Misunderstanding The Monetary System Is Bad For Your Portfolio [View article]
How about this.
Look at a populace on a consolidated basis. They have aggregate assets, liabilities, equity, income, and expense. Assets are physical manifestations of stored labor balanced out by liabilities which are potential stored labor and capital which is actual stored labor. Revenue is some theoretical potential for producing stored labor, and expenses are the costs of labor that determine how much (if any) stored labor is created.
A gov is a wholly owned sub of its populace, and as such it is just a cost of labor. When a gov borrows it is simply using the authority granted to it by the populace to grant claims on the stored capital of the populace and its potential to create further stored labor. Thus a central bank note or a treasury note are just different term structure notes (liabilities) that grant people in the populace or a foreigner a claim on the labor of the members of that populace.
What makes those claims good is the productive capacity of the populace. When the claims on labor are issued faster than labor can keep up with the claims, the value of the debt decreases. So if your 10 year 5% treasury note gets paid off with depreciating central bank notes because gov is causing consumption greater than capital creation, you might think yourself ripped off. Your tendency would then be to exchange those central bank notes for a loss with some other central bank note to prevent even further loss. The other suckers holding the remaining central bank notes now have an even bigger problem because the next buyer of their notes is going to want a similar deal.
For the US our note holders don't have many alternatives because even with our problems we are still the biggest game on the globe. People that trade with us must do so in dollars, or face possible losses that are worse than the losses they would receive by simply accepting our depreciating central bank notes. In short, we have them trapped. We can push this pretty far because our productive capacity is still the largest in the world, but there is a limit.
So our gov can spend (consume), and issue claims on our labor (treas and central bank notes) to make good on the notes it issues on our behalf. If they issue too much (we consume more than we produce) the supply outstrips demand and inflation and interest rates skyrocket. If they issue based on our productive capacity (we consume what we produce) infation and interest rates stay low. If they issue less than we produce (we consume less than we produce) interest rates go up and inflation goes down. Just supply and demand.
So we can issue an infinite amount of central bank and treasury notes, but we cannot issue an infinite amount of notes that are worth anything because our labor and our knowledge about how to use our labor in the time we have allotted is limited. Think about it. A central bank could theoretically issue an infinite claim on everybody's labor, but do we really want that?
A Jackson Hole Primer: Look For Hints At Aggressive Options [View article]
"most of the economic policies that support robust economic growth in the long run are outside the province of the central bank." - BB
He is so close, but he is a little less close on his suggestions for what can be done. The chances of dragging a full fleged recovery across the finish line are still pretty remote.
A Jackson Hole Primer: Look For Hints At Aggressive Options [View article]
WMARKW
I would say that balance sheet repair would lead to confidence. The way I see it, consumption can only occur as some function of capital creation. In other words until you can make more, you can't consume more. The only way to make more, is when you learn how to produce better. This requires better knowledge about production methods. Something no gov entity can do because it has no incentives to do so.
People have reached their limit with consumption because they see their capital being destroyed or threatened. When capital shrinks, assets shrink (dr capital cr assets i.e. recession). If by somehow we could actually push people into more consumption now (you're right, we probably couldn't), the situation would only get worse. The only alternative we have right now to "jump start" the economy is to lower production costs.
Since we can't create new production knowledge out of thin air, we can look to areas of waste. The most potent thing our govs (fed & state) could do right now is lower the tax burden on the populace. This would include the illogical labryinth and counter productive regulatory scheme we have (regulations are just disguised taxes). The chances of this happening are just about zero.
We don't have a consumption problem. We have a production problem. A central bank is just a subsidy for consumption. In other words it never really had any cures for our ailment, just morphine. Fiscal policy is the only thing now that can address production costs, but it isn't going to happen. We are are not in wealth creation mode, but wealth transfer mode. Protect yourself accordingly if you can.
A Jackson Hole Primer: Look For Hints At Aggressive Options [View article]
The real threat right now is if the central bank actually manages to stimulate aggregate demand. The additional consumption without new, cheaper production methods will only lead to a further and deeper recession once the unstainable consumption ends.
A Jackson Hole Primer: Look For Hints At Aggressive Options [View article]
A central bank has only one tool.
DR assets CR liabilities
This tool has many manifestations, but each manifestation does the same thing. If a central bank could debit assets and then credit capital, then they would really have something. However, the only thing that can affect capital is improved knowledge about production. Neither fiscal policy nor monetary policy can provide knowledge about new production methods.
