What Rand Paul Republicans & Libertarians Are Missing About Balanced Budgets

[Nima]

[IsaacGage860]

No empirical evidence for money being a medium of exchange? This is incorrect. We have the history of the Roman Empire and to a certain extent Greece. What happened in the Roman Empire is that silver denarius coins were used as the money. Silver is a earthly commodity and therefore limited by the reality of scarcity, a fundamental economic concept. As the Roman Empire grew larger and larger with heavier and heavier demands on its citizenry to maintain the Empire through a strong military, the Roman aristocracy or government as we would refer to it had to debase the currency. This is one of the earliest examples of hyperinflation. I am sure there are earlier ones but I am focusing on Rome because Roman and Greek ideas form the basis for all of the West's institutions and governance. Through the process of hyperinflation the Romans were able to deceive the mercenaries in their army for a while but eventually they caught on. This is when the fall of the Roman empire occurs. The government promises something for nothing and provides bread and circuses for the dumbed down masses to consume so that they do not see the titanic going down. So when Libertarians and Republicans bring up massive national debts and the insolvency of the entire system, this is what most are likely referring to. I am assuming you do not want Western civilization as we know it to collapse so that is why there is such resistance. Libertarians understand what happened with Rome and understand that this is the current trajectory we are on unless people decide to wake the hell up. So in conclusion, this is why your video here is flawed.

[thebeardslastcall]

Any budget is a problem to me. Balanced, unbalanced, whatever. I want their budget to go to zero and to force them to get real jobs.

[Dylan Lawrence Moore]

Silver and gold have been used as money not because they were mediums of exchange, but because governments and religious authorities demanded them for taxes. I believe this is also a major point of MMT. 

 

Additionally, the "value" civilization has given gold and silver had always been defined by the government. The traditional 16:1 gold to silver value ratio was by government decree, not by market forces (this ratio moved around a bit over the course of European history, but 16:1 is roughly it). In more modern times (think pre WWI-ish), even the gold reserve ratio was defined by governments. For example, the government would simply say that the amount of currency allowed was 10 to 1, meaning that $10 of currency was allowed for every $1 of gold in reserve (the value of gold, again, being government-defined).

 

I've seen Nima mention a few times that the hyperinflation of Weimar Germany was largely due to its currency being tied to gold, so as the currency increased, the currency to gold ratio was destroyed. In modern countries ("free floating"), there is nothing the currency is tied to, which makes the effects of increasing the supply different.

I've heard this point mentioned, and I think it's a good one, is that before the modern era, gold and silver didn't have any "intrinsic" value. You can't eat it or make tools out of it. It was basically only useful for jewelry (i.e. it looks pretty), and there was a MASSIVE cost to mine and smelt it. If this were the case, why go through all the effort of mining it and smelting it, unless someone was demanding it via force?

[Dylan Lawrence Moore]

I would like Nima to comment on this, because I've been thinking about it more since we've had time to chat.

 

Something that has been bugging me about Modern Money Theory is that, by first appearances at least, it seems to be creating something out of nothing:

 

• Goods and services are finite. They can't be created out of nothing.
• Fiat currency is fantasy land pixie dust. Government snaps its fingers, and it appears.
• Currency is a necessary commodity in a modern economy; its existence and proper usage spur the production of goods and services.
• Therefore, government snapping its fingers to create fantasy land pixie dust out of nothing creates finite resources and services.
• ...what?

 

For awhile now I've been attempting to organize in my mind what I call the difference between economics and finance. I think I can make sense of the above conundrum with it.

 

By economics I mean the actual goods and services. Iron taken out of the ground, railroad track being laid, oil being refined, windows washed, trucks hauling stuff, etc. If human beings disappeared overnight, all this stuff would still exist.

 

By finance I mean ideas and mental constructions that human beings make to help us organize goods and services. Money, credit, loans, bonds, taxes, banks, insurance, etc. If human beings disappeared overnight, all this stuff would disappear with them.

 

I think that finance, as I've described it above, is a brilliant human creation on a similar level to science and philosophy, and should be approached with the same objective rigor. I think that the gut feeling that Austrian economics tend to argue from is that, because you can't create something out of nothing in the economics realm, there is nothing you can do in the financial realm to change that ("Audit the Fed!"). The place that Keynesians seem to come from is that, because you can create stuff out of nothing in the financial realm, the economics realm must follow ("War improves the economy because we're spending money!").

 

The right spot seems somewhere in the middle. Because money is a necessity in a modern economy, when government spends it on something and injects that money into the system, it's "providing a service" by giving the economy (i.e. the private sector) the lifeblood it needs to thrive. Because government has a monopoly on this service, it follows that government spending must be good on some level, because without it we can't have a modern economy. The government encourages growth in a certain area by providing services (roads, bridges, dams, pyramids, etc.), and the money generated from that can flow into the public sector.

