. He extinguishes them. After doing this, you have returned all certificates your trading promise has created and you have effected delivery through an extension to simple barter we know as money.
What if you fail to deliver? Well, then you DEFAULT. This default (broken trading promise) leaves those certificates (money) circulating without a valid trading promise ... thus forever. They must be reclaimed and INTEREST collections do that ... collections that obviously must equal the DEFAULT. This protects all the other money circulating and the trading promises they stand for.
Pretty simple isn't it. Create money freely as demanded. Reclaim and extinguish money when returned as promised. Monitor for DEFAULT. Collect an equal amount of INTEREST. The operative relation is:
INFLATION = DEFAULT - INTEREST = zero (all the time ... everywhere).
The economist that wins the prize, for this which we all see as obvious, is worth more than all the dynamite Nobel and his successors ever produced or ever will produce.
But don't hold your breath. Economics wouldn't exist if INFLATION was guaranteed to be zero all the time everywhere. It's non-zero INFLATION that leads to economics.
you are correct about INFLATION = DEFAULT - INTEREST = zero
but there is a problem with that approach - money do not circulate in circle but tend to accumulate in the hands of the capital owners
ordinary folks would be left with no money and revolt
money do not circulate in circle but tend to accumulate in the hands of the capital owners
Money is not required to circulate in a circle. It is only required to be created under recorded circumstances and extinguished under recorded circumstances. In the meantime, all you have to do is deal with counterfeits. Money will do what those traders holding it want it to do ... which at a minimum is to trade for food and shelter.
In our current system called capitalism, accumulation in the hands of capital owners is by design ... of the capital owners. To buy a house I supposedly must find a capitalist before the bank can create the money. This is nonsense. The constraint is there by design of those with capital ... just as if those with gold prevail in their so-called "sound money", people with a hoard of gold will gain control.
What I'm saying is that it is totally unnecessary for traders to give up any control.
Assuming a properly managed MOE and with the universal characteristic that some of us are better traders than others, proficient traders will obtain a pile of cash. However, since their cash is not required for other traders to make trading promises ... especially if those traders are responsible and enjoy zero INTEREST collections against their trades, the advantage obtained by the hoarders is greatly diminished. Savings has no impact on trading either (where now it takes money out of circulation making still circulating money more dear).
Further, since the amount of money in circulation is always exactly equal to the total outstanding trading promises, and that new trading promises are created out of thin air by traders themselves, there is never an artificial (or real) shortage of money, dislocation of capital, or other nonsense economists "struggle with" today. Almost everything (if not actually everything), that today is a big issue, turns out to be a non-issue for a properly managed MOE.
Plan NEIN! From Outer Space
@withglee - There's merit to any argument that keeps gov out of the loop, but how do you buy a single tomato?
And, the damn thing is, gov is where money is and that's where the lawyers are. They will no allow themselves to be written out of their cream-skimming status - they'll insist on arbitrating every transaction to their benefit. And, by rights, every civilized society NEEDS an honest legal system so the old "kill 'em all" adage is unworkable.
Mike in GA:
"but how do you buy a single tomato?
I'm presuming you recognize "all" trade does not entail creation of new money. Buying a single tomato entails trading existing money for the tomato (i.e. it's simple barter with one party using money ... the most sought after item of simple barter because it is accepted universally and never loses or gains value).
Where did you get the money? Likely from your employer (or less likely from trading your services or things you have for it ... or maybe dipping into savings which you accumulate and store as appropriate knowing they will never lose or gain value).
That part of the medium of exchange we have had working (in public and private form) since the forming of the republic and before the Fed (our current MOE manager). The main problem is we have never enjoyed the "never losing or gain value part"... the Fed has delivered us, on average, 4% annual INFLATION. The big leak is our governments who never deliver on their trading promises (they just roll them over ... which is DEFAULT), and they pay less interest than we responsible traders do.
Where did your employer get it? Well, he sold his products for some of it. He made trading promises for some of it (e.g. sold bonds or stocks or borrowed from a bank). Where did the bank get it? They "created it" in exchange for some trading promise which they are monitoring for DEFAULT and which they are collecting INTEREST in anticipation of DEFAULT ... at least that's how it should work in a properly managed closed system. Why can banks do this? Because they are "federated" arms of our MOE manager, the Fed.