The action of a central bank can only encourage an increase of levered assets created with with existing knowledge about production. Basically, levering up with no real change in contribution margins. In other words working harder for the same rewards on a per hour basis. People can only do this for a short time, and without new knowledge of production, the levered assets only serve to depreciate away capital. Only new production knowledge will allow for the replacement of outdated assets with new ones, which again neither fiscal nor monetary policy can do.
Each new wave of central bank action, without a concomitant increase in production knowledge, will only succeed in eroding capital further and leading to further recession. The only option now is for fiscal policy to back off its pressures on production, thereby lowering production costs, which can then facilitate capital creation, which can then support the assets values and prevent further recession.
The likely hood of such a policy reversal is just about zero, so when further recessionary pressures hit (which they assurdly will, its just a question of when), the central bank will be forced to use the only tool it has. The manifestation of which will be interesting to debate, but this game can only last so long. When the personal capital levels of the populace are eroded so severly that they finally take action, only then when fisal policy be changed. This could theoretically take decades. The US still has a lot of knowledge about production (and it does improve all the time), and it still has a lot of capital, so we can create capital just as fast as we erode it (like Japan). Just don't expect any vibrant grow with this scenario.
Hard to say. Years ago the ability for the populace to communicate was very limited. I think Napoleon reduced papers in Paris from 80 to 4. Today with greater access to information and ideas, it may be hard for it to run its course like it usually does. I wouldn't count it out just yet though. Access to force is a huge advantage. Once the move to a two class society (those with guns and privilege and those without) begins, it is hard to stop.
A Look Inside The Fed's Limited Toolkit [View article]
Net
I would challenge your thesis this way. When gov monopolizes money the product of money ceases to exist. All that remains is a taxing mechanism that simply looks like money. Like a road that looks like a road, but is really a taxing mechanism because it costs more than it generates. So, when a gov monopolizes money it hasn't created an infinite supply of money, it has actually done away with money. All that remains is a infinite claim on labor that is supported by gov force (this usually winds up being dangerous). In essence, the gov has bestowed upon anyone holding one of its notes, the ability to tax another individual.
Money and roads should be products that add to capital creation. That is they both lower the cost of labor, thereby increasing capital (stored labor). People's knowledge about how to more effectively utilize their labor and resources lead to enhanced capital creation, and only when this happens are they safe to increase their consumption (i.e. a road is only built when it saves time, and this is learned via trial and error from voluntary based transactions)
A water tower could be a mistake, because a irrigation ditch may have been a better choice. The problem, is there is no way to test this because we can't go back in time and rerun the scenrio and only change one variable. Therefore, to assume the water tower has benefits is a mistake, because though it may have provided what appeared to be benefits, when compared to the opportunity costs it may have actually been a loss. The way people figure this out over time is via experience. When force is involved (like a gov using force to support its claims on labor) the need to learn is basically erased. Thus, the water tower may not be an asset at all, and rather a liability. It could be that over the life of the water tower, that the operating costs could far outweigh the benefit it provided. A gov claim on labor (central bank notes) makes it easy to compel work, and that unchecked claim will result in wasted labor because there is no reason to learn from mistakes. We wind up building water towers everywhere, when irrigation ditches would have been much better, but we never learned this because the gov claim on labor erased the need for us to realize our mistake.
So, what we think may be net national assets, could actually be net national liabilities. That is they are actually eroding our collective capital, and reducing our standard of living in the process. The initial assumption for a central bank and a gov control of the "money" supply is a flawed assumption, thus all the subsequent assumptions built on that initial flawed assumption will be equally flawed.
Anyway, just another point of view to stir things up.
A Look Inside The Fed's Limited Toolkit [View article]
Yes. The gov tunnel is more likely to consume more capital than it creates (a net loss). A private tunnel is more likely to create more capital than it consumes (a gain). The gov tunnel then becomes a taxing mechanism via consumption in excess of capital creation.
A Look Inside The Fed's Limited Toolkit [View article]
In general I would say that having gov build infrastructure is wasteful. Gov incentives tend to have the infrastructure cost far more than it should have, and subsidize things that create even more waste. For instance, gov builds roads, roads are a subsidy for cars and trucks, we wind up with lots and lots of cars and trucks, and then complain about our dependence on foreign oil.
If infrastructure is a money maker, then the it is better to let the private economy do it. If it is a money looser, then nobody should do it, but if we seriously reduced the gov burden on production, we could easily pay for roads and bridges.
