Incumbents, elites, will be a very hard sell

Incumbents, elites, will be a very hard sell

70,000 years ago human beings did everything using their own muscles, from digging roots to carrying things.  Sometime in the last 5,000 or so years, human beings domesticated horses and oxen which human beings then used in place of their own muscles whenever possible.  Over the last 300 years human being began to replace horses and oxen with steam and internal combustion engines.  The change from human muscle to power work to horses and oxen and then to machines was an obvious improvement to anyone relying on the older method (save some who claimed to be too old to change or who. would not change for religious reasons or who had too much of an investment in the old approach).  So the movement from human muscles to machines took place because each step was more efficient or productive than the last way of doing things.  (NOTE wind mills were first used about 3,000 years ago and water wheels some 2,400 years ago, electricity less than 150 years ago and nuclear reactors about 75 years ago.   Each source of power was integrated into use fairly quickly. However, these substitutes for human and animal muscle require location and material investments.)

 

 

Change in social, economic, and political arrangements and power, however, haven’t been as quickly embraced because those who exercise power in economic, social or political contexts don’t want change; for change means those in power think they will lose it.  The Queen of Hearts cry “Off with their heads” is all too frequently heard by incumbents during a revolution.  And revolutions are often required for political, social and economic change (and religious change in some cases).  Besides, most economic elites seem to think economies are zero-sum games when in fact the more participants the greater the wealth (goods, services and money) available to be divided among the participants.  Most political elites seem bent on maintaining their control regardless of the costs to their wealth, ideology, religion, or socioeconomic status.  Besides the vast majority of political elites have poorly treated others to the point that the elites fear retribution should they relinquish power.

 

Generally, those with social power have overlapped with those with economic and/ or political power.  Generally social elites have been the bulwark of maintaining the order or the status quo — conservative or reactionary.  What social elites have to loose with change is status and deference by others.  Hence, social elites risk becoming ordinary human beings when social change is implemented.

 

In addition, alternatives to existing social, economic and political arrangements are not easy to envision for there are no examples or scant and ill formed examples to demonstrate the alternatives.  There are, however, a variety of alternatives at any given time in history–socialism/capitalism/communism, monarchy/republic/dictatorship, hierarchical/egalitarian and secular/sacred.  Unlike the replacement of human muscles by horses, machines and even computers there are no examples of working alternatives to existing social, economic and political “arrangements” for people to examine or witness.

 

Compound all of these impediments to changing some social, economic or political arrangement with the fact that human beings are creatures of belief before they are prone to accept and use evidence and well-reasoned argument and one has almost an iron clad warrantee against change.

 

Let’s begin with an assumption about human behavior.  People tend to try to hang on to what they have and try to get more.  That is people are conservative and not satiated with what they have; they always want more.  This largely says the same thing as the economist ‘ s assumption that people’s wants are never filled.   History, generally, shows improvements in our standard of living with both technological and egalitarian improvements.   Yes, in Sapiens: A Brief History of Humankind Harari, among others, presents a strong case for the worsening of the human condition as a result of giving up hunting and gathering for agriculture.  And any number of observers would strongly argue that the revolutions of the proletariat were disasters former Soviet Bloc countries and China.  However even with local (in history) blips the human condition has improved with technology and real inclusion (equality).

 

So, I would argue here that democratizing money creation is, while less than obvious, the next logical step in expanding participation in the economy—improving, on the whole, the human condition by making as many people as possible full participants in the economy.  The existing ideologies-liberalism and conservativism-both approach the way to move forward and improve the human condition as a tug of war involving taxes and government programs.  Unfortunately, that tug of war has led to greater inequalities, discontent, institutionalized poverty and divergence from the equality values proponents of both claim to share:  life, liberty and the pursuit of happiness.

 

As I have presented elsewhere in this blog creating new money by depositing in citizen’s financial accounts will necessitate a smaller government footprint by eliminating the need for most catch-all social welfare programs.  A smaller government footprint will reduce the sheer number of areas in which that tug of war will be played out and the government’s need for taxes.  Recall, the scheme I propose provides governments with new money too.

 

However, as I asserted at the beginning of this installment there are no existing models one can point to as examples.  Hence it will require a massive sales job.   Ironically, in the American context, those in power are the safest from any changes democratizing money occasions.  The average citizen pays little attention to political matters.  The average citizen tends to vote in the next election the same way he and she did in the last election.   Most incumbents enjoy a 95% reelection rate.  To say their seats or positions are safe is a mammoth understatement.  However, it is those incumbents who have to act to make the democratization of money a reality.  If they do or don’t they will be reelected.  They fear primary challenges and opposition party challenges.  Yes, the evidence is neither a same party or opposition party challenger is particularly successful.  So the incumbents who know how to work the socio-economic system to their political advantage will tend to shy away from changing that system.  Ironically, they would probably enjoy a larger rate of reelection immediately after they put forth the change to democratize money.  They would enjoy that increased electoral safety because their potential opponents would be caught with their proverbial policies down—there would be very little for opponents to run on— “I’m a better choice for I never would have given you a safe and secure income flow.  Elect me and I will repeal it.”  Yet, incumbents will be a very hard sell.

The Impact on Immigration Policy

The Impact on Immigration Policy

 

While an over simplification, family unification comprises more than 70% Of all legal US immigrants; and, the US admits 10 times as many resident immigrants as all the rest of the countries in the world combined.  The reasons for immigrating to the United States may be as numerous as the number of immigrants, but the reasons seem to boil down to three: freedom, economic opportunity and family unification.

 

Ironically the main reasons illegal immigrants come are freedom, economic opportunity and family unification.  The difference is the legal immigrant had the resources and time to go through the “process of waiting.”  Generally, the illegal takes jobs for which those already here don’t even apply-agricultural and other “menial” jobs.  For example, in eastern Washington State one apple grower told a news reporter that it had been decades since a non-Latino had applied for a job on his farm.  The implication is that Latino applicants were illegal immigrants.  That is probably not 100% correct.  But it illustrates the point that were there not employment opportunities illegal immigrants would not come in the numbers that they have historically.  Indeed, estimates of the number of Mexican illegals over the past few years, during the current protracted contraction, have declined and even reversed with more Mexicans returning to Mexico that crossing illegally into the US.

 

Given all American citizens would receive new base money in their accounts, America, if possible, would become a more attractive place for immigrants.  But, only if they became citizens.  Illegal immigrants would not have increased reasons for coming unless one thinks that more Americans would choose to live on their base money deposits and more employment opportunities would be available to illegal immigrants.

 

This raises explicitly the question of what motivates people to work or not work?  Economists tend to assume that peoples’ wants are insatiable.  So that chain of logic leads to people with regular base money deposits in their accounts will seek ways to get more money.  Most of these ways involve gainful employment.  Indeed, as I argue elsewhere in this blog, base money deposits in the poorer voters’ accounts may give them the necessary resources to apply for jobs.

 

I know there is a line of thought that the poor do not work because they are satisfied living on welfare, unemployment and other “government handouts.”  Since welfare, unemployment compensation and other income support programs will be replaced by new base money deposits into voter’s accounts, at least those satisfied to live on that resource will no longer be taking transfer payments from tax payers who believe those not working do so because they would rather live on our tax dollars.  So, even if a voter chooses not to work, so what?  The non-working voter costs society only the lost production from his or her laziness and not tax dollars from the rest of us (but, I am retired and would probably fall into that lazy group.  However, after writing all of the words in this blog and more which were edited out, I am tired and need some time to be lazy).

