- Equating war with defending the country
- Seeing an economic benefit to war
- Participating in the war, or having family or friends participating.
- Not realizing there can be future consequences not apparent now (blowback)
- Viewing other people’s and country’s interests based on your own
- Buying everything the government and press say
- Everyone else is supporting it
- Long held animosities
- Being enthralled with the technology (video game syndrome)
- Not understanding the long term effects of the trauma of war
- Not fully understanding the meaning of life
Friday, June 09, 2017
Thursday, June 16, 2016
What is Johnson referring to when he says “American Empire”? An empire is a country whose economy and raw military power is unchallenged in the world. It is logical for such a country to assume that it must be exceptional, since it achieved this status. It follows that it may also assume that the system it uses must be superior to that of other countries who haven’t achieved similar status. And it may further assume that if other countries would only adopt their system, they would be better off. Continuing this scenario can become very hubristic to the point where the assumptions don’t conform to reality due the different development paths, and ethical, cultural and religious norms adopted by other countries throughout their history.
So what happens when an empire decides to use its economic and military power to change other countries toward the goal of making everything better for them. In such an endeavor, the justification is usually righteousness. We know what will make the country better. Selfish reasons like accessing the country’s resources and controlling commerce by various financial schemes are usually presented as being necessary for the good of the country. Making political changes is a logical next step. Get the people in power who will agree with what we are trying to do. These moves usually result in resentment that the country being “helped” is losing its autonomy. Factions within the country that share this resentment are the first to rebel in some way, first in a diplomatic way, progressing to protest, and ultimately to violence. The “rebels” eventually look for a way to get back at the empire. When the empire faces this, they consider such rebels as troublemakers, interfering with benevolent actions the empire is trying to implement, and who must be rooted out. Eventually, disproportionate force is used by the empire against the rebels to suppress them. As we have seen in many instances in history, the end result is a coup that installs a government sympathetic to the empire.
But, the problem doesn’t end there. If rebels are successful by sheer numbers, or receive aid from another strong power as the case was in Vietnam, the empire is kicked out. If the empire triumphs, blowback starts. Rebel actions turn to terrorism on the empire’s assets abroad, such as the bombing of the USS Cole, or attacks on the empire’s embassies abroad. The last rebel resort is to attack the empire homeland, as was the case in 9/11, and finally inspire rebel elements in the empire’s homeland toward indiscriminate violence, which is what we are seeing now.
So what are specific acts by the empire that inspire the most violent rebel response? On top of the list is asymmetric response. Using an air force or drones, which impact the people of the country in question greatly, but hardly affect the empire are major sources. Financial sanctions and trade embargoes are just war by other means that strangle the country, but cause little harm to the empire. All of these measures are viewed as being extremely unfair and inspire rage.
As these activities escalate, destabilization eventually results. When a country is destabilized and survival is paramount, religion, ethics, and morality are secondary considerations to the suffering people and brutality increases dramatically. If the livelihood and security of the people in the country are threatened, and hope for a solution is lost, extreme blowback to the empire may even lead to destabilization of the empire. The bottom line is, when people have little to lose by losing their life, they will do whatever causes the most damage to the empire that is causing their problems.
The only logical solution is for empires to get out of other countries where they are not wanted and let whatever happens, happen unless an international body not dominated by empires sanctions a solution. Empires should not pick winners and losers. International bodies have a role in such disputes, and should not be dominated by empires. The more countries are allowed to solve their own major problems with help from international institutions, the less likely they are to have an interest in causing trouble in an empire.
The focus of empires should be getting along with other strong countries that could become empires that could challenge them. If empires challenge each other with force, or sanctions that lead to force, what results is world war, as we have seen twice in one century. For the survival of the world, it is imperative for empires to resolve their differences diplomatically and work together and with international organizations to solve the many problems to world faces, and give weaker countries the non-military help they ask for, not what empires want, without any carrots or sticks.
Thursday, March 03, 2016
As I see it, the main problems that need addressing are correcting inequality, reducing foreign wars, and reducing the burden on the middle class and small businesses. Correcting inequality boils down to shifting the tax burden to higher income people and increasing wages for working people. Eliminating duplication of government services should also be a top priority, along with eliminating old government programs aimed at problems which no longer exist, like expensive defense programs for aircraft and ships that were designed to fight the last war, not the current conflicts.
I think we can forget about any new initiatives until until the country comes back economically and the middle class is rebuilt to where it can sustain a healthy demand for good and services, particularly those which can be produced domestically. The most promising course to accomplish this is repairing our crumbling infrastructure and passing a living wage. Forget about balancing the budget until demand exceeds our capacity to produce, since only then will inflation become a problem. Right now we are in greater danger of deflation. I'm afraid we're going to have to put major changes in health care and education off until we solve these immediate problems. Of the current candidates, Sanders program has the most detail but is a bit too ambitious, Clinton and Trump the least and the most stuff that goes in the wrong direction. Check it out for yourself.
I think we will be relying mainly on the current government staffing to carry on. All of these candidates lack the experience to address our immediate problems, including Clinton, who will likely continue what we've been doing wrong all along. Sanders knows what needs to be done, but lacks the executive experience to carry it out. Trump is promising some of the right things in the area of trade and jobs, but the way he is proposing to do it will make things worse. If he continues just blowing smoke like he is now it's hard to see how he will accomplish any of the reasonable things he is proposing, and other things he is proposing will be a disaster. Forget the other three. They're either living in the past, governed by ideology, or lack any understanding of political economy.
Monday, October 26, 2015
The whole thing started when Clinton put a monkey wrench in the Bush’s plans for a dynasty in 1992, with a little help from Ross Perot. Once in office the Clintons started planning for a dynasty of their own, as Howard Zinn has documented in chapter 23 of his “Peoples History of the United States” entitled, ”THE CLINTON PRESIDENCY AND THE CRISIS OF DEMOCRACY”.
This lasted as long as it took the Bush’s to gear up for the next challenge in 2000 where eldest son, “W” ousted the Clintons VP choice, Al Gore, with a little help from the Supreme Court.
In 2008, the Clintons were ready for the next round, with Hillary in the drivers seat to pick up where Bill left off. But, a funny thing happened on the way to the nomination. An upstart one term African American Senator promising “A Change We Can Believe In (Yes, We Can)” was too much for the Dems to pass up as a real chance to put a cap on the civil rights struggle. It was such a world wide hope and promise that Obama was awarded the Nobel Peace Prize before he had really done anything.
The only problem was, the promised change never materialized, starting with the appointment of Clinton as Secretary of State, keeping on the Republican Gates as Secretary of Defense, and appointing neocons and Wall Street big wigs to other key administration positions. Unfortunately, Howard Zinn died one year into Obama’s administration. I would have loved to have read what he would have written about it.
Most of the Obama administration was spent continuing the wars “W” started and adding to it, surveillance of the entire citizenry, arming police department with military equipment, maintaining a kill list of undesirables the US should assassinate (along with others who were considered “collateral damage”) Little was accomplished domestically, since the GOP had identified as its main mission, stopping anything Obama proposed. While the Dems still had the Congress, a health care bill, first developed by the Heritage Foundation and implemented in Massachusetts by GOP governor Romney, was passed and pilloried by the GOP as Obamacare. But progress was made in minority rights, sometimes with Obama and Clinton coming late to the party.
Now we face the next dynasty challenge, this time with both a Bush and a Clinton competing. Clinton immediately became the anointed Dem, serving in the Obama administration to burnish her credentials for the next run.
But, at this point, things look a bit foggy in both parties. When Bill Clinton moved the Dems to the right, coopting the GOP welfare reform and corporate deregulation to assure the Dems of future election victories, the GOP moved even further to the right, to the point where they went off the edge into never-never land, advocating pre-depression era plutocracy and total destruction of New Deal programs. The GOP is so frustrated with their inability to get any of their agenda enacted that they have fallen for the uber-persuasive TV personality and business empire mogul, Donald Trump. In the Dem camp, Bernie Sanders, an independent self avowed democratic socialist, with a life long history of consistency has captured the imagination of the disowned progressives in the Democratic Party, many independents, and even a few main street types on the right, He’s decided to run as a Democrat and challenge the slickster waffling Clinton magic.