 

This irks me, and I think it irks everyone else on this board, for two main reasons:

 

1. It implies that the state is actually vital for something.

2. It seems to be creating something out of nothing.

Regarding #2, it infuriates my anarchist capacity that something like welfare or social security spending can improve the economy. I can kinda sorta see how building infrastructure by government provides services (though the usefulness of those services are in question, as government is detached from market forces that would guide it in building these things in the right places for the right reasons), but how could it possibly be considered an improvement to "pay" someone to not work? There has to be some sort of scam here beyond the outright initiation of the use of force of taxation.

 

What I've come to, is that the government control of the money supply is a weight that holds the population down. There is a certain demand for a money supply and net savings within the private sector, and money can be introduced into the system relatively inflation-free until this demand is met. By not meeting this demand, the government, due to its monopoly on currency creation, is squandering the potential productive value of its citizenry by keeping them currency-starved. I would venture, that in a system of competing currencies, each currency would be working its best providing itself in the best way to make its clients as productive as possible. This currency-starved state keeps the citizenry dependent and reactive, so that future money creation will continue to "buy/create" whatever and however much real resources the government might want, where if it had been left in the private sectors hands, they could just supply it to themselves.

 

I appreciate any feedback. I'm still trying really hard to work this stuff out.

[Nima]

No empirical evidence for money being a medium of exchange? This is incorrect. We have the history of the Roman Empire and to a certain extent Greece. What happened in the Roman Empire is that silver denarius coins were used as the money. Silver is a earthly commodity and therefore limited by the reality of scarcity, a fundamental economic concept. As the Roman Empire grew larger and larger with heavier and heavier demands on its citizenry to maintain the Empire through a strong military, the Roman aristocracy or government as we would refer to it had to debase the currency. This is one of the earliest examples of hyperinflation. I am sure there are earlier ones but I am focusing on Rome because Roman and Greek ideas form the basis for all of the West's institutions and governance. Through the process of hyperinflation the Romans were able to deceive the mercenaries in their army for a while but eventually they caught on. This is when the fall of the Roman empire occurs. The government promises something for nothing and provides bread and circuses for the dumbed down masses to consume so that they do not see the titanic going down. So when Libertarians and Republicans bring up massive national debts and the insolvency of the entire system, this is what most are likely referring to. I am assuming you do not want Western civilization as we know it to collapse so that is why there is such resistance. Libertarians understand what happened with Rome and understand that this is the current trajectory we are on unless people decide to wake the hell up. So in conclusion, this is why your video here is flawed.

 

The historical evidence shows that these coins that were minted back then were circulating at a huge premium to the actual metal value. This is because the government accepted them in tax payments. This is actually supportive of the case that I'm making in this video. They just happened to use gold and silver as material for SOME of their currency, not even most of it. Some historical evidence shows that some of these precious metal coins gave the user access to exclusive marketplaces.

Silver and gold have been used as money not because they were mediums of exchange, but because governments and religious authorities demanded them for taxes. I believe this is also a major point of MMT. 

 

Additionally, the "value" civilization has given gold and silver had always been defined by the government. The traditional 16:1 gold to silver value ratio was by government decree, not by market forces (this ratio moved around a bit over the course of European history, but 16:1 is roughly it). In more modern times (think pre WWI-ish), even the gold reserve ratio was defined by governments. For example, the government would simply say that the amount of currency allowed was 10 to 1, meaning that $10 of currency was allowed for every $1 of gold in reserve (the value of gold, again, being government-defined).

 

I've seen Nima mention a few times that the hyperinflation of Weimar Germany was largely due to its currency being tied to gold, so as the currency increased, the currency to gold ratio was destroyed. In modern countries ("free floating"), there is nothing the currency is tied to, which makes the effects of increasing the supply different.

 

I've heard this point mentioned, and I think it's a good one, is that before the modern era, gold and silver didn't have any "intrinsic" value. You can't eat it or make tools out of it. It was basically only useful for jewelry (i.e. it looks pretty), and there was a MASSIVE cost to mine and smelt it. If this were the case, why go through all the effort of mining it and smelting it, unless someone was demanding it via force?

 

I also think additionally, there simply wasn't as much technology back then as there is now. So gold and silver were actually pretty good materials to use to mint tokens that couldn't be counterfeited easily.

I would like Nima to comment on this, because I've been thinking about it more since we've had time to chat.