 

So let us return to illegal immigrants.  If they have no hope of receiving base money deposits and welfare is no longer in existence, why will they still come?  They will still come for freedom, economic opportunity and to unify their families.  If you think about it, we provide the freedom and economic opportunity with our capitalist system and our democratic constitution.  Our basic creed is that in America all are free, equal and have the same opportunity.  They believe we mean it.  We do mean it, “kinda.” However, the part we seem to get hung up on is when it comes to sharing our freedom and opportunity.  For we seem to view freedom and opportunity as zero-sum situations.  They are not zero-sum situations for the more people who enjoy freedom with us the more secure our freedom is.  The more people who enjoy opportunity with us, the more opportunity and wealth there is for each and all.  So, if we really meant that everyone is free and has opportunity we would not cry out for fences, deportations, jail terms and the like for people, in the face of massive unemployment in America, manage to do the apple piking and other harvest work for which you, my fellow Americans, and I refuse even to apply.

 

You can have whatever restrictions on immigration that you want.  I would advise an alternative route.  Let anyone who wants to become a citizen go to an American embassy or consulate and apply for citizenship.  Setup a test similar to what is used now and continue with the same background checks.  Then when an applicant meets the qualifications, swear him or her in, get their account information and have them register to vote in the jurisdiction of their choice.  Or set up a voting district for non-resident citizens.  Either way works.  Then those who were immigrating for economic reasons can stay where they are and not have to come.

 

Consider the possibilities for eventual new states.  I should think that the lure of a steady income of base money will drive a majority in most places to become Americans. Then, realizing their strength in numbers, they will take over that country’s government through elections and petition for statehood.  If America is what it says that it stands for, it will eventually encompass the world.

 

A little inclusion can go a long way.

One Reason Private Money should be excluded from Politics

One Reason Private Money should be excluded from Politics

 

I went in for a follow-up visit with my pulmonologist the other day.  As it happens, the conversation took a political twist.  I made the statement that Obama should have pressed for universal health coverage after the fashion of the UK and Canada.  She replied that if we had that people would have to wait for dialysis and other forms of treatment because of the sheer numbers.  She said one would achieve equality but the tradeoff is you would make those who need treatment wait unless they can buy it outside of the system.   So, she asserted that one would have an egalitarian system but the rich would still be better treated because they would get private treatment. She is right.  Universal health care in the US would still be subpar and the rich would still get better treatment.  However, it would not be equal for under the existing system of campaign finance the US “enjoys,” the rich consisting of corporate, union and incredibly wealthy individual donors determine how and what public policy is written—laws—by using their money to pick candidates to their liking and which candidates either will do their bidding (through the use of lobbyists) or who are predisposed to their positions.   She is right because in the United States the rich make the rules, the laws, through their private contributions to politicians running for office or re-election; and, the rich finance public advertising campaigns asserting this or that.

 

Just as campaign contributing donors would write the rules for universal health care, as they have for most policies over the history of the United States, they would write the rules for the plan in this blog for distributing new money to citizens.  The growing concentration of wealth in the US (and other countries for that matter) and the growing disparity between the income of those with wealth and the rest of us, is the strongest evidence to demonstrate the validity of the proposition that if the campaign contributing donors write the rules, there will be more opportunities for them to increase their wealth even further as the plan for distributing new money to citizens is detailed and passed into law.  But what if the rich did not make the rules?  What if we made private contributions to campaigns illegal, all gifts of any kind to candidates for office illegal—call a bribe a bribe?   And we went further and make candidates spending their own money or resources on campaigns illegal?

 

So, step one in implementing the plan for distributing new money to citizens is to reform campaign election financing and take big money out of determining candidates, outcomes and public policy—make it illegal for any use of private money or resources to support an election or reelection to an office or in support of any ballot proposal.  In short, if the US is to achieve electoral equality and not have public policy favoring the wealthy, private money has to be taken out of elections.  So, my digression into campaign finance is not as much of a digression as one would think at first blush.

Economic Policy Impact of an Egalitarian way to Create New Money

Economic Policy Impact of an Egalitarian way to Create New Money

 

US economic policy has three consistent goals (not in the order of importance): growth (or sustainable and increasing productivity), full employment, and a stable dollar (or no to little inflation). While foreign trade, transportation, energy, education, immigration and defense all have major impacts on the economy, these and other policy areas are classically treated as separate policy areas. It is a bit strange that the US House and Senate have committees dealing with most of these policy areas, neither chamber has a committee devoted to the economy and a coherent economic policy unless one considers the two appropriations committees fiscal policy economic specialists. Rather responsibility for nation’s economic policy, primarily monetary policy, rests with the Federal Reserve Banks, the Securities and Exchange Commission, state banking agencies and state and federally chartered banks in all states and territories. Yes, this means that economic policy is primarily viewed as monetary and fiscal policy (monetary policy is essentially under the direction of the Fed and fiscal policy suffers from Congressional inattention).

 

However, regulation of business practices falls in the field of growth, full employment and a stable dollar: bank regulation, environmental regulation, Consumer Protection Agency regulations, Justice Department fraud and other units, drug and pure food regulations, the National Labor Relations regulations and decisions, the Federal Aeronautical Administration, just to name a few types of economic regulations. In a nut shell commerce needs to be monitored least it produce too great a quantity of negative externalities or commit too many out right criminal acts.

 

If the US were to adopt a policy of depositing base money into voter accounts, there is little likelihood that the regulatory aspects of economic policy will chance significantly. However, it is highly likely that the goal of full employment will become moribund for every voter should have the means for securing employment; this is not to mention that producers and retailers responding to a rightward shifted aggregate demand curve will be in a constant state of needing new employees.

 

Growth will be realized consistently over time. Inflation will be “worrisome” to economists trapped in a money backed by debt frame of mind. However, historical bumps in the money supply have not resulted in inflation. So while there will be a great deal of nervousness and anxiety, other than an initial blip in prices, a stable dollar will continue.

 

What the Feds and economists fail to recognize is tastes, technology and other such factors are rooted in the ability of consumers to buy. The larger the share of the population that have the where with all to purchase discretionary items, the shorter the time those items will remain discretionary. So, increasing the consumer base increases demand for everything. Apparently, an opportunity for all to have a higher level of consumption will be the new economic reality.

How the system might work.

How the system might work.

 

The voter registration system maintained by local units of government would remain in place. The only new information required would be a box to mark for direct deposit, an account number and financial institution’s routing number if the voter wishes direct deposit. If the voter does not wish direct deposit, then the voter’s address, already on file will be used for mailing a check to the voter for his or her participation.

 

The local election authority already keep account of voter’s participation. Participation, banking and address data will be forwarded to the regional Federal Reserve Bank which will route money to the voter’s account in a financial institution or send a check to the voter’s home.

 

This will be done on a bi-weekly or monthly basis (weekly would be fine too, as long as the payments are equal and regular).

 

The dollar bill along with higher denomination notes would not have to be modified in anyway shape or form.