So what are we in for? If Sander can ignite the Dem progressive base to come out in 2016, there is a good chance he could roll back the control of the Party from Wall Street, and put it back into the hands of masses. If he doesn’t, the Clinton dynasty will likely continue the Wall Street and neocon influence to keep winning elections. In this case there will be a lot of hope, but don’t expect any change you can believe in.
On the other side, the Bush dynasty looks to be in real trouble. It seems the GOP doesn’t like dynasties as much as the Dems. They’re looking for change at all costs, and don’t appear to be seeking a move back to the center. Instead, they seeming willing to follow anyone that will let them enact their extreme right wing agenda.
So what if it’s Bush, or any establishment sanctioned Republican vs Clinton. More of the same. “fagetaboutit”. Suffer for another term, no matter who wins. Both parties will be looking ahead to 2020. We’re in one term territory. No more dynasties to worry about. The next generation will be voting and things will likely be moving in a more progressive direction.
What if it’s Clinton vs. Trump. The progressives have the wind at their back. This will probably be last of the Wall Street Dems no matter who wins. If Clinton wins, expect Clinton 2 or Obama 2 and more obstructionism. Should Trump win, it’s anybody’s guess. He could be the disaster the GOP crazies have been waiting for, or he could tell them to go jump and do what he really wants. In any case It’s the end of the GOP dynasties. But, if you like change at all costs, he may be your man.
So what if it’s Sanders vs. Trump. We’ve already said what’s going to happen if Trump wins. If Sanders wins, it likely won’t lead to quick changes, but the table will be set for the next generation to take over and return the country to a democracy.
Saturday, September 26, 2015
Those who spend beyond their income (spenders) owe those whose income exceeds their spending (savers). If net savings is greater than the need for capital to expand production to meet demand, i. e. savings is too high compared to spending, that means lower demand for goods and services resulting in recession and ultimately depression. This excess of private debt is important. The concept of a Debt Jubilee (periodic cancellation of all debts) was used in past economies to fix this situation. In the current era, redistribution of debt, wealth, and income through living wage laws, progressive tax policy, inheritance tax laws, and relaxed bankruptcy laws could accomplish the same thing.
The converse is also true. If the debt is too low to finance production to meet demand, i. e. spending is too high compared to saving, inflation results and must be controlled by the reverse of the measures prescribed above for excess debt.
Monday, June 22, 2015
Social networks like Facebook and Google+ are a mixed bag. It’s a way to expose your thoughts to the world or just friends and family. But, the price you pay is being subjected to a constant stream of promotions and suggestions from the hosting service that don’t interest you. Plus it is sometimes difficult to screen out information you don’t want to see, from that you do.
A better way, if only more people would adopt it is the combination of a blog and an RSS reader. With a blog you see only information from the person you want to follow without commercial interruption. You also get an indexed history of post titles instead of a cluttered timeline. The format is set by the author of the blog, rather than the host service.
To easily follow blog posts from multiple sources, and be alerted to new posts, you need an
RSS reader. You just enter the URL of the blog or site you want to follow and you are alerted to new posts from all the sites you follow in one convenient place. It’s easy to scan the titles to see which ones interest you, and then click on the ones of interest to go directly to the post.
Currently, I blog here at Blogspot.com and use Inoreader.com as my RSS (Real Simple Syndication) service. There are many others available to suit your preferences. Just do a search on Blog Services and RSS Services.
Thursday, December 11, 2014
Suppose there is a world consisting of only two countries, one rich and powerful and the other relatively poor and not very powerful, but with many natural resources. The powerful country has been calling the shots for some time due to its power and wealth. All trading has been done in the currency of the powerful country, but most of the consumer goods produced are made in the poor country where they can be produced much more cheaply. The rich country also has a sizeable gold hoard which used to back its currency, but not longer does. The poor country has accumulated a lot of the currency of the rich country, which it has used to buy bonds issued by the rich country in their currency. Along with the consumer goods purchased from the poor country is a sizeable quantity of natural resources needed to support the lifestyles of the people in the rich country.
Things seem to be working out okay, the poor country is prospering from the trade and the interest on the bonds and slowly getting richer, while the rich country enjoys the cheap goods manufactured by the poor county and its natural resources power the lavish lifestyle in the rich country. But, then the bottom drops out of the interest on the rich country’s bonds. So the poor country decides to take the payments for its resources and goods in gold rather than currency, gold being a very thin market, but nevertheless required for some critical manufacturing processes and is highly sought after by affluent people in the rich country for jewelry and art objects. All of a sudden gold becomes the medium of exchange (indirectly, see how below) rather than the currency of the rich country. The demand for the rich country’s currency tanks relative to the demand for gold. Over time the gold hoard in the rich country diminishes and piles up in the poor country. So how does this scenario end? Is war the only alternative for the rich country? Maybe the rich country only slaps sanctions on the poor country. Or do the countries stop trading with each other and become isolated? Or do they develop a mutual respect for each other and work something out?
Now consider that the rich country is the West and the poor country is the BRICS, led by Russia and China. So how could this happen? The US will only pay for what it buys in its own currency. So that’s what the BRICS accept. But they turn around and buy gold with it on the open market, driving up the price of gold and driving down the price of the dollar. China has already said they’re not going to buy any more US bonds. The BRICS have already come to some agreements to trade in their own currencies, possibly using their values in gold to arrive at an equitable exchange rate. Russia is already replacing purchases of Western goods with purchases from other BRICS countries. China has worked out an agreement to buy oil and gas from Russia. If the West were to refuse to buy oil and gas from Russia the price of these commodities would skyrocket since the Russian supply is absolutely needed to meet world demand.
So, in the long run, who is in the drivers seat here, the countries with the natural resources and a pile of gold or the consuming West with their paper currency. This is already happening. See the link below. I’ve posted or sent this link before, but no one in the West seems to get it. Or, they do get it and keep quiet about it, realizing their jeopardy, hence their sabre rattling and attempts to destabilize Russia and eventually China and the rest of the BRICs.
Sunday, October 19, 2014
When most of the rewards of productivity go to a few people they control the economy for their own benefit. They create a labor surplus to drive to wages down by offshoring and mechanizing production. There would be nothing wrong with offshoring and mechanization if the benefits were not going to just a few people. With wages down for the great majority of people, demand is reduced and the economy tanks. With excess wealth at the disposal of capital owners and managers, and little wealth available to the great mass of people, the owners and managers of capital can buy the government through lobbying and campaign financing. It’s a vicious circle that can only be turned around by direct steps to reduce inequality.
So, how can this be done? Right now the efforts to make changes are thwarted by too many different proposals: increased government regulation, changes in the structure of taxation, subsidizing low wage and impoverished people, etc. There are too many ideological elements in all of these proposals.
Instead, only two simple proposals need be implemented initially: increase the minimum weekly wage and shorten the work week. Raising the weekly minimum wage would put more money in the hands of working people and shortening the work week will employ more people, creating a greater demand for labor.
Once the demand is up, more money will flow into the pockets of labor and less into the pockets of the capitalists, reducing inequality and providing more resources for the great mass of people to influence their government, taking power away from the owners and managers of capital.
This solution is largely market driven, taking subsidies, welfare, and government size out of the argument. The only thing that must be recognized is that government has a role in protecting the general welfare of the people.
Once the people again have control of their government, changes can be made in other aspects of government, like balancing domestic and military spending, creating a fairer tax system where taxes on labor and capital are more uniform, etc. It’s just a matter of giving the great mass of the people a larger voice in their government through increases in their wealth relative to that of the owners and managers of capital.
Sunday, April 20, 2014
After watching a president I voted for twice, I have to conclude that Obama is the Democrat's version of George W. Bush. Both are weak presidents who don't have the experience or temperament for the job. Both have knuckled under to entrenched Washington interests that have been around through several administrations, Bush to Cheney and his neocon crowd who are bent on the US dominating the world, and Obama, first to the Wall Street and corporate oligarchs determined to increase their stranglehold on the control of the economy, and now to the same neocons supported by the guy he defeated to become president, John McCain.