 

Something that has been bugging me about Modern Money Theory is that, by first appearances at least, it seems to be creating something out of nothing:

 

• Goods and services are finite. They can't be created out of nothing.
• Fiat currency is fantasy land pixie dust. Government snaps its fingers, and it appears.
• Currency is a necessary commodity in a modern economy; its existence and proper usage spur the production of goods and services.
• Therefore, government snapping its fingers to create fantasy land pixie dust out of nothing creates finite resources and services.
• ...what?

 

For awhile now I've been attempting to organize in my mind what I call the difference between economics and finance. I think I can make sense of the above conundrum with it.

 

By economics I mean the actual goods and services. Iron taken out of the ground, railroad track being laid, oil being refined, windows washed, trucks hauling stuff, etc. If human beings disappeared overnight, all this stuff would still exist.

 

By finance I mean ideas and mental constructions that human beings make to help us organize goods and services. Money, credit, loans, bonds, taxes, banks, insurance, etc. If human beings disappeared overnight, all this stuff would disappear with them.

 

I think that finance, as I've described it above, is a brilliant human creation on a similar level to science and philosophy, and should be approached with the same objective rigor. I think that the gut feeling that Austrian economics tend to argue from is that, because you can't create something out of nothing in the economics realm, there is nothing you can do in the financial realm to change that ("Audit the Fed!"). The place that Keynesians seem to come from is that, because you can create stuff out of nothing in the financial realm, the economics realm must follow ("War improves the economy because we're spending money!").

 

The right spot seems somewhere in the middle. Because money is a necessity in a modern economy, when government spends it on something and injects that money into the system, it's "providing a service" by giving the economy (i.e. the private sector) the lifeblood it needs to thrive. Because government has a monopoly on this service, it follows that government spending must be good on some level, because without it we can't have a modern economy. The government encourages growth in a certain area by providing services (roads, bridges, dams, pyramids, etc.), and the money generated from that can flow into the public sector.

 

This irks me, and I think it irks everyone else on this board, for two main reasons:

 

1. It implies that the state is actually vital for something.

2. It seems to be creating something out of nothing.

 

Regarding #2, it infuriates my anarchist capacity that something like welfare or social security spending can improve the economy. I can kinda sorta see how building infrastructure by government provides services (though the usefulness of those services are in question, as government is detached from market forces that would guide it in building these things in the right places for the right reasons), but how could it possibly be considered an improvement to "pay" someone to not work? There has to be some sort of scam here beyond the outright initiation of the use of force of taxation.

 

What I've come to, is that the government control of the money supply is a weight that holds the population down. There is a certain demand for a money supply and net savings within the private sector, and money can be introduced into the system relatively inflation-free until this demand is met. By not meeting this demand, the government, due to its monopoly on currency creation, is squandering the potential productive value of its citizenry by keeping them currency-starved. I would venture, that in a system of competing currencies, each currency would be working its best providing itself in the best way to make its clients as productive as possible. This currency-starved state keeps the citizenry dependent and reactive, so that future money creation will continue to "buy/create" whatever and however much real resources the government might want, where if it had been left in the private sectors hands, they could just supply it to themselves.

 

I appreciate any feedback. I'm still trying really hard to work this stuff out.

 

I think your last paragraph is spot on. It's not like the government is creating something out of nothing. The government has to have the ability to enforce the tax it declares for its money to have value. That in and of itself is not exactly "nothing", is it?

 

Yes, the state is vital in running the fiat money racket it imposes upon us, I don't think our anarchist senses have to be offended by observing this mechanism, and integrating it with the rest of our economic understanding. Nor does any of this mean that this is the only way monetary systems can ever be run for eternity. I've said before that Bitcoin for example functions in part much like a fiat money system, only a private one where it's not violence that makes you surrender the token, but rather cryptographically secured access restrictions to the Blockchain.

 

Also, I wouldn't say that MMT leads you to conclude that war is good for the economy. War destroys lots of productive capacity, in fact I've argued before that war has been the cause of many hyperinflations.

[Dylan Lawrence Moore]

Also, I wouldn't say that MMT leads you to conclude that war is good for the economy. War destroys lots of productive capacity, in fact I've argued before that war has been the cause of many hyperinflations.

 

Thanks for your input! I just wanted to emphasize, I meant that Keynesianism leads to conclude that war is good for the economy, not MMT. I've heard idiots like Paul Krugman say stuff like this.

 

"War is good for the economy" is the Broken Window Fallacy on steroids. From what I know of Keynesian economics, all they care about is spending. The idea that a nation's economy improves because a nation is spending more (i.e. manipulating finance) during a war, even though it's destroying real goods and services, to the extreme that war kills human capital (i.e. destroying economics).

 

For example: taking metal that could have been used to make a car, turning it into a massive bullet, then sending it to the other side of no man's land where it kills 20 people that could have been building cars instead. This "improves" the economy because some fat cat weapons contractor back home swelled his bank account. It takes approximately 12 years of government schooling to swallow that one.