 

Initially one would expect a run on voter registration sites as citizens who have not participated (lack a current voter registration) hurry out to register. After the initial rush only newly eligible voters will constitute the traffic at voter registration sites.

 

Ballots will not have to change either. Presently, depending upon one’s state, one can physically go to the polls or mail in a ballot without actually voting in any given contest. Such votes are “votes for none of the above” in every contest unmarked/selected. That feature is essential to maintain freedom of choice.

 

In jurisdictions that require more than a simple plurality of votes to determine a win there may need to be some “rules of the game” modifications to account for large numbers of “votes for none of the above.” As disaffected as large numbers of citizens become from time to time jurisdictions might want to consider if they really want to operate without a judge, sheriff or treasurer (they pay bills). If not some decision rules may need to be changed.

 

As local voting authorities report votes by jurisdiction (polling places), the Feds can determine how much base money to deposit into government accounts on a monthly basis (governments need a regular cash flow, but will not need weekly or bi-weekly cash infusions) based upon the number of voters in each type jurisdiction and the amount allotted for each type of jurisdiction. Supposedly, governments are used to a longer interval between cash receipts. Obviously, local units of government will need to share account numbers and routing numbers with the regional Feds.

 

Under the Constitution individual revenue from voting would not be taxable. Taxing such payments would constitute a poll tax. This is not to prohibit governmental units from taxation altogether. However, it is conceivable that taxes as a source of governmental revenue would become the exception rather than the rule. However, that is an entirely separate issue.

The impact of the new money creation system on government programs

The impact of the new money creation system on government programs starting with Social Security, Unemployment Insurance, and other income maintenance and supplement programs

 

Most, not all, government programs making direct and periodic payments to individuals to maintain or supplement personal income can be phased out or simply eliminated. Since citizens will be receiving around $12,000/year (this figure is not set in stone, it is a first approximation for discussion as invariably the amount will become a stumbling block, so this is just for discussion) as new money is created, all those whose combined receipts from all government programs, say food stamps, rent subsidies, unemployment stipends and the like can simply be switched from those payments to the new system. Since those programs are designed to provide resources for folks who otherwise would have none, receiving newly created money would provide them with needed income.

 

The same is true of Social Security, SSI and the like. The initial impact will be to remove present and future obligations for unemployment insurance, old age pensions, income for workers who become disabled and can no longer work from the federal government’s budgetary obligations. At the same time add no further people to those programs. Hence, what we now know as old age pensions, disability (SSI) and economy caused (unemployment) emergency assistance will no longer be necessary and can be phased out. For every citizen will have an income from their political participation-voting.

 

For those currently on federal income, food and shelter assistance whose combined individual federal payments exceed $12,000/year, simply reduce the existing federal subsidy/welfare payments to the amount in excess of new money creation those individuals will receive. Again, no new people will be placed on the rolls of these programs.

 

Indeed, a government safety net or a social welfare security system, often confused with a socialist approach to government will be a shadow of its former self. Largely, it will remain only necessary to provide assistance for the most extreme cases, for example assistance for those with severe physical, intellectual and emotional disabilities. For most infirmities, programs already exist. It would make sense to examine those programs with an eye to providing the fullest assistance to integrate those qualifying individuals into the greater society; and, with the intent to continue assistance to make sure that these individuals can make the fullest participation and contribution that they wish. However, if these individuals participate politically, vote, they should receive new base money as any other participating citizen.

 

Currently both employees and employers pay taxes to support retirement and unemployment programs. Under the plan to create new money through political participation, neither set of taxes would be required and should be phased out as soon as it is feasible to do so. Indeed, state and federal agencies devoted to food and rent subsidies, unemployment insurance and job searches will be retired as well.

 

Generally what are considered transfer payments will become a thing of the past.

 

Monetary Policy & Fiscal Policy

 

Monetary policy refers to central bank (the Feds) operations to increase and decrease the money supply. Those operations include buying and selling securities (normally US Treasury obligations) from and to banks and security dealers, setting reserve levels for banks, operating a discount window (where banks can borrow funds, normally as a last resort), and setting the interest rate that banks can charge each other on overnight loans. In addition, the Feds make periodic statements that are intended to signal financial and business components of the economy what those components should be doing (jawboning). All of the activities attempt to impact the economy at large in attempts to promote growth and employment and maintain a stable dollar (keep inflation in check and deflation at bay).

 

The economy feels the impact of Fed actions after a delay. It takes months for new base money to impact the economy. Ironically the term trickledown economics applies to Fed attempts to stimulate or dampen economic activity in the economy. The Fed deposits new base money into a bank’s account. The bank processes loan applications and makes loans. The borrower, if a business, undertakes, say, an expansion. Then months later new hires at the business start getting pay checks.   Then, and only then, are the new hires in a position to start spending. Remember, and this cannot be over stated, consumers drive the economy! So until money is in the hands of consumers the Fed’s attempt at stimulating the economy does not actually have any success. The converse is also true if the Fed’s attempt to slow growth by selling Treasuries or calling in bank loans, there is a lengthy delay until consumers feel the pinch with lost jobs and stop or slow down buying. (Notice here that decreasing the money supply costs people jobs. This is not well understood for it is “awkward” to acknowledge the pain and toll of lost jobs (which also means lost livelihoods and abilities for those loosing their jobs to support themselves and their families).

 

The way monetary policy works under the present system is an attempt to indirectly manipulate overall economic activity with a 12 to 18 month delay in the impact for any given manipulation. Monetary policy attempts to manage the entire new base money supply and through it the multiplier of bank money.   It is not clear that the entire money supply needs to be involved to attempt to influence business and financial activity. Rather, marginal adjustments in the money supply might be more appropriate. Marginal adjustments to the money supply might focus on specific uses of bank money. Yes, more regulation of banks. However, the Fed would only regulate new base money after the fashion that banks use to regulate consumers-collateral. Say the Fed wants to stimulate building houses. Then it might require banks to demonstrate, with mortgage contracts that it is making such loans to continue receiving and using new base money supplied by the Fed. On its other deposits the bank would not be so constrained. Hence, the Fed would be operating at the margin in a specific sector of the economy. By the same token, the Fed might require banks to change their loan portfolios (asset mix) to qualify to use new base money. Or, the Fed could use differential rates for loans for differing purposes. If all of this sounds familiar it is because it is close to what banks require of their loan applicants. In short, the Fed would be using monetary policy at the margin and incrementally rather than as the blunt instrument it currently is.

 

Fiscal Policy

 

Fiscal policy in the use of government expenditures and revenues (taxes) to influence aggregate demand in the economy. There are side issues of resource allocation (stimulating home ownership with tax breaks/deductions), and income distribution or redistribution (taxing those with incomes to make direct and indirect payments to those with little or no income-welfare, for example). However, the main focus of the elected branches fiscal policy efforts is attempts to influence aggregate demand in the economy.

 

While aggregate demand should be a goal in an of its self, economists and policy makers muddy the waters by asserting that striving to manipulate aggregate demand is to achieve all or some of other objectives: price stability, full employment and economic growth.   Notice the similarity of the goals of fiscal policy with those of monetary policy. It is important to keep in mind that actual laws that comprise fiscal policy often impact or are intended for other policy reasons. For example a tax deduction for interest paid on home mortgages increases aggregate economic demand (and specifically demand in the housing market) but it also encourages more citizens to have a larger stake in the political system. Let us look at each of these supposed goals in turn.

