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Thursday, November 29, 2012

Financial innovations?

Or maybe those rising stock prices are the result of all that additional productivity now made possible by 3G/4G, Android, and iPad:
Lauren is correct.  Look at the TNX compared to when QE was instituted in all cases and then what happened when it ended.  When The Fed intervenes it says it is trying to depress interest rates but in fact the opposite happens.

Why?  Because interest rates are the time-value of money including the expected devaluation.  When you raise that figure rates go up.

In addition credit and currency are fungible.

Peter has long argued for "coming hyperinflation."  He's been dead wrong.  He's wrong because the inflation already happened through the issuance of bogus credit.

Doubt me?  What do you call stock prices going up by a factor of 14 over the last 30 years?
Some of you will recall I tried to explain that credit was money to Mr. Schiff, but to no avail.  It's not that M2 doesn't matter, it's just that Z1 matters more.  What I don't understand is why those individuals who say that debt doesn't matter always insist on increasing taxes.  If debt doesn't matter, then why tax anyone?  We're already borrowing and spending more money than we used to tax-and-spend, so obviously, there is no need to fund the government through taxation.

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50 Comments:

Anonymous JartStar November 29, 2012 1:59 PM  

If debt doesn't matter, then why tax anyone?

The only answer I've heard is that it adds value to fiat currency in people's mind.

Anonymous szook November 29, 2012 2:09 PM  

Come, Vox, if we don't tax then how will we replace the productivity metrics generated by all those IRS employees !?!?!

Anonymous Northern Observer November 29, 2012 2:10 PM  

"If debt doesn't matter, then why tax anyone?"

Without taxes, how would we redistribute wealth? Giving is all fine and good, but we need to take from the greedy bastards too.

Anonymous allyn71 November 29, 2012 2:13 PM  

I have been asking the same question of folks that bring up the dreaded fiscal cliff debates. If debt doesn't matter, why are we debating raising taxes to reduce the deficit and reduce the debt?

I have been waiting for someone to ask a cat loving nobel-prize winning economist that. If his oft mentioned claim that debt doesn't matter is true, then why propose to raise taxes on the top earners to 91%?

Blogger Serge_Tomiko November 29, 2012 2:13 PM  

The function of taxes is not to raise revenue.

There are several functions:

1) Taxes are the way governments assert authority and create demand for money. Without taxes, there would be no demand for money. Before you repeat the lies of neoliberalism, that money spontaneously appeared because of its obvious rationality, do read up on this. Read about the thousands of hordes of Roman coins found once the Empire collapsed and the tax man stopped coming. Read about the ridiculous taxes the British had to come up with to get their colonial subjects to use and work for money. When governments fail to assert authority over a given area, the failure is primarily manifested through an inability to get a given people to pay taxes and use sovereign issued currency.

2. Outside of inducing demand for money, taxes also control inflation in an advanced fiat currency economy. This is why a flat tax is completely unfeasible - it eliminates the government's only method of controlling inflation. It's also why people like Steve Forbes are liars. He knows damn well the government doesn't have to tax.

3. Taxes also prevent malfeasance and prevent wealth aggregation, particularly in society's that allow usury. You will find that most far right parties today are taking a populist stance on this with total confiscation above a certain figure.

Anonymous Stilicho November 29, 2012 2:17 PM  

I have been waiting for someone to ask a cat loving nobel-prize winning economist that. If his oft mentioned claim that debt doesn't matter is true, then why propose to raise taxes on the top earners to 91%?

Indeed. Why we could just raise the debt ceiling indefinitely and sell all of the Treasury bonds directly to the Fed.

Anonymous stg58 November 29, 2012 2:18 PM  

How did America ever survive without an income tax? It galls me that people used to be able to keep their own money.

Anonymous Daniel November 29, 2012 2:18 PM  

Taxation is the social engineering necessary to convince a culture that debt is unimportant.

So, it is not directly necessary to the "debt doesn't matter" decision makers or their fantasy engine, but it is a critical component to the magic show that causes the masses to assume it is working.

Anonymous stg58 November 29, 2012 2:18 PM  

How did America ever survive without an income tax? It galls me that people used to be able to keep their own money.

Anonymous stg58 November 29, 2012 2:18 PM  

How did America ever survive without an income tax? It galls me that people used to be able to keep their own money.

Anonymous JT November 29, 2012 2:18 PM  

Using that assumption, the only need there is for taxation is to control the amount of money in the system...and the more you take money out of the system from the people of limited means (and you can include everyone in the "middle-class" with that) you can keep inflation under control since inflation is a monetary phenom, at least until all those penny-a-day factory and textile workers in China and Indonesia or elsewhere unionize...

It won't work there as it did here; they'll just shoot them and bulldoze more rice patties and force more dependents onto the new plantation.