Not much has changed and there is not much hope that it will.
The US still opts for military might as a foreign policy cudgel to throw its weight around in the world and domestic surveillance and militarizing of the police to ensure that any attempt by the populace to counter its moves is kept in check. The use of drones and sanctions is war by other means to send a message to the world about who is in charge. Sanctions only work for a country whose currency is the world reserve currency, and use of them is an abuse of the trust the world has placed in the dollar as the world reserve currency.
We truly are living in troubled times where the government is no longer responsive to rule of the people. It has taken on a life of its own to serve the interests of an elite few who are consolidating their hold on the countries resources and an entrenched old Washington guard that has been around through several administrations urging the use of covert subterfuge and military power to achieve hegemonic ends. I see nothing on the horizon that will restore the country to the greatness it achieved in the fifties and sixties when inequality was at a minimum and people pulled together to land a man on the moon.
Thursday, December 26, 2013
In some of my posts on Facebook, Progressive Policy Digest, The Soap Blog, or in my emails I have referred to "MMT". I usually get no questions or inquiries about it, which seems to reflect a lack of knowledge of the subject. Basically, MMT prescribes a path that would have had us at full employment long ago, and from a federal debt perspective, is the exact opposite of the austerity currently being pushed by both political parties, so it's very important. In spite of it's name, it's not modern, not exclusively monetary, and certainly not theory. It's an explanation of how economics and banking works in a country with it's own currency. It's understood by all good economists at the Fed and think tanks around the country that are not wedded to an ideological agenda. But, it can't seem to penetrate the Washington Consensus, the mainstream media, or the lay public, who continue to think the federal government must operate like an individual or a state that only uses the currency, which is the exact opposite of the way it works.
The macroeconomic literature provides the evidence for the validity of MMT, but is beyond the understanding of lay people. "What is Modern Monetary Theory, or “MMT”? by Dale Pierce is a lay explanation by a non-economist of the basics of MMT. For background and an historical perspective explore the three part series on MMT at New Economic Perspectives by the same author.
Friday, December 20, 2013
Have you noticed that the MMTers (Mosler, Wray, Kelton, etal) are getting more exposure in interviews on the internet and some main stream media? By the time the next election rolls around the jig will be up for the austerity dummies. I've digested all the MMT (Modern Money Theory) stuff and am convinced that most of the other economists are in a time warp, or just being outright political to maintain their research funding. It's so simple, we just need the government to get a jobs program enacted and start spending again on infrastructure, education, and research like we did in the fifties.
In the long run we should have government health insurance, public financing of infrastructure, education and basic research, and publicly funded retirement programs for all, so people don't have to worry about these things and can spend their income to maintain demand and enjoy life. That is a legitimate role for government as demonstrated by most enlightened developed countries around the world. We need to catch up.
We also need to harness the corporations and the few that own and run them, so they can do what they do well, and not run the country into the ground to satisfy their own greed. But, it's very hard to do when all the politicians and the electorate are acting like we're still on the gold standard. Guys like Pete Peterson, Simpson, and Bowles are engaging in false advertising. They're totally in the pockets of the oligarchy.
Beyond that we need to stop the warring, snooping, and international belligerence and join the community of nations instead of trying to sanction or rule them, while agitating for another cold war. And, that includes dissolving the dependent relationships with the Saudis and Israelis and their lobbyists in Washington.
It will be up to the Democrats to do all this, because the Republicans are at present a hopeless cause. They are trapped in the Ayn Rand propaganda. Democrats will have to start discovering what is important and what is not and re-prioritize their objectives and actions. Rehashing Republican ills is just free advertising for Fox News. Keeping issues in the limelight is what gets the public started thinking about them. And, in my opinion, the important issues are the ones I've just enumerated. The Dems won't be successful until they ditch the alliance with Wall Street and corporate America. We already have one party that is totally dedicated to that bunch. We don't need two. We need one party that is smart and is the champion of the people, so the people have a voice in what legislation gets enacted. It may take a couple election cycles to accomplish it, buts it has to be done to get the country back on the right track.
The one thing individuals you can do is keep these talking points alive in the circles they travel in, and vote for what is right, not what is expedient or compromising to win elections. That will only maintain the status quo.
And, this is not being negative! It's positive. Being negative is going along to get along, while half the country suffers in poverty or near poverty.
Do your part and tell your family and friends to do the same!
Thursday, December 12, 2013
Modern Money Theory (MMT) explains the way finance works in a country with its own currency, when many self imposed legal constraints are removed. Currently existing legal constraints in the United States include the following:
1) a national debt limit
2) the Treasury can only mint coin
3) the Federal Reserve bank (Fed) can issue paper money and credit Treasury and private reserve accounts in payment for notes, bills and other Treasury and privately issued financial assets it buys in the open market. The Fed cannot buy Treasury securities directly from the Treasury.
3) the income earned on assets the Fed purchases is paid to the Treasury
4) the members of the Fed Board of Governors are appointed by the President and approved by the Senate.
In these legal constraints we see and attempt to make the Treasury and Fed somewhat independent, but also subject to government action in the final analysis. This is probably due to the time period when these laws were enacted, when the country was on the gold standard. We are no longer on the gold standard now, so some no longer apply, as we are now a country with a fiat currency. If held strictly to the current legal constraints, the country is treated like an individual or state which must use tax collections or borrow in it’s own currency to finance its operations.
The contention between MMT advocates and its critics largely revolves around the independence of the Fed from the Treasury. In practice, over the years the Fed and Treasury have acted jointly on the vast majority of matters, for example, in Fed provided loans to bring reserve accounts up to the required level and in purchasing Treasury notes and bills from member banks to lower the interest rate the Treasury needs to pay on them. MMT economists tend to treat the Treasury and Fed as a consolidated unit. Critics sometimes do not. Both have a point and the difference is not likely to be resolved any time soon.
The downside of the current stalemate serves to reinforce the commonly held premise that the federal government needs to be treated like and individual or state that is a user of the currency and not like the issuer to the currency that it is, which leads to policies that are the exact opposite of what is needed when the country is in a recession or near depression and unemployment is high. The current emphasis on cutting spending and limiting debt, when fiscal stimulus or reduced taxes are needed to increase demand is an example of this case. When the country is prospering and at full employment taxes need to be increased or federal debt repaid to avoid inflation. These necessities, and the need for changes in the law to accommodate them, are obscured by the lack of understanding of the underlying principles that MMT seeks to reveal .
Monday, December 09, 2013
The mindset of the right is wrong. The federal government is not like an individual or a state. It is the issuer of the currency. Individuals and states are just users. They must borrow to spend beyond their means. The government doesn’t. When the private sector saves, but the savings are not invested, the government must run deficits to provide the vehicle to absorb the savings, i. e. government bills and bonds. It’s a mathematical identity that many economists, politicians, and think tanks don’t understand.
The public must understand that the federal government has a major role to play in providing infrastructure, in the form of roads, bridges, power grids, research, education, health insurance, retirement benefits, and a living wage job guarantee to eliminate unemployment. Worker skills and attitudes deteriorate when workers are unemployed. When the individuals and private businesses have to provide for these benefits through savings, it reduces spending, which sustains demand and maintains a healthy economy.
To harness the capitalistic drive for innovation, entrepreneurship, and monetary success reasonable government regulations are required to prevent an unequal distribution of the rewards of productivity growth, maintain a healthy middle class, and keep people from falling into poverty and becoming a drag on the economy.
If we continue to think that capitalism is a self regulating wonder and people are self sustaining individuals that don’t need to cooperate in their endeavors we will continue to be a society struggling for answers and living with cycles of economic bubbles that destroy the spirit and will of the country.
Sunday, November 17, 2013
The economy needs demand and investment to produce goods and services. Demand and investment come from the same source, income. If more income is saved, there is less available to create demand and vice versa.