 

Price stability is a euphemism for near zero inflation. Inflation is deemed to be bad because it erodes savings, is a viscous cycle of price-wage increases and devalues capital resources. If prices decline, deflation, another viscous cycle of price cuts-lay off occurs. Notice that wages plays a central role in these cycles. To put it another way, personal income fluctuations play a central role in these cycles. So, price stability is actually an attempt to maintain wages and their buying powers.

 

Full employment as a goal of fiscal policy manipulation of aggregate demand is a recognition that if all actors in the economic system have income, the system will function better. Full employment is not the goal, citizens all having livable levels of incomes that allow all to participate in economic transactions is the goal.   Since income is simply cash flow, full employment represents the case where almost all economic actors have sufficient cash flow to participate, spend or consume. Full employment also represents a close to optimal production level, holding all other things constant. Optimal production levels are also closely associated with maximizing profit in a firm. Hence, the connection between full employment and profit maximization in firms is understandable to and desirable for the business world.

 

Unfortunately, full employment does not begin to approximate maximum profit levels for firms. However, the greater the proportion of the population that has an income that can support the individual and his or her family (dependents using tax code nomenclature, children using common sense language) and that income is both regular and dependable, the more growth the economy will exhibit. As the proportion of the population has a livable, regular and dependable (predictable) income, firms will experience increasing profits, again holding all other things such as technology and tastes constant.

 

That leaves economic growth as the final justification for fiscal policy to manipulate aggregate demand through government spending and taxing. An economy can grow in absolute number of transactions, the value of those transactions or by the proportion of potential actors taking part in economic transactions. Unfortunately we have historically measured growth in the value of transactions in dollars or adjusted dollars to a given base year-summarized in gross domestic product. While it is true that the value of annual transactions tends to go up-grow-as the number of economic actors increases, it is also true that the value of annual transactions can also increase in real or adjusted dollars by having a fixed number of economic actors engage in more transactions. Further, the value of annual transactions has increased as a result of fewer transactions and fewer economic actors because of “increased productivity.”

 

So growth, per se, is a strange and amorphous goal that can lead to price declines and employment declines. To be a realizable goal of fiscal policy, growth needs a better, more focused, definition. Tentatively growth will become defined in terms of improvement in the least advantaged sector of an economy. The late President Reagan once said “A rising tide lifts all boats.” This phrase was actually popularized by President Kennedy some decades earlier. However, if one does not have a boat, a rising tide can be the event that drowns one. It is strange that economic growth in the present system can be applauded when it causes pain and suffering in some parts of the population.

 

Increasing or attempting to manage aggregate demand is a legitimate goal in and of itself. First let us postulate that increasing aggregate demand involves starting where demand is weakest and increase it there first. Then, increase it where it gets stronger and stronger. In effect we need to increase demand the most where it currently exists the least. In effect that would be to increase demand at the margin. If a person has $5 and he or she receives an additional $5 that person’s demand for goods and services is likely to double. However if a person has $100 and he or she receives an additional $5 that person’s demand is only going to increase incrementally. And if a person has $1 million, receiving an additional $5 has no effect on that person’s demand and is likely to be a bookkeeping nightmare for that person. So, depositing an equal amount of money in every voter’s bank or credit union account will increase both aggregate demand on a regular basis and increase demand differentially. The more wealthy voters become the less aggregate demand will stimulate the economy. Voters’ marginal propensities to consume is a built in break on wild economic growth.

 

This work recommends an income for every citizen of $12,000/year. That may not be sufficient. It may require more. Politically it may end up with less. Some will recommend less. Regardless, it is unlikely a citizen’s income from new base money deposits by the Fed will satisfy everyone’s wants and needs unless economists have been dreadfully wrong about people having unfulfillable wants.

 

Minimum wage laws

 

Since people generally want more, a base income of $12,000/year is unlikely to dissuade many from working. In the State of Washington, at this writing, the minimum wage is just under $10/hour. If a person in Washington were employed full time at minimum wage, his or her annual income would be close o $20,000/year. So, the proposal of depositing $12,000/year in voter’s accounts would mean that a person currently employed at minimum wage in Washington State would double his or her income (recall the $12,000 deposited in a voter’s account is not taxed). However, a person currently working for minimum wage presumably does so because he or she cannot get a higher paying job. The person also presumably needs the income his or her minimum wage job provides for his or her livelihood. So, with the cushion of $12,000/year in base money deposited in his or her account, would the person work for more, less or the same wage he or she is presently earning? I, quite frankly, do not know. What about you? What would be the practical impact on you wage or salary demands in the market place? However, I will speculate further.

 

Minimum wage laws protect the worker from some exploitation by employers. Since the median worker is dependent on his or her income, he or she could be coerced into taking less; or, he or she could simply be terminated and replaced with someone willing to work for lower wages. Essentially, minimum wage laws set a floor on wages that minimizes coercive labor practices by employers. So, would those laws need to remain on the books as currently written? I suspect not. But, they will become superfluous; for, employee’s base income from voting will make it possible for employees to walk away from employers using predatory practices. Indeed, with the elimination of unemployment premiums and social security taxes, it is likely that employers will be more willing to pay slightly higher wages initially.

 

Then too, since every citizen has a “cushion” it is likely that wages will have to increase to entice citizens to enter (reenter) the work world. Indeed, given the stimulus to aggregate demand, employers will need to find ways to attract and retain employees. So, minimum wage laws will go by way of the blacksmith–become a small and seldom used part of the employment environment.

 

At this writing (2012) the US economy is in the fourth year of a contraction. The unemployment rate is around 9%. News stories report that employers with job openings are asking only people currently employed to apply! It is as if unemployment were contagious and if one hired a formerly unemployed person the hiring firm would go out of business because of the contagion. Could it be that employers are afraid that the unemployed workers caused their former employers to go out of business? This is an interesting way to dodge management responsibility.

 

 

The economic (and perhaps political) impact of creating base money through political participation

The economic (and perhaps political) impact of creating base money through political participation

 

Initially new base money “appearing” in voter’s demand accounts in financial institutions will be an economic stimulus–a shot in the arm to the national economy. Economists, politicians, new analysts and the Feds all claim that the American consumer drives the economy. Well, consumers will uniformly have more money to spend. And, the base money voters receive will come in as regular as clockwork,   providing they vote and show up for jury duty. Will they spend it? A significant proportion will make new expenditures, some will begin to pay off debts faster, and some will save. As far as the overall impact on the economy, demand for goods and services will increase (the demand curve will move to the right and change slopes slightly). Since supply of goods and services will initially remain close to stable, prices will initially increase.

 

The supply curve is not likely to remain unchanged. Indeed, it will shift to the right in response to the increased demand and the movement of the demand curve to the right. Historically shifts in the supply curve have been governed by the availability of funds (loans, investments and profits) and external events (war and natural disaster come to mind). Not surprisingly, funds will be available. Business, if anything, is not slow in gearing up production to meet “new markets.” Businesses will demand new labor. Unlike “normal contractions,” the period at the beginning of new base money deposits in voters’ accounts, will find businesses clamoring for new hires. Rather than waiting for banks to signal that an expansion is beginning, businesses will see the increased demand for all goods and services and real property and lead the expansion.