Anonymous Noah B. November 29, 2012 2:19 PM  

Could I ask you to clarify something? When you say "credit is money," are you including in your definition of "credit" only those loans that have actually been made, or are you also including, in some form, open lines of credit that have not actually been borrowed against?

Anonymous JT November 29, 2012 2:20 PM  

"2. Outside of inducing demand for money, taxes also control inflation in an advanced fiat currency economy. This is why a flat tax is completely unfeasible - it eliminates the government's only method of controlling inflation. It's also why people like Steve Forbes are liars. He knows damn well the government doesn't have to tax."

----

you didn't have to go any further than that.

Anonymous Daniel November 29, 2012 2:24 PM  

In other words, if "debt doesn't matter" is the article of faith, then taxation is the miracle that supports it.

When you ask Jim Jones what's in the Kool-Aid, he'll tell you "enlightenment" and he'll half-believe it even if he put the poison in himself.

The little death that is a tax is a deep mystery to the alchemical Keynesian. The relationship between taxes and the irrelevance of debt is a mystical economy, not a rational one.

Anonymous zen0 November 29, 2012 2:24 PM  

Speaking of bi-flation, even central bankers are admitting that things are not under control:

Where are we now, and how are we doing four years after the crisis started in earnest?
The outcome in the real world has been decidedly mixed, despite additional rounds of quantitative easing and other unconventional monetary policy initiatives undertaken by major central banks. The deflationary forces in many countries appear to be winning. While global growth has not stalled completely, neither is it as strong or as widely distributed as many had hoped.

--- Deputy Governor, Bank of Canada

He projects 3 possible scenarios, which he labels The Good, The Bad, and The Ugly.

The Good is the grinding out of a slow, long term recovery. It does, however, require global co-operation of policy makers implementing Basel 111 initiatives.

Good luck with that. Jaimie Dimon has already come out against the necessity of such measures, and he is about to head the U.S. Treasury.

Oh, and Japan and Europe have to get their acts together.

Looks like the money should go on Bad and Ugly.

Anonymous Stilicho November 29, 2012 2:26 PM  

Noah, in the past, he has consistently said issued credit is money and an open line of credit is merely potential money.

Anonymous Noah B. November 29, 2012 2:27 PM  

Thanks Stilicho.

Anonymous Josh November 29, 2012 2:40 PM  

Taxes are the way governments assert authority and create demand for money. Without taxes, there would be no demand for money. 

Why wouldn't there be a demand for money?

Also,

How do you define money?

Anonymous VD November 29, 2012 2:52 PM  

When you say "credit is money," are you including in your definition of "credit" only those loans that have actually been made, or are you also including, in some form, open lines of credit that have not actually been borrowed against?

Stilicho covered it correctly. What you owe on your credit card is money. Your credit limit is not.

Anonymous Josh November 29, 2012 2:55 PM  

Nate hasn't shown up yet to defend the hyperinflation viewpoint?

Strange.

Any updates on when the debate will begin (I know there is a book that is being published etc)?

Anonymous Daniel November 29, 2012 3:02 PM  

OT: McRapey just tweeted this link while referring to the "jackhole in the comments."


There's a fine story by @tobiasbuckell, as well as someone being a first-class jackhole in the comments, here:

Sci-Fi authors and their differently attractive raving fans are comedy gold.

Maybe he wouldn't be so sensitive to other authors being asked about plagiarism as homage if he didn't conduct so darn
much
of
it
himself.

Anonymous Stilicho November 29, 2012 3:03 PM  


Why wouldn't there be a demand for money?

Also,

How do you define money?


In the beginning there was the State and the State looked out upon the void and said "Let there be money that I might control the universe." And there was money and the State was pleased with its creation. Then the State went down amongst the people and saw them trading with the aid of yellow rocks and the State was wroth and said unto them "Yellow rocks have no value, pay no interest and you can't even eat them! Put thou away such childish things and instead render praise unto me that you may come to understand the glory that is fiat money. For I am the State, thy god, and thou shalt have no other gods before me, save that thou also serve my handmaiden, inflation."

Anonymous JT November 29, 2012 3:07 PM  

"Why wouldn't there be a demand for money?

Also,

How do you define money?"
------------

...demand for the "Federal Reserve Notes" as money is what I'm sure is meant.

money=any medium of exchange for goods and services

Anonymous Stilicho November 29, 2012 3:08 PM  

taxes also control inflation in an advanced fiat currency economy. This is why a flat tax is completely unfeasible - it eliminates the government's only method of controlling inflation.

Please provide an example of a government taking money away via taxation and then retiring that money in an advanced fiat economy.

Blogger James Dixon November 29, 2012 3:10 PM  

> Nate hasn't shown up yet to defend the hyperinflation viewpoint?