At this time savings need to be reduced to increase demand. The usual means to do this would be to lower interest rates. But rates are already near zero, and this hasn't caused savers to start spending. So what is the mechanism to do this? Tax the savers, and reduce the taxes on spenders, to zero if necessary. If need be, let the government issue the funds to provide the infrastructure, free health care, education, and retirement benefits to the spenders, so more of their income can go to spending.
This is essentially what was done in the decades immediately after WWII, when the highest marginal tax rates were near 100% and the government was spending on roads, education, the GI Bill, and Social Security and Medicare had been implemented.
Instead, what we have done since the 1980's is reduce the highest marginal tax rates and taxes on capital gains, allow offshore tax havens, privatize education, let our infrastructure deteriorate, bust unions, and deregulate business to allow almost all of the rewards of productivity to go to savers. And, now the austerity advocates are on a path to destroy Social Security and Medicare.
Isn't it clear that we have to restore the balance between spending and saving that existed the fifties and sixties?
Tuesday, November 05, 2013
The following paragraph is an example of how to talk to the average voter about how the economy works, could work, or should work without resorting to economic jargon.
“The federal government is the people's agent, and they have authorized it to issue money so they can have a convenient way to buy things and pay their taxes. Taxes can be viewed as reimbursement for infrastructure, education, research, and defense projects the government has undertaken on behalf of the people. If the economy is so weak that people cannot find employment or resources are being underutilized, the government can either lower taxes or issue more money. If the economy is so strong that production of goods and services cannot meet demand, the government can increase taxes or stop issuing money. That's how the economy can be stabilized.”
Implicit in the above description of the economy, but not required to get the point across, is the fact that government is the sole issuer of money, taxes are not collected and then used, but instead the government can issue money to pay for what has been legislated to be done and then collect taxes after the fact to reflect what goods and services the people have received. In times of a weak economy the government can reduce taxes and defer reimbursement for services rendered, or in times of an overheating economy, the government can accumulate taxes it will need for future projects to take some steam out of the economy.
The federal government is not like an individual, a company, or a state. The federal government is the exclusive issuer of money. Any other entity is only a user of the money. To get money they have to engage in economic transactions, or borrow the money from an entity that has money to lend or grant. If they borrow, it results in debts that must be paid off later.
Any money the government issues increases the money available to the private sector to save or spend. If the private sector elects to spend, it will increase demand for goods and services, which could exceed the economic resources of the country. This will result in a rise in the prices of assets, consumer goods, or labor. At this point the government must increase taxes or stop issuing money to bring demand back into line with supply.
The fact that federal deficits and debt are not mentioned reflects their lack of importance in the scheme of things. The "national debt" is not a debt owed to anyone. It can be viewed as the net amount of money the government has issued over time. It may fluctuate up and down, but it is not something that needs to be paid off or compared to GDP. To think of it that way is to think that football teams need to pay back the scores they have run up in a game.
Over time, the population increases and the economy grows. This requires more money in circulation so it is up to the government to provide it. If it doesn’t, the economy will stagnate.
To the extent that the government issues money to further foreign interests or which results in foreign claims, the amount of money issued in that way could arguably become an important issue.
The average voter doesn't want to hear about economic theories or jargon that only an economist or economic analyst would understand. They just want to know how the economy is supposed to work. If economic concepts are explained in a simple, but factual way, people will start to accept them and turn away from the propaganda and misinformation that currently pervades the national economic conversation, much of which is only applicable to countries that don’t have their own money, or whose money is backed by a commodity like gold or silver.
Saturday, November 02, 2013
Trying to work around the two major parties in the US is a fools errand. The grassroots effort of Occupy should be directed at informing workers where their interests lie and organizing them to change the government.
The Democrats under FDR used to represent middle and lower class workers. Since the advent of the DLC and the Clinton administration, the Democrats have moved into Republican territory by accepting Wall Street influence. That is not their natural constituency. They have been able to do it only with the help of the main stream media, which is driven by money. The great mass of the electorate resides in the middle and lower classes. Now they rely mainly on the main stream media for their information, which is selling them a bill of goods on behalf of the 1% and the Washington consensus. To organize them around their real interests requires a door to door and internet media campaign to take over the Democratic Party and move it back to where it was under FDR.
The Republican Party is in disarray, and there is already a strong progressive element in the Democratic Party that is for reducing inequality, single payer health care, minority rights, environmental protection, a safety net, and a place for government in the economic landscape. People like Bernie Sanders and Elizabeth Warren are examples of the type of people that can be elected to national office. People like them can be recruited to local and state offices. The only problem now is voter reliance on the mainstream media and the political advertising propaganda it presents. A sustained grass roots effort on a personal level can turn that around. It's just a matter of personal contact to educate workers where there interests lie. This is the only way to overpower money in politics.
The demonstrations in the seventies around civil rights and the Vietnam war were ruthlessly handled by police and the military, which do what the government tells them to do. The same happened to the current Occupy movements in New York and elsewhere. The only way to give the middle and lower class workers a voice is to inform them of their real interests and organize them to change the government.
Sunday, October 13, 2013
Consider the case where everyone woke up tomorrow and all money in all forms, coin, currency, bank account balances, etc had disappeared? No one would be able to buy food, farmers would not be able to grow food since they wouldn’t have the money to buy seed or fuel for their tractors. All production would stop because no one would have money to buy the goods produced or to pay for the raw materials and labor that went into the goods. It would be a matter of once again living off what nature provides, bartering with the goods available, or introducing some form of money as a way to hasten the recovery.
Clearly, reintroducing money would be a faster means of recovery than the other two. It would boil down to everyone starting to print their own money (IOUs) or the government printing coin or the Fed printing currency to prime the pump and get economy back on track. Most people would feel safer taking government money they had always used rather than personal IOUs in exchange for purchases.
To get the money into circulation the Fed could simply restore the balances everyone had in their accounts at their banks or the Fed the day before the money disappeared.
Since the Fed printed the money, what form of debt did it incur doing so? None. The balances held in treasury notes and bills at the Fed could simply be replaced with reserve account balances of the same amount. So the national debt would disappear unless the government decided to accept reserves for government issued notes and bills again.
So what is this national debt we keep talking about? What’s to keep the Fed from printing all the money it needs to buy up the national debt? All the interest accrued on the government debt the Fed holds is remitted back to the government treasury anyway.
The national debt is nothing more than the government providing a secure way for the private sector to save and for foreign governments to supply goods to Americans. Foreign businesses selling those goods to Americans convert the dollars they get for the goods into the local currency to pay for the labor and materials that went into them. The dollars the foreign government receives from the suppliers in exchange for the local currency it provides ends up in it’s reserve account at the Fed. They usually buy treasury notes and bills since they pay interest.
The only way for foreign governments to cash in their dollars held at the Fed is for them to buy American goods or assets, and we can decide if we want to sell those goods and assets to them depending on what we want our balance of payments and exchange rate to be.
At this point in time the only threat from the national debt seems to be that it can be used by a minority of Americans to blackmail the majority into accepting their ideology as the governing mandate.
Wednesday, October 02, 2013
Why should the government pay interest on the national debt? People hold it because it's better than holding other assets. China holds it to finance their trade surplus. It's our money. We can print whatever we need to sustain full employment if we spend it wisely on the infrastructure, education, and research we need to sustain the economy and don't create more demand than we can support with the population and resources we have at our disposal. Doing the latter would cause inflation, so that's really the only limit there is on printing money. The debt ceiling is just a self imposed constraint that is used to deflate the economy and cause political instability. The easiest way to reduce the debt is to stop paying interest on it, and just print whatever money is necessary to sustain the economy, without overheating it. Think about it. Read about it. It's not a new idea.
Thursday, June 20, 2013
As long as half the population sees some gain in wealth, they vote to enable the rich to impoverish the poor. This explains the current politics of the country. In the chart below the problem lies in in center of the distribution where the gains in wealth are small. These people identify with the people at the very top and are more concerned about handouts to the poor than handouts to the wealthy and corporations in the form of tax breaks and loopholes, so they vote to dismantle unions and squeeze the working people that are losing wealth. As long as the wealthy elite that run the country can continue to throw this middle group a bone to keep them voting in the interest of the wealthy, inequality will continue to increase.