 

Under the present system of money creation the US maintain up to 10% of the population living at or below the poverty level. Under the present system, over the past century, of money creation the “official” unemployment rate fluctuates between 5% and 25%. The real under-employment rate and unemployment rate are much higher. Poverty and both under employment and unemployment are results of insufficient individual incomes. Poverty by definition is a result of lack of monetary resources. Strangely, the unemployed are unemployable because they are unemployed. Businesses actually advertise positions with the caveat that only the presently employed will be considered. Hence, because the unemployed do not have an income, they remain employed. Also, along with the under employed who cannot take time off to look for full time positions, the unemployed face loss of actual or qualifications for income supplements such as food stamps, rent-heat-electric subsidies and eligibility for Medicaid. And that is not to mention either loss of unemployment benefits or assistance from private charities.

 

Given that both the existence and rates of poverty and both unemployment and under employment are functions of the business cycle and the way we presently create base money. The current system must be replaced.

 

With the initiation of the new system for creating money directly in citizen’s bank account and after some fluctuations in prices and the initial growth stimulated by adequate cash in consumer hands, the economy will return to normal with two modifications. First, swings from boom to bust will be flattened out as consumers, not banks, will determine the supply of money which will be steady and predictable. Second, as financial sector firms take risks and fail or overextend themselves and cause crises, those failures and crashes will impact a smaller segment of cash flow than under the current system. We will move from an economy that can be described as “fragile,” to one where sectors can be fragile in an overall robust economic system.

 

In a sense, moving to a money supply backed by citizens’ participation at the polls from the current system where the money is backed by “In God we trust” and based solely upon debt, is similar to our having moved from a money supply backed by gold and silver to one in which the money supply is backed by “In God we trust.” Indeed, one might think of is as returning to a monetary system backed by something from a system in which the money supply is backed by the legal requirement to accept notes “as payments for all debts public and private.”

 

Value in objects (goods) and actions (services) stems from two sources. The first is the labor, effort, time and skill that some one or more persons devotes to that object or activity adds value to it. Read Adam Smith’s discussion of pin making to see the extent of value added and note the multiplication of value by specialization in The Wealth of Nations. Put simply, man or woman drawing out wire, cutting it, fashioning a head an sharpening the other end makes a lump of metal have more value-a specific value because of the uses to which it can be put after the man’s or woman’s effort-than it had as a lump of metal.

 

The second source of value comes about because another person wants the fashioned pin for any reason utilitarian, decorative or even religious.

 

There is an interaction between the fashioner of an object or activity and those who desire that object or activity but have not fashioned it themselves that increases the net worth of the object or activity over the fashioning itself. This is to say without the organized structure of a market there would only be marginal value added by fashioning an object or activity for one’s self. Further, without the protection of ownership and insurance of an equitable way to transfer ownership, government, the value in the object or activity would remain marginally more than the object in its raw state or the activity simply being acted out. Hence, the political process that is government along with a market allows, nay facilitates adding value to objects and activities.

 

In a very straightforward manner value comes from individuals organized in markets and from governments. What both political and economic observers have failed to recognize is that the greater the number and level of involvement by individuals in both the market and the government the more value those people create. The present money creation system systematically excludes or restricts the participation of whole groups of individuals from both the market and politics (governing).

 

It is strange that a socio-politico-economic system which values equality, compassion and individual responsibility to the nation would choose a non-egalitarian, cold and irresponsible manner for providing all members of society with the means to full participation.   Depositing new base money in the accounts of banks and securities dealers is elitist, harmful to the most vulnerable in our midst and as responsible as having the fox guard the hen house.

 

Notice that by having the Fed deposit new base money in voter’s accounts the system becomes egalitarian. This will encourage participation. Some will argue such encouragement is voting for the wrong reason. In fairness the mere act of voting will make some citizens more attuned to current political activities. Since increased citizen attention will occur, how is that a wrong reason to vote? This is nothing more than a which came first quibble. With political participation will come ownership or a tangible stake in America for the poor, unemployed, under employed; and they will have resources with which to have a fighting chance not to suffer because bankers or securities dealers over reach and crash.

 

Responsibility for public policy-laws and actions of governments-rests with voters. After all, voters put representatives, executives and in some jurisdictions, judges in office. However, voters do not have the resources to counter irresponsible actions by banks and other corporations in between elections. If, however, citizens had the cash they could vote with dollars in the market between elections. Who is to say that at least some richer citizens might not choose which financial institution will receive their new money deposits based upon lending policies?

 

 

Democratize America – A side issue for this Blog (funny how money plays a role here)

Democratize America – A side issue for this Blog (funny how money plays a role here)

 

In all the patriotic fervor of teaching American history, we often down play the fact that the Revolution was led by wealthy, educated men. The same wealthy, educated group of men wrote the Articles of Confederation and the Constitution. What they came up with is a republic-a representative form of government.

 

Under the Constitution, representatives are assigned to the states based upon population with the provision that each state shall have at least one representative and exactly two Senators.   While the Constitution starts out with “We the People” the constituent parties to the Constitution are the states-“in Order to form a more perfect Union (of states). The States, former colonies, joined together. They had already coalesced in 1774 under the Continental Congress to jointly prosecute the war (rebellion) against the British. The states’ leaders were of like mind in realizing they needed to maintain a united international front. So, they created one nation out of thirteen separate former colonies. But, by in large, the citizens and leaders of the several states thought of themselves as Virginians, Massachusetts men, New Yorkers and the like rather than Americans. Indeed, as late as Civil War times, when Robert E. Lee wrote of serving his country, he meant Virginia. Carl Sandburg writes that the Civil War was fought over a verb. Prior to the Civil War the reference to the U. S. was “these United States are.” After the Civil war the reference to the U. S. was and is “the United States is.”

 

While the “We the People” document was ratified by the states, it still remains the case that the people have the ultimate “say” in whom is elected to the Congress as America has near universal suffrage. However, the peoples’ choices for representatives are restricted to those candidates who can raise money from the moneyed and producers in America. Only those potential candidates who can persuade enough wealthy people, organizations and corporations to donate campaign funds can be successful at the polls. It takes money, lots of money, to run a successful political campaign.   House and Senate candidates raised over $1.75 billion in the 2010 election cycle (See opensecretes.org), $0.9 billion by the winners alone. 472 winning candidates spent $0.9 billion for jobs paying $174,000/year! That is less than $83 million a year or less than one-tenth of what it cost to get the jobs. Or, to put it another way, on average each winning candidate spent more than $1.9 million to earn $248,000 in the case of a House member and $1.9 million to earn $1.044 million in the case of Senators back in 2010. And that does not count the money spent by their opponents and independent groups (super PACs and 501Cs (nonprofit social organizations)) for and/or against the eventual winners. Nor does it include the administrative costs of actually holding the elections, counting and certifying the winners. In an election to fill a vacant congressional seat in Oregon in 2012 the state spent approximately $500,000 for the actual mechanics of conducting that election; and Oregon has mail in ballots. A lot of money spent to determine who would hold the seats in the House and Senate that were to be filled-435 voting members in the House (the entire House) and 37 members of the Senate (slightly more than 1/3rd of the Senate due to vacancies that had to be filled by election).