War destroys lots of productive capacity, in fact I've argued before that war has been the cause of many hyperinflations.

 

Would you say the reason for this is the increase of currency coupled not only with the decrease of goods and services (weapons destroying things instead of factories making things), but also the decrease in people to actually use the money?

[Nima]

Would you say the reason for this is the increase of currency coupled not only with the decrease of goods and services (weapons destroying things instead of factories making things), but also the decrease in people to actually use the money?

 

That's a theoretical possibility, but empirically I don't think many wars have wiped out enough people in order for it to matter materially in this equation.

"War is good for the economy" is the Broken Window Fallacy on steroids. From what I know of Keynesian economics, all they care about is spending. The idea that a nation's economy improves because a nation is spending more (i.e. manipulating finance) during a war, even though it's destroying real goods and services, to the extreme that war kills human capital (i.e. destroying economics).

 

Without trying to defend Keynes right here, I just want to point out that through MMT I've actually learned that some of these things that are being said about Keynes are strawman arguments and bad interpretations of his actual writings. ("Paying people to dig holes", etc.) But I need to research Keynes' original writings a bit more to make more informed statements in this regard.

[grithin]

Please excuse my lack of commas - I have so many asides, the content would surely be 30% longer.

 

I'm not certain why you care so much about the origin of money, especially in the context of explaining economics to others (who probably don't care).

The likelihood is a priest class extracted tribute in the form of partial harvests, then contracts on partial harvests, then general contracts on goods.  The notion of contracts goes way back.  An enlightening book on the matter is "Babylonian and Assyrian laws. contracts and letters".  This notion of a general goods contract can be encapsulated in a coin, and by its commonality and convenience of use, coins (tokens of tribute to the temples) became money.  But, I'm no anthropologist, and how a hammer came into existence doesn't factor in to me explaining to someone else how to use it.

To explain the current system, for me, the easiest method is to simply say "the first dollar in existence was a loan from the federal reserve with interest.  There is no way to pay back both that dollar and the interest because the interest does not exist; we must borrow more just to pay back the interest."  However, this is a simplification, since the fed can relinquish debts.

In your video, you present what I think is a wrong attachment to the notion of needing a deficit.  If I put $100 into the economy, then for each following year, tax $10 and spend $10, the system can go on continually without either a surplus or a deficit.  

Also, there is subtlety I think missed. And, that is, the money velocity is not entirely based on the quantity available.  Let's conduct a thought experiment (lol).  With this initial $100 into the economy, if the population grew from 100 to 1000, the average amount held by a citizen would go from $1 to $0.1, but this would only affect money velocity if prices did not also scale downwards and if there were some additional inconvenience to spending in smaller amounts.  We can imagine things that would prevent prices from scaling with money supply: limited resources (gold), external factors (external currencies), the cost of repricing goods, the inconvenience of re-issuing revalued currency.  
Why this is important is in analyzing your idea that surpluses cause depressions.  It is important because "surplus" can mean multiple combinations of things including a shrinking of the money supply.
-    We could have a surplus funded by chinese dollars from alaskan oil extractions tax receipts in where no government programs were reduced and domestic tax receipts were the same
-    We could have a surplus where government programs were reduced and taxes were kept the same
-    We could have a surplus were government programs increased but tax receipts increased to over government program expenditure

What I'm getting at here is it is better the analyze the individual factors for a better understanding of the dynamics involved.  And, to my knowledge, it is generally agreed upon that inflation is better than deflation from a societal stand point.  The common example is, if you were a business looking to invest in infrastructure to create some product, in inflation, the potential gain from selling the product goes up relative to the infrastructure expense, whereas, in deflation, it goes down - and this encourages business development during inflation.  


Also, I took issue with your mentioning Andrew Jackson in regards to his zeroing the national debt and think it is, again, an oversimplification by over-including items.  And, this is a consequence of two different scenarios:
1. When you are a country and can print your own money without it becoming worthless, and can pay off your bonds by this printing, and consequently the bond holders do not hold practical leverage over you, there is no reason to zero the national debt.
2. When you are a fledgling country, who can not print its own money without it becoming worthless,  who has bond holders who not only can influence you, but can invade you or otherwise sanction you into oblivion, there is reason to zero the national debt (or at least move it into non-hostile hands).  (this seems to be the IMF scenario a lot of countries have found themselves in).
 

[grithin]

Bill Still touches on what should be the primary concern in opposing the fed in one of his recent videos   (

) .  Unfortunately, opposition to the fed is often confused into a blanket desire to remove government's ability to print money (or a desire balance the budget).  And, unfortunately, from Bill's side, I've never seen an admission or an analysis of the repercussions of removing the banks' control of USD - the banks' control so much of the world economy, if you were to remove their control over the fed, they'd likely retaliate against the new US dollar.