Nate hasn't even shown up on the NFL threads lately. It looks like real life has intervened somewhat in his affairs.

Anonymous bw November 29, 2012 3:11 PM  

The Schiff family played a prominent role in the early 20th Century creating the Banking system/WallStreet mileu that we now have. No one has been able to discover whether or not our Gold friend Peter is one of them.
We do know Al Gore's daughter married into that particular family. It's a small world after all. (Sing it! C'mon!! All together now!!)

Anonymous Josh November 29, 2012 3:18 PM  

Nate hasn't even shown up on the NFL threads lately. It looks like real life has intervened somewhat in his affairs.

By "real life" you must mean "black ops 2"

Anonymous The One November 29, 2012 3:33 PM  

nate is busy with secession.

Anonymous Elmer Fudge (friend of Sexual Chocolate) November 29, 2012 3:51 PM  

It would appear that deflation is on the way for the next decade or so, if not already at hand. Looks like a good buying opportunity for metals, to weather the next inflation period... (that is until the FED finally falls apart [face turning blue])

Anonymous SlackAttack November 29, 2012 4:15 PM  

nate is busy with secession.

One can only hope.

Anonymous JartStar November 29, 2012 4:39 PM  

Good article on the coming decade. I'll take 2% growth and relative calm over the gloom and doom alternative any day.

Anonymous Mr. Nightstick November 29, 2012 5:12 PM  

I wonder if PIMCO will be the leading Mutual Fund company.

Anonymous Noah B. November 29, 2012 5:14 PM  

The government is still trying to keep the illusion of growth alive after the 2008 collapse with its recurring $1T+ deficits and a barrage of other tricks. The entire growth story is a lie.

Blogger Nate November 29, 2012 6:19 PM  

"Doubt me? What do you call stock prices going up by a factor of 14 over the last 30 years?"

I call it inflation.

Do you see any 100 million dollar bills floating around?

No.

The Hyperp-Inflation hasn't happened yet. Really bad inflation has happened.

Which paves the way for the hyper inflation later... when everyone dumps their dollars.

Blogger Nate November 29, 2012 6:38 PM  

And yes... Debt matters a great deal in economic health. But Debt is not money. If you count "debt" as money you are counting the same money two, three, or even four times.

Which is why the inflation that has happened doesn't look as bad as delfationists expect it to... because the numbers aren't as big as they think they are.. because they are counting the same money to many times.

Anonymous Heinrich November 29, 2012 6:39 PM  

That girl from Planet of the Apes is really cute.

Blogger Nate November 29, 2012 6:41 PM  

Honestly it is rather like calling heart disease cancer. Heart disease isn't cancer. Its still bad. it will still kill you. By pointing out that heart disease isn't cancer... I am not taking a pro-heart disease stance. I am simply saying its not cancer.

Debt matters. Aquiring debt is can be deadly. But its not money.

Anonymous Stilicho November 29, 2012 7:08 PM  

And yes... Debt matters a great deal in economic health. But Debt is not money. If you count "debt" as money you are counting the same money two, three, or even four times.

Which is why the inflation that has happened doesn't look as bad as delfationists expect it to... because the numbers aren't as big as they think they are.. because they are counting the same money to many times.


Yet debt spends just like money, every time it is spent and counted. What effect to you think debt deflation and deleveraging will have?

Blogger Nate November 29, 2012 8:40 PM  

No Stilicho. It DOESN'T spend just like money.

Money, by definition, completes a transaction. Debt does not. Example:

I swipe credit card... "spending debt". Visa then transfers an amount of dollars to the vendor... which completes the transaction. Debt requires an additional transaction to take place to complete a purchase. Thus it is not money.

Additionally...

When you spend your debt... that debt is istantly part of M1. Thus... it is accounted for in the money supply.

If you then go count the debt as part of the money supply as well... you have counted the same money twice... thus falsely inflating your estimate of the money supply.

in terms of accounting... Debt is just accounts receivables for banks. If you're going to count it for banks... you have to count it for everyone.

In economics... its much more than that. Its time shifting purchasing power... and what removed from the future... must be accounted for in the long run. That is why debt is so deadly. So it clearly SHOULD be tracked and watched extremely closely.

It is not however money... nor is it part of the money supply.

Blogger Nate November 29, 2012 8:47 PM  

In terms of answering your direct question...


Debt Deflation is an overtly positive thing. Much like say... removing cancer from someone is a positive thing. The process is often uncomfortable... but its still healing.

Debt Deflation is almost universally caused by mal-investment. It is the way mal-investment is washed out of the system. Banks lend a bunch of money that will never be paid back because its blown on bad gambles that never work out... the banks go bankrupt... the debt goes away... and we're back to square one.