Sunday, April 07, 2013
It's a Right vs. Left divide, not Dems vs. GOP. Many Democrats represent conservative, not progressive districts. If 15 Dems in the Senate would vote their party platform, gun control would pass.
If so many Dems weren't conservative, the Iraq war approval wouldn't have passed, Guantanamo would be closed, Wall Street crooks would be in jail, Bibi Netanyahu wouldn't get 22 congressional standing ovations, the war on terror and drone attacks would be winding down, civil liberties would not be threatened, austerity wouldn't be on the table, etc. etc. No wonder the GOP wants to vote by district instead of state. It's why the GOP has moved even farther to the right and the Dems have moved across the center line.
The GOP has Fox News promoting their ideology. The Dems have MSNBC, but MSNBC represents the conservative wing of the Democratic party. There's nothing on there that's progressive. They love the new Obama sellout on Social Security. They still think austerity is wonderful. Who in the main stream media speaks for progressives? Only the polls indicative some progressive sentiment.
So, what does it look like for 2016? Another Clinton that voted for Iraq, loves sanctions and hegemony, loves Bibi, hates Iran, likes Wall Street and globalization. Hardly a progressive. Even Ron Paul is further left than the Democratic Party on foreign policy and military entanglements. It looks like more of the same for a long while.
Read this link and see the evidence that right wingers still run the country.
People know the GOP has gone hard right in pursuit of its ideology. The Democrats used to have an ideology, instilled by FDR and the Great Depression, which embodied keeping capitalism regulated, limiting the power of elite financial interests, preventing extreme inequality of wealth and income, using government to do what it must do to promote the general welfare and secure a stable society, promoting a strong middle class, and providing a safety net for people struggling to maintain a decent living, including retired and disabled people on limited incomes.
The Clinton administration and the Democratic Leadership Council changed all that. They compromised with Republicans in dismantling welfare programs, promoting globalization, and relaxing regulations on Wall Street and corporate America. Since the Clinton administration the Democrats has become largely driven by politics to regain and consolidate power. This has been possible became a sizable contingent of the Democratic base has become affluent in the last several decades and now are part of the investor class that is sympathetic to capitalist dogma. The media and the current administration are classic examples of this contingent.
The principle remaining ideology in the Democratic Party is its fight against discrimination on the basis of race, gender, and sexual orientation. The DLC contingent now largely shares the GOP ideology on globalization, deficits, war, and global hegemony. It is likely to cause a schism in the Democratic Party similar to what has occurred in the GOP.
Tuesday, April 02, 2013
This is an excerpt from the book to show why this book is the best explanation of the financial crisis and its causes. You will be hearing much about it in the future. Get it now and see for yourself. Paul Craig Roberts is an economist who was Assistant Secretary of the Treasury during the Reagan administration. His website is here.
Roberts, Paul (2013-02-24). “The Failure of Laissez Faire Capitalism and Economic Dissolution of the West” Atwell Publishing.
An Introduction by Paul Craig Roberts
Note to reader: This book was first published in the German Language in July 2012 by Weltbuch Verlag in Germany, Austria, and Switzerland under the title, Wirtschaft Am Abgrund. A Chinese language edition is forthcoming from SDX Joint Publishing Company in Beijing, China.
The collapse of the Soviet Union in 1991 and the rise of the high speed Internet have proved to be the economic and political undoing of the West. “The End Of History” caused socialist India and communist China to join the winning side and to open their economies and underutilized labor forces to Western capital and technology. Pushed by Wall Street and large retailers, such as Wal-Mart, American corporations began offshoring the production of goods and services for their domestic markets. Americans ceased to be employed in the manufacture of goods that they consume as corporate executives maximized shareholder earnings and their performance bonuses by substituting cheaper foreign labor for American labor. Many American professional occupations, such as software engineering and Information Technology, also declined as corporations moved this work abroad and brought in foreigners at lower renumeration for many of the jobs that remained domestically. Design and research jobs followed manufacturing abroad, and employment in middle class professional occupations ceased to grow. By taking the lead in offshoring production for domestic markets, US corporations force the same practice on Europe. The demise of First World employment and of Third World agricultural communities, which are supplanted by large scale monoculture, is known as Globalism.
For most Americans income has stagnated and declined for the past two decades. Much of what Americans lost in wages and salaries as their jobs were moved offshore came back to shareholders and executives in the form of capital gains and performance bonuses from the higher profits that flowed from lower foreign labor costs. The distribution of income worsened dramatically with the mega-rich capturing the gains, while the middle class ladders of upward mobility were dismantled. University graduates unable to find employment returned to live with their parents.
The absence of growth in real consumer incomes resulted in the Federal Reserve expanding credit in order to keep consumer demand growing. The growth of consumer debt was substituted for the missing growth in consumer income. The Federal Reserve’s policy of extremely low interest rates fueled a real estate boom. Housing prices rose dramatically, permitting homeowners to monetize the rising equity in their homes by refinancing their mortgages.
Consumers kept the economy alive by assuming larger mortgages and spending the equity in their homes and by accumulating large credit card balances. The explosion of debt was securitized, given fraudulent investment grade ratings, and sold to unsuspecting investors at home and abroad.
Financial deregulation, which began in the Clinton years and leaped forward in the George W. Bush regime, unleashed greed and debt leverage. Brooksley Born, head of the federal Commodity Futures Trading Commission, was prevented from regulating over-the-counter derivatives by the chairman of the Federal Reserve, the Secretary of the Treasury, and the chairman of the Securities and Exchange Commission. The financial stability of the world was sacrificed to the ideology of these three stooges that “markets are self-regulating.” Insurance companies sold credit default swaps against junk financial instruments without establishing reserves, and financial institutions leveraged every dollar of equity with $30 dollars of debt.
When the bubble burst, the former bankers running the US Treasury provided massive bailouts at taxpayer expense for the irresponsible gambles made by banks that they formerly headed. The Federal Reserve joined the rescue operation. An audit of the Federal Reserve released in July, 2011, revealed that the Federal Reserve had provided $16 trillion--a sum larger than US GDP or the US public debt--in secret loans to bail out American and foreign banks, while doing nothing to aid the millions of American families being foreclosed out of their homes. Political accountability disappeared as all public assistance was directed to the mega-rich, whose greed had produced the financial crisis.
The financial crisis and plight of the banksters took center stage and prevented recognition that the crisis sprang not only from the financial deregulation but also from the expansion of debt that was used to substitute for the lack of growth in consumer income. As more and more jobs were offshored, Americans were deprived of incomes from employment. To maintain their consumption, Americans went deeper into debt.
The fact that millions of jobs have been moved offshore is the reason why the most expansionary monetary and fiscal policies in US history have had no success in reducing the unemployment rate. In post-World War II 20th century recessions, laid-off workers were called back to work as expansionary monetary and fiscal policies stimulated consumer demand. However, 21st century unemployment is different. The jobs have been moved abroad and no longer exist. Therefore, workers cannot be called back to factories and to professional service jobs that have been moved abroad.
Economists have failed to recognize the threat that jobs offshoring poses to economies and to economic theory itself, because economists confuse offshoring with free trade, which they believe is mutually beneficial. I will show that offshoring is the antithesis of free trade and that the doctrine of free trade itself is found to be incorrect by the latest work in trade theory. Indeed, as we reach toward a new economics, cherished assumptions and comforting theoretical conclusions will be shown to be erroneous.
This book is organized into three sections. The first section explains successes and failures of economic theory and the erosion of the efficacy of economic policy by globalism. Globalism and financial concentration have destroyed the justifications of market capitalism. Corporations that have become “too big to fail” are sustained by public subsidies, thus destroying capitalism’s claim to be an efficient allocator of resources. Profits no longer are a measure of social welfare when they are obtained by creating unemployment and declining living standards in the home country.
The second section documents how jobs offshoring or globalism and financial deregulation wrecked the US economy, producing high rates of unemployment, poverty and a distribution of income and wealth extremely skewed toward a tiny minority at the top. These severe problems cannot be corrected within a system of globalism.