[Nima]

Please excuse my lack of commas - I have so many asides, the content would surely be 30% longer.

 

I'm not certain why you care so much about the origin of money, especially in the context of explaining economics to others (who probably don't care).

 

The likelihood is a priest class extracted tribute in the form of partial harvests, then contracts on partial harvests, then general contracts on goods.  The notion of contracts goes way back.  An enlightening book on the matter is "Babylonian and Assyrian laws. contracts and letters".  This notion of a general goods contract can be encapsulated in a coin, and by its commonality and convenience of use, coins (tokens of tribute to the temples) became money.  But, I'm no anthropologist, and how a hammer came into existence doesn't factor in to me explaining to someone else how to use it.

 

To explain the current system, for me, the easiest method is to simply say "the first dollar in existence was a loan from the federal reserve with interest.  There is no way to pay back both that dollar and the interest because the interest does not exist; we must borrow more just to pay back the interest."  However, this is a simplification, since the fed can relinquish debts.

 

In your video, you present what I think is a wrong attachment to the notion of needing a deficit.  If I put $100 into the economy, then for each following year, tax $10 and spend $10, the system can go on continually without either a surplus or a deficit.  

 

Also, there is subtlety I think missed. And, that is, the money velocity is not entirely based on the quantity available.  Let's conduct a thought experiment (lol).  With this initial $100 into the economy, if the population grew from 100 to 1000, the average amount held by a citizen would go from $1 to $0.1, but this would only affect money velocity if prices did not also scale downwards and if there were some additional inconvenience to spending in smaller amounts.  We can imagine things that would prevent prices from scaling with money supply: limited resources (gold), external factors (external currencies), the cost of repricing goods, the inconvenience of re-issuing revalued currency.  

Why this is important is in analyzing your idea that surpluses cause depressions.  It is important because "surplus" can mean multiple combinations of things including a shrinking of the money supply.

-    We could have a surplus funded by chinese dollars from alaskan oil extractions tax receipts in where no government programs were reduced and domestic tax receipts were the same

-    We could have a surplus where government programs were reduced and taxes were kept the same

-    We could have a surplus were government programs increased but tax receipts increased to over government program expenditure

 

What I'm getting at here is it is better the analyze the individual factors for a better understanding of the dynamics involved.  And, to my knowledge, it is generally agreed upon that inflation is better than deflation from a societal stand point.  The common example is, if you were a business looking to invest in infrastructure to create some product, in inflation, the potential gain from selling the product goes up relative to the infrastructure expense, whereas, in deflation, it goes down - and this encourages business development during inflation.  

 

 

Also, I took issue with your mentioning Andrew Jackson in regards to his zeroing the national debt and think it is, again, an oversimplification by over-including items.  And, this is a consequence of two different scenarios:

1. When you are a country and can print your own money without it becoming worthless, and can pay off your bonds by this printing, and consequently the bond holders do not hold practical leverage over you, there is no reason to zero the national debt.

2. When you are a fledgling country, who can not print its own money without it becoming worthless,  who has bond holders who not only can influence you, but can invade you or otherwise sanction you into oblivion, there is reason to zero the national debt (or at least move it into non-hostile hands).  (this seems to be the IMF scenario a lot of countries have found themselves in).

 

 

"I'm not certain why you care so much about the origin of money, especially in the context of explaining economics to others (who probably don't care)."

 

I only care insofar as certain present day theories rely on un-empirical reasoning.

 

"The likelihood is a priest class extracted tribute in the form of partial harvests, then contracts on partial harvests, then general contracts on goods.  The notion of contracts goes way back.  An enlightening book on the matter is "Babylonian and Assyrian laws. contracts and letters".  This notion of a general goods contract can be encapsulated in a coin, and by its commonality and convenience of use, coins (tokens of tribute to the temples) became money.  But, I'm no anthropologist, and how a hammer came into existence doesn't factor in to me explaining to someone else how to use it."

 

Thanks, I'll check out that book, I'm currently waiting for delivery of Graeber's "Debt: The First 5000 Years".

 

"To explain the current system, for me, the easiest method is to simply say "the first dollar in existence was a loan from the federal reserve with interest.  There is no way to pay back both that dollar and the interest because the interest does not exist; we must borrow more just to pay back the interest."  However, this is a simplification, since the fed can relinquish debts."

 

But that doesn't answer the question why the first dollar loaned into existence had value. It's true that money can be created by both government spending and loaning into existence. The question is why the latter was possible in the first place. The state theory of money says because taxation gives the token value. Bank reserves and cash are high powered money (HPM) spent into existence by crediting private bank accounts. A private bank loan generates a bank deposit which is a claim to HPM.