 

As a result of the $1.75 billion that candidates spent in the campaigns for Congressional seats how much do you know about the positions your representatives take on the crucial positions on subcommittee, committee and floor votes to change or not change the tax code that allows tax write-offs for corporations that have moved manufacturing, service call centers and financial operations outside the borders of the U. S. yet still sell products in the U. S.? How much do you know about the donations from those firms to your representative’s campaign for election or reelection? In contrast how much do you know about your Congressperson’s position on abortion, gay marriage, prayer in school and other issues that rarely if ever come up for a vote before subcommittees, committees or the floor of the House or Senate? Quite a bit, I would guess. Notice that issues that the Representatives and Senators almost never vote upon are featured in their campaigns: illegal immigration, flag burning, burdensome regulation on business and the like are front and center in their campaigns, yet these are not issues that they deem important enough to actually resolve with legislation. However, we have one of the best tax codes that big business and the wealthy can buy (with their campaign donations).

 

If one were cynical, one might suppose successful candidates used illegal immigration, regulation of business, abortion and the like to distract voters from asking the awkward questions of who has access to the Congressman or Senator and how the Congressman or Senator votes in subcommittee, committee and on the floor of the chamber when issues of financial and economic importance to their big money campaign donors come up?

 

A common complaint about Congress is that it is unable to get things done because of powerful lobbyists. This complaint is made by the president and members of both houses of Congress. Yet, lobbyists have power because lobbyists are employed by big money donors to congressional election campaigns. The donations buy access to the members at decision points on pending legislation-subcommittees and committees especially at mark-up, the point where a bill is being drafted. While buying access is not how anyone involved, the Member of the House, Senator, campaign donor, the lobbyist paid by the campaign donor or staff members on Capitol Hill, would phrase the arrangement, it is exactly what happens.

 

Specifically, if a Member of Congress receives tens or hundreds of thousands of dollars from an identifiable person or group of people associated with a firm or industry then when a representative from that person or group, a lobbyist, shows up in the Member’s office, the Member will see and listen to that representative, lobbyist. The term “quid pro quo” is barely capable of covering the sense of obligation that the Congressman or Senator has for the donors who employ the lobbyists. The Congressman will meet with and carefully heed the lobbyist. The lobbyist generally does not live in the Congressperson’s congressional district; indeed, donors who hire the lobbyists seldom live in the Congressperson’s congressional district or even state.

 

The case of lobbyists hired by the sponsors of super PACs or 501Cs represent a fairly new phenomenon. However, super PACs or 501cs could spend more money than candidates in the next election cycle. I would hazard that successful candidates will be as receptive to meeting with and listening to super PAC lobbyists; for winning candidates would want, at the very least that the super PACs and 501cs not support their opponents in future election cycles.

 

The questions are how does a big money donor choose candidates to support and how do candidates decide whether or not to accept campaign donations from any given donor? Notice that the second question does not apply to expenditures by super PACs and 501cs, for, technically, they are not allowed to “coordinate” expenditures with a campaign organization or a candidate. None-the-less, would a Senator or Representative decline to talk to a lobbyist from a super PAC or 501C that campaigned heavily for the Senator or Representative?   I think not.

 

Big money donors screen candidates based upon their records in offices the candidates have held. Big money donors examine public statements candidates make and any op-ed pieces and other writings.   Groups, in particular, have given questionnaires to candidates. Big money donors will sit down and talk to candidates to ascertain the candidate’s stances on questions of particular interest for the big money donors’ bottom lines.

 

Examining new congressional candidates’ campaign budgets, one finds that those budgets are relatively small. Consider that a non-incumbent does not have committee assignments. So, big money donors cannot estimate the potential impact on their bottom lines by future votes in Congress by those candidates. A first reelection campaign budget will also be modest, but larger than a non-incumbents. When the Representative holds a subcommittee chairmanship, his or her re-election campaign chest will begin to swell. Senior members, members in leadership positions and ranking members or full committee chairmen are all able to initiate their own PACs with their excess donations and donate to other congressional candidates. In short the more impact a congressman or senator can have on specialized legislation due to the perks of seniority, the more big money donors contribute to insure favorable policy continues.

 

If you or I tried to meet and talk with a congressman in whose district we did not live, we would be politely directed to the office of the man or woman elected from our district. This is a problem because Members of Congress have divided the policy pie into segments controlled by 21 committees in the House and 20 committees in the Senate. Committees and their members jealously protect their committees’ turf. So, if you or I wished to have some input on a topic that your representative’s committee assignments does not cover we would have to move heaven and earth to talk with another Member. If we were a lobbyist hired by a large donor we would have almost instant access regardless of our residency in or out of the Members’ district.

 

So, actually, who does the Congressperson represent? Dare I say not you and I. Yes we vote. However, as asserted, we choose between (in some cases among) candidates financed by corporations, organizations and individuals who can afford to keep lobbyists on staff as well as make multiple, large campaign donations. So, why do corporations, organizations and wealthy individuals go to this expense?

 

Expense might be the wrong word. Investment or operating costs might be better words. For a corporation can realize massive savings by not having to install expensive scrubbers on their smoke stacks. Firms can realize tax savings by accelerated depreciation schedules. Individuals can save hundreds of thousands by paying a low rate on passive investments-capital gains on returns from selling stocks and bonds. Organizations can reap benefits for members by expanding entitlements. Everyone who contributes big bucks to a political campaign serves to either gain from the donation or protect a current benefit.

 

It is convenient that big money donors can claim they are contributing in the public interest or doing their civic duty to enable candidates to bring their messages to the voters through radio, television, internet, newspapers, magazines, direct mailings, door to door “pamphleting,”   speeches, telephone calls, bumper stickers, social media postings and campaign buttons All of these campaign techniques cost money. Evidence and common sense tells us that self-financial interest is a very strong motivation.

 

So, we live in a system in which those with resources determine, within limits, the choices the rest of us have at the polls. Indeed, those with resources have moved from direct control of American government to indirect control with every extension of the franchise. However, as long as money is confused with the speech protected by the First Amendment, democracy will not actually exist in America. The one way to “democratize” the US is to amend the Constitution to remove private money from controlling the choices we have at the polls.

 

Removing private funding would radically change candidate selection and require that governments provide the funds for campaigns. Initially incumbents would have an advantage because of their name recognition. Under the present system, incumbents in Congress have over a 95% reelection rate. So, initially, there would be no change. However, people elected under a completely publicly funded campaign would not have to respond to lobbyists. Nor, would incumbents who no longer need their funding to mount campaigns for reelection. This would be a major change from the current system. Indeed, the predominate lament about the role of lobbyists would simply go away–lobbyists power would be eviscerated immediately.

 

If elected representatives are no longer beholding to campaign contributors they will quickly find that more transparent decision processes and more pertinent campaign issues will be needed to stay in office; for representatives will no longer have the security of large campaign chests to saturate the air ways with the kind of advertising they have used under the current system. Elected representatives will have to be responsive to voters and no longer be shackled to large money donors.

 

There will be a great deal of debate over the particulars for public funding elections and how to qualify candidates. Indeed, over the wording of the Constitutional Amendment that eviscerates Citizens United. It should be an interesting time. The consequences will be democratic elections.