The third section addresses the European debt crisis and how it is being used both to subvert national sovereignty and to protect bankers from losses by imposing austerity and bailout costs on citizens of the member countries of the European Union.
I will suggest that it is in Germany’s interest to leave the EU, revive the mark, and enter into an economic partnership with Russia. German industry, technology, and economic and financial rectitude, combined with Russian energy and raw materials, would pull all of Eastern Europe into a new economic union, with each country retaining its own currency and budgetary and tax authority. This would break up NATO, which has become an instrument for world oppression and is forcing Europeans to assume burdens of the American Empire.
Sixty-seven years after the end of World War II, twenty-two years after the reunification of Germany, and twenty-one years after the collapse of the Soviet Union, Germany is still occupied by US troops. Do Europeans desire a future as puppet states of a collapsing empire, or do they desire a more promising future of their own?
Roberts, Paul (2013-02-24). The Failure of Laissez Faire Capitalism and Economic Dissolution of the West Atwell Publishing.
Get it now!
Monday, March 18, 2013
The Republicans have demonstrated over and over again that they want to dismantle the safety net and deregulate the economy so wealth can be concentrated even more in the hands of a few. Supposedly, the Democrats stand for maintaining the safety net, regulating the economy, preserving the hard fought gains of the new deal, and reducing inequality.
Once Republicans took over the Congress in 2010, Obama's main goal was obtaining a compromise with Republicans. How did that work out? Now there has been an election where the people of the country reelected Obama, a signal that he should fight for Democratic Party principles. So what does he seek now? More compromise.
What we have here is one party that is standing by its principles, however wrong they may be, and another party whose main goal appears to be compromising with a party whose principles they disagree with. Has the Democratic approached worked? You be the judge.
There comes a time when nothing is gained by trying to be the lite version of the other party. It's time Obama and the Democrats learned this. They have to relearn the lessons that FDR taught them. They must stand on principle, call out the Republicans, and make the case for their own supposed philosophy of governing.
It's high noon in America. What we need is a showdown between the two parties, standing on the principles they espouse in their platforms, not a stand on principle by one party and an attempt at compromise by the other. May the best party win!
Sunday, March 03, 2013
In the last post we discussed how banks create new money from debt to augment their income. The problem with this is that private entities are allowed to make investment decisions which may not result in a better outcome for the country as a whole, but simply augment the wealth of their investors and executives, resulting in a concentration of wealth and asset bubbles that destabilize the economy.
There are two ways to counter this to create an outcome that is more in the interest of all the people. One way is to simply tax away the income and use it to fund more productive uses that are more in line with long term stability, such as improving infrastructure, education, health care, retirement security and income tax breaks or income augmentation for those who have been damaged by the concentration of income from the private bank decisions. Another way, advocated at the Positive Money site in the UK, is to adjust reserve requirements and separate transactional money requirements from investments involving risk.
Requiring banks to meet higher reserve requirements will allow some of the money creation to occur as base money creation and not private money creation, with that portion of the income from the debt going to the government where it can be applied to more productive uses and counter the inherent wealth concentration of purely private money creation that leads to economic instability.
There is a major problem with our monetary system that few people, even financial experts and economists, either don’t understand or refuse to confront.
The principle creators of our money are private banks that have incentives to act in their own interest, not the public interest. The overwhelming percentage of our money is created through the issuance of debt, unconstrained by anything but a lack of eligible debtors. And, even that doesn’t stand in the way when wins can be privatized and losses socialized.
Essentially free money is available to fund debt that need not even contribute to productivity, but instead can be used for unproductive speculation, if the return is greater. There is no need to take the risks involved with financing new productive ventures when loans can be collateralized with valuable assets like real estate.
It’s a prescription for endless bubbles and crashes that continue to distribute income to a wealthy elite from the most needy of the population. When money is created from the issuance of debt, the holders of the debt will always be the most needy and the interest will always accrue to those with the wealth to fund the debt. Attempts to correct the problem will lead to more debt and an accelerating cycle of increasingly severe crises.
The problem is not a new one. It was addressed decades ago by people like Hyman Minsky and others, but current so-called financial experts, economists, and political leaders have forgotten history and plunge ahead toward certain catastrophe.
To understand the details of the problem watch this short video describing the problem, this series of short videos describing the details of the problem, or spend a couple hours watching the free film, “97% Owned”. This is the British version, but the U. S. is directly comparable.
Tuesday, February 26, 2013
A very simple way to look at government spending is that the government is just another consumer and producer of useful services like the private sector. In fact, it constitutes about 20% of GDP, so when it cuts back on spending it's just like any employer or consumer cutting back, only with much greater effect. When the private sector is increasing its spending is the time for the government to cut back. When the private sector decides to save, it's time for the government to increase spending to make up the difference. If we want a stable economy, overall spending must increase at a rate comparable to the rate of increase in population. Government is not the problem. It's the solution in times of trouble in the private sector.
Monday, November 19, 2012
The title of this post is similar to the title of Warren Mosler’s book.
The Kindle addition can be purchased from Amazon for $3 and read on your Kindle, if you have one, or on your computer or smartphone if you don’t.
Even though the book is short, it’s not light reading for non-economists, so the intent of this post is to give Mosler’s conclusions only, along with the conclusions I’ve drawn from the work.
The amazing thing is, the content of this book is common knowledge among many analysts at the Fed, which has issued its own publications on the same topic. Alan Greenspan and Ben Bernanke have made comments to congressional committees along the same lines. But, many economists, politicians, press, and pundits either are not aware of it’s content, can’t get their minds around it, or refuse to acknowledge it to further their own agendas.
Mosler is only one of many economists who understand what goes under the acronym, MMT, Modern Monetary Theory, these days. Others include most of the economic faculty of the University of Missouri, Kansas City and others in Universities around the world. The people who have done the most to publicize the misunderstandings of our current system, in addition to Mosler, include Stephanie Kelton, L. Randall Wray, Michael Hudson, Marshall Auerback, and William Mitchell. These individuals consult with governments around the world on the subject and have blogs on the internet in addition to their academic contributions.
The following is the Conclusion from Mosler’s book:
“The supposed technical and financial limits imposed by the federal budget deficit and federal debt are a vestige of commodity money. Today's fiat currency system has no such restrictions. The concept of a financial limit to the level of untaxed federal spending (money creation/deficit spending) is erroneous. The former constraints imposed by the gold standard have been gone since 1971. This is not to say that deficit spending does not have economic consequences. It is to say that the full range of fiscal policy options should be considered and evaluated based on their economic impacts rather than imaginary financial restraints. Current macroeconomic policy can center on how to more fully utilize the nation's productive resources. True overcapacity is an easy problem to solve. We can afford to employ idle resources. Obsolete economic models have hindered our ability to properly address real issues. Our attention has been directed away from issues which have real economic effects to meaningless issues of accounting. Discussions of income, inflation, and unemployment have been overshadowed by the national debt and deficit. The range of possible policy actions has been needlessly restricted. Errant thinking about the federal deficit has left policy makers unwilling to discuss any measures which might risk an increase in the amount of federal borrowing. At the same time they are increasing savings incentives, which create further need for those unwanted deficits.”
The following are my conclusions drawn from the work.
1. Any government with its own currency cannot go broke. The government does not need to borrow from the private sector or impose taxes to pay its bills. It simply uses keystrokes on a computer to debit and credit the appropriate accounts. Any limitation on the national debt can only be imposed through law.
2. Individuals and states in the US do not have their own currency so they do not operate under the same rules as the federal government. Hence, their budgets are constrained, whereas the federal budget is not constrained in the same way. Comparison of what individuals and states must do to what the federal government must do are erroneous.
3. Ignoring international transactions, when the private sector runs a savings surplus, as it is now, the federal government must run a deficit. It’s an accounting identity and has been proven by scientific observation of the spending and saving patterns.
4. Banks don’t take deposits and make loans from them. They make loans and then add to their reserves at the Fed from other funds on hand after the fact. If they don’t have funds on hand to increase their reserves, they borrow the money from the Fed or from other banks.