 

"In your video, you present what I think is a wrong attachment to the notion of needing a deficit.  If I put $100 into the economy, then for each following year, tax $10 and spend $10, the system can go on continually without either a surplus or a deficit."

 

Yes, you can run balanced budgets in the following years continually, but without an export surplus you might be depriving the private sector of needed net private saving, resulting in unemployment.

 

"What I'm getting at here is it is better the analyze the individual factors for a better understanding of the dynamics involved.  And, to my knowledge, it is generally agreed upon that inflation is better than deflation from a societal stand point.  The common example is, if you were a business looking to invest in infrastructure to create some product, in inflation, the potential gain from selling the product goes up relative to the infrastructure expense, whereas, in deflation, it goes down - and this encourages business development during inflation."

 

There are many reasons for inflation (if we define it as an increase in aggregate prices) that I couldn't get into in this simplified model, but in general you get the gist of it in that inflation can be routine at times in a monetary production economy. For example when a bank makes a loan to an entrepreneur he is allocated spending power (hopefully for a good project) over others and that CAN push up aggregate prices for capital goods & labor. However, worker productivity also hopefully improves as a result of his project, so that can counterbalance some price increases.

 

For example, entrepreneurs in the consumer goods sector always try to achieve a markup over labor cost. In a simplistic economy with no capital account imbalance the surplus thus created then becomes available for different parties and allows us to put some workers into the investment goods sector, allowing them to consume the surplus that is not available to the workers in the consumer goods sector due to markup. Investment is the reason why we have aggregate corporate profits to begin with.

 

Deflation is problematic in a monetary production economy if it is the outcome of unsatisfied changes in the individuals' liquidity preference. If liquidity preference goes up without corresponding injection of net private saving (e.g. via changes in taxation levels), people consume less so they have enough left to pay the tax, which in turn reduces the price investors are willing to pay for capital goods, resulting in layoffs etc. The market doesn't seem to "clear" as some tend to think when they think of deflation.

 

It can also not be denied that in a monetary production economy's private sector we are psychologically or historically or for whatever reason inclined to try and maximize nominal monetary inflows over nominal outflows. The importance of this and its impacts on pricing inside the structure of production cannot be ignored.

[grithin]

"I'm not certain why you care so much about the origin of money, especially in the context of explaining economics to others (who probably don't care)."

 

I only care insofar as certain present day theories rely on un-empirical reasoning.

 

"The likelihood is a priest class extracted tribute in the form of partial harvests, then contracts on partial harvests, then general contracts on goods.  The notion of contracts goes way back.  An enlightening book on the matter is "Babylonian and Assyrian laws. contracts and letters".  This notion of a general goods contract can be encapsulated in a coin, and by its commonality and convenience of use, coins (tokens of tribute to the temples) became money.  But, I'm no anthropologist, and how a hammer came into existence doesn't factor in to me explaining to someone else how to use it."

 

Thanks, I'll check out that book, I'm currently waiting for delivery of Graeber's "Debt: The First 5000 Years".

 

"To explain the current system, for me, the easiest method is to simply say "the first dollar in existence was a loan from the federal reserve with interest.  There is no way to pay back both that dollar and the interest because the interest does not exist; we must borrow more just to pay back the interest."  However, this is a simplification, since the fed can relinquish debts."

 

But that doesn't answer the question why the first dollar loaned into existence had value. It's true that money can be created by both government spending and loaning into existence. The question is why the latter was possible in the first place. The state theory of money says because taxation gives the token value. Bank reserves and cash are high powered money (HPM) spent into existence by crediting private bank accounts. A private bank loan generates a bank deposit which is a claim to HPM.

 

"In your video, you present what I think is a wrong attachment to the notion of needing a deficit.  If I put $100 into the economy, then for each following year, tax $10 and spend $10, the system can go on continually without either a surplus or a deficit."

 

Yes, you can run balanced budgets in the following years continually, but without an export surplus you might be depriving the private sector of needed net private saving, resulting in unemployment.

 

"What I'm getting at here is it is better the analyze the individual factors for a better understanding of the dynamics involved.  And, to my knowledge, it is generally agreed upon that inflation is better than deflation from a societal stand point.  The common example is, if you were a business looking to invest in infrastructure to create some product, in inflation, the potential gain from selling the product goes up relative to the infrastructure expense, whereas, in deflation, it goes down - and this encourages business development during inflation."