What we have now is a structural problem. Our current central banking system has really done all it can do within the system in which it operates. Our central bank has basically provided an operating line to meet payroll, not it is time for our fiscal policy to get those people working. Lower production costs could certainly do that.
A Look Inside The Fed's Limited Toolkit [View article]
Yes. To me it is all about the efficient utilization of labor. That depends on voluntary transactions that facilitate learning through experience. Force based transactions basically eliminate the need to learn, and the result is poor utilization of labor. Central bank transactions have the back stop of gov force. This creates the tendency for poor utilization of labor (over consumption, over investment), and the only way to pay for this is with a reduced standard of living (recession).
Face to face - anytime. Send me an email. The little window in my door is always open. Just bring a long straw.
A Look Inside The Fed's Limited Toolkit [View article]
Those assets are depreciating assets, which results in a loss to capital. Once capital is consumed, it can never be recovered. You can make new capital, but you have to work to do this. If gov action results in the destruction of capital this is a tax. To make up for this the populace must labor anew to create new capital. This is the danger with having a gov try and manage debt. The people in charge are incentivized not to create appreciating assets, but depreciating assets. In other words, the Fed's tool kit is really one of subsidizing consumption. They can dr assets and cr liabilities, and that is all they can do. When the assets erode, then capital erodes, and our collective balance sheet recedes.
The only thing on the planet that can add to equity is knowledge about better production methods. If a central bank or rather the people in the central bank could do this, you couldn't pay them enough to be central bankers. People with knowledge about better production can create for more wealth for themselves in production.
A central bank can absolutely influence demand via cheaping consumption, but this is a bad thing not a good thing. It will only lead to recession at some point. Our national debt is not net assets (equity), it is a pure claim on labor that the public must make good on regardless of their level of knowledge about production. Without improved knowledge of production, their only option to make good on the debt/money is to work longer. Working longer is a reduction in the standard of living - a tax.
Read Bernanke's Lips: No Depression, No Deflation [View article]
Worked an arm free. Ignore this just working something out.
Peter is paid for a job with a 100 central bank notes, and deposits this in a brand new bank.
Bank balance sheet
Reserve 10 Ex Res 90 Deposits 100
Paul enters into a loan with the bank, and a note is executed for the 90 lendable central bank notes. Paul agrees to pledge land as collateral for the loan he is going to buy for 90 central bank notes.
Bank balance sheet
Reserves 10 Ex Res 90 Loan 90 Deposits 190
Bank funds the loan and Paul uses the 90 bank notes to purchase the land and pledges it as collateral. The 90 new deposit supporting the loan should be the new money, but upon loan funding the transaction collapses. 90 Exc Res eliminate with 90 in deposits.
Bank balance sheet
Res 10 Loan 90 Deposit 100
First where did Peter get his original 100 central bank notes? Second the new money/note creation transaction is just a gross up that eliminates upon loan funding, and 90 of the original 100 central bank notes appears to have funded the loan. The seller of the land used for collateral now has the 90 central bank notes. There are still only 100 central bank notes in this transaction. The net effect is that the loan was funded with excess reserves composed of 90 out of the original 100.
Uh oh. They've noticed my free arm. Darn that little window.
Bernanke's Speech: The Die Is Cast For Future Stimulus [View article]
Misunderstanding The Monetary System Is Bad For Your Portfolio [View article]
Look at a populace on a consolidated basis. They have aggregate assets, liabilities, equity, income, and expense. Assets are physical manifestations of stored labor balanced out by liabilities which are potential stored labor and capital which is actual stored labor. Revenue is some theoretical potential for producing stored labor, and expenses are the costs of labor that determine how much (if any) stored labor is created.
A gov is a wholly owned sub of its populace, and as such it is just a cost of labor. When a gov borrows it is simply using the authority granted to it by the populace to grant claims on the stored capital of the populace and its potential to create further stored labor. Thus a central bank note or a treasury note are just different term structure notes (liabilities) that grant people in the populace or a foreigner a claim on the labor of the members of that populace.
What makes those claims good is the productive capacity of the populace. When the claims on labor are issued faster than labor can keep up with the claims, the value of the debt decreases. So if your 10 year 5% treasury note gets paid off with depreciating central bank notes because gov is causing consumption greater than capital creation, you might think yourself ripped off. Your tendency would then be to exchange those central bank notes for a loss with some other central bank note to prevent even further loss. The other suckers holding the remaining central bank notes now have an even bigger problem because the next buyer of their notes is going to want a similar deal.