 

 

How money is created today

How money is created today

 

The United States of America, central bank is the Federal Reserve Bank, the Fed. While it has several “tools” at its disposal to increase and decrease the nation’s money supply (Fed created money is called “base money” or permanent money to distinguish it from commercial bank created money called “bank money”) create new money and withdraw money from circulation, it essentially creates new money by buying assets. Normally those assets are U.S. Treasury obligations. When the Fed wants to shrink the money supply (destroy money) it sells assets. When the Fed buys assets it can simply make a bookkeeping entry crediting a bank’s or a securities dealer’s account with new money. It doesn’t even have to go through the pretense of having the Bureau of Printing and Engraving pint new money or the U. S. Mint stamp out new coins, a simple bookkeeping entry suffices. If physical money is desired, wanted or needed, the Fed simply orders what it needs from the Bureau of Printing and Engraving and/or the U. S. Mint.

 

When the Fed wants to decrease the money supply, destroy money, it sells assets in its inventory, to whit assets it originally bought to create base money.

 

Most Americans learn about the Fed in school. However, the mechanism is so simple and transparent that most Americans think it is more complicated than it is. The complication comes in the details of managing the money supply in an attempt to manage interest rates and avoid things like inflation, bank failures and recessions/depressions.

 

The basic mechanics of creating new money, however, are fairly routinized. The Fed buys assets from a bank or securities dealer. In each case money is now available on a commercial bank’s books or account at the Fed. As we shall see later, the commercial bank is then in a position to use this new money (actually, base money), as a basis for making loans. The lent money is new money, for the original deposit of base money remains undisturbed as an entry on the bank’s books and technically still available for use by the owner of the account. Indeed, the loan proceeds will likely be deposited in another account and serve as the basis for yet another loan (and more newly created money). This lending by banks is called the multiplier, for it allows the original base money to act as if it were many times larger than the original deposit made by the Fed when it purchased the asset from the bank or securities dealer.

 

The money created by commercial bank loans eventually disappears as it is repaid. But, if the money is lent out again quickly its temporary disappearance will go unnoticed.

 

Nominally new, durable money created by the Fed is called base money; and, new, temporary money created by commercial banks is called bank money. If you need a dollar for a cup of coffee, either base or bank money will do the trick as a dollar is just that, a dollar, no matter how it was created.

 

The problem with base money is that it starts life as a deposit in either a commercial bank’s or a security dealer’s account. To have any impact on an average citizen’s, consumer’s or working person’s life base money has to be loaned to someone with a payroll or a major purchase in mind or construction needs-things that result in employment. It could well be that a whole string of loans involve refinancing, debt service or a highly liquid asset purchase (or, God forbid, purchase of ancient artifacts). In short, base money creation takes time and a series of transactions before it trickles down to the average working stiff. This is ironic for it is the spending habits of the average working stiff and his or her family that drives the economy. Yes, a firm such as Monsanto has a billion dollar balance sheet, but unless Joe Blow and his family have the $2.98 for a loaf of bread on a regular basis Monsanto will go belly up for lack of clients (agribusinesses of all sizes) for its bio-designed wheat seed.

 

As we shall see elsewhere, money in the hands of citizen consumers is where the economic action is. We will return to central banks later. They will become a real key to economic growth and stability-for real. Unless the reader misses the innuendo, central banks are not presently a key to economic growth and stability.

Is there enough Money to Cash Out Assets and turn them into Cash (Currency in any form)

Is there enough Money to Cash Out Assets and turn them into Cash (Currency in any form)

 

A partial inventory of asset (wealth) types includes Business Equities, Financial Securities,

Trusts, Stocks and Mutual Funds, Non-Home Real Estate, Deposits (various financial institution accounts), Pension accounts, Life Insurance, Principal Residence, Debt, and

All other personal property. (Anything, that has a cash value)

 

[ FOOTNOTE “Total assets are defined as the sum of: (1) the gross value of owner-occupied housing; (2) other real estate owned by the household; (3) cash and demand deposits; (4) time and savings deposits, certificates of deposit, and money market accounts; (5) government bonds, corporate bonds, foreign bonds, and other financial securities; (6) the cash surrender value of life insurance plans; (7) the cash surrender value of pension plans, including IRAs, Keogh, and 401(k) plans; (8) corporate stock and mutual funds; (9) net equity in unincorporated businesses; and (10) equity in trust funds.

 

“Total liabilities are the sum of: (1) mortgage debt; (2) consumer debt, including auto loans; and (3) other debt. From Wolff (2004, 2007, & 2010).”

http://sociology.ucsc.edu/whorulesamerica/ END FOOTNOTE]

 

Consider that estimating the value of all business equities owned by citizens and foreign residents in the United States can at best be done with a snap shot at a given point in time or a series of snap shots at regular or irregular time intervals. It would involve taking the market or fair market value for all (a census, if you will) at the same time. There is a problem with market value that needs to be addressed. Fundamentally, the market price of anything is for the number (quantity) of the good/service/property/instrument offered for sale by the given number of sellers with a given number of buyers seeking the good/service/property/instrument at a specific time and place. Were any of the numbers to change, the market price would also be subject to change.   For example if more sellers enter (leave) the market or fewer (more) buyers there will be movement on the supply and demand curves changing the settled price. At any given time all of a good/service/property/instrument is not offered for sale, nor are all possible buyers in the market at a given time. So only a small fraction (and probably an insignificant, in a statistical sense, number) of the good/service/property/instrument sets a current price or market value. But that is the nature of a market. History shows that if too many sellers enter the market at once, the bottom falls out of the “valuation” of the good/service/property/instrument. History also shows if too many buyers enter the market at once the price (cash value) of the good/service/property/instrument goes through the roof.

 

That having been said, suppose it were possible to convert all wealth to cash. With over 3,000 companies, some coming into the exchange and some leaving on any given day (in 2012) a rough estimate of total market valuation for the New York Stock Exchange was $15 trillion. Consider that measured at M3 the total US money supply was less than $14 trillion; “Houston, we have a problem.” There is simply not enough cash to make the conversion-clear the market at market value. Needless to say that as we attempt to add to our cash conversion other forms of wealth it is impossible as we have already run out of money just attempting to cash out the New York Stock Exchange. It is worth noting that had we started with bank deposits there is not enough physical currency in circulation to cash out bank deposits; however, the Feds would order the printing and cause the delivery of physical currency to cover every bank’s needs for that is what the Fed does to insure that there are no reasons for runs on any bank.

 

While there is not anywhere near enough money for us to convert more than a small portion of the wealth held by all citizens and resident aliens, money still is the measure of choice for estimating the value of what is properly termed wealth. Moreover, people used cash and credit (promise to pay cash in the future) to acquire wealth. Yes, some people inherited wealth, but aside from early land grants, thievery and other shenanigans, most people’s ancestors originally paid cash or sweat equity for their wealth.

 

Given that the monetary or market value of wealth accumulations far exceeds the money supply, it logically follows that a large money supply is not required for wealth accumulations. Yet, if managed, wealth accumulations, as we have shown elsewhere, do tend to take currency out of circulation at the rate of return on business expenditures, including depreciation of capital. This is true otherwise rather than investing in a business it would be rational for the investor to deposit his or her money in an interest bearing account in a financial institution rather than engaging in business activities.