 

There are many reasons for inflation (if we define it as an increase in aggregate prices) that I couldn't get into in this simplified model, but in general you get the gist of it in that inflation can be routine at times in a monetary production economy. For example when a bank makes a loan to an entrepreneur he is allocated spending power (hopefully for a good project) over others and that CAN push up aggregate prices for capital goods & labor. However, worker productivity also hopefully improves as a result of his project, so that can counterbalance some price increases.

 

For example, entrepreneurs in the consumer goods sector always try to achieve a markup over labor cost. In a simplistic economy with no capital account imbalance the surplus thus created then becomes available for different parties and allows us to put some workers into the investment goods sector, allowing them to consume the surplus that is not available to the workers in the consumer goods sector due to markup. Investment is the reason why we have aggregate corporate profits to begin with.

 

Deflation is problematic in a monetary production economy if it is the outcome of unsatisfied changes in the individuals' liquidity preference. If liquidity preference goes up without corresponding injection of net private saving (e.g. via changes in taxation levels), people consume less so they have enough left to pay the tax, which in turn reduces the price investors are willing to pay for capital goods, resulting in layoffs etc. The market doesn't seem to "clear" as some tend to think when they think of deflation.

 

It can also not be denied that in a monetary production economy's private sector we are psychologically or historically or for whatever reason inclined to try and maximize nominal monetary inflows over nominal outflows. The importance of this and its impacts on pricing inside the structure of production cannot be ignored.

 

"But that doesn't answer the question why the first dollar loaned into existence had value. .... The state theory of money says because taxation gives the token value"

Apart from negotiable general goods contracts, if we look at gold alone, gold has had intrinsic value for a long time as a distinguisher.  In a way, a collection of gold represented the man hours used to collect it through mining or other methods.  And, it was convenient for exchange between sovereigns, (who used it as a distinguisher (ornamentation)), and could be readily coined.  So, if you want to go into why fiat money has value, certainly taxation if a factor, but gold backing helped get fiat off the runway.  To conceptualize, the value of fiat is in what you can exchange it for, and at its start, it wasn't just tax settlement that you could exchange it for, so to ascribe its value purely to taxation is an over simplification.

 

Also, I suppose I was considering a different scenario of explanation than yours.  The explanation I give to people about loaning does not prompt the question of "where does the value come from", because in my scenario, these are just normal people needing some awakening to the fraud of conventional thought about the dollar, but in your scenario, you are attempting to explain to self-ascribed economists.

 

"Yes, you can run balanced budgets in the following years continually, but without an export surplus you might be depriving the private sector of needed net private saving, resulting in unemployment."

I don't follow.  Even if we assume someone must have a savings increase to maintain employment, unless we are assuming the money is stagnant, the money will move around, for instance from A to B, and one year A will have an increase in savings and the next year B will have an increase, and this rotation maintains an average level of employment.  But, I wouldn't assume there is a need for an increase in savings, but, instead, I assume there is a tendency for spending excess savings for utility (often in the form of employment).  For instance, Ash, who has $50 in savings, and who only needs $5 for taxes, has an excess of $45 for the year and may spend some of that regardless of net savings adjustments.  And, with this situation, we can have an ouroboros, where A employs B who employs C who employs A, all of whom have an excess of savings and an anticipation of no net change.  

 

Of course, if the country is a net importer, the domestic money supply decreases, and then there could be a problem with savings - "could" because exported money can be imported in the form of non-exported goods, like houses.  As for profit in terms of price above labor cost, this is still possible in a balanced budget, under the notion that the money rotates around.  Sure, there is no aggregate profit, but someone playing tug-of-war does not expect to get more rope than there is rope, and it seems to me the continual profit psychology stems from the environment of inflation (as you appear to mention).

 

"The importance of this and its impacts on pricing inside the structure of production cannot be ignored."

Well, I suppose it's a matter of adaptation capacity.  There are currencies that deflate, and the people of those countries use strategies based on the assumption of deflation.  The biggest issue for me has always been money velocity.  If you have a currency that gains value, this disincentivizes people from moving it, so you have to implement fines of holding.  If you have a currency that maintains value, you have a similar situation.  But, if you have a currency that loses value, the fines of holding are inherent, and this avoids the cost of the administration that would be necessary to implement fines of holding.  

 

To approach this at a higher conceptual level:

1. The purpose of currency is to facilitate exchange, and it does this by serving as an intermediary, wherein the seller of a product accepts the intermediary, currency, which can be used later when the seller buys something he wants with that intermediary.

2. The ideal intermediary is some balance between having no stickiness (ie having no intrinsic value that would dissuade someone from parting with it) and maintaining value during the intermediation period.

 

We can contrast #2 with the misconception of savers that money is defined alone by its use as a "store of value", which they tend to use to argue against inflation.  