Now about the Fed: They are the current "gross mis-manager" of our MOE. They guess at what INTEREST collections should be. They claim INFLATION should be 2% ... when we know it should be zero ... and achieve 4%. They have no reporting or clue what DEFAULTS are so ... for sure ... they don't know how to properly manage an MOE.
But of course they are skilled servants of their managers who among them are certainly descendents of the most successful money changer the world has ever known who said "give me control of the money and I care not who makes the laws".
And that leads us to the laws. As a wise man once said "keep it simple stupid". The necessary law can be written in bullet proof form on the back of an envelope.
Complex, opaque laws are easier to game than simple, lucid, objective rules.
There you have it ... the complete set of rules on the back of an envelope.
Also, notice that this doesn't have to be done by a government or an MOE manager. It could be a whole industry of independent operators, not unlike the insurance industry, that competes through efficient management of the DEFAULT, INTEREST balance and minimizing costs and profits which are a form of DEFAULT needing INTEREST collection to balance them.
Many trades have experienced vast disruptions in the face of improvements in practices. Things like lath and plasterers gave way to drywallers; pipe fitters gave way to PVC; caboose riders gave way to little red lights attached to the end of the trains. Surplus lawyers, accountants, economists, and governments can give way to zero inflation guarantees. Capitalists can give way to the proper management of the MOE.
Two step approach:
The plantation slaves will embrace with joy.
The leading macroeconomic Nobel-Laureates, the Central Bankers as well as most Politicians have reduced their economic judgment on how to get the economies in Europe and Japan back to sustainable growth on just two recipes: public investments in infrastructure to be financed by additional public debt and, second, an expansive money market policy based on printing more money and reducing interest rates to zero or even beyond zero to negative rates!
The ultimate definition of madness that always leads to famine and war to pay for it!
Suffice it to say... John Maynard Keynes and his descendents are ALL freaks!
China and Russia Threaten to Destroy the Dollar
http://investmentwatchblog.com/china-and-russia-threaten-to-destroy-the-dollar/
In principle I agree with much of this, except I don't think it's likely that the bill will come due anytime soon.
"Is it really worth it to increase the already heavy burden of public debt, which our children must service someday..."
I believe the system can or will collapse when the burden becomes sufficiently onerous. The bonds will default, and it is the investor class who will ultimately suffer, moreso (or along with) the general public. As the risk of impeding social unrest becomes clear to the ruling (i.e. investor) class, the excessive burdens will be pushed from one fictional balance sheet to another and definitions will be changed in whatever ways are necessary to maintain the precarious balance that avoids catastrophic social unrest while maintaining maximum capital safety for rulers/investors. As we saw with the EU, rules and definitions can and will be adjusted however is needed to maintain the ponzi.
I think we are still long ways from running out places to hide the systemic rot.
But the internet pushes the information down through layers of people that otherwise would never know anything about these CB machinations and policies. Everyone KNOWS now how precarious the debt-fuelled party is worldwide. It gets harder to lie or to cover up your intentions or inflate the value of collateral or cash flows with the free flow of info.
Methinks the Keynesian endpoint is nigh.
When Japan, at 230% of GDP, blows up, how can the ROW emerge unscathed? It just amazes me to hear people, intelligent people, say it can't happen here. History proves there is nothing new under the sun, just iterations of the same folly.
The bill has always come due, and it will come due again, period.
"Everyone KNOWS now how precarious the debt-fuelled party is worldwide."
Sir, I respectfully disagree.
You may be spending your time among Like minded people. This gives you a confirmational bias, not a true picture of the "average" man on the street.
They don't know.
They don't want to know.
They are likely to get quite aggitated should you attempt to aswage them of their fantasy.
Haven't read previous comments, so forgive plagurism or similarities.
The mature economies such as US and Western Europe are still trying to grow, so the economic elites can increase/maintain their wealth and throw in a 0.5 % for the masses , so they will have less tendancy to revolt because of the extreme inequality of wealth. The 2% inflation is eating into the buying power of their loot, then growth is the only answer. I expect the 2% inflation figure is a linear representation of the inflation of the dollar relative to the world price of Gold, since the origin of the Federal Reserve to the present.