In actuality the debt is not the cause of the problem. The problem is mal-investment. The debt makes the mal-investment worse... and the deleveraging is one of the most visible results of the mal-investment.

Borrowing money for real good investments doesn't result in default. IT just results in time shifted money... going back and forth between the future and the present.

Anonymous Josh November 29, 2012 9:23 PM  

Debt is not accounts receivables of banks. A/R is a short term asset, debt is a long ten asset (for a bank).

Blogger Nate November 29, 2012 10:19 PM  

I don't give a diddly damn how long the schedule of the payments is. The payments exist. Its no different than a contract for future services from a cleaning service.

When I cancel that contract is that deflationary too?

Blogger Rahul November 29, 2012 10:33 PM  

So what's different between the 1970's & now?

We would had hyperinflation if Volcker didn't raise rates. And we're printing way more now.

Blogger Nate November 30, 2012 8:48 AM  

No... things weren't nearly as bad in the 70s as people thought they were. Nothing certainly compared to this. Hyper-inflation wasn't a real threat back then... It could've happened... but raising the rates wasn't the only thing that stopped it.

Its like blocking a halfcourt shot. Yeah.. you stopped it.. but its not like it had a great chance to begin with.

Blogger Peter Garstig November 30, 2012 10:46 AM  

Nate, so debt is money. It's just future money transferred to the present to initiate the first part of the transaction, the second part of the transaction happening in the future (well, in theory that is). So it could be said dept is only money if it can be served in the future (2nd part of the transaction).

What do you call it, if it can't be served?

Anonymous Stilicho November 30, 2012 10:49 AM  

No Stilicho. It DOESN'T spend just like money.

Money, by definition, completes a transaction. Debt does not. Example:

I swipe credit card... "spending debt". Visa then transfers an amount of dollars to the vendor... which completes the transaction. Debt requires an additional transaction to take place to complete a purchase. Thus it is not money.


Actually, it does spend like money, but I see the point you are making in that, while the seller is paid, the buyer still has a future obligation to the lender.

When you spend your debt... that debt is istantly part of M1. Thus... it is accounted for in the money supply.

Accounted for in the checkable deposits of the seller. But, prior to the debt-based transaction, this money was either in the checkable deposits of the lender (not additive) or it was created via FRB (additive).

I understand your point here as it regards accounting for the money supply. My point is that debt is accepted as a money substitute in our fiat-based FRB system. The future obligation is treated as a given or, at most, is simply given a partial discount to account for non-payment. Ideally, interest rates are high enough to exceed time preference discounts and risk discounts(although we've seen that this isn't true when there's a chance for lenders to unload the debt to a greater fool at a profit...see MBS debacle). But the money supply must grow enough to enable servicing of the debt (i.e. the money to make interest payments must come from somewhere). Otherwise, new debt must be created to pay off/service old debt. Guess what has happened. More debt was created to service old debt. It's a virtue-less cycle. Eventually, the market reaches a point where it is reluctant (or simply refuses) to create new debt at a sufficient pace to keep servicing and retiring old debt and now, the Fed is trying to create enough base money to keep the house of debt from collapsing.

Here's the 55 trillion dollar question: will the Fed accomplish its goal?

Anonymous Stilicho November 30, 2012 12:34 PM  

Anyone care to discuss the Obama administration's proposal that Congressional oversight of the debt limit be removed? "Debt limit Czar" appointed in 3, 2, 1...

Anonymous Stilicho November 30, 2012 2:37 PM  

When you spend your debt... that debt is istantly part of M1. Thus... it is accounted for in the money supply

One more thing I forgot to ask above: how do you think we get from M1 to $55 trillion or so on the Z1. That requires much more than mere double counting.

Anonymous Sylar December 02, 2012 2:57 PM  

Actually what do you guys think about Gold. I think Gold is a very very bad form of money in today's term. If anyone cares to reply to this, i will explain why.

Anonymous Geoff-UK December 02, 2012 7:19 PM  

@Vox: "If debt doesn't matter, then why tax anyone?"

Because while it's entirely possible for the unholy alliance of the Fed, megabanks, and govt to fund everything via inflation with zero taxes, even Larry the Cable Guy and his ignorant sister would eventually figure out they're being robbed of purchasing power without any govt agent ever needing to touch the cash in Larry's wallet.

Which brings me to my constant question for VD--what matter the money supply at any given moment in time (M1, 2, 3, Z1, et al) when the Fed and the federal govt have motive to inflate in perpetuity, with no upper limit? Any student of history would ask the same question I have--why is this time different? Why would the central bank and central govt not do the same thing as has occurred numerous times? How are we NOT Zimbabwe, Weimar Germany, Hungary, Argentina x7, etc? I submit we are no different--and Obama's reelection shows we have no intention of allowing deflation to make debts good and reduce govt spending to pay for it.

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