 

There are a lot of dynamics here for analysis:

-    competing inflations - how to maintain a stable level of inflation in a global environment (where others are inflating their currencies to drive up exports)

-    how to inflate

    -    government expenditure

    -    bank bad-loaning with government bailouts

        -    do these loans go towards domestic expenditure or foreign (ex. a chinese company getting a US loan to buy iron to import into China)?

-    who controls inflation (non-government banks who seek to diminish sovereign control in an aim for world-serfdom (world-government))

 

And, these dynamics are generally categorized in one of two categories:

1    how to construct an ideal economy

2    how to deal with subversion (the subverting institutions away from their stated goals (government corruption))

 

And, without addressing #2, you are unlikely to be in a position to address and implement #1 (unless you are China, which has the nearly unique position of not trying to undermine itself in favor of global governance ).

 

 

[Nima]

"So, if you want to go into why fiat money has value, certainly taxation if a factor, but gold backing helped get fiat off the runway."

 

What's your historical evidence that gold backing played a role in the emergence of fiat money?

 

"But, I wouldn't assume there is a need for an increase in savings, but, instead, I assume there is a tendency for spending excess savings for utility (often in the form of employment)."

 

It's fun to make assumptions here and there. But from time to time, also look at the empirical data:
https://www.economicsjunkie.com/government-budget-surpluses-can-cause-economic-depressions/
http://www.economicsjunkie.com/sectoral-balances-and-private-saving/


"who controls inflation (non-government banks who seek to diminish sovereign control in an aim for world-serfdom (world-government))"

 

Currently for example we see people, potentially globalists, try a little experiment called how do I cripple an economy by imposing a move towards balanced budgets/surpluses, already officially labeled the "Greek depression": https://en.wikipedia.org/wiki/Greek_government-debt_crisis

[grithin]

"So, if you want to go into why fiat money has value, certainly taxation if a factor, but gold backing helped get fiat off the runway."

 

What's your historical evidence that gold backing played a role in the emergence of fiat money?

 

"But, I wouldn't assume there is a need for an increase in savings, but, instead, I assume there is a tendency for spending excess savings for utility (often in the form of employment)."

 

It's fun to make assumptions here and there. But from time to time, also look at the empirical data:

https://www.economicsjunkie.com/government-budget-surpluses-can-cause-economic-depressions/

http://www.economicsjunkie.com/sectoral-balances-and-private-saving/

 

 

"who controls inflation (non-government banks who seek to diminish sovereign control in an aim for world-serfdom (world-government))"

 

Currently for example we see people, potentially globalists, try a little experiment called how do I cripple an economy by imposing a move towards balanced budgets/surpluses, already officially labeled the "Greek depression": https://en.wikipedia.org/wiki/Greek_government-debt_crisis

"What's your historical evidence that gold backing played a role in the emergence of fiat money?"

 

Well, there have been a few failures of currencies that did not have gold backing, and a few failures of currencies that removed a backing: https://dailyreckoning.com/fiat-currency/

I'd say the concept alone is all that is needed, and it is exemplified in what rome attempted to do, wherein there  was initially a backing, and it was slowly removed.  In a similar way, a currency is inflated, and those who initially get the expanse are benefited more since it takes the economy a while to adjust to the inflation - similar in that, in slowly removing a backing from a currency, the hope is that the inertia of perception of value remains, and this is what I meant when I said the backing helped the dollar get off  the runway.

 

"It's fun to make assumptions here and there. But from time to time, also look at the empirical data:"

I've read those articles and no where does in either provide a basis for eliminating the need for assuming nor does it counter my assumption.  The 'stlouisfed.org' graph is pretty obvious - when the government is not involved, the borrowing and lending within the private sector will tend to net towards zero (they are borrowing and lending to each other, not the government).  And this doesn't appear to have any bearing on my assumption.  

 

My assumption is very basic.  Let's look at it.  "I assume there is a tendency for spending excess savings for utility (often in the form of employment)."  In the assumption there is the very notion of exchange - exchanging something for something else you value more.  And I am essentially saying, beyond obligated expenditures, people will spend savings where they find additional value beyond that of holding the notes.  And, this is very subjective - since some people, for instance, find value in holding notes to meet obligations for a number of years, whereas, others, (most americans), seem content to hold notes just to meet obligations for a few months.

 

[Nima]

"I'd say the concept alone is all that is needed"

 

Then that's where we disagree vehemently.

[grithin]

I think you've misunderstood.  I was not saying the "concept alone is all that is needed" because I had a scarcity of evidence of where a backing supports the value of an eventual fiat currency, which I don't (read the article). I was saying the concept is all that was needed to understand how/why this occurs (perhaps in a sloppy way, since the statement was not there to address "What's your historical evidence", but rather as a transition into explaining the concept).

Either way, that's the end of my contribution to this topic.