For the US our note holders don't have many alternatives because even with our problems we are still the biggest game on the globe. People that trade with us must do so in dollars, or face possible losses that are worse than the losses they would receive by simply accepting our depreciating central bank notes. In short, we have them trapped. We can push this pretty far because our productive capacity is still the largest in the world, but there is a limit.
So our gov can spend (consume), and issue claims on our labor (treas and central bank notes) to make good on the notes it issues on our behalf. If they issue too much (we consume more than we produce) the supply outstrips demand and inflation and interest rates skyrocket. If they issue based on our productive capacity (we consume what we produce) infation and interest rates stay low. If they issue less than we produce (we consume less than we produce) interest rates go up and inflation goes down. Just supply and demand.
So we can issue an infinite amount of central bank and treasury notes, but we cannot issue an infinite amount of notes that are worth anything because our labor and our knowledge about how to use our labor in the time we have allotted is limited. Think about it. A central bank could theoretically issue an infinite claim on everybody's labor, but do we really want that?
A Jackson Hole Primer: Look For Hints At Aggressive Options [View article]
He is so close, but he is a little less close on his suggestions for what can be done. The chances of dragging a full fleged recovery across the finish line are still pretty remote.
A Jackson Hole Primer: Look For Hints At Aggressive Options [View article]
I would say that balance sheet repair would lead to confidence. The way I see it, consumption can only occur as some function of capital creation. In other words until you can make more, you can't consume more. The only way to make more, is when you learn how to produce better. This requires better knowledge about production methods. Something no gov entity can do because it has no incentives to do so.
People have reached their limit with consumption because they see their capital being destroyed or threatened. When capital shrinks, assets shrink (dr capital cr assets i.e. recession). If by somehow we could actually push people into more consumption now (you're right, we probably couldn't), the situation would only get worse. The only alternative we have right now to "jump start" the economy is to lower production costs.
Since we can't create new production knowledge out of thin air, we can look to areas of waste. The most potent thing our govs (fed & state) could do right now is lower the tax burden on the populace. This would include the illogical labryinth and counter productive regulatory scheme we have (regulations are just disguised taxes). The chances of this happening are just about zero.
We don't have a consumption problem. We have a production problem. A central bank is just a subsidy for consumption. In other words it never really had any cures for our ailment, just morphine. Fiscal policy is the only thing now that can address production costs, but it isn't going to happen. We are are not in wealth creation mode, but wealth transfer mode. Protect yourself accordingly if you can.
A Jackson Hole Primer: Look For Hints At Aggressive Options [View article]
A Jackson Hole Primer: Look For Hints At Aggressive Options [View article]
DR assets
CR liabilities
This tool has many manifestations, but each manifestation does the same thing. If a central bank could debit assets and then credit capital, then they would really have something. However, the only thing that can affect capital is improved knowledge about production. Neither fiscal policy nor monetary policy can provide knowledge about new production methods.
The action of a central bank can only encourage an increase of levered assets created with with existing knowledge about production. Basically, levering up with no real change in contribution margins. In other words working harder for the same rewards on a per hour basis. People can only do this for a short time, and without new knowledge of production, the levered assets only serve to depreciate away capital. Only new production knowledge will allow for the replacement of outdated assets with new ones, which again neither fiscal nor monetary policy can do.
Each new wave of central bank action, without a concomitant increase in production knowledge, will only succeed in eroding capital further and leading to further recession. The only option now is for fiscal policy to back off its pressures on production, thereby lowering production costs, which can then facilitate capital creation, which can then support the assets values and prevent further recession.
The likely hood of such a policy reversal is just about zero, so when further recessionary pressures hit (which they assurdly will, its just a question of when), the central bank will be forced to use the only tool it has. The manifestation of which will be interesting to debate, but this game can only last so long. When the personal capital levels of the populace are eroded so severly that they finally take action, only then when fisal policy be changed. This could theoretically take decades. The US still has a lot of knowledge about production (and it does improve all the time), and it still has a lot of capital, so we can create capital just as fast as we erode it (like Japan). Just don't expect any vibrant grow with this scenario.
QE3 On The Way? [View article]
QE3 On The Way? [View article]
QE3 On The Way? [View article]
seekingalpha.com/artic...