5. The main limitation that the federal government has in running up deficits and debt is the threat of devaluing the currency. This only occurs when the demand for goods and services exceeds the capacity of the country to produce them, not a condition that exists now. This condition leads to rising prices and devaluation of the currency. So, when the economy is booming and this condition occurs the federal government must impose additional taxes or retire federal debt to reduce demand to where it can be satisfied by existing productive capacity.
6. The statements made here are conditioned by international trade. International payments can change the balance between federal deficits and private sector surpluses. So, there are actually three sectors that must be considered. We have not gone into the ramifications of the third international sector here to make the essential points without getting overly complicated.
Other posts in this blog have identified resources for further investigation.
Saturday, October 13, 2012
When people are using their income to service debt they are not using it to buy the goods and services that sustain demand and grow the economy. If we continue on the path we're on the small elite that have the wealth to make the loans will receive most of the national income. Inequality will continue to increase, spending on goods and services that drive growth will diminish, and the economy will go into another depression. It's really not that hard to understand. We need to reduce taxes on earned income and increase tax rates on investment income to rebalance the economy and strengthen the middle class that creates the demand and generates growth.
A productive economy that furnishes goods and services and employs people requires credit to finance capital formation that is necessary to accommodate the increase in population and the advancement of technology.
But, there is another kind of credit that is parasitic on the productive economy, namely credit that is used to bid up of the price of assets through speculation.
Credit is always accompanied by debt. If credit for investment does not contribute to productivity increases and employment of a growing population, its accompanying debt becomes a drag on the economy. If earnings are used to pay interest on debt and retire principal they are not available to buy the goods and services an economy produces. Only if the economy benefits more from the investment than it loses from this drag on the economy, is the investment valuable to the economy.
If laws are enacted that advantage capital formation beyond what is necessary for productive investment, investors turn to speculation to sustain their return on investment. So there must be a balancing of taxes on income earned from investment and income earned from production of goods and services.
In the past several decades lower taxes on investment income have led to capital accumulation beyond what is necessary to finance production growth and investors have turned to speculation, primarily in real estate and stocks. As more loans are made to finance asset purchases at a lower interest rates, prices of assets like real estate and stocks are bid up. The increasing price trend reinforces this type of speculative investment. Investors use increasing leverage to take advantage of the opportunity until a point is reached where risks are being taken which jeopardize the entire enterprise. Finally, it comes crashing down, as prices stagnate and borrowers find themselves unable to service the loans. This is the financial crisis we have just experienced.
Sunday, September 09, 2012
One reason our political economy is so unstable is that there are many economic and political fallacies that are widely accepted in political circles and the press and continue to be propagated because they are challenged by only a relative few recognized economists and public policy advocates. Among these fallacies are the following:
1) Governments should behave like households regarding their budgets.
2) Deficits are bad, surpluses are good.
3) Government borrowing crowds out private investment.
4) Inflation is inherently bad.
5) Money for government spending must come from the private sector.
6) Government is the problem, not the solution.
7) Governments with their own currency can become insolvent.
8) The value of a country’s currency is an indication of its economic health.
9) The national debt can reach levels that can’t be sustained
10) Government debt is a burden handed from one generation to the next.
11) Unemployment is necessary
12) Unemployment is mainly a result of structural considerations, not lack of demand.
There are more, but I’ve gone on too long already.
My intent is not to write a tome on all of these fantasies but to present a few sources that introduce the reader to the nature of the problem. The first entries in the list are the most fundamental, later entries more verbose, detailed and complicated. The subject is complex, but getting into it slowly will ease the journey.
Thursday, August 30, 2012
A prior post explained how financial crises develop and the need for a government bailout of banks to prevent a complete collapse of the economy.
There are two ways governments could respond to a financial crisis. One way is to take over failing banks and restructure them. This involves creating new healthy entities that can continue to operate with only loans that can be serviced, and putting loans that can’t be serviced into new entities that will enter bankruptcy where investors and lienholders will suffer the losses. The other is to give the banks money to continue to weather the storm over a long period of time by investing the money in other areas and using the income to deleverage and write off bad loans as they occur.
Political reasons have dictated the second course in the case of the current financial crisis. The financial sector has tremendous political power through contributions to politicians and influence with the national press. Both political parties are subject to this lobbying pressure and succumbed to it.
The bailout funds from the government and through the Fed’s buying of troubled assets has been used by banks primarily to speculate in foreign currencies and invest in productive assets denominated in foreign currencies that pay higher interest rates. Funds that are not invested in this way are simply left in reserve accounts at the Fed where they earn interest.
The government has done little or nothing to reduce overall debt in the private sector by forcing banks to accept losses on bad loans. Again, for political reasons, it has not embarked on any significant government programs to create demand in the economy. Instead it has chosen to allow the financial sector to use government bailouts to generate the kinds of income described above to slowly, over decades of high unemployment, to allow the deleveraging process to slowly bring the economy back to health.
To compound the problem, government has done little or nothing to curb the excesses that caused the problem over the last several decades, in terms of reregulation of banks and investigating and prosecuting fraud that occurred in the financial sector. The financial sector continues in much the same mode it did before the crisis, threatening the reinflation of the asset bubbles that caused the current crisis.
So what can be done about this dilemma? Stay tuned to this blog.
Over the last several decades the private sector has taken on more and more debt, primarily in the real estate sector. Why has this happened?
The main reason is that many consumers don’t view debt as a problem as long as the servicing of that debt is within their budget. Furthermore, they don’t consider only their earned income when they assess their ability to pay service on their debt. They also consider the appreciation of their assets, and the possibility of refinancing these assets as their value increases to pull out money to service the debt. So asset appreciation becomes another source of income.
So, you might ask, are consumers really this smart that they can analyze their financial situation and come to these conclusions? The answer is that they don’t have to be. The financial sector will show them exactly how to do it.
The financial sector gets rich by making loans. As they compete to make loans they find ways to make them ever more accessible to consumers at lower servicing rates with schemes such as adjustable rate loans, balloon payments, securitizing the loans to hide risk, and pointing out to consumers that the appreciation of their assets will allow them to refinance over and over again to pull more money out of the assets to pay for servicing. This is the classic Ponzi scheme, paying servicing out of the appreciation of the asset, instead of out of earned income from a job.
The only problem is, eventually asset prices are bid up to way beyond their replacement value and the whole house of cards comes tumbling down as it did in the financial crisis. This can happen very quickly, but the cause builds very slowly, over decades. As more and more income is used to service debt, it is not available to create demand for consumer products. This results in businesses cutting back on expansion plans, research and development, and eventually leads to layoffs. The layoffs, in turn, lead to reduced ability to service debt, and a vicious downward cycle ensues.
Eventually, the financial sector gets in trouble as consumers default on their loans, or realize that their assets are no longer appreciating and income from refinancing disappears. This downward cycle accelerates and interlocking bank loans put the whole financial system in jeopardy. At this point the financial sector looks to government to bail them out, which it must, or see the whole economy come crashing down.
To be continued in future posts.
Tuesday, July 03, 2012
We have become one world. Communication, transportation, and commerce have weakened national borders and culture.
Meanwhile, world population continues to increase.
The choice to be made is whether private enterprise or governments will be allowed to dominate world affairs.
If private enterprise is allowed to dominate the world will end up like countries that now exist where an elite exploits resources and labor for their own benefit at the expense of the mass population. This will result in a few living a life of luxury while the mass population exists at a subsistance level or below.
If governments can be organized to represent the interests of the mass population, resources and the rewards of productivity can be broadly distributed to the mass population. This will necessarily result in a lower standard of living for the elite few to afford a slightly higher standard of living for all.
As world population continues to increase resource shortages will reduce the standard of living accordingly.
So, the dilemma is how to contain world population to maintain a comfortable standard of living and how to create governments that act in the interests of all instead of an elite few. It’s the problem humanity has had since it came to dominate the world. But, previously it operated on a national basis, with some nations doing better than others in achieving these goals. Now it’s a worldwide problem the must be confronted on a worldwide basis.
Thursday, March 22, 2012
Back when there was no internet, cell phones, or other portable devices there was only hardware and software, computer programs that ran on the hardware.