 

In hard economic times, DeLong asserts that the velocity of money (literally the volume of transactions in a time period) slows and given uncertainty over how long the overall economy will be in the contraction rational economic actors fall in what DeLong calls the liquidity trap-converting holdings (non-monetary wealth) into cash or as near to cash as they can. Literally this means buying treasuries or converting to cash. (John Hicks asserts that in a downturn creditworthy governments will be able to place debt instruments at low interest rates).

 

It is only in hard economic times that individuals want to convert “chunks” of their assets (wealth) into cash; just at the point where the relative scarcity of money will drive down the cash value of assets as there are more people wanting to sell assets for cash than there are buyers of the assets. During contractions, wealth drags down the supply of currency in circulation.

 

So what does that make wealth accumulation relative to money in circulation. Is there a parallel to the tidal bulge caused by the moon slowing the earth’s rotation? For example is there some critical size of wealth accumulations and the number of them which dictates a reduction in the money supply? Can we model the money supply in relation to wealth accumulations. Further, is it the case that people with large wealth accumulations tend to engage in less economic activity in proportion to their wealth than do people who live hand to mouth. Consider a family which uses all of its income to live, 100 “percenters.” Compare this to a family which uses only 1% of its income to live and invests (places into some wealth holding vehicle or instrument) the other 99%.

 

Now do investments cause currency circulation to the same degree as living expense transactions? I am going to guess that financial community transactions are different from day to day consumer transactions and do not stimulate the economy as much as “normal” consumer transactions do. Indeed, in general financial community transactions will tend to retard the velocity of money leaving the financial sector (the flow of money entering the financial sector is much greater than the flow of money leaving the financial sector for other parts of the economy). The weaker the economy, the greater the financial sector will slow the velocity of money and conversely, the stronger the economy, say even in a boom, the less the velocity of money leaving the financial sector will be slowed; but, the velocity of money will be slowed when it enters the financial sector. DeLong’s argument supports this as does the conclusion from Hicks-increased demand for aftermarket treasuries as well as fresh ones.

 

I am going to guess that economists will assert or assume that all transactions are equal-or that there is not a qualitative difference between the purchase of an apple at a truck stop and the purchase of an apple orchard-only a quantitative one. Is that true? Can we model what happens to a dollar in each case? For starters, buying an apple orchard allows the previous owner to cash out, turn an otherwise non-liquid asset into currency. Some of the cash may go to pay off the previous owner’s mortgage. However, unlike the purchase of a single apple, which sends currency spinning off in many directions to cover wages, taxes, electric bills, rent, and the like, selling the orchard tends to confine money received from the sale within the financial sector at least within the short run.

 

Recall in the simplest form of the economic flow model, it is households that provide labor and materials to firms and in turn purchase goods and services from firms. Aside from household savings and retained firm profits, the remainder of the cash from household and firm transactions is applied to further transactions. As one adds specialties (refinements) to the model, such as a government sector and a financial sector, one siphons or funnels currency into these specialized sectors. Other than in a very few budget years over the past century, governments have spent all the money they have taken in, and more. Currency funneled into the government sector receipts, with the possible exception of debt service payments, has tended to flow back into the overall economy. Currency going to the government sector tends to increase in velocity as it comes out. (Indeed, given the level of debt governments carry at this writing, there are those who would argue that taxes are multiplied by governments into expenditures larger in dollar volume than the taxes taken in.) Yes, governments have so called trust funds. However, these funds are generally sources of loans for other government programs.

 

Money going into the financial sector, goes in with the intent that some of it will be left behind in that sector.   Recall the earlier treatment of money aggregations attracting more money. Keeping in mind that firms in the financial sector exist to accumulate wealth, they have a whole different capital base than do either firms producing goods or services or selling goods and services.   For example, any capital investment in goods or services production has a useful life and is depreciated. Money invested in a financial sector firm does not have a limited useful life and is not depreciated, for example bank capital. No, financial firm cash is expected to attract more cash. While the financial firm may put its cash at risk of loss, it does not depreciate that cash.   Recall, one of the characteristics of money is that it holds value (or is a store of value). If a non-financial firm produces widgets or haircuts from its input of capital goods, land, labor, raw materials and management, that firm expects to recoup the depreciation of its capital goods (its investment in the firm), along with the costs its land (rent), labor, raw materials and management in the selling price of widgets or haircuts. In contrast, a financial sector firm not only expects to recoup depreciation on equipment and the costs of land (rent), labor and supplies, it also expects to add a percent of the cash it put at risk to its capital base-grow its currency holdings or its investment in the firm.

 

Least it go unnoticed, startup costs for firms outside the financial sector all involve economic transactions-it is all money spent. Such startups do not withdraw currency from circulation; rather, all the startup costs, especially capital costs do not involve further economic transactions with other economic actors. Even during startups, financial institutions slow the velocity of money involved in firm creation.

 

While the financial sector provides loans for startups and for firms to meet payroll, they make those loans inversely to the state of the economy’s health. Even then it is not clear that aggregations of money in the financial sector are as much of an economic growth engine as they are attractors of more money. To wit, it was not the normal business loans that brought the economy down in 2008.   Rather it was the amount of capital in sub-prime loan bundles. Even with the experience of the recession brought about by financial shenanigans leading up to 2008 as late as 2012, when the economy needed creative lending to create jobs, J. P. Morgan managed to lose billions in credit default swaps.

 

If anything, the history of the business cycle should demonstrate that the financial sector is far too risky a place in which to house the creation of base money. This is especially true if base money creation is to stimulate the economy or maintain economic growth.   It is not altogether clear that currency accumulation in the financial sector actually either stimulates the economy or maintains economic growth other than as an unintended side effect of firms in that sector growing their currency accumulations and portfolios.

 

[Footnote for DeLong:

“John Hicks; I just didn’t quite believe him. Hicks, one of the clever young Brits dotting i’s and crossing t’s in the writings of John Maynard Keynes in the 1930s, was responsible for the workhorse formulation of Keynesian economics — the IS-LM model — that has been the bane of many an intermediate macroeconomics student. It was his version of the IS-LM model that formalized and elevated a key insight: that interest rates paid by creditworthy governments would remain low after a financial crisis. This formulation holds even in the face of enormous budget deficits that greatly expand the supply of government bonds. A financial crisis initiates a sudden flight to safety among bondholders — widening interest-rate spreads, diminishing the private sector’s desire to sell bonds to raise capital and encouraging individuals to save more and consume less as they, too, hunker down. Thus bond prices rise, and interest rates drop. As rates fall, firms see that they can get capital on attractive terms and so issue more bonds; households see the low interest rate earned on their savings and lose some of their desire to save. The market heads toward equilibrium. Safeguarding Wealth But something else happens on the path to equilibrium. The decline in interest rates and the rise in savings are accompanied by an increased desire among businesses and households to safeguard more of their wealth in cash. As a result, the speed with which cash turns over in the economy, the velocity of money, falls. And as the velocity of money falls, total spending falls, workers are fired, and their savings evaporate with their incomes. Thus the equilibrium turns negative, with high unemployment and low capacity utilization.”

 

http://delong.typepad.com/sdj/ 11/13/11 End Footnote]