A Look Inside The Fed's Limited Toolkit [View article]
I would challenge your thesis this way. When gov monopolizes money the product of money ceases to exist. All that remains is a taxing mechanism that simply looks like money. Like a road that looks like a road, but is really a taxing mechanism because it costs more than it generates. So, when a gov monopolizes money it hasn't created an infinite supply of money, it has actually done away with money. All that remains is a infinite claim on labor that is supported by gov force (this usually winds up being dangerous). In essence, the gov has bestowed upon anyone holding one of its notes, the ability to tax another individual.
Money and roads should be products that add to capital creation. That is they both lower the cost of labor, thereby increasing capital (stored labor). People's knowledge about how to more effectively utilize their labor and resources lead to enhanced capital creation, and only when this happens are they safe to increase their consumption (i.e. a road is only built when it saves time, and this is learned via trial and error from voluntary based transactions)
A water tower could be a mistake, because a irrigation ditch may have been a better choice. The problem, is there is no way to test this because we can't go back in time and rerun the scenrio and only change one variable. Therefore, to assume the water tower has benefits is a mistake, because though it may have provided what appeared to be benefits, when compared to the opportunity costs it may have actually been a loss. The way people figure this out over time is via experience. When force is involved (like a gov using force to support its claims on labor) the need to learn is basically erased. Thus, the water tower may not be an asset at all, and rather a liability. It could be that over the life of the water tower, that the operating costs could far outweigh the benefit it provided. A gov claim on labor (central bank notes) makes it easy to compel work, and that unchecked claim will result in wasted labor because there is no reason to learn from mistakes. We wind up building water towers everywhere, when irrigation ditches would have been much better, but we never learned this because the gov claim on labor erased the need for us to realize our mistake.
So, what we think may be net national assets, could actually be net national liabilities. That is they are actually eroding our collective capital, and reducing our standard of living in the process. The initial assumption for a central bank and a gov control of the "money" supply is a flawed assumption, thus all the subsequent assumptions built on that initial flawed assumption will be equally flawed.
Anyway, just another point of view to stir things up.
A Look Inside The Fed's Limited Toolkit [View article]
A Look Inside The Fed's Limited Toolkit [View article]
If infrastructure is a money maker, then the it is better to let the private economy do it. If it is a money looser, then nobody should do it, but if we seriously reduced the gov burden on production, we could easily pay for roads and bridges.
What we have now is a structural problem. Our current central banking system has really done all it can do within the system in which it operates. Our central bank has basically provided an operating line to meet payroll, not it is time for our fiscal policy to get those people working. Lower production costs could certainly do that.
A Look Inside The Fed's Limited Toolkit [View article]
Face to face - anytime. Send me an email. The little window in my door is always open. Just bring a long straw.
A Look Inside The Fed's Limited Toolkit [View article]
The only thing on the planet that can add to equity is knowledge about better production methods. If a central bank or rather the people in the central bank could do this, you couldn't pay them enough to be central bankers. People with knowledge about better production can create for more wealth for themselves in production.
A central bank can absolutely influence demand via cheaping consumption, but this is a bad thing not a good thing. It will only lead to recession at some point. Our national debt is not net assets (equity), it is a pure claim on labor that the public must make good on regardless of their level of knowledge about production. Without improved knowledge of production, their only option to make good on the debt/money is to work longer. Working longer is a reduction in the standard of living - a tax.
Read Bernanke's Lips: No Depression, No Deflation [View article]
Peter is paid for a job with a 100 central bank notes, and deposits this in a brand new bank.
Bank balance sheet
Reserve 10
Ex Res 90
Deposits 100
Paul enters into a loan with the bank, and a note is executed for the 90 lendable central bank notes. Paul agrees to pledge land as collateral for the loan he is going to buy for 90 central bank notes.
Bank balance sheet
Reserves 10
Ex Res 90
Loan 90
Deposits 190
Bank funds the loan and Paul uses the 90 bank notes to purchase the land and pledges it as collateral. The 90 new deposit supporting the loan should be the new money, but upon loan funding the transaction collapses. 90 Exc Res eliminate with 90 in deposits.
Bank balance sheet
Res 10
Loan 90
Deposit 100
First where did Peter get his original 100 central bank notes? Second the new money/note creation transaction is just a gross up that eliminates upon loan funding, and 90 of the original 100 central bank notes appears to have funded the loan. The seller of the land used for collateral now has the 90 central bank notes. There are still only 100 central bank notes in this transaction. The net effect is that the loan was funded with excess reserves composed of 90 out of the original 100.
Uh oh. They've noticed my free arm. Darn that little window.