As more software became available it became divided into categories: operating systems, drivers, utilities, and applications. Applications were programs that were designed to do a specific task like word processing, spread sheets, graphics, etc.
With the arrival of the internet a specialized application called a browser was needed to access all the sites on the internet.
When smart phones and other mobile devices arrived, the size of applications became important, both due to the size of the hardware devices and the processing power that could be incorporated in them. The device size limited the screen size so less information could be displayed and limited the storage that could be made available. Also, the use of mobile devices took on a different complexion. These devices were more suitable to the use of information than the generation of information, having no full keyboards or other suitable entry devices.
Since the mobile processors and operating systems were different from desktop systems, software designed for desktops wasn’t easily portable to mobile systems, and browsers had to be adapted to the small screen, limiting their utility for mobile use. As a result, specialized compact applications became the software of choice for mobile systems. The name was soon abbreviated to apps and online app stores opened to distribute the apps to users. These app stores were the brainchild of the mobile operating system companies like Apple and Google, rather than the hardware manufacturers. In the desktop world applications were sold by the developers directly to the customers, some at quite high costs. Mobile apps, in contrast, were mostly given away free or at nominal costs, the difference being recouped from advertising, since the users were individuals, prime prospects for directed commercial advertising on mobile devices.
So, you might ask, why isn’t there an app store and apps for PCs and Macs. Well, there are. You probably just haven’t heard much about them because it’s a relatively new phenomena. Where you previously had to chase around to different internet sites to find the maker of an application, you can now go to places like The Best Free Applications and Intel AppUp to find what you want. The former allows most Windows apps to be downloaded from a single internet site, whereas the latter is an Intel program for Windows PCs similar to iTunes for Apple apps. In this case apps are downloaded and maintained with the AppUp program.
Earlier applications for desktop computers were expensive but few in number compared to the app market, which is low cost and high in number. So you will find only a few apps out of hundreds or thousands that are useful to you, making app stores a better way to market them.
Looking ahead, the wide variety of devices and operating systems is causing a rethinking of the app market. Some industry analysts are predicting a move towards device independent apps. The applications development industry is already moving in that direction with operating system suppliers providing development kits to app developers to make it easier for them to develop applications that will run on any kind of hardware.
Microsoft is taking a big step with Windows 8 to bridge the gap between mobile and stationery systems. The new operating system will have versions that run on both mobile and stationery systems and with touch, mouse, and keyboard user interfaces. So, you might want to experiment with Intel AppUP to see how apps work with your current PC. You will find some very useful apps from suppliers like Accuweather and nNews that will save you from chasing around to internet sites. But, there are a plethora of apps that are only of interest to a limited spectrum of users. Intel has done a good job of categorizing the apps to guide you to what you need. Intel also has a blog that covers new activity in the AppUp world.
Tuesday, December 20, 2011
Over the last several decades the rewards of productivity have gone to owners of capital, not labor. Automation has reduced the need for labor in manufacturing industries, driving down wages. Producers have moved production offshore to reduce labor costs even further. At the same time, the financial sector share of GDP has tripled. This has happened not only in the US, but in other developed countries as well.
What has been forgotten is what Henry Ford knew at the beginning of the twentieth century, namely that a thriving middle class is the source of most of the demand in consuming countries. When wages stagnate as they have in the last several decades, middle class buying power is destroyed. This may be in the producers interest if they can find buyers in other markets. But, when it happens all over the world in developed countries that supply 70% of world demand, it results in a sustained decline in the world economy.
No amount of money sloshing around in the pockets of a few wealthy people looking for a place to invest it will solve the problem. The only solution is to rebalance world wealth and incomes to put more money in the hands of people who will spend it, not people who save to invest. Until producers realize that that they need the spending power of wage earners to create demand, they are planting the seeds of their own failure. It’s time to start paying workers that spend their income a decent wage to rebalance the need of demand with the need for capital. If producers won’t do it, governments need step in and increase taxes of capital and reduce taxes on labor.
Monday, December 19, 2011
There has been a lot of study of the cause of the Great Depression and now of the current Great Recession. But, answers are clouded by studying primarily what happens after banks get into trouble. This overlooks underlying causes which may be more important. Nobel economist Joseph Stiglitz and Bruce Greenwald of Columbia University have been studying the underlying causes. Stiglitz has presented the results in a recent article in Vanity Fair. It’s a good read.
The scenario goes something like this. Technology improvements take place which increase productivity. This, in turn results in less labor being needed to produce the commodity. Too much labor leads to low wages, lost jobs, and reduced demand. The rewards of increased productivity go increasingly to the providers of capital. As capital accumulates, the return on capital is reduced, so capitalists look for ways to increase it. This usually results in buying up assets that can produce a revenue stream. Asset prices escalate and seeing this, investors buy up more assets to take advantage of increasing asset prices. This is the beginning of a bubble in asset prices.
Seeing a chance to make easy money, more people start investing in the asset bubble. Financial institutions are making money hand or fist from the new lending and capital is freely available from increased productivity and asset investments. The opportunity seems a sure thing so leverage is increased to increase profits dramatically. These profits must be invested to earn income, so banks seek to place new debt with less credit worthy debtors, and so are willing to take higher risks, which they offset by buying credit default swaps, a form of unregulated insurance not fully backed by the assets. Eventually the bubble bursts when these risky investments start to fail and the whole economic system is put in jeopardy by the threat of bank failures.
Only now does the analysis of what happened start. The first place analysts look is why excessive risk was taken on and why not enough liquidity is available to prevent a collapse of the economy. Governments are looked to for bailouts of failing banks. And we know the story from that point on. It’s a battle between people who think government spending is needed to sustain the economy and people who think it all happened because people and governments were irresponsible and what is needed is austerity measures to teach the irresponsible a lesson. The underlying problem has been long forgotten in the process.
The Underlying Problem in the Great Depression
Prior to the banking problems in the great depression, the economy was largely based on agriculture. As technology advanced, farmers were able to produce more food with less labor and the same size farm, so farm commodity prices fell and fewer farmers were needed. But switching from farming to an industrial job was not easy. Most farmers had only an elementary school education, so they continued to do what they knew how to do, farm. With less income per acre, they needed more acreage and loans to buy the acreage. But, this just compounded the problem. More production meant even lower prices and now they had bigger loans to pay off. And a drought in many parts of the country made things even worse. So many of these farmers ended up losing their farms and ended up unemployed. The unemployment among farmers, a large segment of the economy at the time, meant reduced demand for products and service produced elsewhere in the economy, resulting in unemployment there. Banks foreclosed on the farms, but with more production than was needed, banks took losses on the loans. And, the excess of labor and lack of new projects to employ them meant a drop in demand for all goods and services, driving the economy into depression.
The Underlying Problem in the Great Recession
In our current recession the underlying problem was increased productivity in manufacturing, hence less required labor, and moving much of the manufacturing sector overseas where labor costs were much lower. Again the rewards of productivity increases went to capital and wage income stagnated. Capitalists, flushed with newfound wealth looked for places to invest. And consumers, whose wages had stagnated looked for other ways to make ends meet. Investment in land and construction soon supplied the answer. Average homeowners soon saw the opportunity to increase their income by taking loans on the increasing equity in their homes, and banks, flushed with cash saw another opportunity to make a killing leveraging up on riskier and riskier loans and unregulated insurance. The rest is history, and we know who governments bailed and who is picking up the tab.
So, What is the Solution?
Stiglitz seems to think the solution is to put people to work by embarking on new projects to employ them and education to equip them for new jobs. Just as the war economy pulled us out of the Great Depression by creating new jobs for the unemployed, we can create new jobs for the current unemployed by investing in infrastructure which has deteriorated for lack of maintenance and in research on promising new transportation, communication, and energy technology. But, just as the war required massive government spending and increased government debt, we need to accept greater debt now to ensure a healthy future economy that can pay off the debt. And, just as the economy after the war required higher taxes on those who could afford to pay them, the same will be required now from people who have profited handsomely from years of productivity rewards, the bubble and the ensuing bailout.