Germany is exporting to all these other countries and therefore has to pay more taxes, assuming a progressive rate, which most people agree with, even the Berkshire man acknowledges the system has failed in that regard, with many thanks to the GOP. So those who make a lot, pay more, sounds like something I'd accept. When I worked, I would voluteer for any extra hours of work, so I could have more take home pay, even if I had to pay more taxes. Also I paid off the payroll/employment tax sooner and had a good raise in the last half of the year.
So those who "make" a lot, pay more, sounds like something I'd accept.
Not me. The only thing I accept is 'those who "consume" a lot pay more'. What you accept is socialism and I reject that vehemently.
Supposedly government is there to provide for services we need but cannot address as individuals ... like keeping track of who owns what in the way of real estate for instance. People who partake of those services should pay for them according to their cost ...not according to "what the traffic will bear". Those who don't should not.
And indirect benefit is not relevant. Someone directly benefits from government services and its up to them to pass the costs to the indirect beneficiaries. For example, if I don't personally use roads I shouldn't pay for them. If the goods I consume require the use of roads, that cost should be included in the cost of the goods.
In all cases, resorting to government should only come as a last resort. Even in the case of who-owns-what record keeping, the real service is provided by private title companies ... not by the county clerks.
'Deficits don't matter.'
- Dick Cheney.
"raising the debt ceiling won't add one dime to the federal debt"
-Obama
"There is a lot of blame offloaded onto Maynard Keynes by critics of the present ruling opinion of more deficit spending by governments. But I don’t believe that Keynes would approve any of today’s Nobel-Laureates who saw no other way out of recession than by money printing in unlimited amounts and years of deficit spending by already over-indebted economies."
OMG!!!! ZH prints an article that isn't mindless, froth-mouthed fulmination against Keynes?!?!?! The world really must be coming to an end. FWIW, Keynes advocated government deficit spending to fund make-work projects, infrastructure and public works as a way to stimulate final demand (ie: put money in Average Joe's pocket and he will spend it). He also advocated government under-spending during booms to offset the deficit spending. He DID NOT advocate unlimited money-printing to fund criminal zombie bank gambling. Nor did he advocate much of the monetary jive (targeted asset purchases and other market manipulations, buying toxic assets from banks and the like) we see being conducted currently. In the US, there has been precious little government spending on make-work projects and a tremendous emphasis on monetary manipulations. The focus on money supply, to the exclusion of all else, was something that Milton Friedman and the Monetarists advocated.
Note to ZH! Most of what you are calling Keynesianism could more accurately be labeled Monetarism. Of course, to know this, you'd have to stop yelling long enough to do some reading. Please do so.
The problem with all of Keynes thinking is that his proposals were all totally open ended and required constant manual control. He seems to have been totally clueless as to the use of negative feedback in automatic control systems.
If you gave him a broom and asked him to maintain it in a vertical attitude, he would place it on a platform bristles down and station people all around the platform to push it back if it fell their way (manual perceived error open ended control).
Your average third grader would hang it from a string and let gravity keep it vertical (automatic negative feedback control).
Today: "Screw the next generation. What'd they ever do for us. Besides, we need the money now."
Tomorrow: The young parents, struggling to raise their families in a perpetual stagflation economy, weigh the wisdom of now-legal mandatory euthanizing of elderly parents no longer able to care for themselves. The elderly parents say "What'd we ever do to you"? The young parent's decision suddenly seems easy.
If we can abort the inconvenient young, why not the inconvenient old who have already spent their children's future?
Re; The young parent's decision suddenly seems easy.
All the more so since it has already been made for them, and passed into Law.
It really should have been read before it was passed.
Who is this Monetarism guy? I thought he was a French Artist. I know he wasn't able to sell his paintings for much, while still alive. Only the future recognized his talents. Does this mean the French Government should have bought his works then, or what?
Let’s instead be happy with zero GDP growth, zero inflation and zero growth of public debt!
not a bad idea...but how will planet ponzi stay propped up?
Therein lies the rub. It's a conundrum that can't resolve to a higher order, therefore, has to resolve to the downside. Once the state of equilibrium is altered, ie, - contraction rayher than expansion - the jig is up. Nothing any banker or politician says will change the fact of implosion once the defaults begin cascading .
Let the ponzi beneficiaries worry about that ... and if you're a ponzi beneficiary, get out now while the getting is good. Eventually the caboose riders all lost their jobs to little red lights on the back of the trains. But it was the right thing to do.
Hear! Hear!